Alcoa 2012 Annual Report Download - page 48

These valuations reflect assumptions about financial market and other economic conditions, which may change based
on changes in key economic indicators. The most significant year-end assumptions used by Alcoa to estimate pension
or other postretirement benefit income or expense for the following year are the discount rate and the expected long-
term rate of return on plan assets. The large decline in our funded status in 2008 due to the financial crisis generated
significant unrecognized actuarial losses. We anticipate that expense in future years will continue to be affected as the
unrecognized losses are recognized in earnings. In addition, Alcoa is required to make an annual measurement of plan
assets and liabilities, which may result in a significant charge to shareholders’ equity. For a discussion regarding how
Alcoa’s financial statements can be affected by pension and other postretirement benefits accounting policies, see Part
II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) under the
caption “Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits,” and Part II, Item 8.
(Financial Statements and Supplementary Data) under Note W to the Consolidated Financial Statements—Pension and
Other Postretirement Benefits.
Although GAAP expense and pension funding contributions are not directly related, the key economic factors that
affect GAAP expense would also likely affect the amount of cash or securities Alcoa would contribute to the pension
plans. Potential pension contributions include both mandatory amounts required under federal law and discretionary
contributions to improve the plans’ funded status. The recently enacted Moving Ahead for Progress in the 21st Century
Act provides temporary relief for employers like Alcoa who sponsor defined benefit pension plans related to funding
contributions under the Employee Retirement Income Security Act of 1974 by allowing the use of a 25-year average
interest rate within an upper and lower range for purposes of determining minimum funding obligations instead of an
average interest rate for the two most recent years, as currently is the case. Alcoa has elected this temporary relief and
believes that it will moderately reduce the cash flow sensitivity of the Company’s U.S. pension plans’ funded status to
additional declines in discount rates over the next two to three years. However, higher than expected pension
contributions due to a further decline in our funded status as a result of additional declines in the discount rate or
lower-than-expected investment returns on plan assets could have a material negative effect on our cash flows. Adverse
capital market conditions could result in reductions in the fair value of plan assets and increase the Company’s
liabilities related to such plans, adversely affecting Alcoa’s liquidity and results of operations.
Union disputes and other employee relations issues could adversely affect Alcoa’s financial results.
A significant portion of Alcoa’s employees are represented by labor unions in a number of countries under various
collective bargaining agreements with varying durations and expiration dates. While Alcoa was successful in
renegotiating the master collective bargaining agreement with the United Steelworkers in June 2010, Alcoa may not be
able to satisfactorily renegotiate other collective bargaining agreements in the U.S. and other countries when they
expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at Alcoa’s
facilities in the future. Alcoa may also be subject to general country strikes or work stoppages unrelated to its business
or collective bargaining agreements. Any such work stoppages (or potential work stoppages) could have a material
adverse effect on Alcoa’s financial results.
Alcoa’s human resource talent pool may not be adequate to support the Company’s growth.
Alcoa’s existing operations and development projects require highly skilled executives, and staff with relevant industry
and technical experience. The inability of the Company or the industry to attract and retain such people may adversely
impact Alcoa’s ability to adequately meet project demands and fill roles in existing operations. Skills shortages in
engineering, technical service, construction and maintenance contractors and other labor market inadequacies may also
impact activities. These shortages may adversely impact the cost and schedule of development projects and the cost
and efficiency of existing operations.
Alcoa may not realize expected long-term benefits from its productivity and cost-reduction initiatives.
Alcoa has undertaken, and may continue to undertake, productivity and cost-reduction initiatives to improve
performance and conserve cash, including new procurement strategies for raw materials, such as backward integration
and non-traditional sourcing from numerous geographies, and deployment of company-wide business process models,
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