Alcoa Corp - Quarter Report: 2018 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2018

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-37816

 

 

ALCOA CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		81-1789115
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
201 Isabella Street, Suite 500, Pittsburgh, Pennsylvania		15212-5858
(Address of principal executive offices)		(Zip Code)

412-315-2900

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of October 29, 2018, 186,494,049 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
Item 1.		Financial Statements			1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			40
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			50
Item 4.		Controls and Procedures			51
PART II – OTHER INFORMATION
Item 4.		Mine Safety Disclosures			52
Item 6.		Exhibits			53
SIGNATURES					54

Forward-Looking Statements

This report contains statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements by Alcoa Corporation that reflect expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts concerning global demand growth for bauxite, alumina, and aluminum, and supply/demand balances; statements, projections or forecasts of future financial results or operating performance; statements about strategies, outlook, and business and financial prospects; and statements about return of capital. These statements reflect beliefs and assumptions that are based on Alcoa Corporation’s perception of historical trends, current conditions, and expected future developments, as well as other factors that management believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and changes in circumstances that are difficult to predict. Although Alcoa Corporation believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such risks and uncertainties include, but are not limited to: (a) material adverse changes in aluminum industry conditions, including global supply and demand conditions and fluctuations in London Metal Exchange-based prices and premiums, as applicable, for primary aluminum and other products, and fluctuations in indexed-based and spot prices for alumina; (b) deterioration in global economic and financial market conditions generally; (c) unfavorable changes in the markets served by Alcoa Corporation; (d) the impact of changes in foreign currency exchange rates on costs and results; (e) increases in energy costs; (f) declines in the discount rates used to measure pension liabilities or lower-than-expected investment returns on pension assets, or unfavorable changes in laws or regulations that govern pension plan funding; (g) the inability to achieve improvement in profitability and margins, cost savings, cash generation, revenue growth, fiscal discipline, or strengthening of competitiveness and operations anticipated from operational and productivity improvements, cash sustainability, technology advancements, and other initiatives; (h) the inability to realize expected benefits, in each case as planned and by targeted completion dates, from acquisitions, divestitures, facility closures, curtailments, restarts, expansions, or joint ventures; (i) political, economic, trade, and regulatory risks in the countries in which Alcoa Corporation operates or sells products; (j) labor disputes and work stoppages; (k) the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation; (l) the impact of cyberattacks and potential information technology or data security breaches; and (m) the other risk factors described in Part I Item 1A of Alcoa Corporation’s Form 10-K for the year ended December 31, 2017 and Part II Item 1A of Alcoa Corporation’s Form 10-Q for the quarter ended March 31, 2018, and in other reports filed by Alcoa Corporation with the U.S. Securities and Exchange Commission, including those described in this report. Alcoa Corporation disclaims any obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law. Market projections are subject to the risks described above and other risks in the market.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Alcoa Corporation and subsidiaries

Statement of Consolidated Operations (unaudited)

(in millions, except per-share amounts)

 

		Third quarter ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Sales (C & E)		$	3,390			$	2,964			$	10,059			$	8,478
Cost of goods sold (exclusive of expenses below)			2,534				2,340				7,547				6,652
Selling, general administrative, and other expenses			58				70				189				211
Research and development expenses			7				8				24				23
Provision for depreciation, depletion, and amortization			173				194				559				563
Restructuring and other charges (D)			177				(10	)			389				12
Interest expense			33				26				91				77
Other expenses (income), net (O)			2				48				32				(3	)
Total costs and expenses			2,984				2,676				8,831				7,535
Income before income taxes			406				288				1,228				943
Provision for income taxes			251				119				569				328
Net income			155				169				659				615
Less: Net income attributable to noncontrolling interest			196				56				475				202
NET (LOSS) INCOME ATTRIBUTABLE TO ALCOA CORPORATION		$	(41	)		$	113			$	184			$	413
EARNINGS PER SHARE ATTRIBUTABLE TO ALCOA CORPORATION COMMON SHAREHOLDERS (F):
Basic		$	(0.22	)		$	0.61			$	0.99			$	2.24
Diluted		$	(0.22	)		$	0.60			$	0.97			$	2.21

The accompanying notes are an integral part of the consolidated financial statements.

 

1

Alcoa Corporation and subsidiaries

Statement of Consolidated Comprehensive Income (Loss) (unaudited)

(in millions)

 

		Alcoa Corporation								Noncontrolling interest								Total
		Third quarter ended September 30,								Third quarter ended September 30,								Third quarter ended September 30,
		2018				2017				2018				2017				2018				2017
Net (loss) income		$	(41	)		$	113			$	196			$	56			$	155			$	169
Other comprehensive income (loss), net of tax (G):
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits			398				44				4				5				402				49
Foreign currency translation adjustments			(142	)			141				(54	)			44				(196	)			185
Net change in unrecognized gains/losses on cash flow hedges			(29	)			(415	)			5				(5	)			(24	)			(420	)
Total Other comprehensive income (loss), net of tax			227				(230	)			(45	)			44				182				(186	)
Comprehensive income (loss)		$	186			$	(117	)		$	151			$	100			$	337			$	(17	)
		Nine months ended September 30,								Nine months ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017				2018				2017
Net income		$	184			$	413			$	475			$	202			$	659			$	615
Other comprehensive income (loss), net of tax (G):
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits			682				190				7				24				689				214
Foreign currency translation adjustments			(586	)			281				(219	)			121				(805	)			402
Net change in unrecognized gains/losses on cash flow hedges			346				(729	)			(25	)			57				321				(672	)
Total Other comprehensive income (loss), net of tax			442				(258	)			(237	)			202				205				(56	)
Comprehensive income		$	626			$	155			$	238			$	404			$	864			$	559

The accompanying notes are an integral part of the consolidated financial statements.

 

2

Alcoa Corporation and subsidiaries

Consolidated Balance Sheet (unaudited)

(in millions)

 

		September 30, 2018				December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents (L)		$	1,022			$	1,358
Receivables from customers			1,017				811
Other receivables			176				232
Inventories (I)			1,666				1,453
Fair value of derivative instruments (L)			57				113
Prepaid expenses and other current assets			255				271
Total current assets			4,193				4,238
Properties, plants, and equipment			21,839				23,046
Less: accumulated depreciation, depletion, and amortization			13,484				13,908
Properties, plants, and equipment, net			8,355				9,138
Investments (H & N)			1,381				1,410
Deferred income taxes			599				814
Fair value of derivative instruments (L)			42				128
Other noncurrent assets			1,615				1,719
Total assets		$	16,185			$	17,447
LIABILITIES
Current liabilities:
Accounts payable, trade		$	1,711			$	1,898
Accrued compensation and retirement costs			420				459
Taxes, including income taxes			417				282
Fair value of derivative instruments (L)			133				185
Other current liabilities			319				412
Long-term debt due within one year (L)			4				16
Total current liabilities			3,004				3,252
Long-term debt, less amount due within one year (J & L)			1,820				1,388
Accrued pension benefits (K)			1,210				2,341
Accrued other postretirement benefits (K)			926				1,100
Asset retirement obligations			528				617
Environmental remediation (N)			248				258
Fair value of derivative instruments (L)			630				1,105
Noncurrent income taxes			297				309
Other noncurrent liabilities and deferred credits			237				279
Total liabilities			8,900				10,649
CONTINGENCIES AND COMMITMENTS (N)
EQUITY
Alcoa Corporation shareholders’ equity:
Common stock			2				2
Additional capital			9,656				9,590
Retained earnings			298				113
Accumulated other comprehensive loss (G)			(4,740	)			(5,182	)
Total Alcoa Corporation shareholders’ equity			5,216				4,523
Noncontrolling interest			2,069				2,275
Total equity			7,285				6,798
Total liabilities and equity		$	16,185			$	17,447

The accompanying notes are an integral part of the consolidated financial statements.

 

3

Alcoa Corporation and subsidiaries

Statement of Consolidated Cash Flows (unaudited)

(in millions)

 

		Nine months ended September 30,
		2018				2017
CASH FROM OPERATIONS
Net income		$	659			$	615
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion, and amortization			559				564
Deferred income taxes			(16	)			64
Equity earnings, net of dividends			(11	)			1
Restructuring and other charges (D)			389				12
Net gain from investing activities – asset sales (O)			—				(115	)
Net periodic pension benefit cost (K)			115				83
Stock-based compensation			29				21
Other			(64	)			31
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
(Increase) in receivables			(209	)			(112	)
(Increase) in inventories			(279	)			(102	)
Decrease in prepaid expenses and other current assets			3				62
(Decrease) Increase in accounts payable, trade			(135	)			109
(Decrease) in accrued expenses			(288	)			(320	)
Increase in taxes, including income taxes			248				15
Pension contributions (K)			(940	)			(82	)
(Increase) in noncurrent assets			(89	)			(88	)
(Decrease) Increase in noncurrent liabilities			(58	)			11
CASH (USED FOR) PROVIDED FROM OPERATIONS			(87	)			769
FINANCING ACTIVITIES
Cash paid to former parent company related to separation			—				(247	)
Net change in short-term borrowings (original maturities of three months or less)			—				2
Additions to debt (original maturities greater than three months) (J)			553				3
Payments on debt (original maturities greater than three months) (J)			(105	)			(55	)
Proceeds from the exercise of employee stock options			23				38
Contributions from noncontrolling interest			109				56
Distributions to noncontrolling interest			(566	)			(244	)
Other			(8	)			(6	)
CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES			6				(453	)
INVESTING ACTIVITIES
Capital expenditures			(251	)			(255	)
Proceeds from the sale of assets and businesses			—				243
Additions to investments (H)			(6	)			(44	)
CASH USED FOR INVESTING ACTIVITIES			(257	)			(56	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH			(1	)			8
Net change in cash and cash equivalents and restricted cash			(339	)			268
Cash and cash equivalents and restricted cash at beginning of year (B)			1,365				859
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD (B)		$	1,026			$	1,127

The accompanying notes are an integral part of the consolidated financial statements.

 

4

Alcoa Corporation and subsidiaries

Statement of Changes in Consolidated Equity (unaudited)

(in millions)

 

		Alcoa Corporation shareholders
		Common stock				Additional capital				Retained earnings (deficit)				Accumulated other comprehensive loss				Non- controlling interest				Total equity
Balance at June 30, 2017		$	2			$	9,559			$	196			$	(3,803	)		$	2,245			$	8,199
Net income			—				—				113				—				56				169
Other comprehensive (loss) income (G)			—				—				—				(230	)			44				(186	)
Stock-based compensation			—				7				—				—				—				7
Common stock issued: compensation plans			—				20				—				—				—				20
Distributions			—				—				—				—				(89	)			(89	)
Other			—				(2	)			—				—				—				(2	)
Balance at September 30, 2017		$	2			$	9,584			$	309			$	(4,033	)		$	2,256			$	8,118
Balance at June 30, 2018		$	2			$	9,650			$	339			$	(4,967	)		$	2,084			$	7,108
Net (loss) income			—				—				(41	)			—				196				155
Other comprehensive income (loss) (G)			—				—				—				227				(45	)			182
Stock-based compensation			—				9				—				—				—				9
Common stock issued: compensation plans			—				1				—				—				—				1
Distributions			—				—				—				—				(181	)			(181	)
Other			—				(4	)			—				—				15				11
Balance at September 30, 2018		$	2			$	9,656			$	298			$	(4,740	)		$	2,069			$	7,285
Balance at December 31, 2016		$	2			$	9,531			$	(104	)		$	(3,775	)		$	2,043			$	7,697
Net income			—				—				413				—				202				615
Other comprehensive (loss) income (G)			—				—				—				(258	)			202				(56	)
Stock-based compensation			—				21				—				—				—				21
Common stock issued: compensation plans			—				37				—				—				—				37
Contributions			—				—				—				—				56				56
Distributions			—				—				—				—				(244	)			(244	)
Other			—				(5	)			—				—				(3	)			(8	)
Balance at September 30, 2017		$	2			$	9,584			$	309			$	(4,033	)		$	2,256			$	8,118
Balance at December 31, 2017		$	2			$	9,590			$	113			$	(5,182	)		$	2,275			$	6,798
Net income			—				—				184				—				475				659
Other comprehensive income (loss) (G)			—				—				—				442				(237	)			205
Stock-based compensation			—				29				—				—				—				29
Common stock issued: compensation plans			—				23				—				—				—				23
Contributions			—				—				—				—				109				109
Distributions			—				—				—				—				(566	)			(566	)
Other			—				14				1				—				13				28
Balance at September 30, 2018		$	2			$	9,656			$	298			$	(4,740	)		$	2,069			$	7,285

The accompanying notes are an integral part of the consolidated financial statements.

 

5

Alcoa Corporation and subsidiaries

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” 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 2017 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 Form 10-Q report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which includes all disclosures required by GAAP. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see Note B).

References in these Notes to “ParentCo” refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries (through October 31, 2016, at which time was renamed Arconic Inc. (Arconic)). On November 1, 2016 (the “Separation Date”), ParentCo separated into two standalone, publicly-traded companies, Alcoa Corporation and Arconic (the “Separation Transaction”). In connection with the Separation Transaction, as of October 31, 2016, the Company and Arconic entered into several agreements to effect the Separation Transaction, including a Separation and Distribution Agreement and a Tax Matters Agreement. See Note A to the Consolidated Financial Statements in Part II Item 8 of Alcoa Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.

Principles of Consolidation. The Consolidated Financial Statements of Alcoa Corporation include the accounts of Alcoa Corporation and companies in which Alcoa Corporation has a controlling interest, including those that comprise the Alcoa World Alumina & Chemicals (AWAC) joint venture (see below). Intercompany transactions have been eliminated. The equity method of accounting is used for investments in affiliates and other joint ventures over which Alcoa Corporation has significant influence but does not have effective control. Investments in affiliates in which Alcoa Corporation cannot exercise significant influence are accounted for on the cost method.

AWAC is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited and consists of several affiliated operating entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within Alcoa Corporation’s Bauxite and Alumina segments (except for the Poços de Caldas mine and refinery and a portion of the São Luís refinery, all in Brazil) and the Portland smelter in Australia. Alcoa Corporation owns 60% and Alumina Limited owns 40% of these individual entities, which are consolidated by the Company for financial reporting purposes and include Alcoa of Australia Limited, Alcoa World Alumina LLC (AWA), and Alcoa World Alumina Brasil Ltda. (AWAB). Alumina Limited’s interest in the equity of such entities is reflected as Noncontrolling interest on the accompanying Consolidated Balance Sheet.

B. Recently Adopted and Recently Issued Accounting Guidance

Adopted

On January 1, 2018, Alcoa Corporation adopted guidance issued by the Financial Accounting Standards Board (FASB) to the recognition of revenue from contracts with customers. This guidance created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. Management’s assessment of this guidance was applied only to those customer contracts that were open on the date of adoption under the modified retrospective method. Through a previously established project team, the Company completed a detailed review of the terms and provisions of its

 

6

customer contracts, as well as evaluated these contracts under the new guidance, throughout 2017 and concluded that Alcoa Corporation’s revenue recognition practices were in compliance with this framework. That said, the Company did make some minor modifications to its internal accounting policies and internal control structure to ensure that any future customer contracts that may have different terms and conditions of those that the Company has today are properly evaluated under the new guidance. Other than providing additional disclosure (see Note C), the adoption of this guidance had no impact on the Consolidated Financial Statements.

On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting and reporting of certain equity investments. This guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Additionally, the impairment assessment of equity investments without readily determinable fair values has been simplified by requiring a qualitative assessment to identify impairment. The adoption of this guidance had no impact on the Consolidated Financial Statements, as all of Alcoa Corporation’s equity investments are accounted for under the equity method of accounting.

On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the presentation of several items in the statement of cash flows. Specifically, the guidance identifies nine cash flow items and the sections where they must be presented within the statement of cash flows, including distributions received from equity method investees, proceeds from the settlement of insurance claims, and restricted cash. Other than as it relates to restricted cash, the adoption of this guidance had no impact on the Consolidated Financial Statements. This guidance requires that restricted cash be aggregated with cash and cash equivalents in both the beginning-of-period and end-of-period line items at the bottom of the statement of cash flows. Previously, the change in restricted cash between the beginning-of-period and end-of period was reflected as either an investing, financing, operating, or non-cash activity based on the underlying nature of the transaction. Accordingly, for the accompanying Statement of Consolidated Cash Flows for the nine months ended September 30, 2018, the Cash and cash equivalents and restricted cash at beginning of year and Cash and cash equivalents and restricted cash at end of period line items include restricted cash of $7 and $4, respectively. Additionally, the Company’s Statement of Consolidated Cash Flows for the nine months ended September 30, 2017 was recast to reflect this change in presentation. As a result, the Cash and cash equivalents and restricted cash at beginning of year and Cash and cash equivalents and restricted cash at end of period line items include restricted cash of $6 and $8 respectively. The change of $2 for the nine months ended September 30, 2017 is reflected in the Effect of exchange rate changes on cash and cash equivalents and restricted cash line item. The following table provides a reconciliation of Cash and cash equivalents and Restricted cash reported in the accompanying Consolidated Balance Sheet that sum to the Cash and cash equivalents and restricted cash at both the beginning of year and end of period presented on the accompanying Statement of Consolidated Cash Flows for the nine months ended September 30, 2018:

 

		September 30, 2018				December 31, 2017
Cash and cash equivalents		$	1,022			$	1,358
Restricted cash*			4				7
		$	1,026			$	1,365

 

*

These amounts are reported in Prepaid expenses and other current assets on the accompanying Consolidated Balance Sheet.

On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting for intra-entity transactions, other than inventory. The guidance requires the current and deferred income tax consequences of an intra-entity transfer to be recorded immediately when the transaction occurs; the exception to defer the tax consequences of inventory transactions is maintained. Prior to this guidance, no immediate tax impact was permitted to be recognized in an entity’s financial statements as a result of intra-entity transfers of assets. An entity was precluded from reflecting a tax benefit or expense from an intra-entity asset transfer between entities that file separate tax returns, whether or not such entities are in different tax jurisdictions, until the asset had been sold to a third party or otherwise recovered. The buyer of such asset was prohibited from recognizing a deferred tax asset for the temporary difference arising from the excess of the buyer’s tax basis over the cost to the seller. The adoption of this guidance had an immaterial impact on the Consolidated Financial Statements.

On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to accounting for business combinations. This guidance clarifies the definition of a business for the purposes of evaluating whether a particular transaction should be accounted for as an acquisition or disposal of a business or an

 

7

asset. Generally, a business is an integrated set of assets and activities that contain inputs, processes, and outputs, although outputs are not required. This guidance provides a “screen” to determine whether an integrated set of assets and activities qualifies as a business. If substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets, the definition of a business has not been met and the transaction should be accounted for as an acquisition or disposal of an asset. Otherwise, an entity is required to evaluate whether the integrated set of assets and activities include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and are no longer to consider whether a market participant could replace any missing elements. This guidance also narrows the definition of an output. Previously, an output was defined as the ability to provide a return in the form of dividends, lower costs, or other economic benefits directly to investors, owners, members, or participants. An output is now defined as the ability to provide goods or services to customers, investment income, or other revenues. The adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered in the event Alcoa Corporation acquires or disposes of an integrated set of assets and activities.

On January 1, 2018, Alcoa Corporation early adopted guidance issued by the FASB to the assessment of goodwill for impairment as it relates to the quantitative test. Prior to this guidance, there were two steps when performing a quantitative impairment test. The first step required an entity to compare the current fair value of a reporting unit to its carrying value. In the event the reporting unit’s estimated fair value was less than its carrying value, an entity performed the second step, which was to compare the carrying amount of the reporting unit’s goodwill with the implied fair value of that goodwill. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeded its implied fair value, an impairment loss equal to such excess was recognized. This guidance eliminates the second step of the quantitative impairment test. Accordingly, an entity would recognize an impairment of goodwill for a reporting unit, if under what was previously referred to as the first step, the estimated fair value of the reporting unit is less than the carrying value. The impairment would be 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. The adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered each time the Company performs an assessment of goodwill for impairment under the quantitative test.

On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the presentation of net periodic benefit cost related to pension and other postretirement benefit plans. This guidance requires that an entity report the service cost component of net periodic benefit cost in the same line item(s) on its income statement as other compensation costs arising from services rendered by the pertinent employees during a reporting period. The other components of net periodic benefit cost (see Note K) are required to be reported separately from the service cost component. In other words, these other components may be aggregated and presented as a separate line item or they may be reported in existing line items on the income statement other than such line items that include the service cost component. Previously, Alcoa Corporation reported all components of net periodic benefit cost, except for certain settlements, curtailments, and special termination benefits, in Cost of goods sold (business employees) and Selling, general administrative, and other expenses (corporate employees) consistent with the location of other compensation costs related to the respective employees. The non-service cost components noted as exceptions are reported in Restructuring and other charges, as applicable. Additionally, this guidance only permits the service cost component to be capitalized as applicable (e.g., as a cost of internally manufactured inventory). Upon adoption of this guidance, management began reporting the non-service cost components of net periodic benefit cost, except for certain settlements, curtailments, and special termination benefits that will continue to be reported in Restructuring and other charges, in Other expenses (income), net on the accompanying Statement of Consolidated Operations (see Note K). For the third quarter and nine months ended September 30, 2018, the non-service cost components reported in Other expenses, net was $32 and $109, respectively. Additionally, the Statement of Consolidated Operations for the third quarter and nine months ended September 30, 2017 was recast to reflect the reclassification of the non-service cost components of net periodic benefit cost to Other expense (income), net from both Cost of goods sold and Selling, general administrative, and other expenses. As a result, for the third quarter and nine months ended September 30, 2017, Cost of goods sold decreased by $21 and $61, respectively, Selling, general administrative, and other expenses decreased by $3 (nine-month period only), and Other expenses (income), net changed by $21 and $64, respectively, from previously reported amounts. Under the practical expedient option provided for in the guidance, the Company used previously disclosed amounts for non-service cost components to recast these line items for the third quarter and nine months ended September 30, 2017. Furthermore, Alcoa

 

8

Corporation no longer capitalizes any non-service cost components as part of the cost of inventory prospectively beginning January 1, 2018.

On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting for stock-based compensation when there has been a modification to the terms or conditions of a share-based payment award. This guidance requires an entity to account for the modification only when there has been a substantive change to the terms or conditions of a share-based payment award. A substantive change occurs when the fair value, vesting conditions or balance sheet classification (liability or equity) of a share-based payment award is/are different immediately before and after the modification. Previously, an entity was required to account for any modification in the terms or conditions of a share-based payment award. The adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered if the Company initiates a modification that is determined to be a substantive change to an outstanding share-based award. Additionally, the Company will no longer account for any future non-substantive change to the terms or conditions of a share-based payment awards as a modification.

On April 1, 2018, Alcoa Corporation early adopted guidance issued by the FASB to the accounting for hedging activities retroactive to January 1, 2018. This guidance permits hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk; reduces current limitations on the designation and measurement of a hedged item in a fair value hedge of interest rate risk; removes the requirement to separately measure and report hedge ineffectiveness; provides an election to systematically and rationally recognize in earnings the initial value of any amount excluded from the assessment of hedge effectiveness for all types of hedges; and eases the requirements of effectiveness testing. Additionally, modifications to existing disclosures, as well as additional disclosures, are required, as applicable, to reflect these changes regarding the measurement and recognition of hedging activities. This guidance is to be initially applied only to hedging instruments that exist as of the adoption date using the modified retrospective method. In other words, any financial statement impact from application of these changes to open hedging instruments as of the adoption date related to periods prior to the adoption year is to be recognized through a cumulative effect adjustment in beginning retained earnings of the adoption year. Accordingly, upon adoption of this guidance, Alcoa Corporation recognized an immaterial cumulative effect adjustment within equity effective January 1, 2018 related to open Level 1 hedging instruments as of the adoption date. The Company had no open Level 2 hedging instruments as of the adoption date and there was no financial statement impact from Alcoa Corporation’s open Level 3 hedging instruments as of the adoption date. This guidance will also be applied prospectively upon the Company entering into any new hedging instruments. See the Derivatives section of Note L for additional information.

Issued

In January 2018, the FASB issued guidance regarding the assessment of land easements (or rights of way) under the pending lease accounting requirements to be adopted on January 1, 2019 (see below). This guidance provides an entity an option to not evaluate existing or expired land easements as leases in preparation for the adoption of the new lease accounting requirements, as long as such land easements were recorded as something other than leases under current accounting requirements. That said, any new land easement acquired or existing land easement modified on January 1, 2019 or later must be assessed for lease accounting under the new requirements. This guidance becomes effective for Alcoa Corporation on January 1, 2019. Management plans to elect the option to not evaluate existing or expired land easements that are currently accounted for as something other than leases under the new lease accounting requirements. The Company’s land easements are currently accounted for as fixed assets and are immaterial to Alcoa Corporation’s Consolidated Financial Statements. Accordingly, management has determined that the adoption of this guidance will not have an immediate impact on the Company’s Consolidated Financial Statements. The new lease accounting requirements will need to be considered if the Company acquires a new land easement or modifies an existing land easement on January 1, 2019 or later.

In February 2018, the FASB issued guidance regarding the reclassification of certain income tax effects reported in accumulated comprehensive income (loss) in response to U.S. tax legislation enacted on December 22, 2017 known as the U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”). For corporations, one of the main provisions of the TCJA was the reduction in the corporate income tax rate to 21% from 35%. Under current income tax accounting requirements, an entity was required to remeasure applicable U.S. deferred tax assets and deferred tax liabilities at the 21% tax rate effective on the TCJA enactment date. This remeasurement was required to be recognized in an entity’s income tax provision in its income statement. However, certain of these deferred tax assets and deferred tax liabilities relate to income tax effects initially recognized at the 35% tax rate through other comprehensive income (loss) on items reported within accumulated other comprehensive income (loss) on an entity’s balance sheet.

 

9

Consequently, an entity’s financial statements will reflect an inconsistency between the deferred tax assets and deferred tax liabilities measured at 21% and the related income tax effects in accumulated other comprehensive income (loss) recorded at 35%. Accordingly, this guidance provides a one-time option to remeasure the income tax effects within accumulated other comprehensive income (loss) at the 21% income tax rate. The impact from this remeasurement is to be recorded directly in retained earnings on an entity’s balance sheet. This guidance becomes effective for Alcoa Corporation on January 1, 2019, with early adoption permitted. Management is currently evaluating whether to elect this option, as well as whether to early adopt the guidance. If management elects to apply this guidance, the impact on the Company’s Consolidated Balance Sheet is estimated to be an increase of approximately $350 to both Retained earnings and Accumulated other comprehensive loss.

In June 2018, the FASB issued guidance regarding the accounting for nonemployee share-based payment transactions. This guidance effectively changes the accounting for such transactions to be consistent with the accounting for employee share-based payment transactions. The nonemployee share-based payment transactions subject to this guidance are those in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is not to be applied to other nonemployee share-based payment transactions, such as those used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under revenue recognition principles. This guidance becomes effective for Alcoa Corporation on January 1, 2019, with early adoption permitted. The only nonemployees to receive share-based payments from Alcoa Corporation are the members of the Company’s Board of Directors. Accordingly, management does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements.

In August 2018, the FASB issued separate guidance regarding the respective disclosure requirements associated with fair value measurements and defined benefit plans. This guidance makes changes to the disclosures of fair value measurements and defined benefit plans through several removals, modifications, additions, and/or clarifications of the existing requirements. The following are the changes that will have an immediate disclosure impact for Alcoa Corporation upon adoption of the guidance for fair value measurements: (i) disclosure of the valuation processes for Level 3 fair value measurements is no longer required, (ii) changes in unrealized gains and losses for the reporting period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period is a new disclosure requirement, and (iii) the range and weighted average (or other reasonable and rational method) of significant unobservable inputs used to develop Level 3 fair value measurements is a new disclosure requirement. The following are the changes that will have an immediate disclosure impact for Alcoa Corporation upon adoption of the guidance for defined benefit plans: (i) disclosure of the amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year is no longer required, (ii) disclosure of the effects of a one-percentage-point change in assumed health care cost trend rates on both the aggregate of the service and interest cost components of net periodic benefit costs and the benefit obligation for postretirement health care benefits is no longer required, and (iii) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the reporting period is a new disclosure requirement. The guidance for fair value measurements and defined benefit plans becomes effective for Alcoa Corporation on January 1, 2020 and December 31, 2020, respectively, with early adoption permitted. Other than updating the applicable disclosures, the adoption of this guidance will not have an impact on the Company’s Consolidated Financial Statements.

In August 2018, the FASB issued guidance regarding the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract (in other words, does not contain a software license). This guidance aligns the accounting for cloud computing implementation costs with that of costs to develop or obtain internal-use software, meaning such costs that are part of the application development stage are capitalized as an asset and amortized over the term of the arrangement, otherwise, such costs are expensed as incurred. Additionally, this guidance requires applying existing impairment guidance for long-lived assets to the capitalized implementation costs. Furthermore, this guidance requires the following presentation in an entity’s financial statements: (i) payments for the capitalized implementation costs should be classified on the cash flows statement in the same manner as payments for the service fees associated with the arrangement, (ii) the capitalized implementation costs should be presented in the same asset line item on the balance sheet as any prepayment for the service fees associated with the arrangement, and (iii) the amortization of the capitalized implementation costs should be reflected in the same expense line item on the income statement as the service fees associated with the arrangement. This guidance becomes effective for Alcoa Corporation on January 1, 2020, with early adoption permitted. Management is currently evaluating the potential impact of this guidance on the Consolidated Financial Statements.

In February 2016, the FASB issued guidance regarding the accounting for leases. This guidance requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for leases

 

10

classified as operating leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option, or not exercise an option to terminate the lease. A right-of-use asset represents an entity’s right to use the underlying asset for the lease term, and a lease liability represents an entity’s obligation to make lease payments. Currently, an asset and liability only are recorded for leases classified as capital leases (financing leases). The measurement, recognition, and presentation of expenses and cash flows arising from leases by a lessee remains the same. This guidance becomes effective for Alcoa Corporation on January 1, 2019. Through a previously established cross-functional project team, the Company has completed the accumulation of all leases into a lease management system and has validated the information for accuracy and completeness. This team is in the final stages of implementing the system, which will be the primary source for the Company’s lease information and the related accounting. Upon adoption of the new lease guidance, management expects to record a right-of-use asset and lease liability on Alcoa Corporation’s Consolidated Balance Sheet for several types of operating leases, including land and buildings, alumina refinery process control technology, plant equipment, vehicles, and computer equipment. The amount of the respective asset and liability is estimated to be less than 5% of both total assets and total liabilities, as reported on the accompanying Consolidated Balance Sheet as of September 30, 2018. Additionally, in July 2018, the FASB issued guidance to provide for an alternative transition method to the new lease guidance, whereby an entity can choose to not reflect the impact of the new lease guidance in the prior periods included in its financial statements. The Company intends to elect this alternative transition method on the January 1, 2019 adoption date.

C. Revenue – The Company recognizes revenue when it satisfies a performance obligation(s) in accordance with the provisions of a customer order or contract. This is achieved when control of the product has been transferred to the customer, which is generally determined when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (commercial delivery truck, train, or vessel). Accordingly, except for the sale of electricity, the sale of Alcoa Corporation’s products to its customers represent single performance obligations for which revenue is recognized at a point in time. Based on the foregoing, no significant judgment is required to determine when control of a product has been transferred to a customer.

The Company measures revenue based on the consideration it expects to be entitled to receive in exchange for its products. The standard terms and conditions of customer orders and contracts include general rights of return and product warranty provisions related to nonconforming or “out-of-spec” product. Depending on the circumstances, the product is either replaced or a quality adjustment is issued. Historically, such returns and adjustments have not been material to Alcoa Corporation’s Consolidated Financial Statements.

The Company considers shipping and handling activities as costs to fulfill the promise to transfer the related products. As a result, customer payments of shipping and handling costs are recorded as a component of revenue. Also, Alcoa Corporation may collect various taxes (e.g., sales, use, value-added, excise) from its customers related to the sale of its products and remit such amounts to governmental authorities. As such, amounts paid to the Company for these types of taxes are excluded from the transaction price used to determine the proper measurement of revenue.

Alcoa Corporation has five product divisions as follows:

Bauxite—Bauxite is a reddish clay rock that is mined from the surface of the earth’s terrain. This ore is the basic raw material used to produce alumina and is the primary source of aluminum.

Alumina—Alumina is an oxide that is extracted from bauxite and is the basic raw material used to produce primary aluminum. This product can also be consumed for non-metallurgical purposes, such as industrial chemical products.

Primary aluminum—Primary aluminum is metal in the form of a common alloy ingot (e.g., t-bar, sow, standard ingot) or a value-add ingot (e.g., billet, rod, and slab). These products are sold primarily to customers that produce products for the transportation, building and construction, packaging, wire, and other industrial markets.

Flat-rolled aluminum—Flat-rolled aluminum is metal in the form of sheet, which is sold primarily to customers that produce beverage and food cans, including body, tab, and end stock.

 

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Energy—Energy is the generation of electricity, which is sold in the wholesale market to traders, large industrial consumers, distribution companies, and other generation companies.

The following table represents the general commercial profile of the Company’s Bauxite, Alumina, Primary aluminum, and Flat-rolled aluminum product divisions (see text below table for Energy):

 

Product division		Pricing components		Shipping terms(4)		Payment terms(5)
Bauxite		Negotiated		FOB/CIF		LC Sight
Alumina:
Smelter-grade		API(1)/spot		FOB		LC Sight/CAD/Net 30 days
Non-metallurgical		Negotiated		FOB/CIF		Net 30 days
Primary aluminum:
Common alloy ingot		LME + Regional premium(2)		DAP/CIF		Net 30 to 45 days
Value-add ingot		LME + Regional premium + Product premium(2)		DAP/CIF		Net 30 to 45 days
Flat-rolled aluminum		Metal + Conversion(3)		DAP		Negotiated

 

(1)

API (Alumina Price Index) is a pricing mechanism that 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 Metallurgical Grade Alumina Price; Platts Metals Daily Alumina PAX Price; and Metal Bulletin Non-Ferrous Metals Alumina Index.

(2)

LME (London Metal Exchange) is a globally recognized exchange for commodity trading, including aluminum. The LME pricing component represents the underlying base metal component, based on quoted prices for aluminum on the exchange. The regional premium 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 in the United States). The product premium represents the incremental price for receiving physical metal in a particular shape (e.g., billet, rod, slab, etc.) or alloy.

(3)	Metal represents the underlying base metal component plus a regional premium (see footnote 2). Conversion represents the incremental price over the metal price component that is associated with converting primary or scrap aluminum into sheet.

(4)

CIF (cost, insurance, and freight) means that the Company pays for these items until the product reaches the buyer’s designated destination point related to transportation by vessel. DAP (delivered at place) means the same as CIF related to all methods of transportation. FOB (free on board) means that the Company pays for costs, insurance, and freight until the product reaches the seller’s designated shipping point.

(5)

The net number of days means that the customer is required to remit payment to the Company for the invoice amount within the designated number of days. LC Sight is a letter of credit that is payable immediately (usually within five to ten business days) after a seller meets the requirements of the letter of credit (i.e. shipping documents that evidence the seller performed its obligations as agreed to with a buyer). CAD (cash against documents) is a payment arrangement in which a seller instructs a bank to provide shipping and title documents to the buyer at the time the buyer pays in full the accompanying bill of exchange.

For the Company’s Energy product division, sales of electricity are based on current market prices. Electricity is provided to customers on demand through a national or regional power grid; the customer simultaneously receives and consumes the electricity. Payment terms are generally within 10 days related to the previous 30 days of electricity consumption.

The following table details Alcoa Corporation’s revenue by product division:

 

		Third quarter ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Primary aluminum		$	1,658			$	1,608			$	5,176			$	4,458
Alumina			1,098				710				3,079				2,187
Flat-rolled aluminum			472				410				1,417				1,286
Energy			115				157				261				340
Bauxite			63				104				179				254
Other*			(16	)			(25	)			(53	)			(47	)
		$	3,390			$	2,964			$	10,059			$	8,478

 

*	Other includes realized gains and losses related to embedded derivative instruments designated as cash flow hedges of forward sales of aluminum (see Note L).

 

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D. Restructuring and Other Charges – In the third quarter and nine-month period of 2018, Alcoa Corporation recorded Restructuring and other charges of $177 and $389, respectively, which were comprised of the following components: $174 (net) and $318 (net), respectively, related to settlements and/or curtailments of certain pension and other postretirement employee benefits (see Note K); $2 and $86, respectively, for additional costs related to the curtailed Wenatchee (Washington) smelter, including $73 (nine-month period only) associated with recent management decisions (see below); a $15 net benefit (nine-month period only) related to the Portovesme (Italy) smelter (see “Italy 148” in the Litigation section of Note N); and a $1 net charge (third quarter only) for miscellaneous items.

In June 2018, management decided not to restart the fully curtailed Wenatchee smelter within the term provided in the related electricity supply agreement. Alcoa Corporation was therefore required to make a $62 payment to the energy supplier under the provisions of the agreement. Additionally, management decided to permanently close one (38 kmt) of the four potlines at this smelter. This potline has not operated since 2001 and the investments needed to restart this line are cost prohibitive. The remaining three curtailed potlines have a capacity of 146 kmt. In connection with these decisions, the Company recognized a charge of $73, composed of the $62 payment, $10 for asset impairments, and $1 for asset retirement obligations triggered by the decision to decommission the potline.

In the third quarter and nine-month period of 2017, Alcoa Corporation recorded $10 of income and $12 of expense, respectively, in Restructuring and other charges, which were comprised of the following components: $6 and $24, respectively, for additional contract costs related to the curtailed Wenatchee and São Luís (Brazil) smelters; $4 and $17, respectively, for layoff costs, including the separation of approximately 10 and 120 (110 in the Aluminum segment) employees, respectively, and related pension costs of $3 and $6, respectively (see Note K); $7 (both periods) for costs related to the relocation of the Company’s headquarters and principal executive office from New York, New York to Pittsburgh, Pennsylvania; a charge of $2 (both periods) for miscellaneous items; and a reversal of $29 and $38, respectively, associated with several reserves related to prior periods (see below).

In July 2017, Alcoa Corporation announced plans to restart three (161 kmt of capacity) of the five potlines (269 kmt of capacity) at the Warrick (Indiana) smelter. This smelter was previously permanently closed in March 2016 by ParentCo. The capacity identified for restart will directly supply the existing rolling mill at the Warrick location to improve efficiency of the integrated site and provide an additional source of metal to help meet an anticipated increase in production volumes. As a result of the decision to reopen this smelter, in the 2017 third quarter, Alcoa Corporation reversed $29 in remaining liabilities related to the original closure decision. These liabilities consisted of $20 in asset retirement obligations and $4 in environmental remediation obligations, which were necessary due to the previous decision to demolish the smelter, and $5 in severance and contract termination costs. Additionally, the carrying value of the smelter and related assets was reduced to zero as the smelter ramped down between the permanent closure decision date (end of 2015) and the end of March 2016. Once these assets are placed back into service in conjunction with the restart, their carrying value will remain zero. As such, only newly acquired or constructed assets related to the Warrick smelter will be depreciated.

Alcoa Corporation does not include Restructuring and other charges in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:

 

		Third quarter ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Bauxite		$	1			$	1			$	1			$	1
Alumina			1				3				3				2
Aluminum			2				7				86				34
Segment total			4				11				90				37
Corporate			173				(21	)			299				(25	)
Total restructuring and other charges		$	177			$	(10	)		$	389			$	12

As of September 30, 2018, approximately 130 of the 140 employees associated with 2017 restructuring programs were separated. The remaining separations for the 2017 restructuring programs are expected to be completed by the end of 2018.

In the 2018 third quarter and nine-month period, cash payments of $1 and $3, respectively, were made against layoff reserves related to 2017 restructuring programs.

 

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Activity and reserve balances for restructuring charges were as follows:

 

		Layoff costs				Other costs				Total
Reserve balances at December 31, 2016		$	38			$	28			$	66
2017:
Cash payments			(30	)			(43	)			(73	)
Restructuring charges			23				67				90
Other*			(20	)			(18	)			(38	)
Reserve balances at December 31, 2017			11				34				45
2018:
Cash payments			(7	)			(92	)			(99	)
Restructuring charges			1				102				103
Other*			(1	)			(7	)			(8	)
Reserve balances at September 30, 2018		$	4			$	37			$	41

 

*

Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation. In the 2018 nine-month period, Other for Other costs also included a reclassification of the following restructuring charges: $1 in asset retirement and $2 in environmental obligations, as these liabilities were included in Alcoa Corporation’s separate reserves for asset retirement obligations and environmental remediation. In 2017, Other for Layoff costs also included a reclassification of $8 in pension benefits costs, as these obligations were included in Alcoa Corporation’s separate liability for pension benefits obligations. Additionally in 2017, Other for Other costs also included a reclassification of the following restructuring charges: $10 in asset retirement and $8 in environmental obligations, as these liabilities were included in Alcoa Corporation’s separate reserves for asset retirement obligations and environmental remediation.

The remaining reserves are expected to be paid in cash during the fourth quarter of 2018, with the exception of $29 that is expected to be paid between 2019 ($20) and 2020 ($9). This amount is comprised of $15 related to the Portovesme smelter (see “Italy 148” in the Litigation section of Note N), $8 associated with supplier contract-related costs at the Wenatchee smelter, $3 related to the termination of an office lease contract, and $3 for other items.

E. Segment Information – The operating results of Alcoa Corporation’s reportable segments were as follows (differences between segment totals and consolidated amounts are in Corporate):

 

		Bauxite				Alumina				Aluminum				Total
Third quarter ended September 30, 2018
Sales:
Third-party sales		$	67			$	1,101			$	2,198			$	3,366
Intersegment sales			224				544				6				774
Total sales		$	291			$	1,645			$	2,204			$	4,140
Adjusted EBITDA		$	106			$	660			$	73			$	839
Supplemental information:
Depreciation, depletion, and amortization		$	27			$	48			$	91			$	166
Equity income (loss)			—				10				(5	)			5
Third quarter ended September 30, 2017
Sales:
Third-party sales		$	104			$	713			$	2,090			$	2,907
Intersegment sales			221				398				9				628
Total sales		$	325			$	1,111			$	2,099			$	3,535
Adjusted EBITDA		$	112			$	203			$	315			$	630
Supplemental information:
Depreciation, depletion, and amortization		$	24			$	53			$	106			$	183
Equity loss			—				(5	)			(7	)			(12	)

 

14

		Bauxite				Alumina				Aluminum				Total
Nine months ended September 30, 2018
Sales:
Third-party sales		$	191			$	3,083			$	6,722			$	9,996
Intersegment sales			699				1,534				14				2,247
Total sales		$	890			$	4,617			$	6,736			$	12,243
Adjusted EBITDA		$	316			$	1,690			$	457			$	2,463
Supplemental information:
Depreciation, depletion, and amortization		$	83			$	150			$	305			$	538
Equity income (loss)			—				23				(13	)			10
Nine months ended September 30, 2017
Sales:
Third-party sales		$	254			$	2,196			$	5,884			$	8,334
Intersegment sales			648				1,143				16				1,807
Total sales		$	902			$	3,339			$	5,900			$	10,141
Adjusted EBITDA		$	319			$	727			$	766			$	1,812
Supplemental information:
Depreciation, depletion, and amortization		$	61			$	155			$	315			$	531
Equity loss			—				(10	)			(11	)			(21	)

The following table reconciles total segment Adjusted EBITDA to consolidated net (loss) income attributable to Alcoa Corporation:

 

		Third quarter ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Total segment Adjusted EBITDA		$	839			$	630			$	2,463			$	1,812
Unallocated amounts:
Transformation(1),(2)			1				(11	)			(2	)			(59	)
Corporate inventory accounting(1),(3)			(17	)			(9	)			(18	)			(12	)
Corporate expenses(4)			(22	)			(33	)			(75	)			(100	)
Provision for depreciation, depletion, and amortization			(173	)			(194	)			(559	)			(563	)
Restructuring and other charges (D)			(177	)			10				(389	)			(12	)
Interest expense			(33	)			(26	)			(91	)			(77	)
Other (expenses) income, net (O)			(2	)			(48	)			(32	)			3
Other(1),(5)			(10	)			(31	)			(69	)			(49	)
Consolidated income before income taxes			406				288				1,228				943
Provision for income taxes			(251	)			(119	)			(569	)			(328	)
Net income attributable to noncontrolling interest			(196	)			(56	)			(475	)			(202	)
Consolidated net (loss) income attributable to Alcoa Corporation		$	(41	)		$	113			$	184			$	413

 

(1)

Effective in the first quarter of 2018, 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 Alcoa Corporation to provide additional transparency to the nature of these reconciling items. Accordingly, Transformation (see footnote 2), which was previously reported within Other, is presented as a separate line item. Additionally, Impact of LIFO (last in, first out) and Metal price lag, which were previously reported as separate line items, are now combined and reported in a new line item labeled Corporate inventory accounting (see footnote 3). Also, the impact of intersegment profit eliminations, which was previously reported within Other, is reported in the new Corporate inventory accounting line item. The applicable information for all prior periods presented was recast to reflect these changes.

(2)	Transformation includes, among other items, the Adjusted EBITDA of previously closed operations.

(3)	Corporate inventory accounting is composed of the impacts of LIFO inventory accounting, metal price lag, and intersegment profit eliminations. Metal price lag describes the timing difference created when the average price of metal sold differs from the

 

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average cost of the metal when purchased by Alcoa Corporation’s rolled aluminum operations. In general, when the price of metal increases, metal price lag is favorable, and when the price of metal decreases, metal price lag is unfavorable.

(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 Alcoa Corporation’s Statement of Consolidated Operations that are not included in the Adjusted EBITDA of the reportable segments.

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):

 

		Third quarter ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Net (loss) income attributable to Alcoa Corporation		$	(41	)		$	113			$	184			$	413
Average shares outstanding – basic			186				185				186				184
Effect of dilutive securities:
Stock options			—				1				1				1
Stock and performance awards			—				1				2				2
Average shares outstanding – diluted			186				187				189				187

In the third quarter of 2018, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive since Alcoa Corporation generated a net loss. As a result, 4 million stock awards and stock options combined were not included in the computation of diluted EPS. Had Alcoa Corporation generated net income in the 2018 third quarter, 2 million potential shares of common stock related to stock awards and stock options combined would have been included in diluted average shares outstanding.

 

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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
		Third quarter ended September 30,								Third quarter ended September 30,
		2018				2017				2018				2017
Pension and other postretirement benefits (K)
Balance at beginning of period		$	(2,502	)		$	(2,184	)		$	(44	)		$	(37	)
Other comprehensive income:
Unrecognized net actuarial loss and prior service cost/benefit			174				(6	)			4				6
Tax (expense) benefit			(1	)			2				(1	)			(2	)
Total Other comprehensive income (loss) before reclassifications, net of tax			173				(4	)			3				4
Amortization of net actuarial loss and prior service cost/benefit(1)			227				50				1				1
Tax expense(2)			(2	)			(2	)			—				—
Total amount reclassified from Accumulated other comprehensive loss, net of tax(6)			225				48				1				1
Total Other comprehensive income			398				44				4				5
Balance at end of period		$	(2,104	)		$	(2,140	)		$	(40	)		$	(32	)
Foreign currency translation
Balance at beginning of period		$	(1,911	)		$	(1,515	)		$	(746	)		$	(600	)
Other comprehensive (loss) income(3)			(142	)			141				(54	)			44
Balance at end of period		$	(2,053	)		$	(1,374	)		$	(800	)		$	(556	)
Cash flow hedges (L)
Balance at beginning of period		$	(554	)		$	(104	)		$	21			$	63
Other comprehensive (loss) income:
Net change from periodic revaluations			(60	)			(545	)			12				(2	)
Tax benefit (expense)			10				109				(4	)			1
Total Other comprehensive (loss) income before reclassifications, net of tax			(50	)			(436	)			8				(1	)
Net amount reclassified to earnings:
Aluminum contracts(4)			26				33				—				—
Financial contracts(5)			(6	)			(8	)			(4	)			(5	)
Foreign exchange contracts(4)			3				—				—				—
Sub-total			23				25				(4	)			(5	)
Tax (expense) benefit(2)			(2	)			(4	)			1				1
Total amount reclassified from Accumulated other comprehensive (loss) income, net of tax(6)			21				21				(3	)			(4	)
Total Other comprehensive (loss) income			(29	)			(415	)			5				(5	)
Balance at end of period		$	(583	)		$	(519	)		$	26			$	58

 

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