Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in millions, except per-share amounts and aluminum prices; shipments in thousands of metric tons [kmt])
Overview
Our Business
Arconic (“Arconic” or the “Company”) is a global leader in lightweight metals engineering and manufacturing. Arconic’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.
Arconic is a global company operating in 18 countries. Based upon the country where the point of sale occurred, the United States and Europe generated 63% and 26%, respectively, of Arconic’s sales in
2017
. In addition, Arconic has operating activities in Brazil, Canada, China, Japan, and Russia, among others. Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.
Management Review of
2017
and Outlook for the Future
In 2017, Arconic’s revenues increased 5% over 2016 as a result of higher volumes across all segments including strong volume growth in our aerospace, automotive, and commercial transportation markets, and higher aluminum pricing primarily impacting the Global Rolled Products segment, partially offset by the planned ramp down and Toll Processing and Services Agreement (the “Toll Processing Agreement”) relating to the Company’s North America packaging business in Tennessee, and unfavorable product pricing and mix. In the segments, Adjusted EBITDA increased over 2016 as a result of the aforementioned higher volumes and continued focus on net cost savings that more than offset negative factors including product pricing pressures, ramp up costs associated with new aerospace engine parts, aerospace customer inventory destocking and reduced build rates, and higher aluminum prices.
Loss from continuing operations after income taxes was $74 in 2017 compared to $1,062 in 2016. There were several significant items that impacted the fourth quarter of 2017. The Company recorded a charge of $719 ($719 pre-tax) associated with the impairment of goodwill in the forgings and extrusions business and a charge of $41 ($41 pre-tax) for the impairment of assets in the Latin America extrusions business in conjunction with an agreement to sell the business. Also in the fourth quarter of 2017, the Company recorded income of $97 ($106 pre-tax) associated with the reversal of liabilities for a contingent earn-out and a separation-related guarantee. The Company was also impacted by the Tax Cuts and Jobs Act enacted on December 22, 2017 (“the 2017 Act”), and recorded a provisional charge of $272 associated with the revaluation of U.S. net deferred tax assets due to a decrease in the U.S. corporate tax rate from 35% to 21%, as well as a one-time transition tax on the non-previously taxed earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017. The impact of the 2017 Act provisions will be updated over the course of 2018, in accordance with guidance issued by the Securities and Exchange Commission which has provided a one-year measurement period to finalize the accounting impacts of the new legislation, and as additional guidance is issued and the new law is further analyzed.
Additionally during 2017, the Company disposed of its retained interest in Alcoa Corporation common stock and recorded gains of $405 ($518 pre-tax), and the Company redeemed debt of $1,250, recording charges of $49 ($76 pre-tax) primarily for the premium paid for the early redemption of the debt. See discussion that follows under Results of Operations below for further information on 2017 results.
Management continued its focus on liquidity and cash flows as well as improving its operating performance through cost reductions, streamlined organizational structures, margin enhancement, and profitable revenue generation. Management has also intensified its focus on capital efficiency. This focus and the related results enabled Arconic to end 2017 with a solid financial position.
The following financial information reflects certain key measures of Arconic’s
2017
results:
|
|
•
|
Sales of
$12,960
and Net loss of
$74
, or
0.28
per diluted share;
|
|
|
•
|
Consolidated adjusted EBITDA of
$1,761
, an
increase
of
17%
from
2016
1
;
|
|
|
•
|
Cash from operations of
$701
;
|
|
|
•
|
Capital expenditures of
$596
;
|
|
|
•
|
Cash on hand at the end of the year of
$2,150
; and
|
|
|
•
|
Total debt of
$6,844
, a
decrease
in total debt of
$1,240
from
2016
.
|
(1)
For the reconciliation of Net loss attributable to Arconic to Consolidated adjusted EBITDA and related information, see page 45.
In 2018, management projects that sales will be up 3% to 6% based on volume and share gains, as well as higher aluminum prices. In aerospace, it is anticipated that the favorable impact of share gains on new platforms and engines will be somewhat offset by lower pricing and the mix of wide-body and narrow-body aircraft produced. Management also expects strong growth in automotive sheet and commercial transportation markets, particularly due to North American and European heavy-duty truck production increases, while the industrial gas turbine market will continue declining throughout 2018.
Looking ahead over the next year, management will continue to focus on improving operating performance through cost reductions, margin enhancement, and profitable revenue generation. As part of this effort, the Company made the decision to freeze its U.S. defined benefit pension plans for all U.S.-based salaried and non-bargained hourly employees effective April 1, 2018, and the Company intends to relocate its global headquarters by the end of 2018 out of New York City to a more cost-effective location. Management has initiated a review of the Company’s strategy and portfolio. Additionally, each of the segments are projected to achieve net cost savings in 2018. As a result, adjusted earnings per share is anticipated to increase and free cash flow is also expected to improve in 2018 through increased focus on driving operational improvements and working capital efficiency.
To further enhance the Company’s financial position and return capital to shareholders, Arconic’s Board of Directors authorized a share repurchase program of up to $500 of its outstanding common stock and a $500 early debt reduction. Under the share repurchase program, the Company may repurchase shares from time to time, in amounts, at prices, and at such times as the Company deems appropriate. Repurchases will be subject to market conditions, legal requirements and other considerations. The Company is not obligated to repurchase any specific number of shares or to do so at any particular time, and the share repurchase program may be suspended, modified or terminated at any time without prior notice. For the early debt reduction, Arconic intends to redeem in March 2018 all of its outstanding 5.72% Notes due in 2019.
Beginning in the first quarter of 2018, the Company's primary measure of segment performance will change from Adjusted EBITDA to Operating income, which more closely aligns segment performance with Operating income as presented in the Statement of Consolidated Operations. As part of this change, LIFO and metal price lag will be included in the Operating income of the segments.
In conjunction with the implementation of the new accounting guidance on changes to the classification of certain cash receipts and cash payments within the statement of cash flows (effective January 1, 2018 and to be applied retrospectively), specifically as it relates to the requirement to reclassify cash received from net sales of beneficial interest in sold receivables from Cash from operations to Cash provided from investing activities, the Company has changed the calculation of its measure of free cash flow to Cash from operations plus cash received from net sales of beneficial interest in sold receivables, less Capital expenditures. This change to our measure of free cash flow is being implemented to ensure consistent presentation of this measure across all historical periods, once the required accounting guidance reclassification is reflected in our financial results beginning in the first quarter of 2018. The adoption of this accounting change does not reflect a change in our underlying business or activities.
2016 Separation Transaction.
On November 1, 2016, the Company completed the separation of its business into two standalone, publicly-traded companies, Arconic Inc. and Alcoa Corporation. Following the Separation Transaction, Arconic comprises the Global Rolled Products (other than the rolling mill in Warrick, Indiana, and the 25.1% equity ownership stake in the Ma’aden Rolling Company), the Engineered Products and Solutions, and the Transportation and Construction Solutions segments. Alcoa Corporation comprises the Alumina and Primary Metals segments, the rolling mill in Warrick, Indiana, and the 25.1% equity ownership stake in the Ma’aden Rolling Company in Saudi Arabia.
The Separation Transaction was effected by the distribution of 80.1% of the outstanding shares of Alcoa Corporation common stock to the Company’s shareholders (the “Distribution”). The Company’s shareholders of record as of the close of business on October 20, 2016 (the “Record Date”) received one share of Alcoa Corporation common stock for every three shares of the Company’s common stock held as of the Record Date. The Company distributed 146,159,428 shares of common stock of Alcoa Corporation in the Distribution and retained 36,311,767 shares, or approximately 19.9% (see disposition of retained shares under Results of Operations below), of the common stock of Alcoa Corporation immediately following the Distribution. As a result of the Distribution, Alcoa Corporation is now an independent public company trading under the symbol “AA” on the New York Stock Exchange, and the Company trades under the symbol “ARNC” on the New York Stock Exchange.
On October 31, 2016, Arconic entered into several agreements with Alcoa Corporation that govern the relationship of the parties following the completion of the Separation Transaction. These agreements include the following: Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, Alcoa Corporation to Arconic Inc. Patent, Know-How, and Trade Secret License Agreement, Arconic Inc. to Alcoa Corporation Patent, Know-How, and Trade Secret License Agreement, Alcoa Corporation to Arconic Inc. Trademark License Agreement, Toll Processing and Services Agreement, Master Agreement for the Supply of Primary Aluminum, Massena Lease and Operations Agreement, Fusina Lease and Operations Agreement, and Stockholder and Registration Rights Agreement.
Results of Operations
Earnings Summary
Sales—
Sales for
2017
were
$12,960
compared with sales of
$12,394
in
2016
, an
increase
of
$566
, or
5%
. The increase was the result of strong volume growth in all segments and higher aluminum pricing, partially offset by the planned ramp down and Toll Processing Agreement relating to the Company’s North America packaging business in Tennessee in the Global Rolled Products segment, as well as unfavorable product pricing in both the Engineered Products and Solutions and Global Rolled Products segments. Pursuant to the Toll Processing Agreement that Arconic entered into with Alcoa Corporation on October 31, 2016 in connection with the Separation Transaction, Arconic provides can body stock to Alcoa Corporation using aluminum supplied by Alcoa Corporation, resulting in the absence of metal sales in 2017 compared to 2016.
Sales for 2016 were $12,394 compared with sales of $12,413 in 2015, a decline of $19, or less than 1%. The relatively flat performance was the result of a full-year effect of two 2015 acquisitions in the Engineered Products and Solutions segment and automotive volume increases in the Global Rolled Products segment, which were more than offset by the ramp-down of the Tennessee packaging business and the impact of aluminum prices in the Global Rolled Products segment and unfavorable product price and mix across all segments.
Cost of Goods Sold (COGS)—
COGS as a percentage of Sales was
79.9%
in
2017
compared with
79.2%
in
2016
. The increase was primarily attributable to cost increases, including net higher aluminum prices of $84 and ramp-up costs related to new commercial aerospace engines, and a lower margin product mix, partially offset by net cost savings.
COGS as a percentage of Sales was 79.2% in 2016 compared with 81.4% in 2015. The primary drivers in the improvement in COGS as a percentage of sales were productivity gains across all segments and higher volume in the Engineered Products and Solutions segment due to the benefit of a full-year effect of two 2015 acquisitions. This benefit was somewhat offset by overall cost increases across all segments and unfavorable product pricing and mix impacts primarily in the Engineered Products and Solutions and Global Rolled Products segments.
Selling, General Administrative, and Other Expenses (SG&A) —
SG&A expenses were
$731
, or
5.6%
of Sales, in
2017
compared with
$942
, or
7.6%
of Sales, in
2016
. The
decrease
in SG&A was the result of expenses related to the Separation Transaction of $193 in 2016 compared to $18 in 2017, as well as ongoing overhead cost reduction efforts (see Restructuring and Other Charges below), partially offset by proxy, advisory and governance-related costs of $58, external legal and other advisory costs related to Grenfell Tower of $14 and costs associated with the Company’s Delaware reincorporation of $3 in 2017.
,
SG&A expenses were $942, or 7.6% of Sales, in 2016 compared with $765, or 6.2% of Sales, in 2015. The increase in SG&A was primarily due to costs related to the Separation Transaction of $193 in 2016, an increase of $169 from 2015 separation costs.
Research and Development Expenses (R&D)—
R&D expenses were
$111
in
2017
compared with
$132
in
2016
and
$169
in 2015. The decrease in 2017 as compared to 2016 was driven by lower spending. The decrease in 2016 as compared to 2015 was driven by the decrease in spending for the Micromill™ in San Antonio, TX which was completed in 2015 and began production of automotive sheet, on a limited basis, for the Global Rolled Products segment.
Provision for Depreciation and Amortization (D&A)—
The provision for D&A was
$551
in
2017
compared with
$535
in
2016
. The
increase
of
$16
, or
3%
, was primarily due to capital projects placed into service. The provision for D&A was $535 in 2016 compared with $508 in 2015. The increase of $27 related to a full year of D&A related to two acquisitions which occurred during 2015 (see Engineered Products and Solutions under Segment Information below).
Impairment of Goodwill—
In 2017, the Company recognized an impairment of goodwill of $719, related to the annual impairment review of the Arconic Forgings and Extrusions business. In 2015, the Company recognized an impairment of goodwill of $25 related to the annual impairment review of the soft alloy extrusion business in Brazil. See Goodwill under Critical Accounting Policies and Estimates below.
Restructuring and Other Charges—
Restructuring and other charges for each year in the three-year period ended December 31,
2017
were comprised of the following:
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|
|
|
2017
|
2016
|
2015
|
Asset impairments
|
$
|
58
|
|
$
|
80
|
|
$
|
—
|
|
Layoff costs
|
64
|
|
70
|
|
97
|
|
Net loss on divestitures of businesses
|
57
|
|
3
|
|
136
|
|
Other
|
(3
|
)
|
27
|
|
(11
|
)
|
Reversals of previously recorded layoff costs
|
(11
|
)
|
(25
|
)
|
(8
|
)
|
Restructuring and other charges
|
$
|
165
|
|
$
|
155
|
|
$
|
214
|
|
Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans.
2017 Actions
. In 2017, Arconic recorded Restructuring and other charges of $165 ($143 after-tax), which were comprised of the following components: $69 ($47 after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately 880 employees (400 in the Engineered Products and Solutions segment, 245 in the Global Rolled Products segment, 135 in the Transportation and Construction Solutions segment and 100 in Corporate), a charge of $60 ($60 after-tax) related to the sale of the Fusina, Italy rolling mill; a charge of $41 ($41 after-tax) for the impairment of assets associated with the agreement to sell the Latin America Extrusions business (see Note F to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K); a net benefit of $6 ($4 after-tax), for the reversal of forfeited executive stock compensation of $13, partially offset by a charge of $7 for the related severance; a net charge of $12 ($7 after-tax) for other miscellaneous items; and a favorable benefit of $11 ($8 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
As of December 31,
2017
, approximately
300
of the
880
employees were separated. The remaining separations for
2017
restructuring programs are expected to be completed by the end of
2018
. In
2017
, cash payments of
$28
were made against layoff reserves related to
2017
restructuring programs.
2016 Actions.
In 2016, Arconic recorded Restructuring and other charges of $155 ($114 after-tax), which were comprised of the following components: $57 ($46 after-tax) for costs related to the exit of certain legacy Firth Rixson operations in the U.K.; $37 ($24 after-tax) for exit costs related to the decision to permanently shut down a can sheet facility; $20 ($14 after-tax) for costs related to the closures of five facilities, primarily in the Transportation and Construction Solutions segment and Engineered Products and Solutions segment, including the separation of approximately 280 employees; $53 ($33 after-tax) for other layoff costs, including the separation of approximately 1,315 employees (1,045 in the Engineered Products and Solutions segment, 210 in Corporate, 30 in the Global Rolled Products segment and 30 in the Transportation and Construction Solutions segment); $11 ($8 after-tax) for other miscellaneous items, including $3 ($2 after-tax) for the sale of Remmele Medical; $2 ($1 after-tax) for a pension settlement; and $25 ($12 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In 2016, management made the decision to exit certain legacy Firth Rixson facilities in the U.K. Costs related to these actions included asset impairments and accelerated depreciation of $51; other exit costs of $4; and $2 for the separation of 60 employees.
Also in 2016, management approved the shutdown and demolition of the can sheet facility in Tennessee upon completion of the Toll Processing Agreement with Alcoa Corporation (see Global Rolled Products under Segment Information below). Costs related to this action included $21 in asset impairments; $9 in other exit costs; and $7 for the separation of 145 employees. The other exit costs of $9 represent $4 in asset retirement obligations and $3 in environmental remediation, both of which were triggered by the decision to permanently shut down and demolish the can sheet facility in Tennessee, and $2 in other exit costs.
As of December 31,
2017
, approximately
1,280
of the
1,700
(previously
1,750
) employees were separated. The total number of employees associated with 2016 restructuring programs was updated to reflect employees, who were initially identified for separation, accepting other positions within Arconic and natural attrition. The remaining separations for 2016 restructuring programs are expected to be completed by the end of 2018.
In
2017
and
2016
, cash payments of
$26
and
$16
were made against layoff reserves related to 2016 restructuring programs.
2015 Actions.
In 2015, Arconic recorded Restructuring and other charges of $214 ($192 after-tax), which were comprised of the following components: a $136 ($134 after-tax) net loss related to the March 2015 divestiture of a rolling mill in Russia and post-closing adjustments associated with the December 2014 divestitures of three rolling mills located in Spain and France; $97 ($70 after-tax) for layoff costs, including the separation of approximately 1,505 employees (590 in the Engineered Products and Solutions segment, 425 in the Transportation and Construction Solutions segment, 400 in Corporate, and 90 in the Global Rolled Products segment); an $18 ($13 after-tax) gain on the sale of land related to one of the rolling mills in Australia that was permanently closed in December 2014; a net charge of $7 ($4 after-tax) for other miscellaneous items; and $8 ($3 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
As of December 31,
2017
, the separations associated with the 2015 restructuring programs were essentially complete. In
2017
,
2016
and
2015
, cash payments of
$5
,
$55
and
$18
, respectively, were made against layoff reserves related to 2015 restructuring programs.
Arconic does not include Restructuring and other charges in the results of its reportable segments. The pre-tax impact of allocating such charges to segment results would have been as follows:
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|
|
|
|
|
2017
|
2016
|
2015
|
Engineered Products and Solutions
|
$
|
30
|
|
$
|
78
|
|
$
|
46
|
|
Global Rolled Products
|
72
|
|
40
|
|
121
|
|
Transportation and Construction Solutions
|
52
|
|
14
|
|
8
|
|
Segment total
|
154
|
|
132
|
|
175
|
|
Corporate
|
11
|
|
23
|
|
39
|
|
Total restructuring and other charges
|
$
|
165
|
|
$
|
155
|
|
$
|
214
|
|
Interest Expense—
Interest expense was
$496
in
2017
compared with
$499
in
2016
. The
decrease
of
$3
, or
1%
, was primarily due to lower interest expense resulting from lower outstanding debt, mostly offset by $73 primarily in higher premiums paid in 2017 related to the early redemption of $1,250 in debt. In the second quarter of 2017, Arconic redeemed all of the Company’s 6.50% Bonds due 2018 and 6.75% Notes due 2018, and a portion of the Company’s 5.72% Notes due 2019 in advance of the respective maturity dates.
Interest expense was $499 in 2016 compared with $473 in 2015. The increase of $26, or 5%, was primarily due to debt issuance costs of $9 that were expensed in connection with the Separation Transaction and costs associated with the early redemption of $750 of 5.55% Notes due February 2017, completed on December 30, 2016, which included a $3 purchase premium, and a full-year of interest related to RTI International Metals, Inc. (RTI) debt of $6.
Other Income, Net—
Other income, net was
$640
in
2017
compared with
$94
in
2016
. The increase of
$546
was
primarily due to the gain on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock of $351 (in February 2017, the Company sold 23,353,000 shares of Alcoa Corporation stock at $38.03 per share, which resulted in cash proceeds of $888 and a gain of $351) and the gain of $167 on the Debt-for-Equity Exchange (in April and May 2017, the Company acquired a portion of its outstanding notes held by two investment banks (the “Investment Banks”) in exchange for cash and the Company’s remaining 12,958,767 shares (valued at $35.91 per share) in Alcoa Corporation stock and recorded a gain of $167), income of $25 associated with a higher reversal of a contingent earn-out liability related to the Firth Rixson acquisition (see Note F to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information), and income of $25 due to the reversal of a liability associated with a separation-related guarantee. The Company was required to provide a guarantee for an Alcoa Corporation electricity contract in the event of an Alcoa Corporation payment default. In the fourth quarter of 2017, Alcoa Corporation announced that it had terminated the electricity contract at its Rockdale Operations and, as a result, Arconic reversed its associated guarantee liability.
Other income, net was $94 in 2016 compared with $28 in 2015. The increase of $66 was mainly the result of a favorable adjustment to the contingent earn-out liability and a post-closing adjustment, both of which related to the acquisition of Firth Rixson of $76, and favorable foreign currency movements of $55. These items were partially offset by the absence of gains on the sales of land in the United States and an equity investment in a China rolling mill of $38 in 2015.
Income Taxes—
Arconic’s effective tax rate was 115.7% in 2017 compared with the U.S. federal statutory rate of 35%. The effective tax rate primarily differs from the U.S. federal statutory rate as a result of a $719 impairment of goodwill, a $41 impairment of assets in the Latin America extrusions business, and a $60 charge related to the sale of a rolling mill in Italy that are nondeductible for income tax purposes, a $272 tax charge as a provisional impact of the 2017 Act, and a $23 tax charge for an increase in an uncertain tax position in Germany, partially offset by a $73 tax benefit related to the sale and Debt-for-Equity Exchange of the Alcoa Corporation stock, a $69 tax benefit for the release of U.S. state valuation allowances net of the federal tax benefit, a $27 favorable tax impact associated with a non-taxable earn-out liability adjustment in connection with the Firth Rixson acquisition, and by foreign income taxed in lower rate jurisdictions.
Arconic’s effective tax rate was 356.5% in 2016 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate primarily due to a $1,267 discrete income tax charge for valuation allowances related to the Separation Transaction (see Income Taxes under Critical Accounting Policies and Estimates below), a $95 tax charge associated with the redemption of company-owned life insurance policies whose tax basis was less than the redemption amount resulting in a taxable gain, a $51 net charge for the remeasurement of certain deferred tax assets and liabilities due to tax rate and tax law changes, and a $34 unfavorable tax impact related to certain separation costs which are nondeductible for income tax purposes, somewhat offset by a $39 discrete income tax benefit for the release of valuation allowances in Canada and Russia, a $38 tax benefit related to currency impacts of a distribution of previously taxed income, and a $26 favorable tax impact associated with non-taxable settlement proceeds and earn-out liability adjustments in connection with the Firth Rixson acquisition.
Arconic’s effective tax rate was 185.2% in 2015 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate principally due to a $190 discrete income tax charge for valuation allowances on certain deferred tax assets in the U.S. and Iceland (see Income Taxes under Critical Accounting Policies and Estimates below), a $25 impairment of goodwill that is nondeductible for income tax purposes, a loss on the sale of a rolling mill in Russia for which no tax benefit was recognized, and a $34 net discrete income tax charge as described below.
In 2015, Alcoa World Alumina and Chemicals (AWAC), the former joint venture owned 60% by Arconic and 40% by Alumina Limited, recognized an $85 discrete income tax charge for a valuation allowance on certain deferred tax assets in Suriname (see Income Taxes under Critical Accounting Policies and Estimates below), which were related mostly to employee benefits and tax loss carryforwards. Arconic also had a $51 deferred tax liability related to its 60%-share of these deferred tax assets that was written off as a result of the valuation allowance recognized by AWAC.
Management anticipates that the effective tax rate in 2018 will be between 27% and 29%. However, business portfolio actions, changes in the current economic environment, tax legislation or rate changes, currency fluctuations, ability to realize deferred tax assets, movements in stock price impacting tax benefits or deficiencies on stock-based payment awards, and the results of operations in certain taxing jurisdictions may cause this estimated rate to fluctuate. It is also expected that continuing analysis of the 2017 Act, as well as additional guidance as it is issued, will have an impact on the estimated rate.
Loss from continuing operations after income taxes and noncontrolling interests—
Loss
from continuing operations after income taxes and noncontrolling interests was
$74
for
2017
, or
$0.28
per diluted share, compared to
$1,062
for
2016
, or
$2.58
per share. The
increase
in results of
$988
was primarily attributable to charges for tax valuation allowances and costs related to the Separation Transaction in 2016; a gain of $238 ($351 pre-tax) on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and a gain of $167 ($167 pre-tax) on the Debt-for-Equity Exchange in 2017; income of $25 ($25 pre-tax) associated with a higher reversal of a contingent earn-out liability related to the Firth Rixson acquisition and income of $16 ($25 pre-tax) due to the reversal of a liability associated with a separation-related guarantee; net cost savings; and higher sales volumes across all segments; partially offset by a charge for goodwill impairment of $719 ($719 pre-tax); a charge related to the 2017 Act of $272; $47 ($73 pre-tax) of higher premiums paid for the early redemption of debt in 2017; higher LIFO inventory expense associated with higher aluminum prices; charges for asset impairments of the Fusina, Italy rolling mill of $60 ($60 pre-tax) and Latin America extrusions business of $41 ($41 pre-tax) based on the sale of these businesses; unfavorable product pricing, primarily in aerospace; and lower-margin product mix.
Loss from continuing operations after income taxes and noncontrolling interests was $1,062 for 2016, or $2.58 per diluted share, compared to $157 for 2015, or $0.54 per share. The decrease in results of $905 was primarily due to charges for tax valuation allowances and costs related to the Separation Transaction, primarily offset by a full-year effect of 2015 acquisitions (see Engineered Products and Solutions under Segment Information below) and net cost savings across all segments.
Segment Information
Arconic’s operations consist of three worldwide reportable segments: Engineered Products and Solutions, Global Rolled Products and Transportation and Construction Solutions (see below). In the first quarter of 2017, the Company changed its primary measure of segment performance from After-tax operating income (ATOI) to Adjusted earnings before interest, tax,
depreciation, and amortization (“Adjusted EBITDA”). Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance in 2017 was Adjusted EBITDA. Arconic’s definition of Adjusted EBITDA is net margin plus an add-back for depreciation and amortization. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation and amortization. Prior period information has been recast to conform to current year presentation. The Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. Certain items are excluded from segment Adjusted EBITDA such as: Impairment of goodwill; Restructuring and other charges; the impact of LIFO inventory accounting; metal price lag (the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by the respective segment - generally, when the price of metal increases, metal price lag is favorable, and when the price of metal decreases, metal price lag is unfavorable); corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities and corporate research and development expenses); and other items, including intersegment profit eliminations.
Beginning in the first quarter of 2018, the Company's primary measure of segment performance will change from Adjusted EBITDA to Operating income, which more closely aligns segment performance with Operating income as presented in the Statement of Consolidated Operations. As part of this change, LIFO and metal price lag will be included in the Operating income of the segments.
Adjusted EBITDA for all reportable segments totaled
$2,144
in
2017
,
$2,063
in
2016
, and $1,894 in
2015
. The following information provides sales and Adjusted EBITDA for each reportable segment, as well as certain shipment and realized price data for Global Rolled Products, for each of the three years in the period ended December 31,
2017
. See Note N to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
Engineered Products and Solutions
|
|
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|
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|
2017
|
2016
|
2015
|
Third-party sales
|
$
|
5,935
|
|
$
|
5,728
|
|
$
|
5,342
|
|
Adjusted EBITDA
|
$
|
1,224
|
|
$
|
1,195
|
|
$
|
1,111
|
|
The Engineered Products and Solutions segment produces products that are used primarily in the aerospace (commercial and defense), industrial, commercial transportation, and power generation end markets. Such products include fastening systems (titanium, steel, and nickel superalloys) and seamless rolled rings (mostly nickel superalloys); investment castings (nickel superalloys, titanium, and aluminum), including airfoils and forged jet engine components (e.g., jet engine disks), and extruded, machined and formed aircraft parts (titanium and aluminum), all of which are sold directly to customers and through distributors. More than 75% of the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forged, extruded, and machined metal products (titanium, aluminum and steel) for the oil and gas, automotive, and land and sea defense end markets. Seasonal decreases in sales are generally experienced in the third quarter of the year due to the European summer slowdown across all end markets. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar, British pound and the euro.
In April 2016, Arconic completed the sale of the Remmele Medical business that was part of the RTI acquisition (see below) and manufactured precision-machined metal products for customers in the minimally invasive surgical device and implantable device markets. Remmele Medical generated third-party sales of $23 from January 1, 2016 through the divestiture date, and, at the time of the divestiture, had approximately 330 employees.
In July 2015, Arconic completed the acquisition of RTI, a global supplier of titanium and specialty metal products and services for the commercial aerospace, defense, energy, and medical device end markets. The purpose of the acquisition was to expand Arconic’s range of titanium offerings and add advanced technologies and materials, primarily related to the aerospace end market. In 2014, RTI generated net sales of $794 and had approximately 2,600 employees. The operating results and assets and liabilities of RTI have been included within the Engineered Products and Solutions segment since the date of acquisition.
In March 2015, Arconic completed the acquisition of TITAL, a privately held aerospace castings company with approximately 650 employees (at the time of the acquisition) based in Germany. TITAL produces aluminum and titanium investment casting products for the aerospace and defense end markets. In 2014, TITAL generated sales of approximately $100. The purpose of the acquisition was to capture increasing demand for advanced jet engine components made of titanium, establish titanium-casting capabilities in Europe, and expand existing aluminum casting capacity. The operating results and assets and liabilities of TITAL have been included within the Engineered Products and Solutions segment since the date of acquisition.
Third-party sales for the Engineered Products and Solutions segment
increase
d
$207
, or
4%
, in
2017
compared with
2016
, primarily attributable to volume growth in both aerospace engines and airframes, partially offset by lower product pricing, primarily in the aerospace end market, and the absence of sales of $23 related to the Remmele Medical business, which was sold in April 2016.
Third-party sales for this segment
increase
d
$386
, or
7%
, in 2016 compared with 2015, primarily attributable to higher third-party sales of the two acquired businesses of $457, primarily related to the aerospace end market, and increased demand from the industrial gas turbine end market, partially offset by lower volumes in the oil and gas end market and commercial transportation end market as well as pricing pressures in aerospace.
Adjusted EBITDA for the Engineered Products and Solutions segment
increase
d $29, or 2%, in
2017
compared with
2016
, primarily on higher volumes and net cost savings, partially offset by product pricing pressures, ramp up costs associated with increasing production volumes of new aerospace engine parts, and a lower margin product mix.
Adjusted EBITDA for this segment
increase
d $84, or
8%
, in
2016
compared with
2015
,
primarily on net cost savings across all businesses as well as the volume increase from both the RTI acquisition and organic revenue growth, partially offset by a lower margin product mix and pricing pressures in the aerospace end market.
In 2018, demand in the commercial aerospace end market is expected to remain strong, driven by the ramp-up of new aerospace engine platforms. Demand in the defense end market is expected to grow due to the continuing ramp-up of certain aerospace programs. Additionally, net cost savings are anticipated while declines in the industrial gas turbine market and pricing pressure across all markets is likely to continue.
Global Rolled Products
(1)
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Third-party sales
|
$
|
4,992
|
|
$
|
4,864
|
|
$
|
5,253
|
|
Intersegment sales
|
148
|
|
118
|
|
125
|
|
Total sales
|
$
|
5,140
|
|
$
|
4,982
|
|
$
|
5,378
|
|
Adjusted EBITDA
|
$
|
599
|
|
$
|
577
|
|
$
|
512
|
|
Third-party aluminum shipments (kmt)
|
1,197
|
|
1,339
|
|
1,375
|
|
Average realized price per metric ton of aluminum
(2)
|
$
|
4,171
|
|
$
|
3,633
|
|
$
|
3,820
|
|
|
|
(1)
|
Excludes the Warrick, IN rolling operations and the equity interest in the rolling mill at the joint venture in Saudi Arabia, both of which were previously part of the Global Rolled Products segment but became part of Alcoa Corporation effective November 1, 2016.
|
|
|
(2)
|
Generally, average realized price per metric ton of aluminum includes two elements: a) the price of metal (the underlying base metal component based on quoted prices from the LME, plus a regional premium which represents the incremental price over the base LME component that is associated with physical delivery of metal to a particular region), and b) the conversion price, which represents the incremental price over the metal price component that is associated with converting primary aluminum into sheet and plate. In this circumstance, the metal price component is a pass-through to this segment’s customers with limited exception (e.g., fixed-priced contracts, certain regional premiums).
|
The Global Rolled Products segment produces aluminum sheet and plate for a variety of end markets. Sheet and plate is sold directly to customers and through distributors related to the aerospace, automotive, commercial transportation, packaging, building and construction, and industrial products (mainly used in the production of machinery and equipment and consumer durables) end markets. A small portion of this segment also produces aseptic foil for the packaging end market. While the customer base for flat-rolled products is large, a significant amount of sales of sheet and plate is to a relatively small number of customers. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar, Chinese yuan, the euro, the Russian ruble, the Brazilian real, and the British pound.
In March 2017, Arconic completed the sale of its Fusina, Italy rolling mill. While owned by Arconic, the operating results and assets and liabilities of the Fusina, Italy rolling mill were included in the Global Rolled Products segment. The rolling mill generated third-party sales of approximately $54 and $165 for 2017 and 2016, respectively. At the time of the divestiture, the rolling mill had approximately 312 employees. See Restructuring and Other Charges under Results of Operations above.
On November 1, 2016, Arconic entered into a Toll Processing Agreement with Alcoa Corporation for the tolling of metal for the Warrick, IN rolling mill which became a part of Alcoa Corporation upon the completion of the Separation Transaction. As
part of this arrangement, Arconic provides a toll processing service to Alcoa Corporation to produce can sheet products at its facility in Tennessee through the expected end date of the contract, December 31, 2018. Alcoa Corporation supplies all required raw materials to Arconic and Arconic processes the raw materials into finished can sheet coils ready for shipment to the end customer. Tolling revenue for 2017 and the two months ended December 31, 2016 was $190 and $37, respectively.
In March 2015, Arconic completed the sale of a rolling mill located in Belaya Kalitva, Russia. While owned by Arconic, the operating results and assets and liabilities of the rolling mill were included in the Global Rolled Products segment. The rolling mill generated sales of approximately $20 and $130 in 2015 and 2014 and, at the time of divestiture, had approximately 1,870 employees. See Restructuring and Other Charges under Results of Operations above.
Third-party sales for the Global Rolled Products segment
increase
d $128, or 3%, in
2017
compared with
2016
, primarily attributable to volume growth in the automotive end market and higher aluminum pricing, partially offset by the impact of $362 associated with the ramp-down and Toll Processing Agreement with Alcoa Corporation at the Company’s North America packaging business in Tennessee, the absence of sales of $111 from the rolling mill in Fusina, Italy, aerospace customer inventory destocking and reduced build rates, and pricing pressures in the global packaging market.
Third-party sales for this segment
decrease
d
$389
, or
7%
, in 2016 compared with 2015, primarily due to the ramp-down of Tennessee packaging of $251; lower aluminum prices; and lower demand in the industrial products, packaging, commercial aerospace, commercial transportation, and North American heavy duty truck markets. These decreases were partially offset by higher volume in the automotive market.
Adjusted EBITDA for the Global Rolled Products segment
increase
d $22, or 4%, in
2017
compared with
2016
, primarily driven by net cost savings and increased automotive volumes, partially offset by lower aerospace volume from customer destocking and reduced build rates, continued pricing pressure on global packaging products and higher aluminum prices. The higher aluminum prices negatively impacted the Global Rolled Products Adjusted EBITDA margin by $18, or 140 basis points, in 2017 compared with 2016.
Adjusted EBITDA for this segment
increase
d $65, or 13%, in
2016
compared with
2015
,
primarily driven by strong productivity improvements, which significantly exceeded cost increases, partially offset by lower pricing, primarily due to overall pricing pressure in the global can sheet market, unfavorable product mix and lower volumes as detailed above.
In 2018, demand in the automotive end market is expected to continue to grow due to the growing demand for innovative products and aluminum-intensive vehicles. Demand from the commercial airframe end market is expected to be flat in 2018 as the ramp-up of new programs is offset by lower build rates for aluminum intensive wide-body programs. The ramp-down of the North American packaging operations is expected to continue in 2018. Net productivity improvements are anticipated to continue.
Transportation and Construction Solutions
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Third-party sales
|
$
|
1,985
|
|
$
|
1,802
|
|
$
|
1,882
|
|
Adjusted EBITDA
|
$
|
321
|
|
$
|
291
|
|
$
|
271
|
|
The Transportation and Construction Solutions segment produces products that are used mostly in the commercial transportation and nonresidential building and construction end markets. Such products include integrated aluminum structural systems, architectural extrusions, and forged aluminum commercial vehicle wheels, which are sold both directly to customers and through distributors. A small part of this segment also produces aluminum products for the industrial products end market. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are primarily the U.S. dollar, the euro, and the Brazilian real.
In December 2017, Arconic reached an agreement to sell its Latin America extrusions business that operates primarily in Brazil (see Restructuring and Other Charges under Results of Operations above). The sale is expected to close in the first half of 2018 following customary regulatory and anti-trust reviews. The operating results and assets and liabilities of the extrusions business are included in the Transportation and Construction Solutions segment.
Third-party sales for the Transportation and Construction Solutions segment
increase
d
$183
, or
10%
, in
2017
compared with
2016
, primarily driven by increased volumes in the commercial transportation and building and construction end markets, higher aluminum pricing, and favorable foreign currency movements, partially offset by lower product pricing.
Third-party sales for this segment
decrease
d
$80
, or
4%
, in 2016 compared with 2015, primarily driven by lower demand from the North American commercial transportation end market, which was partially offset by rising demand from the building and construction end market.
Adjusted EBITDA for the Transportation and Construction Solutions segment
increase
d $30, or 10%, in
2017
compared with
2016
, principally driven by net cost savings and higher volumes, partially offset by lower product pricing in the heavy-duty truck market, unfavorable product mix, and higher aluminum prices. The higher aluminum prices negatively impacted the Transportation and Construction Solutions Adjusted EBITDA margin by $19, or 120 basis points, in 2017 compared with 2016.
Adjusted EBITDA for this segment
increase
d $20, or
7%
, in
2016
compared with
2015
, principally driven by net cost savings across all businesses and growth in the building and construction segment, partially offset by lower demand in the North American heavy duty truck and Brazilian markets.
In 2018, we expect continued growth in the North American and European commercial transportation and building and construction markets and continued demand for innovative products. Additionally, net cost savings are anticipated.
Reconciliation of Combined segment adjusted EBITDA to Net loss attributable to Arconic
Items required to reconcile Combined segment adjusted EBITDA to Net loss attributable to Arconic include: the Provision for depreciation and amortization; Impairment of goodwill; Restructuring and other charges; the impact of LIFO inventory accounting; metal price lag (the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by the respective segment — generally, when the price of metal increases, metal price lag is favorable, and when the price of metal decreases, metal price lag is unfavorable); corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities and corporate research and development expenses); other items, including intersegment profit eliminations; Other income, net; Interest expense; Income tax expense; and the results of discontinued operations.
The following table reconciles Combined segment adjusted EBITDA to Net loss attributable to Arconic:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Combined segment adjusted EBITDA
|
$
|
2,144
|
|
$
|
2,063
|
|
$
|
1,894
|
|
Unallocated amounts:
|
|
|
|
Depreciation and amortization
|
(551
|
)
|
(535
|
)
|
(508
|
)
|
Impairment of goodwill
|
(719
|
)
|
—
|
|
(25
|
)
|
Restructuring and other charges
|
(165
|
)
|
(155
|
)
|
(214
|
)
|
Impact of LIFO
|
(110
|
)
|
(18
|
)
|
101
|
|
Metal price lag
|
72
|
|
27
|
|
(175
|
)
|
Corporate expense
|
(274
|
)
|
(454
|
)
|
(371
|
)
|
Other
|
(71
|
)
|
(109
|
)
|
(74
|
)
|
Operating income
|
$
|
326
|
|
$
|
819
|
|
$
|
628
|
|
Interest expense
|
(496
|
)
|
(499
|
)
|
(473
|
)
|
Other income, net
|
640
|
|
94
|
|
28
|
|
Income from continuing operations before income taxes
|
$
|
470
|
|
$
|
414
|
|
$
|
183
|
|
Provision for income taxes
|
(544
|
)
|
(1,476
|
)
|
(339
|
)
|
Discontinued operations
|
—
|
|
121
|
|
(165
|
)
|
Net income attributable to noncontrolling interest
|
—
|
|
—
|
|
(1
|
)
|
Net loss attributable to Arconic
|
$
|
(74
|
)
|
$
|
(941
|
)
|
$
|
(322
|
)
|
The significant changes in the reconciling items between Combined segment adjusted EBITDA and Net loss attributable to Arconic for
2017
compared with
2016
consisted of:
|
|
•
|
an impairment of goodwill related to the annual impairment review of the Arconic Forgings and Extrusions business in 2017;
|
|
|
•
|
a change in the Impact of LIFO, mostly due to a greater increase in the price of aluminum, driven by higher base metal prices (LME) and regional premiums (increase in price at December 31, 2017 indexed to December 31, 2016 compared to the increase in price at December 31, 2016 indexed to December 31, 2015);
|
|
|
•
|
a favorable change in Metal price lag due to higher prices for aluminum;
|
|
|
•
|
a decrease in Corporate expense primarily attributable to costs incurred in 2016 related to the Separation Transaction, partially offset by proxy, advisory and governance-related costs and legal and other advisory costs related to Grenfell Tower incurred in 2017;
|
|
|
•
|
an increase in Other income, net, largely the result of the $351 gain on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and a $167 gain on the Debt-for-Equity Exchange, income of $25 associated with a higher reversal of a contingent earn-out liability related to the Firth Rixson acquisition, and income of $25 due to the reversal of a liability associated with a separation-related guarantee;
|
|
|
•
|
a decrease in Interest expense due to lower outstanding debt, mostly offset by premiums paid for the early redemption of $1,250 of the Company’s long-term debt; and
|
|
|
•
|
a decrease in Provision for income taxes attributable to a charge for tax valuation allowances related to the Separation Transaction of $1,267 in 2016, partially offset by a charge of $272 resulting from the 2017 Act that principally relates to the revaluation of U.S. deferred tax assets and liabilities from 35% to 21%.
|
The significant changes in the reconciling items between Combined segment adjusted EBITDA and Net loss attributable to Arconic for 2016 compared with 2015 consisted of:
|
|
•
|
an increase in Depreciation and amortization related to a full year of D&A related to two acquisitions which occurred during 2015 (see Engineered Products and Solutions under Segment Information above)
|
|
|
•
|
a decrease in Restructuring and other charges, due to fewer portfolio actions;
|
|
|
•
|
a change in the impact of LIFO, mostly due to higher aluminum prices, driven by higher base metal prices (LME) (increase in price at December 31, 2016 indexed to December 31, 2015 compared to a decrease in price at December 31, 2015 indexed to December 31, 2014);
|
|
|
•
|
a favorable change in Metal price lag, the result of higher prices for aluminum;
|
|
|
•
|
an increase in Corporate expense, largely attributable to an increase in costs related to the Separation Transaction of $193, partially offset by decreases in corporate research and development expenses and other various expenses;
|
|
|
•
|
an increase in Other income, net, as a result of income of $76 associated with the reversal of a contingent earn-out liability and a post-closing adjustment, both of which related to the November 2014 acquisition of Firth Rixson;
|
|
|
•
|
an increase in Interest expense, due to debt issuance costs expensed associated with the Separation Transaction, a full year of interest related to the RTI debt and costs associated with the early redemption of $750 of 5.55% Notes due February 2017, completed on December 30, 2016, which included a purchase premium; and
|
|
|
•
|
an increase in Provision for income taxes attributable to a charge for tax valuation allowances related to the Separation Transaction of $1,267.
|
Reconciliation of Net loss attributable to Arconic to Consolidated adjusted EBITDA
Items required to reconcile Net loss attributable to Arconic to Consolidated adjusted EBITDA include: Depreciation and amortization; Impairment of goodwill; Restructuring and other charges; Other income, net; Interest expense; Income tax expense; and Discontinued operations.
The following table reconciles Net loss attributable to Arconic to Consolidated adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Net loss attributable to Arconic
|
$
|
(74
|
)
|
$
|
(941
|
)
|
$
|
(322
|
)
|
Depreciation and amortization
|
551
|
|
535
|
|
508
|
|
Impairment of goodwill
|
719
|
|
—
|
|
25
|
|
Restructuring and other charges
|
165
|
|
155
|
|
214
|
|
Other income, net
|
(640
|
)
|
(94
|
)
|
(28
|
)
|
Interest expense
|
496
|
|
499
|
|
473
|
|
Income taxes
|
544
|
|
1,476
|
|
339
|
|
Discontinued operations
|
—
|
|
(121
|
)
|
165
|
|
Consolidated Adjusted EBITDA
(1)
|
$
|
1,761
|
|
$
|
1,509
|
|
$
|
1,374
|
|
(1)
Consolidated adjusted EBITDA is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because Consolidated adjusted EBITDA provides additional information with respect to Arconic’s operating performance. Additionally, presenting Consolidated adjusted EBITDA pursuant to our debt agreements is appropriate to provide additional information to investors to demonstrate Arconic’s ability to comply with its financial debt covenants. The Consolidated adjusted EBITDA presented may not be comparable to similarly titled measures of other companies.
Environmental Matters
See the Environmental Matters section of Note K to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Liquidity and Capital Resources
Arconic maintains a disciplined approach to cash management and strengthening of its balance sheet. Management continued to focus on actions to improve Arconic’s cost structure and liquidity, providing the Company with the ability to operate effectively. Such actions included procurement efficiencies and overhead rationalization to reduce costs, working capital initiatives, and maintaining a sustainable level of capital expenditures.
Cash provided from operations and financing activities is expected to be adequate to cover Arconic’s operational and business needs over the next 12 months. For an analysis of long-term liquidity, see Contractual Obligations and Off-Balance Sheet Arrangements below.
At December 31,
2017
, cash and cash equivalents of Arconic were
$2,150
, of which $402 was held by Arconic's non-U.S. subsidiaries. The cash held by non-U.S. subsidiaries is generally used for operational activities of Arconic’s international businesses. As such, management does not have a current expectation of repatriating cash held in foreign jurisdictions.
The Statement of Consolidated Cash Flows has not been restated for discontinued operations, therefore the discussion below concerning Cash from Operations, Financing Activities, and Investing Activities for the years ended December 31, 2016 and 2015 includes the results of both Arconic and Alcoa Corporation up through the completion of the Separation Transaction on November 1, 2016.
Cash from Operations
Cash provided from operations in
2017
was
$701
compared with
$870
in
2016
. The
decrease
of
$169
, or
19%
, was primarily due to lower operating results (net loss plus net add-back for noncash transactions in earnings) of $345 and higher pension contributions of $20, partially offset by a favorable change in noncurrent assets of $111 due to the prepayment of $200 made in April 2016 related to a gas supply agreement for the Australia alumina refineries (Alcoa Corporation), a favorable change in noncurrent liabilities of $55, and lower cash used for working capital of $30. The components of the change in working capital included favorable changes of $114 in receivables; $87 in prepaid expenses and other current assets; and $278 in accrued expenses; mostly offset by unfavorable changes in working capital, including $163 in inventories; $170 in accounts payable, trade; and $116 in taxes, including income taxes.
Cash provided from operations in 2016 was $870 compared with $1,582 in 2015. The decrease of $712, or 45%, was primarily due to lower operating results (net loss plus net add-back for noncash transactions in earnings) of $985 and unfavorable changes in working capital of $104 and noncurrent liabilities of $21, partially offset by a favorable change associated with noncurrent assets of $218 and a decrease in pension contributions of $180. The components of the unfavorable change in working capital included $450 in receivables and $122 in prepaid expenses and other current assets; partially offset by
favorable changes in working capital including $322 in accounts payable, trade, principally the result of the impact of purchasing metal from Alcoa Corporation and the timing of payments; $68 in taxes, including income taxes; $43 in accrued expenses; and $35 in inventories.
Financing Activities
Cash used for financing activities was
$963
in
2017
compared with
$754
in
2016
and
$441
in
2015
.
The use of cash of
$963
in
2017
was principally the result of $1,634 in repayments on borrowings under certain revolving credit facilities (see below) and repayments on debt, primarily related to the early redemption of the Company’s 6.50% Bonds due 2018, 6.75% Notes due 2018, and a portion of the 5.72% Notes due 2019 (see Note I to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information); and $162 in dividends to shareholders. These items were partially offset by $816 in additions to debt, primarily from borrowings under certain revolving credit facilities, and $50 of proceeds from the exercise of stock options.
The use of cash of $754 in 2016 was principally the result of $2,734 in payments on debt, mostly related to the repayment of borrowings under certain revolving credit facilitates (see below) and the repayment in December 2016 of $750 of outstanding principal of 5.55% Notes due February 2017; $228 in dividends to shareholders; and $175 in net cash paid to noncontrolling interests. These items were mostly offset by $1,962 in additions to debt, virtually all of which was the result of borrowing under certain revolving credit facilities, and $421 in net cash transferred from Alcoa Corporation at the completion of the Separation Transaction.
The use of cash in 2015 of $441 was principally the result of $2,030 in payments on debt, mostly related to the repayment of borrowings under certain revolving credit facilities (see below) and the repayment of convertible notes assumed in conjunction with the acquisition of RTI (see below); $223 in dividends paid to shareholders; and $104 in net cash paid to noncontrolling interests. These items were mostly offset by $1,901 in additions to debt, virtually all of which was the result of borrowings under certain revolving credit facilities (see below).
In July 2015, through the acquisition of RTI (see Engineered Products and Solutions under Segment Information above), Arconic assumed the obligation to repay two tranches of convertible debt; one tranche was due and settled in cash on December 1, 2015 (principal amount of $115) and the other tranche is due on October 15, 2019 (principal amount of $403), unless earlier converted or purchased by Arconic at the holder’s option under specific conditions. Upon conversion of the 2019 convertible notes, holders will receive, at Arconic’s election, cash, shares of common stock (approximately 14,294,000 shares using the December 31, 2017 conversion rate of 35.5119 shares per $1,000 (not in millions) bond or per-share conversion price of $28.1596), or a combination of cash and shares. On the maturity date, each holder of outstanding notes will be entitled to receive $1,000 (not in millions) in cash for each $1,000 (not in millions) bond, together with accrued and unpaid interest.
On July 25, 2014, Arconic entered into a Five-Year Revolving Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and issuers named therein which provides for a senior unsecured revolving credit facility (the “Credit Facility”). The proceeds are to be used to provide working capital or for other general corporate purposes of Arconic. By an Extension Request and Amendment Letter dated as of June 5, 2015, the maturity date of the Credit Facility was extended to July 25, 2020. In September 2016, Arconic entered into an amendment to the Credit Agreement to permit the Separation Transaction and to amend certain terms of the Credit Facility including the replacement of the existing financial covenant with a leverage ratio and reduction of total commitments available from $4,000 to $3,000. The amendment became effective on the separation date of November 1, 2016. The previous financial covenant, based upon Consolidated Net Worth (as defined in the Credit Agreement) was replaced. Arconic is required to maintain a ratio of Indebtedness (as defined in the Credit Agreement), to Consolidated EBITDA (as defined in the Credit Agreement) of 4.50 to 1.00 for the period of the four fiscal quarters most recently ended, declining to 3.50 to 1.00 on December 31, 2019 and thereafter.
The Credit Agreement includes additional covenants, including, among others, (a) limitations on Arconic’s ability to incur liens securing indebtedness for borrowed money, (b) limitations on Arconic’s ability to consummate a merger, consolidation or sale of all or substantially all of its assets, and (c) limitations on Arconic’s ability to change the nature of its business. As of December 31, 2017, Arconic was in compliance with all such covenants.
The Credit Agreement matures on July 25, 2020, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. Arconic may make one additional one-year extension request during the remaining term of the Credit Agreement, subject to the lender consent requirements set forth in the Credit Agreement. Under the provisions of the Credit Agreement, Arconic will pay a fee of 0.30% (based on Arconic’s long-term debt ratings as of December 31, 2017) of the total commitment per annum to maintain the Credit Facility.
The Credit Facility is unsecured and amounts payable under it will rank
pari passu
with all other unsecured, unsubordinated indebtedness of Arconic. Borrowings under the Credit Facility may be denominated in U.S. dollars or euros. Loans will bear interest at a base rate or a rate equal to LIBOR, plus, in each case, an applicable margin based on the credit ratings of Arconic’s outstanding senior unsecured long-term debt. The applicable margin on base rate loans and LIBOR loans will be 0.70% and 1.70% per annum, respectively, based on Arconic’s long-term debt ratings as of December 31, 2017. Loans may be prepaid without premium or penalty, subject to customary breakage costs.
The obligation of Arconic to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an “Event of Default” as defined in the Credit Agreement. Such Events of Default include, among others, (a) Arconic’s failure to pay the principal of, or interest on, borrowings under the Credit Facility, (b) any representation or warranty of Arconic in the Credit Agreement proving to be materially false or misleading, (c) Arconic’s breach of any of its covenants contained in the Credit Agreement, and (d) the bankruptcy or insolvency of Arconic.
There were no amounts outstanding at December 31,
2017
and
2016
and no amounts were borrowed during
2017
,
2016
or
2015
under the Credit Facility. In addition to the Credit Facility, Arconic has a number of other credit facilities that provide a combined borrowing capacity of
$715
as of December 31,
2017
, of which
$640
is due to expire in
2018
and
$75
is due to expire in
2019
. The purpose of any borrowings under these credit arrangements is to provide for working capital requirements and for other general corporate purposes. The covenants contained in all these arrangements are the same as the Credit Agreement (see above).
In
2017
,
2016
and
2015
, Arconic borrowed and repaid
$810
,
$1,950
, and
$1,890
, respectively, under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during
2017
,
2016
, and
2015
were
2.6%
,
1.9%
, and
1.6%
, respectively, and
46
days,
49
days, and
69
days, respectively.
In September 2014, Arconic completed two public securities offerings under its shelf registration statement for (i) $1,250 of 25 million depositary shares, each representing a 1/10th interest in a share of Arconic’s 5.375% Class B Mandatory Convertible Preferred Stock, Series 1, par value $1 per share, liquidation preference $500 per share, and (ii) $1,250 of 5.125% Notes due 2024. The net proceeds of the offerings were used to finance the cash portion of the acquisition of Firth Rixson. On October 2, 2017, all outstanding 24,975,978 depositary shares were converted at a rate of 1.56996 into 39,211,286 common shares; 24,022 depositary shares were previously tendered for early conversion into 31,420 shares of Arconic common stock. No gain or loss was recognized associated with this noncash equity transaction.
Arconic’s cost of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short- and long-term debt ratings assigned to Arconic’s debt by the major credit rating agencies.
On May 1, 2017, Standard and Poor’s Ratings Services affirmed Arconic’s long-term debt at BBB-, an investment grade rating, with a stable outlook, and its short-term debt at A-3. On November 1, 2016, Moody’s Investor Service (Moody’s) downgraded Arconic’s long-term debt rating from Ba1, a non-investment grade, to Ba2 and its short-term debt rating from Speculative Grade Liquidity-1 to Speculative Grade Liquidity-2. Additionally, Moody’s changed the outlook from negative to stable (ratings and outlook were affirmed on November 2, 2017). On April 21, 2016, Fitch affirmed Arconic’s long-term debt rating at BB+, a non-investment grade, and short-term debt at B. Additionally, Fitch changed the current outlook from positive to evolving. On July 7, 2016, Fitch changed the current outlook from evolving to stable (ratings and outlook were affirmed on July 3, 2017).
Investing Activities
Cash provided from investing activities was $540 in
2017
compared with cash used for investing activities of
$165
in
2016
and
$1,060
in
2015
.
The source of cash in
2017
included proceeds of $888 from the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and the receipt of proceeds from the sale of the Yadkin Hydroelectric Project of $243, somewhat offset by cash used for capital expenditures of $596, including the aerospace expansion (very thick plate stretcher and horizontal heat treat furnace) at the Davenport, IA plant and a titanium aluminide furnace at the Niles, Ohio facility, and the injection of $10 into the Fusina rolling business prior to its sale.
The use of cash in 2016 was mainly due to $1,125 in capital expenditures ($298 Alcoa Corporation), 29% of which related to growth projects, including the aerospace expansion (very thick plate stretcher) at the Davenport, IA plant and a titanium aluminide furnace at the Niles, Ohio facility. This use of cash was primarily offset by $692 in proceeds from the sale of assets and businesses, including $457 from the redemption of company-owned life insurance policies, $120 in proceeds related to the sale of the Intalco smelter wharf property (Alcoa Corporation), and $102 in proceeds ($99 net of transaction costs) from the sale of the Remmele Medical business, which was part of Arconic’s acquisition of RTI in July 2015; and $280 in sales of
investments, composed primarily of $145 for an equity interest in a natural gas pipeline in Australia (Alcoa Corporation) and $130 for securities held by Arconic’s captive insurance company.
The use of cash in 2015 was mainly due to $1,180 in capital expenditures ($391 Alcoa Corporation) (includes costs related to environmental control in new and expanded facilities of $141), 38% of which related to growth projects, including the aerospace expansion at the La Porte, IN plant, the automotive expansion at the Alcoa, TN plant, the aerospace expansion (very thick plate stretcher) at the Davenport, IA plant, the aerospace expansion (isothermal press) at the Savannah, GA plant (Firth Rixson), and the specialty foil expansion at the Itapissuma plant in Brazil; $205 (net of cash acquired) for the acquisition of TITAL (see Engineered Products and Solutions under Segment Information above); and $134 in additions to investments, including the purchase of $70 in securities held by Arconic’s captive insurance company and equity contributions of $29 related to the aluminum complex joint venture in Saudi Arabia (Alcoa Corporation). These items were somewhat offset by $302 in cash acquired from RTI (see Engineered Products and Solutions under Segment Information above); $112 in proceeds from the sale of assets and businesses, composed of three land sales in Australia and the United States combined and post-closing adjustments related to an ownership stake in a smelter (Alcoa Corporation), four rolling mills, and an ownership stake in a bauxite mine/alumina refinery (Alcoa Corporation) divested from December 2014 through March 2015; and $40 in sales of investments, related to the sale of $21 in securities held by Arconic’s captive insurance company and $19 in proceeds from the sale of the remaining portion of an equity investment in a China rolling mill.
Noncash Financing and Investing Activities.
On October 2, 2017, all outstanding
24,975,978
depositary shares (each depositary share representing a 1/10th interest in a share of the mandatory convertible preferred stock) were converted at a rate of
1.56996
into
39,211,286
common shares;
24,022
depositary shares were previously tendered for early conversion into
31,420
shares of Arconic common stock. No gain or loss was recognized associated with this equity transaction. (See Note O to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.)
In the second quarter of 2017, the Company completed a Debt-for-Equity Exchange with the Investment Banks of a portion of Arconic’s retained interest in Alcoa Corporation common stock for a portion of the Company’s outstanding notes held by the Investment Banks for $465 including accrued and unpaid interest.
On October 5, 2016, Arconic completed a 1-for-3 reverse stock split of its outstanding and authorized shares of common stock, pursuant to the authorization provided at a special meeting of Arconic common shareholders (the “Reverse Stock Split”). The Reverse Stock Split reduced the number of shares of common stock outstanding from approximately 1.3 billion shares to approximately 0.4 billion shares. The par value of the common stock remained at $1.00 per share. Accordingly, Common stock and Additional capital in the Company’s Consolidated Balance Sheet at December 31, 2016 reflect a decrease and increase of $877, respectively.
In August 2016, Arconic retired its outstanding treasury stock consisting of approximately 76 million shares. As a result, Common stock and Additional capital were decreased by $76 and $2,563, respectively, to reflect the retirement of the treasury shares.
In July 2015, Arconic purchased all outstanding shares of RTI common stock in a stock-for-stock transaction valued at $870. As a result, Arconic issued 29 million shares (87 million shares—pre-Reverse Stock Split) of its common stock to consummate this transaction.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations.
Arconic is required to make future payments under various contracts, including long-term purchase obligations, financing arrangements, and lease agreements. Arconic also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects. As of December 31,
2017
, a summary of Arconic’s outstanding contractual obligations is as follows (these contractual obligations are grouped in the same manner as they are classified in the Statement of Consolidated Cash Flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
2018
|
2019-2020
|
2021-2022
|
Thereafter
|
Operating activities:
|
|
|
|
|
|
Energy-related purchase obligations
|
$
|
71
|
|
$
|
40
|
|
$
|
26
|
|
$
|
5
|
|
$
|
—
|
|
Raw material purchase obligations
|
1,013
|
|
801
|
|
210
|
|
2
|
|
—
|
|
Other purchase obligations
|
51
|
|
20
|
|
14
|
|
12
|
|
5
|
|
Operating leases
|
442
|
|
108
|
|
150
|
|
84
|
|
100
|
|
Interest related to total debt
|
2,675
|
|
371
|
|
693
|
|
429
|
|
1,182
|
|
Estimated minimum required pension funding
|
1,600
|
|
350
|
|
675
|
|
575
|
|
—
|
|
Other postretirement benefit payments
|
785
|
|
90
|
|
180
|
|
180
|
|
335
|
|
Layoff and other restructuring payments
|
58
|
|
58
|
|
—
|
|
—
|
|
—
|
|
Deferred revenue arrangements
|
30
|
|
12
|
|
18
|
|
—
|
|
—
|
|
Uncertain tax positions
|
75
|
|
—
|
|
—
|
|
—
|
|
75
|
|
Financing activities:
|
|
|
|
|
|
Total debt
|
6,844
|
|
29
|
|
1,883
|
|
1,870
|
|
3,062
|
|
Dividends to shareholders
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Investing activities:
|
|
|
|
|
|
Capital projects
|
426
|
|
340
|
|
86
|
|
—
|
|
—
|
|
Totals
|
$
|
14,070
|
|
$
|
2,219
|
|
$
|
3,935
|
|
$
|
3,157
|
|
$
|
4,759
|
|
Obligations for Operating Activities
Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from one year to six years. Raw material purchase obligations consist mostly of aluminum, titanium sponge, and various other metals with expiration dates ranging from less than one year to four years. Many of these purchase obligations contain variable pricing components, and, as a result, actual cash payments may differ from the estimates provided in the preceding table. Operating leases represent multi-year obligations for certain land and buildings, plant equipment, vehicles, and computer equipment.
Interest related to total debt is based on interest rates in effect as of December 31, 2017 and is calculated on debt with maturities that extend to 2042.
Estimated minimum required pension funding and postretirement benefit payments are based on actuarial estimates using current assumptions for discount rates, long-term rate of return on plan assets, rate of compensation increases, and health care cost trend rates, among others. It is Arconic’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws. Arconic has determined that it is not practicable to present pension funding and other postretirement benefit payments beyond 2022 and 2027, respectively.
Layoff and other restructuring payments to be paid within one year primarily relate to severance costs and special layoff benefit payments.
Deferred revenue arrangements require Arconic to deliver product to a customer over the specified contract period through 2020 for a sheet and plate contract. While these obligations are not expected to result in cash payments, they represent contractual obligations for which the Company would be obligated if the specified product deliveries could not be made.
Uncertain tax positions taken or expected to be taken on an income tax return may result in additional payments to tax authorities. The amount in the preceding table includes interest and penalties accrued related to such positions as of December 31, 2017. The total amount of uncertain tax positions is included in the “Thereafter” column as the Company is not
able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.
Obligations for Financing Activities
Arconic has historically paid quarterly dividends on its preferred and common stock. Including dividends on preferred stock, Arconic paid $162 in dividends to shareholders during 2017. This amount includes dividends related to a class of preferred stock issued in September 2014, which converted to common stock on October 2, 2017 (see Financing Activities under Liquidity and Capital Resources above). Because all dividends are subject to approval by Arconic’s Board of Directors, amounts are not included in the preceding table unless such authorization has occurred. As of December 31, 2017, there were 481,416,537 shares of outstanding common stock and 546,024 shares of outstanding Class A preferred stock. The annual preferred stock dividend is at a rate of $3.75 per share and the annual common stock dividend expected to be paid is $0.24 per share for 2018.
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by management as of December 31,
2017
. Funding levels may vary in future years based on anticipated construction schedules of the projects. It is expected that significant expansion projects will be funded through various sources, including cash provided from operations. Total capital expenditures are anticipated to be approximately $700 in
2018
.
Off-Balance Sheet Arrangements.
At December 31,
2017
, Arconic has outstanding bank guarantees related to tax matters, outstanding debt, workers’ compensation, environmental obligations, energy contracts, and customs duties, among others. The total amount committed under these guarantees, which expire at various dates between
2018
and
2026
was
$29
at December 31,
2017
.
Pursuant to the Separation and Distribution Agreement, Arconic was required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of $8 and $35 at December 31, 2017 and 2016, respectively, and were included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. Arconic was required to provide payment guarantees for Alcoa Corporation issued on behalf of a third party, and amounts outstanding under these payment guarantees were $197 and $354 at December 31, 2017 and 2016, respectively. These guarantees expire at various times between 2018 and 2024, and relate to project financing for Alcoa Corporation’s aluminum complex in Saudi Arabia. Furthermore, Arconic was required to provide guarantees related to two long-term supply agreements for energy for Alcoa Corporation facilities in the event of an Alcoa Corporation payment default. In October 2017, Alcoa Corporation announced that it had terminated one of the two agreements, the electricity contract with Luminant Generation Company LLC that was tied to its Rockdale Operations, effective as of October 1, 2017. As a result of the termination of the Rockdale electricity contract, Arconic recorded income of $25 in the fourth quarter of 2017 associated with reversing the fair value of the electricity contract guarantee. For the remaining long-term supply agreement, Arconic is required to provide a guarantee up to an estimated present value amount of approximately $1,297.
Arconic was also required to provide guarantees of $50 related to two Alcoa Corporation energy supply contracts. These guarantees expired in March 2017. Additionally, Arconic was required to provide guarantees of $53 related to certain Alcoa Corporation environmental liabilities. Notification of a change in guarantor to Alcoa Corporation was made to the appropriate environmental agencies and as such, Arconic no longer provides these guarantees.
In December 2016, Arconic entered into a one-year claims purchase agreement with a bank covering claims up to $245 related to the Saudi Arabian joint venture and two long-term energy supply agreements. The majority of the premium was paid by Alcoa Corporation. The agreement matured in December 2017 and was not renewed in 2018 due to the decline in exposure to guarantee claims including a substantial reduction in the guarantees related to the Saudi Arabian joint venture and also the elimination of the guarantee related to the Rockdale energy contract. The decision to enter into a claims purchase agreement will be made on an annual basis going forward.
Arconic has outstanding letters of credit primarily related to workers’ compensation, energy contracts and leasing obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2018, was
$120
at December 31,
2017
.
Pursuant to the Separation and Distribution Agreement, Arconic was required to retain letters of credit of
$62
that had previously been provided related to both Arconic and Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016. Alcoa Corporation workers’ compensation claims and letter of credit fees paid by Arconic are being
proportionally billed to and are being fully reimbursed by Alcoa Corporation. Additionally, Arconic was required to provide letters of credit for certain Alcoa Corporation equipment leases and energy contracts and, as a result, Arconic had $103 of outstanding letters of credit relating to these liabilities. The entire $103 of outstanding letters of credit were canceled in 2017 when Alcoa Corporation issued its own letters of credit to cover these obligations.
Arconic also has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, and customs duties. The total amount committed under these bonds, which automatically renew or expire at various dates, mostly in 2018, was
$54
at December 31,
2017
.
As part of the Separation Transaction, Arconic was required to provide surety bonds related to Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016 and, as a result, Arconic has $25 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconic are being proportionally billed to and are being fully reimbursed by Alcoa Corporation.
Critical Accounting Policies and Estimates
The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain judgments, estimates, and assumptions regarding uncertainties that affect the amounts reported in the Consolidated Financial Statements and disclosed in the accompanying Notes. Areas that require significant judgments, estimates, and assumptions include accounting for environmental and litigation matters; the testing of goodwill, other intangible assets, and properties, plants, and equipment for impairment; estimating fair value of businesses acquired or divested; pension plans and other postretirement benefits obligations; stock-based compensation; and income taxes.
Management uses historical experience and all available information to make these judgments, estimates, and assumptions, and actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes provide a meaningful and fair perspective of the Company.
A summary of the Company’s significant accounting policies is included in Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the Consolidated Financial Statements with useful and reliable information about the Company’s operating results and financial condition.
Environmental Matters.
Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery are recognized when probable and as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that Arconic has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters.
For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Goodwill.
Goodwill is not amortized; instead, it is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or realign a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity
operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Arconic has
eight
reporting units, of which
four
are included in the Engineered Products and Solutions segment,
three
are included in the Transportation and Construction Solutions segment, and the remaining reporting unit is the Global Rolled Products segment. More than
85%
of Arconic’s total goodwill at
December 31, 2017
is allocated to
two
reporting units as follows: Arconic Fastening Systems and Rings (AFSR) (
$2,221
) and Arconic Power and Propulsion (APP) (
$1,686
) businesses, both of which are included in the Engineered Products and Solutions segment. These amounts include an allocation of Corporate’s goodwill.
In January 2018, management announced a change in the organizational structure of the Engineered Products and Solutions segment, from four business units to three business units, with a focus on aligning its internal structure to core markets and customers and reducing cost. As a result of this change, goodwill will be reallocated to the three new reporting units and evaluated for impairment during the first quarter of 2018. The Company does not expect any goodwill impairment as a result of this realignment.
In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the quantitative impairment test.
Arconic determines annually, based on facts and circumstances, which of its reporting units will be subject to the qualitative assessment. For those reporting units where a qualitative assessment is either not performed or for which the conclusion is that an impairment is more likely than not, a quantitative impairment test will be performed. Arconic’s policy is that a quantitative impairment test be performed for each reporting unit at least once during every three-year period.
Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.
During the 2017 annual review of goodwill, management performed the qualitative assessment for one reporting unit, Arconic Wheel and Transportation Products (within the Transportation and Construction Solutions segment). Management concluded that it was not more likely than not that the estimated fair value of the reporting unit was less than its carrying value. As such, no further analysis was required.
Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Arconic uses a discounted cash flow (DCF) model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes. Most of these assumptions vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The WACC rate for the individual reporting units is estimated with the assistance of valuation experts. Arconic would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value without exceeding the total amount of goodwill allocated to that reporting unit.
During the
2017
annual review of goodwill, management proceeded directly to the quantitative impairment test for
six
reporting units as follows: AFSR, APP, Arconic Titanium and Engineered Products (ATEP), and Arconic Forgings and Extrusions (AFE), which are all included in the Engineered Products and Solutions segment, Global Rolled Products, and Building and Construction Systems, which is included in the Transportation and Construction Solutions segment. The estimated fair value for five of the six reporting units exceeded its respective carrying value, resulting in no impairment. However, the
estimated fair value of AFE was lower than its carrying value. As such, in the fourth quarter of 2017, Arconic recorded an impairment for the full amount of goodwill in the AFE reporting unit of $719. The decrease in the AFE fair value was primarily due to unfavorable performance that is impacting operating margins and a higher discount rate due to an increase in the risk-free rate of return, while the carrying value increased compared to prior year.
Goodwill impairment tests in 2016 and 2015 indicated that goodwill was not impaired for any of the Company’s reporting units, except for the soft alloy extrusion business in Brazil which is included in the Transportation and Construction Solutions segment. In the fourth quarter of 2015, for the soft alloy extrusion business in Brazil, the estimated fair value as determined by the DCF model was lower than the associated carrying value of its reporting unit’s goodwill. As a result, management determined that the implied fair value of the reporting unit’s goodwill was
zero
. Arconic recorded a goodwill impairment of $25 in 2015. The impairment of goodwill resulted from headwinds from the downturn in the Brazilian economy and the continued erosion of gross margin despite the execution of cost reduction strategies. As a result of the goodwill impairment, there is no goodwill remaining for the reporting unit.
Properties, Plants, and Equipment and Other Intangible Assets.
Properties, plants, and equipment and Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a DCF model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of assets also require significant judgments.
Discontinued Operations and Assets Held For Sale.
The fair values of all businesses to be divested are estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements.
Pension and Other Postretirement Benefits.
Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, health care cost trend rates, retirement age, and mortality).
The interest rate used to discount future estimated liabilities is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, industrials, transportation, and utilities, among others. The yield curve model parallels the plans’ projected cash flows, which have an average duration of 11 years. The underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. In
2017
,
2016
, and
2015
, the discount rate used to determine benefit obligations for U.S. pension and other postretirement benefit plans was
3.75%
,
4.20%
, and
4.29%
, respectively. The impact on the liabilities of a change in the discount rate of 1/4 of 1% would be approximately $225 and either a charge or credit of approximately $3 to after-tax earnings in the following year.
In conjunction with the annual measurement of the funded status of Arconic’s pension and other postretirement benefit plans at December 31, 2015, management elected to change the manner in which the interest cost component of net periodic benefit cost will be determined in 2016 and beyond. Previously, the interest cost component was determined by multiplying the single equivalent rate described above and the aggregate discounted cash flows of the plans’ projected benefit obligations. Under the new methodology, the interest cost component will be determined by aggregating the product of the discounted cash flows of the plans’ projected benefit obligations for each year and an individual spot rate (referred to as the “spot rate” approach). This change resulted in a lower interest cost component of net periodic benefit cost under the new methodology compared to the previous methodology in 2017 and 2016 of $34 and $84, respectively, for pension plans and $6 and $14, respectively, for other postretirement benefit plans. Management believes this new methodology, which represents a change in an accounting estimate, is a better measure of the interest cost as each year’s cash flows are specifically linked to the interest rates of bond payments in the same respective year.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (a fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on a combination of historical asset return information and forward-looking returns by asset class. As it relates to historical asset return information, management focuses on various historical moving averages when developing this assumption. While consideration is given to recent performance and historical returns, the assumption represents a long-term, prospective return. Management also incorporates expected future returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment.
For
2017
,
2016
, and
2015
, management used
7.75%
as its expected long-term rate of return, which was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. These rates fell within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. In 2015, the decrease of 25 basis points in the expected long-term rate of return was due to a decrease in the 20-year moving average of actual performance. For
2018
, management anticipates that 7.00% will be the expected long-term rate of return. The decrease of 75 basis points in the expected long-term rate is due to a decrease in the expected return by asset class and the 20-year moving average.
A change in the assumption for the expected long-term rate of return on plan assets of 1/4 of 1% would impact after-tax earnings by approximately $9 for
2018
.
In 2017, a net loss of $220 (after-tax) was recorded in other comprehensive loss, primarily due to the decrease in the discount rate of 45 basis points and asset performance less than expected, which was partially offset by the amortization of actuarial losses. In 2016, a net benefit of $1,601 (after-tax and noncontrolling interest) was recorded in other comprehensive loss, primarily due to the transfer of $2,080 to Alcoa Corporation which was partially offset by a net charge of $479. The charge was due to the unfavorable performance of the plan assets and a 9 basis point decrease in the discount rate, which was partially offset by the amortization of actuarial losses. In 2015, a net charge of $10 (after-tax and noncontrolling interest) was recorded in other comprehensive loss, primarily due to the unfavorable performance of the plan assets, which was mostly offset by the amortization of actuarial losses and a 29 basis point increase in the discount rate.
In January 2018, the Company announced the freeze of its U.S. defined benefit pension plans for salaried and non-bargained hourly employees, effective April 1, 2018. Benefit accruals for future service and compensation under all of the Company’s qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargained hourly employees (the “Pension Plans”) will cease. In connection with this change, effective April 1, 2018, impacted employees will commence receiving an employer contribution of 3% of eligible compensation under the Arconic Salaried Retirement Savings Plan, and, for the period from April 1, 2018 through December 31, 2018, an additional transition employer contribution of 3% of eligible compensation.
As a result of this change to the Pension Plans, in the first quarter of 2018, the Company expects to record a liability decrease of approximately $140 related to the reduction of future benefits and a curtailment charge of approximately $5 pre-tax. For the full year 2018, the Company expects pension-related expense to be lower by approximately $50 pre-tax compared to 2017 full year expenses. The lower pension expense expectation is based on preliminary year-end December 31, 2017 results and is inclusive of the change to the Pension Plans described above as well as expected changes in other pension-related assumptions.
Additionally, in accordance with accounting guidance effective January 1, 2018 that requires the other components of net periodic benefit cost to be presented separately from the service cost component, approximately $110 of pension-related expense in 2018 is expected to be recorded in the Other income, net line item in the Statement of Consolidated Operations.
Stock-based Compensation.
Arconic recognizes compensation expense for employee equity grants using the non-substantive vesting period approach, in which the expense is recognized ratably over the requisite service period based on the grant date fair value. Forfeitures are accounted for as they occur. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance awards containing a market condition is valued using a Monte Carlo valuation model. Determining the fair value at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
As part of Arconic’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. As a result, a larger portion of expense will be recognized in the first half of each year for these retirement-eligible employees. Compensation expense recorded in
2017
,
2016
, and
2015
was
$54
(
$36
after-tax),
$76
(
$51
after-tax), and
$77
(
$51
after-tax), respectively. Of these amounts,
$15
,
$19
, and
$15
in
2017
,
2016
, and
2015
, respectively, pertains to the acceleration of expense related to retirement-eligible employees.
Most plan participants can choose whether to receive their award in the form of stock options, stock awards, or a combination of both. This choice is made before the grant is issued and is irrevocable.
Income Taxes.
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Arconic’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
In 2017, Arconic released
$98
of certain U.S. state valuation allowances. After weighing all available positive and negative evidence, management determined that the underlying net deferred tax assets were more likely than not realizable based on projected taxable income estimates taking into account expected post-separation apportionment data. Valuation allowances of
$750
remain against other net state deferred tax assets expected to expire before utilization. The need for valuation allowances against net state deferred tax assets will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.
Arconic also recorded an additional valuation allowance of $675 which offsets additional losses reported on the Spanish tax return filed in 2017 related to the Separation Transaction that are not more likely than not to be realized. There is no net impact to the provision for income taxes, as the additional valuation allowance fully offsets the current year tax benefit in Spain
.
Arconic’s foreign tax credits in the United States have a 10-year carryforward period with expirations ranging from 2018 to 2027 (as of December 31, 2017). Valuation allowances were initially established in prior years on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. After consideration of all available evidence including potential tax planning strategies and earnings of foreign subsidiaries projected to be distributable as taxable foreign dividends, incremental valuation allowances of $302 and $134 were recognized in 2016 and 2015, respectively. Foreign tax credits of $57, $128, and $15 expired at the end of 2017, 2016, and 2015, respectively, resulting in a corresponding decrease to the valuation allowance. During 2017, an additional valuation allowance of
$23
was recorded for current year excess foreign tax credits, offset by a net $14 reduction for other adjustments. At December 31, 2017, the cumulative amount of the valuation allowance was
$379
. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances, including the impact of the 2017 Act.
Arconic will continue its analysis of the 2017 Act, including any additional guidance that may be issued. Further analysis could result in changes to assumptions related to the realizability of certain deferred tax assets including, but not limited to, foreign tax credits, alternative minimum tax credits, and state tax loss carryforwards. Provisional estimates of the impact of the 2017 Act on the realizability of certain deferred tax assets have been made based on information and computations that were available, prepared, and analyzed as of February 2, 2018. In accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, issued by the Securities and Exchange Commission, Arconic will reassess the need for valuation allowances on these deferred tax assets as necessary during 2018.
In 2016, Arconic recognized a $1,267 discrete income tax charge for valuation allowances related to the Separation Transaction, including $925 with respect to Alcoa Corporation’s net deferred tax assets in the United States, $302 with respect to Arconic’s foreign tax credits in the United States, $42 with respect to certain deferred tax assets in Luxembourg, and $(2) related to the net impact of other smaller items. After weighing all positive and negative evidence, as described above,
management determined that the net deferred tax assets of Alcoa Corporation were not more likely than not to be realized due to lack of historical and projected domestic source taxable income. As such, a valuation allowance was recorded immediately prior to separation.
In addition, Arconic recognized a $42 discrete income tax charge in 2016 for a valuation allowance on the full value of certain net deferred tax assets in Luxembourg. Sources of taxable income which previously supported the net deferred tax asset are no longer available as a result of the Separation Transaction. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.
In 2016, Arconic also recognized discrete income tax benefits related to the release of valuation allowances on certain net deferred tax assets in Russia and Canada of $19 and $20, respectively. After weighing all available evidence, management determined that it was more likely than not that the net income tax benefits associated with the underlying deferred tax assets would be realizable based on historical cumulative income and projected taxable income.
Arconic also recorded additional valuation allowances in Australia of $93 related to the Separation Transaction, in Spain of $163 related to a tax law change and in Luxembourg of $280 related to the Separation Transaction as well as a tax law change. These valuation allowances fully offset current year changes in deferred tax asset balances of each respective jurisdiction, resulting in no net impact to tax expense. The need for a valuation allowance will be reassessed on a continuous basis in future periods by each jurisdiction and, as a result, the allowances may increase or decrease based on changes in facts and circumstances.
In 2015, Arconic recognized an additional $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Iceland and Suriname. Of this amount, an $85 valuation allowance was established on the full value of the deferred tax assets in Suriname, which were related mostly to employee benefits and tax loss carryforwards. These deferred tax assets have an expiration period ranging from 2016 to 2022 (as of December 31, 2015). The remaining $56 charge relates to a valuation allowance established on a portion of the deferred tax assets recorded in Iceland. These deferred tax assets have an expiration period ranging from 2017 to 2023. After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Arconic will realize the tax benefit of either of these deferred tax assets. This was mainly driven by a decline in the outlook of the Primary Metals business, combined with prior year cumulative losses and a short expiration period.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.
Related Party Transactions
Arconic buys products from and provides services to Alcoa Corporation following the separation at negotiated prices between the parties. These transactions were not material to the financial position or results of operations of Arconic for all periods presented. Effective May 2017, upon disposition of the remaining common stock that Arconic held in Alcoa Corporation, they are no longer deemed a related party.
Recently Adopted Accounting Guidance
See the Recently Adopted Accounting Guidance section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Recently Issued Accounting Guidance
See the Recently Issued Accounting Guidance section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Management’s Reports to Arconic Shareholders
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Arconic Inc. and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best judgments and estimates. The other financial information included in the annual report is consistent with that in the financial statements.
Management also recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in
Internal Control—Integrated Framework (2013)
, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31,
2017
, based on criteria in
Internal Control—Integrated Framework (2013)
issued by the COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31,
2017
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
|
|
/s/ Charles P. Blankenship
|
Charles P. Blankenship
Chief Executive Officer
|
|
|
/s/ Ken Giacobbe
|
Ken Giacobbe
Executive Vice President and
Chief Financial Officer
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Arconic Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Arconic Inc. and its subsidiaries
as of December 31, 2017
and December 31, 2016,
and the related consolidated statements of operations, comprehensive (loss) income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”).
We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017
and December 31, 2016
,
and the results of their
operations and their
cash flows for each of the three years in the period ended December 31, 2017
in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated
financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 23, 2018
We have served as the Company’s auditor since 1950.
Arconic and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
2016
|
2015
|
Sales (N)
|
$
|
12,960
|
|
$
|
12,394
|
|
$
|
12,413
|
|
Cost of goods sold (exclusive of expenses below)
|
10,357
|
|
9,811
|
|
10,104
|
|
Selling, general administrative, and other expenses (C)
|
731
|
|
942
|
|
765
|
|
Research and development expenses
|
111
|
|
132
|
|
169
|
|
Provision for depreciation and amortization
|
551
|
|
535
|
|
508
|
|
Impairment of goodwill (A and E)
|
719
|
|
—
|
|
25
|
|
Restructuring and other charges (D)
|
165
|
|
155
|
|
214
|
|
Operating income
|
326
|
|
819
|
|
628
|
|
Interest expense (S)
|
496
|
|
499
|
|
473
|
|
Other income, net (L)
|
(640
|
)
|
(94
|
)
|
(28
|
)
|
Income from continuing operations before income taxes
|
470
|
|
414
|
|
183
|
|
Provision for income taxes (Q)
|
544
|
|
1,476
|
|
339
|
|
Loss from continuing operations after income taxes
|
(74
|
)
|
(1,062
|
)
|
(156
|
)
|
Income (loss) from discontinued operations after income taxes (C)
|
—
|
|
184
|
|
(41
|
)
|
Net loss
|
(74
|
)
|
(878
|
)
|
(197
|
)
|
Less: Net income from continuing operations attributable to noncontrolling interests
|
—
|
|
—
|
|
1
|
|
Less: Net income from discontinued operations attributable to noncontrolling interests (C)
|
—
|
|
63
|
|
124
|
|
Net loss Attributable to Arconic
|
$
|
(74
|
)
|
$
|
(941
|
)
|
$
|
(322
|
)
|
Amounts Attributable to Arconic Common Shareholders (P):
|
|
|
|
Net loss
|
$
|
(127
|
)
|
$
|
(1,010
|
)
|
$
|
(391
|
)
|
(Loss) earnings per share—basic:
|
|
|
|
Continuing operations
|
$
|
(0.28
|
)
|
$
|
(2.58
|
)
|
$
|
(0.54
|
)
|
Discontinued operations
|
—
|
|
0.27
|
|
(0.39
|
)
|
Net loss per share-basic
|
$
|
(0.28
|
)
|
$
|
(2.31
|
)
|
$
|
(0.93
|
)
|
(Loss) earnings per share—diluted
|
|
|
|
Continuing operations
|
$
|
(0.28
|
)
|
$
|
(2.58
|
)
|
$
|
(0.54
|
)
|
Discontinued operations
|
—
|
|
0.27
|
|
(0.39
|
)
|
Net loss per share-diluted
|
$
|
(0.28
|
)
|
$
|
(2.31
|
)
|
$
|
(0.93
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic and subsidiaries
Statement of Consolidated Comprehensive (Loss) Income
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arconic
|
|
Noncontrolling
Interests
|
|
Total
|
For the year ended December 31,
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
Net (loss) income
|
$
|
(74
|
)
|
$
|
(941
|
)
|
$
|
(322
|
)
|
|
$
|
—
|
|
$
|
63
|
|
$
|
125
|
|
|
$
|
(74
|
)
|
$
|
(878
|
)
|
$
|
(197
|
)
|
Other comprehensive (loss) income, net of tax (B):
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits
|
(220
|
)
|
(479
|
)
|
(10
|
)
|
|
—
|
|
(3
|
)
|
8
|
|
|
(220
|
)
|
(482
|
)
|
(2
|
)
|
Foreign currency translation adjustments
|
252
|
|
268
|
|
(1,566
|
)
|
|
2
|
|
182
|
|
(429
|
)
|
|
254
|
|
450
|
|
(1,995
|
)
|
Net change in unrealized gains on available-for-sale securities
|
(134
|
)
|
137
|
|
(5
|
)
|
|
—
|
|
—
|
|
—
|
|
|
(134
|
)
|
137
|
|
(5
|
)
|
Net change in unrecognized gains (losses) on cash flow hedges
|
26
|
|
(617
|
)
|
827
|
|
|
—
|
|
5
|
|
(1
|
)
|
|
26
|
|
(612
|
)
|
826
|
|
Total Other comprehensive (loss) income, net of tax
|
(76
|
)
|
(691
|
)
|
(754
|
)
|
|
2
|
|
184
|
|
(422
|
)
|
|
(74
|
)
|
(507
|
)
|
(1,176
|
)
|
Comprehensive (loss) income
|
$
|
(150
|
)
|
$
|
(1,632
|
)
|
$
|
(1,076
|
)
|
|
$
|
2
|
|
$
|
247
|
|
$
|
(297
|
)
|
|
$
|
(148
|
)
|
$
|
(1,385
|
)
|
$
|
(1,373
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic and subsidiaries
Consolidated Balance Sheet
(in millions)
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
Assets
|
|
|
Current assets:
|
|
|
Cash and cash equivalents (U)
|
$
|
2,150
|
|
$
|
1,863
|
|
Receivables from customers, less allowances of $8 in 2017 and $13 in 2016 (R)
|
1,035
|
|
974
|
|
Other receivables (C and R)
|
339
|
|
477
|
|
Inventories (G)
|
2,480
|
|
2,253
|
|
Prepaid expenses and other current assets
|
374
|
|
325
|
|
Total current assets
|
6,378
|
|
5,892
|
|
Properties, plants, and equipment, net (H)
|
5,594
|
|
5,499
|
|
Goodwill (A and E)
|
4,535
|
|
5,148
|
|
Deferred income taxes (Q)
|
743
|
|
1,234
|
|
Investment in common stock of Alcoa Corporation (C and U)
|
—
|
|
1,020
|
|
Intangibles, net (E)
|
987
|
|
988
|
|
Other noncurrent assets
|
481
|
|
257
|
|
Total Assets
|
$
|
18,718
|
|
$
|
20,038
|
|
Liabilities
|
|
|
Current liabilities:
|
|
|
Accounts payable, trade
|
$
|
1,839
|
|
$
|
1,744
|
|
Accrued compensation and retirement costs
|
399
|
|
398
|
|
Taxes, including income taxes
|
75
|
|
85
|
|
Accrued interest payable
|
124
|
|
153
|
|
Other current liabilities
|
349
|
|
329
|
|
Short-term debt (I and U)
|
38
|
|
40
|
|
Total current liabilities
|
2,824
|
|
2,749
|
|
Long-term debt, less amount due within one year (I and U)
|
6,806
|
|
8,044
|
|
Accrued pension benefits (T)
|
2,564
|
|
2,345
|
|
Accrued other postretirement benefits (T)
|
841
|
|
889
|
|
Other noncurrent liabilities and deferred credits (J)
|
759
|
|
870
|
|
Total liabilities
|
13,794
|
|
14,897
|
|
Contingencies and commitments (K)
|
|
|
Equity
|
|
|
Arconic shareholders’ equity:
|
|
|
Preferred stock (O)
|
55
|
|
55
|
|
Mandatory convertible preferred stock (O)
|
—
|
|
3
|
|
Common stock (O)
|
481
|
|
438
|
|
Additional capital
|
8,266
|
|
8,214
|
|
Accumulated deficit
|
(1,248
|
)
|
(1,027
|
)
|
Accumulated other comprehensive loss (B)
|
(2,644
|
)
|
(2,568
|
)
|
Total Arconic shareholders’ equity
|
4,910
|
|
5,115
|
|
Noncontrolling interests
|
14
|
|
26
|
|
Total equity
|
4,924
|
|
5,141
|
|
Total Liabilities and Equity
|
$
|
18,718
|
|
$
|
20,038
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2017
|
2016
|
2015
|
Cash from Operations
|
|
|
|
Net loss
|
$
|
(74
|
)
|
$
|
(878
|
)
|
$
|
(197
|
)
|
Adjustments to reconcile net loss to cash from operations:
|
|
|
|
Depreciation, depletion and amortization
|
551
|
|
1,132
|
|
1,280
|
|
Deferred income taxes
|
434
|
|
1,125
|
|
34
|
|
Equity income, net of dividends
|
—
|
|
42
|
|
158
|
|
Impairment of goodwill (A and E)
|
719
|
|
—
|
|
25
|
|
Restructuring and other charges
|
165
|
|
257
|
|
1,195
|
|
Net gain from investing activities—asset sales
|
(513
|
)
|
(156
|
)
|
(74
|
)
|
Net periodic pension benefit cost
|
217
|
|
304
|
|
485
|
|
Stock-based compensation
|
67
|
|
86
|
|
92
|
|
Excess tax benefits from stock-based payment arrangements
|
—
|
|
—
|
|
(9
|
)
|
Other
|
61
|
|
60
|
|
(32
|
)
|
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
|
|
|
|
(Increase) decrease in receivables
|
(124
|
)
|
(238
|
)
|
212
|
|
(Increase) in inventories
|
(192
|
)
|
(29
|
)
|
(64
|
)
|
Decrease (increase) in prepaid expenses and other current assets
|
11
|
|
(76
|
)
|
46
|
|
Increase (decrease) in accounts payable, trade
|
62
|
|
232
|
|
(90
|
)
|
(Decrease) in accrued expenses
|
(116
|
)
|
(394
|
)
|
(437
|
)
|
(Decrease) increase in taxes, including income taxes
|
(23
|
)
|
93
|
|
25
|
|
Pension contributions
|
(310
|
)
|
(290
|
)
|
(470
|
)
|
(Increase) in noncurrent assets
|
(41
|
)
|
(152
|
)
|
(370
|
)
|
(Decrease) in noncurrent liabilities
|
(193
|
)
|
(248
|
)
|
(227
|
)
|
Cash provided from operations
|
701
|
|
870
|
|
1,582
|
|
Financing Activities
|
|
|
|
Net change in short-term borrowings (original maturities of three months or less)
|
(2
|
)
|
(3
|
)
|
(16
|
)
|
Additions to debt (original maturities greater than three months)
|
816
|
|
1,962
|
|
1,901
|
|
Payments on debt (original maturities greater than three months)
|
(1,634
|
)
|
(2,734
|
)
|
(2,030
|
)
|
Proceeds from exercise of employee stock options
|
50
|
|
4
|
|
25
|
|
Excess tax benefits from stock-based payment arrangements
|
—
|
|
—
|
|
9
|
|
Dividends paid to shareholders
|
(162
|
)
|
(228
|
)
|
(223
|
)
|
Distributions to noncontrolling interests
|
(14
|
)
|
(226
|
)
|
(106
|
)
|
Contributions from noncontrolling interests
|
—
|
|
51
|
|
2
|
|
Net cash transferred from Alcoa Corporation at separation
|
—
|
|
421
|
|
—
|
|
Other
|
(17
|
)
|
(1
|
)
|
(3
|
)
|
Cash used for financing activities
|
(963
|
)
|
(754
|
)
|
(441
|
)
|
Investing Activities
|
|
|
|
Capital expenditures
|
(596
|
)
|
(1,125
|
)
|
(1,180
|
)
|
Acquisitions, net of cash acquired (F and M)
|
—
|
|
10
|
|
97
|
|
Proceeds from the sale of assets and businesses (M)
|
(9
|
)
|
692
|
|
112
|
|
Additions to investments
|
(2
|
)
|
(52
|
)
|
(134
|
)
|
Sales of investments (C and M)
|
890
|
|
280
|
|
40
|
|
Net change in restricted cash
|
12
|
|
14
|
|
(20
|
)
|
Other (C)
|
245
|
|
16
|
|
25
|
|
Cash provided from (used for) investing activities
|
540
|
|
(165
|
)
|
(1,060
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
9
|
|
(7
|
)
|
(39
|
)
|
Net change in cash and cash equivalents
|
287
|
|
(56
|
)
|
42
|
|
Cash and cash equivalents at beginning of year
|
1,863
|
|
1,919
|
|
1,877
|
|
Cash and cash equivalents at end of year
|
$
|
2,150
|
|
$
|
1,863
|
|
$
|
1,919
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic and subsidiaries
Statement of Changes in Consolidated Equity
(in millions, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arconic Shareholders
|
|
|
|
Preferred
stock
|
Mandatory
convertible
preferred
stock
|
Common
stock
|
Additional
capital
|
Retained earnings (deficit)
|
Treasury
stock
|
Accumulated
Other
Comprehensive
Loss
|
Noncontrolling
interests
|
Total
equity
|
Balance at December 31, 2014
|
$
|
55
|
|
$
|
3
|
|
$
|
1,304
|
|
$
|
9,284
|
|
$
|
9,379
|
|
$
|
(3,042
|
)
|
$
|
(4,677
|
)
|
$
|
2,488
|
|
$
|
14,794
|
|
Net (loss) income
|
—
|
|
—
|
|
—
|
|
—
|
|
(322
|
)
|
—
|
|
—
|
|
125
|
|
(197
|
)
|
Other comprehensive loss (B)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(754
|
)
|
(422
|
)
|
(1,176
|
)
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
Preferred–Class A @ $3.75 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
Preferred–Class B @ $26.8750 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(67
|
)
|
—
|
|
—
|
|
—
|
|
(67
|
)
|
Common @ $0.12 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(154
|
)
|
—
|
|
—
|
|
—
|
|
(154
|
)
|
Equity option on convertible notes (F)
|
—
|
|
—
|
|
—
|
|
55
|
|
—
|
|
—
|
|
—
|
|
—
|
|
55
|
|
Stock-based compensation (O)
|
—
|
|
—
|
|
—
|
|
92
|
|
—
|
|
—
|
|
—
|
|
—
|
|
92
|
|
Common stock issued: compensation plans (O)
|
—
|
|
—
|
|
—
|
|
(195
|
)
|
—
|
|
217
|
|
—
|
|
—
|
|
22
|
|
Issuance of common stock (F and O)
|
—
|
|
—
|
|
87
|
|
783
|
|
—
|
|
—
|
|
—
|
|
—
|
|
870
|
|
Distributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(106
|
)
|
(106
|
)
|
Contributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2
|
|
2
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
(2
|
)
|
Balance at December 31, 2015
|
$
|
55
|
|
$
|
3
|
|
$
|
1,391
|
|
$
|
10,019
|
|
$
|
8,834
|
|
$
|
(2,825
|
)
|
$
|
(5,431
|
)
|
$
|
2,085
|
|
$
|
14,131
|
|
Net (loss) income
|
—
|
|
—
|
|
—
|
|
—
|
|
(941
|
)
|
—
|
|
—
|
|
63
|
|
(878
|
)
|
Other comprehensive (loss) income (B)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(691
|
)
|
184
|
|
(507
|
)
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
Preferred–Class A @ $3.75 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
Preferred–Class B @ $26.8750 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(67
|
)
|
—
|
|
—
|
|
—
|
|
(67
|
)
|
Common @ $0.36 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(159
|
)
|
—
|
|
—
|
|
—
|
|
(159
|
)
|
Stock-based compensation (O)
|
—
|
|
—
|
|
—
|
|
86
|
|
—
|
|
—
|
|
—
|
|
—
|
|
86
|
|
Common stock issued: compensation plans (O)
|
—
|
|
—
|
|
—
|
|
(205
|
)
|
—
|
|
186
|
|
—
|
|
—
|
|
(19
|
)
|
Retirement of Treasury stock (O)
|
—
|
|
—
|
|
(76
|
)
|
(2,563
|
)
|
—
|
|
2,639
|
|
—
|
|
—
|
|
—
|
|
Reverse stock split (O)
|
—
|
|
—
|
|
(877
|
)
|
877
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Distribution of Alcoa Corporation
|
—
|
|
—
|
|
—
|
|
—
|
|
(8,692
|
)
|
—
|
|
3,554
|
|
(2,133
|
)
|
(7,271
|
)
|
Distributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(226
|
)
|
(226
|
)
|
Contributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
51
|
|
51
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2
|
|
2
|
|
Balance at December 31, 2016
|
$
|
55
|
|
$
|
3
|
|
$
|
438
|
|
$
|
8,214
|
|
$
|
(1,027
|
)
|
$
|
—
|
|
$
|
(2,568
|
)
|
$
|
26
|
|
$
|
5,141
|
|
Net loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(74
|
)
|
—
|
|
—
|
|
—
|
|
(74
|
)
|
Other comprehensive loss (B)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(76
|
)
|
2
|
|
(74
|
)
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
Preferred–Class A @ $3.75 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
Preferred–Class B @ $20.1563 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(51
|
)
|
—
|
|
—
|
|
—
|
|
(51
|
)
|
Common @ $0.24 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(109
|
)
|
—
|
|
—
|
|
—
|
|
(109
|
)
|
Stock-based compensation (O)
|
—
|
|
—
|
|
—
|
|
67
|
|
—
|
|
—
|
|
—
|
|
—
|
|
67
|
|
Common stock issued: compensation plans (O)
|
—
|
|
—
|
|
—
|
|
21
|
|
—
|
|
—
|
|
—
|
|
—
|
|
21
|
|
Conversion of mandatory convertible preferred stock (O)
|
—
|
|
(3
|
)
|
39
|
|
(36
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Issuance of common stock (F and O)
|
—
|
|
—
|
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
Distributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(14
|
)
|
(14
|
)
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
15
|
|
—
|
|
—
|
|
—
|
|
15
|
|
Balance at December 31, 2017
|
$
|
55
|
|
$
|
—
|
|
$
|
481
|
|
$
|
8,266
|
|
$
|
(1,248
|
)
|
$
|
—
|
|
$
|
(2,644
|
)
|
$
|
14
|
|
$
|
4,924
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except per-share amounts)
A. Summary of Significant Accounting Policies
Basis of Presentation.
The Consolidated Financial Statements of Arconic Inc. and subsidiaries (“Arconic” or the “Company”) are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and require management to make certain judgments, estimates, and assumptions. These 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 period. Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain prior year amounts have been reclassified to conform to the current year presentation.
The separation of Alcoa Inc. into two standalone, publicly-traded companies, Arconic Inc. (the new name for Alcoa Inc.) and Alcoa Corporation, became effective on November 1, 2016 (the “Separation Transaction”). The financial results of Alcoa Corporation for all periods prior to the Separation Transaction have been retrospectively reflected in the Statement of Consolidated Operations as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented prior to the Separation Transaction. The cash flows and comprehensive income related to Alcoa Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows and Statement of Consolidated Comprehensive (Loss) Income, respectively, for all periods presented. See Note C for additional information related to the Separation Transaction and discontinued operations.
Principles of Consolidation.
The Consolidated Financial Statements include the accounts of Arconic and companies in which Arconic has a controlling interest. Intercompany transactions have been eliminated. Investments in affiliates in which Arconic cannot exercise significant influence are accounted for on the cost method.
Management also evaluates whether an Arconic entity or interest is a variable interest entity and whether Arconic is the primary beneficiary. Consolidation is required if both of these criteria are met. Arconic does not have any variable interest entities requiring consolidation.
Related Party Transactions.
Arconic buys products from and provides services to Alcoa Corporation following the separation at negotiated prices between the parties. These transactions were not material to the financial position or results of operations of Arconic for all periods presented. Effective May 2017, upon disposition of the remaining common stock that Arconic held in Alcoa Corporation, they are no longer deemed a related party.
Cash Equivalents.
Cash equivalents are highly liquid investments purchased with an original maturity of
three months
or less.
Inventory Valuation.
Inventories are carried at the lower of cost and net realizable value, with cost for approximately half of U.S. inventories determined under the last-in, first-out (LIFO) method. The cost of other inventories is determined under a combination of the first-in, first-out (FIFO) and average-cost methods.
Properties, Plants, and Equipment.
Properties, plants, and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets. The following table details the weighted-average useful lives of structures and machinery and equipment by reporting segment (numbers in years):
|
|
|
|
Segment
|
Structures
|
Machinery and equipment
|
Engineered Products and Solutions
|
29
|
17
|
Global Rolled Products
|
31
|
21
|
Transportation and Construction Solutions
|
27
|
18
|
Gains or losses from the sale of assets are generally recorded in Other income, net (see policy below for assets classified as held for sale and discontinued operations). Repairs and maintenance are charged to expense as incurred. Interest related to the construction of qualifying assets is capitalized as part of the construction costs.
Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets
(asset group) over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of assets also require significant judgments. See Note F for information regarding asset impairments.
Goodwill.
Goodwill is not amortized; instead, it is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or realign a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Arconic has
eight
reporting units, of which
four
are included in the Engineered Products and Solutions segment,
three
are included in the Transportation and Construction Solutions segment, and the remaining reporting unit is the Global Rolled Products segment. More than
85%
of Arconic’s total goodwill at
December 31, 2017
is allocated to
two
reporting units as follows: Arconic Fastening Systems and Rings (AFSR) (
$2,221
) and Arconic Power and Propulsion (APP) (
$1,686
) businesses, both of which are included in the Engineered Products and Solutions segment. These amounts include an allocation of Corporate’s goodwill.
In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than
50%
) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the quantitative impairment test.
Arconic determines annually, based on facts and circumstances, which of its reporting units will be subject to the qualitative assessment. For those reporting units where a qualitative assessment is either not performed or for which the conclusion is that an impairment is more likely than not, a quantitative impairment test will be performed. Arconic’s policy is that a quantitative impairment test be performed for each reporting unit at least once during every
three
-year period.
Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.
During the
2017
annual review of goodwill, management performed the qualitative assessment for
one
reporting unit, Arconic Wheel and Transportation Products (within the Transportation and Construction Solutions segment). Management concluded that it was not more likely than not that the estimated fair value of the reporting unit was less than its carrying value. As such, no further analysis was required.
Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Arconic uses a discounted cash flow model (DCF) to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes. Most of these assumptions vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The WACC rate for the individual reporting units is estimated with the assistance of valuation experts. Arconic would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value without exceeding the total amount of goodwill allocated to that reporting unit.
During the
2017
annual review of goodwill, management proceeded directly to the quantitative impairment test for
six
reporting units as follows: AFSR, APP, Arconic Titanium and Engineered Products (ATEP), and Arconic Forgings and
Extrusions (AFE), which are all included in the Engineered Products and Solutions segment, Global Rolled Products, and Building and Construction Systems, which is included in the Transportation and Construction Solutions segment. The estimated fair value for five of the six reporting units exceeded its respective carrying value, resulting in no impairment. However, the estimated fair value of AFE was lower than its carrying value. As such, in the fourth quarter of 2017, Arconic recorded an impairment for the full amount of goodwill in the AFE reporting unit of
$719
. The decrease in the AFE fair value was primarily due to unfavorable performance that is impacting operating margins and a higher discount rate due to an increase in the risk-free rate of return, while the carrying value increased compared to prior year.
Goodwill impairment tests in 2016 and 2015 indicated that goodwill was not impaired for any of the Company’s reporting units, except for the soft alloy extrusion business in Brazil which is included in the Transportation and Construction Solutions segment. In the fourth quarter of 2015, for the soft alloy extrusion business in Brazil, the estimated fair value as determined by the DCF model was lower than the associated carrying value of its reporting unit’s goodwill. As a result, management determined that the implied fair value of the reporting unit’s goodwill was
zero
. Arconic recorded a goodwill impairment of
$25
in 2015. The impairment of goodwill resulted from headwinds from the downturn in the Brazilian economy and the continued erosion of gross margin despite the execution of cost reduction strategies. As a result of the goodwill impairment, there is no goodwill remaining for the reporting unit.
Other Intangible Assets.
Intangible assets with indefinite useful lives are not amortized while intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited. The following table details the weighted-average useful lives of software and other intangible assets by reporting segment (numbers in years):
|
|
|
|
Segment
|
Software
|
Other intangible assets
|
Engineered Products and Solutions
|
6
|
34
|
Global Rolled Products
|
6
|
9
|
Transportation and Construction Solutions
|
5
|
16
|
Revenue Recognition.
Arconic recognizes revenues when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck, train, or vessel).
In certain circumstances, Arconic receives advanced payments from its customers for product to be delivered in future periods. These advanced payments are recorded as deferred revenue until the product is delivered and title and risk of loss have passed to the customer in accordance with the terms of the contract. Deferred revenue is included in Other current liabilities and Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet.
Environmental Matters.
Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery are recognized when probable and as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that Arconic has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters.
For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Income Taxes.
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable)
for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Arconic’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.
Stock-based Compensation.
Arconic recognizes compensation expense for employee equity grants using the non-substantive vesting period approach, in which the expense is recognized ratably over the requisite service period based on the grant date fair value. Forfeitures are accounted for as they occur. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance awards containing a market condition is valued using a Monte Carlo valuation model. Determining the fair value at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
Most plan participants can choose whether to receive their award in the form of stock options, stock awards, or a combination of both. This choice is made before the grant is issued and is irrevocable.
Foreign Currency.
The local currency is the functional currency for Arconic’s significant operations outside the United States, except for certain operations in Canada and Russia, where the U.S. dollar is used as the functional currency. The determination of the functional currency for Arconic’s operations is made based on the appropriate economic and management indicators.
Acquisitions.
Arconic’s business acquisitions are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included in the Statement of Consolidated Operations from the date of the acquisition.
Discontinued Operations and Assets Held For Sale.
For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale. Businesses to be divested are generally classified in the Consolidated Financial Statements as either discontinued operations or held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities of discontinued operations on the Consolidated Balance Sheet and to
discontinued operations on the Statement of Consolidated Operations, respectively, for all periods presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the Statement of Consolidated Operations. The Statement of Consolidated Cash Flows is not required to be reclassified for discontinued operations for any period. Segment information does not include the assets or operating results of businesses classified as discontinued operations for all periods presented. These businesses are expected to be disposed of within
one year
.
For businesses classified as held for sale that do not qualify for discontinued operations treatment, the balance sheet and cash flow amounts are reclassified from their historical presentation to assets and liabilities of operations held for sale for all periods presented. The results of operations continue to be reported in continuing operations. The gains or losses associated with these divested businesses are recorded in Restructuring and other charges on the Statement of Consolidated Operations. The segment information includes the assets and operating results of businesses classified as held for sale for all periods presented.
Recently Adopted Accounting Guidance.
On January 1, 2017, Arconic adopted changes issued by the Financial Accounting Standards Board (“FASB”) to employee share-based payment accounting. Previously, an entity determined for each share-based payment award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes resulted in either an excess tax benefit or a tax deficiency. Excess tax benefits were recognized in additional paid-in capital; tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits were not recognized until the deduction reduced taxes payable. The changes require all excess tax benefits and tax deficiencies related to share-based payment awards to be recognized as income tax expense or benefit in the Statement of Consolidated Operations. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. In addition, the presentation of excess tax benefits related to share-based payment awards in the statement of cash flows changed. Previously, excess tax benefits were separated from other income tax cash flows and classified as a financing activity. The changes require excess tax benefits to be classified along with other income tax cash flows as an operating activity. Also, the changes require cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity. Further, for a share-based award to qualify for equity classification it previously could not be partially settled in cash in-excess of the employer’s minimum statutory withholding requirements. The changes permit equity classification of share-based awards for withholdings up to the maximum statutory tax rates in applicable jurisdictions. The prospective transition method was utilized for excess tax benefits in the Statement of Consolidated Cash Flows. Management determined that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
On January 1, 2017, Arconic adopted changes issued by the FASB eliminating the requirement for an investor to adjust an equity method investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held as a result of an increase in the level of ownership interest or degree of influence. In addition, an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting must recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. Management determined that the adoption of this guidance had no impact on the Consolidated Financial Statements.
On January 1, 2017, Arconic adopted changes issued by the FASB to derivative instruments designated as hedging instruments. These changes clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. Management determined that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
On January 1, 2017, Arconic adopted changes issued by the FASB to the accounting for Intra-Entity transactions, other than inventory. Previously, no immediate tax impact was recognized in the consolidated financial statements as a result of intra-entity transfers of assets. The previous standard precluded an entity from reflecting a tax benefit or expense from an intra-entity transfer between entities that file separate tax returns, whether or not such entities were in different tax jurisdictions, until the asset was sold to a third party or otherwise recovered. The previous standard also prohibited recognition by the buyer of 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 changes require the current and deferred income tax consequences of the intra-entity transfer to be recorded when the transaction occurs. The exception to defer the tax consequences of inventory transactions is maintained. Management determined that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
On January 1, 2017, Arconic adopted changes issued by the FASB to the subsequent measurement of goodwill by eliminating step 2 from the goodwill impairment test, which previously required measurement of any goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. An entity will
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value without exceeding the total amount of goodwill allocated to that reporting unit. Arconic applied this new guidance on a prospective basis. See Goodwill policy above for further details.
On January 1, 2017, Arconic adopted changes issued by the FASB which narrow the definition of a business and require an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, which would not constitute the acquisition of a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. Arconic applied this new guidance on a prospective basis. Management determined that the adoption of this guidance had no impact on the Consolidated Financial Statements.
On January 1, 2017, Arconic adopted changes issued by the FASB to the subsequent measurement of inventory. Previously, an entity was required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes required that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes did not apply to inventories measured using LIFO (last-in, first-out) or the retail inventory method. Arconic applies the net realizable value market option to measure non-LIFO inventories at the lower of cost or market. Management determined that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
Recently Issued Accounting Guidance.
In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue and, therefore, supersede 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. In August 2015, the FASB deferred the effective date of the new guidance by one year, making these changes effective for Arconic on January 1, 2018.
Arconic will adopt the new guidance using the modified retrospective transition approach, reflecting the cumulative effect of initially applying the new standard to revenue recognition in the first quarter of 2018. The Company had formed a project assessment and adoption team that reviewed contract terms to assess the impact of adopting the new guidance on the Consolidated Financial Statements. While the Company generally recognizes revenue at a point in time upon delivery and transfer of title and risk of loss for most arrangements, based on the contract reviews performed, certain contracts within the Engineered Products and Solutions segment were identified as potentially moving to over time revenue recognition. The Company modified certain contract terms in conjunction with its customers to remain at point-in-time revenue recognition. These modifications will not result in significant changes to revenue, business practices or controls. Management has determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements. The Company is in the process of identifying appropriate changes to its business processes and controls, as well as preparing for revisions to accounting policies and expanded disclosures related to revenue recognition in the notes to the Consolidated Financial Statements.
In January 2016, the FASB issued changes to equity investments. These changes require 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 using the measurement alternative of 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. Also, the impairment assessment of equity investments without readily determinable fair values has been simplified by requiring a qualitative assessment to identify impairment. Also, the new guidance will require changes in fair value of equity securities to be recognized immediately as a component of net income instead of being reported in accumulated other comprehensive loss until the gain (loss) is realized. These changes became effective for Arconic on January 1, 2018 and have been applied on a prospective basis. Arconic elected the measurement alternative for its equity investments that do not have readily determinable fair values. Management determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
In February 2016, the FASB issued changes to the accounting and presentation of leases. These changes require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. 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. These changes become effective for Arconic on January 1, 2019. Arconic’s current operating lease portfolio is primarily comprised of land and buildings, plant equipment, vehicles, and computer equipment. A cross-functional implementation team is in process of determining the scope of arrangements that will be subject to this standard as well as assessing the impact to the Company’s systems, processes and internal controls. Management is evaluating the impact of these changes on the Consolidated Financial Statements, which will require right of use assets and lease liabilities be recorded in the consolidated balance sheet for operating leases. Therefore, an estimate of the impact is not currently determinable. However, the adoption is not expected to have a material impact on the Statement of Consolidated Operations.
In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective for Arconic on January 1, 2020. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
In August 2016, the FASB issued changes to the classification of certain cash receipts and cash payments within the statement of cash flows. The guidance identifies eight specific cash flow items and the sections where they must be presented within the statement of cash flows. These changes became effective for Arconic on January 1, 2018 and will be applied retrospectively. As of result of the adoption, Arconic will reclassify cash received related to beneficial interest in previously transferred trade accounts receivables from operating activities to investing activities in the Statement of Consolidated Cash Flows. This reclassification is expected to have a material impact on the Statement of Consolidated Cash Flows, but does not reflect a change in our underlying business or activities. Additionally, Arconic will reclassify cash paid for debt prepayments including extinguishment costs from operating activities to financing activities in the Statement of Consolidated Cash Flows.
In November 2016, the FASB issued changes to the classification of cash and cash equivalents within the statement of cash flow. Restricted cash and restricted cash equivalents will be included within the cash and cash equivalents line on the cash flow statement and a reconciliation must be prepared to the statement of financial position. Transfers between restricted cash and restricted cash equivalents and cash and cash equivalents will no longer be presented as cash flow activities in the statement of cash flows and for material balances of restricted cash and restricted cash equivalents an entity must disclose information regarding the nature of the restrictions. These changes became effective for Arconic on January 1, 2018 and will be applied retrospectively. Management has determined that the adoption of this guidance will not have a material impact on the Statement of Consolidated Cash Flows.
In March 2017, the FASB issued changes to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. These changes become effective for Arconic on January 1, 2019 and early adoption is permitted. Management has determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
In March 2017, the FASB issued changes to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires registrants to present the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. Also, only the service cost component will be eligible for asset capitalization. Registrants will present the other components of net periodic benefit cost separately from the service cost component; and, the line item or items used in the income statement to present the other components of net periodic benefit cost must be disclosed. These changes became effective for Arconic on January 1, 2018 and will be adopted retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement, and prospectively for the asset capitalization of the service cost component of net periodic benefit cost. The Company currently records non-service related net periodic pension cost and net periodic postretirement benefit cost within Cost of goods sold, Selling, general, administrative and other expenses and Research and development expenses and upon the adoption of this standard will be recorded separately from service cost in the Other income, net line item in the Statement of Consolidated Operations. The impact of the retrospective
adoption of this guidance will be an increase to consolidated Operating income of approximately
$154
and
$135
while there will be no impact to consolidated Net loss for the years ended December 31, 2017 and 2016, respectively. The prospective adoption of the asset capitalization of only the service cost component will have an impact of approximately
$20
in the first quarter of 2018 Statement of Consolidated Operations.
In May 2017, the FASB issued clarification to guidance on the modification accounting criteria for share-based payment awards. The new guidance requires registrants to apply modification accounting unless three specific criteria are met. The three criteria are 1) the fair value of the award is the same before and after the modification, 2) the vesting conditions are the same before and after the modification and 3) the classification as a debt or equity award is the same before and after the modification. These changes became effective for Arconic on January 1, 2018 and are to be applied prospectively to new awards granted after adoption. Management determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
In August 2017, the FASB issued guidance that will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. These changes become effective for Arconic on January 1, 2019. For cash flow and net investment hedges existing at the date of adoption, Arconic will apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year in which the amendment is adopted. The amended presentation and disclosure guidance is required only prospectively. Management is currently evaluating the potential impact of this guidance on the Consolidated Financial Statements.
In February 2018, the FASB issued guidance that allows a reclassification from Accumulated other comprehensive loss to Accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. These changes become effective for Arconic on January 1, 2019. Management is currently evaluating the potential impact of this guidance on the Consolidated Financial Statements.
B. Accumulated Other Comprehensive Loss
The following table details the activity of the four components that comprise Accumulated other comprehensive loss for both Arconic’s shareholders and noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arconic
|
|
Noncontrolling Interests
|
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
Pension and other postretirement benefits (U)
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(2,010
|
)
|
$
|
(3,611
|
)
|
$
|
(3,601
|
)
|
|
$
|
—
|
|
$
|
(56
|
)
|
$
|
(64
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service cost/benefit
|
(466
|
)
|
(1,112
|
)
|
(478
|
)
|
|
—
|
|
(9
|
)
|
5
|
|
Tax benefit (expense)
|
102
|
|
380
|
|
170
|
|
|
—
|
|
3
|
|
(1
|
)
|
Total Other comprehensive (loss) income before reclassifications, net of tax
|
(364
|
)
|
(732
|
)
|
(308
|
)
|
|
—
|
|
(6
|
)
|
4
|
|
Amortization of net actuarial loss and prior service cost/benefit
(1)
|
222
|
|
389
|
|
458
|
|
|
—
|
|
4
|
|
6
|
|
Tax expense
(2)
|
(78
|
)
|
(136
|
)
|
(160
|
)
|
|
—
|
|
(1
|
)
|
(2
|
)
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(8)
|
144
|
|
253
|
|
298
|
|
|
—
|
|
3
|
|
4
|
|
Total Other comprehensive (loss) income
|
(220
|
)
|
(479
|
)
|
(10
|
)
|
|
—
|
|
(3
|
)
|
8
|
|
Transfer to Alcoa Corporation
|
—
|
|
2,080
|
|
—
|
|
|
—
|
|
59
|
|
—
|
|
Balance at end of period
|
$
|
(2,230
|
)
|
$
|
(2,010
|
)
|
$
|
(3,611
|
)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(56
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(689
|
)
|
$
|
(2,412
|
)
|
$
|
(846
|
)
|
|
$
|
(2
|
)
|
$
|
(780
|
)
|
$
|
(351
|
)
|
Other comprehensive income (loss)
(3)
|
252
|
|
268
|
|
(1,566
|
)
|
|
2
|
|
182
|
|
(429
|
)
|
Transfer to Alcoa Corporation
|
—
|
|
1,455
|
|
—
|
|
|
—
|
|
596
|
|
—
|
|
Balance at end of period
|
$
|
(437
|
)
|
$
|
(689
|
)
|
$
|
(2,412
|
)
|
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
(780
|
)
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
132
|
|
$
|
(5
|
)
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Other comprehensive (loss) income
(4)
|
(134
|
)
|
137
|
|
(5
|
)
|
|
—
|
|
—
|
|
—
|
|
Transfer to Alcoa Corporation
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Balance at end of period
|
$
|
(2
|
)
|
$
|
132
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(1
|
)
|
$
|
597
|
|
$
|
(230
|
)
|
|
—
|
|
$
|
(3
|
)
|
$
|
(2
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
37
|
|
(843
|
)
|
1,138
|
|
|
—
|
|
36
|
|
(1
|
)
|
Tax (expense) benefit
|
(9
|
)
|
252
|
|
(340
|
)
|
|
—
|
|
(10
|
)
|
—
|
|
Total Other comprehensive income (loss) before reclassifications, net of tax
|
28
|
|
(591
|
)
|
798
|
|
|
—
|
|
26
|
|
(1
|
)
|
Net amount reclassified to earnings:
|
|
|
|
|
|
|
|
Aluminum contracts
(5)
|
(2
|
)
|
1
|
|
21
|
|
|
—
|
|
—
|
|
—
|
|
Energy contracts
(6)
|
—
|
|
(49
|
)
|
6
|
|
|
—
|
|
(34
|
)
|
—
|
|
Foreign exchange contracts
(5)
|
—
|
|
—
|
|
5
|
|
|
—
|
|
—
|
|
—
|
|
Interest rate contracts
(7)
|
—
|
|
9
|
|
1
|
|
|
—
|
|
5
|
|
—
|
|
Nickel contracts
(6)
|
(1
|
)
|
1
|
|
2
|
|
|
—
|
|
—
|
|
—
|
|
Sub-total
|
(3
|
)
|
(38
|
)
|
35
|
|
|
—
|
|
(29
|
)
|
—
|
|
Tax benefit (expense)
(2)
|
1
|
|
12
|
|
(6
|
)
|
|
—
|
|
8
|
|
—
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(8)
|
(2
|
)
|
(26
|
)
|
29
|
|
|
—
|
|
(21
|
)
|
—
|
|
Total Other comprehensive income (loss)
|
26
|
|
(617
|
)
|
827
|
|
|
—
|
|
5
|
|
(1
|
)
|
Transfer to Alcoa Corporation
|
—
|
|
19
|
|
—
|
|
|
—
|
|
(2
|
)
|
—
|
|
Balance at end of period
|
$
|
25
|
|
$
|
(1
|
)
|
$
|
597
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(3
|
)
|
|
|
(1)
|
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note T).
|
|
|
(2)
|
These amounts were included in Provision for income taxes on the accompanying Statement of Consolidated Operations.
|
|
|
(3)
|
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
|
|
|
(4)
|
Realized gains and losses were included in Other income, net on the accompanying Statement of Consolidated Operations.
|
|
|
(5)
|
These amounts were included in Sales on the accompanying Statement of Consolidated Operations.
|
|
|
(6)
|
These amounts were included in Cost of goods sold on the accompanying Statement of Consolidated Operations.
|
|
|
(7)
|
These amounts were included in Interest expense on the accompanying Statement of Consolidated Operations.
|
|
|
(8)
|
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings. These amounts were reflected on the accompanying Statement of Consolidated Operations in the line items indicated in footnotes 1 through 7.
|
C. Separation Transaction and Discontinued Operations
On November 1, 2016, Arconic completed the Separation Transaction. Alcoa Inc., which was re-named Arconic Inc., continues to own the Global Rolled Products (except for the Warrick, IN rolling operations and the equity interest in the rolling mill at the joint venture in Saudi Arabia), Engineered Products and Solutions, and Transportation and Construction Solutions segments. Alcoa Corporation includes the Alumina and Primary Metals segments and the aforementioned Warrick, IN rolling operations and equity interest in the rolling mill at the joint venture in Saudi Arabia, both of which were formally part of the Global Rolled Products segment.
Arconic completed the Separation Transaction by distribution on November 1, 2016 of
80.1%
of the outstanding common stock of Alcoa Corporation to the Company’s shareholders of record (the “Distribution”) as of the close of business on October 20, 2016 (the “Record Date”). Arconic retained
19.9%
of the Alcoa Corporation common stock (
36,311,767
shares). In the Distribution, each Company shareholder received one share of Alcoa Corporation common stock for every three shares of Arconic common stock held as of the close of business on the Record Date. Shareholders received cash in lieu of fractional shares of Alcoa Corporation common stock. The Company had recorded the retained interest as a cost method investment in Investment in common stock of Alcoa Corporation in the December 2016 Consolidated Balance Sheet. The fair value of Arconic’s retained interest in Alcoa Corporation was
$1,020
at December 31, 2016 and was based on the closing stock price of Alcoa Corporation as of December 31, 2016 multiplied by the number of shares of Alcoa Corporation common stock owned by the Company at that date.
In February 2017, Arconic sold
23,353,000
of its shares of Alcoa Corporation common stock at
$38.03
per share, which resulted in cash proceeds of
$888
which were recorded in Sales of investments within Investing Activities in the accompanying Statement of Consolidated Cash Flows, and a gain of
$351
which was recorded in Other income, net in the accompanying Statement of Consolidated Operations. In April and May 2017, the Company acquired a portion of its outstanding notes held by
two
investment banks (the “Investment Banks”) in exchange for cash and the Company’s remaining
12,958,767
Alcoa Corporation shares (valued at
$35.91
per share) (the “Debt-for-Equity Exchange”) (See Note I). A gain of
$167
on the Debt-for-Equity Exchange was recorded in Other income, net in the accompanying Statement of Consolidated Operations. As of May 4, 2017, the Company no longer maintained a retained interest in Alcoa Corporation common stock.
On October 31, 2016, Arconic entered into several agreements with Alcoa Corporation that govern the relationship of the parties following the completion of the Separation Transaction. These agreements include the following: Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, Alcoa Corporation to Arconic Inc. Patent, Know-How, and Trade Secret License Agreement, Arconic Inc. to Alcoa Corporation Patent, Know-How, and Trade Secret License Agreement, Alcoa Corporation to Arconic Inc. Trademark License Agreement, Toll Processing and Services Agreement (the “Toll Processing Agreement”), Master Agreement for the Supply of Primary Aluminum, Massena Lease and Operations Agreement, Fusina Lease and Operations Agreement, and Stockholder and Registration Rights Agreement.
Effective November 1, 2016, Arconic entered into a Toll Processing Agreement with Alcoa Corporation for the tolling of metal for the Warrick, IN rolling mill which became a part of Alcoa Corporation upon completion of the Separation Transaction. As part of this arrangement, Arconic provides a toll processing service to Alcoa Corporation to produce can sheet products at its facility in Tennessee through the expected end date of the contract, December 31, 2018. Alcoa Corporation supplies all required raw materials to Arconic and Arconic processes the raw materials into finished can sheet coils ready for shipment to the end customer. Tolling revenues for 2017 and the two-month period ended December 31, 2016 and accounts receivable at
December 31, 2017 and December 31, 2016 were not material to the consolidated results of operations and financial position for the years ended December 31, 2017 and December 31, 2016.
As part of the Separation Transaction, Arconic was required to provide maximum potential future payment guarantees for Alcoa Corporation issued on behalf of a third party, guarantees related to
two
long-term Alcoa Corporation energy supply agreements, guarantees related to certain Alcoa Corporation environmental liabilities and energy supply contracts, letters of credit and surety bonds related to Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016, and letters of credit for certain Alcoa Corporation equipment leases and energy contracts (see Note K).
As part of the Separation Transaction, Arconic had recorded a receivable in the December 2016 Consolidated Balance Sheet for the net after-tax proceeds from Alcoa Corporation’s sale of the Yadkin Hydroelectric Project. The transaction closed and the Company received proceeds of
$238
in the first quarter of 2017 and the remaining
$5
in the second quarter of 2017. The
$243
proceeds were included in Other within Investing Activities in the Statement of Consolidated Cash Flows.
The results of operations of Alcoa Corporation were presented as discontinued operations in the Statement of Consolidated Operations as summarized below:
|
|
|
|
|
|
|
|
|
|
Ten months
ended October 31,
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
Sales
|
$
|
6,752
|
|
|
$
|
10,121
|
|
Cost of goods sold (exclusive of expenses below)
|
5,655
|
|
|
7,965
|
|
Selling, general administrative, and other expenses
|
164
|
|
|
214
|
|
Research and development
|
28
|
|
|
69
|
|
Provision for depreciation, depletion and amortization
|
593
|
|
|
772
|
|
Restructuring and other charges
|
102
|
|
|
981
|
|
Interest expense
|
28
|
|
|
25
|
|
Other (income) expenses, net
|
(75
|
)
|
|
30
|
|
Income from discontinued operations before income taxes
|
257
|
|
|
65
|
|
Provision for income taxes
|
73
|
|
|
106
|
|
Income (loss) from discontinued operations after income taxes
|
184
|
|
|
(41
|
)
|
Less: Net income from discontinued operations attributable to noncontrolling interests
|
63
|
|
|
124
|
|
Net income (loss) from discontinued operations
|
$
|
121
|
|
|
$
|
(165
|
)
|
During 2017, 2016 and 2015, Arconic recognized
$18
(
$12
after-tax),
$193
(
$158
after-tax) and
$24
(
$24
after-tax), respectively, in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations for costs related to the Separation Transaction. In addition, Arconic also incurred capital expenditures and debt issuance costs of
$110
during
2016
related to the Separation Transaction. None of the aforementioned costs and expenses related to the Separation Transaction were reclassified into discontinued operations.
On November 1, 2016, management evaluated the net assets of Alcoa Corporation for potential impairment and determined that
no
impairment charge was required.
The cash flows related to Alcoa Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows for 2016 and all prior periods presented. The following table presents depreciation, depletion and amortization, restructuring and other charges, and purchases of property, plant and equipment of the discontinued operations related to Alcoa Corporation:
|
|
|
|
|
|
|
|
For the year ended December 31,
|
2016
|
2015
|
Depreciation, depletion and amortization
|
$
|
593
|
|
$
|
772
|
|
Restructuring and other charges
|
$
|
102
|
|
$
|
981
|
|
Capital expenditures
|
$
|
298
|
|
$
|
391
|
|
D. Restructuring and Other Charges
Restructuring and other charges for each year in the three-year period ended
December 31, 2017
were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Asset impairments
|
$
|
58
|
|
$
|
80
|
|
$
|
—
|
|
Layoff costs
|
64
|
|
70
|
|
97
|
|
Net loss on divestitures of businesses (F)
|
57
|
|
3
|
|
136
|
|
Other
|
(3
|
)
|
27
|
|
(11
|
)
|
Reversals of previously recorded layoff costs
|
(11
|
)
|
(25
|
)
|
(8
|
)
|
Restructuring and other charges
|
$
|
165
|
|
$
|
155
|
|
$
|
214
|
|
Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans.
2017 Actions
. In 2017, Arconic recorded Restructuring and other charges of
$165
(
$143
after-tax), which were comprised of the following components:
$69
(
$47
after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately
880
employees (
400
in the Engineered Products and Solutions segment,
245
in the Global Rolled Products segment,
135
in the Transportation and Construction Solutions segment and
100
in Corporate), a charge of
$60
(
$60
after-tax) related to the sale of the Fusina, Italy rolling mill; a charge of
$41
(
$41
after-tax) for the impairment of assets associated with the agreement to sell the Latin America Extrusions business (see Note F); a net benefit of
$6
(
$4
after-tax), for the reversal of forfeited executive stock compensation of
$13
, partially offset by a charge of
$7
for the related severance; a net charge of
$12
(
$7
after-tax) for other miscellaneous items; and a favorable benefit of
$11
(
$8
after-tax) for the reversal of a number of small layoff reserves related to prior periods.
As of December 31,
2017
, approximately
300
of the
880
employees were separated. The remaining separations for
2017
restructuring programs are expected to be completed by the end of
2018
. In
2017
, cash payments of
$28
were made against layoff reserves related to
2017
restructuring programs.
2016 Actions.
In 2016, Arconic recorded Restructuring and other charges of
$155
(
$114
after-tax), which were comprised of the following components:
$57
(
$46
after-tax) for costs related to the exit of certain legacy Firth Rixson operations in the U.K.;
$37
(
$24
after-tax) for exit costs related to the decision to permanently shut down a can sheet facility;
$20
(
$14
after-tax) for costs related to the closures of
five
facilities, primarily in the Transportation and Construction Solutions segment and Engineered Products and Solutions segment, including the separation of approximately
280
employees;
$53
(
$33
after-tax) for other layoff costs, including the separation of approximately
1,315
employees (
1,045
in the Engineered Products and Solutions segment,
210
in Corporate,
30
in the Global Rolled Products segment and
30
in the Transportation and Construction Solutions segment);
$11
(
$8
after-tax) for other miscellaneous items, including
$3
(
$2
after-tax) for the sale of Remmele Medical;
$2
(
$1
after-tax) for a pension settlement; and
$25
(
$12
after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In 2016, management made the decision to exit certain legacy Firth Rixson facilities in the U.K. Costs related to these actions included asset impairments and accelerated depreciation of
$51
; other exit costs of
$4
; and
$2
for the separation of
60
employees.
Also in 2016, management approved the shutdown and demolition of the can sheet facility in Tennessee upon completion of the Toll Processing Agreement with Alcoa Corporation. Costs related to this action included
$21
in asset impairments;
$9
in other exit costs; and
$7
for the separation of
145
employees. The other exit costs of
$9
represent
$4
in asset retirement obligations and
$3
in environmental remediation, both of which were triggered by the decision to permanently shut down and demolish the can sheet facility in Tennessee, and
$2
in other exit costs.
As of
December 31, 2017
, approximately
1,280
of the
1,700
(previously
1,750
) employees were separated. The total number of employees associated with 2016 restructuring programs was updated to reflect employees, who were initially identified for separation, accepting other positions within Arconic and natural attrition. The remaining separations for 2016 restructuring programs are expected to be completed by the end of 2018. In 2017 and 2016, cash payments of
$26
and
$16
were made against layoff reserves related to 2016 restructuring programs.
2015 Actions.
In 2015, Arconic recorded Restructuring and other charges of
$214
(
$192
after-tax), which were comprised of the following components: a
$136
(
$134
after-tax) net loss related to the March 2015 divestiture of a rolling mill in Russia and post-closing adjustments associated with the December 2014 divestitures of
three
rolling mills located in Spain and France;
$97
(
$70
after-tax) for layoff costs, including the separation of approximately
1,505
employees (
590
in the Engineered Products and Solutions segment,
425
in the Transportation and Construction Solutions segment,
400
in Corporate and
90
in the Global Rolled Products segment); an
$18
(
$13
after-tax) gain on the sale of land related to one of the rolling mills in Australia that was permanently closed in December 2014; a net charge of
$7
(
$4
after-tax) for other miscellaneous items; and
$8
(
$3
after-tax) for the reversal of a number of small layoff reserves related to prior periods.
As of
December 31, 2017
, the separations associated with the 2015 restructuring programs were essentially complete. In 2017, 2016 and 2015, cash payments of
$5
,
$55
and
$18
, respectively, were made against layoff reserves related to 2015 restructuring programs.
Arconic does not include Restructuring and other charges in the results of its reportable segments. The pre-tax impact of allocating such charges to segment results would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Engineered Products and Solutions
|
$
|
30
|
|
$
|
78
|
|
$
|
46
|
|
Global Rolled Products
|
72
|
|
40
|
|
121
|
|
Transportation and Construction Solutions
|
52
|
|
14
|
|
8
|
|
Segment total
|
154
|
|
132
|
|
175
|
|
Corporate
|
11
|
|
23
|
|
39
|
|
Total restructuring and other charges
|
$
|
165
|
|
$
|
155
|
|
$
|
214
|
|
Activity and reserve balances for restructuring charges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Layoff
costs
|
Other
exit costs
|
Total
|
Reserve balances at December 31, 2014
|
$
|
48
|
|
$
|
20
|
|
$
|
68
|
|
2015:
|
|
|
|
Cash payments
|
(45
|
)
|
(12
|
)
|
(57
|
)
|
Restructuring charges
|
97
|
|
7
|
|
104
|
|
Other*
|
(16
|
)
|
(6
|
)
|
(22
|
)
|
Reserve balances at December 31, 2015
|
84
|
|
9
|
|
93
|
|
2016:
|
|
|
|
Cash payments
|
(73
|
)
|
(13
|
)
|
(86
|
)
|
Restructuring charges
|
70
|
|
27
|
|
97
|
|
Other*
|
(31
|
)
|
(14
|
)
|
(45
|
)
|
Reserve balances at December 31, 2016
|
50
|
|
9
|
|
59
|
|
2017:
|
|
|
|
Cash payments
|
(59
|
)
|
(6
|
)
|
(65
|
)
|
Restructuring charges
|
64
|
|
1
|
|
65
|
|
Other*
|
1
|
|
(2
|
)
|
(1
|
)
|
Reserve balances at December 31, 2017
|
$
|
56
|
|
$
|
2
|
|
$
|
58
|
|
|
|
*
|
Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation. In 2017, Other for layoff costs also includes the reclassification of a stock awards reversal of
$13
. In 2016, Other for other exit costs also included a reclassification of
$8
in asset retirement and
$2
in environmental obligations, as these liabilities were included in Arconic’s separate reserves for asset retirement obligations and environmental remediation. Other for other exit costs also included a reclassification of
$4
in legal obligations, as these liabilities were included in Arconic’s separate reserves for legal costs. In 2015, Other for other exit costs included a reclassification of
$5
for certain obligations included in Arconic’s separate reserves for warranties, lease terminations and tax indemnities.
|
The remaining reserves are expected to be paid in cash during 2018.
E. Goodwill and Other Intangible Assets
The following table details the changes in the carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered
Products
and
Solutions
|
Global
Rolled
Products
|
Transportation
and
Construction
Solutions
|
Corporate*
|
Total
|
Balances at December 31, 2015
|
|
|
|
|
|
Goodwill
|
$
|
4,660
|
|
$
|
201
|
|
$
|
111
|
|
$
|
330
|
|
$
|
5,302
|
|
Accumulated impairment losses
|
—
|
|
—
|
|
(53
|
)
|
—
|
|
(53
|
)
|
|
4,660
|
|
201
|
|
58
|
|
330
|
|
5,249
|
|
Acquisitions and Divestitures (F)
|
47
|
|
—
|
|
—
|
|
—
|
|
47
|
|
Translation and other
|
(128
|
)
|
(20
|
)
|
(1
|
)
|
1
|
|
(148
|
)
|
Balances at December 31, 2016
|
|
|
|
|
|
Goodwill
|
4,579
|
|
181
|
|
110
|
|
331
|
|
5,201
|
|
Accumulated impairment losses
|
—
|
|
—
|
|
(53
|
)
|
—
|
|
(53
|
)
|
|
4,579
|
|
181
|
|
57
|
|
331
|
|
5,148
|
|
Impairment (A)
|
(719
|
)
|
—
|
|
—
|
|
—
|
|
(719
|
)
|
Translation and other
|
89
|
|
12
|
|
3
|
|
2
|
|
106
|
|
Balances at December 31, 2017
|
|
|
|
|
|
Goodwill
|
4,668
|
|
193
|
|
113
|
|
333
|
|
5,307
|
|
Accumulated impairment losses
|
(719
|
)
|
—
|
|
(53
|
)
|
—
|
|
(772
|
)
|
|
$
|
3,949
|
|
$
|
193
|
|
$
|
60
|
|
$
|
333
|
|
$
|
4,535
|
|
|
|
*
|
As of
December 31, 2017
, the amount reflected in Corporate is allocated to Arconic’s
three
reportable segments (
$256
to Engineered Products and Solutions,
$59
to Global Rolled Products and
$18
to Transportation and Construction Solutions) for purposes of impairment testing (see Goodwill policy in Note A). This goodwill is reflected in Corporate for segment reporting purposes because it is not included in management’s assessment of performance by the
three
reportable segments.
|
In 2017, Arconic recognized an impairment of goodwill in the amount of
$719
related to the annual impairment review of the AFE reporting unit which is included in the Engineered Products and Solutions segment. In 2015, Arconic recognized an impairment of goodwill in the amount of
$25
related to the annual impairment review of the soft alloy extrusion business reporting unit which is included in the Transportation and Construction Solutions segment (see Goodwill policy in Note A).
Other intangible assets were as follows:
|
|
|
|
|
|
|
|
December 31, 2017
|
Gross
carrying
amount
|
Accumulated
amortization
|
Computer software
|
$
|
789
|
|
$
|
(674
|
)
|
Patents and licenses
|
110
|
|
(107
|
)
|
Other intangibles
|
953
|
|
(116
|
)
|
Total amortizable intangible assets
|
1,852
|
|
(897
|
)
|
Indefinite-lived trade names and trademarks
|
32
|
|
—
|
|
Total other intangible assets
|
$
|
1,884
|
|
$
|
(897
|
)
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Gross
carrying
amount
|
Accumulated
amortization
|
Computer software
|
$
|
755
|
|
$
|
(623
|
)
|
Patents and licenses
|
110
|
|
(102
|
)
|
Other intangibles
|
897
|
|
(81
|
)
|
Total amortizable intangible assets
|
1,762
|
|
(806
|
)
|
Indefinite-lived trade names and trademarks
|
32
|
|
—
|
|
Total other intangible assets
|
$
|
1,794
|
|
$
|
(806
|
)
|
Computer software consists primarily of software costs associated with an enterprise business solution (EBS) within Arconic to drive common systems among all businesses.
Amortization expense related to the intangible assets in the tables above for the years ended
December 31, 2017
,
2016
, and
2015
was
$71
,
$65
, and
$67
, respectively, and is expected to be in the range of approximately
$60
to
$75
annually from 2018 to 2022.
F. Acquisitions and Divestitures
Pro forma results of the Company, assuming all acquisitions described below were made at the beginning of the earliest prior period presented, would not have been materially different from the results reported.
2017 Divestitures
. In March 2017, Arconic completed the sale of its Fusina, Italy rolling mill to Slim Aluminium. While owned by Arconic, the operating results and assets and liabilities of the Fusina, Italy rolling mill were included in the Global Rolled Products segment. As part of the transaction, Arconic injected
$10
of cash into the business and provided a third-party guarantee with a fair value of
$5
related to Slim Aluminium’s environmental remediation. The Company recorded a loss on the sale of
$60
, which was recorded in Restructuring and other charges (see Note D) on the Statement of Consolidated Operations for 2017. The rolling mill generated third-party sales of approximately
$54
and
$165
for 2017 and 2016, respectively. At the time of the divestiture, the rolling mill had approximately
312
employees.
In December 2017, Arconic entered into an agreement to sell its Latin America Extrusions business for
$10 million
in cash, subject to working capital and other adjustments. The Latin America Extrusions business operates primarily in Brazil and is part of the Company’s Transportation and Construction Solutions segment. Following customary regulatory and anti-trust approvals, the ownership of this business is expected to be transferred to a subsidiary of Hydro Extruded Solutions AS in the first half of 2018. As a result of the transaction, Arconic recognized a charge of
$41 million
in the fourth quarter of 2017 primarily related to the non-cash impairment of the net book value of the business (See Notes A and D).
2016 Divestitures
. In April 2016, Arconic completed the sale of the Remmele Medical business to LISI MEDICAL for
$102
in cash (
$99
net of transaction costs), which was included in Proceeds from the sale of assets and businesses on the accompanying Statement of Consolidated Cash Flows. This business, which was part of the RTI International Metals Inc. (RTI) acquisition (see below), manufactured precision-machined metal products for customers in the minimally invasive surgical device and implantable device markets. Since this transaction occurred within a year of the completion of the RTI acquisition,
no
gain was recorded on this transaction as the excess of the proceeds over the carrying value of the net assets of this business was reflected as a purchase price adjustment (decrease to goodwill of
$44
) to the final allocation of the purchase price related to Arconic’s acquisition of RTI. While owned by Arconic, the operating results and assets and liabilities of this business were included in the Engineered Products and Solutions segment. This business generated sales of approximately
$20
from January 1, 2016 through the divestiture date, April 29, 2016, and, at the time of the divestiture, had approximately
330
employees.
2015 Acquisitions
. In March 2015, Arconic completed the acquisition of an aerospace structural castings company, TITAL, for
$204
(
€188
) in cash (an additional
$1
(
€1
) was paid in September 2015 to settle working capital in accordance with the purchase agreement). TITAL, a privately held company with approximately
650
employees at the time of the acquisition and based in Germany, produces aluminum and titanium investment casting products for the aerospace and defense markets. The purpose of this acquisition was to capture increasing demand for advanced jet engine components made of titanium, establish titanium-casting capabilities in Europe, and expand existing aluminum casting capacity. The assets, including the associated goodwill, and liabilities of this business were included within Arconic’s Engineered Products and Solutions segment since the date of acquisition. Based on the preliminary allocation of the purchase price, goodwill of
$118
was recorded for this transaction. In the first quarter of 2016, the allocation of the purchase price was finalized, based, in part, on the completion of a
third-party valuation of certain assets acquired, resulting in a
$1
reduction of the initial goodwill amount.
None
of the
$117
in goodwill is deductible for income tax purposes and no other intangible assets were identified.
In July 2015, Arconic completed the acquisition of RTI, a U.S. company that was publicly traded on the New York Stock Exchange under the ticker symbol “RTI.” Arconic purchased all outstanding shares of RTI common stock in a stock-for-stock transaction valued at
$870
(based on the
$9.96
per share July 23, 2015 closing price of Arconic’s common stock). Each issued and outstanding share of RTI common stock prior to the completion of the transaction was converted into the right to receive
2.8315
shares of Arconic common stock. In total, Arconic issued
29,132,471
shares (
87,397,414
shares pre-reverse stock split – see Note O) of its common stock to consummate this transaction, which was not reflected in the accompanying Statement of Consolidated Cash Flows as it represents a noncash financing activity. The exchange ratio was the quotient of a
$41
per RTI common share acquisition price and the
$14.48
per share March 6, 2015 closing price of Arconic’s common stock. In addition to the transaction price, Arconic also paid
$25
(
$19
after-tax) in professional fees and costs related to this acquisition. This amount was recorded in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations.
RTI is a global supplier of titanium and specialty metal products and services for the commercial aerospace, defense, energy, and medical device end markets. The purpose of this acquisition was to expand Arconic’s range of titanium offerings and add advanced technologies and materials, primarily related to the aerospace end market. In 2014, RTI generated net sales of
$794
and had approximately
2,600
employees. The operating results and assets and liabilities of RTI were included within Arconic’s Engineered Products and Solutions segment since the date of acquisition. Third-party sales and Adjusted EBITDA (Arconic’s primary segment performance measure – see Note N) of RTI from the acquisition date through December 31, 2015 were
$309
and
$21
, respectively. During the third quarter of 2016, the final purchase price allocation was completed.
Arconic recognized goodwill of
$298
, which represents the earnings growth potential of RTI, Arconic’s ability to expand its titanium capabilities in the aerospace market, and expected synergies from combining the operations of the
two
companies. This goodwill was allocated to a new Arconic reporting unit associated with the Engineered Products and Solutions segment, ATEP, which consists solely of the acquired RTI business.
None
of this goodwill is deductible for income tax purposes. Arconic also recorded intangible assets of
$37
consisting mainly of customer relationships which are being amortized over a period of
20
years.
As part of this acquisition, Arconic assumed the obligation to repay
two
tranches of convertible debt; one tranche was due and settled in cash on
December 1, 2015
(principal amount of
$115
) and the other tranche is due on
October 15, 2019
(principal amount of
$403
), unless earlier converted or purchased by Arconic at the holder’s option under specific conditions. Upon conversion of the 2019 convertible notes, holders will receive, at Arconic’s election, cash, shares of common stock (approximately
14,294,000
shares using the December 31, 2017 conversion rate of
35.5119
shares per
$1,000
(not in millions) bond or per-share conversion price of
$28.1596
), or a combination of cash and shares. On the maturity date, each holder of outstanding notes will be entitled to receive
$1,000
(not in millions) in cash for each $1,000 (not in millions) bond, together with accrued and unpaid interest. The cash conversion feature requires the convertible notes to be bifurcated into a liability component and an equity component. The fair value of the liability component was determined by calculating the net present value of the cash flows of the convertible notes using the interest rate of a similar instrument without a conversion feature. The fair value of the equity component is the difference between the fair value of the entire instrument on the date of acquisition and the fair value of the liability and is included as Additional capital on the accompanying Consolidated Balance Sheet.
2015 Divestitures.
In 2015, Arconic completed the divestiture of an operation in Russia (see below) and had post-closing adjustments, as provided for in the respective purchase agreements, related to a divestiture completed in December 2014. The divestiture and post-closing adjustments combined resulted in net cash paid of
$11
and a net loss of
$137
, which was recorded in Restructuring and other charges (see Note D) on the accompanying Statement of Consolidated Operations.
In March 2015, Arconic completed the sale of a rolling mill located in Belaya Kalitva, Russia to a wholly-owned subsidiary of Stupino Titanium Company. While owned by Arconic, the operating results and assets and liabilities of the rolling mill were included in the Global Rolled Products segment. The rolling mill generated sales of approximately
$130
in 2014 and, at the time of divestiture, had approximately
1,870
employees.
2014 Acquisitions.
In November 2014, Arconic acquired Firth Rixson. The purchase price included an earn-out agreement that required Arconic to make earn-out payments up to an aggregate maximum amount of
$150
through December 31, 2020 upon certain conditions. This earn-out was contingent on the Firth Rixson forging business in Savannah, Georgia achieving certain identified financial targets through December 31, 2020. During the fourth quarter of 2016, management determined that payment of the maximum amount was not probable based on the forecasted financial performance of this location. Therefore, the fair value of this liability was reduced by
$56
with a corresponding credit to Other income, net on the accompanying Statement of Consolidated Operations. During the fourth quarter of 2017, management determined that payment of the
remaining amount of the contingent liability was not probable based on the forecasted financial performance of this location. Therefore, the fair value of this liability was reduced by
$81
to
zero
at December 31, 2017 with a corresponding credit to Other income, net on the accompanying Statement of Consolidated Operations.
G. Inventories
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
Finished goods
|
$
|
669
|
|
$
|
625
|
|
Work-in-process
|
1,349
|
|
1,144
|
|
Purchased raw materials
|
381
|
|
408
|
|
Operating supplies
|
81
|
|
76
|
|
|
$
|
2,480
|
|
$
|
2,253
|
|
At
December 31, 2017
and
2016
, the total amount of inventories valued on a LIFO basis was
$1,208
and
$947
, respectively. If valued on an average-cost basis, total inventories would have been
$481
and
$371
higher at
December 31, 2017
and
2016
, respectively. During
2017
and
2016
, reductions in LIFO inventory quantities caused partial liquidations of the lower cost LIFO inventory base. These liquidations resulted in the recognition of immaterial income amounts in
2017
,
2016
, and
2015
.
H. Properties, Plants, and Equipment, Net
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
Land and land rights
|
$
|
140
|
|
$
|
135
|
|
Structures:
|
|
|
Engineered Products and Solutions
|
784
|
|
733
|
|
Global Rolled Products
|
1,090
|
|
1,061
|
|
Transportation and Construction Solutions
|
268
|
|
254
|
|
Other
|
253
|
|
248
|
|
|
2,395
|
|
2,296
|
|
Machinery and equipment:
|
|
|
Engineered Products and Solutions
|
3,054
|
|
2,728
|
|
Global Rolled Products
|
4,641
|
|
4,570
|
|
Transportation and Construction Solutions
|
777
|
|
723
|
|
Other
|
358
|
|
337
|
|
|
8,830
|
|
8,358
|
|
|
11,365
|
|
10,789
|
|
Less: accumulated depreciation and amortization
|
6,392
|
|
6,073
|
|
|
4,973
|
|
4,716
|
|
Construction work-in-progress
|
621
|
|
783
|
|
|
$
|
5,594
|
|
$
|
5,499
|
|
I. Debt
Long-Term Debt.
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
6.50% Bonds, due 2018
|
$
|
—
|
|
$
|
250
|
|
6.75% Notes, due 2018
|
—
|
|
750
|
|
5.72% Notes, due 2019
|
500
|
|
750
|
|
1.63% Convertible Notes, due 2019*
|
403
|
|
403
|
|
6.150% Notes, due 2020
|
1,000
|
|
1,000
|
|
5.40% Notes, due 2021
|
1,250
|
|
1,250
|
|
5.87% Notes, due 2022
|
627
|
|
627
|
|
5.125% Notes, due 2024
|
1,250
|
|
1,250
|
|
5.90% Notes, due 2027
|
625
|
|
625
|
|
6.75% Bonds, due 2028
|
300
|
|
300
|
|
5.95% Notes due 2037
|
625
|
|
625
|
|
Iowa Finance Authority Loan, due 2042 (4.75%)
|
250
|
|
250
|
|
Other**
|
(23
|
)
|
(32
|
)
|
|
6,807
|
|
8,048
|
|
Less: amount due within one year
|
1
|
|
4
|
|
|
$
|
6,806
|
|
$
|
8,044
|
|
|
|
*
|
Amount was assumed in conjunction with the acquisition of RTI (see Note F).
|
|
|
**
|
Other includes various financing arrangements related to subsidiaries, unamortized debt discounts related to the outstanding notes and bonds listed in the table above, an equity option related to the convertible notes due in 2019 (see Note F), adjustments to the carrying value of long-term debt related to an interest swap contract accounted for as a fair value hedge that was unwound during 2017, and unamortized debt issuance costs.
|
The principal amount of long-term debt maturing in each of the next five years is
$1
in
2018
,
$903
in
2019
,
$1,000
in
2020
,
$1,250
in
2021
, and
$627
in
2022
.
Public Debt
—In April 2017, the Company announced
three
separate cash tender offers by the Investment Banks for the purchase of the Company’s 6.50% Bonds due 2018 (the “6.50% Bonds”), 6.75% Notes due 2018 (the “6.75% Notes”), and 5.72% Notes due 2019 (the “5.72% Notes”), up to a maximum purchase amount of
$1,000
aggregate principal amount of notes, subject to certain conditions.
The Investment Banks purchased notes totaling
$805
aggregate principal amount, including
$150
aggregate principal amount of 6.50% Bonds,
$405
aggregate principal amount of 6.75% Notes, and
$250
aggregate principal amount of $5.72% Notes.
During the second quarter of 2017, the Company agreed to acquire the notes from the Investment Banks for
$409
in cash plus its remaining investment in Alcoa Corporation common stock (
12,958,767
shares valued at
$35.91
per share) for total consideration of
$874
including accrued and unpaid interest. The Company recorded a charge of
$58
(
$27
in cash) primarily for the premium for the early redemption of the notes, a benefit of
$8
for the proceeds of a related interest rate swap agreement, and a charge of
$2
for legal fees associated with the transaction in Interest expense, and recorded a gain of
$167
in Other income, net in the accompanying Statement of Consolidated Operations for the Debt-for-Equity Exchange.
On June 19, 2017, the Company completed the early redemption of its remaining outstanding 6.50% Bonds, with aggregate principal amount of
$100
, and its remaining outstanding 6.75% Notes, with aggregate principal amount of
$345
, for
$479
in cash including accrued and unpaid interest. As a result of the early redemption of the 6.50% Bonds and 6.75% Notes, the Company recorded a charge of
$24
in Interest expense in the accompanying Statement of Consolidated Operations for the premium paid for the early redemption of these notes in excess of their carrying value.
In December 2016, Arconic elected to call for redemption the
$750
in outstanding principal of its
5.55%
Notes due February 2017 (the “2017 Notes”) under the provisions of the 2017 Notes. The total cash paid to the holders of the called 2017 Notes was
$770
, which includes
$17
in accrued and unpaid interest from the last interest payment date up to, but not including, the
settlement date, and a
$3
purchase premium. The purchase premium was recorded in Interest expense on the accompanying Statement of Consolidated Operations. This transaction was completed on December 30, 2016.
The Company has the option to redeem certain of its Notes and Bonds in whole or part, at any time at a redemption price equal to the greater of principal amount or the sum of the present values of the remaining scheduled payments, discounted using a defined treasury rate plus a spread, plus in either case accrued and unpaid interest to the redemption date.
Credit Facilities.
On July 25, 2014, Arconic entered into a
Five
-Year Revolving Credit Agreement (“the Credit Agreement”) with a syndicate of lenders and issuers named therein which provides for a senior unsecured revolving credit facility (the “Credit Facility”). The proceeds are to be used to provide working capital or for other general corporate purposes of Arconic. By an Extension Request and Amendment Letter dated as of June 5, 2015, the maturity date of the Credit Facility was extended to July 25, 2020. In September 2016, Arconic entered into an amendment to the Credit Agreement to permit the Separation Transaction and to amend certain terms of the Credit Agreement including the replacement of the existing financial covenant with a leverage ratio and reduction of total commitments available from
$4,000
to
$3,000
. The amendment became effective on the separation date of November 1, 2016. The previous financial covenant, based upon Consolidated Net Worth (as defined in the Credit Agreement) was replaced. Arconic is required to maintain a ratio of Indebtedness (as defined in the Credit Agreement), to Consolidated EBITDA (as defined in the Credit Agreement) of
4.50
to
1.00
for the period of the four fiscal quarters most recently ended, declining to
3.50
to
1.00
on December 31, 2019 and thereafter.
The Credit Agreement includes additional covenants, including, among others, (a) limitations on Arconic’s ability to incur liens securing indebtedness for borrowed money, (b) limitations on Arconic’s ability to consummate a merger, consolidation or sale of all or substantially all of its assets, and (c) limitations on Arconic’s ability to change the nature of its business. As of December 31, 2017, Arconic was in compliance with all such covenants.
The Credit Facility matures on
July 25, 2020
, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. Arconic may make one additional
one
-year extension request during the remaining term of the Credit Facility, subject to the lender consent requirements set forth in the Credit Agreement. Under the provisions of the Credit Agreement, Arconic will pay a fee up to
0.30%
(based on Arconic’s long-term debt ratings as of
December 31, 2017
) of the total commitment per annum to maintain the Credit Facility.
The Credit Facility is unsecured and amounts payable under it will rank
pari passu
with all other unsecured, unsubordinated indebtedness of Arconic. Borrowings under the Credit Facility may be denominated in U.S. dollars or euros. Loans will bear interest at a base rate or a rate equal to LIBOR, plus, in each case, an applicable margin based on the credit ratings of Arconic’s outstanding senior unsecured long-term debt. The applicable margin on base rate loans and LIBOR loans will be
0.70%
and
1.70%
per annum, respectively, based on Arconic’s long-term debt ratings as of
December 31, 2017
. Loans may be prepaid without premium or penalty, subject to customary breakage costs.
The obligation of Arconic to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an “Event of Default” as defined in the Credit Agreement. Such Events of Default include, among others, (a) Arconic’s failure to pay the principal of, or interest on, borrowings under the Credit Facility, (b) any representation or warranty of Arconic in the Credit Agreement proving to be materially false or misleading, (c) Arconic’s breach of any of its covenants contained in the Credit Agreement, and (d) the bankruptcy or insolvency of Arconic.
There were
no
amounts outstanding at
December 31, 2017
and
2016
and
no
amounts were borrowed during
2017
,
2016
or
2015
under the Credit Facility. In addition to the Credit Facility above, Arconic has a number of other credit facilities that provide a combined borrowing capacity of
$715
as of
December 31, 2017
, of which
$640
is due to expire in
2018
and
$75
is due to expire in
2019
. The purpose of any borrowings under these credit arrangements is to provide for working capital requirements and for other general corporate purposes. The covenants contained in all these arrangements are the same as the Credit Agreement (see above).
In
2017
,
2016
and
2015
, Arconic borrowed and repaid
$810
,
$1,950
, and
$1,890
, respectively, under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during
2017
,
2016
and
2015
were
2.6%
,
1.9%
, and
1.6%
, respectively, and
46
days,
49
days, and
69
days, respectively.
Short-Term Debt.
At
December 31, 2017
and
2016
, short-term debt was
$38
and
$40
, respectively. These amounts included
$33
and
$31
at
December 31, 2017
and
2016
, respectively, related to accounts payable settlement arrangements with certain vendors and third-party intermediaries. These arrangements provide that, at the vendor’s request, the third-party intermediary advances the amount of the scheduled payment to the vendor, less an appropriate discount, before the scheduled payment date and Arconic makes payment to the third-party intermediary on the date stipulated in accordance with the commercial terms negotiated with its vendors. Arconic records imputed interest related to these arrangements in Interest expense on the accompanying Statement of Consolidated Operations.
Commercial Paper.
Arconic had
no
outstanding commercial paper at
December 31, 2017
and
2016
. In
2017
and
2016
, the average outstanding commercial paper was
$67
and
$127
, respectively. Commercial paper matures at various times within
one year
and had an annual weighted average interest rate of
1.6%
,
1.1%
, and
0.6%
during
2017
,
2016
, and
2015
, respectively.
J. Other Noncurrent Liabilities and Deferred Credits
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
Environmental remediation (L)
|
$
|
253
|
|
$
|
260
|
|
Income taxes (Q)
|
162
|
|
154
|
|
Accrued compensation and retirement costs
|
218
|
|
216
|
|
Contingent payment related to an acquisition (F)
|
—
|
|
78
|
|
Other
|
126
|
|
162
|
|
|
$
|
759
|
|
$
|
870
|
|
K. Contingencies and Commitments
Contingencies
Environmental Matters.
Arconic participates in environmental assessments and cleanups at more than
100
locations. These include owned or operating facilities and adjoining properties, previously owned or operating 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 the nature and extent of contamination, changes in remedial requirements, and technological changes, among others.
Arconic’s remediation reserve balance was
$294
at
December 31, 2017
and
$308
at
December 31, 2016
(of which
$41
and
$48
, respectively, was classified as a current liability), and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. In 2017, the remediation reserve increased by
$5
due to a net charge associated with a number of sites and was recorded in Costs of goods sold on the accompanying Statement of Consolidated Operations. The change in the reserve also reflects an increase of
$8
due to a reclassification of amounts included in other reserves within Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet, and a decrease of
$1
due to the effects of foreign currency translation. Payments related to remediation expenses applied against the reserve were
$26
in
2017
and include expenditures currently mandated, as well as those not required by any regulatory authority or third party.
Included in annual operating expenses are the recurring costs of managing hazardous substances and environmental programs. These costs are estimated to be approximately
1%
or less of cost of goods sold.
The following discussion provides details regarding the current status of the most significant remediation reserve related to a current Arconic site.
Massena West, NY—
Arconic has an ongoing remediation project related to the Grasse River, which is adjacent to Arconic’s Massena plant site. Many years ago, it was determined that sediments and fish in the river contain varying levels of polychlorinated biphenyls (PCBs). The project, which was selected by the U.S. Environmental Protection Agency (EPA) in a Record of Decision issued in April 2013, is aimed at capping PCB contaminated sediments with concentration in excess of one part per million in the main channel of the river and dredging PCB contaminated sediments in the near-shore areas where total PCBs exceed one part per million. At
December 31, 2017
and
December 31, 2016
, the reserve balance associated with this matter was
$215
and
$228
, respectively. Arconic is in the planning and design phase of the project, which phase is now expected to be completed in 2018. Originally, the design was scheduled to be completed and approved by the EPA in 2017, but in the third quarter of 2017, the New York State Department of Environmental Conservation (DEC) sent a letter to EPA requesting revisions to the draft design. That caused EPA to delay their review and comment on the draft design. EPA has now responded to the DEC letter and while issues remain, Arconic is now able to recommence work on the final design. Following submittal of the final design and EPA approval, the actual remediation fieldwork is expected to commence and take approximately
four years
. The majority of the project funding is expected to be incurred between
2018
and
2022
.
Tax.
Pursuant to the Tax Matters Agreement (see Note C), dated as of October 31, 2016, entered into between the Company and Alcoa Corporation in connection with the Separation, the Company shares responsibility with Alcoa Corporation for, and Alcoa Corporation has agreed to partially indemnify the Company with respect to the following matter.
As previously reported, in September 2010, following a corporate income tax audit covering the 2003 through 2005 tax years, an assessment was received as a result of Spain’s tax authorities disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by the Company. An appeal of this assessment in Spain’s Central Tax Administrative Court by the Company was denied in October 2013. In December 2013, the Company filed an appeal of the assessment in Spain’s National Court.
On January 16, 2017, Spain’s National Court issued a decision in favor of the Company related to the assessment received in September 2010. The Spanish Tax Administration did not file an appeal within the applicable period. Based on this decision and recent confirming correspondence from the Spanish Tax Administration, the matter is now closed. The Company will not be responsible for any assessment related to the 2003 through 2005 tax years.
Additionally, following a corporate income tax audit of the same Spanish tax group for the 2006 through 2009 tax years, Spain’s tax authorities issued an assessment in July 2013 similarly disallowing certain interest deductions. In August 2013, the Company filed an appeal of this second assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. The Company filed an appeal of this second assessment in Spain’s National Court in March 2015. Spain’s National Court has not yet rendered a decision related to the assessment received in July 2013. The assessment for the 2006 through 2009 tax years is
$155
(
€130
), including interest.
The Company believes it has meritorious arguments to support its tax position and intends to vigorously litigate the assessments through Spain’s court system. However, in the event the Company is unsuccessful, a portion of the assessments may be offset with existing net operating losses available to the Spanish consolidated tax group, which would be shared between the Company and Alcoa Corporation as provided for in the Tax Matters Agreement. Additionally, while the tax years 2010 through 2013 are closed to audit, it is possible that the Company may receive similar assessments for tax years subsequent to 2013. At this time, the Company is unable to reasonably predict an ultimate outcome for this matter.
Reynobond PE.
As previously reported, on June 13, 2017, the Grenfell Tower in London, UK caught fire resulting in fatalities, injuries and damage. A French subsidiary of Arconic, Arconic Architectural Products SAS (AAP SAS), supplied a product, Reynobond PE, to its customer, a cladding system fabricator, which used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supplied its portion of the cladding system to the façade installer, who then completed and installed the system under the direction of the general contractor. Neither Arconic nor AAP SAS was involved in the design or installation of the system used at the Grenfell Tower, nor did it have a role in any other aspect of the building’s refurbishment or original design. Regulatory investigations into the overall Grenfell Tower matter are being conducted, including a criminal investigation by the London Metro Police, a Public Inquiry by the British government and a consumer protection inquiry by a French public authority. AAP SAS sought and received core participant status in the Public Inquiry. The Company will no longer sell the PE product for architectural use on buildings.
In August and September 2017, two purported class action complaints were filed against Arconic and certain officers, directors and/or other parties, alleging that, in light of the Grenfell Tower fire, certain Company filings with the Securities and Exchange Commission contained false and misleading disclosures and omissions in violation of the federal securities laws. Those cases remain pending.
While the Company believes that these cases are without merit and intends to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters. Given the preliminary nature of these matters and the uncertainty of litigation, the Company cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome. The Board of Directors has also received letters, purportedly sent on behalf of shareholders, reciting allegations similar to those made in the federal court lawsuits and demanding that the Board authorize the Company to initiate litigation against members of management, the Board and others. The Board of Directors has appointed a Special Litigation Committee to review these shareholder demand letters and is considering the appropriate course of action. In addition, lawsuits are pending in state court in New York and federal court in Pennsylvania, initiated, respectively, by another purported shareholder and by the Company, concerning the shareholder’s claimed right, which the Company contests, to inspect the Company’s books and records related to the Grenfell Tower fire and Reynobond PE.
Other.
In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Arconic, including those pertaining to environmental, product liability, safety and health, employment, and tax matters. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot
currently be determined because of the considerable uncertainties that exist. Therefore, it is possible that the Company’s liquidity or results of operations in a 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 results of operations, financial position or cash flows of the Company.
Commitments
Purchase Obligations.
Arconic has entered into purchase commitments for raw materials, energy and other goods and services, which total
$861
in
2018
,
$176
in
2019
,
$74
in
2020
,
$13
in
2021
,
$6
in
2022
, and
$5
thereafter.
Operating Leases.
Certain land and buildings, plant equipment, vehicles, and computer equipment are under operating lease agreements. Total expense for all leases was
$113
in
2017
,
$110
in
2016
, and
$112
in
2015
. Under long-term operating leases, minimum annual rentals are
$108
in
2018
,
$88
in
2019
,
$62
in
2020
,
$46
in
2021
,
$38
in
2022
, and
$100
thereafter.
Guarantees.
At
December 31, 2017
, Arconic has outstanding bank guarantees related to tax matters, outstanding debt, workers’ compensation, environmental obligations, energy contracts, and customs duties, among others. The total amount committed under these guarantees, which expire at various dates between
2018
and
2026
was
$29
at December 31, 2017.
Pursuant to the Separation and Distribution Agreement, Arconic was required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of
$8
and
$35
at December 31, 2017 and 2016, respectively, and were included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. Arconic was required to provide payment guarantees for Alcoa Corporation issued on behalf of a third party, and amounts outstanding under these payment guarantees were
$197
and
$354
at December 31, 2017 and 2016, respectively. These guarantees expire at various times between 2018 and 2024, and relate to project financing for Alcoa Corporation’s aluminum complex in Saudi Arabia. Furthermore, Arconic was required to provide guarantees related to two long-term supply agreements for energy for Alcoa Corporation facilities in the event of an Alcoa Corporation payment default. In October 2017, Alcoa Corporation announced that it had terminated one of the two agreements, the electricity contract with Luminant Generation Company LLC that was tied to its Rockdale Operations, effective as of October 1, 2017. As a result of the termination of the Rockdale electricity contract, Arconic recorded income of
$25
in the fourth quarter of 2017 associated with reversing the fair value of the electricity contract guarantee. For the remaining long-term supply agreement, Arconic is required to provide a guarantee up to an estimated present value amount of approximately
$1,297
.
Arconic was also required to provide guarantees of
$50
related to
two
Alcoa Corporation energy supply contracts. These guarantees expired in March 2017. Additionally, Arconic was required to provide guarantees of
$53
related to certain Alcoa Corporation environmental liabilities. Notification of a change in guarantor to Alcoa Corporation was made to the appropriate environmental agencies and as such, Arconic no longer provides these guarantees.
In December 2016, Arconic entered into a
one
-year claims purchase agreement with a bank covering claims up to
$245
related to the Saudi Arabian joint venture and
two
long-term energy supply agreements. The majority of the premium was paid by Alcoa Corporation. The agreement matured in December 2017 and was not renewed in 2018 due to the decline in exposure to guarantee claims including a substantial reduction in the guarantees related to the Saudi Arabian joint venture and also the elimination of the guarantee related to the Rockdale energy contract. The decision to enter into a claims purchase agreement will be made on an annual basis going forward.
Letters of Credit.
Arconic has outstanding letters of credit primarily related to workers’ compensation, energy contracts and leasing obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2018, was
$120
at December 31, 2017.
Pursuant to the Separation and Distribution Agreement, Arconic was required to retain letters of credit of
$62
that had previously been provided related to both Arconic and Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016. Alcoa Corporation workers’ compensation claims and letter of credit fees paid by Arconic are being proportionally billed to and are being fully reimbursed by Alcoa Corporation. Additionally, Arconic was required to provide letters of credit for certain Alcoa Corporation equipment leases and energy contracts and, as a result, Arconic had
$103
of outstanding letters of credit relating to these liabilities. The entire
$103
of outstanding letters of credit were canceled in 2017 when Alcoa Corporation issued its own letters of credit to cover these obligations.
Surety Bonds.
Arconic has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, and customs duties. The total amount committed under these bonds, which automatically renew or expire at various dates, mostly in 2018, was
$54
at
December 31, 2017
.
Pursuant to the Separation and Distribution Agreement, Arconic was required to provide surety bonds related to Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016 and, as a result, Arconic has
$25
in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconic are being proportionately billed to and are being fully reimbursed by Alcoa Corporation.
L. Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Equity income
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
—
|
|
Interest income
|
(19
|
)
|
(16
|
)
|
(16
|
)
|
Foreign currency (gains) losses, net
|
(5
|
)
|
(4
|
)
|
51
|
|
Net (gain) loss from asset sales
|
(513
|
)
|
11
|
|
(42
|
)
|
Net loss (gain) on mark-to-market derivative contracts
|
—
|
|
1
|
|
(3
|
)
|
Other, net
|
(103
|
)
|
(79
|
)
|
(18
|
)
|
|
$
|
(640
|
)
|
$
|
(94
|
)
|
$
|
(28
|
)
|
In 2017, Net gain from assets sales included a gain on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock of
$351
(see Note C) and a gain of
$167
on the Debt-for-Equity Exchange (see Note I). In 2017, Other, net included an adjustment of
$81
to the contingent earn-out liability related to the 2014 acquisition of Firth Rixson (see Note F) and an adjustment of
$25
associated with a separation-related guarantee liability (see Note K). In 2016, Other, net included an adjustment of
$56
to the contingent earn-out liability and a post-closing adjustment of
$20
, both related to the acquisition of Firth Rixson. In 2015, Net gain from asset sales included a gain of
$19
related to the sale of land around Arconic’s former Sherwin, TX site and a gain of
$19
related to the sale of the remaining equity investment in a China rolling mill.
M. Cash Flow Information
Cash paid for interest and income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Interest, net of amount capitalized
|
$
|
508
|
|
$
|
524
|
|
$
|
487
|
|
Income taxes, net of amount refunded
|
$
|
118
|
|
$
|
324
|
|
$
|
345
|
|
The details related to cash paid for acquisitions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Assets acquired
|
$
|
—
|
|
$
|
—
|
|
$
|
2,003
|
|
Liabilities assumed
|
—
|
|
—
|
|
(868
|
)
|
Equity issued
|
—
|
|
—
|
|
(870
|
)
|
Working capital adjustment
|
—
|
|
(10
|
)
|
—
|
|
Increase in Arconic’s shareholders’ equity
|
—
|
|
—
|
|
(60
|
)
|
Cash paid
|
—
|
|
(10
|
)
|
205
|
|
Less: cash acquired
|
—
|
|
—
|
|
302
|
|
Net cash paid
|
$
|
—
|
|
$
|
(10
|
)
|
$
|
(97
|
)
|
During 2016, Arconic sold various securities held by its captive insurance company for
$130
, and an equity interest in a natural gas pipeline of
$145
(Alcoa Corporation), both of which were included in Sales of investments on the accompanying Statement of Consolidated Cash Flows.
In 2016, Arconic received
$457
in proceeds from the redemption of certain company-owned life insurance policies, sold its Intalco smelter wharf property (Alcoa Corporation) for
$120
, and sold the Remmele Medical business (see Note F) for
$102
. These amounts were included in Proceeds from the sale of assets and businesses on the accompanying Statement of Consolidated Cash Flows.
Noncash Financing and Investing Activities.
On October 2, 2017, all outstanding
24,975,978
depositary shares (each depositary share representing a 1/10th interest in a share of the mandatory convertible preferred stock) were converted at a rate
of
1.56996
into
39,211,286
common shares;
24,022
depositary shares were previously tendered for early conversion into
31,420
shares of Arconic common stock. No gain or loss was recognized associated with this equity transaction (see Note O).
In the second quarter of 2017, the Company completed the Debt-for-Equity Exchange with the Investment Banks of the remaining portion of Arconic’s retained interest in Alcoa Corporation common stock for a portion of the Company’s outstanding notes held by the Investment Banks for
$465
including accrued and unpaid interest (see Note I).
On October 5, 2016, Arconic completed a 1-for-
3
Reverse Stock Split (see Note O). The Reverse Stock Split reduced the number of shares of common stock outstanding from approximately
1.3 billion
shares to approximately
0.4 billion
shares. The par value of the common stock remained at
$1.00
per share. Accordingly, Common stock and Additional capital in the Company’s Consolidated Balance Sheet at December 31, 2016 reflect a decrease and increase of
$877
, respectively.
In August 2016, Arconic retired its outstanding treasury stock consisting of approximately
76 million
shares (see Note O). As a result, Common stock and Additional capital were decreased by
$76
and
$2,563
, respectively, to reflect the retirement of the treasury shares.
In July 2015, Arconic purchased all outstanding shares of RTI common stock in a stock-for-stock transaction valued at
$870
(see Note F). As a result, Arconic issued
29 million
shares (
87 million
shares—pre-Reverse Stock Split—see Note O) of its common stock to consummate this transaction.
N. Segment and Geographic Area Information
Arconic is a global leader in lightweight metals engineering and manufacturing. Arconic’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. Arconic’s segments are organized by product on a worldwide basis. In the first quarter of 2017, the Company changed its primary measure of segment performance from After-tax operating income (ATOI) to Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”). Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance in 2017 was Adjusted EBITDA. Arconic’s definition of Adjusted EBITDA is net margin plus an add-back for depreciation and amortization. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation and amortization. Prior period information has been recast to conform to current year presentation. The Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies.
Items required to reconcile Combined segment adjusted EBITDA to Net loss attributable to Arconic include: the Provision for depreciation and amortization; Impairment of goodwill; Restructuring and other charges; the impact of LIFO inventory accounting; metal price lag (the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by the respective segment — generally, when the price of metal increases, metal price lag is favorable, and when the price of metal decreases, metal price lag is unfavorable); corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities and corporate research and development expenses); other items, including intersegment profit eliminations; Other income, net; Interest expense; Income tax expense; and the results of discontinued operations.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note A). Transactions among segments are established based on negotiation among the parties. Differences between segment totals and Arconic’s consolidated totals for line items not reconciled are in Corporate.
Arconic’s operations consist of
three
worldwide reportable segments as follows:
Engineered Products and Solutions.
This segment produces products that are used mostly in the aerospace (commercial and defense), industrial, commercial transportation, and power generation end markets. Such products include fastening systems (titanium, steel, and nickel superalloys) and seamless rolled rings (mostly nickel superalloys); investment castings (nickel superalloys, titanium, and aluminum), including airfoils and forged jet engine components (e.g., jet engine disks); and extruded, machined and formed aircraft parts (titanium and aluminum), all of which are sold directly to customers and through distributors. More than
75%
of the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forged, extruded, and machined metal products (titanium, aluminum and steel) for the oil and gas, automotive, and land and sea defense end markets. Seasonal decreases in sales are generally experienced in the third quarter of the year due to the European summer slowdown across all end markets.
Global Rolled Products.
This segment produces aluminum sheet and plate for a variety of end markets. This segment includes sheet and plate sold directly to customers and through distributors in the aerospace, automotive, commercial transportation, packaging, building and construction, and industrial products (mainly used in the production of machinery and equipment and consumer durables) end markets. A small portion of this segment also produces aseptic foil for the packaging end market. While the customer base for flat-rolled products is large, a significant amount of sales of sheet and plate is to a relatively small number of customers.
Transportation and Construction Solutions.
This segment produces products that are used mostly in the commercial transportation and nonresidential building and construction end markets. Such products include integrated aluminum structural systems, architectural extrusions, and forged aluminum commercial vehicle wheels, which are sold directly to customers and through distributors. A small part of this segment also produces aluminum products for the industrial products end market.
The operating results and assets of Arconic’s reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Products and Solutions
|
Global Rolled Products
|
Transportation and Construction Solutions
|
Total
|
2017
|
|
|
|
|
Sales:
|
|
|
|
|
Third-party sales
|
$
|
5,935
|
|
$
|
4,992
|
|
$
|
1,985
|
|
$
|
12,912
|
|
Intersegment sales
|
—
|
|
148
|
|
—
|
|
148
|
|
Total sales
|
$
|
5,935
|
|
$
|
5,140
|
|
$
|
1,985
|
|
$
|
13,060
|
|
Profit and loss:
|
|
|
|
|
Depreciation and amortization
|
268
|
|
205
|
|
50
|
|
523
|
|
Adjusted EBITDA
|
1,224
|
|
599
|
|
321
|
|
2,144
|
|
2016
|
|
|
|
|
Sales:
|
|
|
|
|
Third-party sales
|
$
|
5,728
|
|
$
|
4,864
|
|
$
|
1,802
|
|
$
|
12,394
|
|
Intersegment sales
|
—
|
|
118
|
|
—
|
|
118
|
|
Total sales
|
$
|
5,728
|
|
$
|
4,982
|
|
$
|
1,802
|
|
$
|
12,512
|
|
Profit and loss:
|
|
|
|
|
Depreciation and amortization
|
$
|
255
|
|
$
|
201
|
|
$
|
48
|
|
$
|
504
|
|
Adjusted EBITDA
|
1,195
|
|
577
|
|
291
|
|
2,063
|
|
2015
|
|
|
|
|
Sales:
|
|
|
|
|
Third-party sales
|
$
|
5,342
|
|
$
|
5,253
|
|
$
|
1,882
|
|
$
|
12,477
|
|
Intersegment sales
|
—
|
|
125
|
|
—
|
|
125
|
|
Total sales
|
$
|
5,342
|
|
$
|
5,378
|
|
$
|
1,882
|
|
$
|
12,602
|
|
Profit and loss:
|
|
|
|
|
Depreciation and amortization
|
$
|
233
|
|
$
|
203
|
|
$
|
43
|
|
$
|
479
|
|
Adjusted EBITDA
|
1,111
|
|
512
|
|
271
|
|
1,894
|
|
2017
|
|
|
|
|
Assets:
|
|
|
|
|
Capital expenditures
|
$
|
308
|
|
$
|
178
|
|
$
|
57
|
|
$
|
543
|
|
Goodwill
|
3,949
|
|
193
|
|
60
|
|
4,202
|
|
Total assets
|
10,252
|
|
4,179
|
|
1,068
|
|
15,499
|
|
2016
|
|
|
|
|
Assets:
|
|
|
|
|
Capital expenditures
|
$
|
333
|
|
$
|
293
|
|
$
|
63
|
|
$
|
689
|
|
Goodwill
|
4,579
|
|
181
|
|
57
|
|
4,817
|
|
Total assets
|
10,542
|
|
3,891
|
|
982
|
|
15,415
|
|
The following tables reconcile certain segment information to consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Sales:
|
|
|
|
Total segment sales
|
$
|
13,060
|
|
$
|
12,512
|
|
$
|
12,602
|
|
Elimination of intersegment sales
|
(148
|
)
|
(118
|
)
|
(125
|
)
|
Corporate
|
48
|
|
—
|
|
(64
|
)
|
Consolidated sales
|
$
|
12,960
|
|
$
|
12,394
|
|
$
|
12,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Combined segment adjusted EBITDA
|
$
|
2,144
|
|
$
|
2,063
|
|
$
|
1,894
|
|
Unallocated amounts:
|
|
|
|
Depreciation and amortization
|
(551
|
)
|
(535
|
)
|
(508
|
)
|
Impairment of goodwill
|
(719
|
)
|
—
|
|
(25
|
)
|
Restructuring and other charges
|
(165
|
)
|
(155
|
)
|
(214
|
)
|
Impact of LIFO
|
(110
|
)
|
(18
|
)
|
101
|
|
Metal price lag
|
72
|
|
27
|
|
(175
|
)
|
Corporate expense
|
(274
|
)
|
(454
|
)
|
(371
|
)
|
Other
|
(71
|
)
|
(109
|
)
|
(74
|
)
|
Operating income
|
326
|
|
819
|
|
628
|
|
Interest expense
|
(496
|
)
|
(499
|
)
|
(473
|
)
|
Other income, net
|
640
|
|
94
|
|
28
|
|
Income from continuing operations before income taxes
|
470
|
|
414
|
|
183
|
|
Provision for income taxes
|
(544
|
)
|
(1,476
|
)
|
(339
|
)
|
Discontinued operations
|
—
|
|
121
|
|
(165
|
)
|
Net income attributable to noncontrolling interest
|
—
|
|
—
|
|
(1
|
)
|
Net loss attributable to Arconic
|
$
|
(74
|
)
|
$
|
(941
|
)
|
$
|
(322
|
)
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
Assets:
|
|
|
Total segment assets
|
$
|
15,499
|
|
$
|
15,415
|
|
Unallocated amounts:
|
|
|
Cash and cash equivalents
|
2,150
|
|
1,863
|
|
Deferred income taxes
|
743
|
|
1,234
|
|
Corporate goodwill
|
333
|
|
331
|
|
Corporate fixed assets, net
|
310
|
|
308
|
|
LIFO reserve
|
(481
|
)
|
(371
|
)
|
Fair value of derivative contracts
|
91
|
|
24
|
|
Investment in common stock of Alcoa Corporation
|
—
|
|
1,020
|
|
Other
|
73
|
|
214
|
|
Consolidated assets
|
$
|
18,718
|
|
$
|
20,038
|
|
Sales by major product grouping were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Sales:
|
|
|
|
Flat-rolled aluminum
|
$
|
4,992
|
|
$
|
4,864
|
|
$
|
5,253
|
|
Fastening systems and rings
|
2,102
|
|
2,060
|
|
2,168
|
|
Investment castings
|
1,983
|
|
1,870
|
|
1,812
|
|
Other extruded and forged products
|
1,565
|
|
1,495
|
|
1,332
|
|
Architectural aluminum systems
|
1,065
|
|
1,010
|
|
951
|
|
Aluminum wheels
|
805
|
|
689
|
|
790
|
|
Other
|
448
|
|
406
|
|
107
|
|
|
$
|
12,960
|
|
$
|
12,394
|
|
$
|
12,413
|
|
Geographic information for sales was as follows (based upon the country where the point of sale occurred):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Sales:
|
|
|
|
United States
|
$
|
8,167
|
|
$
|
7,823
|
|
$
|
8,044
|
|
France
|
965
|
|
930
|
|
802
|
|
Hungary
|
739
|
|
619
|
|
622
|
|
United Kingdom
|
721
|
|
711
|
|
698
|
|
China
|
615
|
|
582
|
|
565
|
|
Russia
|
500
|
|
433
|
|
455
|
|
Germany
|
309
|
|
284
|
|
264
|
|
Brazil
|
285
|
|
250
|
|
297
|
|
Canada
|
261
|
|
262
|
|
180
|
|
Japan
|
141
|
|
145
|
|
138
|
|
Italy
|
37
|
|
127
|
|
139
|
|
Other
|
220
|
|
228
|
|
209
|
|
|
$
|
12,960
|
|
$
|
12,394
|
|
$
|
12,413
|
|
Geographic information for long-lived assets was as follows (based upon the physical location of the assets):
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
Long-lived assets:
|
|
|
United States
|
$
|
4,005
|
|
$
|
3,966
|
|
China
|
347
|
|
336
|
|
Russia
|
276
|
|
295
|
|
United Kingdom
|
259
|
|
232
|
|
Hungary
|
227
|
|
194
|
|
France
|
159
|
|
118
|
|
Germany
|
88
|
|
64
|
|
Canada
|
63
|
|
58
|
|
Brazil
|
62
|
|
97
|
|
Other
|
108
|
|
139
|
|
|
$
|
5,594
|
|
$
|
5,499
|
|
O. Preferred and Common Stock
Preferred Stock.
Arconic has
two
classes of preferred stock: Class A Preferred Stock and Class B Serial Preferred Stock. Class A Preferred Stock has
660,000
shares authorized at a par value of
$100
per share with an annual
3.75
cumulative dividend preference per share. There were
546,024
of such shares outstanding at
December 31, 2017
and
2016
. Class B Serial Preferred Stock has
10,000,000
shares authorized at a par value of
$1
per share. There were
no
shares outstanding at December 31, 2017 and
2,500,000
of such shares outstanding at December 31, 2016 (see below).
In September 2014, Arconic completed a public offering under its shelf registration statement for
$1,250
of
25 million
depositary shares, each of which represents a 1/10th interest in a share of Arconic’s
5.375%
Class B Mandatory Convertible Preferred Stock, Series 1, par value
$1
per share, liquidation preference
$500
per share (the “Mandatory Convertible Preferred Stock”). The
25 million
depositary shares are equivalent to
2.5 million
shares of Mandatory Convertible Preferred Stock. Each depositary share entitled the holder, through the depositary, to a proportional fractional interest in the rights and preferences of a share of Mandatory Convertible Preferred Stock, including conversion, dividend, liquidation, and voting rights, subject to terms of the deposit agreement. Arconic received
$1,213
in net proceeds from the public offering reflecting an underwriting discount. The net proceeds were used, together with the net proceeds of issued debt, to finance the cash portion of the acquisition of Firth Rixson. The underwriting discount was recorded as a decrease to Additional capital. The Mandatory Convertible Preferred Stock constitutes a series of Arconic’s Class B Serial Preferred Stock, which ranks senior to Arconic’s common stock and junior to Arconic’s Class A Preferred Stock and existing and future indebtedness. Holders of the Mandatory Convertible Preferred Stock generally have no voting rights.
Dividends on the Mandatory Convertible Preferred Stock were cumulative in nature and paid at the rate of
$26.8750
per annum per share in 2016 and 2015, which commenced January 1, 2015 (paid on December 30, 2014).
On October 2, 2017, all outstanding
24,975,978
depositary shares were converted at a rate of
1.56996
into
39,211,286
common shares;
24,022
depositary shares were previously tendered for early conversion into
31,420
shares of Arconic common stock. No gain or loss was recognized associated with this equity transaction. Dividends on the Mandatory Convertible Preferred Stock were paid at the rate of
$20.1563
per share in 2017.
Common Stock.
Pursuant to the authorization provided at a special meeting of Arconic common shareholders held on October 5, 2016, shareholders approved a 1-for-3 reverse stock split of Arconic’s outstanding and authorized shares of common stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, every three shares of issued and outstanding common stock were combined into one issued and outstanding share of common stock. The Reverse Stock Split reduced the number of shares of common stock outstanding from approximately
1.3 billion
shares to approximately
0.4 billion
shares. The par value of the common stock remained at
$1
per share. Accordingly, Common stock and Additional capital in the accompanying Consolidated Balance Sheet at December 31, 2016 reflected a decrease and increase of
$877
, respectively. The number of authorized shares of common stock was also decreased from
1.8 billion
shares to
0.6 billion
shares. The Company’s common stock began trading on a reverse stock split-adjusted basis on the NYSE on October 6, 2016.
In August 2016, Arconic retired its outstanding treasury stock consisting of approximately
25 million
shares (
76 million
shares pre-Reverse Stock Split). As a result, Common stock and Additional capital in the accompanying 2016 Consolidated Balance Sheet were decreased by
$76
and
$2,563
, respectively, to reflect the retirement of the treasury shares. As of
December 31, 2017
and 2016, there was
no
outstanding treasury stock.
At
December 31, 2017
,
481,416,537
shares were issued and outstanding. Dividends paid in
2017
were
$0.24
per annum or
$0.06
per quarter and
$0.36
per annum or
$0.09
per quarter in
2016
and
2015
. The current dividend yield as authorized by Arconic’s Board of Directors is
$0.24
per annum or
$0.06
per quarter.
In July 2015, Arconic issued
29 million
shares (
87 million
shares—pre-Reverse Stock Split) of common stock as consideration paid to acquire RTI (see Note F). Additionally, Arconic assumed the obligation to repay two tranches of convertible debt; one tranche was due and settled in cash on December 1, 2015 (principal amount of
$115
) and the other tranche is due on October 15, 2019 (principal amount of
$403
), unless earlier converted or purchased by Arconic at the holder’s option under specific conditions. Upon conversion of the 2019 convertible notes, holders will receive, at Arconic’s election, cash, shares of common stock (approximately
14,294,000
shares using the December 31, 2017 conversion rate of
35.5119
shares per
$1,000
(not in millions) bond or per-share conversion price of
$28.1596
), or a combination of cash and shares. On the maturity date, each holder of outstanding notes will be entitled to receive on such date
$1,000
(not in millions) in cash for each
$1,000
(not in millions) bond, together with accrued and unpaid interest.
As of
December 31, 2017
,
47 million
shares of common stock were reserved for issuance under Arconic’s stock-based compensation plans. As of December 31, 2017,
43 million
shares remain available for issuance. Arconic issues new shares to satisfy the exercise of stock options and the conversion of stock awards.
Share Activity
(number of shares)
|
|
|
|
|
|
|
Common stock
|
|
Treasury
|
Outstanding
|
Balance at end of 2014
|
87,150,169
|
|
1,216,663,661
|
|
Issued for stock-based compensation plans
|
(6,099,066
|
)
|
6,099,066
|
|
Acquisition of RTI
|
—
|
|
87,397,414
|
|
Balance at end of 2015
|
81,051,103
|
|
1,310,160,141
|
|
Issued for stock-based compensation plans
|
(5,219,660
|
)
|
5,302,128
|
|
Treasury stock retirement
|
(75,831,443
|
)
|
—
|
|
Reverse Stock Split
|
—
|
|
(876,942,489
|
)
|
Balance at end of 2016
|
—
|
|
438,519,780
|
|
Conversion of convertible notes
|
—
|
|
39,242,706
|
|
Issued for stock-based compensation plans
|
—
|
|
3,654,051
|
|
Balance at end of 2017
|
—
|
|
481,416,537
|
|
Stock-based Compensation
Arconic has a stock-based compensation plan under which stock options and restricted stock unit awards are granted in January each year to eligible employees. Most plan participants can choose whether to receive their award in the form of stock options, restricted stock unit awards, or a combination of both. This choice is made before the grant is issued and is irrevocable. Stock options are granted at the closing market price of Arconic’s common stock on the date of grant and vest over a
three
-year service period (1/3 each year) with a
ten
-year contractual term. Restricted stock unit awards typically vest over a
three
-year service period from the date of grant. Certain of these awards also include performance and market conditions. For the majority of performance stock awards issued in
2017
,
2016
, and
2015
, the final number of shares earned will be based on Arconic’s achievement of sales and profitability targets over the respective
three
-year performance periods. For awards issued in 2017, the award will be earned at the end of the three-year performance period. For awards issued in 2016 and 2015, one-third of the award will be earned each year based on the performance against the pre-established targets for that year. The performance stock awards earned over the three-year period vest at the end of the third year. Additionally, the 2017 awards will be scaled by a total shareholder return (“TSR”) multiplier, which depends upon relative
three
-year performance against the TSRs of a group of peer companies.
In
2017
,
2016
and
2015
, Arconic recognized stock-based compensation expense of
$54
(
$36
after-tax),
$76
(
$51
after-tax), and
$77
(
$51
after-tax), respectively. The expense related to restricted stock unit awards in
2017
,
2016
and
2015
was approximately
85%
,
80%
and
80%
, respectively.
No
stock-based compensation expense was capitalized in any of those years. 2017 stock-based compensation expense was reduced by
$13
for certain executive pre-vest cancellations which were recorded in Restructuring and other charges within the Statement of Consolidated Operations. At
December 31, 2017
, there was
$43
(pre-tax) of unrecognized compensation expense related to non-vested stock option grants and non-vested restricted stock unit award grants. This expense is expected to be recognized over a weighted average period of
1.6
years. As part of Arconic’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. As a result, a larger portion of expense will be recognized in the first half of each year for these retirement-eligible employees. Of the total pre-tax compensation expense recognized in
2017
,
2016
and
2015
,
$15
,
$19
, and
$15
, respectively, pertains to the acceleration of expense related to retirement-eligible employees.
Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For restricted stock unit awards, the fair value was equivalent to the closing market price of Arconic’s common stock on the date of grant. The grant date fair value of the 2017 performance awards containing a market condition was
$21.99
and was valued using a Monte Carlo model. A Monte Carlo simulation uses assumptions of stock price behavior to estimate the probability of satisfying market conditions and the resulting fair value of the award. The risk-free interest rate (
1.5%
) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. Because of limited historical information due to the Separation Transaction, volatility (
38.0%
) was estimated using implied volatility and the representative price return approach, which uses price returns of comparable companies to develop a correlation assumption. For stock options, the fair value was estimated on the date of grant using a lattice-pricing model, which generated a result of
$6.26
,
$4.78
, and
$10.07
per option in
2017
,
2016
, and
2015
, respectively. The lattice-pricing model uses a number of assumptions to estimate the fair value of a stock option, including a risk-free interest rate, dividend yield, volatility, exercise behavior, and contractual life. The following
paragraph describes in detail the assumptions used to estimate the fair value of stock options granted in
2017
(the assumptions used to estimate the fair value of stock options granted in
2016
and
2015
were not materially different, except as noted below).
The risk-free interest rate (
2.4%
) was based on a yield curve of interest rates at the time of the grant based on the contractual life of the option. The dividend yield (
1.2%
) was based on a one-year average. Volatility (
38.1%
for
2017
,
44.5%
for
2016
, and
36.5%
in
2015
) was based on historical volatilities (except 2017 where we used comparable companies) and implied volatilities over the term of the option. Arconic utilized historical option forfeiture data to estimate annual pre- and post-vesting forfeitures (
6%
). Exercise behavior (
59%
) was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the life of an option (
5.9
years) was an output of the lattice-pricing model. The activity for stock options and stock awards during
2017
was as follows (options and awards in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
Stock awards
|
|
Number of
options
|
Weighted
average
exercise price
|
|
Number of
awards
|
Weighted
average FMV
per award
|
Outstanding, January 1, 2017
|
13
|
|
$
|
24.14
|
|
|
8
|
|
$
|
22.26
|
|
Granted
|
2
|
|
21.13
|
|
|
3
|
|
21.86
|
|
Exercised
|
(2
|
)
|
20.65
|
|
|
—
|
|
—
|
|
Converted
|
—
|
|
—
|
|
|
(2
|
)
|
24.95
|
|
Expired or forfeited
|
(2
|
)
|
25.99
|
|
|
(2
|
)
|
21.26
|
|
Performance share adjustment
|
—
|
|
—
|
|
|
—
|
|
21.48
|
|
Outstanding, December 31, 2017
|
11
|
|
23.94
|
|
|
7
|
|
21.49
|
|
As of
December 31, 2017
, the number of stock options outstanding had a weighted average remaining contractual life of
5.3
years and a total intrinsic value of
$53
. Additionally,
7.4 million
of the stock options outstanding were fully vested and exercisable and had a weighted average remaining contractual life of
4.2
years, a weighted average exercise price of
$25.90
, and a total intrinsic value of
$26
as of
December 31, 2017
. In
2017
,
2016
and
2015
, the cash received from stock option exercises was
$50
,
$4
, and
$25
and the total tax benefit realized from these exercises was
$4
,
$0
, and
$6
, respectively. The total intrinsic value of stock options exercised during
2017
,
2016
and
2015
was
$13
,
$1
, and
$19
, respectively.
P. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings (loss), after the deduction of preferred stock dividends declared, 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 number of shares and per share amounts for all periods presented below have been updated to reflect the Reverse Stock Split (see Note O). The information used to compute basic and diluted EPS attributable to Arconic common shareholders was as follows (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Net loss from continuing operations attributable to Arconic
|
$
|
(74
|
)
|
$
|
(1,062
|
)
|
$
|
(156
|
)
|
Net income from continuing operations attributable to noncontrolling interests
|
—
|
|
—
|
|
(1
|
)
|
Less: preferred stock dividends declared
|
(53
|
)
|
(69
|
)
|
(69
|
)
|
Loss from continuing operations available to Arconic common shareholders
|
(127
|
)
|
(1,131
|
)
|
(226
|
)
|
Income (loss) from discontinued operations after income taxes and noncontrolling interests
(1)
|
—
|
|
121
|
|
(165
|
)
|
Net loss available to Arconic common shareholders—basic
|
(127
|
)
|
(1,010
|
)
|
(391
|
)
|
Add: interest expense related to convertible notes
|
—
|
|
—
|
|
—
|
|
Add: dividends related to mandatory convertible preferred stock
|
—
|
|
—
|
|
—
|
|
Net loss available to Arconic common shareholders—diluted
|
$
|
(127
|
)
|
$
|
(1,010
|
)
|
$
|
(391
|
)
|
Average shares outstanding—basic
|
451
|
|
438
|
|
420
|
|
Effect of dilutive securities:
|
|
|
|
Stock options
|
—
|
|
—
|
|
—
|
|
Stock and performance awards
|
—
|
|
—
|
|
—
|
|
Mandatory convertible preferred stock
|
—
|
|
—
|
|
—
|
|
Convertible notes
|
—
|
|
—
|
|
—
|
|
Average shares outstanding—diluted
|
451
|
|
438
|
|
420
|
|
|
|
(1)
|
Calculated from the Statement of Consolidated Operations as Income (loss) from discontinued operations after income taxes less Net income from discontinued operations attributable to noncontrolling interests.
|
In 2017, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive as Arconic generated a net loss. As a result,
39 million
share equivalents related to the mandatory convertible preferred stock,
14 million
(weighted average) share equivalents related to convertible notes (acquired from RTI - see Note O),
11 million
stock options, and
7 million
stock awards were not included in the computation of diluted EPS. Had Arconic generated sufficient net income in 2017,
30 million
,
14 million
,
5 million
, and
1 million
potential shares of common stock related to the mandatory convertible preferred stock, convertible notes, stock awards, and stock options, respectively, would have been included in diluted average shares outstanding. The mandatory convertible preferred stock converted on October 2, 2017 (see Note O).
In 2016, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive as Arconic generated a net loss. As a result,
39 million
share equivalents related to the mandatory convertible preferred stock,
14 million
share equivalents related to convertible notes,
13 million
stock options, and
8 million
stock awards were not included in the computation of diluted EPS. Had Arconic generated sufficient net income in 2016,
28 million
,
10 million
,
4 million
, and
1 million
potential shares of common stock related to the mandatory convertible preferred stock, convertible notes, stock awards, and stock options, respectively, would have been included in diluted average shares outstanding.
In 2015, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive as Arconic generated a net loss. As a result,
26 million
share equivalents related to mandatory convertible preferred stock,
7 million
stock awards,
11 million
stock options, and
5 million
share equivalents related to convertible notes were not included in the computation of diluted EPS. Had Arconic generated sufficient net income in 2015,
26 million
,
5 million
,
4 million
, and
1 million
potential shares of common stock related to the mandatory convertible preferred
stock, convertible notes, stock awards, and stock options, respectively, would have been included in diluted average shares outstanding.
Options to purchase
3 million
,
10 million
, and
9 million
shares of common stock at a weighted average exercise price of
$33.32
,
$26.93
, and
$38.25
per share were outstanding as of
December 31, 2017
,
2016
, and
2015
, respectively, but were not included in the computation of diluted EPS because they were anti-dilutive, as the exercise prices of the options were greater than the average market price of Arconic’s common stock.
Q. Income Taxes
The components of income from continuing operations before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
United States
|
$
|
500
|
|
$
|
84
|
|
$
|
124
|
|
Foreign
|
(30
|
)
|
330
|
|
59
|
|
|
$
|
470
|
|
$
|
414
|
|
$
|
183
|
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Current:
|
|
|
|
Federal*
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Foreign
|
98
|
|
133
|
|
115
|
|
State and local
|
(2
|
)
|
1
|
|
(1
|
)
|
|
96
|
|
134
|
|
114
|
|
Deferred:
|
|
|
|
Federal*
|
489
|
|
1,208
|
|
196
|
|
Foreign
|
37
|
|
136
|
|
29
|
|
State and local
|
(78
|
)
|
(2
|
)
|
—
|
|
|
448
|
|
1,342
|
|
225
|
|
Total
|
$
|
544
|
|
$
|
1,476
|
|
$
|
339
|
|
* Includes U.S. taxes related to foreign income
The exercise of employee stock options generated a tax charge of
$1
in 2017 and a benefit of
$0
and
$2
in
2016
and
2015
, respectively, representing only the difference between compensation expense recognized for financial reporting and tax purposes. The tax effects related to the exercise of employee stock options in 2017 were recorded to the income statement within the provision for income taxes. Tax effects related to 2016 and 2015 were recorded to equity. Payments either decreased current taxes payable or increased deferred tax assets (net operating losses) in the respective periods.
Arconic has unamortized tax-deductible goodwill of
$24
resulting from intercompany stock sales and reorganizations. Arconic recognizes the tax benefits (at a
25%
rate) associated with this tax-deductible goodwill as it is being amortized for local income tax purposes rather than in the period in which the transaction is consummated.
A reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate was as follows (the effective tax rate for all periods was a provision on income):
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
U.S. federal statutory rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
Taxes on foreign operations
|
(7.5
|
)
|
(10.2
|
)
|
2.5
|
|
Federal benefit of state tax
|
3.1
|
|
0.4
|
|
0.3
|
|
Permanent differences on restructuring and other charges and asset disposals
(1)
|
(167.4
|
)
|
(107.8
|
)
|
3.6
|
|
Non-deductible acquisition costs
|
0.3
|
|
8.4
|
|
7.1
|
|
Statutory tax rate and law changes
(2)
|
52.5
|
|
(15.7
|
)
|
(1.0
|
)
|
Tax holidays
|
(3.0
|
)
|
(0.8
|
)
|
(3.9
|
)
|
Tax credits
|
(0.7
|
)
|
(1.2
|
)
|
(2.8
|
)
|
Changes in valuation allowances
|
137.9
|
|
426.8
|
|
145.8
|
|
Impairment of goodwill
|
53.5
|
|
—
|
|
4.8
|
|
Company-owned life insurance/split-dollar net premiums
|
—
|
|
23.0
|
|
(3.0
|
)
|
Changes in uncertain tax positions
|
10.1
|
|
2.1
|
|
(2.2
|
)
|
Other
|
1.9
|
|
(3.5
|
)
|
(1.0
|
)
|
Effective tax rate
|
115.7
|
%
|
356.5
|
%
|
185.2
|
%
|
|
|
(1)
|
Additional losses were reported in Spain's 2017 tax return related to the Separation Transaction which are offset by an increased valuation allowance.
|
|
|
(2)
|
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act of 2017 ("the 2017 Act”) resulting in significant changes to the Internal Revenue Code (see below). In December 2016, Spain and the United States enacted tax law changes which resulted in the remeasurement of certain deferred tax liabilities recorded by Arconic.
|
On December 22, 2017, the 2017 Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017. Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118"), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, was issued by the Securities and Exchange Commission to address the application of U.S. GAAP for financial reporting. SAB 118 permits the use of provisional amounts based on reasonable estimates in the financial statements. SAB 118 also provides that the tax impact may be considered incomplete in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. Any adjustments to provisional or incomplete amounts should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period that the amounts are determined within one year.
As of February 2, 2018, the Company has calculated a reasonable estimate of the impact of the 2017 Act’s tax rate reduction and one-time transition tax in its year end income tax provision in accordance with its understanding of the 2017 Act and guidance available and, as a result, has recorded a
$272
tax charge in the fourth quarter of 2017, the period in which the legislation was enacted. We anticipate finalizing our accounting during 2018 in accordance with SAB 118.
U.S. deferred tax assets and liabilities as of the date of enactment of the 2017 Act are based on estimated temporary differences which will be updated and finalized with the filing of the 2017 U.S. income tax return. Changes to the estimated temporary differences will result in changes to the revaluation of the deferred tax assets and liabilities. As such, the impact of the 2017 Act’s tax rate reduction is a provisional amount under SAB 118 which will be updated during 2018.
The impact of the one-time transition tax on the deemed repatriation of non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations, net of foreign tax credits, is also considered a provisional amount. The Company will continue to analyze the amount of foreign earnings and profits, the associated foreign tax credits, and additional guidance that may be issued during 2018 and will update the estimated deemed repatriation calculation as necessary under SAB 118. The Company has not yet gathered, prepared and analyzed all the necessary information in sufficient detail to determine whether any excess foreign tax credits that may result from the deemed repatriation will be realizable. The need for additional
valuation allowance on foreign tax credits that may not be more likely than not to be realized in the future will be reassessed during 2018.
The components of net deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
December 31,
|
Deferred
tax
assets
|
Deferred
tax
liabilities
|
|
Deferred
tax
assets
|
Deferred
tax
liabilities
|
Depreciation
|
$
|
31
|
|
$
|
693
|
|
|
$
|
15
|
|
$
|
817
|
|
Employee benefits
|
936
|
|
23
|
|
|
1,382
|
|
8
|
|
Loss provisions
|
134
|
|
14
|
|
|
181
|
|
1
|
|
Deferred income/expense
|
19
|
|
1,144
|
|
|
20
|
|
74
|
|
Tax loss carryforwards
|
3,305
|
|
—
|
|
|
1,540
|
|
—
|
|
Tax credit carryforwards
|
638
|
|
—
|
|
|
652
|
|
—
|
|
Other
|
24
|
|
33
|
|
|
164
|
|
19
|
|
|
5,087
|
|
1,907
|
|
|
3,954
|
|
919
|
|
Valuation allowance
|
(2,584
|
)
|
—
|
|
|
(1,940
|
)
|
—
|
|
|
$
|
2,503
|
|
$
|
1,907
|
|
|
$
|
2,014
|
|
$
|
919
|
|
The following table details the expiration periods of the deferred tax assets presented above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Expires
within
10 years
|
Expires
within
11-20 years
|
No
expiration*
|
Other*
|
Total
|
Tax loss carryforwards
|
$
|
81
|
|
$
|
781
|
|
$
|
2,443
|
|
$
|
—
|
|
$
|
3,305
|
|
Tax credit carryforwards
|
531
|
|
97
|
|
10
|
|
—
|
|
638
|
|
Other
|
—
|
|
—
|
|
84
|
|
1,060
|
|
1,144
|
|
Valuation allowance
|
(467
|
)
|
(646
|
)
|
(1,376
|
)
|
(95
|
)
|
(2,584
|
)
|
|
$
|
145
|
|
$
|
232
|
|
$
|
1,161
|
|
$
|
965
|
|
$
|
2,503
|
|
|
|
*
|
Deferred tax assets with no expiration may still have annual limitations on utilization. Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference. A substantial amount of Other relates to employee benefits that will become deductible for tax purposes over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.
|
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (
30%
) and taxable temporary differences that reverse within the carryforward period (
70%
).
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than
50%
) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
In 2017, Arconic released
$98
of certain U.S. state valuation allowances. After weighing all available positive and negative evidence, management determined that the underlying net deferred tax assets were more likely than not realizable based on projected taxable income estimates taking into account expected post-separation apportionment data. Valuation allowances of
$750
remain against other net state deferred tax assets expected to expire before utilization. The need for valuation allowances against net state deferred tax assets will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.
Arconic also recorded an additional valuation allowance of
$675
which offsets additional losses reported on the Spanish tax return filed in 2017 related to the Separation Transaction that are not more likely than not to be realized. There is no net impact to the provision for income taxes, as the additional valuation allowance fully offsets the current year tax benefit in Spain
.
Arconic’s foreign tax credits in the United States have a
10
-year carryforward period with expirations ranging from 2018 to 2027 (as of December 31, 2017). Valuation allowances were initially established in prior years on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. After consideration of all available evidence including potential tax planning strategies and earnings of foreign subsidiaries projected to be distributable as taxable foreign dividends, incremental valuation allowances of
$302
and
$134
were recognized in 2016 and 2015, respectively. Foreign tax credits of
$57
,
$128
, and
$15
expired at the end of 2017, 2016, and 2015, respectively, resulting in a corresponding decrease to the valuation allowance. During 2017, an additional valuation allowance of
$23
was recorded for current year excess foreign tax credits, offset by a net
$14
reduction for other adjustments. At December 31, 2017, the cumulative amount of the valuation allowance was
$379
. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances, including the impact of the 2017 Act.
Arconic will continue its analysis of the 2017 Act, including any additional guidance that may be issued. Further analysis could result in changes to assumptions related to the realizability of certain deferred tax assets including, but not limited to, foreign tax credits, alternative minimum tax credits, and state tax loss carryforwards. Provisional estimates of the impact of the 2017 Act on the realizability of certain deferred tax assets have been made based on information and computations that were available, prepared, and analyzed as of February 2, 2018. In accordance with SAB 118, Arconic will reassess the need for valuation allowances on these deferred tax assets as necessary during 2018.
In
2016
, Arconic recognized a
$1,267
discrete income tax charge for valuation allowances related to the Separation Transaction, including
$925
with respect to Alcoa Corporation’s net deferred tax assets in the United States,
$302
with respect to Arconic’s foreign tax credits in the United States,
$42
with respect to certain deferred tax assets in Luxembourg, and
$(2)
related to the net impact of other smaller items. After weighing all positive and negative evidence, as described above, management determined that the net deferred tax assets of Alcoa Corporation were not more likely than not to be realized due to lack of historical and projected domestic source taxable income. As such, a valuation allowance was recorded immediately prior to separation.
In addition, Arconic recognized a
$42
discrete income tax charge in
2016
for a valuation allowance on the full value of certain net deferred tax assets in Luxembourg. Sources of taxable income which previously supported the net deferred tax asset are no longer available as a result of the Separation Transaction. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.
In
2016
, Arconic also recognized discrete income tax benefits related to the release of valuation allowances on certain net deferred tax assets in Russia and Canada of
$19
and
$20
, respectively. After weighing all available evidence, management determined that it was more likely than not that the net income tax benefits associated with the underlying deferred tax assets would be realizable based on historic cumulative income and projected taxable income.
Arconic also recorded additional valuation allowances in Australia of
$93
related to the Separation Transaction, in Spain of
$163
related to a tax law change and in Luxembourg of
$280
related to the Separation Transaction as well as a tax law change. These valuation allowances fully offset current year changes in deferred tax asset balances of each respective jurisdiction, resulting in no net impact to tax expense. The need for a valuation allowance will be reassessed on a continuous basis in future periods by each jurisdiction and, as a result, the allowances may increase or decrease based on changes in facts and circumstances.
In
2015
, Arconic recognized an additional
$141
discrete income tax charge for valuation allowances on certain deferred tax assets in Iceland and Suriname. Of this amount, an
$85
valuation allowance was established on the full value of the deferred tax assets in Suriname, which were related mostly to employee benefits and tax loss carryforwards. These deferred tax assets have an expiration period ranging from
2016
to
2022
(as of December 31, 2015). The remaining
$56
charge relates to a valuation
allowance established on a portion of the deferred tax assets recorded in Iceland. These deferred tax assets have an expiration period ranging from
2017
to
2023
. After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Arconic will realize the tax benefit of either of these deferred tax assets. This was mainly driven by a decline in the outlook of the Primary Metals business, combined with prior year cumulative losses and a short expiration period.
The following table details the changes in the valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
2015
|
Balance at beginning of year
|
$
|
1,940
|
|
$
|
1,291
|
|
$
|
1,151
|
|
Increase to allowance
|
831
|
|
772
|
|
180
|
|
Release of allowance
|
(246
|
)
|
(209
|
)
|
(42
|
)
|
Acquisitions and divestitures (F)
|
(1
|
)
|
(1
|
)
|
29
|
|
Tax apportionment, tax rate and tax law changes
|
(24
|
)
|
106
|
|
(15
|
)
|
Foreign currency translation
|
84
|
|
(19
|
)
|
(12
|
)
|
Balance at end of year
|
$
|
2,584
|
|
$
|
1,940
|
|
$
|
1,291
|
|
As a result of the 2017 Act, the non-previously taxed post-1986 foreign earnings and profits (calculated based on U.S. tax principles) of certain U.S.-owned foreign corporations has been subject to U.S. tax under the one-time transition tax provisions. The cumulative amount of Arconic’s foreign undistributed U.S. GAAP earnings is estimated to be less than the total foreign earnings and profits already subject to U.S. tax as of December 31, 2017. As such, Arconic expects to be able to repatriate these earnings back to the United States without additional income tax consequences other than foreign withholding taxes which will not have a material impact. At this time, management has no plans to distribute such earnings in the foreseeable future. The Company will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed foreign earnings in light of the 2017 Act and consider that conclusion to be incomplete under SAB 118.
The 2017 Act creates a new requirement that certain income earned by foreign subsidiaries, Global Intangible Low Taxed Income (GILTI), must be included in the gross income of the U.S. shareholder. The 2017 Act also established the Base Erosion and Anti-Abuse Tax (BEAT). The Company is continuing to evaluate the impact of these provisions and has not yet completed a reasonable estimate where we do not have the necessary information available, prepared, and/or analyzed (including computations) as it relates to the impact of the GILTI and BEAT provisions. In addition, Arconic is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or factor such amounts into the Company’s deferred tax calculation. Arconic has not yet made this policy decision and will update the GILTI and BEAT impact in accordance with SAB 118.
Arconic and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Arconic is no longer subject to income tax examinations by tax authorities for years prior to 2006. All U.S. tax years prior to 2017 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining Arconic’s income tax returns for various tax years through 2016.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
2015
|
Balance at beginning of year
|
$
|
28
|
|
$
|
18
|
|
$
|
7
|
|
Additions for tax positions of the current year
|
23
|
|
12
|
|
—
|
|
Additions for tax positions of prior years
|
27
|
|
—
|
|
14
|
|
Reductions for tax positions of prior years
|
—
|
|
—
|
|
(2
|
)
|
Settlements with tax authorities
|
—
|
|
(1
|
)
|
—
|
|
Expiration of the statute of limitations
|
(5
|
)
|
(1
|
)
|
(1
|
)
|
Foreign currency translation
|
—
|
|
—
|
|
—
|
|
Balance at end of year
|
$
|
73
|
|
$
|
28
|
|
$
|
18
|
|
For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for
2017
,
2016
and
2015
would be approximately
15%
,
6%
, and
7%
, respectively, of pre-tax book income. Arconic does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2018 (see Tax in Note K for a matter for which no reserve has been recognized).
It is Arconic’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes on the accompanying Statement of Consolidated Operations. In 2017, Arconic recognized interest of
$1
but did not recognize any interest or penalties in
2016
or
2015
. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Arconic recognized interest income of
$2
and
$1
in 2017 and
2015
, respectively, but did not recognize any interest income in
2016
. As of
December 31, 2017
and
2016
, the amount accrued for the payment of interest and penalties was
$2
and
$2
, respectively.
R. Receivables
Sale of Receivables Programs
Arconic has an arrangement with
three
financial institutions to sell certain customer receivables without recourse on a revolving basis. The sale of such receivables is completed through the use of a bankruptcy remote special purpose entity, which is a consolidated subsidiary of Arconic. This arrangement provides for minimum funding of
$200
up to a maximum of
$400
for receivables sold. On March 30, 2012, Arconic initially sold
$304
of customer receivables in exchange for
$50
in cash and
$254
of deferred purchase program under this arrangement. Arconic has received additional net cash funding of
$300
for receivables sold (
$2,358
in draws and
$2,058
in repayments) since the program’s inception, including
$0
(
$600
in draws and
$600
in repayments) in 2017 and
$100
(
$500
in draws and
$400
in repayments) in 2016.
As of
December 31, 2017
and
2016
, the deferred purchase program receivable was
$187
and
$83
, respectively, which was included in Other receivables on the accompanying Consolidated Balance Sheet. The deferred purchase program receivable is reduced as collections of the underlying receivables occur; however, as this is a revolving program, the sale of new receivables will result in an increase in the deferred purchase program receivable. The net change in the deferred purchase program receivable was reflected in the (Increase) decrease in receivables line item on the accompanying Statement of Consolidated Cash Flows. This activity is reflected as an operating cash flow because the related customer receivables are the result of an operating activity with an insignificant, short-term interest rate risk. See Note A for additional information on new accounting guidance that will affect the Company during 2018.
In
2017
and
2016
, the gross cash outflows and inflows associated with the deferred purchase program receivable were
$5,471
and
$5,367
, respectively, and
$5,340
and
$5,406
, respectively. The gross amount of receivables sold and total cash collected under this program since its inception was
$35,409
and
$34,872
respectively. Arconic services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.
Allowance for Doubtful Accounts
The following table details the changes in the allowance for doubtful accounts related to customer receivables and other receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer receivables
|
|
Other receivables
|
December 31,
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
Balance at beginning of year
|
$
|
13
|
|
$
|
8
|
|
$
|
6
|
|
|
$
|
32
|
|
$
|
34
|
|
$
|
24
|
|
Provision for doubtful accounts
|
1
|
|
7
|
|
4
|
|
|
9
|
|
6
|
|
8
|
|
Write off of uncollectible accounts
|
(5
|
)
|
(3
|
)
|
(2
|
)
|
|
(1
|
)
|
(1
|
)
|
2
|
|
Recoveries of prior write-offs
|
—
|
|
(1
|
)
|
—
|
|
|
(3
|
)
|
1
|
|
(1
|
)
|
Other
|
(1
|
)
|
2
|
|
—
|
|
|
(3
|
)
|
(8
|
)
|
1
|
|
Balance at end of year
|
$
|
8
|
|
$
|
13
|
|
$
|
8
|
|
|
$
|
34
|
|
$
|
32
|
|
$
|
34
|
|
S. Interest Cost Components
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Amount charged to expense
|
$
|
496
|
|
$
|
499
|
|
$
|
473
|
|
Amount capitalized
|
22
|
|
32
|
|
27
|
|
|
$
|
518
|
|
$
|
531
|
|
$
|
500
|
|
T. Pension and Other Postretirement Benefits
Arconic maintains pension plans covering most U.S. employees and certain employees in foreign locations. Pension benefits generally depend on length of service, job grade, and remuneration. Substantially all benefits are paid through pension trusts that are sufficiently funded to ensure that all plans can pay benefits to retirees as they become due. Most salaried and non-bargaining hourly U.S. employees hired after March 1, 2006 participate in a defined contribution plan instead of a defined benefit plan.
Arconic also maintains health care and life insurance postretirement benefit plans covering eligible U.S. retired employees and certain retirees from foreign locations. Generally, the medical plans are unfunded and pay a percentage of medical expenses, reduced by deductibles and other coverage. Life benefits are generally provided by insurance contracts. Arconic retains the right, subject to existing agreements, to change or eliminate these benefits. All salaried and certain non-bargaining hourly U.S. employees hired after January 1, 2002 and certain bargaining hourly U.S. employees hired after July 1, 2010 are not eligible for postretirement health care benefits. All salaried and certain hourly U.S. employees that retire on or after April 1, 2008 are not eligible for postretirement life insurance benefits.
Effective January 1, 2015, Arconic no longer offers postretirement health care benefits to Medicare-eligible, primarily non-bargaining, U.S. retirees through Company-sponsored plans. Qualifying retirees (hired prior to January 1, 2002), both current and future, may access these benefits in the marketplace by purchasing coverage directly from insurance carriers.
Effective August 1, 2016, in preparation for the Separation Transaction, certain U.S. pension and postretirement benefit plans were separated, requiring a remeasurement as of that date. Additionally, one pension plan was required to be remeasured as a result of settlement accounting. Together, these remeasurements resulted in an increase of
$845
to Arconic’s pension liability and an increase of
$551
(net of tax) to the plans’ unrecognized net actuarial loss (included in Accumulated other comprehensive loss).
Effective April 1, 2018, benefit accruals for future service and compensation under all of the Company’s qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargained hourly employees (the “Pension Plans”) will cease. In connection with this change, effective April 1, 2018, impacted employees will commence receiving an employer contribution of
3%
of eligible compensation under the applicable Arconic Retirement Savings Plans, and, for the period from April 1, 2018 through December 31, 2018, an additional transition employer contribution of
3%
of eligible compensation.
The funded status of all of Arconic’s pension and other postretirement benefit plans are measured as of December 31 each calendar year.
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other
postretirement benefits
|
December 31,
|
2017
|
2016
|
|
2017
|
2016
|
Change in benefit obligation
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
7,026
|
|
$
|
14,247
|
|
|
$
|
980
|
|
$
|
2,319
|
|
Service cost
|
90
|
|
165
|
|
|
7
|
|
13
|
|
Interest cost
|
234
|
|
435
|
|
|
30
|
|
63
|
|
Amendments
|
1
|
|
2
|
|
|
—
|
|
—
|
|
Actuarial (gains) losses
|
311
|
|
770
|
|
|
1
|
|
112
|
|
Transfer to Alcoa Corporation
|
—
|
|
(7,577
|
)
|
|
—
|
|
(1,340
|
)
|
Settlements
|
—
|
|
(82
|
)
|
|
—
|
|
—
|
|
Benefits paid, net of participants’ contributions
|
(425
|
)
|
(794
|
)
|
|
(98
|
)
|
(197
|
)
|
Medicare Part D subsidy receipts
|
—
|
|
—
|
|
|
7
|
|
9
|
|
Foreign currency translation impact
|
122
|
|
(140
|
)
|
|
—
|
|
1
|
|
Benefit obligation at end of year
(1)
|
$
|
7,359
|
|
$
|
7,026
|
|
|
$
|
927
|
|
$
|
980
|
|
Change in plan assets
(1)
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
4,666
|
|
$
|
10,928
|
|
|
$
|
—
|
|
$
|
—
|
|
Actual return on plan assets
|
212
|
|
89
|
|
|
—
|
|
—
|
|
Employer contributions
|
310
|
|
296
|
|
|
—
|
|
—
|
|
Participants’ contributions
|
—
|
|
16
|
|
|
—
|
|
—
|
|
Benefits paid
|
(404
|
)
|
(762
|
)
|
|
—
|
|
—
|
|
Administrative expenses
|
(33
|
)
|
(65
|
)
|
|
—
|
|
—
|
|
Transfer to Alcoa Corporation
|
—
|
|
(5,610
|
)
|
|
—
|
|
—
|
|
Settlements
|
—
|
|
(82
|
)
|
|
—
|
|
—
|
|
Foreign currency translation impact
|
111
|
|
(144
|
)
|
|
—
|
|
—
|
|
Fair value of plan assets at end of year
(1)
|
$
|
4,862
|
|
$
|
4,666
|
|
|
$
|
—
|
|
$
|
—
|
|
Funded status*
|
$
|
(2,497
|
)
|
$
|
(2,360
|
)
|
|
$
|
(927
|
)
|
$
|
(980
|
)
|
Less: Amounts attributed to joint venture partners
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Net funded status
|
$
|
(2,497
|
)
|
$
|
(2,360
|
)
|
|
$
|
(927
|
)
|
$
|
(980
|
)
|
Amounts recognized in the Consolidated Balance Sheet consist of:
|
|
|
|
|
|
Noncurrent assets
|
$
|
89
|
|
$
|
6
|
|
|
$
|
—
|
|
$
|
—
|
|
Current liabilities
|
(22
|
)
|
(21
|
)
|
|
(86
|
)
|
(91
|
)
|
Noncurrent liabilities
|
(2,564
|
)
|
(2,345
|
)
|
|
(841
|
)
|
(889
|
)
|
Net amount recognized
|
$
|
(2,497
|
)
|
$
|
(2,360
|
)
|
|
$
|
(927
|
)
|
$
|
(980
|
)
|
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
|
|
|
|
|
|
Net actuarial loss
|
$
|
3,240
|
|
$
|
2,979
|
|
|
$
|
146
|
|
$
|
150
|
|
Prior service cost (benefit)
|
10
|
|
15
|
|
|
(37
|
)
|
(45
|
)
|
Total, before tax effect
|
3,250
|
|
2,994
|
|
|
109
|
|
105
|
|
Less: Amounts attributed to joint venture partners
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Net amount recognized, before tax effect
|
$
|
3,250
|
|
$
|
2,994
|
|
|
$
|
109
|
|
$
|
105
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss consist of:
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
481
|
|
$
|
(1,992
|
)
|
|
$
|
1
|
|
$
|
(224
|
)
|
Amortization of accumulated net actuarial loss
|
(220
|
)
|
(380
|
)
|
|
(5
|
)
|
(24
|
)
|
Prior service (benefit) cost
|
—
|
|
(42
|
)
|
|
—
|
|
37
|
|
Amortization of prior service (cost) benefit
|
(5
|
)
|
(13
|
)
|
|
8
|
|
24
|
|
Total, before tax effect
|
256
|
|
(2,427
|
)
|
|
4
|
|
(187
|
)
|
Less: Amounts attributed to joint venture partners
|
—
|
|
38
|
|
|
—
|
|
—
|
|
Net amount recognized, before tax effect
|
$
|
256
|
|
$
|
(2,389
|
)
|
|
$
|
4
|
|
$
|
(187
|
)
|
|
|
(1)
|
At
December 31, 2017
, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were
$6,018
,
$3,544
, and
$(2,474)
, respectively. At
December 31, 2016
, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were
$5,707
,
$3,495
, and
$(2,212)
, respectively.
|
Pension Plan Benefit Obligations
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
2017
|
2016
|
The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans was as follows:
|
|
|
Projected benefit obligation
|
$
|
7,359
|
|
$
|
7,026
|
|
Accumulated benefit obligation
|
7,169
|
|
6,850
|
|
The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets was as follows:
|
|
|
Projected benefit obligation
|
6,600
|
|
6,995
|
|
Fair value of plan assets
|
4,016
|
|
4,629
|
|
The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets was as follows:
|
|
|
Accumulated benefit obligation
|
6,422
|
|
6,104
|
|
Fair value of plan assets
|
3,998
|
|
3,894
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
(1)
|
|
Other postretirement benefits
(2)
|
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
Service cost
|
$
|
90
|
|
$
|
155
|
|
$
|
175
|
|
|
$
|
7
|
|
$
|
13
|
|
$
|
14
|
|
Interest cost
|
234
|
|
431
|
|
577
|
|
|
30
|
|
63
|
|
92
|
|
Expected return on plan assets
|
(332
|
)
|
(677
|
)
|
(753
|
)
|
|
—
|
|
—
|
|
—
|
|
Recognized net actuarial loss
|
220
|
|
380
|
|
468
|
|
|
5
|
|
24
|
|
17
|
|
Amortization of prior service cost (benefit)
|
5
|
|
13
|
|
16
|
|
|
(8
|
)
|
(24
|
)
|
(37
|
)
|
Settlements
(3)
|
—
|
|
19
|
|
16
|
|
|
—
|
|
—
|
|
—
|
|
Curtailments
(4)
|
—
|
|
—
|
|
9
|
|
|
—
|
|
—
|
|
(4
|
)
|
Special termination benefits
(5)
|
—
|
|
2
|
|
16
|
|
|
—
|
|
—
|
|
—
|
|
Net periodic benefit cost
(6)
|
$
|
217
|
|
$
|
323
|
|
$
|
524
|
|
|
$
|
34
|
|
$
|
76
|
|
$
|
82
|
|
Discontinued operations
|
—
|
|
122
|
|
248
|
|
|
—
|
|
41
|
|
43
|
|
Net amount recognized in Statement of Consolidated Operations
|
$
|
217
|
|
$
|
201
|
|
$
|
276
|
|
|
$
|
34
|
|
$
|
35
|
|
$
|
39
|
|
|
|
Note:
|
the footnotes below include components of Net Periodic Benefit Cost related to Alcoa Corporation through the completion of the Separation Transaction.
|
|
|
(1)
|
In
2017
,
2016
and
2015
, net periodic benefit cost for U.S. pension plans was
$206
,
$261
, and
$423
, respectively.
|
|
|
(2)
|
In
2017
,
2016
and
2015
, net periodic benefit cost for other postretirement benefits reflects a reduction of
$11
,
$22
, and
$34
, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.
|
|
|
(3)
|
In 2016, settlements were due to workforce reductions (see Note D) and the payment of lump sum benefits and/or purchases of annuity contracts. In 2015, settlements were due to workforce reductions (see Note D) and the payment of lump sum benefits and/or purchases of annuity contracts.
|
|
|
(4)
|
In 2015, curtailments were due to elimination of benefits or workforce reductions (see Note D).
|
|
|
(5)
|
In 2016 and 2015, special termination benefits were due to workforce reductions (see Note D).
|
|
|
(6)
|
Amounts attributed to joint venture partners are not included.
|
Amounts Expected to be Recognized in Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement benefits
|
|
2018
|
|
2018
|
Net actuarial loss recognition
|
168
|
|
|
9
|
|
Prior service cost (benefit) recognition
|
3
|
|
|
(8
|
)
|
Assumptions
Weighted average assumptions used to determine benefit obligations for U.S. pension and other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):
|
|
|
|
|
|
December 31,
|
2017
|
2016
|
Discount rate
|
3.75
|
%
|
4.20
|
%
|
Rate of compensation increase
|
3.50
|
|
3.50
|
|
The discount rate is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, industrials, transportation, and utilities, among others. The yield curve model parallels the plans’ projected cash flows, which have an average duration of
11
years. The underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times.
The rate of compensation increase is based upon actual experience. For
2018
, the rate of compensation increase will be
3.5%
, which approximates the
five
-year average.
Weighted average assumptions used to determine net periodic benefit cost for U.S. pension and other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Discount rate to calculate service cost*
|
4.20
|
%
|
4.29
|
%
|
4.00
|
%
|
Discount rate to calculate interest cost*
|
3.60
|
|
3.15
|
|
4.00
|
|
Expected long-term rate of return on plan assets
|
7.75
|
|
7.75
|
|
7.75
|
|
Rate of compensation increase
|
3.50
|
|
3.50
|
|
3.50
|
|
|
|
*
|
In all periods presented, the respective discount rates were used to determine net periodic benefit cost for most U.S. pension plans for the full annual period. However, the discount rates for a limited number of plans were updated during
2017
,
2016
, and
2015
to reflect the remeasurement of these plans due to new union labor agreements, settlements, and/or curtailments. The updated discount rates used were not significantly different from the discount rates presented.
|
In conjunction with the annual measurement of the funded status of Arconic’s pension and other postretirement benefit plans at December 31, 2015, management elected to change the manner in which the interest cost component of net periodic benefit costs is determined in 2016 and beyond. Previously, the interest component was determined by multiplying the single equivalent rate and the aggregate discounted cash flows of the plans’ projected benefit obligations. Under the new methodology, the interest cost component is determined by aggregating the product of the discounted cash flows of the plans’ projected benefit obligations for each year and an individual spot rate (referred to as the “spot rate” approach). This change resulted in a lower interest cost component of net periodic benefit cost under the new methodology compared to the previous methodology in 2017 and 2016 of
$34
and
$84
, respectively, for pension plans and
$6
and
$14
, respectively, for other postretirement benefit plans. Management believes this new methodology, which represents a change in an accounting estimate, is a better measure of the interest cost as each year’s cash flows are specifically linked to the interest rates of bond payments in the same respective year.
The expected long-term rate of return on plan assets is generally applied to a
five
-year market-related value of plan assets (a fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this
assumption is one that relies on a combination of historical asset return information and forward-looking returns by asset class. As it relates to historical asset return information, management focuses on various historical moving averages when developing this assumption. While consideration is given to recent performance and historical returns, the assumption represents a long-term, prospective return. Management also incorporates expected future returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment.
For
2017
,
2016
and
2015
, the expected long-term rate of return used by management was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. These rates fell within the respective range of the
20
-year moving average of actual performance and the expected future return developed by asset class. In 2015, the decrease of
25
basis points in the expected long-term rate of return was due to a decrease in the
20
-year moving average of actual performance. For
2018
, management anticipates that
7.00%
will be the expected long-term rate of return. The decrease of
75
basis points in the expected long-term rate is due to a decrease in the expected return by asset class and the 20-year moving average.
Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
Health care cost trend rate assumed for next year
|
5.50
|
%
|
5.50
|
%
|
5.50
|
%
|
Rate to which the cost trend rate gradually declines
|
4.50
|
%
|
4.50
|
%
|
4.50
|
%
|
Year that the rate reaches the rate at which it is assumed to remain
|
2021
|
|
2020
|
|
2019
|
|
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by Arconic’s other postretirement benefit plans. For
2018
, a
5.5%
trend rate will be used, reflecting management’s best estimate of the change in future health care costs covered by the plans. The plans’ actual annual health care cost trend experience over the past
three years
has ranged from (
2.2%
) to
9.0%
. Management does not believe this three-year range is indicative of expected increases for future health care costs over the long-term.
Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage point change in these assumed rates would have the following effects:
|
|
|
|
|
|
|
|
|
1%
increase
|
1%
decrease
|
Effect on other postretirement benefit obligations
|
$
|
29
|
|
$
|
(28
|
)
|
Effect on total of service and interest cost components
|
1
|
|
(1
|
)
|
Plan Assets
Arconic’s pension plans’ investment policy and weighted average asset allocations at December 31,
2017
and
2016
, by asset class, were as follows:
|
|
|
|
|
|
|
|
|
Plan assets
at
December 31,
|
Asset class
|
Policy range
|
2017
|
2016
|
Equities
|
20–55%
|
28
|
%
|
30
|
%
|
Fixed income
|
25–55%
|
47
|
|
42
|
|
Other investments
|
15–35%
|
25
|
|
28
|
|
Total
|
|
100
|
%
|
100
|
%
|
The principal objectives underlying the investment of the pension plans’ assets are to ensure that Arconic can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify investments across and within various asset classes to protect asset values against adverse movements. Specific objectives for long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities and achieving diversification across the balance of the asset portfolio. The use of derivative instruments is permitted where appropriate and necessary for achieving
overall investment policy objectives. The investment strategy has used long duration cash bonds and derivative instruments to offset a portion of the interest rate sensitivity of U.S. pension liabilities. Exposure to broad equity risk has been decreased and diversified through investments in discretionary and systematic macro hedge funds, long/short equity hedge funds, high yield bonds, emerging market debt and global and emerging market equities. Investments are further diversified by strategy, asset class, geography, and sector to enhance returns and mitigate downside risk. A large number of external investment managers are used to gain broad exposure to the financial markets and to mitigate manager-concentration risk.
Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and other applicable laws and regulations.
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified (see Note U for the definition of fair value and a description of the fair value hierarchy).
Equities.
These securities consist of: (i) direct investments in the stock of publicly traded U.S. and non-U.S. companies and are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (ii) the plans’ share of commingled funds that are invested in the stock of publicly traded companies and are valued at the net asset value of shares held at December 31 (included in Level 1); and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) and are valued by investment managers based on the most recent financial information available, which typically represents significant unobservable data.
Fixed income.
These securities consist of: (i) U.S. government debt and are generally valued using quoted prices (included in Level 1); (ii) publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate and sovereign bonds and debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data (included in Level 2); (iii) cash and cash equivalents; and (iv) interest rate swaps and are generally valued using industry standard models with market-based observable inputs.
Other investments.
These investments include, among others: (i) exchange traded funds, such as gold, and real estate investment trusts and are valued based on the closing price reported in an active market on which the investments are traded (included in Level 1) and (ii) direct investments of discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued by investment managers based on the most recent financial information available, which typically represents significant unobservable data.
The fair value methods described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Arconic believes the valuation methods used by the plans’ trustees are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table presents the fair value of pension plan assets classified under the appropriate level of the fair value hierarchy or net asset cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Level 1
|
Level 2
|
Net asset value
|
Total
|
Equities:
|
|
|
Equity securities
|
$
|
379
|
|
$
|
—
|
|
$
|
593
|
|
$
|
972
|
|
Long/short equity hedge funds
|
—
|
|
—
|
|
230
|
|
230
|
|
Private equity
|
—
|
|
—
|
|
155
|
|
155
|
|
|
$
|
379
|
|
$
|
—
|
|
$
|
978
|
|
$
|
1,357
|
|
Fixed income:
|
|
|
Intermediate and long duration government/credit
|
$
|
201
|
|
$
|
981
|
|
$
|
779
|
|
$
|
1,961
|
|
Other
|
164
|
|
8
|
|
145
|
|
317
|
|
|
$
|
365
|
|
$
|
989
|
|
$
|
924
|
|
$
|
2,278
|
|
Other investments:
|
|
|
Real estate
|
$
|
85
|
|
$
|
—
|
|
$
|
172
|
|
$
|
257
|
|
Discretionary and systematic macro hedge funds
|
—
|
|
—
|
|
583
|
|
583
|
|
Other
|
77
|
|
7
|
|
275
|
|
359
|
|
|
$
|
162
|
|
$
|
7
|
|
$
|
1,030
|
|
$
|
1,199
|
|
Net plan assets*
|
$
|
906
|
|
$
|
996
|
|
$
|
2,932
|
|
$
|
4,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Level 1
|
Level 2
|
Net Asset Value
|
Total
|
Equities
|
|
|
Equity securities
|
$
|
393
|
|
$
|
—
|
|
$
|
431
|
|
$
|
824
|
|
Long/short equity hedge funds
|
—
|
|
—
|
|
406
|
|
406
|
|
Private equity
|
—
|
|
—
|
|
165
|
|
165
|
|
|
$
|
393
|
|
$
|
—
|
|
$
|
1,002
|
|
$
|
1,395
|
|
Fixed income:
|
|
|
|
|
Intermediate and long duration government/credit
|
$
|
23
|
|
$
|
95
|
|
$
|
655
|
|
$
|
773
|
|
Other
|
1,060
|
|
51
|
|
74
|
|
1,185
|
|
|
$
|
1,083
|
|
$
|
146
|
|
$
|
729
|
|
$
|
1,958
|
|
Other investments:
|
|
|
Real estate
|
$
|
81
|
|
$
|
—
|
|
$
|
185
|
|
$
|
266
|
|
Discretionary and systematic macro hedge funds
|
—
|
|
—
|
|
784
|
|
784
|
|
Other
|
65
|
|
—
|
|
178
|
|
243
|
|
|
$
|
146
|
|
$
|
—
|
|
$
|
1,147
|
|
$
|
1,293
|
|
Net plan assets**
|
$
|
1,622
|
|
$
|
146
|
|
$
|
2,878
|
|
$
|
4,646
|
|
|
|
*
|
As of December 31,
2017
, the total fair value of pension plans’ assets excludes a net receivable of
$28
, which represents assets due from Alcoa Corporation as a result of plan separations and securities sold but not yet settled plus interest and dividends earned on various investments.
|
|
|
**
|
As of December 31,
2016
, the total fair value of pension plans’ assets excludes a net receivable of
$20
, which represents assets due from Alcoa Corporation as a result of plan separations and securities sold not yet settled plus interest and dividends earned on various investments.
|
Funding and Cash Flows
It is Arconic’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws. Periodically, Arconic contributes additional amounts as deemed appropriate. In
2017
and
2016
, cash contributions to Arconic’s pension plans were
$310
and
$290
. The minimum required contribution to pension plans in
2018
is estimated to be
$350
, of which
$320
is for U.S. plans.
During the third quarter of 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate the former Alcoa Inc. pension plans between Arconic and Alcoa Corporation in connection with the Separation Transaction. The plan stipulates that Arconic will make cash contributions totaling
$150
over a period of
30 months
to its two largest pension plans. The payments are expected to be made in increments no less than
$50
each over the
30
-month period, with the first
payment due no later than six months after the separation date of November 1, 2016. The first payment of
$50
was made on April 18, 2017.
Benefit payments expected to be paid to pension and other postretirement benefit plans’ participants and expected Medicare Part D subsidy receipts are as follows utilizing the current assumptions outlined above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Pension
benefits paid
|
Gross Other post-
retirement
benefits
|
Medicare Part D
subsidy receipts
|
Net Other post-
retirement
benefits
|
2018
|
$
|
435
|
|
$
|
90
|
|
$
|
5
|
|
$
|
85
|
|
2019
|
440
|
|
90
|
|
5
|
|
85
|
|
2020
|
440
|
|
90
|
|
5
|
|
85
|
|
2021
|
445
|
|
90
|
|
5
|
|
85
|
|
2022
|
450
|
|
90
|
|
5
|
|
85
|
|
Thereafter
|
2,265
|
|
335
|
|
25
|
|
310
|
|
|
$
|
4,475
|
|
$
|
785
|
|
$
|
50
|
|
$
|
735
|
|
Defined Contribution Plans
Arconic sponsors savings and investment plans in various countries, primarily in the United States. Expenses related to these plans were
$89
in
2017
,
$71
in
2016
, and
$83
in
2015
. In the United States, employees may contribute a portion of their compensation to the plans, and Arconic matches a portion of these contributions in equivalent form of the investments elected by the employee.
U. 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.
|
The carrying values and fair values of Arconic’s financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
December 31,
|
Carrying
value
|
Fair
value
|
|
Carrying
value
|
Fair
value
|
Cash and cash equivalents
|
$
|
2,150
|
|
$
|
2,150
|
|
|
$
|
1,863
|
|
$
|
1,863
|
|
Restricted cash
|
4
|
|
4
|
|
|
15
|
|
15
|
|
Derivatives – current asset
|
61
|
|
61
|
|
|
14
|
|
14
|
|
Noncurrent receivables
|
20
|
|
20
|
|
|
21
|
|
21
|
|
Derivatives – noncurrent asset
|
33
|
|
33
|
|
|
10
|
|
10
|
|
Available-for-sale securities
|
106
|
|
106
|
|
|
102
|
|
102
|
|
Investment in common stock of Alcoa Corporation
|
—
|
|
—
|
|
|
1,020
|
|
1,020
|
|
Short-term debt
|
38
|
|
38
|
|
|
40
|
|
40
|
|
Derivatives – current liability
|
45
|
|
45
|
|
|
5
|
|
5
|
|
Commercial paper
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Derivatives – noncurrent liability
|
14
|
|
14
|
|
|
3
|
|
3
|
|
Contingent payment related to an acquisition
|
—
|
|
—
|
|
|
78
|
|
78
|
|
Long-term debt, less amount due within one year
|
6,806
|
|
7,443
|
|
|
8,044
|
|
8,519
|
|
The following methods were used to estimate the fair values of financial instruments:
Cash and cash equivalents, Restricted cash, Short-term debt, and Commercial paper.
The carrying amounts approximate fair value because of the short maturity of the instruments. The fair value amounts for Cash and cash equivalents, Restricted cash, and Commercial paper were classified in Level 1, and Short-term debt was classified in Level 2.
Derivatives.
The fair value of derivative contracts classified as Level 1 was based on identical unrestricted assets and liabilities. The fair value of derivative contracts classified as Level 2 was based on inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates).
Noncurrent receivables.
The fair value of noncurrent receivables was based on anticipated cash flows, which approximates carrying value, and was classified in Level 2 of the fair value hierarchy.
Available-for-sale securities.
The fair value of such securities was based on quoted market prices. These financial instruments consist of exchange-traded fixed income securities, which are carried at fair value and were classified in Level 1 of the fair value hierarchy.
Investment in common stock of Alcoa Corporation (see Note C).
The fair value was based on the closing stock price of Alcoa Corporation on the New York Stock Exchange at December 31, 2016 multiplied by the number of shares of Alcoa Corporation stock owned by Arconic as of December 31, 2016. This investment was classified in Level 1 of the fair value hierarchy.
Contingent payment related to an acquisition (see Note F).
The fair value was based on the net present value of expected future cash flows and was classified in Level 3 of the fair value hierarchy.
Long-term debt, less amount 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 Arconic 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.
V. Subsequent Events
Management evaluated all activity of Arconic and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements, except as noted below:
In January 2018, the Company announced the freeze of its U.S. defined benefit pension plans for salaried and non-bargained hourly employees, effective April 1, 2018. Benefit accruals for future service and compensation under all of the Company’s qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargained hourly employees (the “Pension Plans”) will cease. In connection with this change, effective April 1, 2018, impacted employees will commence receiving an employer contribution of
3%
of eligible compensation under the Arconic Salaried Retirement Savings Plan, and, for the period from April 1, 2018 through December 31, 2018, an additional transition employer contribution of
3%
of eligible compensation.
In January 2018, management announced a change in the organizational structure of the Engineered Products and Solutions segment, from four business units to three business units, with a focus on aligning its internal structure to core markets and customers and reducing cost. As a result of this change, goodwill will be reallocated to the three new reporting units and evaluated for impairment during the first quarter of 2018. The Company does not expect any goodwill impairment as a result of the realignment.
In February 2018, the Company announced that its Board of Directors authorized a share repurchase program of up to
$500
of its outstanding common stock and a
$500
early debt reduction. Under the share repurchase program, the Company may repurchase shares from time to time, in amounts, at prices, and at such times as the Company deems appropriate. Repurchases will be subject to market conditions, legal requirements and other considerations. Arconic is not obligated to repurchase any specific number of shares or to do so at any particular time, and the share repurchase program may be suspended, modified or terminated at any time without prior notice. For the early debt reduction, Arconic intends to redeem in March 2018 all of its outstanding
5.72%
Notes due in 2019.
Beginning in the first quarter of 2018, the Company's primary measure of segment performance will change from Adjusted EBITDA to Operating income, which more closely aligns segment performance with Operating income as presented in the Statement of Consolidated Operations. As part of this change, LIFO and metal price lag will be included in the Operating income of the segments.
Supplemental Financial Information (unaudited)
Quarterly Data
(in millions, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
Second
|
Third
|
Fourth
(2)
|
Year
|
2017
|
|
|
|
|
|
Sales
|
$
|
3,192
|
|
$
|
3,261
|
|
$
|
3,236
|
|
$
|
3,271
|
|
$
|
12,960
|
|
Net income (loss) attributable to Arconic
|
$
|
322
|
|
$
|
212
|
|
$
|
119
|
|
$
|
(727
|
)
|
$
|
(74
|
)
|
Earnings (loss) per share attributable to Arconic common shareholders
(1)
:
|
|
|
|
|
|
Basic
|
|
|
|
|
|
Net income (loss) per share—basic
|
$
|
0.69
|
|
$
|
0.44
|
|
$
|
0.23
|
|
$
|
(1.51
|
)
|
$
|
(0.28
|
)
|
Diluted
|
|
|
|
|
|
Net income (loss) per share—diluted
|
$
|
0.65
|
|
$
|
0.43
|
|
$
|
0.22
|
|
$
|
(1.51
|
)
|
$
|
(0.28
|
)
|
2016
|
|
|
|
|
|
Sales
|
$
|
3,055
|
|
$
|
3,234
|
|
$
|
3,138
|
|
$
|
2,967
|
|
$
|
12,394
|
|
Net income (loss) attributable to Arconic
|
$
|
16
|
|
$
|
135
|
|
$
|
166
|
|
$
|
(1,258
|
)
|
$
|
(941
|
)
|
Earnings (loss) per share attributable to Arconic common shareholders
(1)
:
|
|
|
|
|
|
Basic
|
|
|
|
|
|
Continuing operations
|
$
|
0.21
|
|
$
|
0.08
|
|
$
|
0.11
|
|
$
|
(2.98
|
)
|
$
|
(2.58
|
)
|
Discontinued operations
|
(0.21
|
)
|
0.19
|
|
0.23
|
|
0.07
|
|
0.27
|
|
Net income (loss) per share—basic
|
$
|
0.00
|
|
$
|
0.27
|
|
$
|
0.34
|
|
$
|
(2.91
|
)
|
$
|
(2.31
|
)
|
Diluted
|
|
|
|
|
|
Continuing operations
|
$
|
0.21
|
|
$
|
0.08
|
|
$
|
0.11
|
|
$
|
(2.98
|
)
|
$
|
(2.58
|
)
|
Discontinued operations
|
(0.21
|
)
|
0.19
|
|
0.22
|
|
0.07
|
|
0.27
|
|
Net income (loss) per share—basic
|
$
|
0.00
|
|
$
|
0.27
|
|
$
|
0.33
|
|
$
|
(2.91
|
)
|
$
|
(2.31
|
)
|
|
|
(1)
|
Per share amounts are calculated independently for each period presented; therefore, the sum of the quarterly per share amounts may not equal the per share amounts for the year.
|
|
|
(2)
|
In the fourth quarter of 2017, Arconic recorded an impairment of goodwill related to the forgings and extrusions business of
$719
(
$719
pre-tax); a provisional charge of
$272
associated with the revaluation of U.S. net deferred tax assets due to a decrease in the U.S. corporate tax rate from
35%
to
21%
, as well as a one-time transition tax on the non-previously taxed earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017; a favorable adjustment to the Firth Rixson earn-out liability of
$81
(
$81
pre-tax); and a favorable adjustment to a separation-related guarantee liability of
$18
(
$25
pre-tax). In the fourth quarter of 2016, as a result of the Separation Transaction, Arconic recorded a charge of
$1,267
for valuation allowances on certain deferred tax assets.
|