☒ | 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 |
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales (I) | $ | 3,236 | $ | 3,138 | $ | 9,689 | $ | 9,427 | ||||||||
Cost of goods sold (exclusive of expenses below) | 2,626 | 2,503 | 7,701 | 7,436 | ||||||||||||
Selling, general administrative, and other expenses | 155 | 229 | 580 | 673 | ||||||||||||
Research and development expenses | 25 | 30 | 83 | 93 | ||||||||||||
Provision for depreciation and amortization | 140 | 136 | 410 | 402 | ||||||||||||
Restructuring and other charges (D & E) | 19 | 3 | 118 | 33 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 271 | 237 | 797 | 790 | ||||||||||||
Interest expense (L) | 100 | 126 | 398 | 371 | ||||||||||||
Other income, net (G) | (1 | ) | (11 | ) | (526 | ) | (40 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations before income taxes | 172 | 122 | 925 | 459 | ||||||||||||
Provision for income taxes | 53 | 56 | 272 | 230 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations after income taxes | 119 | 66 | 653 | 229 | ||||||||||||
Income from discontinued operations after income taxes (G) | — | 120 | — | 146 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | 119 | 186 | 653 | 375 | ||||||||||||
Less: Income from discontinued operations attributable to noncontrolling interests (G) | — | 20 | — | 58 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to Arconic | $ | 119 | $ | 166 | $ | 653 | $ | 317 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Amounts Attributable to Arconic Common Shareholders (J): | ||||||||||||||||
Net income | $ | 101 | $ | 148 | $ | 600 | $ | 265 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings per share - basic | ||||||||||||||||
Continuing operations | $ | 0.23 | $ | 0.11 | $ | 1.36 | $ | 0.40 | ||||||||
Discontinued operations | — | 0.23 | — | 0.20 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per share - basic | $ | 0.23 | $ | 0.34 | $ | 1.36 | $ | 0.60 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings per share - diluted | ||||||||||||||||
Continuing operations | $ | 0.22 | $ | 0.11 | $ | 1.31 | $ | 0.40 | ||||||||
Discontinued operations | — | 0.22 | — | 0.20 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per share - diluted | $ | 0.22 | $ | 0.33 | $ | 1.31 | $ | 0.60 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Dividends paid per share | $ | 0.06 | $ | 0.09 | $ | 0.18 | $ | 0.27 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted Average Shares Outstanding (J): | ||||||||||||||||
Average shares outstanding - basic | 442 | 438 | 441 | 438 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Average shares outstanding - diluted | 462 | 453 | 501 | 443 | ||||||||||||
|
|
|
|
|
|
|
|
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 | ||||||||||||||||||||||
Third quarter ended September 30, | Third quarter ended September 30, | Third quarter ended September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Net income | $ | 119 | $ | 166 | $ | — | $ | 20 | $ | 119 | $ | 186 | ||||||||||||
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 | 31 | (462 | ) | — | (1 | ) | 31 | (463 | ) | |||||||||||||||
Foreign currency translation adjustments | 85 | 157 | — | 45 | 85 | 202 | ||||||||||||||||||
Net change in unrealized gains/losses on available-for-sale securities | 1 | — | — | — | 1 | — | ||||||||||||||||||
Net change in unrecognized gains/losses on cash flow hedges | 10 | (338 | ) | — | (10 | ) | 10 | (348 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Other comprehensive income (loss), net of tax | 127 | (643 | ) | — | 34 | 127 | (609 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Comprehensive income (loss) | $ | 246 | $ | (477 | ) | $ | — | $ | 54 | $ | 246 | $ | (423 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Arconic | Noncontrolling Interests | Total | ||||||||||||||||||||||
Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Net income | $ | 653 | $ | 317 | $ | — | $ | 58 | $ | 653 | $ | 375 | ||||||||||||
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 | 110 | (365 | ) | — | 2 | 110 | (363 | ) | ||||||||||||||||
Foreign currency translation adjustments | 251 | 505 | — | 184 | 251 | 689 | ||||||||||||||||||
Net change in unrealized gains/losses on available-for-sale securities | (133 | ) | 4 | — | — | (133 | ) | 4 | ||||||||||||||||
Net change in unrecognized gains/losses on cash flow hedges | 13 | (571 | ) | — | 4 | 13 | (567 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Other comprehensive income (loss), net of tax | 241 | (427 | ) | — | 190 | 241 | (237 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Comprehensive income (loss) | $ | 894 | $ | (110 | ) | $ | — | $ | 248 | $ | 894 | $ | 138 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,815 | $ | 1,863 | ||||
Receivables from customers, less allowances of $7 in 2017 and $13 in 2016 (K) | 1,150 | 974 | ||||||
Other receivables (G & K) | 373 | 477 | ||||||
Inventories (F) | 2,453 | 2,253 | ||||||
Prepaid expenses and other current assets | 357 | 325 | ||||||
|
|
|
| |||||
Total current assets | 6,148 | 5,892 | ||||||
Properties, plants, and equipment | 11,791 | 11,572 | ||||||
Less: accumulated depreciation and amortization | 6,265 | 6,073 | ||||||
|
|
|
| |||||
Properties, plants, and equipment, net | 5,526 | 5,499 | ||||||
|
|
|
| |||||
Goodwill | 5,246 | 5,148 | ||||||
Deferred income taxes | 1,024 | 1,234 | ||||||
Investment in common stock of Alcoa Corporation (G & N) | — | 1,020 | ||||||
Other noncurrent assets | 1,293 | 1,245 | ||||||
|
|
|
| |||||
Total Assets | $ | 19,237 | $ | 20,038 | ||||
|
|
|
| |||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 54 | $ | 36 | ||||
Accounts payable, trade | 1,656 | 1,744 | ||||||
Accrued compensation and retirement costs | 379 | 398 | ||||||
Taxes, including income taxes | 74 | 85 | ||||||
Accrued interest payable | 101 | 153 | ||||||
Other current liabilities | 412 | 329 | ||||||
Long-term debt due within one year | 1 | 4 | ||||||
|
|
|
| |||||
Total current liabilities | 2,677 | 2,749 | ||||||
Long-term debt, less amount due within one year (L & N) | 6,802 | 8,044 | ||||||
Accrued pension benefits | 2,110 | 2,345 | ||||||
Accrued other postretirement benefits | 811 | 889 | ||||||
Other noncurrent liabilities and deferred credits | 876 | 870 | ||||||
|
|
|
| |||||
Total liabilities | 13,276 | 14,897 | ||||||
|
|
|
| |||||
Contingencies and commitments (H) | ||||||||
Equity | ||||||||
Arconic shareholders’ equity: | ||||||||
Preferred stock | 55 | 55 | ||||||
Mandatory convertible preferred stock | 3 | 3 | ||||||
Common stock | 442 | 438 | ||||||
Additional capital | 8,294 | 8,214 | ||||||
Accumulated deficit | (519 | ) | (1,027 | ) | ||||
Accumulated other comprehensive loss (C) | (2,327 | ) | (2,568 | ) | ||||
|
|
|
| |||||
Total Arconic shareholders’ equity | 5,948 | 5,115 | ||||||
|
|
|
| |||||
Noncontrolling interests | 13 | 26 | ||||||
|
|
|
| |||||
Total equity | 5,961 | 5,141 | ||||||
|
|
|
| |||||
Total Liabilities and Equity | $ | 19,237 | $ | 20,038 | ||||
|
|
|
|
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
Nine months ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash from Operations | ||||||||
Net income | $ | 653 | $ | 375 | ||||
Adjustments to reconcile net income to cash from operations: | ||||||||
Depreciation, depletion and amortization | 410 | 938 | ||||||
Deferred income taxes | 24 | (67 | ) | |||||
Equity income, net of dividends | — | 32 | ||||||
Restructuring and other charges | 118 | 134 | ||||||
Net gain from investing activities - asset sales (G) | (514 | ) | (152 | ) | ||||
Net periodic pension benefit cost (M) | 163 | 246 | ||||||
Stock-based compensation | 59 | 73 | ||||||
Other | 60 | 67 | ||||||
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | ||||||||
(Increase) in receivables | (278 | ) | (226 | ) | ||||
(Increase) decrease in inventories | (168 | ) | 7 | |||||
Decrease (increase) in prepaid expenses and other current assets | 6 | (10 | ) | |||||
(Decrease) in accounts payable, trade | (94 | ) | (196 | ) | ||||
(Decrease) in accrued expenses | (138 | ) | (417 | ) | ||||
Increase in taxes, including income taxes | 144 | 63 | ||||||
Pension contributions | (257 | ) | (227 | ) | ||||
(Increase) in noncurrent assets | (37 | ) | (284 | ) | ||||
(Decrease) in noncurrent liabilities | (62 | ) | (148 | ) | ||||
|
|
|
| |||||
Cash provided from operations | 89 | 208 | ||||||
|
|
|
| |||||
Financing Activities | ||||||||
Net change in short-term borrowings (original maturities of three months or less) | 15 | (6 | ) | |||||
Additions to debt (original maturities greater than three months) | 664 | 1,313 | ||||||
Payments on debt (original maturities greater than three months) (L) | (1,484 | ) | (1,324 | ) | ||||
Proceeds from exercise of employee stock options | 48 | 3 | ||||||
Dividends paid to shareholders | (132 | ) | (171 | ) | ||||
Distributions to noncontrolling interests | (14 | ) | (176 | ) | ||||
Other | (15 | ) | 11 | |||||
|
|
|
| |||||
Cash used for financing activities | (918 | ) | (350 | ) | ||||
|
|
|
| |||||
Investing Activities | ||||||||
Capital expenditures | (360 | ) | (814 | ) | ||||
Proceeds from the sale of assets and businesses (E) | (9 | ) | 683 | |||||
Additions to investments | (2 | ) | (23 | ) | ||||
Sales of investments (G) | 890 | 280 | ||||||
Net change in restricted cash | 11 | (72 | ) | |||||
Other (G) | 246 | 25 | ||||||
|
|
|
| |||||
Cash provided from investing activities | 776 | 79 | ||||||
|
|
|
| |||||
Effect of exchange rate changes on cash and cash equivalents | 5 | 7 | ||||||
|
|
|
| |||||
Net change in cash and cash equivalents | (48 | ) | (56 | ) | ||||
Cash and cash equivalents at beginning of year | 1,863 | 1,919 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 1,815 | $ | 1,863 | ||||
|
|
|
|
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 June 30, 2016 | $ | 55 | $ | 3 | $ | 1,391 | $ | 9,877 | $ | 8,871 | $ | (2,647 | ) | $ | (5,215 | ) | $ | 2,194 | $ | 14,529 | ||||||||||||||||
Net income | — | — | — | — | 166 | — | — | 20 | 186 | |||||||||||||||||||||||||||
Other comprehensive (loss) income (C) | — | — | — | — | — | — | (643 | ) | 34 | (609 | ) | |||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $1.875 per share | — | — | — | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||||||
Preferred-Class B @ $6.71875 per share | — | — | — | — | (16 | ) | — | — | — | (16 | ) | |||||||||||||||||||||||||
Common @ $0.18 per share | — | — | — | — | (80 | ) | — | — | — | (80 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 18 | — | — | — | — | 18 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | — | (12 | ) | — | 8 | — | — | (4 | ) | |||||||||||||||||||||||||
Retirement of Treasury stock | — | — | (76 | ) | (2,563 | ) | — | 2,639 | — | — | — | |||||||||||||||||||||||||
Reverse stock split | — | — | (877 | ) | 877 | — | — | — | — | — | ||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | (92 | ) | (92 | ) | |||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | 14 | 14 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at September 30, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,197 | $ | 8,940 | $ | — | $ | (5,858 | ) | $ | 2,170 | $ | 13,945 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2017 | $ | 55 | $ | 3 | $ | 441 | $ | 8,262 | $ | (567 | ) | $ | — | $ | (2,454 | ) | $ | 13 | $ | 5,753 | ||||||||||||||||
Net income | — | — | — | — | 119 | — | — | — | 119 | |||||||||||||||||||||||||||
Other comprehensive income (C) | — | — | — | — | — | — | 127 | — | 127 | |||||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $1.875 per share | — | — | — | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||||||
Preferred-Class B @ $6.71875 per share | — | — | — | — | (17 | ) | — | — | — | (17 | ) | |||||||||||||||||||||||||
Common at $0.12 per share | — | — | — | — | (53 | ) | — | — | — | (53 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 11 | — | — | — | — | 11 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | 1 | 21 | — | — | — | — | 22 | |||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at September 30, 2017 | $ | 55 | $ | 3 | $ | 442 | $ | 8,294 | $ | (519 | ) | $ | — | $ | (2,327 | ) | $ | 13 | $ | 5,961 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, except per-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 | — | — | — | — | 317 | — | — | 58 | 375 | |||||||||||||||||||||||||||
Other comprehensive (loss) income (C) | — | — | — | — | — | — | (427 | ) | 190 | (237 | ) | |||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||||||||||
Preferred-Class B @ $20.1563 per share | — | — | — | — | (50 | ) | — | — | — | (50 | ) | |||||||||||||||||||||||||
Common @ $0.36 per share | — | — | — | — | (159 | ) | — | — | — | (159 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 73 | — | — | — | — | 73 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | — | (209 | ) | —�� | 186 | — | — | (23 | ) | |||||||||||||||||||||||||
Retirement of Treasury stock | — | — | (76 | ) | (2,563 | ) | — | 2,639 | — | — | — | |||||||||||||||||||||||||
Reverse stock split | — | — | (877 | ) | 877 | — | — | — | — | — | ||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | (176 | ) | (176 | ) | |||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | 13 | 13 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at September 30, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,197 | $ | 8,940 | $ | — | $ | (5,858 | ) | $ | 2,170 | $ | 13,945 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | — | — | — | — | 653 | — | — | — | 653 | |||||||||||||||||||||||||||
Other comprehensive income (C) | — | — | — | — | — | — | 241 | — | 241 | |||||||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
Preferred-Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||||||||||
Preferred-Class B @ $20.1563 per share | — | — | — | — | (51 | ) | — | — | — | (51 | ) | |||||||||||||||||||||||||
Common @ $0.24 per share | — | — | — | — | (107 | ) | — | — | — | (107 | ) | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | 59 | — | — | — | — | 59 | |||||||||||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||||||||||||||||
compensation plans | — | — | 4 | 21 | — | — | — | — | 25 | |||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | (14 | ) | (14 | ) | |||||||||||||||||||||||||
Other | — | — | — | — | 15 | — | — | 1 | 16 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at September 30, 2017 | $ | 55 | $ | 3 | $ | 442 | $ | 8,294 | $ | (519 | ) | $ | — | $ | (2,327 | ) | $ | 13 | $ | 5,961 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 a 1-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 additional paid-in capital; tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits were not recognized until the deduction reduced taxes payable. The changes require all excess tax benefits and tax deficiencies related to share-based payment awards to be recognized as income tax expense or benefit in the 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. In addition, the presentation of excess tax benefits related to share-based payment awards in the statement of cash flows changed. Previously, excess tax benefits were separated from other income tax cash flows and classified as a financing activity. The changes require excess tax benefits to be classified along with other income tax cash flows as an operating activity. Also, the changes require cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity. Further, for a share-based award to qualify for equity classification it previously could not be partially settled in cash in-excess of the employer’s minimum statutory withholding requirements. The changes permit equity classification of share-based awards for withholdings up to the maximum statutory tax rates in applicable jurisdictions. These changes became effective for Arconic on January 1, 2017. The prospective transition method was utilized for excess tax benefits in the Statement of Consolidated Cash Flows. Management concluded that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
8
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 a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held as a result of an increase in the level of ownership interest or degree of influence. In addition, an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting must recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. These changes became effective for Arconic on January 1, 2017. Management determined 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 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 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 will adopt theadopted this new guidance using the modified retrospective transition approach reflecting theapplied to those contracts that were not completed as of January 1, 2018. There was no cumulative effect adjustment to the opening balance of initially applyingretained earnings in the new standard to revenue recognitionConsolidated Balance Sheet in the first quarter of 2018. The Company formed2018, as the adoption did not result in a project assessment and adoption team and is currently reviewing contract terms and assessing the impactchange to our timing of adopting the new guidance on the Consolidated Financial Statements. While the Company generally recognizes revenue recognition, which continues to be at a point in time upon delivery and transfer of title and risk of losstime. See Note C for most arrangements, based on the contract assessments to date, it
9
believes that revenue under certain of those contracts, primarily within the Engineered Products and Solutions segment, may be recognized over time due to the customized nature of certain of its products that have no alternative use combined with an enforceable right of payment from the customer in the event of termination of the contract. The Company is assessing the modification of certain contract terms that may impact point-in-time versus over-time revenue recognition. It is not anticipated that these modifications would result in significant changes to revenue, business practices or controls. 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. In addition, the Company is in the process of identifying appropriate changes to its business processes and controls, as well as preparing for revisions to accounting policies and expanded disclosures related to revenue recognition in the notes to the Consolidated Financial Statements.
further details.
However, the adoption is not expected to have a material impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows.
In August 2016, the FASB issued changes to the classification of certain cash receipts and cash payments within the statement of cash flows. The guidance identifies eight specific cash flow items and the sections where they must be presented within the statement of cash flows. These changes become effective for Arconic on January 1, 2018. Management does not expect these changes to have a material impact on the Consolidated Financial Statements.
In November 2016, the FASB issued changes to the classification of cash and cash equivalents within the cash flow statement. Restricted cash and restricted cash equivalents will be included within the cash and cash equivalents line on the cash flow statement and a reconciliation must be prepared to the statement of financial position. Transfers between restricted cash and restricted cash equivalents and cash and cash equivalents will no longer be presented as cash flow activities in the statement of cash flows and material balances of restricted cash and restricted cash equivalents must disclose information regarding the nature of the restrictions. These changes become effective for Arconic on January 1, 2018. Management 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 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 determined that the adoption of these changes will not have a material impact on the Consolidated Financial Statements.
10
In March 2017, the FASB issued changes to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires registrants to present the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. Also, only the service cost component will be eligible for asset capitalization. Registrants will present the other components of net periodic benefit cost separately from the service cost component; and, the line item or items used in the income statement to present the other components of net periodic benefit cost must be disclosed. These changes 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. The Company currently records non-service related net periodic pension cost and net periodic postretirement benefit cost within Cost of goods sold, Selling, general, administrative and other expenses and Research and development expenses and upon the adoption of this standard will be recorded separately from service cost in the Other income, net line item in the Statement of Consolidated Operations. The impact of the retrospective adoption of this standard update will be an increase to consolidated operating income of approximately $150 while there will be no impact to consolidated net income for the year ended December 31, 2017. Management is currently evaluating the potential impact of prospectively adopting the asset capitalization of only the service cost component on the Consolidated Financial Statements.
In May 2017, the FASB issued clarification to guidance on the modification accounting criteria for share-based payment awards. The new guidance requires registrants to apply modification accounting unless three specific criteria are met. The three criteria are 1) the fair value of the award is the same before and after the modification, 2) the vesting conditions are the same before and after the modification and 3) the classification as a debt or equity award is the same before and after the modification. These changes become effective for Arconic on January 1, 2018 and are to be applied prospectively to new awards granted after adoption. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
11
C. Accumulated Other Comprehensive Loss
The following table details
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 |
Arconic | Noncontrolling Interests | |||||||||||||||
Third quarter ended | Third quarter ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pension and other postretirement benefits (M) | ||||||||||||||||
Balance at beginning of period | $ | (1,931 | ) | $ | (3,514 | ) | $ | — | $ | (53 | ) | |||||
Other comprehensive income (loss): | ||||||||||||||||
Unrecognized net actuarial loss and prior service cost | (7 | ) | (819 | ) | — | (1 | ) | |||||||||
Tax benefit | 1 | 286 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive loss before reclassifications, net of tax | (6 | ) | (533 | ) | — | (1 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Amortization of net actuarial loss and prior service cost(1) | 56 | 109 | — | 1 | ||||||||||||
Tax expense(2) | (19 | ) | (38 | ) | — | (1 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total amount reclassified from Accumulated other comprehensive income, net of tax(5) | 37 | 71 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) | 31 | (462 | ) | — | (1 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (1,900 | ) | $ | (3,976 | ) | $ | — | $ | (54 | ) | |||||
|
|
|
|
|
|
|
| |||||||||
Foreign currency translation | ||||||||||||||||
Balance at beginning of period | $ | (523 | ) | $ | (2,064 | ) | $ | (2 | ) | $ | (641 | ) | ||||
Other comprehensive income(3) | 85 | 157 | — | 45 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (438 | ) | $ | (1,907 | ) | $ | (2 | ) | $ | (596 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
Available-for-sale securities | ||||||||||||||||
Balance at beginning of period | $ | (2 | ) | $ | (1 | ) | $ | — | $ | — | ||||||
Other comprehensive income(4) | 1 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (1 | ) | $ | (1 | ) | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
| |||||||||
Cash flow hedges | ||||||||||||||||
Balance at beginning of period | $ | 2 | $ | 364 | $ | — | $ | 11 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Net change from periodic revaluations | 15 | (430 | ) | — | 20 | |||||||||||
Tax (expense) benefit | (5 | ) | 126 | — | (6 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) before reclassifications, net of tax | 10 | (304 | ) | — | 14 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net amount reclassified to earnings | — | (46 | ) | — | (34 | ) | ||||||||||
Tax benefit(2) | — | 12 | — | 10 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax (5) | — | (34 | ) | — | (24 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) | 10 | (338 | ) | — | (10 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | 12 | $ | 26 | $ | — | $ | 1 | ||||||||
|
|
|
|
|
|
|
|
12
Arconic | Noncontrolling Interests | |||||||||||||||
Nine months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pension and other postretirement benefits (M) | ||||||||||||||||
Balance at beginning of period | $ | (2,010 | ) | $ | (3,611 | ) | $ | — | $ | (56 | ) | |||||
Other comprehensive income (loss): | ||||||||||||||||
Unrecognized net actuarial loss and prior service cost | 4 | (883 | ) | — | — | |||||||||||
Tax (expense) benefit | (3 | ) | 312 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) before reclassifications, net of tax | 1 | (571 | ) | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Amortization of net actuarial loss and prior service cost(1) | 167 | 317 | — | 3 | ||||||||||||
Tax expense(2) | (58 | ) | (111 | ) | — | (1 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | 109 | 206 | — | 2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) | 110 | (365 | ) | — | 2 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (1,900 | ) | $ | (3,976 | ) | $ | — | $ | (54 | ) | |||||
|
|
|
|
|
|
|
| |||||||||
Foreign currency translation | ||||||||||||||||
Balance at beginning of period | $ | (689 | ) | $ | (2,412 | ) | $ | (2 | ) | $ | (780 | ) | ||||
Other comprehensive income(3) | 251 | 505 | — | 184 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (438 | ) | $ | (1,907 | ) | $ | (2 | ) | $ | (596 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
Available-for-sale securities | ||||||||||||||||
Balance at beginning of period | $ | 132 | $ | (5 | ) | $ | — | $ | — | |||||||
Other comprehensive (loss) income(4) | (133 | ) | 4 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (1 | ) | $ | (1 | ) | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
| |||||||||
Cash flow hedges | ||||||||||||||||
Balance at beginning of period | $ | (1 | ) | $ | 597 | $ | — | $ | (3 | ) | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Net change from periodic revaluations | 20 | (772 | ) | — | 35 | |||||||||||
Tax (expense) benefit | (7 | ) | 229 | — | (10 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) before reclassifications, net of tax | 13 | (543 | ) | — | 25 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net amount reclassified to earnings | — | (41 | ) | — | (29 | ) | ||||||||||
Tax benefit2) | — | 13 | — | 8 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | — | (28 | ) | — | (21 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Other comprehensive income (loss) | 13 | (571 | ) | — | 4 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | 12 | $ | 26 | $ | — | $ | 1 | ||||||||
|
|
|
|
|
|
|
|
13
D.nickel, are used worldwide in aerospace, automotive, commercial transportation, building and construction, industrial applications, defense, and packaging. Arconic’s segments are organized by product on a worldwide basis. In the first quarter of 2018, the Company changed its primary measure of segment performance from Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) to Segment operating profit, which more closely aligns segment performance with Operating income as presented in the Statement of Consolidated Operations. Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Segment operating profit. Arconic’s definition of Segment operating profit is Operating income excluding Special items. Special items include Restructuring and other charges and Impairment of goodwill. Segment operating profit also includes certain items that, 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 derivative 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. Differences between segment totals and consolidated Arconic are in Corporate.
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 |
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 first nine months of 2017, Arconic recorded Restructuring and other charges of $118 ($99 after-tax), which included $59 ($4019 after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately 800352 employees (350(129 in the Engineered Products and Solutions segment, 243110 in the Global Rolled Products segment, 93 in the Transportation and Construction Solutions segment, and 20 in Corporate); a net charge of $4 ($3 after-tax) for other miscellaneous items; a net benefit of $6 ($4 after-tax), for the reversal of forfeited executive stock compensation of $13, partially offset by a charge of $7 for the related severance; and a favorable benefit of $1 ($1 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the third quarter of 2016, Arconic recorded Restructuring and other charges of $3 ($2 after-tax), which included $4 ($2 after-tax) for layoff costs related to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 70 employees (60 in the Engineered Products and Solutions segment and 10 in Corporate); a net charge of $7 ($5 after-tax) for other miscellaneous items; and a favorable benefit of $8 ($5 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the first nine months of 2016, Arconic recorded Restructuring and other charges of $33 ($22 after-tax), which included $34 ($21 after-tax) for layoff costs related to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 1,140 employees (860 in the Engineered Products and Solutions segment, 30 in the Global Rolled Products segment, 240 in the Transportation and Construction Solutions segment, and 10 in Corporate); a net charge of $14 ($9 after-tax) for other miscellaneous items; and a net favorable benefit of $15 ($8 after-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 such charges to segment results would have been as follows:
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Engineered Products and Solutions | $ | 10 | $ | (1 | ) | $ | 24 | $ | 16 | |||||||
Global Rolled Products | 2 | (1 | ) | 76 | 1 | |||||||||||
Transportation and Construction Solutions | 2 | (2 | ) | 11 | 6 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Segment Total | 14 | (4 | ) | 111 | 23 | |||||||||||
Corporate | 5 | 7 | 7 | 10 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Restructuring and other charges | $ | 19 | $ | 3 | $ | 118 | $ | 33 | ||||||||
|
|
|
|
|
|
|
|
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 | (41 | ) | (5 | ) | (46 | ) | ||||||
Restructuring charges | 54 | — | 54 | |||||||||
Other* | 10 | (1 | ) | 9 | ||||||||
|
|
|
|
|
| |||||||
Reserve balances at September 30, 2017 | $ | 73 | $ | 3 | $ | 76 | ||||||
|
|
|
|
|
|
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. |
future retirees that participate in a defined benefit pension plan, which impacts approximately 300 of those employees. In addition, effective January 1, 2019, benefit accruals for future service will cease. As result of these changes, a curtailment charge of $9 was recorded in Restructuring and other charges in the second quarter of 2018.
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. |
E. As of June 30, 2018, Arconic was in compliance with all such covenants.
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 |
In April 2016, Arconic completed the sale of the Remmele Medical business to LISI MEDICAL for $102 in cash ($99 net of transaction costs). This business, which was part of the RTI International Metals acquisition, manufactures precision-machined metal products for customers in the minimally invasive surgical device and implantable device markets. While owned by Arconic, the operating results and assets and liabilities of this business were included in the Engineered Products and Solutions segment. Remmele Medical generated third-party sales of $23 from January 1, 2016 through the divestiture date, and, at the time of the divestiture, had approximately 330 employees. This transaction is no longer subject to post-closing adjustments.
F. Inventories
September 30, 2017 | December 31, 2016 | |||||||
Finished goods | $ | 651 | $ | 625 | ||||
Work-in-process | 1,332 | 1,144 | ||||||
Purchased raw materials | 386 | 408 | ||||||
Operating supplies | 84 | 76 | ||||||
|
|
|
| |||||
Total inventories | $ | 2,453 | $ | 2,253 | ||||
|
|
|
|
15
At September 30, 2017 and December 31, 2016, the portion of inventories valued on a last-in, first-out (LIFO) basis was $1,148 and $947, respectively. If valued on an average-cost basis, total inventories would have been $449 and $371 higher at September 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 February 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 accompanying Statement of Consolidated Cash Flows and a gain of $351, which was recorded in Other income, net in the accompanying Statement of Consolidated Operations.
In April and May 2017, the Company acquired a portion of its outstanding notes held by two investment banks (the “Investment Banks”) in exchange for cash and the Company’s remaining 12,958,767 Alcoa Corporation shares (valued at $35.91 per share) (the “Debt-for-Equity Exchange”) (See Note L). A gain of $167 on the Debt-for-Equity Exchange was recorded in Other income, net in the accompanying Statement of Consolidated Operations. The share exchange had no impact on the accompanying 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 September 30, 2017 and December 31, 2016, respectively. The fair value was based on the closing stock price of Alcoa Corporation as of September 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 maintained 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 third quarter and nine months ended September 30, 2017, and accounts receivable at September 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 accompanying Consolidated Balance Sheet as of December 31, 2016 for the net after-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 $5approximately $30 in the second quarter of 2017. The $243 proceeds were included in Other within Investing Activities2017, and $25 and $56 in the Statement of Consolidated Cash Flows.
16
The results of operations of Alcoa Corporation are presented as discontinued operations in the accompanying Statement of Consolidated Operations as summarized below:
Third quarter ended September 30, 2016 | Nine months ended September 30, 2016 | |||||||
Sales | $ | 2,075 | $ | 6,028 | ||||
Cost of goods sold (exclusive of expenses below) | 1,714 | 5,038 | ||||||
Selling, general administrative, and other expenses | 46 | 148 | ||||||
Research and development expenses | 8 | 26 | ||||||
Provision for depreciation, depletion and amortization | 180 | 532 | ||||||
Restructuring and other charges | 15 | 101 | ||||||
Interest expense | 7 | 18 | ||||||
Other income, net | (106 | ) | (80 | ) | ||||
|
|
|
| |||||
Income from discontinued operations before income taxes | 211 | 245 | ||||||
Provision for income taxes | 91 | 99 | ||||||
|
|
|
| |||||
Income from discontinued operations after income taxes | 120 | 146 | ||||||
Less: Net income from discontinued operations attributable to noncontrolling interests | 20 | 58 | ||||||
|
|
|
| |||||
Net income from discontinued operations | $ | 100 | $ | 88 | ||||
|
|
|
|
The cash flows related to Alcoa Corporation have not been segregatedsix months ended June 30, 2018 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:
Nine months ended September 30, | ||||
2016 | ||||
Depreciation, depletion and amortization | $ | 532 | ||
Restructuring and other charges | $ | 101 | ||
Capital expenditures | $ | 258 |
H.2017, respectively.
17
In addition, following a corporate income tax audit of the same Spanish consolidated 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. Spain’s2015 which was denied in July 2018. The Company is preparing to petition the Supreme Court of Spain to review the National Court’s decision. If the petition is accepted, the Supreme Court has not yet rendered a decision related towill review the assessment received in July 2013.on its merits and render a final decision. The National Court’s decision requires the assessment for the 2006 through 2009 tax years is $152to be reissued to take into account the outcome of the 2003 to 2005 audit which was closed in 2017. The Company estimates the revised assessment to be $175 (€129)152), including interest.
Finally, In the event the Company is unsuccessful in appealing the assessment to the Supreme Court of Spain, a portion of the assessment may be offset with existing net operating losses and tax credits available to the Spanish consolidated tax group, had been under audit (beginningwhich would be shared between the Company and Alcoa Corporation as provided for in September 2015)the Tax Matters Agreement. The Company will reassess the recognition and measurement of tax benefits related to the 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
As previously reported, on June 13, 2017,final resolution of the
18
In August and September 2017, two purported class action complaints were filed against Arconic and certain officers, directors and/or other parties, alleging that, in light of the Grenfell Tower fire, certain Company filings with the Securities and Exchange Commission contained false and misleading disclosures and omissions in violation of the federal securities laws.
stay.
2018.
Arconic was also requiredpayment default on its obligations under the respective contracts to provide guarantees of $50 related to two Alcoa Corporation energy supply contracts. These guarantees expired in March 2017. Additionally, Arconic was required to provide guarantees of $53 related to certain Alcoa Corporation environmental liabilities. Notification of a change in guarantor to Alcoa Corporation was made to the appropriate environmental agencies and as such, Arconic no longer provides these guarantees.
be remote.
19
2018.
2018.
I. Segment Information
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 | Transportation | |||||||||||||||
Products and | Global Rolled | and Construction | Combined | |||||||||||||
Solutions | Products | Solutions | Segment | |||||||||||||
Third quarter ended | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 1,476 | $ | 1,234 | $ | 517 | $ | 3,227 | ||||||||
Intersegment sales | — | 36 | — | 36 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total sales | $ | 1,476 | $ | 1,270 | $ | 517 | $ | 3,263 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 68 | 52 | 13 | 133 | ||||||||||||
Adjusted EBITDA | 312 | 140 | 83 | 535 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Third quarter ended | ||||||||||||||||
September 30, 2016 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 1,406 | $ | 1,285 | $ | 450 | $ | 3,141 | ||||||||
Intersegment sales | — | 30 | — | 30 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total sales | $ | 1,406 | $ | 1,315 | $ | 450 | $ | 3,171 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 63 | 52 | 12 | 127 | ||||||||||||
Adjusted EBITDA | 296 | 143 | 76 | 515 | ||||||||||||
|
|
|
|
|
|
|
|
Engineered | Transportation | |||||||||||||||
Products and | Global Rolled | and Construction | Combined | |||||||||||||
Solutions | Products | Solutions | Segment | |||||||||||||
Nine months ended | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 4,445 | $ | 3,751 | $ | 1,467 | $ | 9,663 | ||||||||
Intersegment sales | — | 107 | — | 107 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total sales | $ | 4,445 | $ | 3,858 | $ | 1,467 | $ | 9,770 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 198 | 153 | 37 | 388 | ||||||||||||
Adjusted EBITDA | 928 | 475 | 237 | 1,640 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Nine months ended | ||||||||||||||||
September 30, 2016 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 4,320 | $ | 3,785 | $ | 1,346 | $ | 9,451 | ||||||||
Intersegment sales | — | 88 | — | 88 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total sales | $ | 4,320 | $ | 3,873 | $ | 1,346 | $ | 9,539 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 190 | 152 | 35 | 377 | ||||||||||||
Adjusted EBITDA | 930 | 461 | 216 | 1,607 | ||||||||||||
|
|
|
|
|
|
|
|
21
The following table reconciles Combined segment adjusted EBITDA to Net income attributable to Arconic:
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Combined segment adjusted EBITDA | $ | 535 | $ | 515 | $ | 1,640 | $ | 1,607 | ||||||||
Unallocated amounts: | ||||||||||||||||
Depreciation and amortization | (140 | ) | (136 | ) | (410 | ) | (402 | ) | ||||||||
Restructuring and other charges | (19 | ) | (3 | ) | (118 | ) | (33 | ) | ||||||||
Impact of LIFO | (48 | ) | (1 | ) | (78 | ) | (26 | ) | ||||||||
Metal price lag | 2 | 4 | 43 | 10 | ||||||||||||
Corporate expense | (42 | ) | (113 | ) | (224 | ) | (304 | ) | ||||||||
Other | (17 | ) | (29 | ) | (56 | ) | (62 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | $ | 271 | $ | 237 | $ | 797 | $ | 790 | ||||||||
Other income, net | 1 | 11 | 526 | 40 | ||||||||||||
Interest expense | (100 | ) | (126 | ) | (398 | ) | (371 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations before income taxes | $ | 172 | $ | 122 | $ | 925 | $ | 459 | ||||||||
Provision for income taxes | (53 | ) | (56 | ) | (272 | ) | (230 | ) | ||||||||
Discontinued operations | — | 100 | — | 88 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to Arconic | $ | 119 | $ | 166 | $ | 653 | $ | 317 | ||||||||
|
|
|
|
|
|
|
|
22
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 belowconcluded that no subsequent events have been updated to reflect the Reverse Stock Split (see Note A).
The information used to compute basic and diluted EPS attributable to Arconic common shareholders was as follows (shares in millions):
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Income from continuing operations after income taxes | $ | 119 | $ | 66 | $ | 653 | $ | 229 | ||||||||
Less: Preferred stock dividends declared | (18 | ) | (18 | ) | (53 | ) | (52 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations available to Arconic common shareholders | 101 | 48 | 600 | 177 | ||||||||||||
Income from discontinued operations after income taxes and noncontrolling interests | — | 100 | — | 88 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income available to Arconic common shareholders - basic | 101 | 148 | 600 | 265 | ||||||||||||
Add: Interest expense related to convertible notes | 2 | 2 | 7 | — | ||||||||||||
Add: Dividends related to mandatory convertible preferred stock | — | — | 50 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income available to Arconic common shareholders - diluted | $ | 103 | $ | 150 | $ | 657 | $ | 265 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average shares outstanding - basic | 442 | 438 | 441 | 438 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options | 1 | 1 | 2 | 1 | ||||||||||||
Stock and performance awards | 5 | 5 | 5 | 4 | ||||||||||||
Mandatory convertible preferred stock | — | — | 39 | — | ||||||||||||
Convertible notes | 14 | 9 | 14 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average shares outstanding - diluted | 462 | 453 | 501 | 443 | ||||||||||||
|
|
|
|
|
|
|
|
The following shares were excluded from the calculation of Weighted average shares outstanding – diluted as their effect was anti-dilutive. (shares in millions)
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Mandatory convertible preferred stock | 39 | 26 | — | 26 | ||||||||||||
Convertible notes | — | — | — | 9 |
Also, options to purchase 3 million shares of common stock at a weighted average exercise price of $33.33 and options to purchase 8 million shares of common stock at a weighted average exercise price of $38.16 were outstanding as of September 30, 2017 and 2016, respectively, but were not includedoccurred that would require recognition 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.
23
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 ($2,208 in draws and $1,908 in repayments) since the program’s inception, including net cash draws totaling $0 ($450 in draws and $450 in repayments)Consolidated Financial Statements or disclosure in the nine months ended September 30, 2017.
As of September 30, 2017, and December 31, 2016, the deferred purchase program receivable was $238 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 $34,004 and $33,416, respectively. Arconic services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.
L. Debt
September 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** | (27 | ) | (32 | ) | ||||
|
|
|
| |||||
Total debt | 6,803 | 8,048 | ||||||
Less: amount due within one year | 1 | 4 | ||||||
|
|
|
| |||||
Total long-term debt | $ | 6,802 | $ | 8,044 | ||||
|
|
|
|
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.
24
The Investment Banks purchased notes totaling $805 aggregate principal amount, including $150 aggregate principal amount of 6.50% Bonds, $405 aggregate principal amount of 6.75% Notes, and $250 aggregate principal amount of $5.72% Notes.
During the second quarter of 2017, the Company agreed to acquire the notes from the Investment Banks for $409 in cash plus its remaining investment in Alcoa Corporation common stock (12,958,767 shares valued at $35.91 per share) for total consideration of $874 including accrued and unpaid interest. The Company recorded a charge of $58 ($27 in cash) primarily for the premium for the early redemption of the notes, a benefit of $8 for the proceeds of a related interest rate swap agreement, and a charge of $2 for legal fees associated with the transaction in Interest expense, and recorded a gain of $167 in Other income, net in the accompanying Statement of Consolidated Operations for the nine months ended September 30, 2017 for the Debt-for-Equity Exchange.
On June 19, 2017, the Company completed the early redemption of its remaining outstanding 6.50% Bonds, with aggregate principal amount of $100, and its remaining outstanding 6.75% Notes, with aggregate principal amount of $345, for $479 in cash including accrued and unpaid interest. As a result of the early redemption of the 6.50% Bonds and 6.75% Notes, the Company recorded a charge of $24 in Interest expense in the accompanying Statement of Consolidated Operations for the nine months ended September 30, 2017 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:
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
Pension benefits | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Service cost | $ | 22 | $ | 43 | $ | 67 | $ | 124 | ||||||||
Interest cost | 59 | 114 | 175 | 358 | ||||||||||||
Expected return on plan assets | (82 | ) | (187 | ) | (248 | ) | (558 | ) | ||||||||
Recognized net actuarial loss | 55 | 104 | 165 | 308 | ||||||||||||
Amortization of prior service cost (benefits) | 1 | 4 | 4 | 12 | ||||||||||||
Settlements | — | 13 | — | 15 | ||||||||||||
Special termination benefits | — | — | — | 1 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net periodic benefit cost* | $ | 55 | $ | 91 | $ | 163 | $ | 260 | ||||||||
Discontinued operations | — | 41 | — | 114 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net amount recognized in Statement of Consolidated Operations | $ | 55 | $ | 50 | $ | 163 | $ | 146 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other postretirement benefits | ||||||||||||||||
Service cost | $ | 2 | $ | 3 | $ | 6 | $ | 10 | ||||||||
Interest cost | 7 | 16 | 22 | 53 | ||||||||||||
Recognized net actuarial loss | 2 | 8 | 4 | 19 | ||||||||||||
Amortization of prior service cost (benefits) | (2 | ) | (6 | ) | (6 | ) | (19 | ) | ||||||||
Special termination benefits | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net periodic benefit cost* | $ | 9 | $ | 21 | $ | 26 | $ | 63 | ||||||||
Discontinued operations | — | 12 | — | 37 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net amount recognized in Statement of Consolidated Operations | $ | 9 | $ | 9 | $ | 26 | $ | 26 | ||||||||
|
|
|
|
|
|
|
|
25
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 this 30-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 valuesQ for details of Arconic’s financial instruments were as follows:
September 30, 2017 | December 31, 2016 | |||||||||||||||
Carrying value | Fair value | Carrying value | Fair value | |||||||||||||
Cash and cash equivalents | $ | 1,815 | 1,815 | $ | 1,863 | $ | 1,863 | |||||||||
Restricted cash | 5 | 5 | 15 | 15 | ||||||||||||
Derivatives - current asset | 41 | 41 | 14 | 14 | ||||||||||||
Noncurrent receivables | 18 | 18 | 21 | 21 | ||||||||||||
Derivatives - noncurrent asset | 24 | 24 | 10 | 10 | ||||||||||||
Available-for-sale securities | 106 | 106 | 102 | 102 | ||||||||||||
Investment in common stock of Alcoa Corporation | — | — | 1,020 | 1,020 | ||||||||||||
Short-term borrowings | 54 | 54 | 36 | 36 | ||||||||||||
Derivatives - current liability | 31 | 31 | 5 | 5 | ||||||||||||
Long-term debt due within one year | 1 | 1 | 4 | 4 | ||||||||||||
Derivatives - noncurrent liability | 11 | 11 | 3 | 3 | ||||||||||||
Contingent payment related to an acquisition | 81 | 81 | 78 | 78 | ||||||||||||
Long-term debt, less amount due within one year | 6,802 | 7,440 | 8,044 | 8,519 |
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 December 31, 2016 multiplied by the number of shares of Alcoa Corporation common stock owned by Arconic at that date. 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 paymentsubsequent events related to an acquisition. The fair valueuncertain tax position that was based oneffectively settled and an ongoing tax matter in Spain.
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 for non-public debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
O. Subsequent Events
On October 2, 2017, all outstanding 24,975,978 depositary shares (each depositary share representing a 1/10th interest in a share of the mandatory convertible preferred stock) were converted at a rate of 1.56996 into 39,211,286 common shares; 24,022 depositary shares were previously tendered for early conversion into 31,428 shares of Arconic common stock. No gain or loss was recognized associated with this equity transaction.
On October 13, 2017, Alcoa CorporationCompany announced that it had terminated an electricity contract with Luminant Generation Company LLC, effectiveinitiated a sale process of its Building and Construction Systems (BCS) business, as part of October 1, 2017,the Company’s ongoing strategy and portfolio review that was tied to its Rockdale Operationscommenced in Texas. Pursuant toJanuary 2018. BCS is part of the SeparationTransportation and Distribution Agreement between ArconicConstruction Solutions segment and Alcoa Corporation, Arconic was required to provide a guarantee up to an estimated present value amountgenerated third-party sales of approximately $485 related to this electricity contract$1,070 for Alcoa Corporation’s facility in the event of an Alcoa Corporation payment default. As a result of the termination of the electricity contract by Alcoa Corporation, Arconic expects to record noncash non-operating income in the fourth quarter of 2017 of approximately $25 ($16 after-tax) associated with the reversal of the fair value of the guarantee which was included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet.
27
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.
November 6, 2017
28
amounts)
The separationpackaging.
Results2017. The increase of Operations
Earnings Summary:
Sales.Sales increased $98,$312, or 3%, and $262, or 3%10%, in the thirdsecond quarter of 2018 and nine$565, or 9%, in the six months ended SeptemberJune 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, primarily in our Engineered Productsthe aerospace engines and Solutionsdefense, automotive, commercial transportation, and Transportationbuilding and Construction Solutions segments andconstruction end markets; higher aluminum pricing,prices; and favorable foreign currency movements; partially offset by the planned ramp down and Toll Processing and Services Agreement (the “Toll Processing Agreement”) relatingcosts of $38 related to the Company’s North America packaging business in Tennessee in the Global Rolled Products segment, as well as unfavorablesettlements of certain customer claims primarily related to product pricing in both the Engineered Products and Solutions and Global Rolled Products segments. Pursuant to the Toll Processing Agreement that Arconic entered into with Alcoa Corporation on October 31, 2016 in connection with the Separation Transaction. Arconic provides can body stock to Alcoa Corporation using aluminum supplied by Alcoa Corporation, resulting inintroductions; the absence of metal sales from the rolling mill in Fusina, Italy, which 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 2017 periods compared to the corresponding periods in 2016.
industrial gas turbine end market.
29
$23 charge related to a physical inventory adjustment at one plant in the Engineered Products and Solutions segment. While a portion of this charge for the physical inventory adjustment relates to prior years, the majority relates to 2018. The out-of-period amounts are not material to any interim or annual periods.
SG&A expenses decreased $93 in the ninesix months ended SeptemberJune 30, 2017 compared to2018 was the nine months ended September 30, 2016 as a result of expensescosts related to the Separation Transactionseparation of $117 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 and externalin the 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 $7 in the current year period.
$9.
In the third quarterresult of 2017, Arconic recorded Restructuring and other charges of $19 ($13 after-tax), which included $11 ($8 after-tax) for layoff costs related to cost reduction initiatives including the separation of 124 employees (111 in the Engineered Products and Solutions segment, 12 in Corporate and 1 in the Global Rolled Products segment); and a net charge of $8 ($5 after-tax) for other miscellaneous items.
In the first nine months of 2017, Arconic recorded Restructuring and other charges of $118 ($99 after-tax), which included $59 ($40 after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately 800 employees (350 in the Engineered Products and Solutions segment, 243 in the Global Rolled Products segment, 133 in the Transportation and Construction Solutions segment and 74 in Corporate); a chargeloss of $60 ($60 after-tax) related toon the sale of the Fusina, Italy rolling mill; a net benefit of $6 ($4 after-tax), formill in March 2017. See Note E to the reversal of forfeited executive stock compensation of $13, partially offset by a charge of $7 forConsolidated Financial Statements.
In the thirdsecond quarter of 2016, Arconic recorded Restructuring and other charges of $3 ($2 after-tax), which included $4 ($2 after-tax) for layoff costs related2018 compared to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 70 employees (60$183 in the Engineered Productssecond quarter of 2017 and Solutions segment and 10 in Corporate); a net charge of $7 ($5 after-tax) for other miscellaneous items; and a favorable benefit of $8 ($5 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the first nine months of 2016, Arconic recorded Restructuring and other charges of $33 ($22 after-tax), which included $34 ($21 after-tax) for layoff costs related to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 1,140 employees (860$203 in the Engineered Products and Solutions segment,six months ended June 30, 2018 compared to $298 in the Global Rolled Products segment, 240six months ended June 30, 2017. The decrease of $94, or 51%, in the Transportation and Construction Solutions segment, and 10 in Corporate); a net chargesecond quarter of $14 ($9 after-tax) for other miscellaneous items; and a net favorable benefit2018 was the result of $15 ($8 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
Arconic does not include Restructuring and other chargescosts incurred in the results of its reportable segments. The pretax impact of such charges to segment results would have been as follows:
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Engineered Products and Solutions | $ | 10 | $ | (1 | ) | $ | 24 | $ | 16 | |||||||
Global Rolled Products | 2 | (1 | ) | 76 | 1 | |||||||||||
Transportation and Construction Solutions | 2 | (2 | ) | 11 | 6 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Segment Total | 14 | (4 | ) | 111 | 23 | |||||||||||
Corporate | 5 | 7 | 7 | 10 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Restructuring and other charges | $ | 19 | $ | 3 | $ | 118 | $ | 33 | ||||||||
|
|
|
|
|
|
|
|
30
As of September 30, 2017, approximately 155 of the 800 employees associated with 2017 restructuring programs, approximately 1,200 of the 1,750 employees (previously 1,800) associated with 2016 restructuring programs (with planned departures in 2017), and approximately 1,120 of the 1,220 employees (previously 1,240) associated with the 2015 restructuring programs were separated. The total number of employees associated with both the 2016 and 2015 restructuring programs was updated to reflect employees who, initially identified for separation, accepted other positions within Arconic, as well as natural attrition. Most of the remaining separations for the 2017 restructuring programs are expected to be completed in 2017 and 2018. 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 third quarter and nine-month period, cash payments of $11 and $13, respectively, were made against layoff reserves related to 2017 restructuring programs, cash payments of $3 and $23, respectively, were made against layoff reserves related to 2016 restructuring programs, and cash payments of $1 and $5, respectively, were made against the layoff reserves related to 2015 restructuring programs.
As part of its ongoing restructuring in Brazil, the Company anticipates recognizing a restructuring-related charge of approximately $30 - $50 in the fourthsecond quarter of 2017 related to its extrusions business which is part of the Transportation and Construction Solutions segment. The charge relates to the noncash impairment of the net book value of the business.
Interest expense. Interest expense decreased $26, or 21%, in the third quarter of 2017 compared to the third quarter of 2016 due to lower outstanding debt. During the second quarter of 2017, Arconic redeemed all of the Company’s 6.50% Bonds due 2018 and 6.75% Notes due 2018, and a portion of the Company’s 5.72% Notes due 2019 (see Note L) in advance of the expiration date. Interest expense increased $27, or 7%, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to $76 of premiums paid for the early redemption noted above, partially offset byof the Company’s outstanding debt of $76 which did not recur in 2018, and lower interest expense due to lower debt outstanding. The decrease of $95, or 32%, in the six months ended June 30, 2018, was the result of higher costs incurred in the six months ended June 30, 2017 related to the early redemption of the Company’s outstanding debt.
debt than were incurred during 2018 and lower interest expense due to lower debt outstanding.
Other income, net increased $4862017 that did not recur in 2018. The decrease of $509 in the ninesix months ended SeptemberJune 30, 2017 compared to the nine months ended September 30, 20162018 was primarily due to gains recorded during the gain onsix months ended June 30, 2017 related to 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 the debt-for-equity exchange with two investment banks (the “Investment Banks”)neither of the remaining portion of Arconic’s retained interestwhich recurred in Alcoa Corporation common stock for a portion of the Company’s outstanding notes held by the Investment Banks (the “Debt-for-Equity Exchange”) (See Note G).
2018.
For the ninesix months ended SeptemberJune 30, 2016, Arconic’s estimated annual effective tax rate, before discrete items, was 56.0%. This rate is higher than the federal statutory rate of 35% primarily due to book basis in excess of tax basis of company-owned life insurance contracts that were sold during 2016, and separation expenses for which no tax benefit was recognized, partially offset by foreign income taxed in lower rate jurisdictions.
For the third quarter ended September 30, 2017 and September 30, 2016, the tax rate including discrete items was 30.8% and 45.9% respectively. Discrete items of $2 were recorded in the quarter ended September 30, 2017 and primarily relate to the tax effects of expired stock compensation partially offset by other insignificant adjustments. Discrete items of $7 were recorded in the quarter ended September 30, 2016 and primarily relate to Arconic’s share of a valuation allowance recorded by one of our joint ventures and as-filed adjustments related to the Company’s 2015 U.S. tax return, partially offset by other discrete benefits.
31
The tax provisions for the third quarter and nine months ended September 30, 2017 and September 30, 2016 were comprised of the following:
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pretax income at estimated annual effective income tax rate before discrete items | $ | 49 | $ | 69 | $ | 264 | $ | 257 | ||||||||
Catch-up adjustment to revalue previous quarter pre-tax income at current estimated annual effective tax rate | 1 | 10 | — | | — | | ||||||||||
Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized | 1 | (30 | ) | 5 | (37 | ) | ||||||||||
Other discrete items | 2 | 7 | 3 | 10 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Provision for income taxes | $ | 53 | $ | 56 | $ | 272 | $ | 230 | ||||||||
|
|
|
|
|
|
|
|
Income from continuing operations after income taxes. Income from continuing operations after income taxes was $119 for the third quarter of 2017, or $0.22 per diluted share, compared to income from continuing operations after income taxes of $66 for the third quarter of 2016, or $0.11 per diluted share. The increase of $532018 was primarily attributable to higher volumes and net cost savings acrossgains recorded during the businesses and the absence of expenses associated with the Separation Transaction, partially offset by higher LIFO inventory expense associated with higher aluminum prices, unfavorable product pricing, primarily in aerospace, and lower-margin product mix.
Income from continuing operations after income taxes was $653 for the ninesix months ended SeptemberJune 30, 2017 or $1.31 per diluted share, comparedrelated to income from continuing operations after income taxes of $229 for the nine months ended September 30, 2016, or $0.40 per diluted share. The increase of $424 was primarily attributable to a gain of $351 on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and a gain of $167 on the Debt-for-Equity Exchange; net cost savings;Exchange, neither of which recurred in 2018, higher aluminum prices, and higher volumes across all segments;costs related to settlements of certain customer claims and a physical inventory adjustment, partially offset by higher LIFO inventory expense associated with higher aluminum prices; the loss on sale of the Fusina, Italy rolling mill of $60; unfavorable product pricing, primarily in aerospace;volume growth and lower-margin product mix.
Discontinued operations.In the third quarter of 2016, netlower expenses for Restructuring and other charges, SG&A, interest and income attributable to Arconic included income of $120 from discontinued operations after income taxes and $20 from discontinued operations attributable to noncontrolling interests. In the nine months ended September 30, 2016, net income attributable to Arconic included income of $146 from discontinued operations after income taxes and $58 from discontinued operations attributable to noncontrolling interests.
taxes.
Prior period financial information has been recast to conform to current year presentation.
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Third-party sales | $ | 1,476 | $ | 1,406 | $ | 4,445 | $ | 4,320 | ||||||||
Adjusted EBITDA | $ | 312 | $ | 296 | $ | 928 | $ | 930 |
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 EBITDApricing.
In the fourth quarter of 2017, growth in demand from the commercial aerospace end market relativeis expected to remain strong, driven by the ramp-up of new aerospace engine platforms. Demand in the defense end market is expected to grow due to the fourth quartercontinuing ramp-up of 2016 iscertain aerospace programs, while declines in the industrial gas turbine market are likely to continue. Net cost savings are anticipated despite higher input costs, and pricing pressures and challenges at the rings and disks operations are expected along with continued net cost savings. These benefits will be partially offset by continued ramp up costs associated with the introduction of new commercial aerospace engines and unfavorable product pricing.
32
to continue.
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Third-party sales | $ | 1,234 | $ | 1,285 | $ | 3,751 | $ | 3,785 | ||||||||
Intersegment sales | 36 | 30 | 107 | 88 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total sales | $ | 1,270 | $ | 1,315 | $ | 3,858 | $ | 3,873 | ||||||||
Adjusted EBITDA | $ | 140 | $ | 143 | $ | 475 | $ | 461 | ||||||||
Third-party aluminum shipments (kmt) | 297 | 356 | 914 | 1,063 | ||||||||||||
Average realized price per metric ton of aluminum(2)(3) | $ | 4,155 | $ | 3,610 | $ | 4,104 | $ | 3,561 |
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 |
Adjusted EBITDA2017.
Adjusted EBITDA increased $14 in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase is the result of net cost savings and increased automotive volumes, partially offset by lower aerospace volume from customer destocking and reduced build rates as well as continued pricing pressure on regional specialty products.
33
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Third-party sales | $ | 517 | $ | 450 | $ | 1,467 | $ | 1,346 | ||||||||
Adjusted EBITDA | $ | 83 | $ | 76 | $ | 237 | $ | 216 |
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 EBITDA for the Transportation and Construction Solutions segment increased $7 and $21 in the third quarter and nine months ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The change was principally the result of net cost savings and higher volumes, partially offset by lower product pricing in the heavy-duty truck market, unfavorable product mix, and higher aluminum prices.
further focus on its higher-margin products and profitable growth.
continue.
Items required to reconcile Combined segment adjusted EBITDA to Netbefore 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.
34
The following table reconciles Combined segment adjusted EBITDA to Net income attributable to Arconic:
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Combined segment adjusted EBITDA | $ | 535 | $ | 515 | $ | 1,640 | $ | 1,607 | ||||||||
Unallocated amounts: | ||||||||||||||||
Depreciation and amortization | (140 | ) | (136 | ) | (410 | ) | (402 | ) | ||||||||
Restructuring and other charges | (19 | ) | (3 | ) | (118 | ) | (33 | ) | ||||||||
Impact of LIFO | (48 | ) | (1 | ) | (78 | ) | (26 | ) | ||||||||
Metal price lag | 2 | 4 | 43 | 10 | ||||||||||||
Corporate expense | (42 | ) | (113 | ) | (224 | ) | (304 | ) | ||||||||
Other | (17 | ) | (29 | ) | (56 | ) | (62 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | $ | 271 | $ | 237 | $ | 797 | $ | 790 | ||||||||
Other income, net | 1 | 11 | 526 | 40 | ||||||||||||
Interest expense | (100 | ) | (126 | ) | (398 | ) | (371 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations before income taxes | $ | 172 | $ | 122 | $ | 925 | $ | 459 | ||||||||
Provision for income taxes | (53 | ) | (56 | ) | (272 | ) | (230 | ) | ||||||||
Discontinued operations | — | 100 | — | 88 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to Arconic | $ | 119 | $ | 166 | $ | 653 | $ | 317 | ||||||||
|
|
|
|
|
|
|
|
taxes
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 |
35
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.
The following table reconciles Net income attributable to Arconic to Consolidated adjusted EBITDA:
Third quarter ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income attributable to Arconic | $ | 119 | $ | 166 | $ | 653 | $ | 317 | ||||||||
Depreciation and amortization | 140 | 136 | 410 | 402 | ||||||||||||
Restructuring and other charges | 19 | 3 | 118 | 33 | ||||||||||||
Other income, net | (1 | ) | (11 | ) | (526 | ) | (40 | ) | ||||||||
Interest expense | 100 | 126 | 398 | 371 | ||||||||||||
Income taxes | 53 | 56 | 272 | 230 | ||||||||||||
Discontinued operations | — | (100 | ) | — | (88 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Consolidated adjusted EBITDA(1) | $ | 430 | $ | 376 | $ | 1,325 | $ | 1,225 | ||||||||
|
|
|
|
|
|
|
|
Environmental Matters
On October 2, 2017, all outstanding 24,975,978 depositary shares (each depositary share representing a 1/10th interest in a share of the mandatory convertible preferred stock) were converted at a rate of 1.56996 into 39,211,286 common shares; 24,022 depositary shares were previously tendered for early conversion into 31,428 shares of Arconic common stock. No gain or loss was recognized associated with this equity transaction.
On October 13, 2017, Alcoa Corporation announced that it had terminated an electricity contract with Luminant Generation Company LLC, effective as of October 1, 2017, that was tied to its Rockdale Operations in Texas. Pursuant
Form 10-Q.
The cash flows related to Alcoa Corporation have not been segregated and are included
36
Cash from Operations
Cash provided from operations was $89 in the nine months ended September 30, 2017 compared to $208 in the nine months ended September 30, 2016.2017. The decrease in cash provided from operationsused of $119,$56, or 57%18%, was primarily due to lowerhigher operating results (net income plus net add-back for noncash transactions in earnings) of $673,$87 and a favorable change in noncurrent assets of $56, partially offset by lower cash used forhigher pension contributions of $74 and higher working capital of $251$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 positivefavorable change associated with noncurrent assets of $247 due to the prepayment of $200 made$287 in April 2016 related to a gas supply agreement for the Australia alumina refineries.
accounts payable.
reference.
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 | November 2, 2017 | ||||
Fitch | BB+ | B | Stable | July 3, 2017 |
Cash provided from investing activities for the nine months ended September 30, 2017 included proceeds2017. The decrease of $888 from$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 somewhatduring the six months ended June 30, 2017, which were partly offset by an increase in cash used for capital expendituresreceipts from sold receivables of $360 and the injection of $10 into the Fusina rolling business prior to its sale.
Cash provided from investing activities for the nine months ended September 30, 2016 included proceeds of $683 from the sale of assets and businesses, primarily related to $457 in proceeds from the redemption of Company-owned life insurance policies, proceeds of $120 related to the sale of the Intalco smelter wharf property, and proceeds of $102 from the sale of the Remmele Medical business, and $280 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 flows were partially offset by $814 in capital expenditures, including the aerospace expansion (thick plate stretcher) at the Davenport, Iowa plant.
37
Noncash Financing and Investing Activities
In the second quarter of 2017, the Company completed a Debt-for-Equity Exchange with the Investment Banks of the remaining portion of Arconic’s retained interest in Alcoa Corporation common stock for a portion of the Company’s outstanding notes held by the Investment Banks for $465 including accrued and unpaid interest.
$135.
38
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 the entities that preceded Arconic at the same locations as property owners and/or operators, and other current and former industrial and manufacturing businesses that operated in Orange County in past decades. OCWD seeks to recover the cost of aquifer remediation and attorney’s fees. Trial on statutory, non-jury claims commenced on February 10, 2012. On October 29, 2013, the court issued its final Statement of Decision in favor of Arconic and the other Phase I trial defendants dismissing the statutory law liability claims. On June 20, 2014, following the full briefing by the parties, the trial court entered final judgment in favor of Arconic and the other trial defendants on the remaining tort claims. On August 18, 2014, the OCWD appealed the dismissal of the statutory law claims and common law claims (except for negligence). On March 29, 2017, oral argument on the appeal took place before a panel of three California Court of Appeal justices. On June 1, 2017, the Court of Appeal upheld the trial court’s decision in favor of Arconic on all claims. The OCWD did not file a petition for review to the California Supreme Court. On July 12, 2017, Northrop filed a petition for review by the Supreme Court of the State of California. On September 13, 2017, the California Supreme Court denied Northrop’s petition for review. The remaining claims against Northrop have been remanded to the trial court. No claims against Arconic are pending in the remanded case. No further reports will be made on this matter unless there is a material development.
As previously reported, 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 hearing before the Court was held on September 13, 2017 at which Firth Rixson pled guilty to the underlying offense of allowing a release to occur to the nearby stream. The Agency was not ready to proceed to a full hearing on the culpability and harm elements of the allegations, and requested more time. The Court granted the Agency’s request and set a follow-up hearing for December 6, 2017. The Company expects that to be the final dispositive hearing, at or after which it expects the Court to render final decisions on culpability and harm, and impose a fine on the Company. The Company has recorded an amount to cover the estimated fine and this amount is not material to the Company’s Consolidated Financial Statements.
Reynobond PE
As previously reported, on June 13, 2017, the Grenfell Tower in London, UK caught fire resulting in fatalities, injuries and damage. A French subsidiary of Arconic, Arconic Architectural Products SAS (AAP SAS), supplied a product, Reynobond PE, to its customer, a cladding system fabricator, which used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supplied its portion of the cladding system to the façade installer, who then completed and installed the system under the direction of the general contractor. Neither Arconic nor AAP SAS was involved in the design or installation of the system used at the Grenfell Tower, nor did it have a role in any other aspect of the building’s refurbishment or original design. Regulatory investigations into the overall Grenfell Tower matter are being conducted, including a criminal investigation by the London Metro Police, a Public Inquiry by the British government and a consumer protection inquiry by a French public authority. AAP SAS has filed an application seeking core participant status in the Public Inquiry.
39
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 alleged that the statements in Arconic’s 2016 10-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 sought, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On August 14, 2017, this case was dismissed by the plaintiff without prejudice.
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 alleged that statements in Arconic’s 2012-2016 10-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 alleged that Arconic was motivated to conceal its potential liability to improve its credit ratings and enhance its ability to raise capital. The plaintiffs sought, among other things, unspecified compensatory damages and equitable relief and an award of attorney and expert fees and expenses. On August 25, 2017, this case was dismissed by the plaintiff without prejudice.
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. On August 25, 2017, this case was dismissed by the plaintiff without prejudice and re-filed on September 15, 2017 in the United States District Court for the Western District of Pennsylvania.
Howard v. Arconic Inc. et al. A purported class action complaint was filed on August 11, 2017 in the United States District Court for Western District of Pennsylvania against Arconic Inc., and Klaus Kleinfeld. The complaint alleges that Arconic and Mr. Kleinfeld made various false and misleading statements, and omitted to disclose material information, about the company’s business and financial prospects and, specifically, the risks of
While the Company believes that these cases are without merit and intends to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters. Given the preliminary nature of these matters and the uncertainty of litigation, the Company cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome. The Board of Directors has also received letters, purportedly sent on behalf of shareholders, reciting allegations similar to those made in the federal court lawsuits and demanding that the Board authorize the Company to initiate litigation against members of management, the Board and others. The Board of Directors is reviewing these shareholder demand letters and considering the appropriate course of action. In addition, lawsuits are pending in state court in New York and federal court in Pennsylvania, initiated, respectively, by another purported shareholder and by the Company, concerning the shareholder’s claimed right, which the Company contests, to inspect the Company’s books and records related to the Grenfell Tower fire and Reynobond PE.
40
2013 Arconic Stock Incentive Plan, as amended and | |||
Amendment No. 2, dated as of June 29, 2018, to the Company’s Five-Year Revolving Credit Agreement dated as of July 25, 2014, by and among the Company, a syndicate of lenders and issuers named therein, Citibank, N.A., as administrative agent for the lenders and issuers, and JPMorgan Chase Bank, N.A., as syndication agent, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 2, 2018 | |||
Letter Agreement, from Arconic Inc. to Katherine H. Ramundo, dated as of May 31, 2018 | |||
Special Retention Award Agreement - Katherine H. Ramundo, effective May 16, 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 |
41
Arconic Inc. | |||||
| /s/ Ken Giacobbe | ||||
Date | Ken Giacobbe | ||||
Executive Vice President and | |||||
Chief Financial Officer | |||||
(Principal Financial Officer) | |||||
| /s/ Paul Myron | ||||
Date | Paul Myron | ||||
Vice President and Controller | |||||
(Principal Accounting Officer) |
42