☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2018
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
25-0317820 | ||
(State of incorporation) | (I.R.S. Employer Identification No.) | |
390 Park Avenue, New York, New York | 10022-4608 | |
(Address of principal executive offices) | (Zip code) |
Large accelerated filer | ✓ | Accelerated filer | ||||
Non-accelerated filer | __ | Smaller reporting company | ||||
Emerging growth |
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales (I) | $ | 3,261 | $ | 3,234 | $ | 6,453 | $ | 6,289 | ||||||||
Cost of goods sold (exclusive of expenses below) | 2,583 | 2,533 | 5,075 | 4,933 | ||||||||||||
Selling, general administrative, and other expenses | 204 | 239 | 425 | 444 | ||||||||||||
Research and development expenses | 30 | 32 | 58 | 63 | ||||||||||||
Provision for depreciation and amortization | 137 | 133 | 270 | 266 | ||||||||||||
Restructuring and other charges (D & E) | 26 | 14 | 99 | 30 | ||||||||||||
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Operating income | 281 | 283 | 526 | 553 | ||||||||||||
Interest expense (L) | 183 | 124 | 298 | 245 | ||||||||||||
Other income, net (G) | (171 | ) | (17 | ) | (525 | ) | (29 | ) | ||||||||
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Income from continuing operations before income taxes | 269 | 176 | 753 | 337 | ||||||||||||
Provision for income taxes | 57 | 123 | 219 | 174 | ||||||||||||
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Income from continuing operations after income taxes | 212 | 53 | 534 | 163 | ||||||||||||
Income from discontinued operations after income taxes (G) | — | 125 | — | 26 | ||||||||||||
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Net income | 212 | 178 | 534 | 189 | ||||||||||||
Less: Income from discontinued operations attributable to noncontrolling interests (G) | — | 43 | — | 38 | ||||||||||||
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Net income attributable to Arconic | $ | 212 | $ | 135 | $ | 534 | $ | 151 | ||||||||
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Amounts Attributable to Arconic Common Shareholders (J): | ||||||||||||||||
Net income | $ | 194 | $ | 118 | $ | 499 | $ | 117 | ||||||||
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Earnings per share - basic | ||||||||||||||||
Continuing operations | $ | 0.44 | $ | 0.08 | $ | 1.13 | $ | 0.30 | ||||||||
Discontinued operations | — | 0.19 | — | (0.03 | ) | |||||||||||
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Net income per share - basic | $ | 0.44 | $ | 0.27 | $ | 1.13 | $ | 0.27 | ||||||||
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Earnings per share - diluted | ||||||||||||||||
Continuing operations | $ | 0.43 | $ | 0.08 | $ | 1.07 | $ | 0.29 | ||||||||
Discontinued operations | — | 0.19 | — | (0.03 | ) | |||||||||||
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Net income per share - diluted | $ | 0.43 | $ | 0.27 | $ | 1.07 | $ | 0.26 | ||||||||
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Dividends paid per share | $ | 0.06 | $ | 0.09 | $ | 0.12 | $ | 0.18 | ||||||||
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Weighted Average Shares Outstanding (J): | ||||||||||||||||
Average shares outstanding - basic | 441 | 438 | 440 | 438 | ||||||||||||
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Average shares outstanding - diluted | 462 | 452 | 500 | 442 | ||||||||||||
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Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Sales (C & D) | $ | 3,573 | $ | 3,261 | $ | 7,018 | $ | 6,453 | |||||||
Cost of goods sold (exclusive of expenses below) | 2,903 | 2,549 | 5,671 | 5,007 | |||||||||||
Selling, general administrative, and other expenses | 158 | 200 | 330 | 417 | |||||||||||
Research and development expenses | 29 | 29 | 52 | 57 | |||||||||||
Provision for depreciation and amortization | 144 | 137 | 286 | 270 | |||||||||||
Restructuring and other charges (E) | 15 | 26 | 22 | 99 | |||||||||||
Operating income | 324 | 320 | 657 | 603 | |||||||||||
Interest expense (N) | 89 | 183 | 203 | 298 | |||||||||||
Other expense (income), net (F) | 41 | (132 | ) | 61 | (448 | ) | |||||||||
Income before income taxes | 194 | 269 | 393 | 753 | |||||||||||
Provision for income taxes (H) | 74 | 57 | 130 | 219 | |||||||||||
Net income | $ | 120 | $ | 212 | $ | 263 | $ | 534 | |||||||
Amounts Attributable to Arconic Common Shareholders (I): | |||||||||||||||
Net income | $ | 120 | $ | 194 | $ | 262 | $ | 499 | |||||||
Earnings per share - basic | $ | 0.25 | $ | 0.44 | $ | 0.54 | $ | 1.13 | |||||||
Earnings per share - diluted | $ | 0.24 | $ | 0.43 | $ | 0.53 | $ | 1.07 | |||||||
Dividends paid per share | $ | 0.06 | $ | 0.06 | $ | 0.12 | $ | 0.12 | |||||||
Average Shares Outstanding (I): | |||||||||||||||
Average shares outstanding - basic | 483 | 441 | 483 | 440 | |||||||||||
Average shares outstanding - diluted | 502 | 462 | 502 | 500 |
2
Arconic | Noncontrolling Interests | Total | ||||||||||||||||||||||
Second quarter ended June 30, | Second quarter ended June 30, | Second quarter ended June 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Net income | $ | 212 | $ | 135 | $ | — | $ | 43 | $ | 212 | $ | 178 | ||||||||||||
Other comprehensive income (loss), net of tax (C): | ||||||||||||||||||||||||
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | 48 | 65 | — | 2 | 48 | 67 | ||||||||||||||||||
Foreign currency translation adjustments | 99 | 45 | — | 32 | 99 | 77 | ||||||||||||||||||
Net change in unrealized gains/losses onavailable-for-sale securities | (101 | ) | 3 | — | — | (101 | ) | 3 | ||||||||||||||||
Net change in unrecognized gains/losses on cash flow hedges | (2 | ) | (153 | ) | — | 16 | (2 | ) | (137 | ) | ||||||||||||||
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Total Other comprehensive income (loss), net of tax | 44 | (40 | ) | — | 50 | 44 | 10 | |||||||||||||||||
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Comprehensive income | $ | 256 | $ | 95 | $ | — | $ | 93 | $ | 256 | $ | 188 | ||||||||||||
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Arconic | Noncontrolling Interests | Total | ||||||||||||||||||||||
Six months ended June 30, | Six months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Net income | $ | 534 | $ | 151 | $ | — | $ | 38 | $ | 534 | $ | 189 | ||||||||||||
Other comprehensive income, net of tax (C): | ||||||||||||||||||||||||
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | 79 | 97 | — | 3 | 79 | 100 | ||||||||||||||||||
Foreign currency translation adjustments | 166 | 348 | — | 139 | 166 | 487 | ||||||||||||||||||
Net change in unrealized gains/losses onavailable-for-sale securities | (134 | ) | 4 | — | — | (134 | )�� | 4 | ||||||||||||||||
Net change in unrecognized gains/losses on cash flow hedges | 3 | (233 | ) | — | 14 | 3 | (219 | ) | ||||||||||||||||
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Total Other comprehensive income, net of tax | 114 | 216 | — | 156 | 114 | 372 | ||||||||||||||||||
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Comprehensive income | $ | 648 | $ | 367 | $ | — | $ | 194 | $ | 648 | $ | 561 | ||||||||||||
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Arconic | Noncontrolling Interests | Total | |||||||||||||||||||||
Second quarter ended June 30, | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||
Net income | $ | 120 | $ | 212 | $ | — | $ | — | $ | 120 | $ | 212 | |||||||||||
Other comprehensive (loss) income, net of tax (J): | |||||||||||||||||||||||
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | 29 | 48 | — | — | 29 | 48 | |||||||||||||||||
Foreign currency translation adjustments | (201 | ) | 99 | — | — | (201 | ) | 99 | |||||||||||||||
Net change in unrealized gains on available-for-sale securities | (2 | ) | (101 | ) | — | — | (2 | ) | (101 | ) | |||||||||||||
Net change in unrecognized losses/gains on cash flow hedges | 4 | (2 | ) | — | — | 4 | (2 | ) | |||||||||||||||
Total Other comprehensive (loss) income, net of tax | (170 | ) | 44 | — | — | (170 | ) | 44 | |||||||||||||||
Comprehensive (loss) income | $ | (50 | ) | $ | 256 | $ | — | $ | — | $ | (50 | ) | $ | 256 | |||||||||
Arconic | Noncontrolling Interests | Total | |||||||||||||||||||||
Six months ended June 30, | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||
Net income | $ | 263 | $ | 534 | $ | — | $ | — | $ | 263 | $ | 534 | |||||||||||
Other comprehensive income, net of tax (J): | |||||||||||||||||||||||
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | 172 | 79 | — | — | 172 | 79 | |||||||||||||||||
Foreign currency translation adjustments | (79 | ) | 166 | — | — | (79 | ) | 166 | |||||||||||||||
Net change in unrealized gains on available-for-sale securities | (2 | ) | (134 | ) | — | — | (2 | ) | (134 | ) | |||||||||||||
Net change in unrecognized gains/losses on cash flow hedges | (3 | ) | 3 | — | — | (3 | ) | 3 | |||||||||||||||
Total Other comprehensive income, net of tax | 88 | 114 | — | — | 88 | 114 | |||||||||||||||||
Comprehensive income | $ | 351 | $ | 648 | $ | — | $ | — | $ | 351 | $ | 648 |
3
June 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,785 | $ | 1,863 | ||||
Receivables from customers, less allowances of $8 in 2017 and $13 in 2016 (K) | 1,170 | 974 | ||||||
Other receivables (G & K) | 357 | 477 | ||||||
Inventories (F) | 2,416 | 2,253 | ||||||
Prepaid expenses and other current assets | 305 | 325 | ||||||
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Total current assets | 6,033 | 5,892 | ||||||
Properties, plants, and equipment | 11,738 | 11,572 | ||||||
Less: accumulated depreciation and amortization | 6,231 | 6,073 | ||||||
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Properties, plants, and equipment, net | 5,507 | 5,499 | ||||||
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Goodwill | 5,215 | 5,148 | ||||||
Deferred income taxes | 1,080 | 1,234 | ||||||
Investment in common stock of Alcoa Corporation (G & N) | — | 1,020 | ||||||
Other noncurrent assets | 1,271 | 1,245 | ||||||
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Total Assets | $ | 19,106 | $ | 20,038 | ||||
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Liabilities | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 48 | $ | 36 | ||||
Accounts payable, trade | 1,667 | 1,744 | ||||||
Accrued compensation and retirement costs | 363 | 398 | ||||||
Taxes, including income taxes | 77 | 85 | ||||||
Accrued interest payable | 124 | 153 | ||||||
Other current liabilities | 379 | 329 | ||||||
Long-term debt due within one year | — | 4 | ||||||
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Total current liabilities | 2,658 | 2,749 | ||||||
Long-term debt, less amount due within one year (L & N) | 6,796 | 8,044 | ||||||
Accrued pension benefits | 2,202 | 2,345 | ||||||
Accrued other postretirement benefits | 822 | 889 | ||||||
Other noncurrent liabilities and deferred credits | 875 | 870 | ||||||
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Total liabilities | 13,353 | 14,897 | ||||||
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Contingencies and commitments (H) | ||||||||
Equity | ||||||||
Arconic shareholders’ equity: | ||||||||
Preferred stock | 55 | 55 | ||||||
Mandatory convertible preferred stock | 3 | 3 | ||||||
Common stock | 441 | 438 | ||||||
Additional capital | 8,262 | 8,214 | ||||||
Accumulated deficit | (567 | ) | (1,027 | ) | ||||
Accumulated other comprehensive loss (C) | (2,454 | ) | (2,568 | ) | ||||
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Total Arconic shareholders’ equity | 5,740 | 5,115 | ||||||
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Noncontrolling interests | 13 | 26 | ||||||
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Total equity | 5,753 | 5,141 | ||||||
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Total Liabilities and Equity | $ | 19,106 | $ | 20,038 | ||||
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June 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,455 | $ | 2,150 | |||
Receivables from customers, less allowances of $5 in 2018 and $8 in 2017 (K) | 1,159 | 1,035 | |||||
Other receivables (K) | 478 | 339 | |||||
Inventories (L) | 2,659 | 2,480 | |||||
Prepaid expenses and other current assets | 324 | 374 | |||||
Total current assets | 6,075 | 6,378 | |||||
Properties, plants, and equipment, net (M) | 5,582 | 5,594 | |||||
Goodwill (A & M) | 4,518 | 4,535 | |||||
Deferred income taxes | 626 | 743 | |||||
Intangibles, net | 963 | 987 | |||||
Other noncurrent assets | 455 | 481 | |||||
Total assets | $ | 18,219 | $ | 18,718 | |||
Liabilities | |||||||
Current liabilities: | |||||||
Accounts payable, trade | $ | 2,024 | $ | 1,839 | |||
Accrued compensation and retirement costs | 364 | 399 | |||||
Taxes, including income taxes | 69 | 75 | |||||
Accrued interest payable | 113 | 124 | |||||
Other current liabilities | 362 | 349 | |||||
Short-term debt | 45 | 38 | |||||
Total current liabilities | 2,977 | 2,824 | |||||
Long-term debt, less amount due within one year (N & O) | 6,312 | 6,806 | |||||
Accrued pension benefits (G) | 2,184 | 2,564 | |||||
Accrued other postretirement benefits | 815 | 841 | |||||
Other noncurrent liabilities and deferred credits | 713 | 759 | |||||
Total liabilities | 13,001 | 13,794 | |||||
Contingencies and commitments (Q) | |||||||
Equity | |||||||
Arconic shareholders’ equity: | |||||||
Preferred stock | 55 | 55 | |||||
Common stock | 483 | 481 | |||||
Additional capital | 8,295 | 8,266 | |||||
Accumulated deficit | (1,073 | ) | (1,248 | ) | |||
Accumulated other comprehensive loss (J) | (2,556 | ) | (2,644 | ) | |||
Total Arconic shareholders’ equity | 5,204 | 4,910 | |||||
Noncontrolling interests | 14 | 14 | |||||
Total equity | 5,218 | 4,924 | |||||
Total liabilities and equity | $ | 18,219 | $ | 18,718 |
4
Six months ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash from Operations | ||||||||
Net income | $ | 534 | $ | 189 | ||||
Adjustments to reconcile net income to cash from operations: | ||||||||
Depreciation, depletion and amortization | 270 | 622 | ||||||
Deferred income taxes | 27 | (78 | ) | |||||
Equity income, net of dividends | — | 20 | ||||||
Restructuring and other charges | 99 | 116 | ||||||
Net gain from investing activities - asset sales (G) | (515 | ) | (28 | ) | ||||
Net periodic pension benefit cost (M) | 108 | 168 | ||||||
Stock-based compensation | 48 | 55 | ||||||
Other | 63 | 19 | ||||||
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | ||||||||
(Increase) in receivables | (282 | ) | (218 | ) | ||||
(Increase) in inventories | (150 | ) | (3 | ) | ||||
Decrease in prepaid expenses and other current assets | 30 | 4 | ||||||
(Decrease) in accounts payable, trade | (69 | ) | (243 | ) | ||||
(Decrease) in accrued expenses | (105 | ) | (301 | ) | ||||
Increase in taxes, including income taxes | 121 | 57 | ||||||
Pension contributions | (163 | ) | (147 | ) | ||||
(Increase) in noncurrent assets | (60 | ) | (215 | ) | ||||
(Decrease) in noncurrent liabilities | (39 | ) | (115 | ) | ||||
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Cash used for operations | (83 | ) | (98 | ) | ||||
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Financing Activities | ||||||||
Net change in short-term borrowings (original maturities of three months or less) | 9 | (5 | ) | |||||
Additions to debt (original maturities greater than three months) | 512 | 876 | ||||||
Payments on debt (original maturities greater than three months) (L) | (1,333 | ) | (882 | ) | ||||
Proceeds from exercise of employee stock options | 26 | 2 | ||||||
Dividends paid to shareholders | (88 | ) | (114 | ) | ||||
Distributions to noncontrolling interests | (14 | ) | (84 | ) | ||||
Other | (15 | ) | — | |||||
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Cash used for financing activities | (903 | ) | (207 | ) | ||||
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Investing Activities | ||||||||
Capital expenditures | (229 | ) | (528 | ) | ||||
Proceeds from the sale of assets and businesses (E) | (9 | ) | 549 | |||||
Additions to investments | (1 | ) | (8 | ) | ||||
Sales of investments (G) | 888 | 275 | ||||||
Net change in restricted cash | 10 | 7 | ||||||
Other (G) | 245 | 15 | ||||||
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Cash provided from investing activities | 904 | 310 | ||||||
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Effect of exchange rate changes on cash and cash equivalents | 4 | 5 | ||||||
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Net change in cash and cash equivalents | (78 | ) | 10 | |||||
Cash and cash equivalents at beginning of year | 1,863 | 1,919 | ||||||
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Cash and cash equivalents at end of period | $ | 1,785 | $ | 1,929 | ||||
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Six months ended | |||||||
June 30, | |||||||
2018 | 2017 | ||||||
Operating activities | |||||||
Net income | $ | 263 | $ | 534 | |||
Adjustments to reconcile net income to cash used for operations: | |||||||
Depreciation and amortization | 286 | 270 | |||||
Deferred income taxes | 47 | 27 | |||||
Restructuring and other charges | 22 | 99 | |||||
Net loss (gain) from investing activities - asset sales (F) | 5 | (515 | ) | ||||
Net periodic pension benefit cost (G) | 71 | 108 | |||||
Stock-based compensation | 29 | 48 | |||||
Other | 50 | 115 | |||||
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||
(Increase) in receivables (B) | (709 | ) | (567 | ) | |||
(Increase) in inventories | (220 | ) | (150 | ) | |||
Decrease in prepaid expenses and other current assets | 8 | 30 | |||||
Increase (decrease) in accounts payable, trade | 218 | (69 | ) | ||||
(Decrease) in accrued expenses | (84 | ) | (105 | ) | |||
Increase in taxes, including income taxes | 37 | 121 | |||||
Pension contributions | (237 | ) | (163 | ) | |||
(Increase) in noncurrent assets | (4 | ) | (60 | ) | |||
(Decrease) in noncurrent liabilities | (42 | ) | (39 | ) | |||
Cash used for operations | (260 | ) | (316 | ) | |||
Financing Activities | |||||||
Net change in short-term borrowings (original maturities of three months or less) | 5 | 9 | |||||
Additions to debt (original maturities greater than three months) | 300 | 512 | |||||
Premiums paid on early redemption of debt (B & N) | (17 | ) | (52 | ) | |||
Payments on debt (original maturities greater than three months) (N) | (801 | ) | (1,333 | ) | |||
Proceeds from exercise of employee stock options | 13 | 26 | |||||
Dividends paid to shareholders | (60 | ) | (88 | ) | |||
Distributions to noncontrolling interests | — | (14 | ) | ||||
Other | (17 | ) | (15 | ) | |||
Cash used for financing activities | (577 | ) | (955 | ) | |||
Investing Activities | |||||||
Capital expenditures | (288 | ) | (229 | ) | |||
Proceeds from the sale of assets and businesses (P) | 5 | (9 | ) | ||||
Sales of investments (F) | 9 | 888 | |||||
Cash receipts from sold receivables (B & K) | 420 | 285 | |||||
Other | — | 244 | |||||
Cash provided from investing activities | 146 | 1,179 | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2 | ) | 4 | ||||
Net change in cash, cash equivalents and restricted cash (B) | (693 | ) | (88 | ) | |||
Cash, cash equivalents and restricted cash at beginning of year (B) | 2,153 | 1,878 | |||||
Cash, cash equivalents and restricted cash at end of period (B) | $ | 1,460 | $ | 1,790 |
5
Arconic Shareholders | ||||||||||||||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Retained earnings | Treasury stock | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||||||
Balance at March 31, 2016 | $ | 55 | $ | 3 | $ | 1,391 | $ | 9,856 | $ | 8,753 | $ | (2,657 | ) | $ | (5,175 | ) | $ | 2,135 | $ | 14,361 | ||||||||||||||||
Net income | — | — | — | — | 135 | — | — | 43 | 178 | |||||||||||||||||||||||||||
Other comprehensive income (C) | — | — | — | — | — | — | (40 | ) | 50 | 10 | ||||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $0.9375 per share | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred-Class B @ $6.71875 per share | — | — | — | — | (17 | ) | — | — | — | (17 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 29 | — | — | — | — | 29 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | — | (8 | ) | — | 10 | — | — | 2 | ||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | (34 | ) | (34 | ) | |||||||||||||||||||||||||
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Balance at June 30, 2016 | $ | 55 | $ | 3 | $ | 1,391 | $ | 9,877 | $ | 8,871 | $ | (2,647 | ) | $ | (5,215 | ) | $ | 2,194 | $ | 14,529 | ||||||||||||||||
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Arconic Shareholders | ||||||||||||||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Accumulated deficit | Treasury stock | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||||||
Balance at March 31, 2017 | $ | 55 | $ | 3 | $ | 441 | $ | 8,249 | $ | (768 | ) | $ | — | $ | (2,498 | ) | $ | 13 | $ | 5,495 | ||||||||||||||||
Net income | — | — | — | — | 212 | — | — | — | 212 | |||||||||||||||||||||||||||
Other comprehensive income (C) | — | — | — | — | — | — | 44 | — | 44 | |||||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $0.9375 per share | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred-Class B @ $6.71875 per share | — | — | — | — | (18 | ) | — | — | — | (18 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 20 | — | — | — | — | 20 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | — | (7 | ) | — | — | — | — | (7 | ) | |||||||||||||||||||||||||
Other | — | — | — | — | 7 | — | — | — | 7 | |||||||||||||||||||||||||||
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| |||||||||||||||||||
Balance at June 30, 2017 | $ | 55 | $ | 3 | $ | 441 | $ | 8,262 | $ | (567 | ) | $ | — | $ | (2,454 | ) | $ | 13 | $ | 5,753 | ||||||||||||||||
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Arconic Shareholders | |||||||||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,214 | $ | (1,027 | ) | $ | (2,568 | ) | $ | 26 | $ | 5,141 | |||||||||||||
Net income | — | — | — | — | 534 | — | — | 534 | |||||||||||||||||||||||
Other comprehensive income (J) | — | — | — | — | — | 114 | — | 114 | |||||||||||||||||||||||
Cash dividends declared: | |||||||||||||||||||||||||||||||
Preferred-Class A @ $1.875 per share | — | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||||
Preferred-Class B @ $13.4375 per share | — | — | — | — | (34 | ) | — | — | (34 | ) | |||||||||||||||||||||
Common @ $0.12 per share | — | — | — | — | (54 | ) | — | — | (54 | ) | |||||||||||||||||||||
Stock-based compensation | — | — | — | 48 | — | — | — | 48 | |||||||||||||||||||||||
Common stock issued: compensation plans | — | — | 3 | — | — | — | — | 3 | |||||||||||||||||||||||
Distributions | — | — | — | — | — | — | (14 | ) | (14 | ) | |||||||||||||||||||||
Other | — | — | — | — | 15 | — | 1 | 16 | |||||||||||||||||||||||
Balance at June 30, 2017 | $ | 55 | $ | 3 | $ | 441 | $ | 8,262 | $ | (567 | ) | $ | (2,454 | ) | $ | 13 | $ | 5,753 |
Arconic Shareholders | |||||||||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 55 | $ | — | $ | 481 | $ | 8,266 | $ | (1,248 | ) | $ | (2,644 | ) | $ | 14 | $ | 4,924 | |||||||||||||
Net income | — | — | — | — | 263 | — | — | 263 | |||||||||||||||||||||||
Other comprehensive income (J) | — | — | — | — | — | 88 | — | 88 | |||||||||||||||||||||||
Cash dividends declared: | |||||||||||||||||||||||||||||||
Preferred-Class A @ $1.875 per share | — | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||||
Common @ $0.18 per share | — | — | — | — | (87 | ) | — | — | (87 | ) | |||||||||||||||||||||
Stock-based compensation | — | — | — | 29 | — | — | — | 29 | |||||||||||||||||||||||
Common stock issued: compensation plans | — | — | 2 | — | — | — | — | 2 | |||||||||||||||||||||||
Balance at June 30, 2018 | $ | 55 | $ | — | $ | 483 | $ | 8,295 | $ | (1,073 | ) | $ | (2,556 | ) | $ | 14 | $ | 5,218 |
6
Statement of Changes in Consolidated Equity (unaudited)
(in millions, exceptper-share amounts)
Arconic Shareholders | ||||||||||||||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Retained earnings | Treasury stock | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 55 | $ | 3 | $ | 1,391 | $ | 10,019 | $ | 8,834 | $ | (2,825 | ) | $ | (5,431 | ) | $ | 2,085 | $ | 14,131 | ||||||||||||||||
Net income | — | — | — | — | 151 | — | — | 38 | 189 | |||||||||||||||||||||||||||
Other comprehensive income (C) | — | — | — | — | — | — | 216 | 156 | 372 | |||||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $1.875 per share | — | — | — | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||||||
Preferred-Class B @ $13.4375 per share | — | — | — | — | (34 | ) | — | — | — | (34 | ) | |||||||||||||||||||||||||
Common @ $0.06 per share | — | — | — | — | (79 | ) | — | — | — | (79 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 55 | — | — | — | — | 55 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | — | (197 | ) | — | 178 | — | — | (19 | ) | |||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | (84 | ) | (84 | ) | |||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | (1 | ) | (1 | ) | |||||||||||||||||||||||||
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Balance at June 30, 2016 | $ | 55 | $ | 3 | $ | 1,391 | $ | 9,877 | $ | 8,871 | $ | (2,647 | ) | $ | (5,215 | ) | $ | 2,194 | $ | 14,529 | ||||||||||||||||
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Arconic Shareholders | ||||||||||||||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Accumulated deficit | Treasury stock | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,214 | $ | (1,027 | ) | $ | — | $ | (2,568 | ) | $ | 26 | $ | 5,141 | ||||||||||||||||
Net income | — | — | — | — | 534 | — | — | — | 534 | |||||||||||||||||||||||||||
Other comprehensive income (C) | — | — | — | — | — | — | 114 | — | 114 | |||||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $1.875 per share | — | — | — | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||||||
Preferred-Class B @ $13.4375 per share | — | — | — | — | (34 | ) | — | — | — | (34 | ) | |||||||||||||||||||||||||
Common @ $0.12 per share | — | — | — | — | (54 | ) | — | — | — | (54 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 48 | — | — | — | — | 48 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | 3 | — | — | — | — | — | 3 | |||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | (14 | ) | (14 | ) | |||||||||||||||||||||||||
Other | — | — | — | — | 15 | — | — | 1 | 16 | |||||||||||||||||||||||||||
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Balance at June 30, 2017 | $ | 55 | $ | 3 | $ | 441 | $ | 8,262 | $ | (567 | ) | $ | — | $ | (2,454 | ) | $ | 13 | $ | 5,753 | ||||||||||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
7
Arconic and subsidiaries
The separation of Alcoa Inc. into two standalone, publicly-traded companies,presentation (see below and Note D).
Pursuant to the authorization provided at a special meeting of Arconic common shareholders held on October 5, 2016, shareholders approved a1-for-3 reverse stock split of Arconic’s outstandingcustomers and authorized shares of common stock (the “Reverse Stock Split”).reducing cost. 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, without anythis change in the parEP&S segment organizational structure, management assessed and concluded that each of the three business units represent reporting units for goodwill impairment evaluation purposes. Also, as a result of the reorganization, goodwill was reallocated to the three new reporting units and evaluated for impairment during the first quarter of 2018. The estimated fair value per share. The Reverse Stock Split reducedof each reporting unit substantially exceeded its carrying value; thus, there was no goodwill impairment. More than 92% of Arconic’s total goodwill at March 31, 2018 was allocated to the numberfollowing three EP&S reporting units: Arconic Engines ($2,095), Arconic Fastening Systems ($1,623) and Arconic Engineered Structures ($517). See Note M for further details of sharesan interim goodwill impairment evaluation that was performed for the Arconic Engines reporting unit during the second quarter of common stock outstanding from approximately 1.3 billion shares to approximately 0.4 billion shares. The Company’s common stock began trading on a reverse stock split-adjusted basis on the New York Stock Exchange on October 6, 2016.
2018.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued changes 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 additionalpaid-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 income statement. 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. Additionally, 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 fortax-withholding purposes to be classified as a financing activity. Additionally, 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. These changes became effective for Arconic on January 1, 2017. Management has concluded that the adoption of this guidance did not have a material effect on the Consolidated Financial Statements.
In March 2016, the FASB issued changes eliminating the requirement for an investor to adjust an equity method investment, results of operations, and retained earnings retroactively on astep-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. Additionally, an entity that has anavailable-for-sale equity security that
8
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. These changes became effective for Arconic on January 1, 2017. Management has concluded that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
In March 2016, the FASB issued changes 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. These changes became effective for Arconic on January 1, 2017. Management has determined that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
In October 2016, the FASB issued changes 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. These changes became effective for Arconic on January 1, 2017. Management has determined that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
In January 2017, the FASB issued changes 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 has elected to early adopt this guidance as of January 1, 2017, and will apply it on a prospective basis. Management does not anticipate that the adoption of these changes will have a material impact on the Consolidated Financial Statements.
In January 2017, the FASB issued changes 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 has elected to early adopt this guidance as of January 1, 2017, and will apply it on a prospective basis. Management does not anticipate that the adoption of these changes will have a material impact on the Consolidated Financial Statements.
Issued
Arconic expects to adopt theadopted this new guidance using the modified retrospective transition approach. The Company has formed a project assessment and adoption team and is currently reviewing contract terms and assessingapproach applied to those contracts that were not completed as of January 1, 2018. There was no cumulative effect adjustment to the impactopening balance of adopting the new guidance onretained earnings in the Consolidated Financial Statements. Based onBalance Sheet in the Company’s initial contract assessment, it believes thatfirst quarter of 2018, as the adoption did not result in a change to our timing of revenue under certain contracts will continuerecognition, which continues to be recognized at a point in time, while revenue under other contracts, primarily within the Engineered Products and Solutions segment, may be recognized over time due to no alternative usetime. See Note C for the product as well as an enforceable right of payment from the customer in the event of termination of the contract. The Company is continuing to assess the impact that over-time revenue recognition will have on its Consolidated Financial Statements, therefore an estimate of the impact of adopting this standard is not currently determinable.
9
further details.
Statements.
However, the adoption is not expected to have a material impact on the Statement of Consolidated Operations or 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 these changes 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. In addition, 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 become effective for Arconic on January 1, 2018, including interim periods within those fiscal years. The new standard must 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.2019. Management is currently evaluating the potential impact of these
10
changesthis guidance on the Consolidated Financial Statements. For 2017,
Engineered Products and Solutions | Global Rolled Products | Transportation and Construction Solutions | Total Segment | ||||||||||||
Second quarter ended June 30, 2018 | |||||||||||||||
Aerospace | $ | 1,241 | $ | 226 | $ | — | $ | 1,467 | |||||||
Transportation | 119 | 612 | 253 | 984 | |||||||||||
Building and construction | — | 60 | 297 | 357 | |||||||||||
Industrial and other | 236 | 553 | 12 | 801 | |||||||||||
Total end-market revenue | $ | 1,596 | $ | 1,451 | $ | 562 | $ | 3,609 | |||||||
Second quarter ended June 30, 2017 | |||||||||||||||
Aerospace | $ | 1,141 | $ | 241 | $ | — | $ | 1,382 | |||||||
Transportation | 97 | 475 | 200 | 772 | |||||||||||
Building and construction | — | 51 | 283 | 334 | |||||||||||
Industrial and other | 247 | 504 | 21 | 772 | |||||||||||
Total end-market revenue | $ | 1,485 | $ | 1,271 | $ | 504 | $ | 3,260 | |||||||
Six months ended June 30, 2018 | |||||||||||||||
Aerospace | $ | 2,431 | $ | 425 | $ | — | $ | 2,856 | |||||||
Transportation | 216 | 1,210 | 496 | 1,922 | |||||||||||
Building and construction | — | 108 | 582 | 690 | |||||||||||
Industrial and other | 490 | 1,074 | 21 | 1,585 | |||||||||||
Total end-market revenue | $ | 3,137 | $ | 2,817 | $ | 1,099 | $ | 7,053 | |||||||
Six months ended June 30, 2017 | |||||||||||||||
Aerospace | $ | 2,296 | $ | 456 | $ | — | $ | 2,752 | |||||||
Transportation | 190 | 968 | 373 | 1,531 | |||||||||||
Building and construction | — | 100 | 545 | 645 | |||||||||||
Industrial and other | 486 | 995 | 42 | 1,523 | |||||||||||
Total end-market revenue | $ | 2,972 | $ | 2,519 | $ | 960 | $ | 6,451 |
In May 2017, the FASB issued clarificationother companies. Prior period financial information has been recast to guidance on the modification accounting criteria for share-based payment awards. conform to current year presentation. Differences between segment totals and consolidated Arconic are in Corporate.
11
C. Accumulated Other Comprehensive Loss
follows:
Engineered Products and Solutions | Global Rolled Products | Transportation and Construction Solutions | Total Segment | ||||||||||||
Second quarter ended June 30, 2018 | |||||||||||||||
Sales: | |||||||||||||||
Third-party sales | $ | 1,596 | $ | 1,451 | $ | 562 | $ | 3,609 | |||||||
Intersegment sales | — | 46 | — | 46 | |||||||||||
Total sales | $ | 1,596 | $ | 1,497 | $ | 562 | $ | 3,655 | |||||||
Profit and loss: | |||||||||||||||
Segment operating profit | $ | 212 | $ | 123 | $ | 97 | $ | 432 | |||||||
Restructuring and other charges | 9 | 1 | — | 10 | |||||||||||
Provision for depreciation and amortization | 70 | 53 | 12 | 135 | |||||||||||
Second quarter ended June 30, 2017 | |||||||||||||||
Sales: | |||||||||||||||
Third-party sales | $ | 1,485 | $ | 1,271 | $ | 504 | $ | 3,260 | |||||||
Intersegment sales | — | 37 | — | 37 | |||||||||||
Total sales | $ | 1,485 | $ | 1,308 | $ | 504 | $ | 3,297 | |||||||
Profit and loss: | |||||||||||||||
Segment operating profit | $ | 250 | $ | 133 | $ | 71 | $ | 454 | |||||||
Restructuring and other charges | 8 | 17 | 6 | 31 | |||||||||||
Provision for depreciation and amortization | 66 | 51 | 12 | 129 |
Engineered Products and Solutions | Global Rolled Products | Transportation and Construction Solutions | Total Segment | ||||||||||||
Six months ended June 30, 2018 | |||||||||||||||
Sales: | |||||||||||||||
Third-party sales | $ | 3,137 | $ | 2,817 | $ | 1,099 | $ | 7,053 | |||||||
Intersegment sales | — | 88 | — | 88 | |||||||||||
Total sales | $ | 3,137 | $ | 2,905 | $ | 1,099 | $ | 7,141 | |||||||
Profit and loss: | |||||||||||||||
Segment operating profit | $ | 433 | $ | 235 | $ | 164 | $ | 832 | |||||||
Restructuring and other charges | 10 | — | — | 10 | |||||||||||
Provision for depreciation and amortization | 141 | 104 | 25 | 270 | |||||||||||
Six months ended June 30, 2017 | |||||||||||||||
Sales: | |||||||||||||||
Third-party sales | $ | 2,972 | $ | 2,519 | $ | 960 | $ | 6,451 | |||||||
Intersegment sales | — | 71 | — | 71 | |||||||||||
Total sales | $ | 2,972 | $ | 2,590 | $ | 960 | $ | 6,522 | |||||||
Profit and loss: | |||||||||||||||
Segment operating profit | $ | 497 | $ | 269 | $ | 139 | $ | 905 | |||||||
Restructuring and other charges | 14 | 74 | 9 | 97 | |||||||||||
Provision for depreciation and amortization | 130 | 101 | 24 | 255 |
Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Total segment operating profit | $ | 432 | $ | 454 | $ | 832 | $ | 905 | |||||||
Unallocated amounts: | |||||||||||||||
Restructuring and other charges | (15 | ) | (26 | ) | (22 | ) | (99 | ) | |||||||
Corporate expense | (93 | ) | (108 | ) | (153 | ) | (203 | ) | |||||||
Consolidated operating income | $ | 324 | $ | 320 | $ | 657 | $ | 603 | |||||||
Interest expense | (89 | ) | (183 | ) | (203 | ) | (298 | ) | |||||||
Other (expense) income, net | (41 | ) | 132 | (61 | ) | 448 | |||||||||
Consolidated income before income taxes | $ | 194 | $ | 269 | $ | 393 | $ | 753 |
Arconic | Noncontrolling Interests | |||||||||||||||
Second quarter ended June 30, | Second quarter ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pension and other postretirement benefits (M) | ||||||||||||||||
Balance at beginning of period | $ | (1,979 | ) | $ | (3,579 | ) | $ | — | $ | (55 | ) | |||||
Other comprehensive income: | ||||||||||||||||
Unrecognized net actuarial loss and prior service cost | 17 | (5 | ) | — | 1 | |||||||||||
Tax (expense) benefit | (5 | ) | 3 | — | — | |||||||||||
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Total Other comprehensive loss before reclassifications, net of tax | 12 | (2 | ) | — | 1 | |||||||||||
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| |||||||||
Amortization of net actuarial loss and prior service cost(1) | 56 | 104 | — | |||||||||||||
Tax (expense) benefit(2) | (20 | ) | (37 | ) | — | 1 | ||||||||||
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Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | 36 | 67 | — | 1 | ||||||||||||
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| |||||||||
Total Other comprehensive income | 48 | 65 | — | 2 | ||||||||||||
|
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| |||||||||
Balance at end of period | $ | (1,931 | ) | $ | (3,514 | ) | $ | — | $ | (53 | ) | |||||
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| |||||||||
Foreign currency translation | ||||||||||||||||
Balance at beginning of period | $ | (622 | ) | $ | (2,109 | ) | $ | (2 | ) | $ | (673 | ) | ||||
Other comprehensive income(3) | 99 | 45 | — | 32 | ||||||||||||
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| |||||||||
Balance at end of period | $ | (523 | ) | $ | (2,064 | ) | $ | (2 | ) | $ | (641 | ) | ||||
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| |||||||||
Available-for-sale securities | ||||||||||||||||
Balance at beginning of period | $ | 99 | $ | (4 | ) | $ | — | $ | — | |||||||
Other comprehensive (loss) income(4) | (101 | ) | 3 | — | — | |||||||||||
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|
|
|
|
|
| |||||||||
Balance at end of period | $ | (2 | ) | $ | (1 | ) | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
| |||||||||
Cash flow hedges | ||||||||||||||||
Balance at beginning of period | $ | 4 | $ | 517 | $ | — | $ | (5 | ) | |||||||
Other comprehensive income (loss): | ||||||||||||||||
Net change from periodic revaluations | (4 | ) | (225 | ) | — | 18 | ||||||||||
Tax benefit (expense) | 1 | 66 | — | (5 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) before reclassifications, net of tax | (3 | ) | (159 | ) | — | 13 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net amount reclassified to earnings | 1 | 7 | 5 | |||||||||||||
Tax expense(2) | — | (1 | ) | — | (2 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | 1 | 6 | — | 3 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) | (2 | ) | (153 | ) | — | 16 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | 2 | $ | 364 | $ | — | $ | 11 | ||||||||
|
|
|
|
|
|
|
|
12
Arconic | Noncontrolling Interests | |||||||||||||||
Six months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pension and other postretirement benefits (M) | ||||||||||||||||
Balance at beginning of period | $ | (2,010 | ) | $ | (3,611 | ) | $ | — | $ | (56 | ) | |||||
Other comprehensive income: | ||||||||||||||||
Unrecognized net actuarial loss and prior service cost | 11 | (64 | ) | — | 1 | |||||||||||
Tax (expense) benefit | (4 | ) | 26 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive loss before reclassifications, net of tax | 7 | (38 | ) | — | 1 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Amortization of net actuarial loss and prior service cost(1) | 111 | 208 | — | 2 | ||||||||||||
Tax expense(2) | (39 | ) | (73 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | 72 | 135 | — | 2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income | 79 | 97 | — | 3 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (1,931 | ) | $ | (3,514 | ) | $ | — | $ | (53 | ) | |||||
|
|
|
|
|
|
|
| |||||||||
Foreign currency translation | ||||||||||||||||
Balance at beginning of period | $ | (689 | ) | $ | (2,412 | ) | $ | (2 | ) | $ | (780 | ) | ||||
Other comprehensive income(3) | 166 | 348 | — | 139 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (523 | ) | $ | (2,064 | ) | $ | (2 | ) | $ | (641 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
Available-for-sale securities | ||||||||||||||||
Balance at beginning of period | $ | 132 | $ | (5 | ) | $ | — | $ | — | |||||||
Other comprehensive (loss) income(4) | (134 | ) | 4 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (2 | ) | $ | (1 | ) | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
| |||||||||
Cash flow hedges | ||||||||||||||||
Balance at beginning of period | $ | (1 | ) | $ | 597 | $ | — | $ | (3 | ) | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Net change from periodic revaluations | 4 | (342 | ) | — | 15 | |||||||||||
Tax (expense) benefit | (2 | ) | 103 | — | (4 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) before reclassifications, net of tax | 2 | (239 | ) | — | 11 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net amount reclassified to earnings | 1 | 5 | 5 | |||||||||||||
Tax benefit (expense)(2) | — | 1 | — | (2 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | 1 | 6 | — | 3 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) | 3 | (233 | ) | — | 14 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | 2 | $ | 364 | $ | — | $ | 11 | ||||||||
|
|
|
|
|
|
|
|
13
D.Arconic's reportable segment were as follows:
June 30, 2018 | December 31, 2017 | ||||||
Engineered Products and Solutions | $ | 10,447 | $ | 10,325 | |||
Global Rolled Products | 4,153 | 3,955 | |||||
Transportation and Construction Solutions | 1,087 | 1,041 | |||||
Total segment assets | $ | 15,687 | $ | 15,321 |
June 30, 2018 | December 31, 2017 | ||||||
Total segment assets | $ | 15,687 | $ | 15,321 | |||
Unallocated amounts: | |||||||
Cash and cash equivalents | 1,455 | 2,150 | |||||
Deferred income taxes | 626 | 743 | |||||
Corporate fixed assets, net | 304 | 310 | |||||
Fair value of derivative contracts | 57 | 91 | |||||
Other | 90 | 103 | |||||
Consolidated assets | $ | 18,219 | $ | 18,718 |
In the second quarter of 2016, Arconic recorded Restructuring and other charges of $14 ($9after-tax), which included $13 ($8after-tax) for layoff costs related to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 540 employees (300 in the Engineered Products and Solutions segment and 240 in the Transportation and Construction Solutions segment); a net charge of $7 ($4after-tax) for other miscellaneous items; and a favorable benefit of $6 ($3after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the first six months of 2016, Arconic recorded Restructuring and other charges of $30 ($20after-tax), which included $30 ($19after-tax) for layoff costs related to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 1,070 employees (800 in the Engineered Products and Solutions segment, 30 in the Global Rolled Products segment, and 240 in the Transportation and Construction Solutions segment); a net charge of $7 ($4after-tax) for other miscellaneous items; and a net favorable benefit of $7 ($3after-tax) for the reversal of a number of small layoff reserves related to prior periods.
Arconic does not include Restructuring and other charges in the results of its reportable segments. The pretax impact of allocating such charges to segment results would have been as follows:
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Engineered Products and Solutions | $ | 8 | $ | 9 | $ | 14 | $ | 17 | ||||||||
Global Rolled Products | 17 | — | 74 | 2 | ||||||||||||
Transportation and Construction Solutions | 6 | 8 | 9 | 8 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Segment Total | 31 | 17 | 97 | 27 | ||||||||||||
Corporate | (5 | ) | (3 | ) | 2 | 3 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Restructuring and other charges | $ | 26 | $ | 14 | $ | 99 | $ | 30 | ||||||||
|
|
|
|
|
|
|
|
In2018.
14
Layoff costs | Other exit costs | Total | ||||||||||
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 | (26 | ) | (5 | ) | (31 | ) | ||||||
Restructuring charges | 43 | — | 43 | |||||||||
Other* | 10 | (1 | ) | 9 | ||||||||
|
|
|
|
|
| |||||||
Reserve balances at June 30, 2017 | $ | 77 | $ | 3 | $ | 80 | ||||||
|
|
|
|
|
|
Layoff costs | Other exit costs | Total | |||||||||
Reserve balances at December 31, 2016 | $ | 50 | $ | 9 | $ | 59 | |||||
Cash payments | (59 | ) | (6 | ) | (65 | ) | |||||
Restructuring charges | 64 | 1 | 65 | ||||||||
Other(1) | 1 | (2 | ) | (1 | ) | ||||||
Reserve balances at December 31, 2017 | 56 | 2 | 58 | ||||||||
Cash payments | (30 | ) | — | (30 | ) | ||||||
Restructuring charges | 23 | 5 | 28 | ||||||||
Other(1) | (23 | ) | — | (23 | ) | ||||||
Reserve balances at June 30, 2018 | $ | 26 | $ | 7 | $ | 33 |
(1) | Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation. In 2018, Other for layoff costs also included a reclassification of $14 in pension costs, as this liability was reflected in Arconic’s separate liability for pension obligations. In 2017, Other for layoff costs |
Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Non-service related net periodic benefit cost | $ | 28 | $ | 39 | $ | 56 | $ | 77 | |||||||
Interest income | (4 | ) | (4 | ) | (10 | ) | (8 | ) | |||||||
Foreign currency gains (losses), net | 17 | 2 | 14 | (3 | ) | ||||||||||
Net loss (gain) from asset sales | 2 | (166 | ) | 5 | (515 | ) | |||||||||
Other, net | (2 | ) | (3 | ) | (4 | ) | 1 | ||||||||
$ | 41 | $ | (132 | ) | $ | 61 | $ | (448 | ) |
Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Pension benefits | |||||||||||||||
Service cost | $ | 8 | $ | 21 | $ | 28 | $ | 44 | |||||||
Interest cost | 55 | 58 | 110 | 116 | |||||||||||
Expected return on plan assets | (77 | ) | (82 | ) | (154 | ) | (165 | ) | |||||||
Recognized net actuarial loss | 42 | 55 | 84 | 110 | |||||||||||
Amortization of prior service cost (benefit) | 1 | 2 | 2 | 3 | |||||||||||
Curtailments | 9 | — | 14 | — | |||||||||||
Net periodic benefit cost(1) | $ | 38 | $ | 54 | $ | 84 | $ | 108 | |||||||
Other postretirement benefits | |||||||||||||||
Service cost | $ | 2 | $ | 2 | $ | 4 | $ | 4 | |||||||
Interest cost | 7 | 7 | 14 | 15 | |||||||||||
Recognized net actuarial loss | 2 | 1 | 4 | 2 | |||||||||||
Amortization of prior service cost (benefit) | (2 | ) | (2 | ) | (4 | ) | (4 | ) | |||||||
Net periodic benefit cost(1) | $ | 9 | $ | 8 | $ | 18 | $ | 17 |
(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. |
E. Acquisitionsfuture 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 $9 was recorded in Restructuring and Divestitures
In April 2016, Arconic completedother charges in the salesecond quarter of 2018.
valuation allowance, and foreign income tax in higher rate jurisdictions.
Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Pre-tax income at estimated annual effective income tax rate before discrete items | $ | 52 | $ | 60 | $ | 106 | $ | 214 | |||||||
Catch-up adjustment to revalue previous quarter pre-tax income at current estimated annual effective tax rate | 1 | — | — | — | |||||||||||
Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized | — | (3 | ) | 1 | 4 | ||||||||||
Other discrete items | 21 | — | 23 | 1 | |||||||||||
Provision for income taxes | $ | 74 | $ | 57 | $ | 130 | $ | 219 |
Second quarter ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 120 | $ | 212 | $ | 263 | $ | 534 | ||||||||
Less: Preferred stock dividends declared | — | (18 | ) | (1 | ) | (35 | ) | |||||||||
Net income available to Arconic common shareholders - basic | 120 | 194 | 262 | 499 | ||||||||||||
Add: Interest expense related to convertible notes | 3 | 2 | 6 | 4 | ||||||||||||
Add: Dividends related to mandatory convertible preferred stock | — | — | — | 34 | ||||||||||||
Net income available to Arconic common shareholders - diluted | $ | 123 | $ | 196 | — | $ | 268 | $ | 537 | |||||||
Average shares outstanding - basic | 483 | 441 | 483 | 440 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options | — | 2 | — | 2 | ||||||||||||
Stock and performance awards | 5 | 5 | 5 | 5 | ||||||||||||
Mandatory convertible preferred stock | — | — | — | 39 | ||||||||||||
Convertible notes | 14 | 14 | 14 | 14 | ||||||||||||
Average shares outstanding - diluted | 502 | 462 | 502 | 500 |
Second quarter ended | Six months ended | ||||||||||
June 30, | June 30, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
Mandatory convertible preferred stock | — | 39 | — | — | |||||||
Stock options(1) | 9 | 7 | 9 | 7 |
(1) | The average exercise price of options per share was $26.80 for the second quarter and six months ended June 30, 2018 and $28.85 for the second quarter and six months ended June 30, 2017. |
Arconic | Noncontrolling Interests | ||||||||||||||
Second quarter ended June 30, | 2018 | 2017 | 2018 | 2017 | |||||||||||
Pension and other postretirement benefits (G) | |||||||||||||||
Balance at beginning of period | $ | (2,087 | ) | $ | (1,979 | ) | $ | — | $ | — | |||||
Other comprehensive income: | |||||||||||||||
Unrecognized net actuarial loss and prior service cost/benefit | (15 | ) | 17 | — | — | ||||||||||
Tax benefit (expense) | 3 | (5 | ) | — | — | ||||||||||
Total Other comprehensive (loss) income before reclassifications, net of tax | (12 | ) | 12 | — | — | ||||||||||
Amortization of net actuarial loss and prior service cost(1) | 52 | 56 | — | — | |||||||||||
Tax expense(2) | (11 | ) | (20 | ) | — | — | |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | 41 | 36 | — | — | |||||||||||
Total Other comprehensive income | 29 | 48 | — | — | |||||||||||
Balance at end of period | $ | (2,058 | ) | $ | (1,931 | ) | $ | — | $ | — | |||||
Foreign currency translation | |||||||||||||||
Balance at beginning of period | $ | (315 | ) | $ | (622 | ) | $ | — | $ | (2 | ) | ||||
Other comprehensive (loss) income(3) | (201 | ) | 99 | — | — | ||||||||||
Balance at end of period | $ | (516 | ) | $ | (523 | ) | $ | — | $ | (2 | ) | ||||
Available-for-sale securities | |||||||||||||||
Balance at beginning of period | $ | (2 | ) | $ | 99 | $ | — | $ | — | ||||||
Other comprehensive loss(4) | (2 | ) | (101 | ) | — | — | |||||||||
Balance at end of period | $ | (4 | ) | $ | (2 | ) | $ | — | $ | — | |||||
Cash flow hedges | |||||||||||||||
Balance at beginning of period | $ | 18 | $ | 4 | $ | — | $ | — | |||||||
Other comprehensive income (loss): | |||||||||||||||
Net change from periodic revaluations | 9 | (4 | ) | — | — | ||||||||||
Tax (expense) benefit | (1 | ) | 1 | — | — | ||||||||||
Total Other comprehensive income (loss) before reclassifications, net of tax | 8 | (3 | ) | — | — | ||||||||||
Net amount reclassified to earnings | (4 | ) | 1 | — | — | ||||||||||
Tax benefit(2) | — | — | — | — | |||||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | (4 | ) | 1 | — | — | ||||||||||
Total Other comprehensive income (loss) | 4 | (2 | ) | — | — | ||||||||||
Balance at end of period | $ | 22 | $ | 2 | $ | — | $ | — | |||||||
Total balance at end of period | $ | (2,556 | ) | $ | (2,454 | ) | $ | — | $ | (2 | ) |
(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. |
Arconic | Noncontrolling Interests | ||||||||||||||
Six months ended June 30, | 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 | 122 | 11 | — | — | |||||||||||
Tax expense | (28 | ) | (4 | ) | — | — | |||||||||
Total Other comprehensive income before reclassifications, net of tax | 94 | 7 | — | — | |||||||||||
Amortization of net actuarial loss and prior service cost(1) | 100 | 111 | — | — | |||||||||||
Tax expense(2) | (22 | ) | (39 | ) | — | — | |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | 78 | 72 | — | — | |||||||||||
Total Other comprehensive income | 172 | 79 | — | — | |||||||||||
Balance at end of period | $ | (2,058 | ) | $ | (1,931 | ) | $ | — | $ | — | |||||
Foreign currency translation | |||||||||||||||
Balance at beginning of period | $ | (437 | ) | $ | (689 | ) | $ | — | $ | (2 | ) | ||||
Other comprehensive (loss) income(3) | (79 | ) | 166 | — | — | ||||||||||
Balance at end of period | $ | (516 | ) | $ | (523 | ) | $ | — | $ | (2 | ) | ||||
Available-for-sale securities | |||||||||||||||
Balance at beginning of period | $ | (2 | ) | $ | 132 | $ | — | $ | — | ||||||
Other comprehensive loss(4) | (2 | ) | (134 | ) | — | — | |||||||||
Balance at end of period | $ | (4 | ) | $ | (2 | ) | $ | — | $ | — | |||||
Cash flow hedges | |||||||||||||||
Balance at beginning of period | $ | 25 | $ | (1 | ) | $ | — | $ | — | ||||||
Other comprehensive (loss) income: | |||||||||||||||
Net change from periodic revaluations | 3 | 4 | — | — | |||||||||||
Tax expense | — | (2 | ) | — | — | ||||||||||
Total Other comprehensive income before reclassifications, net of tax | 3 | 2 | — | — | |||||||||||
Net amount reclassified to earnings | (7 | ) | 1 | — | — | ||||||||||
Tax benefit(2) | 1 | — | — | — | |||||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | (6 | ) | 1 | — | — | ||||||||||
Total Other comprehensive (loss) income | (3 | ) | 3 | — | — | ||||||||||
Balance at end of period | $ | 22 | $ | 2 | $ | — | $ | — | |||||||
Total balance at end of period | $ | (2,556 | ) | $ | (2,454 | ) | $ | — | $ | (2 | ) |
(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. |
June 30, 2018 | December 31, 2017 | ||||||
Finished goods | $ | 682 | $ | 669 | |||
Work-in-process | 1,485 | 1,349 | |||||
Purchased raw materials | 401 | 381 | |||||
Operating supplies | 91 | 81 | |||||
Total inventories | $ | 2,659 | $ | 2,480 |
June 30, 2018 | December 31, 2017 | ||||||
Land and land rights | $ | 139 | $ | 140 | |||
Structures | 2,376 | 2,395 | |||||
Machinery and equipment | 9,148 | 8,830 | |||||
11,663 | 11,365 | ||||||
Less: accumulated depreciation and amortization | 6,674 | 6,392 | |||||
4,989 | 4,973 | ||||||
Construction work-in-progress | 593 | 621 | |||||
$ | 5,582 | $ | 5,594 |
June 30, 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) | (15 | ) | (23 | ) | |||
Total debt | 6,315 | 6,807 | |||||
Less: amount due within one year | 3 | 1 | |||||
Total long-term debt | $ | 6,312 | $ | 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. |
June 30, 2018 | December 31, 2017 | ||||||||||||||
Carrying value | Fair value | Carrying value | Fair value | ||||||||||||
Long-term debt, less amount due within one year | $ | 6,312 | $ | 6,457 | $ | 6,806 | $ | 7,443 |
F. Inventories
June 30, 2017 | December 31, 2016 | |||||||
Finished goods | $ | 652 | $ | 625 | ||||
Work-in-process | 1,300 | 1,144 | ||||||
Purchased raw materials | 383 | 408 | ||||||
Operating supplies | 81 | 76 | ||||||
|
|
|
| |||||
Total inventories | $ | 2,416 | $ | 2,253 | ||||
|
|
|
|
15
At June 30, 2017 and December 31, 2016, the total amount of inventories valued on a LIFO basis was $1,057 and $947, respectively. If valued on an average-cost basis, total inventories would have been $401 and $371 higher at June 30, 2017 and December 31, 2016, respectively.
G. Separation Transaction and Discontinued Operations
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 as of the close of business on October 20, 2016. Arconic retained 19.9% of the Alcoa Corporation common stock (36,311,767 shares).
In February2018 and 2017, the Company sold 23,353,000 shares of Alcoa Corporation common stock at $38.03 per share, which resulted in cash proceeds of $888 which were recorded in Sale of investments within Investing Activities in the 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 L). A gain of $167 on theDebt-for-Equity Exchange was recorded in Other income, net in the accompanying Statement of Consolidated Operations. The share exchange had no impact on the Statement of Consolidated Cash Flows.
The Company had recorded the retained interest as a cost method investment in Investment in common stock of Alcoa Corporation in the accompanying Consolidated Balance Sheet. The fair value of Arconic’s retained interest in Alcoa Corporation was $0 and $1,020 at June 30, 2017 and December 31, 2016, respectively. The fair value was based on the closing stock price of Alcoa Corporation as of June 30, 2017, and December 31, 2016 multiplied by the number of shares of Alcoa Corporation common stock owned by the Company at those respective dates. As of May 4, 2017, the Company no longer maintains a retained interest in Alcoa Corporation common stock.
In connection with the Separation Transaction, on October 31, 2016, Arconic and Alcoa Corporation entered into a Toll Processing and Services Agreement (the “Toll Processing Agreement”) pursuant to which Arconic provides can body stock from its Tennessee operations to Alcoa Corporation’s Warrick, Indiana rolling mill. Aluminum for the can body stock is supplied by Alcoa Corporation. The Toll Processing Agreement expires on December 31, 2018, unless sooner terminated by the parties. Tolling revenues for the second quarter and six months ended June 30, 2017 and accounts receivable at June 30, 2017 were not material to the consolidated results of operations and financial position, respectively.
As part of the Separation Transaction, Arconic had recorded a receivable in the December 2016 Consolidated Balance Sheet for the netafter-tax proceeds from Alcoa Corporation’s sale of the Yadkin Hydroelectric Project. The transaction closed in the first quarter of 2017 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.
16
The results of operations of Alcoa Corporation are presented as discontinued operations in the Statement of Consolidated Operations as summarized below:
Second quarter ended June 30, 2016 | Six months ended June 30, 2016 | |||||||
Sales | $ | 2,061 | $ | 3,953 | ||||
Cost of goods sold (exclusive of expenses below) | 1,683 | 3,324 | ||||||
Selling, general administrative, and other expenses | 47 | 102 | ||||||
Research and development expenses | 7 | 18 | ||||||
Provision for depreciation, depletion and amortization | 177 | 352 | ||||||
Restructuring and other charges | 9 | 86 | ||||||
Interest expense | 5 | 11 | ||||||
Other (income) expense, net | (21 | ) | 26 | |||||
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Income from discontinued operations before income taxes | 154 | 34 | ||||||
Provision for income taxes | 29 | 8 | ||||||
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Income from discontinued operations after income taxes | 125 | 26 | ||||||
Less: Net income from discontinued operations attributable to noncontrolling interests | 43 | 38 | ||||||
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Net income (loss) from discontinued operations | $ | 82 | $ | (12 | ) | |||
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The cash flows related to Alcoa Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows for all 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:
Six months ended June 30, | ||||
2016 | ||||
Depreciation, depletion and amortization | $ | 352 | ||
Restructuring and other charges | $ | 86 | ||
Capital expenditures | $ | 172 |
H.
17
site.
2022.
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, Arconic filed an appeal of this second assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. Arconic filed another appeal of this second assessment in Spain’s National Court in March 2015.
2015 which was denied in July 2018. The combined assessments, remeasuredCompany is preparing to petition the Supreme Court of Spain to review the National Court’s decision. If the petition is accepted, the Supreme Court will review the assessment on its merits and render a final decision. The National Court’s decision requires the assessment for athe 2006 through 2009 tax rate change enactedyears to be reissued to take into account the outcome of the 2003 to 2005 audit which was closed in November 2014, total $2832017. The Company estimates the revised assessment to be $175 (€248)152), including interest. 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. A further decision is expected on the application of this ruling to the overall assessment. Spain’s National Court has not yet rendered a decision related to the assessment received in July 2013.
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, inIn the event the Company is unsuccessful in appealing the assessment to the Supreme Court of Spain, a portion of the assessmentsassessment may be offset with existing net operating losses and tax credits available to the Spanish consolidated tax group, which would be shared between Arconicthe Company and Alcoa Corporation as provided for in the Tax Matters AgreementAgreement. The Company will reassess the recognition and measurement of tax benefits related to the Separation Transaction. uncertain tax positions in the 2006 to 2009 tax years in the third quarter of 2018. The potential impact of the revised assessment on the Provision for income taxes could be a charge of up to approximately $59 (€51) which would be recognized in the third quarter of 2018. As stated above, Alcoa Corporation is responsible for 49% of the net liability.
Reynobond PE
Regulatory investigations are being conducted in connection with the fatal Grenfell Tower fire in London, UK on June 13, 2017. 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 systembe material to the façade installer, who then completed and installed the system under the direction of the general contractor. NeitherCompany’s consolidated operations.
In July 2017, three purported class action complaints were filed against Arconic and certain officers, directors and/or other parties, alleging that, in light ofcomplaint 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
18
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. On June 8, 2018, all defendants moved to dismiss the consolidated amended complaint for failure to state a claim. Briefing on that motion remains ongoing.
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
2018.
Arconic was also required to provide guarantees of $50 related to twoan Alcoa Corporation energy supply contracts. These guarantees expired in March 2017. Additionally, Arconic was requiredpayment default on its obligations under the respective contracts 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.
be remote.
2018.
19
2018.
I. Segment Information
Arconic is a producer of multi-material products including sheet, plate, precision castings, forgings, rolled rings, extrusions, wheels and fasteners. Arconic’s products are used worldwide in transportation (including aerospace, automotive, truck, trailer, rail, and shipping), packaging, building and construction, oil and gas, defense, 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 fromAfter-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 is Adjusted EBITDA. Arconic’s definition of Adjusted EBITDA is net margin plus anadd-back for depreciation and amortization and special items. 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. 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 income attributable to Arconic include: the Provision for depreciation and amortization; 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. Prior period information has been recast to conform to current year presentation.
20
The operating results of Arconic’s reportable segments were as follows:
Engineered Products and Solutions | Global Rolled Products | Transportation and Construction Solutions | Combined Segment | |||||||||||||
Second quarter ended June 30, 2017 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 1,484 | $ | 1,268 | $ | 501 | $ | 3,253 | ||||||||
Intersegment sales | — | 37 | — | 37 | ||||||||||||
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Total sales | $ | 1,484 | $ | 1,305 | $ | 501 | $ | 3,290 | ||||||||
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Profit and loss: | ||||||||||||||||
Depreciation and amortization | 66 | 51 | 12 | 129 | ||||||||||||
Adjusted EBITDA | 310 | 164 | 82 | 556 | ||||||||||||
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Second quarter ended June 30, 2016 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 1,465 | $ | 1,316 | $ | 467 | $ | 3,248 | ||||||||
Intersegment sales | — | 29 | — | 29 | ||||||||||||
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Total sales | $ | 1,465 | $ | 1,345 | $ | 467 | $ | 3,277 | ||||||||
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Profit and loss: | ||||||||||||||||
Depreciation and amortization | 62 | 50 | 12 | 124 | ||||||||||||
Adjusted EBITDA | 329 | 163 | 76 | 568 | ||||||||||||
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Engineered Products and Solutions | Global Rolled Products | Transportation and Construction Solutions | Combined Segment | |||||||||||||
Six months ended June 30, 2017 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 2,969 | $ | 2,517 | $ | 950 | $ | 6,436 | ||||||||
Intersegment sales | — | 71 | — | 71 | ||||||||||||
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Total sales | $ | 2,969 | $ | 2,588 | $ | 950 | $ | 6,507 | ||||||||
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Profit and loss: | ||||||||||||||||
Depreciation and amortization | 130 | 101 | 24 | 255 | ||||||||||||
Adjusted EBITDA | 616 | 335 | 154 | 1,105 | ||||||||||||
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Six months ended June 30, 2016 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 2,914 | $ | 2,500 | $ | 896 | $ | 6,310 | ||||||||
Intersegment sales | — | 58 | — | 58 | ||||||||||||
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Total sales | $ | 2,914 | $ | 2,558 | $ | 896 | $ | 6,368 | ||||||||
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Profit and loss: | ||||||||||||||||
Depreciation and amortization | 127 | 100 | 23 | 250 | ||||||||||||
Adjusted EBITDA | 634 | 318 | 140 | 1,092 | ||||||||||||
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21
The following table reconciles Combined segment adjusted EBITDA to Net income attributable to Arconic:
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Combined segment adjusted EBITDA | $ | 556 | $ | 568 | $ | 1,105 | $ | 1,092 | ||||||||
Unallocated amounts: | ||||||||||||||||
Depreciation and amortization | (137 | ) | (133 | ) | (270 | ) | (266 | ) | ||||||||
Restructuring and other charges | (26 | ) | (14 | ) | (99 | ) | (30 | ) | ||||||||
Impact of LIFO | (11 | ) | (13 | ) | (30 | ) | (25 | ) | ||||||||
Metal price lag | 19 | 6 | 41 | 6 | ||||||||||||
Corporate expense | (91 | ) | (115 | ) | (182 | ) | (191 | ) | ||||||||
Other | (29 | ) | (16 | ) | (39 | ) | (33 | ) | ||||||||
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Operating income | $ | 281 | $ | 283 | $ | 526 | $ | 553 | ||||||||
Other income, net | 171 | 17 | 525 | 29 | ||||||||||||
Interest expense | (183 | ) | (124 | ) | (298 | ) | (245 | ) | ||||||||
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Income from continuing operations before income taxes | $ | 269 | $ | 176 | $ | 753 | $ | 337 | ||||||||
Income taxes | (57 | ) | (123 | ) | (219 | ) | (174 | ) | ||||||||
Discontinued operations | — | 82 | — | (12 | ) | |||||||||||
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Net income attributable to Arconic | $ | 212 | $ | 135 | $ | 534 | $ | 151 | ||||||||
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J. 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 number of shares and per share amounts for all periods presented below have been updated to reflect the Reverse Stock Split (see Note A).
22
The information used to compute basic and diluted EPS attributable to Arconic common shareholders was as follows (shares in millions):
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Income from continuing operations after income taxes | $ | 212 | $ | 53 | $ | 534 | $ | 163 | ||||||||
Less: Preferred stock dividends declared | (18 | ) | (17 | ) | (35 | ) | (35 | ) | ||||||||
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Income from continuing operations available to Arconic common shareholders | 194 | 36 | 499 | 128 | ||||||||||||
Income (loss) from discontinued operations after income taxes and noncontrolling interests | — | 82 | — | (12 | ) | |||||||||||
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Net income available to Arconic common shareholders - basic | 194 | 118 | 499 | 116 | ||||||||||||
Add: Interest expense related to convertible notes | 2 | 2 | 4 | — | ||||||||||||
Add: Dividends related to mandatory convertible preferred stock | — | — | 34 | — | ||||||||||||
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Net income available to Arconic common shareholders - diluted | $ | 196 | $ | 120 | $ | 537 | $ | 116 | ||||||||
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Average shares outstanding - basic | 441 | 438 | 440 | 438 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options | 2 | 1 | 2 | — | ||||||||||||
Stock and performance awards | 5 | 4 | 5 | 4 | ||||||||||||
Mandatory convertible preferred stock | — | — | 39 | — | ||||||||||||
Convertible notes | 14 | 9 | 14 | — | ||||||||||||
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Average shares outstanding - diluted | 462 | 452 | 500 | 442 | ||||||||||||
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The following shares were excluded from the calculation of Average shares outstanding – diluted as their effect was anti-dilutive.
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Mandatory convertible preferred stock | 39 | 26 | — | 26 | ||||||||||||
Convertible notes | — | — | — | 9 |
Additionally, options to purchase 7 million shares of common stock at a weighted average exercise price of $28.85 and options to purchase 8 million shares of common stock at a weighted average exercise price of $38.18 were outstanding as of June 30, 2017 and 2016, respectively, but were not included in the computation of diluted EPS because their effect was anti-dilutive as the exercise price of the options was greater than the average market price of Arconic’s common stock.
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. 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 ($2,058 in draws and $1,758 in repayments) since the program’s inception, including net cash draws totaling $0 ($300 in draws and $300 in repayments) in the six months ended June 30, 2017.
23
As of June 30, 2017, and December 31, 2016, the deferred purchase program receivable was $222 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) 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.
The gross amount of receivables sold and total cash collected under this program since its inception was $32,629 and $32,057, respectively. Arconic services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.
L. Debt
June 30, 2017 | December 31, 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 | 250 | 250 | ||||||
Other** | (34 | ) | (32 | ) | ||||
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Total debt | 6,796 | 8,048 | ||||||
Less: amount due within one year | — | 4 | ||||||
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Total long-term debt | $ | 6,796 | $ | 8,044 | ||||
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24
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.
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 on theDebt-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 for the premium paid for the early redemption of these notes in excess of their carrying value.
M. Pension and Other Postretirement Benefits
The components of net periodic benefit cost were as follows:
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pension benefits | ||||||||||||||||
Service cost | $ | 22 | $ | 41 | $ | 45 | $ | 81 | ||||||||
Interest cost | 58 | 122 | 116 | 244 | ||||||||||||
Expected return on plan assets | (83 | ) | (186 | ) | (166 | ) | (371 | ) | ||||||||
Recognized net actuarial loss | 55 | 102 | 110 | 204 | ||||||||||||
Amortization of prior service cost (benefits) | 2 | 4 | 3 | 8 | ||||||||||||
Settlements | — | 2 | — | 2 | ||||||||||||
Special termination benefits | — | — | — | 1 | ||||||||||||
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Net periodic benefit cost* | $ | 54 | $ | 85 | $ | 108 | $ | 169 | ||||||||
Discontinued operations | — | 40 | — | 73 | ||||||||||||
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Net amount recognized in Statement of Consolidated Operations | $ | 54 | $ | 45 | $ | 108 | $ | 96 | ||||||||
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Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Other postretirement benefits | ||||||||||||||||
Service cost | $ | 2 | $ | 4 | $ | 4 | $ | 7 | ||||||||
Interest cost | 7 | 19 | 15 | 37 | ||||||||||||
Recognized net actuarial loss | 1 | 5 | 2 | 11 | ||||||||||||
Amortization of prior service cost (benefits) | (2 | ) | (7 | ) | (4 | ) | (13 | ) | ||||||||
Special termination benefits | — | — | — | — |
25
Second quarter ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pension benefits | ||||||||||||||||
Net periodic benefit cost* | $ | 8 | $ | 21 | $ | 17 | $ | 42 | ||||||||
Discontinued operations | — | 13 | — | 25 | ||||||||||||
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Net amount recognized in Statement of Consolidated Operations | $ | 8 | $ | 8 | $ | 17 | $ | 17 | ||||||||
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In conjunction with the Separation Transaction, 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 to its two largest pension plans. Payments are expected to be made in three increments of no less than $50 each ($150 total) over this30-month period. The first payment of $50 was made on April 18, 2017.
N. 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:
The carrying values and fair values of Arconic’s financial instruments were as follows:
June 30, 2017 | December 31, 2016 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
value | value | value | value | |||||||||||||
Cash and cash equivalents | $ | 1,785 | 1,785 | $ | 1,863 | $ | 1,863 | |||||||||
Restricted cash | 5 | 5 | 15 | 15 | ||||||||||||
Derivatives - current asset | 19 | 19 | 14 | 14 | ||||||||||||
Noncurrent receivables | 20 | 20 | 21 | 21 | ||||||||||||
Derivatives - noncurrent asset | 12 | 12 | 10 | 10 | ||||||||||||
Available-for-sale securities | 104 | 104 | 102 | 102 | ||||||||||||
Investment in common stock of Alcoa Corporation | — | — | 1,020 | 1,020 | ||||||||||||
Short-term borrowings | 48 | 48 | 36 | 36 | ||||||||||||
Derivatives - current liability | 14 | 14 | 5 | 5 | ||||||||||||
Long-term debt due within one year | — | — | 4 | 4 | ||||||||||||
Derivatives - noncurrent liability | 9 | 9 | 3 | 3 | ||||||||||||
Contingent payment related to an acquisition | 80 | 80 | 78 | 78 | ||||||||||||
Long-term debt, less amount due within one year | 6,796 | 7,249 | 8,044 | 8,519 | ||||||||||||
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26
The following methods were used to estimate the fair values of financial instruments:
Cash and cash equivalents, Restricted cash, and Short-term borrowings.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 borrowings were 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 and equity 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.The fair value was based on the closing stock price of Alcoa Corporation on the New York Stock Exchange at June 30, 2017 and December 31, 2016 multiplied by the number of shares of Alcoa Corporation common stock owned by Arconic at those dates. This investment was classified in Level 1 of the fair value hierarchy. The Company disposed of its remaining investment in Alcoa Corporation common stock in the second quarter of 2017.
Contingent payment related to an acquisition. 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 due within one year and 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 fornon-public debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
O.R. Subsequent Events
In July 2017, three purported class action complaints were filed against ArconicCompany’s ongoing strategy and other defendants. See Note Hportfolio review that commenced in January 2018. BCS is part of the Transportation and Construction Solutions segment and generated third-party sales of approximately $1,070 for further information on these matters.
27
the year ended December 31, 2017.
Firm
America.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related statements of consolidated operations, consolidated comprehensive loss, changes in consolidated equity, and consolidated cash flows for the year then ended (not presented herein), and in our report dated February 28, 2017 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
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amounts)
The separationpackaging.
Results of Operations
Earnings Summary:
Income from continuing operations after income taxes. Income from continuing operations after income taxes was $212 for the second quarter of 2017 or $0.43 per diluted share, compared to income from continuing operations after income taxes of $53 for the second quarter of 2016, or $0.08 per diluted share. The increase of $159 was primarily attributable to a $167 gain on thedebt-for-equity exchange with two investment banks (the “Investment Banks”) of the remaining portion of Arconic’s retained interestand $7,018 in Alcoa Corporation common stock for a portion of the Company’s outstanding notes held by the Investment Banks (the“Debt-for-Equity Exchange”), net cost savings and higher volumes across all segments, partially offset by expense incurred due to the early redemption of outstanding notes, unfavorable product pricing and mix, primarily in aerospace.
Income from continuing operations after income taxes was $534 for the six months ended June 30, 2017, or $1.07 per diluted share,2018 compared to income from continuing operations after income taxes of $163 for$6,453 in the six months ended June 30, 2016, or $0.29 per diluted share.2017. The increase of $371$312, or 10%, in the second quarter of 2018 and $565, or 9%, in the six months ended June 30, 2018, was primarily attributable to a gain on the saleresult of a portion of Arconic’s investment in Alcoa Corporation common stock of $351 and a $167 gain on the Debt-for-Equity Exchange, net cost savings and higher volumesstrong volume growth across all segments, primarily in the aerospace engines and defense, automotive, commercial transportation, and building and construction end markets; higher aluminum prices; and favorable foreign currency movements; partially offset by costs of $38 related to settlements of certain customer claims primarily related to product introductions; the loss on saleabsence of sales from the rolling mill in Fusina, Italy, rolling millwhich was divested in March 2017, and the Latin America extrusions business, which was divested in April 2018; unfavorable aerospace wide-body production mix; and a decline in the industrial gas turbine end market.
Sales.Sales increased $27, or 1%, and $164, or 3%,the six months ended June 30, 2018 compared to 77.6% in the six months ended June 30, 2017. The increase in the second quarter and six months ended June 30, 2017, respectively, compared to the corresponding periods in 2016. The increase in both periods2018 was the result of strong volume growth across all segments and higher aluminum pricing, partially offset by the ramp down and Toll Processing and Services Agreement (the “Toll Processing Agreement”) with Alcoa Corporation relatingprices, unfavorable product mix, higher input costs, costs related to the Company’s North America packaging business in Tennessee, pursuant to which Arconic provides can body stock to Alcoa Corporation using aluminum supplied by Alcoa Corporation, resultingsettlements of certain customer claims noted above, performance shortfalls in the absencerings and disks operations, and the impact of metal salesa $23 charge related to a physical inventory adjustment at one plant in the 2017 periods compared to the corresponding periods in 2016, as well as unfavorable product pricing in both the Engineered Products and Solutions and Global Rolled Products segments.
Costsegment. While a portion of goods sold (COGS). COGS as a percentage of Sales was 79.2% and 78.6% inthis charge for the second quarter and six months ended June 30, 2017, respectively, comparedphysical inventory adjustment relates to 78.3% and 78.4% inprior years, the second quarter and six months ended June 30, 2016, respectively.majority relates to 2018. The increase in both periods was primarily attributableout-of-period amounts are not material to cost increases, including higher aluminum prices, and a lower margin product mix, partially offset by net cost savings.
any interim or annual periods.
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SG&Asecond quarter of 2017 which did not recur in 2018. Also, lower expenses decreased $19driven by overhead cost reductions were partially offset by the impact of legal and other advisory costs related to Grenfell Tower of $4. The decrease of $87, or 21%, in the six months ended June 30, 2017 compared to2018 was the same period in 2016 as a result of expensescosts related to the Separation Transactionseparation of $63 in the prior year period compared toAlcoa Inc. of $18 in the current year period, as well as ongoing overhead cost reduction efforts (see Note D), partially offset byand proxy, advisory and governance-related costs of $58 in the current year period.
six months ended June 30, 2017, neither of which recurred in 2018. Also, lower expenses driven by overhead cost reductions were partially offset by the impact of legal and other advisory costs related to Grenfell Tower of $9.
In2018 compared to Other income, net of $448 in the six months ended June 30, 2017. The decrease of $173 in the second quarter of 2018 was primarily due to the $167 gain on the Debt-for-Equity Exchange (see Note F to the Consolidated Financial Statements) in the second quarter of 2017 Restructuring and other charges included $29 ($19after-tax) for layoff costs related to cost reduction initiatives, including the separationthat did not recur in 2018. The decrease of approximately 352 employees (129$509 in the Engineered Products and Solutions segment, 110 in the Global Rolled Products segment, 93 in the Transportation and Construction Solutions segment, and 20 in Corporate); a net charge of $4 ($3after-tax) for other miscellaneous items; a net benefit of $6 ($4after-tax) for the reversal of forfeited executive stock compensation of $13, partially offset by a charge of $7 for the related severance; and a favorable benefit of $1 ($1after-tax) for the reversal of a number of small layoff reserves relatedsix months ended June 30, 2018 was primarily due to prior periods.
Restructuring and other charges forgains recorded during the six months ended June 30, 2017 included $48 ($32after-tax) for layoff costs related to cost reduction initiatives, including the separation of approximately 680 employees (243 in the Engineered Products and Solutions segment, 242 in the Global Rolled Products segment, 133 in the Transportation and Construction Solutions segment, and 62 in Corporate); a charge of $60 ($60after-tax) related to the sale of the Fusina, Italy rolling mill; a net benefit of $6 ($4after-tax) for the reversal of forfeited executive stock compensation of $13, partially offset by a charge of $7 for the related severance; a net benefit of $1 ($0after-tax) for other miscellaneous items; and a favorable benefit of $2 ($2after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the second quarter of 2016, Restructuring and other charges included $13 ($8after-tax) for layoff costs related to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 540 employees (300 in the Engineered Products and Solutions segment and 240 in the Transportation and Construction Solutions segment); a net charge of $7 ($4after-tax) for other miscellaneous items; and a favorable benefit of $6 ($3after-tax) for the reversal of a number of small layoff reserves related to prior periods.
Restructuring and other charges for the six months ended June 30, 2016 included $30 ($20after-tax) for layoff costs related to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 1,070 employees (800 in the Engineered Products and Solutions segment, 30 in the Global Rolled Products segment, and 240 in the Transportation and Construction Solutions segment); a net charge of $7 ($4after-tax) for other miscellaneous items; and a net favorable benefit of $7 ($3after-tax) for the reversal of a number of small layoff reserves related to prior periods.
Arconic does not include Restructuring and other charges in the results of its reportable segments. The pretax impact of allocating such charges to segment results would have been as follows:
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Engineered Products and Solutions | $ | 8 | $ | 9 | $ | 14 | $ | 17 | ||||||||
Global Rolled Products | 17 | — | 74 | 2 | ||||||||||||
Transportation and Construction Solutions | 6 | 8 | 9 | 8 | ||||||||||||
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Segment Total | 31 | 17 | 97 | 27 | ||||||||||||
Corporate | (5 | ) | (3 | ) | 2 | 3 | ||||||||||
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Total Restructuring and other charges | $ | 26 | $ | 14 | $ | 99 | $ | 30 | ||||||||
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As of June 30, 2017, approximately 65 of the 680 employees associated with 2017 restructuring programs, approximately 1,170 of the 1,770 employees associated with 2016 restructuring programs, and approximately 1,120 of the 1,220 employees (previously 1,240 – updated to reflect employees accepting other positions within Arconic and natural attrition) associated with the 2015 restructuring programs had been separated. Most of the remaining separations for the 2017 restructuring programs and all of the remaining separations for the 2016 and 2015 restructuring programs are expected to be completed by the end of 2017.
In the 2017 second quarter andsix-month period, cash payments of $1 and $2, respectively, were made against layoff reserves related to 2017 restructuring programs, cash payments of $6 and $20, respectively, were made against layoff reserves related to 2016 restructuring programs, and cash payments of $1 and $4, respectively, were made against the layoff reserves related to 2015 restructuring programs.
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Interest expense. Interest expense increased $59, or 48%, and $53, or 22%, in the second quarter and six months ended June 30, 2017, respectively, compared to the corresponding periods in 2016. Interest expense in both the 2017 second quarter andsix-month periods included $76 primarily for premiums paid for the early redemption of 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 (see Note L).
Other income, net. Other income, net increased $154 in the second quarter of 2017 compared to the same period in 2016, primarily due to a $167 gain on theDebt-for-Equity Exchange.
Other income, net increased $496 in the six months ended June 30, 2017 compared to the corresponding period in 2016 primarily due to the gain on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock of $351 and the gainDebt-for-Equity Exchange of $167, on theneither of which recurred in 2018.
Provision for income taxes. For The tax rate, including discrete items, was 38.1% and 21.2% for the six months ended June 30,second quarter of 2018 and 2017, Arconic’srespectively. A discrete charge of $21 was recorded in the second quarter of 2018. The estimated annual effective tax rate before discrete items applied to ordinary income was 28.4%. This rate is lower than the federal statutory rate of 35% due to foreign income taxed in lower rate jurisdictions, a tax basis in excess of book basis in Alcoa Corporation common stock sold (see Note G),27.0% and a nontaxable gain on the Debt-for-Equity Exchange (see Note L). These beneficial items were partially offset by a loss on the sale of a rolling mill in Fusina, Italy28.4% for which no net tax benefit was recognized (see Note E) and valuation allowances related to U.S. foreign tax credits.
For the six months ended June 30, 2016, Arconic’s estimated annual effective tax rate, before discrete items,2018 and 2017, respectively. See Note H to the Consolidated Financial Statements.
For the second quarter of 2018 or $0.24 per diluted share, compared to $212 in the second quarter of 2017, or $0.43 per diluted share, and $263 in the six months ended June 30, 2017 and June 30, 2016,2018, or $0.53 per diluted share, compared to $534 in the tax rate on year to date earnings, including discrete items, is 21.2% and 69.9% respectively. There were no individually material discrete items recorded in either period.
The tax provisions for the second quarter and six months ended June 30, 2017, and June 30, 2016 were comprisedor $1.07 per diluted share. The decrease of the following:
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pretax income at estimated annual effective income tax rate before discrete items | $ | 76 | $ | 93 | $ | 214 | $ | 178 | ||||||||
Catch-up adjustment to revalue previous quarterpre-tax income at current estimated annual effective tax rate | (16 | ) | (18 | ) | — | — | ||||||||||
Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized | (3 | ) | 51 | 4 | (7 | ) | ||||||||||
Other discrete items | — | (3 | ) | 1 | 3 | |||||||||||
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Provision for income taxes | $ | 57 | $ | 123 | $ | 219 | $ | 174 | ||||||||
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Discontinued operations.For$92, or 43%, in the second quarter of 2016, net income2018 was primarily attributable to Arconic included incomethe gain on the Debt-for-Equity Exchange in the second quarter of $125 from discontinued operations after income taxes2017 that did not recur in 2018, higher aluminum prices, and $43 from discontinued operations attributablecosts related to noncontrolling interests. Forsettlements of certain customer claims and a physical inventory adjustment, partially offset by volume growth and lower SG&A and interest expense. The decrease of $271, or 51%, in the six months ended June 30, 2016, net income2018 was primarily attributable to Arconic includedgains recorded during the six months ended June 30, 2017 related to the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and the Debt-for-Equity Exchange, neither of which recurred in 2018, higher aluminum prices, and costs related to settlements of certain customer claims and a physical inventory adjustment, partially offset by volume growth and lower expenses for Restructuring and other charges, SG&A, interest and income of $26 from discontinued operations after income taxes and $38 from discontinued operations attributable to noncontrolling interests.
taxes.
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plus anadd-back for depreciation and amortization. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative,Operating income excluding Special items. Special items include Restructuring and other expenses; Researchcharges and development expenses;Impairment of goodwill. Segment operating profit also includes certain items which under the previous segment performance measure were recorded in Corporate, such as the impact of LIFO inventory accounting, metal price lag, intersegment profit eliminations, and Provision for depreciation and amortization. The Adjusted EBITDA presentedderivative activities. Segment operating profit may not be comparable to similarly titled measures of other companies.
Prior period financial information has been recast to conform to current year presentation.
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Third-party sales | $ | 1,484 | $ | 1,465 | $ | 2,969 | $ | 2,914 | ||||||||
Adjusted EBITDA | $ | 310 | $ | 329 | $ | 616 | $ | 634 |
Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Third-party sales | $ | 1,596 | $ | 1,485 | $ | 3,137 | $ | 2,972 | |||||||
Segment operating profit | 212 | 250 | 433 | 497 |
Adjusted EBITDAunfavorable product pricing.
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Third-party sales | $ | 1,268 | $ | 1,316 | $ | 2,517 | $ | 2,500 | ||||||||
Intersegment sales | 37 | 29 | 71 | 58 | ||||||||||||
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Total sales | $ | 1,305 | $ | 1,345 | $ | 2,588 | $ | 2,558 | ||||||||
Adjusted EBITDA | $ | 164 | $ | 163 | $ | 335 | $ | 318 | ||||||||
Third-party aluminum shipments (kmt) | 307 | 376 | 617 | 707 | ||||||||||||
Average realized price per metric ton of aluminum(2)(3) | $ | 4,130 | $ | 3,500 | $ | 4,079 | $ | 3,536 |
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Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Third-party sales | $ | 1,451 | $ | 1,271 | $ | 2,817 | $ | 2,519 | |||||||
Intersegment sales | 46 | 37 | 88 | 71 | |||||||||||
Total sales | $ | 1,497 | $ | 1,308 | $ | 2,905 | $ | 2,590 | |||||||
Segment operating profit | 123 | 133 | 235 | 269 | |||||||||||
Third-party aluminum shipments (kmt) | 315 | 307 | 623 | 617 |
Third-party sales2017.
Adjusted EBITDA for the Global Rolled Products segment increased $1 and $17 in the second quarter and six months ended June 30, 2017, respectively, compared to the corresponding periods in 2016. The change was primarily the result of net cost savings2017, principally driven by unfavorable aerospace wide-body production mix and increased automotive volumes,higher aluminum prices, partially offset by lower aerospace volume from customer destockinghigher automotive and reduced build rates as well as continued pricing pressure on regional specialty products.
commercial transportation volumes and net cost savings.
continue to comply with these sanctions. We do not anticipate any interruption in Samara’s supply of metal from Rusal based on these sanctions, and we expect that our facilities in Europe and the United States will be able to obtain metal from alternate sources if necessary. We anticipate that the price of aluminum will continue to fluctuate based upon supply/demand balance and the supply uncertainty created by the sanctions.
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Third-party sales | $ | 501 | $ | 467 | $ | 950 | $ | 896 | ||||||||
Adjusted EBITDA | $ | 82 | $ | 76 | $ | 154 | $ | 140 |
Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Third-party sales | $ | 562 | $ | 504 | $ | 1,099 | $ | 960 | |||||||
Segment operating profit | 97 | 71 | 164 | 139 |
Adjusted EBITDAsales resulting from the divestiture of the Latin America extrusions business in April 2018.
Second quarter ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Total segment operating profit | $ | 432 | $ | 454 | $ | 832 | $ | 905 | |||||||
Unallocated amounts: | |||||||||||||||
Restructuring and other charges | (15 | ) | (26 | ) | (22 | ) | (99 | ) | |||||||
Corporate expense | (93 | ) | (108 | ) | (153 | ) | (203 | ) | |||||||
Consolidated operating income | $ | 324 | $ | 320 | $ | 657 | $ | 603 | |||||||
Interest expense | (89 | ) | (183 | ) | (203 | ) | (298 | ) | |||||||
Other (expense) income, net | (41 | ) | 132 | (61 | ) | 448 | |||||||||
Consolidated income before income taxes | $ | 194 | $ | 269 | $ | 393 | $ | 753 |
In 2017, continued growth in the North American and European building and construction markets and in the European commercial transportation market, as well as growth in demand for innovative new products, is expected, and the North American heavy duty truck market is starting to recover. Additionally, net cost savings are anticipated to continue.
Reconciliation of Combined segment adjusted EBITDA to Net income attributable to Arconic
Items required to reconcile Combined segment adjusted EBITDA to Net income attributable to Arconic include: the Provision for depreciation and amortization; 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. Prior period information has been recast to conform to current year presentation.
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The following table reconciles Combined segment adjusted EBITDA to Net income attributable to Arconic:
Second quarter ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Combined segment adjusted EBITDA | $ | 556 | $ | 568 | $ | 1,105 | $ | 1,092 | ||||||||
Unallocated amounts: | ||||||||||||||||
Depreciation and amortization | (137 | ) | (133 | ) | (270 | ) | (266 | ) | ||||||||
Restructuring and other charges | (26 | ) | (14 | ) | (99 | ) | (30 | ) | ||||||||
Impact of LIFO | (11 | ) | (13 | ) | (30 | ) | (25 | ) | ||||||||
Metal price lag | 19 | 6 | 41 | 6 | ||||||||||||
Corporate expense | (91 | ) | (115 | ) | (182 | ) | (191 | ) | ||||||||
Other | (29 | ) | (16 | ) | (39 | ) | (33 | ) | ||||||||
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Operating income | $ | 281 | $ | 283 | $ | 526 | $ | 553 | ||||||||
Other income, net | 171 | 17 | 525 | 29 | ||||||||||||
Interest expense | (183 | ) | (124 | ) | (298 | ) | (245 | ) | ||||||||
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Income from continuing operations before income taxes | $ | 269 | $ | 176 | $ | 753 | $ | 337 | ||||||||
Income taxes | (57 | ) | (123 | ) | (219 | ) | (174 | ) | ||||||||
Discontinued operations | — | 82 | — | (12 | ) | |||||||||||
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Net income attributable to Arconic | $ | 212 | $ | 135 | $ | 534 | $ | 151 | ||||||||
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The changes in the reconciling items between Combined segment adjusted EBITDA and Net income attributable to Arconic for the second quarter of 2018 of $38 related to settlements of certain customer claims primarily related to product introductions and $4 for legal and other advisory costs related to Grenfell Tower. The decrease in Corporate expense in the six months ended June 30, 2018 was primarily due to costs related to the separation of Alcoa Inc. of $18 and proxy, advisory and governance-related costs of $58 incurred during the six months ended June 30, 2017, comparedneither of which recurred in 2018, as well as lower expenses driven by overhead cost reductions, partially offset by costs incurred in the six months ended June 30, 2018 of $38 related to corresponding periods in 2016 consisted of:
Reconciliation of Net income attributable to Arconic to Consolidated adjusted EBITDA
Items required to reconcile Net income attributable to Arconic to Consolidated adjusted EBITDA include: Depreciation and amortization; Restructuring and other charges; Other income, net; Interest expense; Income tax expense; and Discontinued operations.
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The following table reconciles Net income attributable to Arconic to Consolidated adjusted EBITDA:
Second quarter ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income attributable to Arconic | $ | 212 | $ | 135 | $ | 534 | $ | 151 | ||||||||
Depreciation and amortization | 137 | 133 | 270 | 266 | ||||||||||||
Restructuring and other charges | 26 | 14 | 99 | 30 | ||||||||||||
Other income, net | (171 | ) | (17 | ) | (525 | ) | (29 | ) | ||||||||
Interest expense | 183 | 124 | 298 | 245 | ||||||||||||
Income taxes | 57 | 123 | 219 | 174 | ||||||||||||
Discontinued operations | — | (82 | ) | — | 12 | |||||||||||
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Consolidated adjusted EBITDA(1) | $ | 444 | $ | 430 | $ | 895 | $ | 849 | ||||||||
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Environmental Matters
In July 2017, three purported class action complaints were filed against Arconic and other defendants.
10-Q.
The cash flows related to Alcoa Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows for the six months ended June 30, 2016. As a result, the cash flow amounts reported for the six months ended June 30, 2017 are not comparable to the amounts reported for the six months ended June 30, 2016.
Cash from Operations
capital of $10. The components of the change in working capital included unfavorable changes of $142 in receivables, $70 in inventories and $84 in taxes, including income taxes, partially offset by a favorable change of $287 in accounts payable.
reference.
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Long-Term Debt | Short-Term Debt | Outlook | Date of Last Update | |||||
Standard and Poor’s | BBB- | A-3 | Stable | May 1, 2017 | ||||
Moody’s | Ba2 | Speculative Grade Liquidity-2 | Stable | |||||
Fitch | BB+ | B | Stable | July 3, 2017 |
Cash provided from investing activities for the six months ended June 30, 2017 included2017. The decrease of $1,033 was primarily due to the sale of a portion of Arconic’s investment in Alcoa Corporation common stock for proceeds of $888 and the receipt of proceeds from the sale of the Yadkin Hydroelectric Project of $243 somewhat offset by cash used for capital expenditures of $229 and the injection of $10 into the Fusina rolling business prior to its sale.
Cash provided from investing activities forduring the six months ended June 30, 2016 included proceeds of $549 from the sale of assets and businesses, primarily related to $457 in proceeds from the redemption of Company-owned life insurance policies and proceeds of $102 from the sale of the Remmele Medical business, and $275 in proceeds received from the sale of investments, including $145 for the sale of an equity interest in a natural gas pipeline in Australia and $130 for fixed income and equity securities held by Arconic’s captive insurance company. These cash flows2017, which were partiallypartly offset by $528an increase in capital expenditures, including the aerospace expansion (thick plate stretcher) at the Davenport, Iowa plant.
cash receipts from sold receivables of $135.
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closures, curtailments, expansions, or joint ventures; (g)(h) the impact of cyber-attackscyber attacks and potential information technology or data security breaches; (h) political, economic, and regulatory risks(i) changes in the countries in which Arconic operatesdiscount rates or sells products; (i)investment returns on pension assets; (j) the impact of the separation on the businesses of Arconic; (j) material adverse changes in aluminum industry conditions, including fluctuations in London Metal Exchange-based aluminum prices;prices and foreign currency exchange rates on costs and results; (k) the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation;remediation, which can expose Arconic to substantial costs and liabilities; and (l) the other risk factors summarized in Arconic’s Form10-K for the year ended December 31, 2016, including under Part I, Item 1A thereof,2017 and inother reports filed with the following sections of this report: Note H to the financial statements, the discussion included above under Segment Information,U.S. Securities and the Risk Factors discussion in Part II, Item 1A.Exchange Commission (the “SEC”). Arconic disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law. Market projections are subject to the risks discussed above and other risks in the market.
Environmental Matters
As previously reported, by an amended complaint filed April 21, 2005, Alcoa Global Fasteners, Inc. (now known as Arconic Global Fasteners & Rings, Inc.) was added as a defendant in Orange County Water District (OCWD) v. Northrop Corporation, et al., civil action 04cc00715 (Superior Court of California, County of Orange). OCWD alleges contamination or threatened contamination of a drinking water aquifer by Arconic, certain of
On June 21, 2017, the UK Environment Agency (the “Agency”) confirmed that it will prosecute Firth Rixson Metals Limited in Chesterfield (UK) Magistrates Court in relation to an environmental incident that took place on April 22, 2015 at the Company’s Glossop UK site. It is alleged that an acid scrubber unit at the site caused a leak into the local river resulting in environmental damage, including the death of approximately 200 fish. Arconic was not successful in persuading the Agency to drop the prosecution in lieu of an enforcement undertaking (a civil remedy) despite the fact that cyanide, a compound not used on the site, had been identified in the samples of water taken at the time. A court hearing has been scheduled for September 13, 2017. Given that this proceeding is in its preliminary stage, the Company is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.
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Reynobond PE
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 componentand Tax sections 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 Tower, nor did it have a role in any other aspect of the building’s refurbishment or original design. Regulatory investigations 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. No private litigation has yet been filed in the UK or France.
Brave v. Arconic Inc., Kenneth J. Giacobbe and Klaus Kleinfeld. A purported class action complaint was filed on July 13, 2017 in the United States District Court for the Southern District of New York against Arconic Inc., Kenneth J. Giacobbe and Klaus Kleinfeld. The complaint alleges that the statements in Arconic’s 201610-K about management’s recognition of its responsibility to conduct the Company’s affairs according to the highest standards of personal and corporate conduct and within the laws of the host countries in which it operates, and its failure to disclose that Arconic knowingly supplied highly flammable Reynobond PE cladding panels for use in construction that significantly increased the risk of property damage, injury and death, were false and misleading in violation of the federal securities laws and artificially inflated the prices of Arconic’s securities. The plaintiffs seek, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses.
Tripson v. Arconic Inc. and Klaus Kleinfeld. A purported class action complaint was filed on July 14, 2017 in the United States District Court for the Southern District of New York against Arconic Inc. and Klaus Kleinfeld. The complaint alleges that statements in Arconic’s 2012-201610-Ks,2012-15 Annual Reports and the 2016 Annual Highlights Report about management’s recognition of its responsibility to conduct the Company’s affairs according to the highest standards of personal and corporate conduct and within the laws of the host countries in which it operates, and its failure to disclose that Arconic knowingly supplied highly flammable Reynobond PE cladding panels for use in construction that significantly increased the risk of property damage, injury and death, were false and misleading in violation of the federal securities laws and artificially inflated the prices of Arconic’s securities. The complaint also alleges that Arconic was motivated to conceal its potential liability to improve its credit ratings and enhance its ability to raise capital. The plaintiffs seek, among other things, unspecified compensatory damages and equitable relief and an award of attorney and expert fees and expenses.
Sullivan v. Arconic Inc. et al. A purported class action complaint was filed on July 18, 2017 in the United States District Court for the Southern District of New York against Arconic Inc., as well as two former Arconic executives and several current and former Arconic directors, and banks that acted as underwriters for Arconic’s September 18, 2014 preferred stock offering. The complaint alleges that statements in the registration statement for Arconic’s September 18, 2014 preferred stock offering were false and misleading in light of the subsequent Grenfell Tower fire. The complaint also alleges that Arconic’s failure to disclose at the time of the offering that it was obtaining significant profits through sales that exposed it to substantial liability violated the federal securities laws. The plaintiffs seek, among other things, unspecified compensatory and recissory damages and an award of attorney and expert fees and expenses.
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.
Other Matters
As previously reported, Arconic Inc. and certain officers and directors are named as defendants in a lawsuit filed on April 18, 2017 in Pennsylvania state court, the Philadelphia County Court of Common Pleas, by plaintiff shareholder Arthur Ehrlich on behalf of himself and other similarly situated shareholders alleging breach of fiduciary duty related to Arconic’s April 12, 2017 filing of a Form8-K in which the Company disclosed that it had given notice of a “potential change in control” under the terms of a rabbi trust agreement. Plaintiff alleges that this statement constitutes an improper attempt to coerce shareholders into voting for incumbent directors. After a hearing on May 1, 2017, the Court denied plaintiff’s request for a preliminary injunction. On May 18, 2017, plaintiff voluntarily dismissed the lawsuit with prejudice as to Ehrlich, but without prejudice as it relates to other potential named plaintiffs. No further reports will be made on this matter.
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As previously reported, Arconic Inc. and certain officers and directors are named as defendants in a lawsuit filed on April 19, 2017 in the United States District Court for the Southern District of New York by plaintiff City of Atlanta Firefighters Pension Fund alleging violations of the Exchange Act related to Arconic’s April 12, 2017 filing of a Form8-K in which the Company disclosed that it had given notice of a “potential change in control” under the terms of a rabbi trust agreement. Plaintiff alleges that this statement constitutes an improper attempt to coerce shareholders into voting for incumbent directors. After a hearing on May 10, 2017, the Court denied plaintiff’s Motion for Preliminary Injunction. On May 24, 2017, plaintiff voluntarily dismissed the lawsuit without prejudice. No further reports will be made on this matter.
Arconic’s business, financial condition and results of operations may be impacted by a number of factors. In addition to the factors discussed elsewhere in this report, in Part I, Item 1A of Arconic’s Annual Report on Form10-K for the year ended December 31, 2016, and in other reports filed by Arconic with the Securities and Exchange Commission, the following risks and uncertainties, updated from and in addition to those in the Form10-K, could materially harm its business, financial condition or results of operations, including causing Arconic’s actual results to differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to Arconic or that Arconic currently deems immaterial also may materially adversely affect the Company in future periods.
Arconic could encounter manufacturing difficulties or other issues that impact product performance, quality or safety, which could affect Arconic’s reputation, business and financial statements.
The manufacture of many of Arconic’s products is a highly exacting and complex process. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, including those related to quality, problems with raw materials, supply chain interruptions, natural disasters, labor unrest and environmental factors. Such problems could have an adverse impact on the Company’s ability to fulfill orders or on product performance. Product manufacturing or performance issues could result in recalls, customer penalties, contract cancellation and product liability exposure, including if any of our products are defective or are used in a manner that results in injuries or other damages. Because of approval and license requirements applicable to manufacturers and/or their suppliers, alternatives to mitigate manufacturing disruptions may not be readily available to the Company or its customers. Accordingly, manufacturing problems, product defects or other risks associated with our products, including their use or application, could result in significant costs to and liability for Arconic, including the payment of potentially substantial monetary damages, fines or penalties, as well as negative publicity and damage to the Company’s reputation, which could adversely impact product demand and customer relationships.
Arconic may be exposed to significant legal proceedings, investigations or changes in U.S. federal, state or foreign law, regulation or policy.
Arconic’s results of operations or liquidity in a particular period could be affected by new or increasingly stringent laws, regulatory requirements or interpretations, or outcomes of significant legal proceedings or investigations adverse to Arconic. The Company may experience a change in effective tax rates or become subject to unexpected or rising costs associated with business operations or provision of health or welfare benefits to employees due to changes in laws, regulations or policies. The Company is also subject to a variety of legal and regulatory compliance risks associated with its business and products. These risks include, among other things, potential claims relating to product liability (including personal injury, property loss or similar claims), health and safety, environmental matters, intellectual property rights, government contracts and taxes, as well as compliance with U.S. and foreign laws and regulations governing export, anti-bribery, competition, sales and trading practices, and the manufacture and sale of products. Arconic could be subject to fines, penalties, damages (in certain cases, treble damages), or suspension or debarment from government contracts.
Even if Arconic successfully defends against these types of claims, the Company could still be required to spend a substantial amount of money in connection with legal proceedings or investigations with respect to such claims; the Company’s management could be required to devote significant time, attention and operational resources responding to and defending against these claims; and Arconic’s reputation could suffer, any of which could have a material adverse effect on its financial condition and results of operations.
While Arconic believes it has adopted appropriate risk management and compliance programs to address and reduce these risks, including insurance arrangements with respect to these risks, such measures may not provide adequate protection against liabilities that may arise. The global and diverse nature of Arconic’s operations means that these risks will continue to exist, and additional legal proceedings and contingencies may arise from time to time. In addition, various factors or developments can lead the Company to change current estimates of liabilities or make such
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estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the Company cannot predict with certainty could have a material adverse effect on the Company’s results of operations or cash flows in a particular period. For additional information regarding the legal proceedings involving the Company, see the discussion in Part I, Item 3. (Legal Proceedings) of this report and in Note LQ to the Consolidated Financial Statements in Part II,I Item 8. (Financial Statements and Supplementary Data).
Arconic is subject to a broad range1 of product, health, safety and environmental laws and regulations in the jurisdictions in which it operates and may be exposed to substantial costs and liabilities associated with such laws and regulations.
Arconic’s operations worldwide are subject to numerous complex and increasingly stringent product, health, safety and environmental laws and regulations. The costs of complying with such laws and regulations, including participation in assessments and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Environmental laws may impose cleanup liability on owners and occupiers of contaminated property, including past or divested properties, regardless of whether the owners and occupiers caused the contamination or whether the activity that caused the contamination was lawful at the time it was conducted. Environmental matters for which Arconic may be liable may arise in the future at its present sites, where no problem is currently known, at previously owned sites, sites previously operated by the Company, sites owned by its predecessors or sites that it may acquire in the future. Compliance with product, health, safety and environmental laws and regulations may prove to be more limiting and costly than the Company anticipates. For example, if safety issues, whether real or perceived, arise in connection with any Arconic product, sales of such product could be halted or recalled. New data and information, including information about the ways in which the Company’s products are used, may lead the Company, regulatory authorities, government agencies or other entities or organizations to publish guidelines or recommendations, or impose restrictions, related to the manufacturing or use of the Company’s products. This could lead to reduced sales or market acceptance of the Company’s products. Arconic’s results of operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to certain sites as well as other health and safety risks relating to its operations and products. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows.
On July 31, 2017, Arconic entered into a separation agreement with Klaus Kleinfeld, the former Chairman and Chief Executive Officer of the Company. The separation agreement provides that, subject to Mr. Kleinfeld’snon-revocation of a general release of claims in favor of the Company and compliance with his obligations under the separation agreement, and in full satisfaction of Mr. Kleinfeld’s right to receive severance benefits, the Company will provide to Mr. Kleinfeld (a) a cash payment of $5,000,000, (b) continued life, accident and health benefits until the second anniversary of his employment termination date at no greaterafter-tax cost to Mr. Kleinfeld than theafter-tax cost to him as of immediately prior to his employment termination date, and (c) a prorated bonus for 2017 equal to the greater of (i) 37% of the annual bonus to which Mr. Kleinfeld would have been entitled had he remained employed through the end of 2017 and (ii) $1,000,000.
The separation agreement also contains a mutualnon-disparagement covenant, a mutual general release of claims and a cooperation covenant, as well as an acknowledgement by Mr. Kleinfeld that he continues to be bound by the restrictive covenants applicable to him under the Executive Severance Agreement between him and the Company dated December 8, 2008.
The foregoing description of the separation agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the separation agreement filed herewith as Exhibit 10(c).
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2013 Arconic Stock Incentive Plan, as amended and | |||
Letter Agreement, from Arconic Inc. to Katherine H. Ramundo, dated as of May 31, 2018 | |||
Special Retention Award Agreement - Paul Myron, effective May 16, 2018 | |||
Form of Stock Option Award Agreement | |||
Form of Restricted Share Unit Award Agreement | |||
Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends | |||
Letter regarding unaudited interim financial information | |||
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Arconic Inc. | |||||||
August 2, | /s/ Ken Giacobbe | ||||||
Date | Ken Giacobbe | ||||||
Executive Vice President and | |||||||
Chief Financial Officer | |||||||
(Principal Financial Officer) | |||||||
August 2, | /s/ Paul Myron | ||||||
Date | Paul Myron | ||||||
Vice President and Controller | |||||||
(Principal Accounting Officer) |
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EXHIBIT INDEX
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