Item 1. Financial Statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
Notes to the Consolidated Financial Statements (unaudited)
(dollars in millions, except per-share amounts; metric tons in thousands (kmt))
A. Basis of Presentation – The interim Consolidated Financial Statements of Alcoa Corporation and its subsidiaries (Alcoa Corporation, Alcoa, or the Company) are unaudited. These Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position, and cash flows. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The 2019 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which includes all disclosures required by GAAP.
In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Management uses historical experience and all available information to make these estimates, including considerations for the impact of the coronavirus (COVID-19) pandemic on the macroeconomic environment. The extent and duration of the pandemic is unknown, causing uncertainty of the future impact on the Company’s business, financial condition, operating results, cash flows, and market capitalization and could adversely impact future results, including estimates, such as the recoverability of goodwill and long-lived assets and the realizability of deferred tax assets, made at March 31, 2020. Despite these inherent limitations, management believes that the amounts recorded in the financial statements related to these items are based on its best estimates and judgments using all relevant information available at the time. Management regularly evaluates the judgments and assumptions used in its estimates, and results could differ from those estimates upon future events and their effects or new information.
References in these Notes to ParentCo refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries through October 31, 2016, at which time it was renamed Arconic Inc. (and since has been subsequently renamed Howmet Aerospace Inc.). On November 1, 2016 (the Separation Date), ParentCo separated into two standalone, publicly-traded companies, Alcoa Corporation and Arconic Inc. (the Separation Transaction). In connection with the Separation Transaction, as of October 31, 2016, the Company and Arconic Inc. entered into several agreements to effect the Separation Transaction, including a Separation and Distribution Agreement and a Tax Matters Agreement. See Note A to the Consolidated Financial Statements in Part II Item 8 of Alcoa Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.
Principles of Consolidation. The Consolidated Financial Statements of Alcoa Corporation include the accounts of Alcoa Corporation and companies in which Alcoa Corporation has a controlling interest, including those that comprise the Alcoa World Alumina & Chemicals (AWAC) joint venture (see below). Intercompany transactions have been eliminated. The equity method of accounting is used for investments in affiliates and other joint ventures over which Alcoa Corporation has significant influence but does not have effective control. Investments in affiliates in which Alcoa Corporation cannot exercise significant influence are accounted for on the cost method.
AWAC is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited and consists of several affiliated operating entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within Alcoa Corporation’s Bauxite and Alumina segments (except for the Poços de Caldas mine and refinery and portions of the São Luís refinery and investment in Mineração Rio do Norte S.A., all in Brazil) and the Portland smelter in Australia within Alcoa Corporation’s Aluminum segment. Alcoa Corporation owns 60% and Alumina Limited owns 40% of these individual entities, which are consolidated by the Company for financial reporting purposes and include Alcoa of Australia Limited (AofA), Alcoa World Alumina LLC (AWA), and Alcoa World Alumina Brasil Ltda. (AWAB). Alumina Limited’s interest in the equity of such entities is reflected as Noncontrolling interest on the accompanying Consolidated Balance Sheet.
B. Recently Adopted and Recently Issued Accounting Guidance
Adopted
On January 1, 2020, the Company adopted the following Accounting Standard Updates (ASU) issued by the Financial Accounting Standard Board (FASB), none of which had a material impact on the Company’s Consolidated Financial Statements:
|
|
•
|
ASU No. 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606);
|
|
|
•
|
ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software;
|
|
|
•
|
ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20);
|
|
|
•
|
ASU No. 2018-13, Fair Value Measurement (Topic 820); and,
|
6
|
|
•
|
ASU No. 2016-13, Financial Instruments – Credit Losses.
|
Issued
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) which is intended to simplify the accounting for income taxes by eliminating certain exceptions and simplifying certain requirements under Topic 740. Updates are related to intraperiod tax allocation, deferred tax liabilities for equity method investments, interim period tax calculations, tax laws or rate changes in interim periods, and income taxes related to employee stock ownership plans. The guidance for ASU No. 2019-12 becomes effective for Alcoa on January 1, 2021. Management is currently evaluating the impact of these changes on the Consolidated Financial Statements.
In March 2020, the FASB issued ASU No. 2020-04 to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Management is currently evaluating the impact from the replacement of the London Interbank Offered Rate (LIBOR) and whether the Company will elect the adoption of the optional guidance.
C. Divestitures – During the first quarter of 2020, the Company sold Elemental Environmental Solutions LLC (EES), a wholly-owned Alcoa subsidiary that operated the waste processing facility in Gum Springs, Arkansas, to a global environmental firm in a transaction valued at $250. At the close of the transaction the Company recorded a gain of $180 (pre- and after-tax; see Note O) and received $200 with another $50 held in escrow to be paid to Alcoa if certain post-closing conditions are satisfied.
D. Restructuring and Other Charges, Net – In the first quarter of 2020, Alcoa Corporation recorded Restructuring and other charges, net, of $2 which was comprised of several insignificant items including $3 related to pension curtailments (see Note J).
In the first quarter of 2019, Alcoa Corporation recorded Restructuring and other charges, net of $113, which were comprised of the following components: $103 for exit costs related to the collective dismissal process and curtailment of the Avilés and La Coruña smelters in Spain (see below); $7 for closure costs related to a coal mine; and a $3 net charge for various items.
Restructuring charges recorded in the first quarter of 2019 related to the collective dismissal process and smelter curtailments in Spain included asset impairments of $80, employee-related costs of $15 and contract termination costs of $8. Additional charges recorded in the first quarter included a $15 write down of remaining inventories to their net realizable value, which was recorded in Cost of goods sold, and $2 in miscellaneous charges recorded in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations.
Alcoa Corporation does not include Restructuring and other charges, net in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:
|
|
|
First quarter ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Bauxite
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Alumina
|
|
|
2
|
|
|
|
1
|
|
|
Aluminum
|
|
|
2
|
|
|
|
107
|
|
|
Segment total
|
|
|
4
|
|
|
|
109
|
|
|
Corporate
|
|
|
(2
|
)
|
|
|
4
|
|
|
Total Restructuring and other charges, net
|
|
$
|
2
|
|
|
$
|
113
|
|
During 2019, Alcoa Corporation announced and implemented a new operating model that resulted in a leaner, more integrated, operator-centric organization. As a result of the restructuring, a Severance and other employee termination cost reserve of $27 remained at December 31, 2019. During the first quarter of 2020, changes to the reserve included additional net charges of $1, a reduction of $2 caused by foreign currency impacts, and a reduction from cash payments of $13. As of March 31, 2020, approximately 210 of the 260 employees were separated. In addition to the employees separated under the program, the Company eliminated 60 positions as open roles or retirements were not replaced.
In December 2019, Alcoa Corporation announced the closure of its Point Comfort (Texas) alumina refinery. As a result of the restructuring, a Severance and other employee termination cost reserve of $4 remained at December 31, 2019. During the first quarter of 2020, payments of $1 were made against the reserve. At March 31, 2020, approximately 20 of the 40 employees were separated.
Also during 2019, Alcoa Corporation curtailed and subsequently divested the aluminum facilities at Avilés and La Coruña (Spain). As a result of the divestiture, a restructuring reserve of $68 remained at December 31, 2019 relating to financial contributions
7
to the investment firm that acquired the facilities. In the first quarter of 2020, cash payments of $12 were made against the reserve. The remaining reserve of $56 will be paid through the second quarter of 2021.
Activity and reserve balances for restructuring charges were as follows:
|
|
|
Severance
and
employee
termination
costs
|
|
|
Other
costs
|
|
|
Total
|
|
|
Balance at December 31, 2018
|
|
$
|
5
|
|
|
$
|
42
|
|
|
$
|
47
|
|
|
Restructuring and other charges, net
|
|
|
51
|
|
|
|
161
|
|
|
|
212
|
|
|
Cash payments
|
|
|
(19
|
)
|
|
|
(99
|
)
|
|
|
(118
|
)
|
|
Reversals and other
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
Balance at December 31, 2019
|
|
|
35
|
|
|
|
102
|
|
|
|
137
|
|
|
Restructuring and other charges, net
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
|
Cash payments
|
|
|
(17
|
)
|
|
|
(20
|
)
|
|
|
(37
|
)
|
|
Reversals and other
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
Balance at March 31, 2020
|
|
$
|
17
|
|
|
$
|
83
|
|
|
$
|
100
|
|
The activity and reserve balances include only Restructuring and other charges, net that impact the reserves for Severance and employee termination costs and Other costs. Restructuring and other charges, net that affected other liability accounts such as environmental obligations (see Note N), asset retirement obligations, and pension and other postretirement reserves (see Note J) are excluded from the above activity and balances. Reversals and other includes reversals of previously recorded liabilities and foreign currency translation impacts.
The noncurrent portion of the reserve was $7 and $13 at March 31, 2020 and December 31, 2019, respectively, of which $6 and $12, respectively, relate to financial contributions to the investment firm that acquired the Avilés and La Coruña aluminum facilities.
E. Segment Information – The operating results of Alcoa Corporation’s reportable segments were as follows (differences between segment totals and consolidated amounts are in Corporate):
|
|
|
Bauxite
|
|
|
Alumina
|
|
|
Aluminum
|
|
|
Total
|
|
|
First quarter ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
71
|
|
|
$
|
707
|
|
|
$
|
1,598
|
|
|
$
|
2,376
|
|
|
Intersegment sales
|
|
|
235
|
|
|
|
336
|
|
|
|
3
|
|
|
|
574
|
|
|
Total sales
|
|
$
|
306
|
|
|
$
|
1,043
|
|
|
$
|
1,601
|
|
|
$
|
2,950
|
|
|
Segment Adjusted EBITDA
|
|
$
|
120
|
|
|
$
|
193
|
|
|
$
|
62
|
|
|
$
|
375
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
34
|
|
|
$
|
49
|
|
|
$
|
81
|
|
|
$
|
164
|
|
|
Equity (loss) income
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
5
|
|
|
$
|
(4
|
)
|
|
First quarter ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
65
|
|
|
$
|
897
|
|
|
$
|
1,735
|
|
|
$
|
2,697
|
|
|
Intersegment sales
|
|
|
236
|
|
|
|
417
|
|
|
|
3
|
|
|
|
656
|
|
|
Total sales
|
|
$
|
301
|
|
|
$
|
1,314
|
|
|
$
|
1,738
|
|
|
$
|
3,353
|
|
|
Segment Adjusted EBITDA
|
|
$
|
126
|
|
|
$
|
372
|
|
|
$
|
(96
|
)
|
|
$
|
402
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
28
|
|
|
$
|
48
|
|
|
$
|
89
|
|
|
$
|
165
|
|
|
Equity income (loss)
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
(22
|
)
|
|
$
|
(10
|
)
|
8
The following table reconciles total Segment Adjusted EBITDA to consolidated net income (loss) attributable to Alcoa Corporation:
|
|
|
First quarter ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Total Segment Adjusted EBITDA
|
|
$
|
375
|
|
|
$
|
402
|
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
Transformation(1)
|
|
|
(16
|
)
|
|
|
2
|
|
|
Intersegment eliminations
|
|
|
(8
|
)
|
|
|
86
|
|
|
Corporate expenses(2)
|
|
|
(27
|
)
|
|
|
(24
|
)
|
|
Provision for depreciation, depletion, and
amortization
|
|
|
(170
|
)
|
|
|
(172
|
)
|
|
Restructuring and other charges, net (D)
|
|
|
(2
|
)
|
|
|
(113
|
)
|
|
Interest expense
|
|
|
(30
|
)
|
|
|
(30
|
)
|
|
Other income (expenses), net (O)
|
|
|
132
|
|
|
|
(41
|
)
|
|
Other(3)
|
|
|
(35
|
)
|
|
|
(18
|
)
|
|
Consolidated income before income taxes
|
|
|
219
|
|
|
|
92
|
|
|
Provision for income taxes
|
|
|
(80
|
)
|
|
|
(150
|
)
|
|
Net income attributable to noncontrolling
interest
|
|
|
(59
|
)
|
|
|
(141
|
)
|
|
Consolidated net income (loss) attributable to
Alcoa Corporation
|
|
$
|
80
|
|
|
$
|
(199
|
)
|
|
(1)
|
Transformation includes, among other items, the Adjusted EBITDA of previously closed operations.
|
|
(2)
|
Corporate expenses are composed of general administrative and other expenses of operating the corporate headquarters and other global administrative facilities, as well as research and development expenses of the corporate technical center.
|
|
(3)
|
Other includes certain items that impact Cost of goods sold and Selling, general administrative, and other expenses on Alcoa Corporation’s Statement of Consolidated Operations that are not included in the Adjusted EBITDA of the reportable segments.
|
The following table details Alcoa Corporation’s Sales by product division:
|
|
|
First quarter ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Primary aluminum
|
|
$
|
1,297
|
|
|
$
|
1,394
|
|
|
Alumina
|
|
|
707
|
|
|
|
897
|
|
|
Flat-rolled aluminum
|
|
|
272
|
|
|
|
312
|
|
|
Bauxite
|
|
|
59
|
|
|
|
58
|
|
|
Energy
|
|
|
52
|
|
|
|
69
|
|
|
Other
|
|
|
(6
|
)
|
|
|
(11
|
)
|
|
|
|
$
|
2,381
|
|
|
$
|
2,719
|
|
Other includes realized gains and losses related to embedded derivative instruments designated as cash flow hedges of forward sales of aluminum.
9
F. Earnings Per Share – Basic earnings per share (EPS) amounts are computed by dividing earnings by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The information used to compute basic and diluted EPS attributable to Alcoa Corporation common shareholders was as follows (shares in millions):
|
|
|
First quarter ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net income (loss) attributable to Alcoa Corporation
|
|
$
|
80
|
|
|
$
|
(199
|
)
|
|
Average shares outstanding – basic
|
|
|
186
|
|
|
|
185
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
Stock units
|
|
|
1
|
|
|
|
—
|
|
|
Average shares outstanding – diluted
|
|
|
187
|
|
|
|
185
|
|
Options to purchase two million shares of common stock outstanding at March 31, 2020 were excluded because they had a weighted average exercise price of $26.55 per share which was greater than the average market price of Alcoa Corporation’s common stock.
In the first quarter of 2019, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive. Had Alcoa generated net income in the first quarter of 2019, one million common share equivalents related to five million outstanding stock units and stock options combined would have been included in diluted average shares outstanding for the period. Options to purchase one million shares of common stock outstanding at March 31, 2019 would have also been excluded had Alcoa generated net income because they had a weighted average exercise price of $38.49 per share which was greater than the average market price of Alcoa Corporation’s common stock.
10
G. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss for both Alcoa Corporation’s shareholders and Noncontrolling interest:
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling interest
|
|
|
|
|
First quarter ended
March 31,
|
|
|
First quarter ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Pension and other postretirement benefits (J)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(2,282
|
)
|
|
$
|
(2,283
|
)
|
|
$
|
(56
|
)
|
|
$
|
(46
|
)
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service
cost/benefit
|
|
|
(20
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
Tax benefit
|
|
|
6
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
Total Other comprehensive loss
before reclassifications, net of tax
|
|
|
(14
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
Amortization of net actuarial loss and prior
service cost/benefit(1)
|
|
|
54
|
|
|
|
45
|
|
|
|
1
|
|
|
|
1
|
|
|
Tax expense(2)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Total amount reclassified from Accumulated
other comprehensive loss, net of tax(7)
|
|
|
52
|
|
|
|
44
|
|
|
|
1
|
|
|
|
1
|
|
|
Total Other comprehensive income
|
|
|
38
|
|
|
|
41
|
|
|
|
—
|
|
|
|
1
|
|
|
Balance at end of period
|
|
|
(2,244
|
)
|
|
|
(2,242
|
)
|
|
|
(56
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(2,160
|
)
|
|
|
(2,071
|
)
|
|
|
(834
|
)
|
|
|
(810
|
)
|
|
Other comprehensive (loss) income(3)
|
|
|
(663
|
)
|
|
|
(22
|
)
|
|
|
(245
|
)
|
|
|
2
|
|
|
Balance at end of period
|
|
|
(2,823
|
)
|
|
|
(2,093
|
)
|
|
|
(1,079
|
)
|
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges (K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(532
|
)
|
|
|
(211
|
)
|
|
|
20
|
|
|
|
31
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
|
|
852
|
|
|
|
(352
|
)
|
|
|
(26
|
)
|
|
|
27
|
|
|
Tax (expense) benefit
|
|
|
(175
|
)
|
|
|
66
|
|
|
|
7
|
|
|
|
(8
|
)
|
|
Total Other comprehensive income (loss)
before reclassifications, net of tax
|
|
|
677
|
|
|
|
(286
|
)
|
|
|
(19
|
)
|
|
|
19
|
|
|
Net amount reclassified to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts(4)
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
Financial contracts(5)
|
|
|
3
|
|
|
|
(26
|
)
|
|
|
(2
|
)
|
|
|
(18
|
)
|
|
Interest rate contracts(6)
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreign exchange contracts(4)
|
|
|
8
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
Sub-total
|
|
|
25
|
|
|
|
(9
|
)
|
|
|
(2
|
)
|
|
|
(18
|
)
|
|
Tax (expense) benefit(2)
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
1
|
|
|
|
5
|
|
|
Total amount reclassified from
Accumulated other comprehensive
loss, net of tax(7)
|
|
|
24
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(13
|
)
|
|
Total Other comprehensive income (loss)
|
|
|
701
|
|
|
|
(288
|
)
|
|
|
(20
|
)
|
|
|
6
|
|
|
Balance at end of period
|
|
|
169
|
|
|
|
(499
|
)
|
|
|
—
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss
|
|
$
|
(4,898
|
)
|
|
$
|
(4,834
|
)
|
|
$
|
(1,135
|
)
|
|
$
|
(816
|
)
|
|
(1)
|
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note J).
|
|
(2)
|
These amounts were reported in Provision for income taxes on the accompanying Statement of Consolidated Operations.
|
|
(3)
|
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
|
|
(4)
|
These amounts were primarily reported in Sales on the accompanying Statement of Consolidated Operations.
|
|
(5)
|
These amounts were reported in Cost of goods sold on the accompanying Statement of Consolidated Operations.
|
|
(6)
|
These amounts were reported in Other (income) expenses, net of the accompanying Statement of Consolidated Operations.
|
11
|
(7)
|
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.
|
H. Investments – A summary of unaudited financial information for Alcoa Corporation’s equity investments is as follows (amounts represent 100% of investee financial information):
|
First quarter ended March 31, 2020
|
|
Saudi Arabia
Joint Venture
|
|
|
Mining
|
|
|
Energy
|
|
|
Other
|
|
|
Sales
|
|
$
|
585
|
|
|
$
|
218
|
|
|
$
|
59
|
|
|
$
|
73
|
|
|
Cost of goods sold
|
|
|
462
|
|
|
|
148
|
|
|
|
26
|
|
|
|
67
|
|
|
Net (loss) income
|
|
|
(13
|
)
|
|
|
9
|
|
|
|
27
|
|
|
|
(9
|
)
|
|
Equity in net (loss) income of affiliated companies,
before reconciling adjustments
|
|
|
(3
|
)
|
|
|
6
|
|
|
|
11
|
|
|
|
(4
|
)
|
|
Other
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
5
|
|
|
Alcoa Corporation’s equity in net (loss) income of
affiliated companies
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
9
|
|
|
|
1
|
|
|
First quarter ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
958
|
|
|
|
228
|
|
|
|
63
|
|
|
|
14
|
|
|
Cost of goods sold
|
|
|
852
|
|
|
|
149
|
|
|
|
29
|
|
|
|
15
|
|
|
Net (loss) income
|
|
|
(68
|
)
|
|
|
(2
|
)
|
|
|
28
|
|
|
|
(6
|
)
|
|
Equity in net (loss) income of affiliated companies,
before reconciling adjustments
|
|
|
(17
|
)
|
|
|
5
|
|
|
|
11
|
|
|
|
(3
|
)
|
|
Other
|
|
|
6
|
|
|
|
8
|
|
|
|
—
|
|
|
|
2
|
|
|
Alcoa Corporation’s equity in net (loss) income of
affiliated companies
|
|
|
(11
|
)
|
|
|
13
|
|
|
|
11
|
|
|
|
(1
|
)
|
During the second quarter of 2019, Alcoa Corporation and the Saudi Arabian Mining Company (Ma’aden) amended the joint venture agreement that governed the operations of each of the three companies that comprised the joint venture at that time. The amendment resulted in various changes including the divestiture of the Company’s investment in Ma’aden Rolling Company (MRC). As a result, Saudi Arabia Joint Venture only includes MRC’s results for the first quarter ended March 31, 2019.
The Company’s basis in the ElysisTM Limited Partnership, included in Other in the table above, has been reduced to zero for its share of losses incurred to date. As a result, the Company has $21 in unrecognized losses as of March 31, 2020 that will be recognized upon additional contributions into the partnership.
I. Inventories
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Finished goods
|
|
$
|
300
|
|
|
$
|
305
|
|
|
Work-in-process
|
|
|
242
|
|
|
|
282
|
|
|
Bauxite and alumina
|
|
|
427
|
|
|
|
446
|
|
|
Purchased raw materials
|
|
|
399
|
|
|
|
453
|
|
|
Operating supplies
|
|
|
141
|
|
|
|
158
|
|
|
|
|
$
|
1,509
|
|
|
$
|
1,644
|
|
12
J. Pension and Other Postretirement Benefits – The components of net periodic benefit cost were as follows:
|
|
|
Pension benefits
|
|
|
Other postretirement benefits
|
|
|
First quarter ended March 31,
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Service cost
|
|
$
|
14
|
|
|
$
|
12
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Interest cost(1)
|
|
|
42
|
|
|
|
56
|
|
|
|
5
|
|
|
|
8
|
|
|
Expected return on plan assets(1)
|
|
|
(74
|
)
|
|
|
(81
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Recognized net actuarial loss(1)
|
|
|
51
|
|
|
|
42
|
|
|
|
4
|
|
|
|
3
|
|
|
Amortization of prior service cost(1)
|
|
|
—
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
Curtailments(2)
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net periodic benefit cost
|
|
$
|
36
|
|
|
$
|
30
|
|
|
$
|
7
|
|
|
$
|
12
|
|
|
(1)
|
These amounts were reported in Other (income) expenses, net on the accompanying Statement of Consolidated Operations (see Note O).
|
|
(2)
|
These amounts were reported in Restructuring and other charges, net on the accompanying Statements of Consolidated Operations (see Note D) and of Cash Flows.
|
Plan Actions. In 2020, management initiated the following actions to certain pension plans:
Action #1 – In February 2020, the Company entered into a new, six-year collective bargaining agreement with the Union of Professional and Office Workers of the Alcoa Smelter of Baie-Comeau in Canada. Under the agreement, all unionized office employees that are participants in one of the Company’s defined benefit pension plans will cease accruing retirement benefits for future service effective January 1, 2021. This change will affect approximately 20 employees, who are targeted to be transitioned to a target benefit plan, where the funding risk is assumed by the employees. The Company will contribute approximately 12% of these participants’ eligible earnings to the new plan on an annual basis. Participants already collecting benefits or who terminated with a vested benefit under the defined benefit pension plan are not affected by these changes.
Action #2 – In February 2020, the Company notified all non-unionized hourly employees of Aluminerie de Deschambault, who are participants in one of the Company’s defined benefit pension plans, that they will cease accruing retirement benefits for future service effective January 1, 2021. This change will affect approximately 430 employees, who will be transitioned to a replacement plan yet to be determined, where the funding risk is assumed by the employees. The Company will contribute a certain percentage of these participants’ eligible earnings to the new plan on an annual basis. Participants already collecting benefits or who terminated with a vested benefit under the defined benefit pension plan are not affected by these changes.
The above actions caused the respective plans to be remeasured, including an update to the discount rates used to determine the benefit obligations of the affected plans. The following table presents certain information and the financial impacts of these actions on the accompanying Consolidated Financial Statements:
|
Action #
|
|
Number of
affected
plan
participants
|
|
Weighted
average
discount
rate as of
December 31,
2019
|
|
|
Plan
remeasurement
date
|
|
Weighted
average
discount rate
as of plan
remeasurement
date
|
|
|
Increase to
accrued
pension
benefits
liability
|
|
|
Curtailment
charge(1)
|
|
|
1
|
|
~20
|
|
3.15%
|
|
|
January 31, 2020
|
|
2.75%
|
|
|
$
|
18
|
|
|
$
|
1
|
|
|
2
|
|
~430
|
|
3.20%
|
|
|
January 31, 2020
|
|
2.75%
|
|
|
|
28
|
|
|
|
2
|
|
|
|
|
~450
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46
|
|
|
$
|
3
|
|
|
(1)
|
These amounts represent the accelerated amortization of a portion of the existing prior service cost and was reclassified from Accumulated other comprehensive loss to Restructuring and other charges, net (see Note D) on the accompanying Statement of Consolidated Operations.
|
Funding and Cash Flows. As permitted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Company is planning on deferring approximately $220 of pension contributions, primarily for the U.S. plans, from 2020 to January 1, 2021. As a result, as of March 31, 2020, Alcoa’s minimum required contribution to defined benefit pension plans in 2020 is now estimated to be approximately $75, of which approximately $40 is primarily for U.S. plans.
13
K. Derivatives and Other Financial Instruments
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
|
|
•
|
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
•
|
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
|
Derivatives
Alcoa Corporation is exposed to certain risks relating to its ongoing business operations, including the risks of changing commodity prices, foreign currency exchange rates and interest rates. Alcoa Corporation’s commodity and derivative activities include aluminum, energy, foreign exchange and interest rate contracts which are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility, and to cover underlying exposures. Alcoa Corporation is not involved in trading activities for energy, weather derivatives, or other nonexchange commodity trading activities.
Several of Alcoa Corporation’s aluminum, energy, and foreign exchange contracts are classified as Level 1 or Level 2 under the fair value hierarchy. All of these contracts are designated as either fair value or cash flow hedging instruments. Alcoa Corporation also has several derivative instruments classified as Level 3 under the fair value hierarchy, which are either designated as cash flow hedges or undesignated.
The following tables present the detail for Level 1, 2 and 3 derivatives (see additional Level 3 information in further tables below):
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Level 1 and 2 derivative instruments
|
|
$
|
32
|
|
|
$
|
101
|
|
|
$
|
3
|
|
|
$
|
33
|
|
|
Level 3 derivative instruments
|
|
|
467
|
|
|
|
143
|
|
|
|
74
|
|
|
|
615
|
|
|
Total
|
|
$
|
499
|
|
|
$
|
244
|
|
|
$
|
77
|
|
|
$
|
648
|
|
|
Less: Current
|
|
|
53
|
|
|
|
80
|
|
|
|
59
|
|
|
|
67
|
|
|
Noncurrent
|
|
$
|
446
|
|
|
$
|
164
|
|
|
$
|
18
|
|
|
$
|
581
|
|
|
|
|
Unrealized gain (loss) recognized in Other comprehensive income (loss)
|
|
|
Realized (loss) gain reclassed from Other comprehensive income (loss) to earnings
|
|
|
First quarter ended March 31,
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Level 1 and 2 derivative instruments
|
|
$
|
(29
|
)
|
|
$
|
(8
|
)
|
|
$
|
(14
|
)
|
|
$
|
(4
|
)
|
|
Level 3 derivative instruments
|
|
|
867
|
|
|
|
(317
|
)
|
|
|
(8
|
)
|
|
|
31
|
|
|
Noncontrolling and equity interest
|
|
|
14
|
|
|
|
(27
|
)
|
|
|
(3
|
)
|
|
|
(18
|
)
|
|
Total
|
|
$
|
852
|
|
|
$
|
(352
|
)
|
|
$
|
(25
|
)
|
|
$
|
9
|
|
For the quarter ended March 31, 2020, the realized loss of $14 on Level 1 and 2 cash flow hedges was comprised of a $7 loss recognized in Sales and a $7 loss recognized in Cost of goods sold. For the quarter ended March 31, 2019, the realized loss of $4 on Level 1 and 2 cash flow hedges was recognized in Sales.
14
Additional Level 3 Disclosures
The following table presents quantitative information related to the significant unobservable inputs described above for Level 3 derivative instruments (megawatt hours in MWh):
|
|
|
March 31, 2020
|
|
|
Unobservable Input
|
|
Unobservable Input Range
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Financial contract
|
|
$
|
4
|
|
|
Interrelationship of
|
|
Electricity (per MWh)
|
|
2020: $31.87
|
|
|
|
|
|
|
|
forward energy price and the Consumer Price Index
|
|
|
|
2021: $34.16
|
|
Power contracts
|
|
|
458
|
|
|
MWh of energy needed
to produce the forecasted
mt of aluminum
|
|
LME (per mt)
|
|
2020: $1,502
2029: $2,173
2036: $2,470
|
|
|
|
|
|
|
|
|
|
Midwest premium
(per pound)
|
|
2020: $0.1175
2029: $0.1300
2036: $0.1300
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
Rate of 11 million MWh per year
|
|
Power contract
|
|
3
|
|
|
MWh of energy needed to produce the forecasted metric
|
|
LME (per mt)
|
|
2020: $1,502
2020: $1,523
|
|
|
|
|
|
|
|
tons of aluminum
|
|
Midwest premium
(per pound)
|
|
2020: $0.1175
2020: $0.1250
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
Rate of 2 million MWh per year
|
|
Total Asset Derivatives
|
|
$
|
465
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Power contract
|
|
$
|
113
|
|
|
MWh of energy needed
|
|
LME (per mt)
|
|
2020: $1,502
|
|
|
|
|
|
|
|
to produce the forecasted
|
|
|
|
2027: $2,065
|
|
|
|
|
|
|
|
mt of aluminum
|
|
Electricity
|
|
Rate of 4 million MWh per year
|
|
Power contract (undesignated)
|
|
28
|
|
|
Estimated spread between
the 30-year debt yield of
Alcoa and the counterparty
|
|
Credit spread
|
|
4.48%: 30-year debt yield spread
8.98%: Alcoa (estimated)
4.50%: counterparty
|
|
Total Liability Derivatives
|
|
$
|
141
|
|
|
|
|
|
|
|
The Total Asset Derivatives and Total Liability Derivatives in the table above are lower by $2 compared to the respective amount reflected in the Level 3 tables presented below. This is due to the fact that the Financial contract is in an asset position for the current portion and is in a liability position for the noncurrent portion and is reflected as such on the accompanying Consolidated Balance Sheet. However, this derivative is reflected as a net asset in the above table for purposes of presenting the assumptions utilized to measure the fair value of the derivative instrument in its entirety.
The fair values of Level 3 derivative instruments recorded in the accompanying Consolidated Balance Sheet were as follows:
|
Asset Derivatives
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Current—power contracts
|
|
$
|
25
|
|
|
$
|
—
|
|
|
Current—financial contract
|
|
|
6
|
|
|
|
57
|
|
|
Noncurrent—power contracts
|
|
|
436
|
|
|
|
—
|
|
|
Noncurrent—financial contract
|
|
|
—
|
|
|
|
17
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
467
|
|
|
$
|
74
|
|
|
Total Asset Derivatives
|
|
$
|
467
|
|
|
$
|
74
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Current—power contracts
|
|
$
|
9
|
|
|
$
|
47
|
|
|
Noncurrent—power contracts
|
|
|
104
|
|
|
|
551
|
|
|
Noncurrent—financial contract
|
|
|
2
|
|
|
|
—
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
115
|
|
|
$
|
598
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Current—power contract
|
|
$
|
4
|
|
|
$
|
3
|
|
|
Noncurrent—power contract
|
|
|
24
|
|
|
|
14
|
|
|
Total derivatives not designated as hedging instruments
|
|
$
|
28
|
|
|
$
|
17
|
|
|
Total Liability Derivatives
|
|
$
|
143
|
|
|
$
|
615
|
|
15
Assuming market rates remain constant with the rates at March 31, 2020, a realized gain of $16 related to power contracts and $6 related to the financial contract are expected to be recognized in Sales and Cost of goods sold, respectively, over the next 12 months.
At March 31, 2020 and December 31, 2019, the power contracts with embedded derivatives designated as cash flow hedges hedge forecasted aluminum sales of 2,298 kmt and 2,347 kmt, respectively. At March 31, 2020 and December 31, 2019, the financial contract hedges forecasted electricity purchases of 3,278,484 and 3,891,096 megawatt hours, respectively.
The following table presents a reconciliation of activity for Level 3 derivative instruments:
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
Power contract
|
|
|
Financial
contract
|
|
|
Power contract
|
|
|
Financial
contract
|
|
|
Embedded
credit
derivative
|
|
|
January 1, 2020
|
|
$
|
—
|
|
|
$
|
74
|
|
|
$
|
598
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
Total gains or losses included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (realized)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Cost of goods sold (realized)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other (income) expenses, net (unrealized/realized)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
Other comprehensive (loss) income (unrealized)
|
|
|
462
|
|
|
|
(61
|
)
|
|
|
(468
|
)
|
|
|
2
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
March 31, 2020
|
|
$
|
461
|
|
|
$
|
6
|
|
|
$
|
113
|
|
|
$
|
2
|
|
|
$
|
28
|
|
|
Change in unrealized gains or losses included in earnings
for derivative instruments held at March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expenses, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
There were no purchases, sales or settlements of Level 3 derivative instruments in the periods presented.
Other Financial Instruments
The carrying values and fair values of Alcoa Corporation’s other financial instruments were as follows:
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
|
Cash and cash equivalents
|
|
$
|
829
|
|
|
$
|
829
|
|
|
$
|
879
|
|
|
$
|
879
|
|
|
Restricted cash
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
|
Long-term debt due within one year
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
Long-term debt, less amount due within one year
|
|
|
1,801
|
|
|
|
1,668
|
|
|
|
1,799
|
|
|
|
1,961
|
|
The following methods were used to estimate the fair values of other financial instruments:
Cash and cash equivalents and Restricted cash. The carrying amounts approximate fair value because of the short maturity of the instruments. The fair value amounts for Cash and cash equivalents and Restricted cash were classified in Level 1 of the fair value hierarchy.
Long-term debt due within one year and Long-term debt, less amount due within one year. The fair value was based on quoted market prices for public debt and on interest rates that are currently available to Alcoa Corporation for issuance of debt with similar terms and maturities for non-public debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
16
L. Income Taxes – Alcoa Corporation’s estimated annualized effective tax rate (AETR) for 2020 as of March 31, 2020 differs from the U.S. federal statutory rate of 21% primarily due to losses in countries with full valuation reserves resulting in no tax benefit, as well as foreign income taxed in higher rate jurisdictions.
|
|
|
Three-months ended March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Income before income taxes
|
|
$
|
219
|
|
|
|
$
|
92
|
|
|
Estimated annualized effective tax rate
|
|
|
57.1
|
|
%
|
|
|
72.2
|
%
|
|
Income tax expense
|
|
$
|
125
|
|
|
|
$
|
67
|
|
|
(Favorable) unfavorable tax impact related to losses in jurisdictions with no tax benefit
|
|
|
(46
|
)
|
|
|
|
83
|
|
|
Discrete tax charge
|
|
|
1
|
|
|
|
|
—
|
|
|
Provision for income taxes
|
|
$
|
80
|
|
|
|
$
|
150
|
|
Deferred taxes are recorded for future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. These future tax consequences result from differences between the financial and tax bases of Alcoa’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
The future realization of net deferred tax assets is reviewed quarterly, or more frequently if there are changes in the positive and negative evidence used in management’s assessments, and is based on projections of the respective future taxable income (defined as the sum of pretax income, other comprehensive income, and permanent tax differences), exclusive of reversing temporary differences and carryforwards.
Management’s forecasted taxable income is based on macroeconomic indicators and involves assumptions related to, among others: commodity prices; volume levels; and key inputs and raw materials, such as bauxite, alumina, caustic soda, calcined petroleum coke, liquid pitch, energy, labor, and transportation costs. These are the same assumptions utilized by management to develop the financial and operating plan that is used to manage the Company and measure performance against actual results. Additionally, uncertainty and changes in the macroeconomic environment and the economy in Alcoa’s operating locations may arise as a result of the COVID-19 pandemic. Adverse effects from these changes may impact the assumptions utilized to develop the forecasted taxable income and may result in the need for a valuation allowance on certain deferred tax assets.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management applies judgment in assessing all available positive and negative evidence and considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Alcoa’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance.
At December 31, 2019, Alcoa Canada Company was in a three-year cumulative loss position without a valuation allowance where, in management’s judgment, the weight of the positive evidence more than offset the negative evidence of the cumulative losses. At March 31, 2020, in management’s judgment, the positive evidence continued to more than offset the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that Alcoa Canada Company’s deferred tax assets may not be realized, resulting in a future charge to establish a valuation allowance. Alcoa Canada Company’s net deferred tax assets were $46 and $137 at March 31, 2020 and December 31, 2019, respectively. The majority of the Alcoa Canada Company net deferred tax assets relate to pension obligations and derivatives.
M. Leasing
Managements records a right-of-use asset and lease liability for several types of operating leases, including land and buildings, alumina refinery process control technology, plant equipment, vehicles, and computer equipment. The leases have remaining terms of one to 38 years. The discount rate applied to these leases is the Company’s incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments, unless there is a rate implicit in the lease agreement. The Company does not have material financing leases.
17
Lease expense and operating cash flows include:
|
|
|
First quarter ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Costs from operating leases
|
|
$
|
18
|
|
|
$
|
19
|
|
|
Variable lease payments
|
|
$
|
4
|
|
|
$
|
3
|
|
|
Short-term rental expense
|
|
$
|
1
|
|
|
$
|
3
|
|
The weighted average lease term and weighted average discount rate as of March 31, 2020 and December 31, 2019 were as follows:
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Weighted average lease term for operating leases (years)
|
|
|
4.5
|
|
|
|
4.6
|
|
|
Weighted average discount rate for operating leases
|
|
5.4%
|
|
|
5.4%
|
|
The following represents the aggregate right-of use assets and related lease obligations recognized in the Consolidated Balance Sheet at:
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Properties, plants and equipment, net
|
|
$
|
141
|
|
|
$
|
154
|
|
|
Other current liabilities
|
|
$
|
56
|
|
|
$
|
61
|
|
|
Other noncurrent liabilities and deferred credits
|
|
|
90
|
|
|
|
100
|
|
|
Total operating lease liabilities
|
|
$
|
146
|
|
|
$
|
161
|
|
New leases of $7 were added during the three months ended March 31, 2020.
The future cash flows related to the operating lease obligations as of March 31, 2020 were as follows:
|
2020 (excluding the three months ended March 31)
|
|
$
|
49
|
|
|
2021
|
|
|
53
|
|
|
2022
|
|
|
21
|
|
|
2023
|
|
|
13
|
|
|
2024
|
|
|
7
|
|
|
Thereafter
|
|
|
26
|
|
|
Total lease payments (undiscounted)
|
|
|
169
|
|
|
Less: discount to net present value
|
|
|
(23
|
)
|
|
Total
|
|
$
|
146
|
|
N. Contingencies
Environmental Matters
Alcoa Corporation participates in environmental assessments and cleanups at several locations. These include currently or previously owned or operated facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as, among others, the nature and extent of contamination, changes in remedial requirements, and technology advancements.
Alcoa Corporation’s environmental remediation reserve balance reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. The following table details the changes in the carrying value of recorded environmental remediation reserves:
18
|
Balance at December 31, 2018
|
|
$
|
280
|
|
|
Liabilities incurred
|
|
|
73
|
|
|
Cash payments
|
|
|
(17
|
)
|
|
Reversals of previously recorded liabilities
|
|
|
(1
|
)
|
|
Balance at December 31, 2019
|
|
|
335
|
|
|
Liabilities incurred
|
|
|
2
|
|
|
Cash payments
|
|
|
(3
|
)
|
|
Foreign currency translation and other
|
|
|
(7
|
)
|
|
Balance at March 31, 2020
|
|
$
|
327
|
|
At March 31, 2020 and December 31, 2019, the current portion of Alcoa Corporation’s environmental remediation reserve balance was $38 and $39, respectively. The Company incurred liabilities of $2 and $1 for the quarter ended March 31, 2020 and 2019, respectively, which were primarily recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations.
Payments related to remediation expenses applied against the reserve were $3 for the quarters ended March 31, 2020 and 2019. These amounts include mandated expenditures as well as those not required by any regulatory authority or third party. The reserve also reflects a decrease of $6 in the first quarter of 2020, and $1 in the first quarter of 2019 due to the effects of foreign currency translation. The first quarter of 2019 also included a $1 reversal of previously recorded liabilities.
The estimated timing of cash outflows on the environmental remediation reserve at March 31, 2020 is as follows:
|
2020 (excluding the three months ended March 31, 2020)
|
$
|
24
|
|
|
2021 - 2025
|
|
194
|
|
|
Thereafter
|
|
109
|
|
|
Total
|
$
|
327
|
|
Reserve balances at March 31, 2020 and December 31, 2019, associated with significant sites with active remediation underway or for future remediation were $268 and $274, respectively. In management’s judgment, the Company’s reserves are sufficient to satisfy the provisions of the respective action plans. Upon changes in facts or circumstances, a change to the reserve may be required. The Company’s significant sites include:
Poços de Caldas, Brazil—The reserve associated with the 2015 closure of the Alcoa Alumínio S.A. smelter in Poços de Caldas, Brazil, is for remediation of historic spent potlining storage and disposal areas. The final remediation plan is currently under review; such review could require the reserve balance to be adjusted.
Fusina and Portovesme, Italy—Alcoa Corporation’s subsidiary Alcoa Trasformazioni S.r.l. has remediation projects underway for its closed smelter sites at Fusina and Portovesme which have been approved by the Italian Ministry of Environment and Protection of Land and Sea (MOE). Work is ongoing for soil remediation at both sites with expected completion in 2020. Additionally, annual payments are made to MOE over a 10-year period through 2022 for groundwater emergency containment and natural resource damages at the Fusina site. A groundwater remediation project at Portovesme will have a final remedial design completed in 2020 which may result in a change to the existing reserve.
Suriname—The reserve associated with the 2017 closure of the Suralco refinery and bauxite mine is for treatment and disposal of refinery waste and soil remediation. The work began in 2017 and is expected to be completed at the end of 2025.
Hurricane Creek, Arkansas—The reserve associated with the 1990 closure of two mining areas and refineries near Hurricane Creek, Arkansas is for ongoing monitoring and maintenance for water quality surrounding the mine areas and residue disposal areas.
Massena, New York—The reserve associated with the 2015 closure of the Massena East smelter by the Company’s subsidiary, Reynolds Metals Company, is for subsurface soil remediation to be performed after demolition of the structures. Remediation work is expected to commence in 2021 and will take four to eight years to complete.
Point Comfort, Texas—The reserve associated with the 2019 closure of the Point Comfort alumina refinery is for disposal of industrial wastes contained at the site, subsurface remediation, and post-closure monitoring and maintenance. The final remediation plan is currently under review, which may result in a change to the existing reserve.
Sherwin, Texas—In connection with the 2018 settlement of a dispute related to the previously-owned Sherwin alumina refinery, the Company’s subsidiary, Copano Enterprises LLC, accepted responsibility for the final closure of four bauxite residue waste disposal areas (known as the Copano facility). Work commenced on the first residue in 2018 and will take eight to twelve years to
19
complete, depending on the nature of its potential re-use. Work on the next three areas has not commenced but is expected to be completed by 2048, depending on its potential re-use.
Longview, Washington—In connection with a 2018 Consent Decree and Cleanup Action Plan with the Washington State Department of Ecology, the Company’s subsidiary, Northwest Alloys, accepted certain responsibilities for future remediation of contaminated soil and sediments at the site located near Longview, Washington.
Other Sites—The Company is in the process of decommissioning various other plants and remediating sites in several countries for potential redevelopment or to return the land to a natural state. In aggregate, there are approximately 35 remediation projects at these other sites that are planned or underway. These activities will be completed at various times in the future with the latest expected to be in 2026, after which ongoing monitoring and other activities may be required. At March 31, 2020 and December 31, 2019, the reserve balance associated with these activities was $59 and $61, respectively.
Tax
Spain— In July 2013, following a corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received from Spain’s tax authorities disallowing certain interest deductions claimed by ParentCo’s Spanish consolidated tax group. In 2015, ParentCo filed an appeal of this assessment to Spain’s Central Tax Administrative Court which was denied. Two months later, ParentCo filed an appeal in Spain’s National Court (the National Court). The amount of this assessment, including interest, was $152 (€131) as of June 30, 2018.
In July 2018, the National Court denied ParentCo’s appeal of the assessment; however, it required Spain’s tax authorities to issue a new assessment, which considers available net operating losses of the former Spanish consolidated tax group from prior tax years that can be utilized during the assessed tax years. Subsequently, Arconic Inc. and Alcoa Corporation (collectively, the Companies) estimated the amount of the new assessment, including applicable interest, to be in the range of $25 to $61 (€21 to €53) after consideration of available net operating losses and tax credits. Under the Tax Matters Agreement related to the Separation Transaction, unfavorable tax outcomes are split by Arconic Inc. and Alcoa Corporation 51% and 49%, respectively. Based on a review of the basis on which the National Court decided this matter, Alcoa Corporation management no longer believed that the Companies were more likely than not (greater than 50%) to prevail in this matter. Accordingly, in the third quarter of 2018, Alcoa Corporation recorded a charge of $30 (€26) in Provision for income taxes to establish a liability for its 49% share of the estimated loss in this matter, representing management’s best estimate at the time.
On November 8, 2018, the Companies filed a petition for appeal to Spain’s Supreme Court, which was accepted in March 2019 and an appeal was submitted on May 6, 2019.
Separately, in January 2017, the National Court issued a decision in favor of the former Spanish consolidated tax group related to a similar assessment for the 2003 through 2005 tax years, effectively making that assessment null and void. Additionally, in August 2017, in lieu of receiving a formal assessment, the Companies reached a settlement with Spain’s tax authorities for the 2010 through 2013 tax years that had been under audit for a similar matter. Alcoa Corporation’s share of this settlement was not material to the Company’s Consolidated Financial Statements. The ultimate outcomes related to the 2003 through 2005 and the 2010 through 2013 tax years are not indicative of the potential ultimate outcome of the assessment for the 2006 through 2009 tax years due to procedural differences. Also, it is possible that the Companies may receive similar assessments for tax years subsequent to 2013; however, management does not expect any such assessment, if received, to be material to Alcoa Corporation’s Consolidated Financial Statements.
Brazil (AWAB)— In March 2013, AWAB was notified by the Brazilian Federal Revenue Office (RFB) that approximately $110 (R$220) of value added tax credits previously claimed are being disallowed and a penalty of 50% assessed. Of this amount, AWAB received $41 (R$82) in cash in May 2012. The value-added tax credits were claimed by AWAB for both fixed assets and export sales related to the Juruti bauxite mine and São Luís refinery expansion. The RFB has disallowed credits they allege belong to the consortium in which AWAB owns an interest and should not have been claimed by AWAB. Credits have also been disallowed as a result of challenges to apportionment methods used, questions about the use of the credits, and an alleged lack of documented proof. AWAB presented defense of its claim to the RFB on April 8, 2013. If AWAB is successful in this administrative process, the RFB would have no further recourse. If unsuccessful in this process, AWAB has the option to litigate at a judicial level. Separately from AWAB’s administrative appeal, in June 2015, new tax law was enacted repealing the provisions in the tax code that were the basis for the RFB assessing a 50% penalty in this matter. As such, the estimated range of reasonably possible loss for these matters is $0 to $43 (R$220). It is management’s opinion that the allegations have no basis; however, at this time, the Company is unable to reasonably predict an outcome for this matter.
20
Australia (AofA)— In December 2019, AofA received a statement of audit position (SOAP) from the Australian Taxation Office (ATO) related to the pricing of certain historic third-party alumina sales. The SOAP proposed adjustments that would result in additional income tax payable by AofA of approximately $129 (A$212), exclusive of interest and penalties.
The SOAP is currently the subject of an independent review process within the ATO. At the conclusion of this process, the ATO may or may not issue a tax assessment. If an assessment were to be issued, in accordance with the ATO dispute procedures, it is expected that AofA would pay 50% of the disputed tax amount to the ATO. AofA could then pursue all available dispute resolution methods, up to and including the filing of proceedings in the Australian Courts, without the ATO seeking further payment prior to final resolution. If AofA is ultimately successful, any amounts paid to the ATO would be refunded.
Management does not agree with the ATO’s position and believes it is more likely than not the Company’s tax position will be sustained and, therefore, has not recognized any tax liabilities in relation to this matter. Because the resolution of this matter is uncertain at this time, the Company cannot predict the outcome which may materially affect its financial results.
AofA is part of the Company’s joint venture with Alumina Limited, an Australian public company listed on the Australian Securities Exchange. The Company and Alumina Limited own 60% and 40%, respectively, of the joint venture entities, including AofA.
General
In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Alcoa Corporation, including those pertaining to environmental, safety and health, commercial, tax, product liability, intellectual property infringement, employment, and employee and retiree benefit matters, and other actions and claims arising out of the normal course of business. While the amounts claimed in these other matters may be substantial, the ultimate liability is not readily determinable because of the considerable uncertainties that exist. Accordingly, it is possible that the Company’s liquidity or results of operations in a particular period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of the Company.
O. Other (Income) Expenses, Net
|
|
|
First quarter ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Equity loss
|
|
$
|
7
|
|
|
$
|
12
|
|
|
Foreign currency losses, net
|
|
|
11
|
|
|
|
12
|
|
|
Net gain from asset sales
|
|
|
(177
|
)
|
|
|
(8
|
)
|
|
Net loss on mark-to-market derivative
instruments (K)
|
|
|
11
|
|
|
|
—
|
|
|
Non-service costs – Pension & OPEB (J)
|
|
|
25
|
|
|
|
29
|
|
|
Other
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
|
$
|
(132
|
)
|
|
$
|
41
|
|
Net gain from asset sales for the first quarter of 2020 includes a net gain of $180 related to the sale of EES (see Note C).
P. Subsequent Events
On April 22, 2020, as part of the Company’s portfolio review, Alcoa announced that it will curtail the remaining 230,000 metric tons of uncompetitive smelting capacity at its Intalco smelter in Ferndale, Washington amid declining market conditions. The full curtailment of 279,000 metric tons, which includes 49,000 metric tons of earlier-curtailed capacity, is expected to be complete by the end of July 2020. The smelter recorded a net loss of $24 in the first quarter of 2020. This action will bring Alcoa’s total curtailed smelting capacity to 880,000 metric tons, or approximately 30 percent of its total global smelting capacity.
The Company will record estimated restructuring charges of approximately $25 (pre- and after-tax) in the second quarter of 2020 associated with the curtailment, for employee-related costs and contract termination costs, which are all cash-based charges expected to be paid primarily in the third quarter of 2020. Intalco employs approximately 700 people, and the workforce will be significantly reduced due to the curtailment.
21