F. Other Expense (Income), Net
|
|
|
|
|
|
|
|
|
|
First quarter ended
|
|
March 31,
|
|
2018
|
|
2017
|
Non-service related net periodic benefit cost
|
$
|
28
|
|
|
38
|
|
Interest income
|
(6
|
)
|
|
(4
|
)
|
Foreign currency gains, net
|
(3
|
)
|
|
(5
|
)
|
Net loss (gain) from asset sales
|
3
|
|
|
(349
|
)
|
Other, net
|
(2
|
)
|
|
4
|
|
|
$
|
20
|
|
|
$
|
(316
|
)
|
For the quarter ended March 31, 2017,
Net loss (gain) from asset sales
included a gain on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock of
$351
which resulted in cash proceeds of
$888
which were recorded in Sale of investments within Investing Activities in the Statement of Consolidated Cash Flows.
G. Pension and Other Postretirement Benefits
The components of net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
First quarter ended
|
|
March 31,
|
|
2018
|
|
2017
|
Pension benefits
|
|
|
|
Service cost
|
$
|
20
|
|
|
$
|
23
|
|
Interest cost
|
55
|
|
|
58
|
|
Expected return on plan assets
|
(77
|
)
|
|
(83
|
)
|
Recognized net actuarial loss
|
42
|
|
|
55
|
|
Amortization of prior service cost (benefit)
|
1
|
|
|
1
|
|
Curtailments
|
5
|
|
|
—
|
|
Net periodic benefit cost
(1)
|
$
|
46
|
|
|
$
|
54
|
|
|
|
|
|
Other postretirement benefits
|
|
|
|
Service cost
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
7
|
|
|
8
|
|
Recognized net actuarial loss
|
2
|
|
|
1
|
|
Amortization of prior service cost (benefit)
|
(2
|
)
|
|
(2
|
)
|
Net periodic benefit cost
(1)
|
$
|
9
|
|
|
$
|
9
|
|
|
|
(1)
|
Service cost was included within Cost of goods sold,
Selling, general administrative, and other expenses
, and
Research and development expenses
; curtailments were included in Restructuring and other charges; and all other cost components were recorded in
Other expense (income), net
in the Statement of Consolidated Operations.
|
On 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-bargaining hourly employees ceased. As a result of this change, in the first quarter of 2018, the Company recorded a decrease to the accrued pension benefit liability of
$136
related to the reduction of future benefits (
$141
offset in Accumulated other comprehensive loss) and curtailment charges of
$5
in Restructuring and other charges.
In conjunction with the separation of Alcoa Inc. on November 1, 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate the Alcoa Inc. pension plans between Arconic Inc. and Alcoa Corporation. The plan stipulates that Arconic will make cash contributions over a period of
30 months
(from November 1, 2016) to its two largest pension plans. Payments are expected to be made in
three
increments of no less than
$50
each (
$150
total) over this
30
-month period. The Company made payments of
$50
in March 2018 and
$50
in April 2017. Upon finalization of 2018 pension plan valuations, additional cash contributions that were made in the first quarter of 2018 may be used to satisfy the
$150
requirement.
H. Income Taxes
Arconic’s year-to-date tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date pre-tax ordinary income. The tax impact of unusual or infrequently occurring items, including changes in judgement about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur. In addition, the tax provision is adjusted for the interim period impact of non-benefited pre-tax losses.
For the first quarter of 2018, the estimated annual effective tax rate applied to ordinary income was
26.5%
. This rate is higher than the federal statutory rate of 21%, which was enacted by the Tax Cuts and Jobs Act ("the 2017 Act") on December 22, 2017, primarily due to additional estimated U.S. tax on Global Intangible Low-Taxed Income (GILTI) pursuant to the 2017 Act, domestic income taxable in certain U.S. states no longer subject to a valuation allowance, and foreign income taxed in higher rate jurisdictions.
For the first quarter of 2017, the estimated annual effective tax rate applied to ordinary income was
31.6%
. This rate is lower than the federal statutory rate of 35% applicable to 2017 primarily due to foreign income taxed in lower rate jurisdictions, tax basis in excess of book basis of Alcoa Corporation common stock sold in February 2017, partially offset by a loss on the sale of a rolling mill in Fusina, Italy for which no net tax benefit was recognized.
For the first quarter of 2018 and 2017, the tax rate including discrete items was
28.1%
and
33.5%
, respectively. A discrete charge of
$2
was recorded for the first quarter of 2018 and was primarily related to stock compensation. A discrete charge of
$1
was recorded for the first quarter of 2017 and was primarily related to stock compensation offset by other prior period adjustments.
The tax provisions for the first quarter of
2018
and
2017
were comprised of the following:
|
|
|
|
|
|
|
|
|
|
First quarter ended
|
|
March 31,
|
|
2018
|
|
2017
|
Pretax income at estimated annual effective income tax rate before discrete items
|
$
|
53
|
|
|
$
|
154
|
|
Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized
|
1
|
|
|
7
|
|
Other discrete items
|
2
|
|
|
1
|
|
Provision for income taxes
|
$
|
56
|
|
|
$
|
162
|
|
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 U.S. 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.
In the fourth quarter of 2017, Arconic recorded a
$272
tax charge for the impact of the 2017 Act’s tax rate reduction and one-time transition tax; the impact of both the rate reduction and one-time transition tax were provisional amounts in the 2017 provision for income taxes. No adjustments to these provisional amounts have been recorded in the first quarter of 2018. The impact of the rate reduction will be finalized as part of the filing of the 2017 U.S. income tax return during 2018. Arconic 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 in order to update the estimated deemed repatriation calculation as necessary under SAB 118. Arconic 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.
Provisional estimates of the impact of the 2017 Act on the realizability of certain deferred tax assets, including, but not limited to, foreign tax credits, alternative minimum tax credits, and state tax loss carryforwards have been made based on information and computations that were available, prepared, and analyzed as of February 2, 2018. Through March 31, 2018, there were no changes to the provisional estimates of the impact of the 2017 Act or the estimates used to evaluate the realizability of deferred tax assets. Further analysis, or the issuance of additional guidance, could result in changes to the realizability of deferred tax assets.
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. In the fourth quarter of 2017, Arconic had no plans to distribute such earnings in the foreseeable future and considered that conclusion to be incomplete under SAB 118. There is no change to this conclusion through March 31, 2018.
The 2017 Act creates a new requirement that certain income earned by foreign subsidiaries, 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). Arconic anticipates that it will be subject to GILTI and has included an estimate of GILTI in the calculation of the 2018 estimated annual effective tax rate. At this time, Arconic does not anticipate being subject to BEAT for 2018. During the first quarter of 2018, Arconic has made a final accounting policy election to treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.
I. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings, 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 information used to compute basic and diluted EPS attributable to Arconic common shareholders was as follows (shares in millions):
|
|
|
|
|
|
|
|
|
|
First quarter ended
|
|
March 31,
|
|
2018
|
|
2017
|
Net income
|
$
|
143
|
|
|
$
|
322
|
|
Less: Preferred stock dividends declared
|
(1
|
)
|
|
(17
|
)
|
Net income available to Arconic common shareholders - basic
|
142
|
|
|
305
|
|
Add: Interest expense related to convertible notes
|
3
|
|
|
2
|
|
Add: Dividends related to mandatory convertible preferred stock
|
—
|
|
|
17
|
|
Net income available to Arconic common shareholders - diluted
|
$
|
145
|
|
|
$
|
324
|
|
|
|
|
|
Average shares outstanding - basic
|
482
|
|
|
440
|
|
Effect of dilutive securities:
|
|
|
|
Stock options
|
5
|
|
|
1
|
|
Stock and performance awards
|
2
|
|
|
5
|
|
Mandatory convertible preferred stock
|
—
|
|
|
39
|
|
Convertible notes
|
14
|
|
|
14
|
|
Average shares outstanding - diluted
|
503
|
|
|
499
|
|
The following shares were excluded from the calculation of average shares outstanding – diluted as their effect was anti-dilutive (shares in millions).
|
|
|
|
|
|
|
|
First quarter ended
|
|
March 31,
|
|
2018
|
|
2017
|
Mandatory convertible preferred stock
|
—
|
|
|
—
|
|
Convertible notes
|
—
|
|
|
—
|
|
Stock options
(1)
|
6
|
|
|
—
|
|
Stock awards
|
—
|
|
|
4
|
|
|
|
(1)
|
The average exercise price of options was
$30.75
per share for the first quarter of
2018
.
|
J. 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
|
First quarter ended March 31,
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Pension and other postretirement benefits (G)
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(2,230
|
)
|
|
$
|
(2,010
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service cost/benefit
|
137
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
Tax (expense) benefit
|
(31
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
Total Other comprehensive income (loss) before reclassifications, net of tax
|
106
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss and prior service cost
(1)
|
48
|
|
|
55
|
|
|
—
|
|
|
—
|
|
Tax expense
(2)
|
(11
|
)
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(5)
|
37
|
|
|
36
|
|
|
—
|
|
|
—
|
|
Total Other comprehensive income
|
143
|
|
|
31
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
(2,087
|
)
|
|
$
|
(1,979
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(437
|
)
|
|
$
|
(689
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Other comprehensive income
(3)
|
122
|
|
|
67
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
(315
|
)
|
|
$
|
(622
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(2
|
)
|
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other comprehensive loss
(4)
|
—
|
|
|
(33
|
)
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
(2
|
)
|
|
$
|
99
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
25
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
(6
|
)
|
|
8
|
|
|
—
|
|
|
—
|
|
Tax benefit (expense)
|
1
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Total Other comprehensive (loss) income before reclassifications, net of tax
|
(5
|
)
|
|
5
|
|
|
—
|
|
|
—
|
|
Net amount reclassified to earnings
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax benefit
(2)
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(5)
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Other comprehensive (loss) income
|
(7
|
)
|
|
5
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
18
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note G).
|
|
|
(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 expense (income), net on the accompanying Statement of Consolidated Operations.
|
|
|
(5)
|
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.
|
K. Receivables
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 using 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. Arconic maintains a beneficial interest, or a right to collect cash, on the sold receivables that have not been funded (deferred purchase program). On March 30, 2012, Arconic initially sold
$304
of customer receivables in exchange for
$50
cash and
$254
of deferred purchase program under the arrangement. Arconic has received additional net cash funding of
$300
(
$2,508
in draws and
$2,208
in repayments) since the program’s inception, including net cash draws totaling
$0
(
$150
in draws and
$150
in repayments) for the quarter ended
March 31, 2018
.
As of
March 31, 2018
and
December 31, 2017
, the deferred purchase program receivable was
$320
and
$187
, 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 gross amount of receivables sold and total cash collected under this program since its inception was
$36,938
and
$36,268
, respectively. Arconic services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.
Cash receipts from customer payments on sold receivables (which are cash receipts on the underlying trade receivables that have already been previously sold in this program) as well as cash receipts and cash disbursements from draws and repayments under the program are presented as cash receipts from sold receivables within investing activities in the Statement of Consolidated Cash Flows.
L. Inventories
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Finished goods
|
$
|
718
|
|
|
$
|
669
|
|
Work-in-process
|
1,406
|
|
|
1,349
|
|
Purchased raw materials
|
435
|
|
|
381
|
|
Operating supplies
|
89
|
|
|
81
|
|
Total inventories
|
$
|
2,648
|
|
|
$
|
2,480
|
|
At
March 31, 2018
and
December 31, 2017
, the portion of inventories valued on a last-in, first-out (LIFO) basis was
$1,302
and
$1,208
, respectively. If valued on an average-cost basis, total inventories would have been
$495
and
$481
higher at
March 31, 2018
and
December 31, 2017
, respectively.
M. Properties, Plants, and Equipment, Net
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Land and land rights
|
$
|
142
|
|
|
$
|
140
|
|
Structures
|
2,413
|
|
|
2,395
|
|
Machinery and equipment
|
9,222
|
|
|
8,830
|
|
|
11,777
|
|
|
11,365
|
|
Less: accumulated depreciation and amortization
|
6,721
|
|
|
6,392
|
|
|
5,056
|
|
|
4,973
|
|
Construction work-in-progress
|
572
|
|
|
621
|
|
|
$
|
5,628
|
|
|
$
|
5,594
|
|
N. Debt
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
5.72% Notes, due 2019
|
—
|
|
|
500
|
|
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
|
250
|
|
|
250
|
|
Other
(1)
|
(18
|
)
|
|
(23
|
)
|
Total debt
|
6,312
|
|
|
6,807
|
|
Less: amount due within one year
|
3
|
|
|
1
|
|
Total long-term debt
|
$
|
6,309
|
|
|
$
|
6,806
|
|
|
|
(1)
|
Includes various financing arrangements related to subsidiaries, unamortized debt discounts related to outstanding notes and bonds listed in the table above, an equity option related to the convertible notes due in 2019, and unamortized debt issuance costs.
|
Public Debt
– During the first quarter of 2018, the Company completed the early redemption of its remaining outstanding
5.72%
Notes due in 2019, with aggregate principal amount of
$500
, for
$518
in cash including accrued and unpaid interest. As a result, the Company recorded a charge of
$19
in Interest expense in the accompanying Statement of Consolidated Operations for the quarter ended March 31, 2018 primarily for the premium paid on the early redemption of these notes in excess of their carrying value.
O. 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:
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Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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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.
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Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
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The carrying values and fair values of Arconic’s financial instruments were as follows:
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March 31, 2018
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December 31, 2017
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Carrying
value
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Fair
value
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Carrying
value
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Fair
value
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Cash and cash equivalents
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$
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1,205
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$
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1,205
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$
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2,150
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$
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2,150
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Restricted cash
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3
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3
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4
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4
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Derivatives – current asset
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37
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37
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61
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61
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Noncurrent receivables
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20
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20
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20
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20
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Derivatives – noncurrent asset
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19
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19
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33
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33
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Available-for-sale securities
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96
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96
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106
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106
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Short-term debt
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45
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45
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38
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38
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Derivatives – current liability
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29
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29
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45
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45
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Derivatives – noncurrent liability
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8
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8
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14
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14
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Long-term debt, less amount due within one year
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6,309
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6,631
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6,806
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7,443
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The following methods were used to estimate the fair values of financial instruments:
Cash and cash equivalents, Restricted cash, Short-term debt.
The carrying amounts approximate fair value because of the short maturity of the instruments. The fair value amounts for Cash and cash equivalents and Restricted cash were classified in Level 1, 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.
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.
P. Acquisitions and 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 E) on the Statement of Consolidated Operations in the first quarter of 2017. The rolling mill generated third-party sales of approximately
$37
in the first quarter of 2017. At the time of the divestiture, the rolling mill had approximately
312
employees.
On April 2, 2018, Arconic completed the sale of its Latin America extrusions business to a subsidiary of Hydro Extruded Solutions AS for
$5
in cash, subject to post-closing adjustments that are not expected to be significant. The sales price approximates the carrying value of the net assets sold on the closing date, following the charge of
$41
recognized in the fourth quarter of 2017 related to the non-cash impairment of the net book value of the business. The operating results and assets and liabilities of the business were included in the Transportation and Construction Solutions segment. This business generated sales of approximately
$25
and
$26
in the first quarter of 2018 and 2017, respectively.
Q. 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
$292
at
March 31, 2018
and
$294
at
December 31, 2017
(of which
$40
and
$41
, 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.
Payments related to remediation expenses applied against the reserve were
$3
in the quarter ended
March 31, 2018
. This amount includes 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 reserves 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
March 31, 2018
and
December 31, 2017
, the reserve balance associated with this matter was
$213
and
$215
, respectively. Arconic is in the planning and design phase of the project, which is expected to be completed in 2018. Following the 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 entered into between Arconic and Alcoa Corporation in connection with the separation transaction with Alcoa Corporation, Arconic shares responsibility with Alcoa Corporation, and Alcoa Corporation has agreed to partially indemnify Arconic, with respect to the following matter.
As previously reported, in July 2013, following a corporate income tax audit covering the 2006 through 2009 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. The assessment is
$161
(
€130
), including interest. In August 2013, the Company filed an appeal of this assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. Arconic filed another appeal in Spain’s National Court in March 2015. Spain’s National Court has not yet rendered a decision related to the assessment.
The Company believes it has meritorious arguments to support its tax position and intends to continue to vigorously litigate the assessment. However, in the event the Company is unsuccessful, a portion of the assessment 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
Howard v. Arconic Inc. et al.
As previously reported, a purported class action complaint related to the Grenfell Tower fire was filed on August 11, 2017 in the United States District Court for the Western District of Pennsylvania against Arconic Inc., and Klaus Kleinfeld. A related purported class action complaint was filed in the United States District Court for the Western District
of Pennsylvania on August 25, 2017, under the caption
Sullivan v. Arconic Inc. et al
., against Arconic Inc., two former Arconic executives, several current and former Arconic directors, and banks that acted as underwriters for Arconic’s September 18, 2014 preferred stock offering (the “Preferred Offering”). The plaintiff in
Sullivan
had previously filed a purported class action against the same defendants on July 18, 2017 in the Southern District of New York and, on August 25, 2017, voluntarily dismissed that action without prejudice. On February 7, 2018, on motion from certain putative class members, the court consolidated
Howard
and
Sullivan
, closed
Sullivan
, and appointed lead plaintiffs in the consolidated case. On April 9, 2018, the lead plaintiffs in the consolidated purported class action filed a consolidated amended complaint. The consolidated amended complaint alleges that the registration statement for the Preferred Offering contained false and misleading statements and omitted to state material information, including by allegedly failing to disclose material uncertainties and trends resulting from sales of Reynobond PE for unsafe uses and by allegedly expressing a belief that appropriate risk management and compliance programs had been adopted while concealing the risks posed by Reynobond PE sales. The consolidated amended complaint also alleges that between November 4, 2013 and June 23, 2017 Arconic and Kleinfeld made false and misleading statements and failed to disclose material information about the Company’s commitment to safety, business and financial prospects, and the risks of the Reynobond PE product, including in Arconic’s Form 10-Ks for the fiscal years ended December 31, 2013, 2014, 2015 and 2016, its Form 10-Qs and quarterly financial press releases from the fourth quarter of 2013 through the first quarter of 2017, its 2013, 2014, 2015 and 2016 Annual Reports, and its 2016 Annual Highlights Report. The consolidated amended complaint seeks, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses.
While the Company believes that this case is without merit and intends to challenge it vigorously, there can be no assurances regarding the ultimate resolution of this matter. Given the preliminary nature of this matter 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 lawsuit 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 of the Board to review these shareholder demand letters and consider 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
Guarantees
At
March 31, 2018
, Arconic had 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
$27
at
March 31, 2018
.
Pursuant to the Separation and Distribution Agreement between Arconic and Alcoa Corporation, Arconic was required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of
$7
and
$8
at
March 31, 2018
and
December 31, 2017
, 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
$169
and
$197
at
March 31, 2018
and
December 31, 2017
, 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 a guarantee up to an estimated present value amount of approximately
$1,188
and
$1,297
at March 31, 2018 and December 31, 2017, respectively, related to a long-term supply agreement for energy for an Alcoa Corporation facility in the event of an Alcoa Corporation payment default. For each guarantee, subject to its respective provisions, Arconic is secondarily liable in the event of a payment default by Alcoa Corporation. Arconic currently views the risk of an Alcoa Corporation payment default on its obligations under the respective contracts to be remote.
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
$126
at
March 31, 2018
.
Pursuant to the Separation and Distribution Agreement, Arconic was required to retain letters of credit of
$53
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.
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 surety bonds, which expire at various dates, primarily in
2018
, was
$55
at
March 31, 2018
.
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.
R. 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:
See Note P for further details of a subsequent event related to the sale of the Latin America extrusions business.
On April 13, 2018, the United Auto Workers ratified a new
five
-year labor agreement, effective May 1, 2018 covering approximately
1,300
U.S. employees of Arconic. A provision within the agreement includes a retirement benefit increase for future retirees that participate in a defined benefit pension plan, which impacts approximately
300
of those employees. In addition, effective January 1, 2019, benefit accruals for future service will cease. As result of these changes, a curtailment charge of approximately
$10
will be recorded in Restructuring and other charges in the second quarter of 2018.
On April 18, 2018, Arconic Inc. disclosed that, effective April 20, 2018, Eric V. Roegner will no longer serve as Executive Vice President and Group President, Engineered Products and Solutions, and President of Arconic Defense.
Report of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors of Arconic Inc.
Results of Review of Financial Statements
We have reviewed the accompanying consolidated balance sheet of Arconic Inc. and its subsidiaries
as of March 31, 2018, and the related statements of consolidated operations, consolidated comprehensive income, changes in consolidated equity, and consolidated cash flows for the three-month periods ended March 31, 2018 and March 31, 2017,
including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of the Company as of December 31, 2017, and the related statements of consolidated operations, consolidated comprehensive (loss) income, changes in consolidated equity,
and consolidated cash flows
for the year then ended (not presented herein), and in our report dated February 23, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. 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 review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
May 1, 2018