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))
References in this Management's Discussion and Analysis of Financial Condition and Results of Operations to ParentCo refer toAlcoa Inc. , aPennsylvania corporation, and its consolidated subsidiaries throughOctober 31, 2016 , at which time it was renamedArconic Inc. (and has since been subsequently renamed Howmet Aerospace Inc.). OnNovember 1, 2016 (the Separation Date), ParentCo separated into two standalone, publicly-traded companies,Alcoa Corporation andArconic Inc. (the Separation Transaction). In connection with the Separation Transaction, as ofOctober 31, 2016 , the Company andArconic Inc. entered into several agreements to affect the Separation Transaction, including a Separation and Distribution Agreement and a Tax Matters Agreement. See Overview in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II Item 7 ofAlcoa Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information regarding the Separation Transaction. Business Update Coronavirus In response to the threat of coronavirus (COVID-19),Alcoa has implemented swift measures to protect the health of the Company's workforce, prevent infection in our locations, and mitigate impacts from the global pandemic. Currently, all ofAlcoa's bauxite mines, alumina refineries, and aluminum manufacturing facilities remain in operation with comprehensive measures in place for health and business continuity. Each location has implemented extensive preparedness and response plans which include social distancing protocols and other protective actions aligned with guidance from theU.S. Centers for Disease Control and Prevention , theWorld Health Organization , and all other relevant government agencies in countries where we operate. Additional actions include:
• Adjusted shift schedules and other work patterns to create separation for
the workforce and ensure redundancy for critical resources;
• Developed and implemented additional hygiene protocols and cleaning
routines at each location;
• Deployed communications to our suppliers, vendors, customers, and delivery
personnel on our comprehensive actions;
• Issued global communications to educate and update employees on public
health practices to mitigate the potential spread of the virus in our
communities;
• Implemented access restrictions to anyone who has visited or transited
through high-risk countries. Everyone must be free of the signs and
symptoms of COVID-19 before entering Alcoa sites;
• Implemented remote work procedures where practical; and,
• Eliminated non-essential travel.
Due to the economic impacts of the COVID-19 pandemic and to comply with
restrictions in the Canadian province, the previously announced restart at the
Bécancour (Canada ) smelter has been slowed, leaving the operating capacity at
approximately 85 percent of total nameplate capacity at March 31, 2020 . The
restart, which was originally expected to be complete by the end of the second
quarter of 2020, may be extended past such date. Additionally, COVID-19 has
negatively impacted customer demand of value-added aluminum products, resulting
in lower margins on aluminum product sales from a shift to commodity-grade
products from value-add products.
As the impact of COVID-19 on the global economy continues to evolve, the Company
is constantly evaluating the broad impact of the pandemic on the macroeconomic
environment, including specific regions and end markets in which the Company
operates. As a result of the pandemic's impact on the macroeconomic environment,
management evaluated the future recoverability of the Company's assets,
including goodwill and long-lived assets, and the realizability of deferred tax
assets while considering the Company's current market capitalization. Management
concluded that no asset impairments existed and no additional valuation
allowances were required in the first quarter of 2020. Additionally, the
pandemic did not have a significant impact on the 2020 first quarter financial
and operating results of Alcoa Corporation .
The extent and duration of the COVID-19 pandemic is unknown. The pandemic could
have adverse future impacts on the Company's business, financial condition,
operating results, and cash flows. Specifically, if the global health threat
persists, it could adversely affect:
• Global demand for aluminum, negatively impacting our ability to generate
cash flows from operations;
• Global financial and credit markets and our ability to obtain credit or
financing upon acceptable terms or at all, which could negatively affect
our liquidity and financial condition;
• The liquidity of customers, which could negatively impact the
collectability of outstanding receivables and our cash flows;
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• Commercial sustainability of key vendors within our supply chain which
could result in higher inventory costs and/or inability to fulfill customer
orders;
•
our facilities, which could negatively impact our ability to operate,
results of operations, and profitability;
• The Company's ability to meet covenants in our outstanding debt and credit
facility agreements;
• The financial condition of equity method investments and key joint venture
partners, negatively impacting the results of operations, cash flows, and
recoverability of investment balances;
•
impacting the realizability of our deferred tax assets;
• Investment return on pension assets and declining interest rates, resulting
in increased required Company contributions, negatively impacting future
cash flows;
• The effectiveness of hedging instruments;
• The recoverability of certain long-lived and intangible assets, including
goodwill;
• Legal obligations resulting from employee claims related to health and
safety; and,
• The efficiency of production at our operating locations, negatively
impacting the results of operations.
The preceding list of potential adverse effects of the coronavirus COVID-19
pandemic is not all-inclusive or necessarily in order of importance or
magnitude. The potential impact(s) of the pandemic on the Company's business,
financial condition, operating results, cash flows and/or market capitalization
is difficult to predict and will continue to be monitored in subsequent periods.
Further or prolonged deterioration of adverse conditions could negatively impact
our financial condition and result in asset impairment charges, including
long-lived assets or goodwill, or affect the realizability of deferred tax
assets.
In addition to utilizing all preventative and mitigation options available to ensure continuity of operations, the Company has implemented various cash preservation initiatives. These measures include:
• Reducing non-critical capital expenditures planned for 2020 by$100 ;
• Deferring non-regulated environmental and asset retirement obligations
payments of
• Deferring approximately
1, 2021 in the U.S. , as permitted under the Coronavirus Aid, Relief, and
Economic Security (CARES) Act; and,
• Implementing hiring restrictions outside of critical production roles,
implementing and extending travel restrictions throughout the organization,
and utilizing other appropriate government support programs to save or
defer approximately $35 .
Through a combination of these initiatives, the previously announced strategic
actions, and the 2020 programs discussed below, the Company is targeting
approximately
Additionally, duringApril 2020 , management took measures to improveAlcoa's liquidity levers. These include amending the Second Amended Revolving Credit Facility to temporarily provide a more favorable leverage ratio calculation and amending the three-year revolving credit facility secured by certain receivables, converting it to a Receivables Purchase Agreement which provides the option for faster liquidation of certain customer receivables. OnApril 8, 2020 , the Company's wholly-owned subsidiary,Alcoa Norway ANS , drew$100 against its one-year, multicurrency revolving credit facility, and may do so from time to time in the future, in the ordinary course of business. Interest on the drawn$100 will be accrued at 2.93%. See Credit Facilities under the Liquidity and Capital Resources section of Management's Discussion and Analysis for additional detail on the amendments. Strategic ActionsAlcoa continues to progress with its strategic actions to drive lower costs and sustainable profitability, however, the global effects of COVID-19 may impact the timing of the previously announced strategic actions. During 2019,Alcoa Corporation announced the following strategic actions:
• The implementation of a new operating model that results in a leaner, more
integrated, operator-centric organization with reduced overhead costs;
• The pursuit of non-core asset sales by early 2021 expected to generate an
estimated $500 to $1,000 in net proceeds in support of its updated
strategic priorities; and,
• The realignment of its operating portfolio over the next five years,
placing 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.
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The new operating model has been implemented and the Company is substantially
complete with the transition of eliminated roles. At
InJanuary 2020 , the Company announced the sale ofElemental Environmental Solutions LLC (EES), a wholly-ownedAlcoa subsidiary that operated 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 recognized a gain of$180 (pre- and after-tax) in the first quarter of 2020 and anticipates annual net income improvement of approximately$10 . OnApril 22, 2020 ,Alcoa announced that it will curtail the remaining 230,000 metric tons of uncompetitive smelting capacity at its Intalco smelter inFerndale, 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 ofJuly 2020 . The smelter recorded a net loss of$24 in the first quarter of 2020. This action will bringAlcoa'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. 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 ofAlcoa Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2019 ). 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.
2020 Programs
InFebruary 2020 ,Alcoa announced 2020 programs to drive leaner working capital and improved productivity. First, by utilizing a holistic solution for managing the supply chain across procurement, operations, and the commercial team, the Company is targeting a working capital benefit between$75 to$100 during 2020 to improve its operating cash flows. Secondly, the Company is expecting greater productivity and lower costs of approximately$100 which will be achieved through efficiency programs and specific initiatives taken throughout 2020. Results of Operations Selected Financial Data: First quarter ended March 31, 2020 2019 Sales$ 2,381 $ 2,719 Net income (loss) attributable to Alcoa Corporation$ 80 $ (199 ) Diluted earnings (loss) per share attributable to Alcoa Corporation common shareholders$ 0.43 $ (1.07 ) Third-party shipments of alumina (kmt) 2,365
2,329
Third-party shipments of aluminum products (kmt) 725
709
Average realized price per metric ton of alumina$ 299 $ 385 Average realized price per metric ton of primary aluminum$ 1,988 $ 2,219
Overview-Net income attributable to
• A gain on the divestiture of a waste processing facility in
• Favorable currency impacts, mainly due to changes in the Australian dollar
and Brazilian real;
• Lower raw material and energy costs;
• Lower Net income attributable to non-controlling interest; and,
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• Lower Provision for income taxes.
Partially offset by:
• Lower alumina and aluminum prices.
Sales-Sales were
• Lower alumina and aluminum prices;
• Lower revenue from flat-rolled aluminum products due to lower shipments; and,
• Lower revenue resulting from the divestiture of two Spanish facilities in
July 2019 . Partially offset by:
• Higher sales resulting from the restart of the Aluminerie De Bécancour
(Bécancour ) smelter in Quebec ; and,
• Higher shipments in Bauxite and Alumina.
Cost of goods sold- As a percentage of Sales, Cost of goods sold was 85% in the
first quarter of 2020 compared with 80% in the first quarter of 2019. The first
quarter of 2020 percentage was negatively impacted by a lower average realized
price for both alumina and primary aluminum partially offset by lower raw
material costs, particularly petroleum coke and caustic soda, and lower alumina
prices.
Selling, general administrative, and other expenses- Selling, general
administrative, and other expenses decreased by $24 , or 29% in the first quarter
of 2020 compared with the first quarter of 2019, due primarily to the absence of
a $20 charge to bad debt expense in the first quarter of 2019, the absence of
Spain collective dismissal costs, cost savings from the new operating model, and
favorable foreign currency impacts.
Provision for depreciation, depletion, and amortization- Provision for
depreciation, depletion, and amortization decreased
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 pension curtailment charges of$3 as discussed in Note J to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q. In the first quarter of 2019,Alcoa Corporation recorded Restructuring and other charges, net, of$113 , which were comprised primarily of$103 for exit costs related to the collective dismissal process and curtailment of the Avilés and La Coruña Spanish smelters and$7 for closure costs related to a coal mine.
See Note D to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q for additional detail on the above net charges.
Other (income) expenses, net- Other (income) expenses, net was ($132 ) in the first quarter of 2020 compared with$41 in the first quarter of 2019. The favorable change of$173 in the first quarter of 2020 was largely attributable to the gain on the divestiture of a waste processing facility inGum Springs ,Arkansas , partially offset by mark-to-market losses on derivative instruments. Noncontrolling interest- Net income attributable to noncontrolling interest was$59 in the first quarter of 2020, compared with$141 in the first quarter of 2019. These amounts are entirely related to Alumina Limited's 40% ownership interest in several affiliated operating entities. See Note A to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q. In the first quarter of 2020 these combined entities, particularly the Alumina segment entities, generated lower net income compared with the first quarter of 2019. The unfavorable change in earnings was mostly driven by lower alumina prices (see Alumina under Segment Information below). 25
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Segment Information
Bauxite
First quarter ended
March 31,
2020 2019
Production (mdmt) 11.6 11.9
Third-party shipments (mdmt) 1.4 1.2
Intersegment shipments (mdmt) 10.5 10.2
Total shipments (mdmt) 11.9 11.4
Third-party sales $ 71 $ 65
Intersegment sales 235 236
Total sales $ 306 $ 301
Segment Adjusted EBITDA $ 120 $ 126
Operating costs $ 213 $ 195
Average cost per dry metric ton of bauxite
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. 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. Bauxite production decreased 3% in the first quarter of 2020 compared with the first quarter of 2019, primarily due to lower production at the Australian mines. Third-party sales for the Bauxite segment increased 9% in the first quarter of 2020 compared with the first quarter of 2019, caused primarily by the increase in shipments. Intersegment sales were flat for the first quarter of 2020 compared with the first quarter of 2019 as a result of increased intersegment shipments offsetting the lower average realized price on intersegment sales. Segment Adjusted EBITDA decreased$6 in first quarter of 2020 compared with the first quarter of 2019, primarily due to the previously mentioned lower average realized price on intersegment sales.
For the second quarter of 2020 in comparison with the second quarter of 2019, a lower average realized price for intersegment sales is expected.
Alumina
First quarter ended
March 31,
2020 2019
Production (kmt) 3,298 3,240
Third-party shipments (kmt) 2,365 2,329
Intersegment shipments (kmt) 1,075 972
Total shipments (kmt) 3,440 3,301
Third-party sales 707 $ 897
Intersegment sales 336 417
Total sales $ 1,043 $ 1,314
Segment Adjusted EBITDA $ 193
$ 299 $ 385
Operating costs $ 844 $ 923
Average cost per metric ton of alumina $ 245 $ 279
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.
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At March 31, 2020 , the Alumina segment had base capacity of 12,759 kmt with 214
kmt of curtailed refining capacity compared with a base capacity of 15,064 kmt
and curtailed refining capacity of 2,519 kmt of at March 31, 2019 . The decrease
in base and curtailed was due to the permanent closure of the previously
curtailed Point Comfort alumina refinery.
Alumina production increased by 2% in the first quarter of 2020 compared with
the first quarter of 2019, principally due to continued stabilization of
operations across the refining system. Third-party sales for the Alumina segment
decreased 21% in the first quarter of 2020 compared with the first quarter of
2019, primarily due to a decline in average realized price which was principally
driven by a lower average alumina index price (on 30-day lag), partially offset
by a 2% increase in shipments.
Intersegment sales declined 19% in the first quarter of 2020 compared with the
first quarter of 2019, primarily due to a lower average realized price partially
offset by increased demand from the Aluminum segment. The increased demand from
the Aluminum segment was primarily driven by the restart at the Bécancour
(Canada ) smelter (see Aluminum below).
Segment Adjusted EBITDA decreased $179 in the first quarter of 2020 compared
with the first quarter of 2019. The decline is largely attributed to the decline
in average realized price of alumina. This decrease was partially offset by net
favorable foreign currency movements due to a stronger U.S. dollar (particularly
against the Australian dollar and Brazilian real), lower unit costs for bauxite
and caustic soda, and increased shipments.
For the second quarter of 2020 in comparison with the second quarter of 2019,
lower unit costs for bauxite and caustic soda and an improvement in maintenance
activities are expected.
Aluminum
First quarter ended
March 31,
Total Aluminum information 2020 2019
Third-party aluminum shipments (kmt) 725 709
Third-party sales $ 1,598 $ 1,735
Intersegment sales 3 3
Total sales $ 1,601 $ 1,738
Segment Adjusted EBITDA $ 62 $ (96 )
Primary aluminum information 2020 2019
Production (kmt) 564 537
Third-party shipments (kmt) 652
628
Third-party sales$ 1,297 $
1,394
Average realized third-party price per metric ton$ 1,988 $ 2,219 Total shipments (kmt) 663 639 Operating costs$ 1,327 $ 1,568 Average cost per metric ton$ 2,002 $ 2,454 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. 27
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The following table provides annual consolidated base and idle capacity (each in
kmt) for each smelter owned by
March 31, 2020 March 31, 2019
Facility Country Base Capacity Idle Capacity Base Capacity Idle Capacity Base Change Idle Change
Portland (1) Australia 197 30 197 30 - -
São Luís
(Alumar) (1) Brazil 268 268 268 268 - -
Baie Comeau Canada 280 - 280 - - -
Bécancour (1) Canada 310 49 310 259 - (210 )
Deschambault Canada 260 - 260 - - -
Fjarðaál Iceland 344 - 344 - - -
Lista Norway 94 - 94 - - -
Mosjøen Norway 188 - 188 - - -
San Ciprián Spain 228 - 228 - - -
Avilés Spain - - 93 93 (93 ) (93 )
La Coruña Spain - - 87 87 (87 ) (87 )
Intalco (2) U.S. 279 49 279 49 - -
Massena West U.S. 130 - 130 - - -
Warrick U.S. 269 108 269 108 - -
Wenatchee U.S. 146 146 146 146 - -
2,993 650 3,173 1,040 (180 ) (390 )
(1) These figures represent
based on its ownership interest in the respective smelter.
(2) On
metric tons of smelting capacity at the Intalco smelter. 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.
Idle capacity at the Bécancour smelter decreased by 210 kmt from the first
quarter 2019 to the first quarter 2020 as a result of the restart process. Due
to the economic impacts of the COVID-19 pandemic, the restart at the Bécancour
(Canada ) smelter has been slowed, leaving the operating capacity at
approximately 85 percent of total nameplate capacity at March 31, 2020 . The
restart, which was originally expected to be complete by the end of the second
quarter of 2020, may be extended past such date.
Base and idle capacity at the Avilés and La Coruña facilities decreased from the
first quarter of 2019 to the first quarter of 2020 as a result of the
curtailment (February 2019 ) and subsequent divestiture (July 2019 ) of these
smelters. In addition to the smelters at these locations, the casthouse at each
facility and the paste plant at La Coruña were also divested.
Primary aluminum production increased 5% in the first quarter of 2020 compared with the first quarter of 2019, principally due to the capacity changes discussed above.
Third-party sales for the Aluminum segment decreased 8% in the first quarter of 2020 compared with the first quarter of 2019, primarily due to a reduction in metal price. The change in average realized price of primary aluminum was mainly driven by a 7% lower average LME price (on 15-day lag) combined with a decrease in regional premiums. Additionally, higher overall shipments were primarily the result of theBécancour smelter restart process, partially offset by lower trading activity. Segment Adjusted EBITDA increased$158 in the first quarter of 2020 compared with the first quarter of 2019. The increase is mainly the result of lower costs for alumina and carbon materials, favorable impacts from the divestiture of the Avilés and La Coruña facilities, and state grant revenue recognized at thePortland (Australia ) facility. These favorable impacts were partially offset by lower metal prices, an unfavorable mix of value-added products, and unfavorable production costs related to rolling operations.
For the second quarter of 2020 compared with the second quarter of 2019,
favorable impacts from the
28
--------------------------------------------------------------------------------Reconciliation of Certain Segment Information
Reconciliation of Total Segment Third-Party Sales to Consolidated Sales
First quarter ended
March 31,
2020 2019
Bauxite $ 71 $ 65
Alumina 707 897
Aluminum:
Primary aluminum 1,297 1,394
Other(1) 301 341
Total segment third-party sales 2,376 2,697
Other 5 22
Consolidated sales $ 2,381 $ 2,719 (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
First quarter ended
March 31,
2020 2019
Bauxite $ 213 $ 195
Alumina 844 923
Primary aluminum 1,327 1,568
Other(1) 314 365
Total segment operating costs 2,698 3,051
Eliminations(2) (566 ) (742 )
Provision for depreciation, depletion, amortization(3) (163 ) (164 )
Other(4) 56 35
Consolidated cost of goods sold$ 2,025 $ 2,180
(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 segments (see
footnotes 1 and 3 in the Reconciliation of Total Segment Adjusted EBITDA to
Consolidated Net Income (Loss) Attributable to
29
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Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net Income
(Loss) Attributable to
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