(Mark One)
| (Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
March 31, 2021
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
ARCONIC
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412-553-1950
412-553-1940
(Former name, former address and former fiscal year, if changed since last report)
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $1.00 per share | HWM | New York Stock Exchange | ||||||
| $3.75 Cumulative Preferred Stock, par value $100.00 per share | HWM PR | NYSE American | ||||||
| Large accelerated filer | x | Accelerated filer | ☐ | ||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||
| Emerging growth | company | ☐ | |||||||||||
| Page(s) | ||||||||
| Part I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
Arconic
| 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 | ||||||||||||
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Operating income | 271 | 237 | 797 | 790 | ||||||||||||
Interest expense (L) | 100 | 126 | 398 | 371 | ||||||||||||
Other income, net (G) | (1 | ) | (11 | ) | (526 | ) | (40 | ) | ||||||||
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Income from continuing operations before income taxes | 172 | 122 | 925 | 459 | ||||||||||||
Provision for income taxes | 53 | 56 | 272 | 230 | ||||||||||||
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Income from continuing operations after income taxes | 119 | 66 | 653 | 229 | ||||||||||||
Income from discontinued operations after income taxes (G) | — | 120 | — | 146 | ||||||||||||
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Net income | 119 | 186 | 653 | 375 | ||||||||||||
Less: Income from discontinued operations attributable to noncontrolling interests (G) | — | 20 | — | 58 | ||||||||||||
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Net income attributable to Arconic | $ | 119 | $ | 166 | $ | 653 | $ | 317 | ||||||||
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Amounts Attributable to Arconic Common Shareholders (J): | ||||||||||||||||
Net income | $ | 101 | $ | 148 | $ | 600 | $ | 265 | ||||||||
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Earnings per share - basic | ||||||||||||||||
Continuing operations | $ | 0.23 | $ | 0.11 | $ | 1.36 | $ | 0.40 | ||||||||
Discontinued operations | — | 0.23 | — | 0.20 | ||||||||||||
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Net income per share - basic | $ | 0.23 | $ | 0.34 | $ | 1.36 | $ | 0.60 | ||||||||
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Earnings per share - diluted | ||||||||||||||||
Continuing operations | $ | 0.22 | $ | 0.11 | $ | 1.31 | $ | 0.40 | ||||||||
Discontinued operations | — | 0.22 | — | 0.20 | ||||||||||||
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Net income per share - diluted | $ | 0.22 | $ | 0.33 | $ | 1.31 | $ | 0.60 | ||||||||
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Dividends paid per share | $ | 0.06 | $ | 0.09 | $ | 0.18 | $ | 0.27 | ||||||||
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Weighted Average Shares Outstanding (J): | ||||||||||||||||
Average shares outstanding - basic | 442 | 438 | 441 | 438 | ||||||||||||
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Average shares outstanding - diluted | 462 | 453 | 501 | 443 | ||||||||||||
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| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| $ | 1,209 | $ | 1,634 | ||||||||||||||||||||
| Cost of goods sold (exclusive of expenses below) | 873 | 1,183 | |||||||||||||||||||||
| Selling, general administrative, and other expenses | 65 | 79 | |||||||||||||||||||||
| Research and development expenses | 5 | 4 | |||||||||||||||||||||
| Provision for depreciation and amortization | 68 | 71 | |||||||||||||||||||||
| 9 | 39 | ||||||||||||||||||||||
| Operating income | 189 | 258 | |||||||||||||||||||||
| Interest expense, net | 72 | 84 | |||||||||||||||||||||
| 4 | (24) | ||||||||||||||||||||||
| Income before income taxes | 113 | 198 | |||||||||||||||||||||
| 33 | 45 | ||||||||||||||||||||||
| Income from continuing operations after income taxes | 80 | 153 | |||||||||||||||||||||
| 0 | 62 | ||||||||||||||||||||||
| Net income | $ | 80 | $ | 215 | |||||||||||||||||||
| Net income | $ | 79 | $ | 214 | |||||||||||||||||||
| Earnings per share - basic | |||||||||||||||||||||||
| Continuing operations | $ | 0.18 | $ | 0.35 | |||||||||||||||||||
| Discontinued operations | $ | 0 | $ | 0.14 | |||||||||||||||||||
| Earnings per share - diluted | |||||||||||||||||||||||
| Continuing operations | $ | 0.18 | $ | 0.35 | |||||||||||||||||||
| Discontinued operations | $ | 0 | $ | 0.14 | |||||||||||||||||||
| Average shares outstanding - basic | 434 | 435 | |||||||||||||||||||||
| Average shares outstanding - diluted | 439 | 440 | |||||||||||||||||||||
2
Arconic
| 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 | ) | |||||||||||||||
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Total Other comprehensive income (loss), net of tax | 127 | (643 | ) | — | 34 | 127 | (609 | ) | ||||||||||||||||
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Comprehensive income (loss) | $ | 246 | $ | (477 | ) | $ | — | $ | 54 | $ | 246 | $ | (423 | ) | ||||||||||
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| 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 | ) | ||||||||||||||||
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Total Other comprehensive income (loss), net of tax | 241 | (427 | ) | — | 190 | 241 | (237 | ) | ||||||||||||||||
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Comprehensive income (loss) | $ | 894 | $ | (110 | ) | $ | — | $ | 248 | $ | 894 | $ | 138 | |||||||||||
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| First quarter ended | ||||||||||||||||||||||||||||||||||||||||||||
| March 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 80 | $ | 215 | ||||||||||||||||||||||||||||||||||||||||
| Change in unrecognized net actuarial loss and prior service cost related to pension and other postretirement benefits | 42 | 37 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (44) | (65) | ||||||||||||||||||||||||||||||||||||||||||
| Net change in unrealized gains on debt securities | 0 | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Net change in unrecognized gains (losses) on cash flow hedges | 4 | (13) | ||||||||||||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss), net of tax | 2 | (40) | ||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | $ | 82 | $ | 175 | ||||||||||||||||||||||||||||||||||||||||
3
Arconic
| 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 | ||||||
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Total current assets | 6,148 | 5,892 | ||||||
Properties, plants, and equipment | 11,791 | 11,572 | ||||||
Less: accumulated depreciation and amortization | 6,265 | 6,073 | ||||||
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Properties, plants, and equipment, net | 5,526 | 5,499 | ||||||
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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 | ||||||
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Total Assets | $ | 19,237 | $ | 20,038 | ||||
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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 | ||||||
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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 | ||||||
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Total liabilities | 13,276 | 14,897 | ||||||
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Contingencies and commitments (H) | ||||||||
Equity | ||||||||
Arconic shareholders’ equity: | ||||||||
Preferred stock | 55 | 55 | ||||||
Mandatory convertible preferred stock | 3 | 3 | ||||||
Common stock | 442 | 438 | ||||||
Additional capital | 8,294 | 8,214 | ||||||
Accumulated deficit | (519 | ) | (1,027 | ) | ||||
Accumulated other comprehensive loss (C) | (2,327 | ) | (2,568 | ) | ||||
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Total Arconic shareholders’ equity | 5,948 | 5,115 | ||||||
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Noncontrolling interests | 13 | 26 | ||||||
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Total equity | 5,961 | 5,141 | ||||||
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Total Liabilities and Equity | $ | 19,237 | $ | 20,038 | ||||
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| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,238 | $ | 1,610 | |||||||
| 339 | 328 | ||||||||||
| 96 | 29 | ||||||||||
| 1,453 | 1,488 | ||||||||||
| Prepaid expenses and other current assets | 202 | 217 | |||||||||
| Total current assets | 3,328 | 3,672 | |||||||||
| 2,524 | 2,592 | ||||||||||
| 4,086 | 4,102 | ||||||||||
| Deferred income taxes | 227 | 272 | |||||||||
| Intangibles, net | 563 | 571 | |||||||||
| 243 | 234 | ||||||||||
| Total assets | $ | 10,971 | $ | 11,443 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable, trade | $ | 596 | $ | 599 | |||||||
| Accrued compensation and retirement costs | 171 | 205 | |||||||||
| Taxes, including income taxes | 93 | 102 | |||||||||
| Accrued interest payable | 88 | 89 | |||||||||
| 243 | 289 | ||||||||||
| 489 | 376 | ||||||||||
| Total current liabilities | 1,680 | 1,660 | |||||||||
| 4,224 | 4,699 | ||||||||||
| 941 | 985 | ||||||||||
| 159 | 198 | ||||||||||
| 305 | 324 | ||||||||||
| Total liabilities | 7,309 | 7,866 | |||||||||
| 0 | 0 | ||||||||||
| Equity | |||||||||||
| Howmet Aerospace shareholders’ equity: | |||||||||||
| Preferred stock | 55 | 55 | |||||||||
| Common stock | 434 | 433 | |||||||||
| Additional capital | 4,671 | 4,668 | |||||||||
| Retained earnings | 443 | 364 | |||||||||
| (1,941) | (1,943) | ||||||||||
| Total equity | 3,662 | 3,577 | |||||||||
| Total liabilities and equity | $ | 10,971 | $ | 11,443 | |||||||
4
Arconic
| 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 | ) | ||||
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Cash provided from operations | 89 | 208 | ||||||
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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 | |||||
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Cash used for financing activities | (918 | ) | (350 | ) | ||||
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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 | ||||||
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Cash provided from investing activities | 776 | 79 | ||||||
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Effect of exchange rate changes on cash and cash equivalents | 5 | 7 | ||||||
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Net change in cash and cash equivalents | (48 | ) | (56 | ) | ||||
Cash and cash equivalents at beginning of year | 1,863 | 1,919 | ||||||
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Cash and cash equivalents at end of period | $ | 1,815 | $ | 1,863 | ||||
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| First quarter ended | |||||||||||
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ | 80 | $ | 215 | |||||||
| Adjustments to reconcile net income to cash used for operations: | |||||||||||
| Depreciation and amortization | 68 | 129 | |||||||||
| Deferred income taxes | 10 | 19 | |||||||||
| Restructuring and other charges | 9 | 21 | |||||||||
| Net loss from investing activities—asset sales | 3 | 2 | |||||||||
| 4 | 26 | ||||||||||
| Stock-based compensation | 6 | 13 | |||||||||
| Other | 14 | 25 | |||||||||
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||||||
| Increase in receivables | (144) | (210) | |||||||||
| Decrease (increase) in inventories | 20 | (136) | |||||||||
| Decrease (increase) in prepaid expenses and other current assets | 23 | (2) | |||||||||
| 26 | (132) | ||||||||||
| Decrease in accrued expenses | (92) | (173) | |||||||||
| Increase in taxes, including income taxes | 12 | 90 | |||||||||
| Pension contributions | (29) | (56) | |||||||||
| Increase in noncurrent assets | (2) | 0 | |||||||||
| Decrease in noncurrent liabilities | (14) | (39) | |||||||||
| Cash used for operations | (6) | (208) | |||||||||
| Financing Activities | |||||||||||
| Net change in short-term borrowings (original maturities of three months or less) | (2) | 2 | |||||||||
| 0 | 1,200 | ||||||||||
| (361) | 0 | ||||||||||
| (1) | (45) | ||||||||||
| Proceeds from exercise of employee stock options | 8 | 30 | |||||||||
| Dividends paid to shareholders | 0 | (9) | |||||||||
| Other | (12) | (33) | |||||||||
| Cash (used for) provided from financing activities | (368) | 1,145 | |||||||||
| Investing Activities | |||||||||||
| (55) | (152) | ||||||||||
| 0 | 114 | ||||||||||
| 57 | 48 | ||||||||||
| Other | 1 | 1 | |||||||||
| Cash provided from investing activities | 3 | 11 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1) | (8) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (372) | 940 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 1,611 | 1,703 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,239 | $ | 2,643 | |||||||
5
Arconic
| 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 | |||||||||||||||||||||||||||
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Balance at September 30, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,197 | $ | 8,940 | $ | — | $ | (5,858 | ) | $ | 2,170 | $ | 13,945 | |||||||||||||||||
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| Arconic Shareholders | ||||||||||||||||||||||||||||||||||||
| Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Accumulated deficit | Treasury stock | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||||||
Balance at 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 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
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Balance at September 30, 2017 | $ | 55 | $ | 3 | $ | 442 | $ | 8,294 | $ | (519 | ) | $ | — | $ | (2,327 | ) | $ | 13 | $ | 5,961 | ||||||||||||||||
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| Howmet Aerospace Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 55 | $ | 433 | $ | 7,319 | $ | 113 | $ | (3,329) | $ | 14 | $ | 4,605 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 215 | — | — | 215 | ||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | (40) | — | (40) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $0.9375 per share | — | — | — | (1) | — | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||
| Common @ $0.02 per share | — | — | — | (8) | — | — | (8) | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 13 | — | — | — | 13 | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 3 | (6) | — | — | — | (3) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | 55 | $ | 436 | $ | 7,326 | $ | 319 | $ | (3,369) | $ | 14 | $ | 4,781 | |||||||||||||||||||||||||||||||||||||||
| Howmet Aerospace Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 55 | $ | 433 | $ | 4,668 | $ | 364 | $ | (1,943) | $ | 3,577 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 80 | — | 80 | |||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $0.9375 per share | — | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6 | — | — | 6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 1 | (3) | — | — | (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 55 | $ | 434 | $ | 4,671 | $ | 443 | $ | (1,941) | $ | 3,662 | |||||||||||||||||||||||||||||||||||||||||
6
Arconic
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 | |||||||||||||||||||||||||||
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Balance at September 30, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,197 | $ | 8,940 | $ | — | $ | (5,858 | ) | $ | 2,170 | $ | 13,945 | |||||||||||||||||
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| Arconic Shareholders | ||||||||||||||||||||||||||||||||||||
| Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Accumulated deficit | Treasury stock | Accumulated other comprehensive loss | Noncontrolling interests | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,214 | $ | (1,027 | ) | $ | — | $ | (2,568 | ) | $ | 26 | $ | 5,141 | ||||||||||||||||
Net income | — | — | — | — | 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 | |||||||||||||||||||||||||||
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Balance at September 30, 2017 | $ | 55 | $ | 3 | $ | 442 | $ | 8,294 | $ | (519 | ) | $ | — | $ | (2,327 | ) | $ | 13 | $ | 5,961 | ||||||||||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
7
Arconic and subsidiaries
Pursuantall periods prior to the authorization provided at a special meetingArconic Inc. Separation Transaction. See Note
B.proceeds to make payment to the Company to fund the transfer of certain assets to Arconic Corporation relating to the Arconic Inc. Separation Transaction and for general corporate purposes. The Company incurred debt issuance costs of $45 associated with these issuances for the first quarter of 2020.
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| Sales | $ | 1,575 | |||||||||||||||||||||
| Cost of goods sold | 1,293 | ||||||||||||||||||||||
| Selling, general administrative, research and development and other expenses | 101 | ||||||||||||||||||||||
| Provision for depreciation and amortization | 58 | ||||||||||||||||||||||
| Restructuring and other charges | (18) | ||||||||||||||||||||||
| Operating income from discontinued operations | 141 | ||||||||||||||||||||||
| Interest expense | 7 | ||||||||||||||||||||||
| Other expense, net | 41 | ||||||||||||||||||||||
| Income from discontinued operations | 93 | ||||||||||||||||||||||
| Provision for income taxes | 31 | ||||||||||||||||||||||
| Income from discontinued operations after income taxes | $ | 62 | |||||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| Capital expenditures | $ | 72 | |||||||||||||||||||||
| Proceeds from the sales of businesses | $ | 112 | |||||||||||||||||||||
| Provision for depreciation and amortization | $ | 58 | |||||||||||||||||||||
In March 2016,
8
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 continueanother reference rate expected to be met.discontinued due to reference rate reform. These changes becameamendments are 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 currentimmediately 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
In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB deferred the effective date of the new guidance by one year, making these changes effective for Arconic on January 1, 2018.
Arconic will adopt the new guidance using the modified retrospective transition approach, reflecting the cumulative effect of initially applying the new standard to revenue recognition in the first quarter of 2018. The Company formed a project assessment and adoption team and is currently reviewing contract terms and assessing the impact of adopting the new guidance on the Consolidated Financial Statements. While the Company generally recognizes revenue at a point in time upon delivery and transfer of title and risk of loss for most arrangements, based on the contract 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 dueapplied prospectively 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 practicesmade and hedging relationships entered into or controls. The Company is continuing to assess the impact that over-time revenue recognition will haveevaluated 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.
In January 2016, the FASB issued changes to equity investments. These changes require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Also, the impairment assessment of equity investments without readily determinable fair values has been simplified by requiring a qualitative assessment to identify impairment. Also, the new guidance will require changes in fair value of equity securities to be recognized immediately as a component of net income instead of being reported in accumulated other comprehensive loss until the gain (loss) is realized. These changes, which will be applied on a prospective basis, 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 February 2016, the FASB issued changes to the accounting and presentation of leases. These changes require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option, or not exercise an option to terminate the lease. These changes become effective for Arconic on January 1, 2019.before December 31, 2022. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements,Statements.
In June 2016, the FASB addedimpaired. Consistent with prior practice, a new impairmentdiscounted cash flow model (known aswas used to estimate the current fair value of the reporting unit. The significant assumptions and estimates utilized to determine fair value were developed utilizing current market and forecast information reflecting the disruption in demand that has and is expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Underto negatively impact the new guidance, an entity recognizes as an allowance its estimateCompany’s sales globally in the aerospace industry. If our actual results or external market factors decline significantly from management’s estimates, future goodwill impairment charges may be necessary and could be material. Since the first quarter of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not2020, there have a minimum threshold for recognitionbeen no indicators of impairment lossesidentified for the Engineered Structures reporting unit or any other reporting units or indefinite-lived intangible assets.
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| First quarter ended March 31, 2021 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 534 | $ | 272 | $ | 176 | $ | 227 | $ | 1,209 | |||||||||||||||||||
| Inter-segment sales | 1 | 0 | 1 | 0 | 2 | ||||||||||||||||||||||||
| Total sales | $ | 535 | $ | 272 | $ | 177 | $ | 227 | $ | 1,211 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Segment operating profit | $ | 101 | $ | 45 | $ | 10 | $ | 70 | $ | 226 | |||||||||||||||||||
| Restructuring and other charges | 5 | 2 | 1 | 0 | 8 | ||||||||||||||||||||||||
| Provision for depreciation and amortization | 31 | 12 | 12 | 10 | 65 | ||||||||||||||||||||||||
| Capital expenditures | 11 | 5 | 5 | 9 | 30 | ||||||||||||||||||||||||
| First quarter ended March 31, 2020 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 781 | $ | 385 | $ | 275 | $ | 191 | $ | 1,632 | |||||||||||||||||||
| Inter-segment sales | 2 | 0 | 3 | 0 | 5 | ||||||||||||||||||||||||
| Total sales | $ | 783 | $ | 385 | $ | 278 | $ | 191 | $ | 1,637 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Segment operating profit | $ | 165 | $ | 96 | $ | 28 | $ | 50 | $ | 339 | |||||||||||||||||||
| Restructuring and other charges | 13 | 2 | 17 | 2 | 34 | ||||||||||||||||||||||||
| Provision for depreciation and amortization | 30 | 12 | 13 | 10 | 65 | ||||||||||||||||||||||||
| Capital expenditures | 19 | 8 | 3 | 7 | 37 | ||||||||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Total segment operating profit | $ | 226 | $ | 339 | |||||||||||||||||||
| Unallocated amounts: | |||||||||||||||||||||||
| Restructuring and other charges | (9) | (39) | |||||||||||||||||||||
| Corporate expense | (28) | (42) | |||||||||||||||||||||
| Consolidated operating income | $ | 189 | $ | 258 | |||||||||||||||||||
| Interest expense | (72) | (84) | |||||||||||||||||||||
| Other (expense) income, net | (4) | 24 | |||||||||||||||||||||
| Income from continuing operations before income taxes | $ | 113 | $ | 198 | |||||||||||||||||||
In August 2016, the FASB issued changes to the classification of certain cash receipts and cash payments within the statement of cash flows. Differences between segment and consolidated totals are in Corporate and discontinued operations, including the impact of changes in accrued capital expenditures during the period.
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Total segment capital expenditures | $ | 30 | $ | 37 | |||||||||||||||||||
| Corporate and discontinued operations | 25 | 115 | |||||||||||||||||||||
| Capital expenditures | $ | 55 | $ | 152 | |||||||||||||||||||
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| First quarter ended March 31, 2021 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 227 | $ | 148 | $ | 80 | $ | 0 | $ | 455 | |||||||||||||||||||
| Aerospace - Defense | 151 | 42 | 77 | 0 | 270 | ||||||||||||||||||||||||
| Commercial Transportation | 0 | 46 | 0 | 227 | 273 | ||||||||||||||||||||||||
| Industrial and Other | 156 | 36 | 19 | 0 | 211 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 534 | $ | 272 | $ | 176 | $ | 227 | $ | 1,209 | |||||||||||||||||||
| First quarter ended March 31, 2020 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 507 | $ | 257 | $ | 184 | $ | 0 | $ | 948 | |||||||||||||||||||
| Aerospace - Defense | 127 | 44 | 70 | 0 | 241 | ||||||||||||||||||||||||
| Commercial Transportation | 0 | 46 | 0 | 191 | 237 | ||||||||||||||||||||||||
| Industrial and Other | 147 | 38 | 21 | 0 | 206 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 781 | $ | 385 | $ | 275 | $ | 191 | $ | 1,632 | |||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Layoff costs | $ | 0 | $ | 22 | |||||||||||||||||||
| Adjustments to (reversals of) previously recorded layoff reserves | 1 | (2) | |||||||||||||||||||||
| Pension, Other post-retirement benefits and Deferred Compensation - net settlements | 3 | 0 | |||||||||||||||||||||
| Net loss related to divestitures of assets and businesses | 4 | 16 | |||||||||||||||||||||
| Other | 1 | 3 | |||||||||||||||||||||
| Restructuring and other charges | $ | 9 | $ | 39 | |||||||||||||||||||
In November 2016,first quarter of 2020, the FASB issued changesCompany recorded Restructuring and other charges of $39, which included a $22 charge for layoff costs, including the separation of 460 employees (175 in Engine Products, 106 in Fastening Systems, 100 in Engineered Structures, 56 in Forged Wheels and 23 in Corporate); a $12 charge for impairment of assets associated with an agreement to sell a small manufacturing business in the United Kingdom (U.K.); a $6 post closing adjustment related to the classification2019 sale 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 statementCompany’s U.K. forgings business and a reconciliation must be prepared$3 charge for various other exit costs related to prior programs. These charges were partially offset by a benefit of $2 related to the statementreversal of financial position. Transfers between restricted casha number of prior period program reserves and restricted cash equivalentsa $2 gain on sale of assets.
| Layoff costs | Other��exit costs | Total | |||||||||||||||
| Reserve balances at December 31, 2020 | $ | 54 | $ | 0 | $ | 54 | |||||||||||
| Cash payments | (24) | 0 | (24) | ||||||||||||||
| Restructuring charges | 4 | 5 | 9 | ||||||||||||||
Other(1) | (5) | (5) | (10) | ||||||||||||||
| Reserve balances at March 31, 2021 | $ | 29 | $ | 0 | $ | 29 | |||||||||||
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 premiumother exit costs including accelerated depreciation.
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Non-service related net periodic benefit cost | $ | 3 | $ | 6 | |||||||||||||||||||
| Interest income | 0 | (4) | |||||||||||||||||||||
| Foreign currency losses, net | 2 | 0 | |||||||||||||||||||||
| Net loss from asset sales | 3 | 2 | |||||||||||||||||||||
| Deferred compensation | 2 | (10) | |||||||||||||||||||||
| Other, net | (6) | (18) | |||||||||||||||||||||
| Total | $ | 4 | $ | (24) | |||||||||||||||||||
10
In March 2017, the FASB issued changes to the presentation of net periodic pension cost and net periodic postretirement benefit cost. Other Postretirement Benefits
| First quarter ended | ||||||||||||||||||||||||||
| March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Pension benefits | ||||||||||||||||||||||||||
| Service cost | $ | 1 | $ | 7 | ||||||||||||||||||||||
| Interest cost | 12 | 47 | ||||||||||||||||||||||||
| Expected return on plan assets | (23) | (70) | ||||||||||||||||||||||||
| Recognized net actuarial loss | 14 | 42 | ||||||||||||||||||||||||
| Settlements | 3 | 0 | ||||||||||||||||||||||||
Net periodic benefit cost(1) | 7 | 26 | ||||||||||||||||||||||||
| Discontinued operations | 0 | 20 | ||||||||||||||||||||||||
| Net amount recognized in continuing operations in Statement of Consolidated Operations | $ | 7 | $ | 6 | ||||||||||||||||||||||
| Other postretirement benefits | ||||||||||||||||||||||||||
| Service cost | $ | 0 | $ | 1 | ||||||||||||||||||||||
| Interest cost | 1 | 6 | ||||||||||||||||||||||||
| Recognized net actuarial loss | 0 | 2 | ||||||||||||||||||||||||
| Amortization of prior service benefit | (1) | (2) | ||||||||||||||||||||||||
Net periodic benefit cost(1) | 0 | 7 | ||||||||||||||||||||||||
| Discontinued operations | 0 | 6 | ||||||||||||||||||||||||
| Net amount recognized in continuing operations in Statement of Consolidated Operations | $ | 0 | $ | 1 | ||||||||||||||||||||||
In May 2017,first quarter of 2021 and 2020, the FASB issued clarificationtax rate including discrete items was 29.2% and 22.7%, respectively. For the first quarter of 2021, the Company recorded a discrete net tax benefit of $1 for other items. For the first quarter of 2020, the Company recorded a discrete tax benefit of $8 related primarily to guidance onstock compensation.
| First quarter ended | ||||||||||||||||||||||||||
| March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Pre-tax income at estimated annual effective income tax rate before discrete items | $ | 34 | $ | 53 | ||||||||||||||||||||||
| Other discrete items | (1) | (8) | ||||||||||||||||||||||||
| Provision for income taxes | $ | 33 | $ | 45 | ||||||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net income from continuing operations attributable to common shareholders | $ | 80 | $ | 153 | |||||||||||||||||||
| Income from discontinued operations | 0 | 62 | |||||||||||||||||||||
| Net income attributable to common shareholders | 80 | 215 | |||||||||||||||||||||
| Less: preferred stock dividends declared | 1 | 1 | |||||||||||||||||||||
| Net income available to Howmet Aerospace common shareholders - basic and diluted | $ | 79 | $ | 214 | |||||||||||||||||||
| Average shares outstanding - basic | 434 | 435 | |||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Stock options | 1 | 1 | |||||||||||||||||||||
| Stock and performance awards | 4 | 4 | |||||||||||||||||||||
| Average shares outstanding - diluted | 439 | 440 | |||||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
Stock options(1) | 1 | 4 | |||||||||||||||||||||
In August 2017, the FASB issued guidance that will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. These changes become effective for Arconic on January 1, 2019. For cash flow and net investment hedges existing at the date of adoption, Arconic will apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings$27.65 as of the beginning of the fiscal year in which the amendment is adopted. The amended presentationMarch 31, 2021 and disclosure guidance is required only prospectively. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
11
2020, respectively.
C.
| 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 | ||||||||
|
|
|
|
|
|
|
| |||||||||
(1)These amounts were recorded in Other expense (income), net on the Statement of Consolidation Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. Restructuring and Other Charges
In the third quarter 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 charge of $60 ($60 after-tax) related to the sale of the Fusina, Italy rolling mill; a net benefit of $6 ($4 after-tax), for the reversal of forfeited executive stock compensation of $13, partially offset by a charge of $7 for the related severance; a net charge of $7 ($5 after-tax) for other miscellaneous items; and a favorable benefit of $2 ($2 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 | ||||||||
|
|
|
|
|
|
|
| |||||||||
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.
14
Activity and reserve balances for restructuring charges were as follows:
| 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 | ||||||
|
|
|
|
|
| |||||||
The remaining reserves are expected to be paid in cash during the remainder of 2017, except for approximately $15 to $20, which is expected to be paid within the next year for layoffs.
As part of its ongoing restructuring in Brazil, the Company anticipates recognizing a restructuring-related charge of approximately $30 - $50 in the fourth 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.
E. Acquisitions and Divestitures
In April 2016, Arconic completed the sale of the Remmele Medical business to LISI MEDICAL for $102 in cash ($99 net of transaction costs)F). 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
In March 2017, Arconic completed the sale of its Fusina, Italy rolling mill to Slim Aluminium. While owned by Arconic, the operating results and assets and liabilities of the Fusina, Italy rolling millearnings.
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, 2017March 31, 2021 and December 31, 2016,2020, the deferred purchase program receivable was $68 and $12, 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 Company services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Finished goods | $ | 516 | $ | 528 | |||||||
| Work-in-process | 627 | 629 | |||||||||
| Purchased raw materials | 271 | 292 | |||||||||
| Operating supplies | 39 | 39 | |||||||||
| Total inventories | $ | 1,453 | $ | 1,488 | |||||||
G. Separation Transaction
On November 1, 2016, Arconic completed the Separation Transaction. Alcoa Inc.,Equipment, net
| March 31, 2021 | December 31, 2020 | ||||||||||
| Land and land rights | $ | 92 | $ | 98 | |||||||
| Structures | 1,020 | 1,033 | |||||||||
| Machinery and equipment | 3,856 | 3,879 | |||||||||
| 4,968 | 5,010 | ||||||||||
| Less: accumulated depreciation and amortization | 2,644 | 2,626 | |||||||||
| 2,324 | 2,384 | ||||||||||
| Construction work-in-progress | 200 | 208 | |||||||||
| Properties, plants, and equipment, net | $ | 2,524 | $ | 2,592 | |||||||
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 resultedresult in cash proceeds of $888outflows for investing activities in subsequent periods.
In April$17 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$18 in the first quarter of 20172021 and 2020, respectively.
| March 31, 2021 | December 31, 2020 | ||||||||||||||||
| Right-of-use assets classified in Other noncurrent assets | $ | 125 | $ | 131 | |||||||||||||
Current portion of lease liabilities classified in Other current liabilities | 37 | 38 | |||||||||||||||
| Long-term portion of lease liabilities classified in Other noncurrent liabilities | 94 | 100 | |||||||||||||||
| Total lease liabilities | $ | 131 | $ | 138 | |||||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
5.400% Notes, due 2021(1) | $ | 0 | $ | 361 | |||||||
5.870% Notes, due 2022(2) | 476 | 476 | |||||||||
| 5.125% Notes, due 2024 | 1,250 | 1,250 | |||||||||
| 6.875% Notes, due 2025 | 1,200 | 1,200 | |||||||||
| 5.900% Notes, due 2027 | 625 | 625 | |||||||||
| 6.750% Bonds, due 2028 | 300 | 300 | |||||||||
| 5.950% Notes due 2037 | 625 | 625 | |||||||||
| 4.750% Iowa Finance Authority Loan, due 2042 | 250 | 250 | |||||||||
Other(3) | (13) | (12) | |||||||||
| 4,713 | 5,075 | ||||||||||
| Less: amount due within one year | 489 | 376 | |||||||||
| Total long-term debt | $ | 4,224 | $ | 4,699 | |||||||
| No greater than | |||||
| (i) for the quarter ending March 31, 2021 | 5.50 to 1.00 | ||||
| (ii) for the quarter ending June 30, 2021 | 5.50 to 1.00 | ||||
| (iii) for the quarter ending September 30, 2021 | 5.00 to 1.00 | ||||
| (iv) for the quarter ending December 31, 2021 | 4.75 to 1.00 | ||||
| (v) for the quarter ending March 31, 2022 | 4.50 to 1.00 | ||||
| (vi) for the quarter ending June 30, 2022 | 4.50 to 1.00 | ||||
| (vii) for the quarter ending September 30, 2022 | 4.25 to 1.00 | ||||
| (viii) for the quarter ending December 31, 2022 | 3.75 to 1.00 | ||||
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying value | Fair value | Carrying value | Fair value | ||||||||||||||||||||
| Long-term debt, less amount due within one year | $ | 4,224 | $ | 4,831 | $ | 4,699 | $ | 5,426 | |||||||||||||||
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 segregated and are included in the Statement of Consolidated Cash Flows for all periods presented. The following table presents depreciation, depletion and amortization, restructuring and other charges, and purchases of property, plant and equipment of the discontinued operations related to Alcoa Corporation:
| Nine months ended September 30, | ||||
| 2016 | ||||
Depreciation, depletion and amortization | $ | 532 | ||
Restructuring and other charges | $ | 101 | ||
Capital expenditures | $ | 258 | ||
H. Contingencies and Commitments
Contingencies
Form 10-K.
Arconic
Arconic’s
Payments related to remediation expenses applied against the reserve were $10 and $17less than $1 in the thirdfirst quarter ended March 31, 2021 and nine months ended September 30, 2017, respectively. This amount includesincluded expenditures currently mandated, as well as those not required by any regulatory authority or third party.
17
The following discussion provides details regarding the current status of the most significant reserve related to a current Arconic site.
Massena West, NY—Arconic has an ongoing remediation project related to the Grasse River, which is adjacent to Arconic’s Massena plant site. Many years ago, it was determined that sediments and fish in the river contain varying levels of polychlorinated biphenyls (PCBs). The project, which was selected by the U.S. Environmental Protection Agency (USEPA) in a Record of Decision issued in April 2013, is aimed at capping PCB contaminated sediments with concentration in excess of one part per million in the main channel of the river and dredging PCB contaminated sediments in the near-shore areas where total PCBs exceed one part per million. At September 30, 2017 and December 31, 2016, the reserve balance associated with this matter was $221 and $228, respectively. Arconic is in the planning and design phase, which is expected to be completed in 2018. In the third quarter of 2017, the New York State Department of Environmental Conservation (NYSDEC) sent a letter to USEPA requesting a revision to the draft design. The USEPA has not responded to the NYSDEC letter but the request has put on hold Arconic’s preparation of a final design and extended the expected submittal into 2018. Following submittal and USEPA approval of the final design, the actual remediation fieldwork is expected to commence and take approximately four years. The majority of the project funding is expected to be incurred between 2018 and 2022.
Tax
Pursuant to the Tax Matters Agreement entered into between Arconic and Alcoa Corporation in connection with the Separation Transaction, Arconic shares responsibility with Alcoa Corporation, and Alcoa Corporation has agreed to partially indemnify Arconic, with
As previously reported, in September 2010, following a corporate income tax audit covering the 2003 through 2005 tax years, an assessment was received as a result of Spain’s tax authorities disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by the Company. An appeal of this assessment in Spain’s Central Tax Administrative Court by the Company was denied in October 2013. In December 2013, the Company filed an appeal of the assessment in Spain’s National Court. On January 16, 2017, Spain’s National Court issued a decision in favor of the Company. The Spanish Tax Administration did not file an appeal within the applicable period. Based on this decision and recent confirming correspondence from the Spanish Tax Administration, the matter is now closed. The Company will not be responsible for any assessment related to the 2003 through 2005 tax years.
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’s National Court has not yet rendered a decision related to the assessment received in July 2013. The assessment for the 2006 through 2009 tax years is $152 (€129), including interest.
Finally, the Spanish consolidated tax group had been under audit (beginning in September 2015) for the 2010 through 2013 tax years. In August 2017, the Company reached a settlement of this audit. The settlement amount is not material to the Company’s Consolidated Financial Statements. While the 2010 through 2013 tax years are closed to audit, it is possible that the Company may receive similar assessments from Spain’s tax authorities for years subsequent to 2013. The Company believes it has meritorious arguments to support its tax position for all years and intends to vigorously litigate assessments through Spain’s court system. However, in the event the Company is unsuccessful, a portion of the assessments may be offset with existing net operating losses available to the Spanish consolidated tax group, which would be shared between Arconic and Alcoa Corporation as provided for in the Tax Matters Agreement related to the Separation Transaction. At this time, the Company is unable to reasonably predict an outcome for this matter.
Reynobond PE
As previously reported, on June 13, 2017,regulatory investigations into 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 usedmatter, including 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, no update is available.
18
In August and September 2017, two purported class action complaints were filed againstfollowing legal proceedings in which Arconic and certain officers, directorsInc. and/or other parties, alleging that, in lightits then directors were named as parties:
Whileclaims. However, the suits remain at a preliminary stage, and the Company believesis still waiting to be served with full particulars of the claimants’ substantive allegations and the relief that these casesclaimants seek. Following a recent application by legal representatives acting for the claimant groups, the current stay of the suits has been extended until July 7, 2021, when they will be heard together at a case management hearing in the High Court in London on July 7-8, 2021.
claims.
March 31, 2021.
Arconic was also required to provide guarantees of $50 related to two Alcoa Corporation energy supply contracts. These guarantees expired in March 2017. Additionally, ArconicThe Company was required to provide guaranteesa guarantee up to an estimated present value amount of $53 relatedapproximately $1,356 and $1,398 at March 31, 2021 and December 31, 2020, respectively. For this guarantee, subject to certainits provisions, the Company is secondarily liable in the event of a payment default by Alcoa Corporation. The Company currently views the risk of an Alcoa Corporation environmental liabilities. Notification of a change in guarantorpayment default on its obligations under the contract to Alcoa Corporation was made to the appropriate environmental agencies and as such, Arconic no longer provides these guarantees.
be remote.
Arconic
19
March 31, 2021.
Arconic Corporation is being billed for these letter of credit fees paid by the Company and will reimburse the Company for any payments made under these letters of credit.
Arconic
March 31, 2021.
I. Segment Information
Arconic is a producer
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 | ||||||||||||
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| |||||||||
Total sales | $ | 1,476 | $ | 1,270 | $ | 517 | $ | 3,263 | ||||||||
|
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| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 68 | 52 | 13 | 133 | ||||||||||||
Adjusted EBITDA | 312 | 140 | 83 | 535 | ||||||||||||
|
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| |||||||||
Third quarter ended | ||||||||||||||||
September 30, 2016 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 1,406 | $ | 1,285 | $ | 450 | $ | 3,141 | ||||||||
Intersegment sales | — | 30 | — | 30 | ||||||||||||
|
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| |||||||||
Total sales | $ | 1,406 | $ | 1,315 | $ | 450 | $ | 3,171 | ||||||||
|
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| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 63 | 52 | 12 | 127 | ||||||||||||
Adjusted EBITDA | 296 | 143 | 76 | 515 | ||||||||||||
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| 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 | ||||||||||||
|
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| |||||||||
Total sales | $ | 4,445 | $ | 3,858 | $ | 1,467 | $ | 9,770 | ||||||||
|
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| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 198 | 153 | 37 | 388 | ||||||||||||
Adjusted EBITDA | 928 | 475 | 237 | 1,640 | ||||||||||||
|
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| |||||||||
Nine months ended | ||||||||||||||||
September 30, 2016 | ||||||||||||||||
Sales: | ||||||||||||||||
Third-party sales | $ | 4,320 | $ | 3,785 | $ | 1,346 | $ | 9,451 | ||||||||
Intersegment sales | — | 88 | — | 88 | ||||||||||||
|
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Total sales | $ | 4,320 | $ | 3,873 | $ | 1,346 | $ | 9,539 | ||||||||
|
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| |||||||||
Profit and loss: | ||||||||||||||||
Depreciation and amortization | 190 | 152 | 35 | 377 | ||||||||||||
Adjusted EBITDA | 930 | 461 | 216 | 1,607 | ||||||||||||
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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 | ) | ||||||||
|
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| |||||||||
Operating income | $ | 271 | $ | 237 | $ | 797 | $ | 790 | ||||||||
Other income, net | 1 | 11 | 526 | 40 | ||||||||||||
Interest expense | (100 | ) | (126 | ) | (398 | ) | (371 | ) | ||||||||
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Income from continuing operations before income taxes | $ | 172 | $ | 122 | $ | 925 | $ | 459 | ||||||||
Provision for income taxes | (53 | ) | (56 | ) | (272 | ) | (230 | ) | ||||||||
Discontinued operations | — | 100 | — | 88 | ||||||||||||
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Net income attributable to Arconic | $ | 119 | $ | 166 | $ | 653 | $ | 317 | ||||||||
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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 | ) | ||||||||
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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 | ||||||||||||
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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 | — | ||||||||||||
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Net income available to Arconic common shareholders - diluted | $ | 103 | $ | 150 | $ | 657 | $ | 265 | ||||||||
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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 | — | ||||||||||||
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| |||||||||
Weighted average shares outstanding - diluted | 462 | 453 | 501 | 443 | ||||||||||||
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| |||||||||
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,Notes to 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 reducedFinancial Statements, except 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 | ) | ||||
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|
| |||||
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 premiumnoted below:
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 | ||||||||||||
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| |||||||||
Net periodic benefit cost* | $ | 55 | $ | 91 | $ | 163 | $ | 260 | ||||||||
Discontinued operations | — | 41 | — | 114 | ||||||||||||
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| |||||||||
Net amount recognized in Statement of Consolidated Operations | $ | 55 | $ | 50 | $ | 163 | $ | 146 | ||||||||
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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 | — | — | — | — | ||||||||||||
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Net periodic benefit cost* | $ | 9 | $ | 21 | $ | 26 | $ | 63 | ||||||||
Discontinued operations | — | 12 | — | 37 | ||||||||||||
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Net amount recognized in Statement of Consolidated Operations | $ | 9 | $ | 9 | $ | 26 | $ | 26 | ||||||||
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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 values 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 payment related to an acquisition. The fair value was based on the net present value of expected future cash flows and was classified in Level 3 of the fair value hierarchy.
Long-term debt due within one year and Long-term debt, less amount due within one year. The fair value was based on quoted market prices for public debt and on interest rates that are currently available to Arconic for issuance of debt with similar terms and maturities 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 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 to the Separation and Distribution Agreement between Arconic and Alcoa Corporation, Arconic was required to provide a guarantee up to an estimated present value amount of approximately $485 related to this electricity contract 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
Report of Independent Registered Public Accounting Firm*
To the Shareholders and Board of Directors of Arconic Inc.
We have reviewed the accompanying consolidated balance sheet of Arconic Inc. and its subsidiaries (Arconic) as of September 30, 2017, and the related statements of consolidated operations, consolidated comprehensive income (loss), and changes in consolidated equity for the three-month and nine-month periods ended September 30, 2017 and 2016 and the statement of consolidated cash flows for the nine-month periods ended September 30, 2017 and 2016. These consolidated interim financial statements are the responsibility of Arconic’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
November 6, 2017
28
(dollars in millions, except per share amounts and aluminum prices; shipments in thousands of metric tons [kmt])
amounts)
Our Business
Forged Wheels).
December 31, 2020, “Risk Factors — Our business, results of operations, financial condition and/or cash flows have been and could continue to be materially adversely affected by the effects of the COVID-19 pandemic.”
$17.
29
Forged Wheels plant in Barberton, Ohio in mid-February 2020. The Company recorded total COGS charges of $9 related to the fires at France and Barberton in 2021. The Company anticipates additional charges of approximately $3 to $7 in the second quarter of 2021, with further impacts in subsequent quarters as the businesses continue to recover from the fires.
SG&A expenses decreased $93 in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 as a result of expenses related to the Separation Transaction of $117 in the prior year period compared to $18 in the current year period,reductions as well as ongoing overhead cost reduction efforts (see Note D), partially offset by proxy, advisory and governance-related costs of $58 and external legal and other advisory costs related to Grenfell Tower of $7incurred in the current year period.
first quarter of 2020 associated with the Arconic Inc. Separation Transaction.
In the thirdfirst quarter of 2017, Arconic recorded 2021 were primarily comprised of a $4 charge for impairment of assets associated with an agreement to sell a small manufacturing business in France and a $3 charge for U.S. pension plans' settlement accounting.
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 charge of $60 ($60 after-tax)$6 post closing adjustment related to the sale of the Fusina, Italy rolling mill; a net benefit of $6 ($4 after-tax),Company’s U.K. forgings business that occurred in December 2019.
In the thirdfirst quarter of 2016, Arconic recorded Restructuring and other charges of $3 ($2 after-tax), which included $4 ($2 after-tax) for layoff costs related2021 compared to cost reduction initiatives and the separation of Alcoa Inc. (see Note G), including the separation of approximately 70 employees (60$84 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 | |||||||||||
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Segment Total | 14 | (4 | ) | 111 | 23 | |||||||||||
Corporate | 5 | 7 | 7 | 10 | ||||||||||||
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Total Restructuring and other charges | $ | 19 | $ | 3 | $ | 118 | $ | 33 | ||||||||
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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 fourth quarter of 2017 related to its extrusions business which is part2020. The decrease 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,$12, or 21%14%, in the thirdfirst quarter of 2017 compared to the third quarter of 20162021 was primarily due to lower debt outstanding debt. Duringin the first quarter of 2021 driven by the early redemption of
Other income, net. Other income, net decreased $10of $24 in the thirdfirst quarter of 2017 compared to2020. The increase of $28, or 117%, in the thirdfirst quarter of 2016,2021 was primarily due to the favorable post-closing adjustment relatedimpacts of deferred compensation arrangements of $12 and lower interest income of $4.
Other income, net increased $4862021 compared to $8 in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to the gain on the salefirst quarter of a portion of Arconic’s investment in Alcoa Corporation common stock of $351 and the gain of $167 on the debt-for-equity exchange with two investment banks (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 (the “Debt-for-Equity Exchange”) (See Note G).
Provision for income taxes. For the nine months ended September 30, 2017, Arconic’s2020. The estimated annual effective tax rate, before discrete items, applied to ordinary income was 28.5%. This rate is lower than30.4% in the federal statutory ratefirst quarter of 35%2021 compared to 26.9% in the first quarter of 2020. See Note
For the nine months ended September 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 recordeddecrease in the quarter ended September 30, 2017 and primarily relate toprovision for income taxes of $12.
31
The tax provisionsArconic Inc. Separation Transaction occurred on April 1, 2020, there is no income from discontinued operations for the thirdfirst 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 | ||||||||||||
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Provision for income taxes | $ | 53 | $ | 56 | $ | 272 | $ | 230 | ||||||||
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Income from continuing operations after2021. Net income taxes. Income from continuing operations after income taxes was $119$80 for the thirdfirst quarter of 2017, or $0.22 per diluted share, compared to2021 all of which was composed of $80 of income from continuing operations, afteror $0.18 per diluted share.
Income from continuing operations after income taxes was $653 for the nine months ended September 30, 2017, or $1.31 per diluted share, compared 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; and higher volumes across all segments; 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; and lower-margin product mix.
Discontinued operations.In the third quarter of 2016, net income attributable to Arconic included income of $120$62 from discontinued operations, after income taxesor $0.35 and $20 from discontinued$0.14 per diluted share, respectively.
Segment Information
In the first quarter of 2017, the Company changed its primary measure of segment performance from After-tax operating income (ATOI) to Adjusted earnings before interest, tax, depreciation, and amortization (“Adjusted EBITDA”).Forged Wheels. Segment performance under Arconic’sHowmet’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Adjusted EBITDA. Arconic’sSegment operating profit. Howmet's definition of Adjusted EBITDASegment operating profit is net margin plus an add-back for depreciationOperating income excluding Special items. Special items include Restructuring and amortization. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation and amortization. The Adjusted EBITDA presentedOther charges. Segment operating profit may not be comparable to similarly titled measures of other companies.
Engineered Products Differences between segment totals and Solutions
| 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 | ||||||||
Third-party sales for the Engineered Products and Solutions segment increased 5%consolidated Howmet are in the third quarter of 2017 compared to the third quarter of 2016. The increase was the result of volume growth partially offset by lower product pricing, primarily in the aerospace end market. Third-party sales increased 3% in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase was the result of volume growth, partially offset by lower product pricing, primarily in the aerospace end market, the effects of foreign currency fluctuations, and the absence of sales of $23 related to the Remmele Medical business, which was sold in April 2016.
Adjusted EBITDA for the Engineered Products and Solutions segment increased $16 in the third quarter of 2017 compared to the third quarter of 2016. The increase was the result of higher volumes and net cost savings partially offset by lower product pricing and ramp up costs associated with increasing production volumes of new aerospace engine parts, such as higher scrap rates, production inefficiencies, new process development and employee training. Adjusted EBITDA decreased by $2 in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease was the result of unfavorable product pricing, ramp up costs associated with increasing production volumes of new aerospace engine parts, and a lower margin product mix, largely offset by net cost savings and higher volumes.
In the fourth quarter of 2017, growth in demand from the commercial aerospace end market relative to the fourth quarter of 2016 is 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
Global Rolled Products (1)
| 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 | ||||||||||||
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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 | ||||||||
Third-party sales for the Global Rolled Products segment decreased 4% in the third quarter of 2017 compared to the third quarter of 2016. The decrease was primarily related to the impact of $131 associated with the ramp-down and Toll Processing Agreement with Alcoa Corporation at the Company’s North America packaging business in Tennessee, the absence of sales of $39 from the rolling mill in Fusina, Italy, which was sold in March 2017, and unfavorable product pricing, partially offset by higher aluminum pricing. Third-party sales decreased 1% in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease was primarily related to the impact of $365 associated with the ramp-down and Toll Processing Agreement with Alcoa Corporation at the Company’s North America packaging business in Tennessee, the absence of sales of $74 from the rolling mill in Fusina, Italy, and unfavorable product pricing, largely offset by volume growth in the automotive end market and higher aluminum pricing.
Adjusted EBITDA for the Global Rolled Products segment decreased $3 in the third quarter of 2017 compared to the third quarter of 2016. The decrease is the result of the planned ramp-down of the Company’s North America packaging business in Tennessee, lower aerospace volume from customer inventory destocking and reduced build rates as well as continued pricing pressure on regional specialty products, and higher aluminum prices of $7, partially offset by net cost savings. The higher aluminum prices negatively impacted the Global Rolled Products Adjusted EBITDA margin by 170 basis points in the third quarter of 2017 compared to the third quarter of 2016.
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.
In the fourth quarter of 2017, demand in the automotive end market is expected to continue to grow relative to the fourth quarter of 2016 due to the increasing demand for innovative products and aluminum-intensive vehicles. While new programs continue to ramp-up, demand from the commercial airframe end market is expected to decline due to customer destocking and lower build rates for aluminum intensive wide-body programs. Sales to the packaging market are expected to decline due to continuing pricing pressure within this market and the impact of the ramp-down relating to the Company’s North America packaging business in Tennessee. Net cost savings are expected to continue.
33
Transportation and Construction Solutions
| 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 | ||||||||
Third-party sales for the Transportation and Construction Solutions segment increased 15% in the third quarter of 2017 compared to the third quarter of 2016 due to increased volumes in the commercial transportation and building and construction end markets, higher aluminum pricing, and the effects of foreign currency, partially offset by lower product pricing. Third-party sales increased 9% in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to increased volumes in the commercial transportation and building and construction end markets and higher aluminum pricing, partially offset by lower product pricing.
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. The higher aluminum prices negatively impacted the Transportation and Construction Solutions Adjusted EBITDA margin by $4 or 120 basis points in the third quarter of 2017 compared to the third quarter of 2016.
In the fourth quarter of 2017, increased volumes are expected to continue relative to the fourth quarter of 2016 due to growth in the Commercial Transportation and Building and Construction markets, as well as growth in demand for innovative and new products. Additionally, net cost savings and pricing headwinds are anticipated to continue in the fourth quarter.
Reconciliation of Combined segment adjusted EBITDA to Net income attributable to Arconic
Items required to reconcile Combined segment adjusted EBITDA to Net income attributable to Arconic include: the Provision for depreciation and amortization; Restructuring and other charges; the impact of LIFO inventory accounting; metal price lag (the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by the respective segment — generally, when the price of metal increases, metal price lag is favorable, and when the price of metal decreases, metal price lag is unfavorable); corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities and corporate research and development expenses); other items, including intersegment profit eliminations; Other income, net; Interest expense; Income tax expense; and the results of discontinued operations. Prior period information has been recast to conform to current year presentation.
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 | ) | ||||||||
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Operating income | $ | 271 | $ | 237 | $ | 797 | $ | 790 | ||||||||
Other income, net | 1 | 11 | 526 | 40 | ||||||||||||
Interest expense | (100 | ) | (126 | ) | (398 | ) | (371 | ) | ||||||||
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Income from continuing operations before income taxes | $ | 172 | $ | 122 | $ | 925 | $ | 459 | ||||||||
Provision for income taxes | (53 | ) | (56 | ) | (272 | ) | (230 | ) | ||||||||
Discontinued operations | — | 100 | — | 88 | ||||||||||||
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Net income attributable to Arconic | $ | 119 | $ | 166 | $ | 653 | $ | 317 | ||||||||
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The changes in the reconciling items between Combined segment adjusted EBITDA and Net income attributable to Arconic for the third quarter and nine months ended September 30, 2017 compared to corresponding periods in 2016 consisted of:
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 | ) | ||||||||||
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Consolidated adjusted EBITDA(1) | $ | 430 | $ | 376 | $ | 1,325 | $ | 1,225 | ||||||||
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Environmental Matters
See the Environmental Matters section ofCorporate. (See Note H
Subsequent Events
On October 2, 2017, all outstanding 24,975,978 depositary shares (each depositary share representing10-Q for a 1/10th interestdescription of each segment).
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Third-party sales | $ | 534 | $ | 781 | |||||||||||||||||||
| Segment operating profit | 101 | 165 | |||||||||||||||||||||
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. Pursuant2021 compared to the Separationfirst quarter of 2020, primarily due to lower commercial aerospace volumes from production declines for the 737 MAX and Distribution Agreement between Arconic and Alcoa Corporation, Arconic was required to provide a guarantee up to an estimated present value amount of approximately $485 related to this electricity contract for Alcoa Corporation’s facilityCOVID-19 productivity impacts, partially offset by higher volumes in the eventdefense aerospace and industrial gas turbines end markets as well as favorable product pricing.
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Third-party sales | $ | 272 | $ | 385 | |||||||||||||||||||
| Segment operating profit | 45 | 96 | |||||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Third-party sales | $ | 176 | $ | 275 | |||||||||||||||||||
| Segment operating profit | 10 | 28 | |||||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Third-party sales | $ | 227 | $ | 191 | |||||||||||||||||||
| Segment operating profit | 70 | 50 | |||||||||||||||||||||
| First quarter ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Income from continuing operations before income taxes | $ | 113 | $ | 198 | |||||||||||||||||||
| Interest expense | 72 | 84 | |||||||||||||||||||||
| Other expense (income), net | 4 | (24) | |||||||||||||||||||||
| Consolidated operating income | $ | 189 | $ | 258 | |||||||||||||||||||
| Unallocated amounts: | |||||||||||||||||||||||
| Restructuring and other charges | 9 | 39 | |||||||||||||||||||||
| Corporate expense | 28 | 42 | |||||||||||||||||||||
| Total segment operating profit | $ | 226 | $ | 339 | |||||||||||||||||||
Financial Statements in Part I, Item 1 of this Form 10-Q for subsequent events.
36
Cash from Operations
Cash provided from operations was $89 in the nine months ended September 30, 2017March 31, 2021 compared to $208 in the ninethree months ended September 30, 2016.March 31, 2020. The decrease in cash provided fromused for operations of $119,$202, or 57%97%, was primarily due to lower operating results (net income plus net add-back for noncash transactions in earnings) of $673, partially$256 which were more than offset by lower cash used for working capital of $251$408, lower pension contributions of $27, and a positivenoncurrent liabilities of $25. The components of the change associated with noncurrentin working capital included favorable changes in receivables of $66, inventories of $156, accounts payable of $158, accrued expenses of $81, and prepaid expenses and other current assets of $247 due to the prepayment$25, offset by taxes, including income taxes of $200 made in April 2016 related to a gas supply agreement for the Australia alumina refineries.
$78.
ArconicCompany’s common stock, beginning in the third quarter 2021, subject to the discretion and final approval of the Board of Directors each quarter after the Board’s consideration of all factors it deems relevant and subject to applicable law and contractual considerations.
In addition to the Credit Agreement above, Arconic has a number of other credit agreements that provide a combined borrowing capacity of $715 as of September 30, 2017, of which $175 is due to expire in 2017 and $540 is due to expire in 2018. The purpose of any borrowings under these credit arrangements is to provide for working capital requirements and for other general corporate purposes. The covenants contained in all these arrangements are the same as the Credit Agreement. During the third quarter and nine months ended September 30, 2017, Arconic borrowed and repaid $150 and $660, respectively, under these other credit facilities. The weighted-average interest rate and weighted-average days outstanding during the third quarter and nine months ended September 30, 2017 were 2.73% and 73 days and 2.48% and 43 days, respectively.
Arconic’sCompany’s costs of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short-short and long-term debt ratings assigned to Arconicthe Company by the major credit rating agencies.
Arconic’s
| Issuer Rating | Outlook | Date of Last Update | ||||||||||||||||
Standard and Poor’s Ratings Service (S&P) | BB+ | Negative | ||||||||||||||||
Moody’s Investors Service (Moody’s) | Ba2 | Stable | ||||||||||||||||
Fitch Investors Service (Fitch) | BBB- | Stable | ||||||||||||||||
CashMarch 31, 2020. The decrease in cash provided from investing activities for the nine months ended September 30, 2017 includedof $8, or 73%, was primarily due to proceeds of $888 from the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and the receipt of proceeds from the sale of the Yadkin Hydroelectric Project of $243, somewhat offset by cash used for capital expenditures of $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,business of $114 primarily related to $457 in proceeds from the redemption of Company-owned life insurance policies, proceeds of $120 related to the sale of a hard extrusions plant in South Korea and an aluminum rolling mill in Brazil in the Intalco smelter wharf property, and proceedsfirst quarter of $102 from the sale2020 (both 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 partiallywhich related to Arconic Corporation), substantially offset by $814a decrease in capital expenditures includingof $97 and increase in cash receipts from sold receivables of $9.
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Noncash Financingfirst quarter to evaluate whether it is more likely than not that the fair value of any of our reporting units is less than its carrying value. As a result of this assessment, the Company performed a quantitative impairment test in the first quarter for the Engineered Structures reporting unit and Investing Activities
concluded that though the margin between the fair value of the reporting unit and carrying value had declined from approximately 60% to approximately 15%, it was not impaired. Consistent with prior practice, a discounted cash flow model was used to estimate the current fair value of the reporting unit. The significant assumptions and estimates utilized to determine fair value were developed utilizing current market and forecast information reflecting the disruption in demand that has had and is expected to have a negative impact on the Company’s global sales in the aerospace industry. Since the first quarter of 2020, the Company did not identify an indication of impairment of goodwill related to any of its reporting units or indefinite-lived intangible assets.
could be material.
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Arconic’s Interim Chief
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
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.
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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 the Reynobond PE product. The complaint alleges that the statements in Arconic’s Form 10-K for the fiscal yearsyear ended December 31, 2012, 2013, 2014, 2015 and 2016, its 2012, 2013, 2014, 2015 and 2016 Annual Reports, and its 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 plaintiffs seek, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses.
While the Company believes that these cases are without merit and intends to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters. Given the preliminary nature of these matters and the uncertainty of litigation, the Company cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome. 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.
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2020.
| Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of | |||||
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| 104. | Cover Page Interactive Data File - the cover page from this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (included within the Exhibit 101 attachments). | ||||
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| /s/ Ken Giacobbe | |||||||
| Date | Ken Giacobbe | |||||||
| Executive Vice President and | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| May 6, 2021 | /s/ Paul Myron | |||||||
| Date | Paul Myron | |||||||
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| |||||||
| Vice President and Controller | ||||||||
| (Principal Accounting Officer) | ||||||||
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