Alcoa 2013 Annual Report Download - page 50

The potential physical impacts of climate change on the Company’s operations are highly uncertain, and will be
particular to the geographic circumstances. These may include changes in rainfall patterns, shortages of water or other
natural resources, changing sea levels, changing storm patterns and intensities, and changing temperature levels. These
effects may adversely impact the cost, production and financial performance of Alcoa’s operations.
Additional tax expense or additional tax exposures could affect Alcoa’s future profitability.
Alcoa is subject to income taxes in both the United States and various non-U.S. jurisdictions. Our domestic and
international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Alcoa’s
tax expense includes estimates of additional tax which may be incurred for tax exposures and reflects various estimates
and assumptions. In addition, the assumptions include assessments of future earnings of the Company that could
impact the valuation of its deferred tax assets. The Company’s future results of operations could be adversely affected
by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory
tax rates, changes in the overall profitability of the Company, changes in tax legislation and rates, changes in generally
accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of audits and
examinations of previously filed tax returns and continuing assessments of its tax exposures. Corporate tax reform and
tax law changes continue to be analyzed in the United States and in many other jurisdictions. Significant changes to the
U.S. corporate tax system in particular could have a substantial impact, positive or negative, on Alcoa’s effective tax
rate, cash tax expenditures, and deferred tax assets and liabilities.
Adverse decline in liability discount rate, lower-than-expected investment return on pension assets and other
factors could affect Alcoa’s results of operations or amount of pension funding contributions in future periods.
Alcoa’s results of operations may be negatively affected by the amount of expense Alcoa records for its pension and
other postretirement benefit plans, reductions in the fair value of plan assets and other factors. U.S. generally accepted
accounting principles (GAAP) require that Alcoa calculate income or expense for the plans using actuarial valuations.
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 applied to plan liabilities
and the expected long-term rate of return on plan assets. 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 “Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” in Part II,
Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note W to the
Consolidated Financial Statements—Pension and Other Postretirement Benefits in Part II, Item 8. (Financial
Statements and Supplementary Data).
Although GAAP expense and pension funding contributions are impacted by different regulations and requirements, 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 Moving Ahead for Progress in the 21st
Century Act, enacted in 2012, 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 discount rate within an upper and lower range for purposes of determining minimum funding
obligations instead of an average discount 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 potential 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.
34