The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
Notes to the Consolidated Financial Statements (unaudited)
(dollars in millions, except per-share amounts; metric tons in thousands (kmt))
A. Basis of Presentation – The interim Consolidated Financial Statements of Alcoa Corporation and its subsidiaries (Alcoa Corporation, Alcoa, or the Company) are unaudited. These Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position, and cash flows. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The 2021 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which includes disclosures required by GAAP.
In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Management uses historical experience and all available information to make these estimates. Management regularly evaluates the judgments and assumptions used in its estimates, and results could differ from those estimates upon future events and their effects or new information.
Principles of Consolidation. The Consolidated Financial Statements of Alcoa Corporation include the accounts of Alcoa Corporation and companies in which Alcoa Corporation has a controlling interest, including those that comprise the Alcoa World Alumina & Chemicals (AWAC) joint venture (see below). Intercompany transactions have been eliminated. The equity method of accounting is used for investments in affiliates and other joint ventures over which Alcoa Corporation has significant influence but does not have effective control. Investments in affiliates in which Alcoa Corporation cannot exercise significant influence are accounted for using the cost method.
AWAC is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited and consists of several affiliated operating entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within Alcoa Corporation’s Bauxite and Alumina segments (except for the Poços de Caldas mine and refinery, portions of the São Luís refinery, and investment in Mineração Rio do Norte S.A (MRN), all in Brazil) and the Portland smelter in Australia within Alcoa Corporation’s Aluminum segment. Alcoa Corporation and Alumina Limited ultimately own 60% and 40%, respectively, of the AWAC individual entities, which are consolidated by the Company for financial reporting purposes and include Alcoa of Australia Limited (AofA), Alcoa World Alumina LLC (AWA), and Alcoa World Alumina Brasil Ltda. (AWAB). Alumina Limited’s interest in the equity of such entities is reflected as Noncontrolling interest on the accompanying Consolidated Balance Sheet.
B. Recently Adopted and Recently Issued Accounting Guidance
Adopted
Management considers the applicability and impact of all Accounting Standards Updates (ASUs). Management assessed ASUs not disclosed and determined that they were either not applicable or are not expected to have a material impact on the Company's Consolidated Financial Statements.
Issued
In March 2020 and January 2021, the Financial Accounting Standards Board issued ASU No. 2020-04 and ASU No. 2021-01, respectively. Together, the ASUs provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The Company is working to transition from LIBOR to alternative reference rates. Management has identified a total company inventory of affected financial instruments and contracts, has taken action to transition certain legacy contracts linked to LIBOR to alternative reference rates, and intends to utilize alternative reference rates for new contracts in 2022. The transition from LIBOR is not expected to have a material impact on Alcoa.
6
C. Divestitures
Warrick Rolling Mill
On March 31, 2021, Alcoa completed the sale of its rolling mill located at Warrick Operations (Warrick Rolling Mill), an integrated aluminum manufacturing site near Evansville, Indiana (Warrick Operations), to Kaiser Aluminum Corporation (Kaiser) for total consideration of approximately $670, which included the assumption of $69 in other postretirement benefit liabilities. The Company recorded a net gain of $30 in Other income, net (pre- and after-tax, see Note P) on the Statement of Consolidated Operations, $27 of which was recorded in the first quarter of 2021. Upon the closing of the transaction, the Company recorded estimated liabilities for future site separation commitments and remaining transaction costs associated with the sales agreement. At December 31, 2021, the remaining reserve was approximately $70. Over half of the expected cash outlay is to be spent in 2022, with the remainder to be spent through 2023. In the first quarter of 2022, the Company spent $2 against the reserve.
In connection with the transaction, Alcoa and Kaiser entered into a market-based metal supply agreement and a ground lease agreement for the Warrick Rolling Mill property, which Alcoa continues to own. Approximately 1,150 employees at Warrick Rolling Mill, which includes the casthouse, hot mill, cold mills, and coating and slitting lines, became employees of Kaiser as a result of the transaction. Alcoa continues to own and operate the site’s 269,000 metric ton per year aluminum smelter and the power plant, which together employ approximately 670 people. The remaining Warrick Operations site results are included within the Aluminum segment.
D. Restructuring and Other Charges, Net – In the first quarter of 2022, Alcoa Corporation recorded Restructuring and other charges, net, of $125 which were comprised of:
|
• |
A charge of $77 for the offer made to the workers of the divested Avilés and La Coruña facilities to settle various legal disputes related to the 2019 divestiture (see Note O); |
|
• |
A charge of $58 for an asset impairment related to the sale of the Company’s interest in MRN (see Note H); and |
|
• |
A net reversal of $9 for changes in estimated take-or-pay contract costs at the closed Wenatchee (Washington) smelter and the curtailed Intalco (Washington) smelter. |
In the first quarter of 2021, Alcoa Corporation recorded Restructuring and other charges, net, of $7 which were comprised of:
|
• |
A net charge of $9 related to the settlement and curtailment of certain other postretirement benefits resulting from the sale of the Warrick Rolling Mill; |
|
• |
A charge of $6 for additional take-or-pay contract costs related to the curtailed Wenatchee and Intalco smelters; |
|
• |
A reversal of $12 due to lower costs for demolition and remediation related to previously established reserves (see Note O); and, |
|
• |
A net charge of $4 for several other insignificant items. |
Alcoa Corporation does not include Restructuring and other charges, net in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:
|
|
First quarter ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Bauxite |
|
$ |
58 |
|
|
$ |
— |
|
Alumina |
|
|
— |
|
|
|
— |
|
Aluminum |
|
|
68 |
|
|
|
15 |
|
Segment total |
|
|
126 |
|
|
|
15 |
|
Corporate |
|
|
(1 |
) |
|
|
(8 |
) |
Total Restructuring and other charges, net |
|
$ |
125 |
|
|
$ |
7 |
|
7
Activity and reserve balances for restructuring charges were as follows:
|
|
Severance
and
employee
termination
costs |
|
|
Other
costs |
|
|
Total |
|
Balance at December 31, 2020 |
|
$ |
6 |
|
|
$ |
57 |
|
|
$ |
63 |
|
Restructuring and other charges, net |
|
|
1 |
|
|
|
80 |
|
|
|
81 |
|
Cash payments |
|
|
(4 |
) |
|
|
(25 |
) |
|
|
(29 |
) |
Reversals and other |
|
|
— |
|
|
|
(22 |
) |
|
|
(22 |
) |
Balance at December 31, 2021 |
|
|
3 |
|
|
|
90 |
|
|
|
93 |
|
Restructuring and other charges, net |
|
|
— |
|
|
|
68 |
|
|
|
68 |
|
Cash payments |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
Balance at March 31, 2022 |
|
$ |
2 |
|
|
$ |
154 |
|
|
$ |
156 |
|
The activity and reserve balances include only Restructuring and other charges, net that impact the reserves for Severance and employee termination costs and Other costs. Restructuring and other charges, net that affected other liability accounts such as environmental obligations (see Note O) and Investments (see Note H) are excluded from the above activity and balances. Reversals and other includes reversals of previously recorded liabilities and foreign currency translation impacts.
The noncurrent portion of the reserve was $36 and $43 at March 31, 2022 and December 31, 2021, respectively.
E. Segment Information – Alcoa Corporation is a producer of bauxite, alumina, and aluminum products. The Company has three operating and reportable segments, which are organized by product on a global basis: Bauxite, Alumina, and Aluminum. Segment performance under Alcoa 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 believes that the presentation of Adjusted EBITDA is useful to investors because such measure provides both additional information about the operating performance of Alcoa Corporation and insight on the ability of Alcoa Corporation to meet its financial obligations. The presentation of Adjusted EBITDA is not intended to be a substitute for, and should not be considered in isolation from, the financial measures reported in accordance with GAAP. Alcoa Corporation’s Adjusted EBITDA may not be comparable to similarly titled measures of other companies. The chief operating decision maker function regularly reviews the financial information, including Sales and Adjusted EBITDA, of these three operating segments to assess performance and allocate resources.
The operating results of Alcoa Corporation’s reportable segments were as follows (differences between segment totals and consolidated amounts are in Corporate):
|
|
Bauxite |
|
|
Alumina |
|
|
Aluminum |
|
|
Total |
|
First quarter ended March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales |
|
$ |
43 |
|
|
$ |
855 |
|
|
$ |
2,388 |
|
|
$ |
3,286 |
|
Intersegment sales |
|
|
170 |
|
|
|
418 |
|
|
|
7 |
|
|
|
595 |
|
Total sales |
|
$ |
213 |
|
|
$ |
1,273 |
|
|
$ |
2,395 |
|
|
$ |
3,881 |
|
Segment Adjusted EBITDA |
|
$ |
38 |
|
|
$ |
262 |
|
|
$ |
713 |
|
|
$ |
1,013 |
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization |
|
$ |
35 |
|
|
$ |
50 |
|
|
$ |
69 |
|
|
$ |
154 |
|
Equity income |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
39 |
|
|
$ |
40 |
|
First quarter ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales |
|
$ |
58 |
|
|
$ |
760 |
|
|
$ |
2,047 |
|
|
$ |
2,865 |
|
Intersegment sales |
|
|
185 |
|
|
|
364 |
|
|
|
2 |
|
|
$ |
551 |
|
Total sales |
|
$ |
243 |
|
|
$ |
1,124 |
|
|
$ |
2,049 |
|
|
$ |
3,416 |
|
Segment Adjusted EBITDA |
|
$ |
59 |
|
|
$ |
227 |
|
|
$ |
283 |
|
|
$ |
569 |
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization |
|
$ |
57 |
|
|
$ |
46 |
|
|
$ |
73 |
|
|
$ |
176 |
|
Equity (loss) income |
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
13 |
|
|
$ |
8 |
|
8
The following table reconciles total Segment Adjusted EBITDA to Consolidated net income attributable to Alcoa Corporation:
|
|
First quarter ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Total Segment Adjusted EBITDA |
|
$ |
1,013 |
|
|
$ |
569 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
Transformation(1) |
|
|
(14 |
) |
|
|
(11 |
) |
Intersegment eliminations |
|
|
102 |
|
|
|
(7 |
) |
Corporate expenses(2) |
|
|
(29 |
) |
|
|
(26 |
) |
Provision for depreciation, depletion, and amortization |
|
|
(160 |
) |
|
|
(182 |
) |
Restructuring and other charges, net (D) |
|
|
(125 |
) |
|
|
(7 |
) |
Interest expense |
|
|
(25 |
) |
|
|
(42 |
) |
Other income, net (P) |
|
|
14 |
|
|
|
24 |
|
Other(3) |
|
|
(13 |
) |
|
|
(6 |
) |
Consolidated income before income taxes |
|
|
763 |
|
|
|
312 |
|
Provision for income taxes |
|
|
(210 |
) |
|
|
(93 |
) |
Net income attributable to noncontrolling interest |
|
|
(84 |
) |
|
|
(44 |
) |
Consolidated net income attributable to Alcoa Corporation |
|
$ |
469 |
|
|
$ |
175 |
|
(1) |
Transformation includes, among other items, the Adjusted EBITDA of previously closed operations. |
(2) |
Corporate expenses are composed of general administrative and other expenses of operating the corporate headquarters and other global administrative facilities, as well as research and development expenses of the corporate technical center. |
(3) |
Other includes certain items that impact Cost of goods sold on Alcoa Corporation’s Statement of Consolidated Operations that are not included in the Adjusted EBITDA of the reportable segments. |
The following table details Alcoa Corporation’s Sales by product division:
|
|
First quarter ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Primary aluminum |
|
$ |
2,447 |
|
|
$ |
1,727 |
|
Alumina |
|
|
850 |
|
|
|
760 |
|
Energy |
|
|
41 |
|
|
|
39 |
|
Bauxite |
|
|
28 |
|
|
|
52 |
|
Flat-rolled aluminum(1) |
|
|
— |
|
|
|
320 |
|
Other(2) |
|
|
(73 |
) |
|
|
(28 |
) |
|
|
$ |
3,293 |
|
|
$ |
2,870 |
|
(1) |
Flat-rolled aluminum represented sales of the Warrick Rolling Mill through the sale of the facility on March 31, 2021 (see Note C). |
(2) |
Other includes realized gains and losses related to embedded derivative instruments designated as cash flow hedges of forward sales of aluminum. |
9
F. Earnings Per Share – Basic earnings per share (EPS) amounts are computed by dividing earnings by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The information used to compute basic and diluted EPS attributable to Alcoa Corporation common shareholders was as follows (shares in millions):
|
|
First quarter ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Net income attributable to Alcoa Corporation |
|
$ |
469 |
|
|
$ |
175 |
|
Average shares outstanding – basic |
|
|
184 |
|
|
|
186 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
— |
|
|
|
— |
|
Stock units |
|
|
4 |
|
|
|
3 |
|
Average shares outstanding – diluted |
|
|
188 |
|
|
|
189 |
|
All options to purchase shares of common stock outstanding as of March 31, 2022 were included in the computation of diluted EPS. No options had an exercise price greater than the average market price of Alcoa Corporation’s common stock.
Options to purchase one million shares of common stock outstanding as of March 31, 2021 at a weighted average exercise price of $35.67 per share were not included in the computation of diluted EPS because the exercise prices of these options were greater than the average market price of Alcoa Corporation’s common stock.
10
G. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss for both Alcoa Corporation’s shareholders and Noncontrolling interest:
|
|
Alcoa Corporation |
|
|
Noncontrolling interest |
|
|
|
First quarter ended
March 31, |
|
|
First quarter ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Pension and other postretirement benefits (K) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(882 |
) |
|
$ |
(2,536 |
) |
|
$ |
(13 |
) |
|
$ |
(67 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service
cost/benefit |
|
|
(7 |
) |
|
|
69 |
|
|
|
— |
|
|
|
— |
|
Tax benefit(2) |
|
|
1 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
Total Other comprehensive (loss) income
before reclassifications, net of tax |
|
|
(6 |
) |
|
|
71 |
|
|
|
— |
|
|
|
— |
|
Amortization of net actuarial loss and prior
service cost/benefit(1) |
|
|
28 |
|
|
|
61 |
|
|
|
1 |
|
|
|
1 |
|
Tax expense(2) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
Total amount reclassified from Accumulated
other comprehensive loss, net of tax(6) |
|
|
28 |
|
|
|
60 |
|
|
|
1 |
|
|
|
1 |
|
Total Other comprehensive income |
|
|
22 |
|
|
|
131 |
|
|
|
1 |
|
|
|
1 |
|
Balance at end of period |
|
$ |
(860 |
) |
|
$ |
(2,405 |
) |
|
$ |
(12 |
) |
|
$ |
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(2,614 |
) |
|
$ |
(2,385 |
) |
|
$ |
(937 |
) |
|
$ |
(844 |
) |
Other comprehensive income (loss) |
|
|
326 |
|
|
|
(176 |
) |
|
|
98 |
|
|
|
(60 |
) |
Balance at end of period |
|
$ |
(2,288 |
) |
|
$ |
(2,561 |
) |
|
$ |
(839 |
) |
|
$ |
(904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges (L) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(1,096 |
) |
|
$ |
(708 |
) |
|
$ |
(1 |
) |
|
$ |
(1 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations |
|
|
(1,063 |
) |
|
|
(303 |
) |
|
|
1 |
|
|
|
(10 |
) |
Tax benefit(2) |
|
|
153 |
|
|
|
56 |
|
|
|
— |
|
|
|
3 |
|
Total Other comprehensive (loss) income
before reclassifications, net of tax |
|
|
(910 |
) |
|
|
(247 |
) |
|
|
1 |
|
|
|
(7 |
) |
Net amount reclassified to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts(3) |
|
|
110 |
|
|
|
41 |
|
|
|
— |
|
|
|
— |
|
Financial contracts(4) |
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
6 |
|
Interest rate contracts(5) |
|
|
4 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
Foreign exchange contracts(3) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
Sub-total |
|
|
114 |
|
|
|
52 |
|
|
|
— |
|
|
|
6 |
|
Tax expense(2) |
|
|
(34 |
) |
|
|
(9 |
) |
|
|
— |
|
|
|
(2 |
) |
Total amount reclassified from
Accumulated other comprehensive
loss, net of tax(6) |
|
|
80 |
|
|
|
43 |
|
|
|
— |
|
|
|
4 |
|
Total Other comprehensive (loss) income |
|
|
(830 |
) |
|
|
(204 |
) |
|
|
1 |
|
|
|
(3 |
) |
Balance at end of period |
|
$ |
(1,926 |
) |
|
$ |
(912 |
) |
|
$ |
— |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss |
|
$ |
(5,074 |
) |
|
$ |
(5,878 |
) |
|
$ |
(851 |
) |
|
$ |
(974 |
) |
(1) |
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note K). |
(2) |
These amounts were reported in Provision for income taxes on the accompanying Statement of Consolidated Operations. |
(3) |
These amounts were primarily reported in Sales on the accompanying Statement of Consolidated Operations. |
(4) |
These amounts were reported in Cost of goods sold on the accompanying Statement of Consolidated Operations. |
(5) |
These amounts were reported in Other income, net of the accompanying Statement of Consolidated Operations. |
11
(6) |
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings. |
H. Investments – A summary of unaudited financial information for Alcoa Corporation’s equity investments is as follows (amounts represent 100% of investee financial information):
First quarter ended March 31, 2022 |
|
Saudi Arabia
Joint Venture |
|
|
Mining |
|
|
Energy |
|
|
Other |
|
Sales |
|
$ |
897 |
|
|
$ |
231 |
|
|
$ |
62 |
|
|
$ |
117 |
|
Cost of goods sold |
|
|
616 |
|
|
|
146 |
|
|
|
30 |
|
|
|
107 |
|
Net income (loss) |
|
|
155 |
|
|
|
49 |
|
|
|
23 |
|
|
|
(28 |
) |
Equity in net income (loss) of affiliated companies,
before reconciling adjustments |
|
|
39 |
|
|
|
14 |
|
|
|
9 |
|
|
|
(13 |
) |
Other |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
(4 |
) |
Alcoa Corporation’s equity in net income (loss) of
affiliated companies |
|
|
39 |
|
|
|
14 |
|
|
|
10 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
682 |
|
|
$ |
173 |
|
|
$ |
55 |
|
|
$ |
95 |
|
Cost of goods sold |
|
|
503 |
|
|
|
123 |
|
|
|
25 |
|
|
|
63 |
|
Net income (loss) |
|
|
45 |
|
|
|
(5 |
) |
|
|
25 |
|
|
|
(2 |
) |
Equity in net income (loss) of affiliated companies,
before reconciling adjustments |
|
|
11 |
|
|
|
1 |
|
|
|
10 |
|
|
|
(1 |
) |
Other |
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Alcoa Corporation’s equity in net income of
affiliated companies |
|
|
7 |
|
|
|
1 |
|
|
|
10 |
|
|
|
2 |
|
The Saudi Arabia joint venture consisting of the bauxite mine and alumina refinery (MBAC) and the smelter (MAC) is owned 74.9% by the Saudi Arabian Mining Company (Ma’aden) and 25.1% by Alcoa. In accordance with the June 2019 amended joint venture agreement, Ma’aden’s put option and Alcoa Corporation’s call option, relating to additional interests in the joint venture, were exercisable for a period of six months after October 1, 2021. On March 31, 2022, Ma’aden’s and Alcoa’s put and call options, respectively, expired with neither party exercising their options.
The Company’s basis in the ELYSISTM Limited Partnership, included in Other in the table above, has been reduced to zero for its share of losses incurred to date. As a result, the Company has $52 in unrecognized losses as of March 31, 2022 that will be recognized upon additional contributions into the partnership.
On February 15, 2022, the Company signed an agreement to sell its share of its investment in MRN in Brazil for $10 to South32 Minerals S.A. Related to this transaction, the Company recorded an asset impairment of $58 in the first quarter of 2022 in Restructuring and other charges, net on the Statement of Consolidated Operations. On April 30, 2022, Alcoa completed the sale of its investment in MRN. Further, an additional $30 in cash could be paid to the Company in the future if certain post-closing conditions related to future MRN mine development are satisfied.
I. Inventories
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Finished goods |
|
$ |
736 |
|
|
$ |
538 |
|
Work-in-process |
|
|
195 |
|
|
|
85 |
|
Bauxite and alumina |
|
|
588 |
|
|
|
539 |
|
Purchased raw materials |
|
|
798 |
|
|
|
619 |
|
Operating supplies |
|
|
178 |
|
|
|
175 |
|
|
|
$ |
2,495 |
|
|
$ |
1,956 |
|
12
J. Debt
Credit Facilities
Revolving Credit Facility
The Company has a senior secured $1,500 revolving credit and letter of credit facility in place for working capital and/or other general corporate purposes (the Facility). The Facility was established on September 16, 2016, was amended in each of 2017, 2018, 2019, 2020, and 2021, and is scheduled to mature on November 21, 2023. Subject to the terms and conditions under the Facility, the Company may borrow funds or issue letters of credit through its Alcoa Corporation or ANHBV legal entities. See Note M in Part II Item 8 of Alcoa Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information on the Facility.
As of March 31, 2022, the Company was in compliance with all covenants. The Company may access the entire amount of commitments under the Facility. There were no borrowings outstanding at March 31, 2022 and December 31, 2021, and no amounts were borrowed during the first quarters ended March 31, 2022 and March 31, 2021 under the Facility.
K. Pension and Other Postretirement Benefits
The components of net periodic benefit cost were as follows:
|
|
Pension benefits |
|
|
Other postretirement benefits |
|
First quarter ended March 31, |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Service cost |
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
2 |
|
Interest cost(1) |
|
|
27 |
|
|
|
29 |
|
|
|
4 |
|
|
|
4 |
|
Expected return on plan assets(1) |
|
|
(44 |
) |
|
|
(73 |
) |
|
|
— |
|
|
|
— |
|
Recognized net actuarial loss(1) |
|
|
28 |
|
|
|
51 |
|
|
|
4 |
|
|
|
6 |
|
Amortization of prior service cost(1) |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
(4 |
) |
Settlements(2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
Curtailments(2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
Net periodic benefit cost |
|
$ |
14 |
|
|
$ |
12 |
|
|
$ |
6 |
|
|
$ |
17 |
|
(1) |
These amounts were reported in Other income, net on the accompanying Statement of Consolidated Operations (see Note P). |
(2) |
These amounts were reported in Restructuring and other charges, net on the accompanying Statements of Consolidated Operations (see Note D) and Cash Flows. |
Funding and Cash Flows. It is Alcoa’s policy to fund amounts for defined benefit pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws, including ERISA for U.S. plans. From time to time, the Company contributes additional amounts as deemed appropriate.
Under ERISA regulations, a plan sponsor that establishes a pre-funding balance by making discretionary contributions to a U.S. defined benefit pension plan may elect to apply all or a portion of this balance toward its minimum required contribution obligations to the related plan in future years.
In the first quarter of 2022, management made such elections related to the Company’s U.S. plans and intends to do so for the remainder of 2022. As a result, Alcoa’s minimum required contribution to defined benefit pension plans in 2022 is estimated to be approximately $15, of which approximately $4 was contributed to non-U.S. plans during the first quarter of 2022.
In the first quarter of 2021, $49 and $14 were contributed to U.S. and non-U.S. plans, respectively.
13
L. Derivatives and Other Financial Instruments
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
|
• |
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
|
• |
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
|
• |
Level 3 - Inputs that are both significant to the fair value measurement and unobservable. |
Derivatives
Alcoa Corporation is exposed to certain risks relating to its ongoing business operations, including the risks of changing commodity prices, foreign currency exchange rates and interest rates. Alcoa Corporation’s commodity and derivative activities include aluminum, energy, foreign exchange, and interest rate contracts which are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility, and to cover underlying exposures. While Alcoa does not generally enter into derivative contracts to mitigate the risk associated with changes in aluminum price, the Company may do so in isolated cases to address discrete commercial or operational conditions. Alcoa is not involved in trading activities for energy, weather derivatives, or other nonexchange commodity trading activities.
Alcoa Corporation’s aluminum, energy, and foreign exchange contracts are predominantly classified as Level 1 under the fair value hierarchy. All of the Level 1 contracts are designated as either fair value or cash flow hedging instruments. Alcoa Corporation also has several derivative instruments classified as Level 3 under the fair value hierarchy, which are either designated as cash flow hedges or undesignated. Alcoa includes the changes in its equity method investee’s Level 2 derivatives in Accumulated other comprehensive (loss) income.
The following tables present the detail for Level 1 and 3 derivatives (see additional Level 3 information in further tables below):
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
Level 1 derivative instruments |
|
$ |
70 |
|
|
$ |
285 |
|
|
$ |
19 |
|
|
$ |
29 |
|
Level 3 derivative instruments |
|
|
14 |
|
|
|
2,024 |
|
|
|
2 |
|
|
|
1,293 |
|
Total |
|
$ |
84 |
|
|
$ |
2,309 |
|
|
$ |
21 |
|
|
$ |
1,322 |
|
Less: Current |
|
|
64 |
|
|
|
514 |
|
|
|
14 |
|
|
|
274 |
|
Noncurrent |
|
$ |
20 |
|
|
$ |
1,795 |
|
|
$ |
7 |
|
|
$ |
1,048 |
|
|
|
2022 |
|
|
2021 |
|
First quarter ended March 31, |
|
Unrealized loss recognized in Other comprehensive loss |
|
|
Realized loss reclassed from Other comprehensive loss to earnings |
|
|
Unrealized loss recognized in Other comprehensive loss |
|
|
Realized loss reclassed from Other comprehensive loss to earnings |
|
Level 1 derivative instruments |
|
$ |
(233 |
) |
|
$ |
(6 |
) |
|
$ |
(14 |
) |
|
$ |
- |
|
Level 3 derivative instruments |
|
|
(837 |
) |
|
|
(104 |
) |
|
|
(300 |
) |
|
|
(55 |
) |
Noncontrolling and equity interest (Level 2) |
|
|
7 |
|
|
|
(4 |
) |
|
|
11 |
|
|
|
3 |
|
Total |
|
$ |
(1,063 |
) |
|
$ |
(114 |
) |
|
$ |
(303 |
) |
|
$ |
(52 |
) |
14
For the quarter ended March 31, 2022, the realized loss of $6 on Level 1 cash flow hedges was comprised of a $5 loss recognized in Sales and a $1 loss recognized in Cost of goods sold. For the quarter ended March 31, 2021, the realized gains and losses on Level 1 cash flow hedges were immaterial.
The following table presents the outstanding quantities of derivative instruments classified as Level 1:
|
Classification |
|
March 31, 2022 |
|
|
March 31, 2021 |
|
Aluminum (in kmt) |
Commodity forwards |
|
|
481 |
|
|
|
21 |
|
Foreign currency (in millions of euro) |
Foreign exchange forwards |
|
|
80 |
|
|
|
124 |
|
Foreign currency (in millions of A$) |
Foreign exchange forwards |
|
|
— |
|
|
|
94 |
|
Foreign currency (in millions of R$) |
Foreign exchange forwards |
|
|
1,323 |
|
|
|
354 |
|
Alcoa routinely uses Level 1 aluminum derivative instruments to manage exposures to changes in the fair value of firm customer commitments for the purchases or sales of aluminum. Additionally, Alcoa uses Level 1 aluminum derivative instruments to manage exposures to changes in the LME associated with the Alumar (Brazil) restart (April 2022 through December 2023) and the San Ciprián (Spain) strike (expires April 2022).
Alcoa Corporation uses Level 1 foreign exchange forward contracts to mitigate the risk of foreign exchange exposure related to euro power purchases in Norway (expires December 2026), U.S. dollar aluminum sales in Australia (expired June 2021), and U.S. dollar alumina sales in Brazil (expires December 2024).
In March 2021, Alcoa entered into four financial contracts (Financial contracts (undesignated), below) with three counterparties to hedge the anticipated power requirements at one of its smelters for the period from August 1, 2021 through June 30, 2026. A fifth financial contract (undesignated) was entered into in November 2021 with an effective date of September 30, 2022 through June 30, 2026. Two of these financial contracts include LME-linked pricing components and do not qualify for hedge accounting treatment. Management elected not to apply hedge accounting treatment for the other three financial contracts as the value of these contracts is not significant. Unrealized and realized gains and losses on these financial contracts are included in Other income, net on the accompanying Statement of Consolidated Operations.
Additional Level 3 Disclosures
The following table presents quantitative information related to the significant unobservable inputs described above for Level 3 derivative instruments (megawatt hours in MWh):
|
|
March 31, 2022 |
|
|
Unobservable Input |
|
Unobservable Input Range |
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
Financial contract |
|
|
14 |
|
|
Interrelationship of |
|
Electricity (per MWh) |
|
2022: $61.49 |
(undesignated) |
|
|
|
|
|
forward energy price, LME |
|
|
|
2022: $59.25 |
|
|
|
|
|
|
forward price and the |
|
LME (per mt) |
|
2022: $3,484 |
|
|
|
|
|
|
Consumer Price Index |
|
|
|
|
Total Asset Derivatives |
|
$ |
14 |
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
|
|
|
|
|
|
|
Power contract |
|
$ |
436 |
|
|
MWh of energy needed |
|
LME (per mt) |
|
2022: $3,484 |
|
|
|
|
|
|
to produce the forecasted |
|
|
|
2027: $2,868 |
|
|
|
|
|
|
mt of aluminum |
|
Electricity |
|
Rate of 4 million MWh per year |
Power contracts |
|
|
1,587 |
|
|
MWh of energy needed
to produce the forecasted
mt of aluminum |
|
LME (per mt) |
|
2022: $3,484
2029: $2,917
2036: $3,213 |
|
|
|
|
|
|
|
|
Midwest premium
(per pound) |
|
2022: $0.4000
2029: $0.3700
2036: $0.3699 |
|
|
|
|
|
|
|
|
Electricity |
|
Rate of 18 million MWh per year |
Power contract (undesignated) |
|
1 |
|
|
Estimated spread between
the 30-year debt yield of
Alcoa and the counterparty |
|
Credit spread |
|
1.13%: 30-year debt yield spread
5.15%: Alcoa (estimated)
4.02%: counterparty |
Total Liability Derivatives |
|
$ |
2,024 |
|
|
|
|
|
|
|
15
The fair values of Level 3 derivative instruments recorded in the accompanying Consolidated Balance Sheet were as follows:
Asset Derivatives |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Current—financial contract |
|
$ |
14 |
|
|
$ |
2 |
|
Total derivatives not designated as hedging instruments |
|
$ |
14 |
|
|
$ |
2 |
|
Total Asset Derivatives |
|
$ |
14 |
|
|
$ |
2 |
|
Liability Derivatives |
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
Current—power contracts |
|
$ |
386 |
|
|
$ |
262 |
|
Noncurrent—power contracts |
|
|
1,637 |
|
|
|
1,028 |
|
Total derivatives designated as hedging instruments |
|
$ |
2,023 |
|
|
$ |
1,290 |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Current—embedded credit derivative |
|
$ |
— |
|
|
$ |
1 |
|
Noncurrent—embedded credit derivative |
|
|
1 |
|
|
|
2 |
|
Total derivatives not designated as hedging instruments |
|
$ |
1 |
|
|
$ |
3 |
|
Total Liability Derivatives |
|
$ |
2,024 |
|
|
$ |
1,293 |
|
Assuming market rates remain constant with the rates at March 31, 2022, a realized loss of $386 related to power contracts is expected to be recognized in Sales over the next 12 months.
At March 31, 2022 and December 31, 2021, the power contracts with embedded derivatives designated as cash flow hedges hedge forecasted aluminum sales of 1,849 kmt and 1,905 kmt, respectively.
The following tables present the reconciliation of activity for Level 3 derivative instruments:
|
|
Assets |
|
|
Liabilities |
|
Three months ended March 31, 2022 |
|
Financial
contract |
|
|
Power contracts |
|
|
Embedded
credit
derivative |
|
January 1, 2022 |
|
$ |
2 |
|
|
$ |
1,290 |
|
|
$ |
3 |
|
Total gains or losses included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales (realized) |
|
|
— |
|
|
|
(104 |
) |
|
|
— |
|
Other income, net (unrealized/realized) |
|
|
13 |
|
|
|
— |
|
|
|
(2 |
) |
Other comprehensive income (unrealized) |
|
|
— |
|
|
|
837 |
|
|
|
— |
|
Other |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
March 31, 2022 |
|
$ |
14 |
|
|
$ |
2,023 |
|
|
$ |
1 |
|
Change in unrealized gains or losses included in earnings
for derivative instruments held at March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
$ |
13 |
|
|
$ |
— |
|
|
$ |
(2 |
) |
There were no purchases, sales, or settlements of Level 3 derivative instruments in the periods presented.
Other Financial Instruments
The carrying values and fair values of Alcoa Corporation’s other financial instruments were as follows:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
Carrying
value |
|
|
Fair
value |
|
|
Carrying
value |
|
|
Fair
value |
|
Cash and cash equivalents |
|
$ |
1,554 |
|
|
$ |
1,554 |
|
|
$ |
1,814 |
|
|
$ |
1,814 |
|
Restricted cash |
|
|
111 |
|
|
|
111 |
|
|
|
110 |
|
|
|
110 |
|
Short-term borrowings |
|
|
75 |
|
|
|
75 |
|
|
|
75 |
|
|
|
75 |
|
Long-term debt due within one year |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Long-term debt, less amount due within one year |
|
|
1,727 |
|
|
|
1,797 |
|
|
|
1,726 |
|
|
|
1,865 |
|
The following methods were used to estimate the fair values of other financial instruments:
Cash and cash equivalents and Restricted cash. The carrying amounts approximate fair value because of the short maturity of the instruments. The fair value amounts for Cash and cash equivalents and Restricted cash were classified in Level 1 of the fair value hierarchy.
16
Short-term borrowings and Long-term debt, including amounts due within one year. The fair value was based on quoted market prices for public debt and on interest rates that are currently available to Alcoa Corporation for issuance of debt with similar terms and maturities for non-public debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
M. Income Taxes – Alcoa Corporation’s estimated annualized effective tax rate (AETR) for 2022 as of March 31, 2022 differs from the U.S. federal statutory rate of 21% primarily due to foreign jurisdictions with higher statutory tax rates partially offset by income in certain jurisdictions with full valuation allowances resulting in no additional tax expense.
|
|
Three months ended March 31, |
|
|
2022 |
|
|
|
2021 |
|
|
Income before income taxes |
|
$ |
763 |
|
|
|
$ |
312 |
|
|
Estimated annualized effective tax rate |
|
|
26.4 |
|
% |
|
|
39.2 |
|
% |
Income tax expense |
|
$ |
202 |
|
|
|
$ |
122 |
|
|
Unfavorable (favorable) tax impact related to losses in jurisdictions with no tax benefit |
|
|
7 |
|
|
|
|
(28 |
) |
|
Discrete tax expense (benefit) |
|
|
1 |
|
|
|
|
(1 |
) |
|
Provision for income taxes |
|
$ |
210 |
|
|
|
$ |
93 |
|
|
The Company’s subsidiaries in Iceland have a full valuation allowance recorded against deferred tax assets, which was established in 2015 and 2017, as the Company believes it is more likely than not that these tax benefits will not be realized. If current market conditions were to continue or improve, management may conclude that Iceland’s deferred tax assets may be realized, resulting in a future reversal of the valuation allowance, generating a non-cash benefit in the period recorded. Iceland’s net deferred tax assets, excluding the valuation allowance, were $166 as of March 31, 2022.
N. Leasing
Management records a right-of-use asset and lease liability for several types of operating leases, including land and buildings, plant equipment, vehicles, and computer equipment. The leases have remaining terms of less than one to 35 years. The discount rate applied to these leases is the Company’s incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments, unless there is a rate implicit in the lease agreement. The Company does not have material financing leases.
Lease expense and operating cash flows include:
|
|
First quarter ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Costs from operating leases |
|
$ |
12 |
|
|
$ |
21 |
|
Variable lease payments |
|
|
3 |
|
|
|
1 |
|
Short-term rental expense |
|
|
— |
|
|
|
— |
|
The weighted average lease term and weighted average discount rate as of March 31, 2022 and December 31, 2021 were as follows:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Weighted average lease term for operating leases (years) |
|
|
4.8 |
|
|
|
4.9 |
|
Weighted average discount rate for operating leases |
|
5.3% |
|
|
5.2% |
|
The following represents the aggregate right-of use assets and related lease obligations recognized in the Consolidated Balance Sheet at:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Properties, plants and equipment, net |
|
$ |
93 |
|
|
$ |
97 |
|
Other current liabilities |
|
$ |
35 |
|
|
$ |
35 |
|
Other noncurrent liabilities and deferred credits |
|
|
59 |
|
|
|
64 |
|
Total operating lease liabilities |
|
$ |
94 |
|
|
$ |
99 |
|
New leases of $3 and $8 were added during the first quarter of 2022 and 2021, respectively.
17
The future cash flows related to the operating lease obligations as of March 31, 2022 were as follows:
2022 (excluding the three months ended March 31) |
|
$ |
31 |
|
2023 |
|
|
28 |
|
2024 |
|
|
17 |
|
2025 |
|
|
11 |
|
2026 |
|
|
8 |
|
Thereafter |
|
|
18 |
|
Total lease payments (undiscounted) |
|
|
113 |
|
Less: discount to net present value |
|
|
(19 |
) |
Total |
|
$ |
94 |
|
O. Contingencies
Environmental Matters
Alcoa Corporation participates in environmental assessments and cleanups at several locations. These include currently or previously owned or operated facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as, among others, the nature and extent of contamination, changes in remedial requirements, and technology advancements.
Alcoa Corporation’s environmental remediation reserve balance reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. The following table details the changes in the carrying value of recorded environmental remediation reserves:
Balance at December 31, 2020 |
|
$ |
322 |
|
Liabilities incurred |
|
|
21 |
|
Cash payments |
|
|
(23 |
) |
Reversals of previously recorded liabilities |
|
|
(17 |
) |
Foreign currency translation and other |
|
|
6 |
|
Balance at December 31, 2021 |
|
|
309 |
|
Liabilities incurred |
|
|
5 |
|
Cash payments |
|
|
(4 |
) |
Reversals of previously recorded liabilities |
|
|
(2 |
) |
Foreign currency translation and other |
|
|
2 |
|
Balance at March 31, 2022 |
|
$ |
310 |
|
At March 31, 2022 and December 31, 2021, the current portion of Alcoa Corporation’s environmental remediation reserve balance was $46 and $44, respectively.
In the first quarter of 2022, the Company incurred liabilities of $5 primarily related to a new phase of work at the former East St. Louis site, which was recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. Payments related to remediation expenses applied against the reserve were $4 in the first quarter of 2022. These amounts include mandated expenditures as well as those not required by any regulatory authority or third party. Further, the Company recorded a reversal of a reserve of $2 due to the determination that certain remaining site remediation is no longer required.
In the first quarter of 2021, the Company incurred liabilities of $4 related to wetlands mitigation at the Longview site and increases for ongoing monitoring and maintenance at various sites. These charges are primarily recorded in Restructuring and other charges, net and Cost of goods sold on the accompanying Statement of Consolidated Operations. Payments related to remediation expenses applied against the reserve were $5 in the first quarter of 2021. These amounts include mandated expenditures as well as those not required by any regulatory authority or third party. Further, the Company recorded a reversal of a reserve of $7 due to the determination that remaining site remediation is no longer required related to the previously closed Tennessee site.
The estimated timing of cash outflows on the environmental remediation reserve at March 31, 2022 is as follows:
18
2022 (excluding the three months ended March 31, 2022) |
$ |
39 |
|
2023 - 2027 |
|
207 |
|
Thereafter |
|
64 |
|
Total |
$ |
310 |
|
Reserve balances at March 31, 2022 and December 31, 2021, associated with significant sites with active remediation underway or for future remediation were $248 and $247, respectively. In Management’s judgment, the Company’s reserves are sufficient to satisfy the provisions of the respective action plans. Upon changes in facts or circumstances, a change to the reserve may be required. The Company’s significant sites include:
Poços de Caldas, Brazil—The reserve associated with the 2015 closure of the Alcoa Alumínio S.A. smelter in Poços de Caldas, Brazil, is for remediation of historic spent potlining storage and disposal areas. The final remediation plan is currently under review; such review could require the reserve balance to be adjusted.
Fusina and Portovesme, Italy—Alcoa Corporation’s subsidiary Alcoa Trasformazioni S.r.l. has remediation projects underway for its closed smelter sites at Fusina and Portovesme which have been approved by the Italian Ministry for Ecologic Transition (MET). Work is ongoing for soil remediation at the Fusina site with expected completion by the end of 2023 and at the Portovesme site with expected completion in the first half of 2022. The final remedial design for the groundwater remediation project at Portovesme was completed in 2020 and is awaiting approval from the MET.
Suriname—The reserve associated with the 2017 closure of the Suralco refinery and bauxite mine is for treatment and disposal of refinery waste and soil remediation. The work began in 2017 and is expected to be completed at the end of 2025.
Hurricane Creek, Arkansas—The reserve associated with the 1990 closure of two mining areas and refineries near Hurricane Creek, Arkansas is for ongoing monitoring and maintenance for water quality surrounding the mine areas and residue disposal areas.
Massena, New York—The reserve associated with the 2015 closure of the Massena East smelter by the Company’s subsidiary, Reynolds Metals Company, is for subsurface soil remediation to be performed after demolition of the structures. Remediation work commenced in 2021 and will take four to eight years to complete.
Point Comfort, Texas—The reserve associated with the 2019 closure of the Point Comfort alumina refinery is for disposal of industrial wastes contained at the site, subsurface remediation, and post-closure monitoring and maintenance. The final remediation plan is currently under review, which may result in a change to the existing reserve.
Sherwin, Texas—In connection with the 2018 settlement of a dispute related to the previously-owned Sherwin alumina refinery, the Company’s subsidiary, Copano Enterprises LLC, accepted responsibility for the final closure of four bauxite residue waste disposal areas (known as the Copano facility). Work commenced on the first residue disposal area in 2018 and will take up to five additional years to complete, depending on the nature of its potential re-use. Work on the next three areas has not commenced but is expected to be completed by 2048, depending on its potential re-use.
Longview, Washington—In connection with a 2018 Consent Decree and Cleanup Action Plan with the State of Washington Department of Ecology, the Company’s subsidiary, Northwest Alloys as landowner, accepted certain responsibilities for future remediation of contaminated soil and sediments at the site located near Longview, Washington. In December 2020, the lessee of the land, who was a partner in the remediation of the site, filed for bankruptcy and exited the site in January 2021. Remediation design changes for consolidation and remediation of the onsite industrial waste landfills, groundwater remediation, and post-closure monitoring and maintenance at the site was completed in 2021. As of March 31, 2022, the reserve related to the site is deemed to be sufficient.
Other Sites—The Company is in the process of decommissioning various other plants and remediating sites in several countries for potential redevelopment or to return the land to a natural state. In aggregate, there are approximately 35 remediation projects at these other sites that are planned or underway. These activities will be completed at various times in the future with the latest expected to be in 2026, after which ongoing monitoring and other activities may be required. At March 31, 2022 and December 31, 2021, the reserve balance associated with these activities was $62.
19
Tax
Brazil (AWAB)—In March 2013, AWAB was notified by the Brazilian Federal Revenue Office (RFB) that approximately $110 (R$220) of value added tax credits previously claimed are being disallowed and a penalty of 50% assessed. Of this amount, AWAB received $41 (R$82) in cash in May 2012. The value added tax credits were claimed by AWAB for both fixed assets and export sales related to the Juruti bauxite mine and São Luís refinery expansion for tax years 2009 through 2011. The RFB has disallowed credits they allege belong to the consortium in which AWAB owns an interest and should not have been claimed by AWAB. Credits have also been disallowed as a result of challenges to apportionment methods used, questions about the use of the credits, and an alleged lack of documented proof. AWAB presented defense of its claim to the RFB on April 8, 2013. In February 2022, the RFB notified AWAB that it had inspected the value added tax credits claimed for 2012 and disallowed $4 (R$19). In its decision, the RFB allowed credits of $14 (R$65) that were similar to those previously disallowed for 2009 through 2011. The decision on the 2012 credits provides positive evidence to support Management’s opinion that there is no basis for these credits to be disallowed. AWAB received the 2012 allowed credits in cash, with interest of $9 (R$44), in March 2022. AWAB will continue to dispute the credits that were disallowed for 2012. If AWAB is successful in this administrative process, the RFB would have no further recourse. If unsuccessful in this process, AWAB has the option to litigate at a judicial level. Separately from AWAB’s administrative appeal, in June 2015, a new tax law was enacted repealing the provisions in the tax code that were the basis for the RFB assessing a 50% penalty in this matter. As such, the estimated range of reasonably possible loss for these matters is $0 to $50 (R$239). It is Management’s opinion that the allegations have no basis; however, at this time, the Company is unable to reasonably predict an outcome for this matter.
Australia (AofA)—In December 2019, AofA received a statement of audit position (SOAP) from the Australian Taxation Office (ATO) related to the pricing of certain historic third-party alumina sales. The SOAP proposed adjustments that would result in additional income tax payable by AofA. During 2020, the SOAP was the subject of an independent review process within the ATO. At the conclusion of this process, the ATO determined to continue with the proposed adjustments and issued Notices of Assessment (the Notices) that were received by AofA on July 7, 2020. The Notices asserted claims for income tax payable by AofA of approximately $160 (A$214). The Notices also included claims for compounded interest on the tax amount totaling approximately $530 (A$707).
On September 17, 2020, the ATO issued a position paper with its preliminary view on the imposition of administrative penalties related to the tax assessment issued to AofA. This paper proposed penalties of approximately $96 (A$128).
AofA disagreed with the Notices and with the ATO’s proposed position on penalties. In September 2020, AofA lodged formal objections to the Notices. In the fourth quarter of 2020, AofA provided a submission on the ATO’s imposition of interest and also submitted a response to the ATO’s position paper on penalties. After the ATO completes its review of AofA’s response to the penalties position paper, the ATO could issue a penalty assessment.
To date, AofA has not received a response to its submission on the ATO’s imposition of interest or its response to the ATO’s position paper on penalties.
Through February 1, 2022, AofA did not receive a response from the ATO on AofA’s formal objections to the Notices and, on that date, AofA submitted statutory notices to the ATO requiring the ATO to make decisions on AofA’s objections within a 60-day period. On April 1, 2022, the ATO issued its decision disallowing the Company’s objections related to the income tax assessment, while the position on penalties and interest remains outstanding.
On April 29, 2022, AofA filed proceedings in the Australian Administrative Appeals Tribunal to contest the Notices, a process which could last several years. The Company maintains that the sales subject to the ATO’s review, which were ultimately sold to Aluminium Bahrain B.S.C., were the result of arm’s length transactions by AofA over two decades and were made at arm’s length prices consistent with the prices paid by other third-party alumina customers.
In accordance with the ATO’s dispute resolution practices, AofA paid 50% of the assessed income tax amount exclusive of interest and any penalties, or approximately $74 (A$107), during the third quarter 2020, and the ATO is not expected to seek further payment prior to final resolution of the matter. If AofA is ultimately successful, any amounts paid to the ATO as part of the 50% payment would be refunded. AofA funded the payment with cash on hand and recorded the payment within Other noncurrent assets as a noncurrent prepaid tax asset; the related March 31, 2022 balance is $80 (A$107).
Further interest on the unpaid tax and interest amounts will continue to accrue during the dispute. The initial interest assessment and the additional interest accrued are deductible against taxable income by AofA but would be taxable as income in the year the dispute is resolved if AofA is ultimately successful. AofA applied this deduction beginning in the third quarter of 2020 which reduced cash tax payments by approximately $169 (A$219) in 2020, $14 (A$19) in 2021, and $4 (A$5) in the first quarter of 2022. This amount has been reflected within Other noncurrent liabilities and deferred credits as a noncurrent accrued tax liability; the related March 31, 2022 balance is $182 (A$243).
The Company continues to believe it is more likely than not that AofA’s tax position will be sustained and therefore is not recognizing any tax expense in relation to this matter. However, because the ultimate resolution of this matter is uncertain at this time, the Company cannot predict the potential loss or range of loss associated with the outcome, which may materially affect its results of
20
operations and financial condition. References to any assessed U.S. dollar amounts presented in connection with this matter have been converted into U.S. dollars from Australian dollars based on the exchange rate in the respective period.
AofA is part of the Company’s joint venture with Alumina Limited, an Australian public company listed on the Australian Securities Exchange. The Company and Alumina Limited own 60% and 40%, respectively, of the joint venture entities, including AofA.
Other
Spain—In July 2019, the Company completed the divestiture of the Avilés and La Coruña (Spain) aluminum facilities to PARTER Capital Group AG (PARTER) in a sale process endorsed by the Spanish government and supported by the workers’ representatives following a collective dismissal process.
In early 2020, PARTER sold a majority stake in the facilities to an unrelated party. Alcoa had no knowledge of the subsequent transaction prior to its announcement and on August 28, 2020, Alcoa filed a lawsuit with the Court of First Instance in Madrid, Spain asserting that the sale was in breach of the sale agreement between Alcoa and PARTER.
Related to this subsequent sale transaction, certain proceedings and investigations have been initiated by or at the request of the employees of the facilities against their current employers, the new owners of the current employers, and Alcoa, alleging that certain agreements from the 2019 collective dismissal process remain in force and that, under such agreements, Alcoa remains liable for certain related employment benefits. One such proceeding is a collective case before the Spanish National Court, filed on November 10, 2020, wherein the workers’ representatives and employees are seeking to have the terms of a Collective Dismissal Agreement signed between Alcoa and the workers in January 2019 be fulfilled. Other proceedings include: a second collective claim filed in National Court on behalf employees that were not affected by the 2019 collective dismissal process, numerous individual labor claims filed in the labor courts of Avilés and La Coruña and the initiation of a separate criminal investigation by the National Court.
On June 15, 2021, the Spanish National Court ruled that the collective dismissal agreement for the divested Avilés and La Coruña aluminum facilities should be applied to the situation of the claimant workers, and that Alcoa should be liable for the severance of those employees to the extent they were affected by the 2019 collective dismissal process. Alcoa has appealed this ruling to the Supreme Court of Spain.
In July 2021, the Spanish National Court appointed a judicial director to oversee the facilities and later declared the facilities insolvent. In early 2022, the insolvency administrators appointed by the courts (one for each facility) announced their intention to collectively dismiss all employees at the two facilities.
In February 2022, Alcoa initiated discussions with certain of the relevant stakeholders to explore a potential global resolution of all pending matters involving Alcoa arising from the prior divestiture of the two facilities, including a waiver of all claims and investigations previously initiated by or at the request of the employees of the facilities. Due to the progress of negotiations through the end of the first quarter of 2022 and the comprehensive offer proposed by the Company, Alcoa concluded as of March 31, 2022 that it was probable that the workers of the divested facilities would accept the offer and an agreement would be reached. As such, the Company recorded a restructuring charge of $77 to reflect its estimated liability for the offer made to the workers of the divested Avilés and La Coruña facilities in the quarter ended March 31, 2022.
As of the date of this filing, the Company has received unanimous acceptance of the offer from all active workers of the divested Avilés and La Coruña facilities. Additional conditions under the agreement are required to be completed before an agreement on the settlement is formally reached. If the remaining conditions are completed, it is expected that the Company will make cash payments within 90 days of the finalization of the agreement.
In the case that the conditions under the agreement are not completed successfully, Alcoa will continue with its appeal to the National Court ruling to the Spanish Supreme Court and will strongly defend all other pending and future legal proceedings arising from the sale of the Avilés and La Coruña facilities. Alcoa acted in good faith, in full compliance with the law and with all of the terms that it committed to in the contract for the sale of the Avilés and La Coruña facilities to PARTER and in the agreements that it entered into with the representatives of the workers of both facilities.
21
General
In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Alcoa Corporation, including those pertaining to environmental, safety and health, commercial, tax, product liability, intellectual property infringement, employment, and employee and retiree benefit matters, and other actions and claims arising out of the normal course of business. While the amounts claimed in these other matters may be substantial, the ultimate liability is not readily determinable because of the considerable uncertainties that exist. Accordingly, it is possible that the Company’s liquidity or results of operations in a particular period could be materially affected by one or more of these other matters. However, based on facts currently available, Management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of the Company.
P. Other Income, Net
|
|
First quarter ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Equity income |
|
$ |
(18 |
) |
|
$ |
(5 |
) |
Foreign currency losses (gains), net |
|
|
12 |
|
|
|
(4 |
) |
Net loss (gain) from asset sales |
|
|
1 |
|
|
|
(26 |
) |
Net gain on mark-to-market derivative instruments (L) |
|
|
(15 |
) |
|
|
(5 |
) |
Non-service costs – Pension & OPEB (K) |
|
|
16 |
|
|
|
13 |
|
Other |
|
|
(10 |
) |
|
|
3 |
|
|
|
$ |
(14 |
) |
|
$ |
(24 |
) |
Net gain from asset sales for the first quarter ended March 31, 2021 included a net gain of $27 related to the sale of Warrick Rolling Mill (see Note C).
22