ALCOA CORPORATION
(dollars in millions, except per-share amounts, average realized prices, and
average cost amounts;
dry metric tons in millions (mdmt); metric tons in thousands (kmt))
Overview
Our Business
Alcoa Corporation (Alcoa or the Company) is a vertically integrated aluminum company comprised of bauxite mining, alumina refining, aluminum production (smelting, casting, and rolling), and energy generation. Aluminum is a commodity that is traded on theLondon Metal Exchange (LME) and priced daily. Additionally, alumina is subject to market pricing through the Alumina Price Index (API), which is calculated by the Company based on the weighted average of a prior month's daily spot prices published by the following three indices: CRU MetallurgicalGrade Alumina Price ; Platts Metals Daily Alumina PAX Price; and Metal Bulletin Non-Ferrous Metals Alumina Index. As a result, the price of both aluminum and alumina is subject to significant volatility and, therefore, influences the operating results ofAlcoa Corporation . Through direct and indirect ownership,Alcoa Corporation has 30 operating locations in nine countries around the world, situated primarily inAustralia ,Brazil ,Canada ,Iceland ,Norway ,Spain , andthe United States . Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.
Business Update
InSeptember 2019 ,Alcoa Corporation announced the implementation of a new operating model that will result in a leaner, more integrated, operator-centric organization. EffectiveNovember 1, 2019 , the new operating model eliminates the business unit structure, consolidates sales, procurement and other commercial capabilities at an enterprise level, and streamlines the Executive Team that reports to the Chief Executive Officer. The new structure will reduce overhead with the intention of promoting operational and commercial excellence and increasing connectivity between the Company's operations and leadership. As a result of the new operating model, a charge of$37 was recorded related to employee termination and severance costs. Annual operating cost savings of approximately$60 related to the new operating model are expected beginning in the second quarter of 2020. InOctober 2019 , the Company announced initiatives to drive lower costs and sustainable profitability. Planned initiatives include (i) over the next 12 to 18 months, pursuing non-core asset sales expected to generate an estimated$500 to$1,000 in net proceeds in support of its updated strategic priorities and (ii) over the next five years, realigning its operating portfolio. For the portfolio review, the Company has placed 1.5 million metric tons of smelting capacity and 4 million metric tons of alumina refining capacity under review. The review will consider opportunities for significant improvement, potential curtailments, closures, or divestitures. InDecember 2019 , the Company announced the permanent closure of its alumina refinery inPoint Comfort, Texas as its first action of the multi-year portfolio review. The site's 2.3 million metric tons of refining capacity had been fully curtailed since 2016. As a result of the decision to close the refinery, a$274 charge was recorded to Restructuring and other charges, net (see Note D to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K). Beginning in 2020, the closure is expected to result in annual net income improvement of approximately$15 (after-tax and noncontrolling interest) and cash savings of approximately$10 (Alcoa's share) when compared to the ongoing spend for curtailment, exclusive of closure costs. OnDecember 31, 2019 ,Alcoa completed the transfer of the Afobaka hydroelectric dam to the Government of the Republic of Suriname, according to definitive agreements approved by its parliament. After curtailment ofAlcoa's operations in Suriname in 2015 and permanent closure in early 2017,Alcoa continued to operate the dam, selling electricity to the government for its subsequent sale to customers in Suriname.Alcoa expects an annual net income reduction related to the loss of electricity sales of approximately$20 (after-tax and noncontrolling interest) based on 2019 results. InJanuary 2020 , the Company announced the sale ofElemental Environmental Solutions LLC (EES), a wholly-ownedAlcoa subsidiary that operates the waste processing facility inGum Springs ,Arkansas , to a global environmental firm in a transaction valued at$250 . The transaction closed as ofJanuary 31, 2020 whereby the Company received$200 with another$50 held in escrow to be paid toAlcoa if certain post-closing conditions are satisfied. As a result of the transaction, the Company expects to recognize a gain of approximately$175 in the first quarter of 2020 and annual net income improvement of approximately$10 . 34
--------------------------------------------------------------------------------
Separation Transaction
References to ParentCo refer toAlcoa Inc. , aPennsylvania corporation, and its consolidated subsidiaries throughOctober 31, 2016 , at which time was renamed Arconic Inc. (Arconic). OnNovember 1, 2016 (the Separation Date), ParentCo separated into two standalone, publicly-traded companies,Alcoa Corporation and Arconic, effective at12:01 a.m. Eastern Time (the Separation Transaction). Regular-way trading ofAlcoa Corporation's common stock began with the opening of theNew York Stock Exchange onNovember 1, 2016 under the ticker symbol "AA." The Company's common stock has a par value of$0.01 per share. To effect the Separation Transaction, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in an initial cash payment of$1,072 to ParentCo byAlcoa Corporation with the net proceeds of a previous debt offering (see Note L to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K). Additionally,$247 was paid to Arconic by the Company in 2017, including$243 from the proceeds associated with the sale of certain energy operations (see Note C to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K). In connection with the Separation Transaction,Alcoa Corporation and Arconic entered into certain agreements to implement the legal and structural separation between the two companies, govern the relationship between the Company and Arconic after the completion of the Separation Transaction, and allocate betweenAlcoa Corporation and Arconic various assets, liabilities, and obligations. These agreements included a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement, certain Patent, Know-How, Trade Secret License and Trademark License Agreements, and Stockholder and Registration Rights Agreement. Basis of Presentation. The Consolidated Financial Statements ofAlcoa Corporation are prepared in conformity with accounting principles generally accepted inthe United States of America (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. Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation. As ofJanuary 1, 2019 , the Company changed its accounting method for valuing certain inventories from last-in, first-out (LIFO) to average cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented. The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the fiscal years endedDecember 31, 2019 and 2018. For a discussion of changes from the fiscal year endedDecember 31, 2017 to the fiscal year endedDecember 31, 2018 , refer to Management's Discussion and Analysis of Financial Condition and Results of Operation in Part II Item 7 ofAlcoa Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2018 (filedFebruary 26, 2019 ).
Results of Operations
Earnings Summary
Net loss attributable toAlcoa Corporation for 2019 was$1,125 compared with net income of$250 in 2018. The change of$1,375 was primarily due to lower margin from declining alumina and aluminum prices and higher restructuring costs, partially offset by favorable currency impacts, a lower income tax provision, higher volume, and lower net income attributable to noncontrolling interest. Sales-Sales for 2019 were$10,433 compared with$13,403 in 2018, a change of$2,970 , or 22%. The decrease was largely attributed to a lower average realized price for alumina and primary aluminum, the end of a flat rolled products tolling arrangement inTennessee , and reduced sales from the divestiture of two aluminum facilities inSpain . Cost of Goods Sold-Cost of goods sold as a percentage of Sales was 82% in 2019 compared with 75% in 2018. The percentage was negatively impacted by a lower average realized price for both alumina and aluminum products. The unfavorable impacts were partially offset by higher alumina shipments, net favorable foreign currency movements due to a strongerU.S. dollar, primarily against the Australian dollar, the euro, and the Brazilian real, improvements due to the divestiture of two aluminum facilities inSpain , and the partial exemption of tariffs on certain aluminum imports in 2019 (see Aluminum in Segment Information below). Selling, General Administrative, and Other Expenses-Selling, general administrative, and other expenses were$280 , or 3% of Sales, in 2019 compared with$248 , or 2% of Sales, in 2018. The change of$32 was primarily related to the unfavorable impact of a bad debt reserve recorded against a Canadian customer receivable due to a 2019 bankruptcy filing. 35 -------------------------------------------------------------------------------- Provision for Depreciation, Depletion, and Amortization-The provision for DD&A was$713 in 2019 compared with$733 in 2018. The decrease of$20 , or 3%, was principally caused by net favorable foreign currency movements, largely due to a strongerU.S. dollar against the Brazilian real, Australian dollar and Canadian dollar and the divestiture of two aluminum facilities inSpain . The favorable changes were partially offset by higher depreciation from the shortened lives of certain residue disposal areas inBrazil as a result of regulatory changes that occurred in 2019. Restructuring and Other Charges, Net-Restructuring and other charges, net was$1,031 in 2019 compared with$527 in 2018. In 2019, management took several actions to strengthen the Company which had a significant impact on Restructuring and other charges, net. These actions include divestingAlcoa's equity investment in Ma'adenRolling Company , the curtailment and subsequent divestiture of the Avilés and La Coruña (Spain ) aluminum facilities, additional actions taken to reduce the overall pension and other postretirement benefit (OPEB) liabilities, announcing a new operating model that will streamline reporting to assist in operational effectiveness, and deciding to permanently close thePoint Comfort alumina refinery. The increase in charges from 2018 is mainly attributed to the above factors and is partially offset by lower settlements and curtailments related to retirement benefits and the absence of a charge related to value-added tax credits recorded in 2018. See Note D in Part II Item 8 of this Form 10-K for a detailed description of each restructuring action. Other Expenses, net-Other expenses, net was$162 in 2019 compared with$64 in 2018. The change of$98 was mostly due to unfavorable changes in foreign currency movements ($73 ), an unfavorable change in equity earnings ($32 ), primarily related to the joint venture inSaudi Arabia as a result of lower alumina and aluminum prices which were slightly offset by the partial year absence of rolling mill losses, and reduced gains related to mark-to-market derivative instruments. These items were partially offset by lower non-service costs related to pension and other postretirement benefit plans ($22 ) primarily due to the actions taken by management to reduce the overall pension and OPEB liabilities.Income Taxes-Alcoa Corporation's effective tax rate was (94.9)% (provision on loss) in 2019 compared with theU.S. federal statutory rate of 21%.Alcoa's effective tax rate and federal statutory rate for 2018 were 45% (provision on income) and 21%, respectively. The effective tax rate differs from theU.S. federal statutory rate 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. In 2019, the effective tax rate was also impacted by restructuring expenses related to divestitures in foreign jurisdictions that are not deductible for tax purposes. In addition to reviewing the effective tax rate, management utilizes an adjusted effective tax rate (the operational tax rate) to assess the tax on operations exclusive of special items. Management reviews the operating results of the Company exclusive of special items, and therefore believes that this measure is meaningful for assessing the impact of these special items on the effective tax rate. Management anticipates the operational tax rate in 2020 to be between 70% and 80%. However, business portfolio actions, changes in the current economic environment, tax legislation or rate changes, currency fluctuations, ability to realize deferred tax assets, and the results of operations in certain tax jurisdictions may cause the actual rate to fall outside of the estimated range. Noncontrolling Interest-Net income attributable to noncontrolling interest was$272 in 2019 compared with$643 in 2018. These amounts are entirely related to Alumina Limited's 40% ownership interest in several affiliated operating entities, which own, have an interest in, or operate the bauxite mines and alumina refineries withinAlcoa'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 doNorte S.A. , all inBrazil ) and a portion (55%) of thePortland smelter (Australia ) within the Company's Aluminum segment. These individual entities comprise an unincorporated global joint venture betweenAlcoa Corporation and Alumina Limited known asAlcoa World Alumina and Chemicals (AWAC).Alcoa Corporation owns 60% of these individual entities, which are consolidated by the Company for financial reporting purposes and includeAlcoa of Australia Ltd. (AofA),Alcoa World Alumina LLC (AWA),Alcoa World Alumina Brasil Ltda. (AWAB), and Alúmina Española, S.A. (Española). Alumina Limited's 40% interest in the earnings of such entities is reflected as Noncontrolling interest onAlcoa Corporation's Statement of Consolidated Operations.
In 2019, these combined entities generated lower net income compared to 2018, primarily driven by lower alumina prices.
Segment Information
Alcoa Corporation is a producer of bauxite, alumina, and aluminum products (primary and flat-rolled). The Company's operations consist of three worldwide reportable segments: Bauxite, Alumina, and Aluminum. Segment performance underAlcoa Corporation's management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) of each segment. The Company calculates Segment Adjusted EBITDA as Total sales (third-party and intersegment) minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; and Research and development expenses.Alcoa Corporation's Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Segment Adjusted EBITDA totaled$1,626 in 2019,$3,250 in 2018, and$2,739 in 2017. The following information provides production, shipments, sales, and Segment Adjusted EBITDA data for each reportable segment, as well as certain realized 36
-------------------------------------------------------------------------------- price and average cost data, for each of the three years in the period endedDecember 31, 2019 . See Note E to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information. Bauxite 2019 2018 2017 Production (mdmt) 47.4 45.8 45.8 Third-party shipments (mdmt) 6.2 5.7 6.6 Intersegment shipments (mdmt) 41.4 41.2 41.1 Total shipments (mdmt) 47.6 46.9 47.7 Third-party sales$ 297 $ 271 $ 333 Intersegment sales 979 944 875 Total sales$ 1,276 $ 1,215 $ 1,208 Segment Adjusted EBITDA$ 504 $ 426 $ 424 Operating costs$ 859 $ 869 $ 839 Average cost per dry metric ton of bauxite shipped$ 18 $ 19 $ 18
Operating costs in the table above includes all production-related costs: conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.
Overview. This segment represents the Company's global bauxite mining operations. A portion of this segment's production represents the offtake from equity method investments inBrazil andGuinea , as well as AWAC's share of production related to the equity investment inSaudi Arabia . Production in the above table can vary from Total shipments due primarily to differences between the equity allocation of production and off-take agreements with the respective equity investment. The bauxite mined by this segment is sold primarily to internal customers within the Alumina segment; a portion of the bauxite is sold to external customers. Bauxite mined by this segment and used internally is transferred to the Alumina segment at negotiated terms that are intended to approximate market prices; sales to third-parties are conducted on a contract basis. Generally, this segment's sales are transacted inU.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar and the Brazilian real. Most of the operations that comprise the Bauxite segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above). Business Update. The Bauxite segment had record annual production in 2019 which included annual production records for the Willowdale, Huntly, and Juruti mines. The record annual production contributed to the record annual Adjusted EBITDA for the segment. Additionally, inNovember 2019 , employees in Western Australian eligible for coverage by theAustralian Workers Union (AWU) enterprise agreement (EA) voted in support of the agreement proposed by the Company and representatives of the AWU inOctober 2019 . The agreement has been ratified by the Fair Works Counsel and is in effect for approximately 1,500 employees across the Bauxite and Alumina segments combined. Mining operations are relocated periodically in support of optimizing the value extracted from bauxite reserves. During 2019, the Company began the process of moving the Willowdale mining operations to the next planned location in the Darling range, and began preparing for movement of the Juruti mining operations which is expected to start in 2020. As a result of these movements, additional capital expenditures are anticipated for 2020 compared with 2019.
Production. In 2019, bauxite production increased 3% compared with 2018, from higher production at five of the segment's seven mines.
Sales. Third-party sales for the Bauxite segment increased 10% in 2019 compared with 2018, primarily attributed to a 9% increase in third-party shipments.
Intersegment sales for the Bauxite segment increased 4% in 2019 compared with 2018 which was primarily driven by a higher average realized price.
Segment Adjusted EBITDA. Bauxite Segment Adjusted EBITDA improved$78 in 2019 compared with 2018, principally as a result of the previously mentioned higher average realized price for intersegment sales and net favorable foreign currency movements due to a strongerU.S. dollar against the Australian dollar and Brazilian real.
Forward-Look. In 2020, lower intersegment and third-party prices are anticipated in addition to higher capital expenditures as a result of the previously mentioned Willowdale and Juruti mining location moves.
37
--------------------------------------------------------------------------------
Alumina
2019 2018 2017
Production (kmt) 13,302 12,857 13,096
Third-party shipments (kmt) 9,473 9,259 9,220
Intersegment shipments (kmt) 4,072 4,326 4,475
Total shipments (kmt) 13,545 13,585 13,695
Third-party sales $ 3,250 $ 4,215 $ 3,133
Intersegment sales 1,561 2,101 1,723
Total sales $ 4,811 $ 6,316 $ 4,856
Segment Adjusted EBITDA $ 1,097 $ 2,373 $ 1,289
Average realized third-party price per metric
ton of alumina $ 343 $ 455 $ 340
Operating costs $ 3,646 $ 3,892 $ 3,506
Average cost per metric ton of alumina
shipped $ 269 $ 286 In the above table, total shipments include metric tons that were not produced by the Alumina segment. Such alumina was purchased to satisfy certain customer commitments. The Alumina segment bears the risk of loss of the purchased alumina until control of the product has been transferred to this segment's customer. Additionally, operating costs in the table above includes all production-related costs: raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and plant administrative expenses. Overview. This segment represents the Company's worldwide refining system, which processes bauxite into alumina. The alumina produced by this segment is sold primarily to internal and external aluminum smelter customers; a portion of the alumina is sold to external customers who process it into industrial chemical products. Approximately two-thirds of Alumina's production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Aluminum segment. Alumina produced by this segment and used internally is transferred to the Aluminum segment at prevailing market prices. A portion of this segment's third-party sales are completed through the use of alumina traders. Generally, this segment's sales are transacted inU.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar, the Brazilian real, theU.S. dollar, and the euro. Most of the operations that comprise the Alumina segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above). This segment also includes AWAC's 25.1% ownership interest in the mining and refining joint venture company inSaudi Arabia . Business Update. The Alumina segment had record annual production in 2019 which included annual production records for the Wagerup, Pinjarra, and San Ciprián alumina refineries. InNovember 2019 , employees in Western Australian eligible for coverage by the AWU EA voted in support of the agreement proposed by the Company and representatives of the AWU inOctober 2019 . The agreement has been ratified by the Fair Works Counsel and is in effect for approximately 1,500 employees across the Bauxite and Alumina segments combined. Additionally, inDecember 2019 , the Company announced the closure of thePoint Comfort alumina refinery which had been fully curtailed since 2016. During 2019, the average API (on 30-day lag) continued to decrease, while the Alumina segment improved stability across the refining system and realized the benefit of declining prices for caustic soda. Capacity. AtDecember 31, 2019 , the Alumina segment had a base capacity of 12,759 kmt with 214 kmt of curtailed refining capacity, both of which were down from 2018 due to the announcement of the permanent closure of the previously curtailedPoint Comfort alumina refinery. There were no other changes to curtailed or base capacity during 2019.
Production. In 2019, alumina production increased by 445 kmt compared to 2018, principally due to stabilization of operations across the refining system.
Sales. Third-party sales for the Alumina segment decreased 23% in 2019 compared with 2018, primarily attributable to a decline in average realized price which was principally driven by a lower average API (on 30-day lag).
Intersegment sales for the Alumina segment decreased 26% in 2019 compared with 2018 which was primarily driven by a lower average realized price.
Segment Adjusted EBITDA. Alumina Segment Adjusted EBITDA decreased$1,276 in 2019 compared with 2018, largely attributed to the previously mentioned lower average realized prices, higher costs for bauxite and energy, and increased maintenance expenses. These negative impacts were partially offset by net favorable foreign currency movements due to a strongerU.S. dollar, particularly against the Australian dollar and Brazilian real, and lower costs for caustic soda. 38
-------------------------------------------------------------------------------- Forward-Look. In 2020, higher natural gas costs inAustralia are expected to be more than offset by lower costs for both bauxite and caustic soda. Additionally, approximately 10% of the Alumina segment's intercompany shipments will move to an API based price from a percentage of LME price. Aluminum Total Aluminum information 2019 2018 2017 Third-party aluminum shipments (kmt) 2,859 3,268 3,356 Third-party sales$ 6,803 $ 8,829 $ 8,027 Intersegment sales 17 18 21 Total sales$ 6,820 $ 8,847 $ 8,048 Segment Adjusted EBITDA$ 25 $ 451 $ 1,026 Primary aluminum information 2019 2018 2017 Production (kmt) 2,135 2,259 2,328 Third-party shipments (kmt) 2,535 2,732 2,773 Third-party sales$ 5,426 $ 6,787 $ 6,168 Average realized third-party price per metric ton$ 2,141 $ 2,484 $ 2,224 Total shipments (kmt) 2,597 2,844 2,952 Operating costs$ 5,847 $
6,974
In the above table, total aluminum third-party shipments and total primary aluminum shipments include metric tons that were not produced by the Aluminum segment. Such aluminum was purchased by this segment to satisfy certain customer commitments. The Aluminum segment bears the risk of loss of the purchased aluminum until control of the product has been transferred to this segment's customer. Total aluminum information incudes flat-rolled aluminum while Primary aluminum information does not. Operating costs includes all production-related costs: raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and plant administrative expenses. The average realized third-party price per metric ton of primary aluminum includes three elements: a) the underlying base metal component, based on quoted prices from the LME; b) the regional premium, which represents the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for metal sold inthe United States ); and c) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., billet, slab, rod, etc.) or alloy. Overview. This segment consists of the Company's (i) worldwide smelting and casthouse system, which processes alumina into primary aluminum, (ii) portfolio of energy assets inBrazil ,Canada , andthe United States , and (iii) a rolling mill inthe United States . Aluminum's combined smelting and casting operations produce primary aluminum products, virtually all of which are sold to external customers and traders; a portion of this primary aluminum is consumed by the rolling mill. The smelting operations produce molten primary aluminum, which is then formed by the casting operations into either common alloy ingot (e.g., t-bar, sow, standard ingot) or into value-add ingot products (e.g., foundry, billet, rod, and slab). A variety of external customers purchase the primary aluminum products for use in fabrication operations, which produce products primarily for the transportation, building and construction, packaging, wire, and other industrial markets. Results from the sale of aluminum powder and scrap are also included in this segment, as well as the impacts of embedded aluminum derivatives related to energy supply contracts. The energy assets supply power to external customers inBrazil and, to a lesser extent, inthe United States , as well as internal customers in the Aluminum (Canadian smelters andWarrick (Indiana) smelter and rolling mill) and Alumina segments (Brazilian refineries). The rolling mill produces aluminum sheet primarily sold directly to customers in the packaging market for the production of aluminum cans (beverage and food). Additionally, from the Separation Date through the end of 2018,Alcoa Corporation had a tolling arrangement (contractually ended onDecember 31, 2018 ) with Arconic whereby Arconic's rolling mill inTennessee produced can sheet products for certain customers of the Company's rolling operations.Alcoa supplied all of the raw materials to theTennessee facility and paid Arconic for the tolling service. Seasonal increases in can sheet sales are generally experienced in the second and third quarters of the calendar year. Generally, this segment's aluminum sales are transacted inU.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are theU.S. dollar, the euro, the Norwegian krone, the Icelandic króna, the Canadian dollar, the Brazilian real, and the Australian dollar. 39
-------------------------------------------------------------------------------- This segment also includesAlcoa Corporation's 25.1% ownership interest in both the smelting and rolling mill joint venture company inSaudi Arabia (the rolling mill was divested inJune 2019 ). Business Update. During 2019, significant labor agreements inthe United States andCanada were modernized and extended for up to six years. As a result of a more competitive and long-term labor agreement, the process to restart the Bécancour (Canada ) smelter began inJuly 2019 . Previously, inJanuary 2018 , a lockout of the bargained hourly employees commenced at the Bécancour smelter, as labor negotiations reached an impasse. Accordingly, management initiated a curtailment of two of the three potlines at the smelter. Additionally, inDecember 2018 , half of the one operating potline at the Bécancour smelter was curtailed. This additional curtailment was deemed necessary to ensure continued safety and maintenance due to recent retirements and departures among the salaried workforce. InMay 2019 ,Canada andMexico received an exemption from tariffs that had been imposed on aluminum produced and imported from those countries under Section 232 of the Trade Expansion Act of 1962. These tariffs were originally enacted inMarch 2018 . InJune 2019 ,Alcoa and Saudi Arabian Mining Company (known as Ma'aden) amended the joint venture agreement that governs the operations of each of the three companies that comprise the joint venture. The amendment, among other items, transferredAlcoa's 25.1% interest in the rolling mill to Ma'aden and, as a result,Alcoa has no further direct or indirect equity interest in Ma'adenRolling Company . See Note C to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information. InFebruary 2019 ,Alcoa curtailed the smelters at Avilés and La Coruña (Spain ) after reaching an agreement with the workers' representatives on a collective dismissal process. InJuly 2019 ,Alcoa divested the Company's interest in the Avilés and La Coruña aluminum facilities toPARTER Capital Group AG . See Note C to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K. Capacity. AtDecember 31, 2019 , the Aluminum segment had 766 kmt of idle smelting capacity on a base capacity of 2,993 kmt. In 2019, idle capacity decreased 150 kmt and base capacity decreased 180 kmt compared withDecember 31, 2018 due to the curtailment (February 2019 ) and subsequent divestiture (July 2019 ) of the Avilés and La Coruña facilities and the restart of 94 kmt at the Bécancour (Canada ) smelter due to the aforementioned new labor agreement. Production. In 2019, primary aluminum production decreased by 124 kmt compared with 2018, primarily due to lower production at the Bécancour smelter as a result of the previously mentioned curtailment and the curtailment and subsequent divestiture of the Avilés and La Coruña facilities, partially offset by a full year of restarted production at the Warrick smelter. Sales. Third-party sales for the Aluminum segment decreased 23% in 2019 compared with 2018, primarily attributed to a reduction in metal price, a decrease in flat-rolled aluminum shipments due to the end of tolling arrangement with Arconic inDecember 2018 , and decreased primary aluminum shipments, mainly resulting from the curtailment and subsequent divesture of the Avilés and La Coruña facilities and decreased production from the Bécancour (Canada ) smelter resulting from the previously mentioned curtailments. The reduction in metal price was mainly driven by a 15% lower average LME price (on 15-day lag) combined with a decrease in the Midwest regional premium of 5%. Segment Adjusted EBITDA. Aluminum Segment Adjusted EBITDA decreased$426 in 2019 compared with 2018. The decrease was mainly attributable to lower metal prices, unfavorable energy pricing, higher labor costs, and the establishment of a bad debt reserve against a Canadian customer receivable. These unfavorable impacts were partially offset by lower alumina and carbon costs, favorable foreign currency impacts due to a strongerU.S. dollar, primarily against the euro, Norwegian kroner, and Icelandic kròna, and the partial exemption of the Section 232 tariffs inthe United States . Forward-Look. In 2020, benefits from the Bécancour (Canada ) smelter restart and lower raw material costs are expected to offset the volatility in energy exposures not covered by long term contracts. Additionally, the segment will experience the impact of approximately 10% of the intercompany alumina receipts moving to an API based price from a percentage of LME price. 40 --------------------------------------------------------------------------------
Reconciliations of Certain Segment Information
Reconciliation of Total Segment Third-Party Sales to Consolidated Sales
2019 2018 2017
Bauxite $ 297 $ 271 $ 333
Alumina 3,250 4,215 3,133
Aluminum:
Primary aluminum 5,426 6,787 6,168
Other(1) 1,377 2,042 1,859
Total segment third-party sales 10,350 13,315 11,493
Other 83 88 159
Consolidated sales $ 10,433 $ 13,403 $ 11,652 (1) Other includes third-party sales of flat-rolled aluminum and energy, as well
as realized gains and losses related to embedded derivative instruments
designated as cash flow hedges of forward sales of aluminum.
Reconciliation of Total Segment Operating Costs to Consolidated Cost of Goods
Sold
2019 2018 2017
Bauxite $ 859 $ 869 $ 839
Alumina 3,646 3,892 3,506
Primary aluminum 5,847 6,974 5,868
Other(1) 1,404 1,915 1,687
Total segment operating costs 11,756 13,650 11,900
Eliminations(2) (2,707 ) (3,055 ) (2,539 )
Provision for depreciation, depletion,
amortization(3) (676 ) (699 ) (704 )
Other(4) 164 157 293
Consolidated cost of goods sold$ 8,537 $ 10,053 $ 8,950
(1) Other largely relates to the Aluminum segment's flat-rolled aluminum product
division.
(2) This line item represents the elimination of cost of goods sold related to
intersegment sales between Bauxite and Alumina and between Alumina and
Aluminum.
(3) Depreciation, depletion, and amortization is included in the operating costs
used to calculate average cost for each of the bauxite, alumina, and primary
aluminum product divisions (see Bauxite, Alumina, and Aluminum
above). However, for financial reporting purposes, depreciation, depletion,
and amortization is presented as a separate line item on
Statement of Consolidated Operations.
(4) Other includes costs related to Transformation, and certain other items that
impact Cost of goods sold on
Operations that are not included in the operating costs of the segments (see
footnotes 2 and 5 in the Reconciliation of Total Segment Adjusted EBITDA to
Consolidated Net (Loss) Income Attributable to
41
--------------------------------------------------------------------------------
Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net (Loss)
Income Attributable to
2019 2018 2017
Net (loss) income attributable toAlcoa Corporation : Total segment Adjusted EBITDA(1)$ 1,626 $ 3,250 $ 2,739 Unallocated amounts: Transformation(2) (7 ) (3 ) (49 ) Intersegment eliminations(1),(3) 150 (8 ) (80 ) Corporate expenses(4) (101 ) (96 ) (131 ) Provision for depreciation, depletion, and amortization (713 ) (733 ) (750 ) Restructuring and other charges, net (1,031 ) (527 ) (309 ) Interest expense (121 ) (122 ) (104 ) Other expenses, net (162 ) (64 ) (27 ) Other(5) (79 ) (72 ) (89 ) Consolidated income (loss) before income taxes (438 ) 1,625
1,200
Provision for income taxes (415 ) (732 ) (592 ) Net income attributable to noncontrolling interest (272 ) (643 ) (329 ) Consolidated net (loss) income attributable to Alcoa Corporation$ (1,125 ) $ 250 $ 279
(1) As of
certain inventories from LIFO to average cost. The effects of the change in
accounting principle have been retrospectively applied to all prior periods
presented. As a result, for the years ended
segment Adjusted EBITDA increased $47 and $14 , respectively, and the
Intersegment eliminations value above decreased $19 and increased $27 ,
respectively.
(2) Transformation includes, among other items, the Adjusted EBITDA of previously
closed operations.
(3) Concurrent with the change in inventory accounting method as of
2019, management elected to change the presentation of certain line items in
the reconciliation of total Segment Adjusted EBITDA to Consolidated net
(loss) income attributable to
accounting previously included the impact of LIFO, metal price lag, and
intersegment eliminations. The impact of LIFO has been eliminated with the
change in inventory method. Metal price lag attributable to the Company's
rolled operations business is now netted within the Aluminum segment to
simplify presentation of an impact that nets to zero in consolidation. Only
intersegment eliminations remain as a reconciling line item and are labeled
as such.
(4) 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.
(5) Other includes certain items that impact Cost of goods sold and Selling,
general administrative, and other expenses on
of Consolidated Operations that are not included in the Adjusted EBITDA of
the reportable segments.
Environmental Matters
See the Environmental Matters section of Note R to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Liquidity and Capital Resources
Alcoa Corporation's primary future cash flows are centered on operating activities, particularly working capital, as well as sustaining and return-seeking capital expenditures.Alcoa's ability to fund its cash needs depends on the Company's ongoing ability to generate and raise cash in the future. Although management believes thatAlcoa's future cash from operations, together with the Company's access to capital markets, will provide adequate resources to fund operating and investing needs, the Company's access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i)Alcoa Corporation's credit rating; (ii) the liquidity of the overall capital markets; and (iii) the current state of the economy and commodity markets. There can be no assurances that the Company will continue to have access to capital markets on terms acceptable toAlcoa Corporation .
Cash provided from operations and financing activities is expected to be
adequate to cover
42
--------------------------------------------------------------------------------
At December 31, 2019 , the Company's cash and cash equivalents were $879 , of
which $755 was held outside the United States . Alcoa Corporation has a number of
commitments and obligations related to the Company's operations in various
foreign jurisdictions, resulting in the need for cash outside the United States .
Alcoa Corporation continuously evaluates its local and global cash needs for
future business operations, which may influence future repatriation decisions.
Cash from Operations
Cash provided from operations was$686 in 2019 compared with cash provided from operations of$448 in 2018. Notable changes to the sources and (uses) of cash for 2019 include:
•
inventories, and accounts payable, trade);
•
unscheduled, discretionary payments made in 2018 which were primarily
funded with a combination of net proceeds from the
and cash on hand;
•
locations;
•
a legacy legal matter with the
the Separation Transaction;
•
the energy supply agreement for the Wenatchee (
•
settlement of a legal matter in
• (
cash includes changes related to higher tax payments made in 2019 compared
with 2018, primarily payments of income taxes, and changes in the
underlying tax accounts.
Financing Activities
Cash used for financing activities was$444 in 2019 compared with cash used for financing activities of$288 in 2018. The increased use of cash was primarily attributed to the non-recurrence of cash sources of$560 due to the 2018 issuance of debt,$21 of lower proceeds from the exercise of employee stock options, and$12 of financial contributions paid to PARTER as part of the Avilés and La Coruña divestiture. These unfavorable changes were partially offset by$257 lower net cash paid to Alumina Limited,$128 for lower payments on debt, and$50 from the non-recurrence of common stock repurchases made in 2018. Credit Facilities.Alcoa Corporation has access to various sources of liquidity outside of cash generated through operations. Included in these sources is the Second Amended Revolving Credit Facility (the Revolving Credit Facility) entered into byAlcoa Corporation andAlcoa Nederland Holding B.V . (ANHBV), a revolving credit facility entered into duringOctober 2019 byAlcoa Norway ANS , and a three-year revolving credit facility agreement, also entered into duringOctober 2019 , secured by certain customer receivables. The Revolving Credit Facility provides a$1,500 senior secured revolving credit facility to be used for working capital and/or other general corporate purposes ofAlcoa Corporation and its subsidiaries. The Revolving Credit Agreement includes a number of covenants, including financial covenants, that require maintenance of a specified interest expense coverage ratio and a leverage ratio. The leverage ratio compares total indebtedness to a calculated earnings metric as defined in the credit facility agreement to determine compliance with the financial covenant. The calculation also determines the maximum indebtedness the Company can have based on the defined earnings metric. Based on the leverage ratio calculation as ofDecember 31, 2019 , the maximum additional borrowing capacity available to the Company to remain in compliance with the covenant was$1,200 ; the lower capacity primarily resulting from the impact of the restructuring-related charges recorded in 2019 on the earnings metric calculation. However, the Company still has the ability to access the full$1,500 credit facility through a combination of the maximum additional borrowing capacity and the issuances of letters of credit atDecember 31, 2019 . The Company believes that its cash on hand, future operating cash flows, and borrowing capacity atDecember 31, 2019 is adequate to fund its operating and investing needs. As ofDecember 31, 2019 and 2018,Alcoa was in compliance with all covenants. The Revolving Credit Facility is scheduled to mature onNovember 21, 2023 unless extended or earlier terminated in accordance with the provisions of the Second Amended Revolving Credit Agreement. ANHBV may make extension requests during the term of the Revolving Credit Facility, subject to the lender consent requirements set forth in the Second Amended Revolving Credit Agreement. 43 -------------------------------------------------------------------------------- OnOctober 2, 2019 ,Alcoa Norway ANS , a wholly-owned subsidiary ofAlcoa Corporation , entered into a one-year, multicurrency revolving credit facility agreement forNOK 1.3 billion (approximately$147 ) which is guaranteed on an unsecured basis byAlcoa Corporation . This revolving credit facility is scheduled to mature onOctober 2, 2020 , unless extended or terminated early in accordance with the provisions of the agreement. OnOctober 25, 2019 , a wholly-owned subsidiary of the Company entered into a$120 three-year revolving credit facility agreement secured by certain customer receivables.Alcoa Corporation guarantees the performance obligations of the wholly-owned subsidiaries under the facility, however no assets (other than the receivables) are pledged as collateral. As ofDecember 31, 2019 ,Alcoa's combined additional borrowing capacity of$1,200 can be drawn through any combination ofAlcoa's credit facilities. No amounts were borrowed relating to these facilities during 2019. See Note L to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information related to these credit facilities. Debt. As ofDecember 31, 2019 ,Alcoa Corporation has three outstanding Notes maturing at varying times. A summary of the Notes and other debt is shown below. See Note L to the Consolidated Financial Statement in Part II Item 8 of this Form 10-K for additional information related to the Company's debt. December 31, 2019 2018 6.75% Notes, due 2024$ 750 $ 750 7.00% Notes, due 2026 500 500 6.125% Notes, due 2028 500 500 Other 84 91
Unamortized discounts and deferred financing costs (34 ) (39 ) Total
1,800 1,802
Less: amount due within one year 1 1
Long-term debt, less amount due within one year
Ratings.Alcoa Corporation's cost of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short- and long-term debt ratings assigned toAlcoa Corporation's debt by the major credit rating agencies.
On
Common Stock Repurchase Program. InOctober 2018 ,Alcoa Corporation's Board of Directors authorized a common stock repurchase program with an aggregate transactional value of$200 , depending on cash availability, market conditions, and other factors. This program does not have a predetermined expiration date.Alcoa Corporation intends to retire the repurchased shares of common stock. InDecember 2018 , the Company repurchased 1,723,800 shares of its common stock for$50 ; these shares were immediately retired. No amounts were repurchased during 2019. Investing Activities Cash used for investing activities was$468 in 2019 compared with$405 in 2018. The increase in use of cash for 2019 was largely attributed to the cash expenditures related to the divestiture ofAlcoa's investment in Ma'adenRolling Company , partially offset by proceeds from the sale of excess land and lower capital expenditures. In 2020,Alcoa expects capital expenditures to be approximately$400 related to sustaining capital projects and approximately$75 related to growth projects. The timing and amount of capital expenditures may fluctuate as a result of the Company's normal operations. 44
--------------------------------------------------------------------------------
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations.Alcoa Corporation is required to make future payments under various contracts, including long-term purchase obligations and financing arrangements. The Company also has commitments to fund its pension plans and provide payments for other postretirement benefit plans. As ofDecember 31, 2019 , a summary ofAlcoa Corporation's outstanding contractual obligations is as follows: Total 2020 2021-2022 2023-2024 Thereafter Operating activities: Energy-related purchase obligations$ 15,496 $ 1,037 $ 2,460 $ 2,412 $ 9,587 Raw material purchase obligations 5,620 1,016 918 627 3,059 Other purchase obligations 744 223 197 114 210 Estimated minimum required pension funding 1,205 295 510 400 - Other postretirement benefit payments 705 105 185 160 255 Interest related to total debt 763 118 235 233 177 Operating leases 185 67 72 18 28 Layoff and other restructuring payments 137 124 13 - - Deferred revenue arrangements 60 8 16 16 20 Uncertain tax positions 43 - - - 43 Financing activities: Total debt 1,833 1 80 752 1,000 Investing activities: Equity contributions 16 11 5 - - Totals$ 26,807 $ 3,005 $ 4,691 $ 4,732 $ 14,379
Obligations for Operating Activities
Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from 1 year to 28 years. Raw material obligations consist mostly of bauxite (relates to AWAC's bauxite mine interests inGuinea andBrazil ), caustic soda, alumina, aluminum fluoride, calcined petroleum coke, and cathode blocks with expiration dates ranging from less than 1 year to 15 years. Other purchase obligations consist principally of freight for bauxite and alumina with expiration dates ranging from 1 to 13 years. Many of these purchase obligations contain variable pricing components, and, as a result, actual cash payments may differ from the estimates provided in the preceding table. In accordance with the terms of several of these supply contracts, obligations may be reduced as a result of an interruption to operations, such as a plant curtailment or a force majeure event. Interest related to total debt is based on interest rates in effect as ofDecember 31, 2019 and is calculated on debt with maturities that extend to 2028. Some of the contractual interest rates for certain debt are variable; actual cash payments may differ from the estimates provided in the preceding table. Estimated minimum required pension funding and other postretirement benefit payments are based on actuarial estimates using current assumptions for, among others, discount rates, long-term rate of return on plan assets, rate of compensation increases, and/or health care cost trend rates. Actual payments may differ based on changes in assumptions. Other postretirement benefit payments will be slightly offset by subsidy receipts related to Medicare Part D, which are estimated to approximate$5 to$10 annually for years 2020 through 2029.Alcoa Corporation has determined that it is not practicable to present pension funding and other postretirement benefit payments beyond 2024 and 2029, respectively. Layoff and other restructuring payments expected to be paid within one year relate to financial contributions that resulted from the share purchase agreement with PARTER from the divestiture of two Spanish aluminum facilities, take-or-pay provisions of supply contracts associated with curtailed facilities, a contractual commitment to an Italian government agency related to the transfer of the Portovesme smelter, severance costs, and the termination of an office lease contract. Amounts scheduled to be paid beyond one year largely relate to the previously mentioned financial contributions to PARTER. Deferred revenue arrangements requireAlcoa Corporation to deliver alumina to a certain customer over the specified contract period (through 2027). While this obligation is not expected to result in cash payments, it is included in the preceding table as the Company would have such an obligation if the specified product deliveries could not be made. Uncertain tax positions taken or expected to be taken on an income tax return may result in additional payments to tax authorities. The amount in the preceding table includes interest and penalties accrued related to such positions as ofDecember 31, 2019 . The total amount of uncertain tax positions is included in the Thereafter column as the Company is not able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary. 45 --------------------------------------------------------------------------------
Obligations for Financing Activities
Total debt amounts in the preceding table represent the principal amounts of all outstanding long-term debt, which have maturities that extend to 2028.
InOctober 2018 ,Alcoa Corporation's Board of Directors authorized a common stock repurchase program under which the Company may purchase shares of its outstanding common stock up to an aggregate transactional value of$200 , depending on various factors. The program does not have a predetermined expiration date. Accordingly, amounts have not been included in the preceding table. InDecember 2018 , the Company repurchased 1,723,800 shares of its common stock for$50 at a weighted average share price of$29.01 (includes$0.02 broker commission). No shares were repurchased in 2019.
Obligations for Investing Activities
Equity contributions are related to the joint venture,ElysisTM Limited Partnership (ElysisTM). This joint venture requiresAlcoa Corporation to invest a total of$21 (C$28 ) through 2021. In 2018, the Company contributed$5 (C$6 ) toward its initial investment commitment in ElysisTM. Off-Balance Sheet Arrangements.Alcoa Corporation has outstanding bank guarantees and letters of credit related to, among others, energy contracts, environmental obligations, legal and tax matters, outstanding debt, leasing obligations, workers compensation, and customs duties.Alcoa Corporation also has outstanding surety bonds primarily related to tax matters, contract performance, workers compensation, environmental-related matters, and customs duties. See Note R to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
Critical Accounting Policies and Estimates
The preparation of the Company's Consolidated Financial Statements in accordance with accounting principles generally accepted inthe United States of America requires management to make certain estimates based on judgments and assumptions regarding uncertainties that affect the amounts reported in the Consolidated Financial Statements and disclosed in the Notes to the Consolidated Financial Statements. Areas that require such estimates include the review of properties, plants, and equipment and goodwill for impairment, and accounting for each of the following: asset retirement obligations; environmental and litigation matters; pension plans and other postretirement benefits obligations; derivatives and hedging activities; and income taxes. Management uses historical experience and all available information to make these estimates, and actual results may differ from those used to prepare the Company's Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that the amounts recorded in the financial statements related to these items are based on the best estimates and judgments using all relevant information available at the time.
A summary of the Company's significant accounting policies is included in Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Properties, Plants, and Equipment. Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the fair value. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of assets also require significant judgments.Goodwill .Goodwill is not amortized; it is instead reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. Management will test goodwill on a qualitative or quantitative basis. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods. The fair value that could be realized in an actual transaction may differ from that used to evaluate goodwill for impairment. In reviewing goodwill for impairment under the qualitative assessment, an entity will consider if the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If it is determined that an impairment is more likely than not, the entity is then required to perform a quantitative impairment test, otherwise no further analysis is required. 46 -------------------------------------------------------------------------------- Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Management uses a DCF model to estimate the current fair value of its reporting units. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes.
In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, an impairment loss equal to the excess of the reporting unit's carrying value over its fair value not to exceed the total amount of goodwill applicable to that reporting unit would be recognized.
Management performed a quantitative assessment of the Alumina reporting unit in 2019. The estimated fair value of the Alumina reporting unit was substantially in excess of its carrying value, resulting in no impairment. Management performed a qualitative assessment of the Bauxite reporting unit in 2019 and determined that it was not more likely that not that the fair value of the reporting unit was less that its carrying value. Management last performed a quantitative impairment test for the Bauxite reporting unit in 2018. At that time, the estimated fair value of the Bauxite reporting unit was substantially in excess of its carrying value, resulting in no impairment. Additionally, in all prior years presented, there have been no triggering events that necessitated an impairment test for either the Bauxite or Alumina reporting units. Asset Retirement Obligations.Alcoa Corporation recognizes asset retirement obligations (AROs) related to legal obligations associated with the standard operation of bauxite mines, alumina refineries, and aluminum smelters. These AROs consist primarily of costs associated with mine reclamation, closure of bauxite residue areas, spent pot lining disposal, and landfill closure.Alcoa Corporation also recognizes AROs for any significant lease restoration obligation, if required by a lease agreement, and for the disposal of regulated waste materials related to the demolition of certain power facilities. The fair values of these AROs are recorded on a discounted basis, at the time the obligation is incurred, and accreted over time for the change in present value. Additionally,Alcoa Corporation capitalizes asset retirement costs by increasing the carrying amount of the related long-lived assets and depreciating these assets over their remaining useful life. Certain conditional asset retirement obligations (CAROs) related to alumina refineries, aluminum smelters, rolling mills, and energy generation facilities have not been recorded in the Consolidated Financial Statements due to uncertainties surrounding the ultimate settlement date. A CARO is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be withinAlcoa Corporation's control. Such uncertainties exist as a result of the perpetual nature of the structures, maintenance and upgrade programs, and other factors. At the date a reasonable estimate of the ultimate settlement date can be made (e.g., planned demolition),Alcoa Corporation would record an ARO. Such amounts may be material to the Consolidated Financial Statements. Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery, which are recognized as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent thatAlcoa Corporation has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations. Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as, among others, the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management's judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss. Pension and Other Postretirement Benefits. Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, health care cost trend rates, retirement age, and mortality). 47 -------------------------------------------------------------------------------- The yield curve model used to develop the discount rate parallels the plans' projected cash flows and has a weighted average duration of 11 years. The underlying cash flows of the high quality corporate bonds included in the model exceed the cash flows needed to satisfy the Company's plan obligations multiple times. If a deep market of high quality corporate bonds does not exist in a country, then the yield on government bonds plus a corporate bond yield spread is used. The impact on the combined pension and other postretirement liabilities of a change in the weighted average discount rate of ¼ of 1% would be approximately$175 and either a charge or credit of approximately$1 to pretax earnings in the following year. The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (a four-year average or the fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on forward-looking investment returns by asset class. Management incorporates expected future investment returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management's own judgment. A change in the assumption for the weighted average expected long-term rate of return on plan assets of ¼ of 1% would impact pretax earnings by approximately$15 for 2020.
Mortality rate assumptions are based on mortality tables and future improvement
scales published by third parties, such as the
Derivatives and Hedging. Derivatives are held for purposes other than trading and are part of a formally documented risk management program. Alcoa accounts for hedges of firm customer commitments for aluminum as fair value hedges. The fair values of the derivatives and changes in the fair values of the underlying hedged items are reported as assets and liabilities in the Consolidated Balance Sheet. Changes in the fair values of these derivatives and underlying hedged items generally offset and are recorded each period in Sales, consistent with the underlying hedged item. The Company accounts for hedges of foreign currency exposures and certain forecasted transactions as cash flow hedges. The fair values of the derivatives are recorded as assets and liabilities in the Consolidated Balance Sheet. The changes in the fair values of these derivatives are recorded in Other comprehensive (loss) income and are reclassified to Sales, Cost of goods sold, or Other expenses, net in the period in which earnings are impacted by the hedged items or in the period that the transaction no longer qualifies as a cash flow hedge. These contracts cover the same periods as known or expected exposures, generally not exceeding five years. If no hedging relationship is designated, the derivative is marked to market through Other expenses, net. Cash flows from derivatives are recognized in the Statement of Consolidated Cash Flows in a manner consistent with the underlying transactions. Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid and result from differences between the financial and tax bases of assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted. 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, andAlcoa Corporation'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. In certain jurisdictions, deferred tax assets related to cumulative losses exist without a valuation allowance where in management's judgment the weight of the positive evidence more than offsets the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays. Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired, or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are 48 --------------------------------------------------------------------------------
recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.
Related Party Transactions
Recently Adopted Accounting Guidance
See the Recently Adopted Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Recently Issued Accounting Guidance
See the Recently Issued Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
© Edgar Online, source
