0000004281-19-000059.txt : 20190501 0000004281-19-000059.hdr.sgml : 20190501 20190501092234 ACCESSION NUMBER: 0000004281-19-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 99 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190501 DATE AS OF CHANGE: 20190501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Arconic Inc. CENTRAL INDEX KEY: 0000004281 STANDARD INDUSTRIAL CLASSIFICATION: ROLLING DRAWING & EXTRUDING OF NONFERROUS METALS [3350] IRS NUMBER: 250317820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03610 FILM NUMBER: 19785103 BUSINESS ADDRESS: STREET 1: 390 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10022-4608 BUSINESS PHONE: 2128362732 MAIL ADDRESS: STREET 1: 390 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10022-4608 FORMER COMPANY: FORMER CONFORMED NAME: ALCOA INC. DATE OF NAME CHANGE: 20141003 FORMER COMPANY: FORMER CONFORMED NAME: ALCOA INC DATE OF NAME CHANGE: 19990105 FORMER COMPANY: FORMER CONFORMED NAME: ALUMINUM CO OF AMERICA DATE OF NAME CHANGE: 19920703 10-Q 1 form10q_1q19.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3610
 
ARCONIC INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
25-0317820
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
390 Park Avenue, New York, New York
 
10022-4608
(Address of principal executive offices)
 
(Zip code)
Investor Relations 212-836-2758
Office of the Secretary 212-836-2732
(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No      
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No      
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
__  
Non-accelerated filer
__  
Smaller reporting company
__  
 
 
Emerging growth company
__  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes          No  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
ARNC
New York Stock Exchange
$3.75 Cumulative Preferred Stock, par value $100 per share
ARNC PR
NYSE American
As of April 29, 2019, there were 448,629,078 shares of common stock, par value $1.00 per share, of the registrant outstanding.
 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Arconic and subsidiaries
Statement of Consolidated Operations (unaudited)
(in millions, except per-share amounts)
 
First quarter ended
 
March 31,
 
2019
 
2018
Sales (C)
$
3,541

 
$
3,445

Cost of goods sold (exclusive of expenses below)
2,818

 
2,768

Selling, general administrative, and other expenses
178

 
172

Research and development expenses
22

 
23

Provision for depreciation and amortization
137

 
142

Restructuring and other charges (D)
12

 
7

Operating income
374

 
333

Interest expense
85

 
114

Other expense, net (E)
32

 
20

Income before income taxes
257

 
199

Provision for income taxes (G)
70

 
56

Net income
$
187

 
$
143

 
 
 
 
Amounts Attributable to Arconic Common Shareholders (I):
 
 
 
Net income
$
186

 
$
142

Earnings per share - basic
$
0.40

 
$
0.30

Earnings per share - diluted
$
0.39

 
$
0.29

Average Shares Outstanding (I):
 
 
 
Average shares outstanding - basic
471

 
482

Average shares outstanding - diluted
489

 
503

The accompanying notes are an integral part of the consolidated financial statements.


2



Arconic and subsidiaries
Statement of Consolidated Comprehensive Income (unaudited)
(in millions)
 
Arconic
 
Noncontrolling
Interests
 
Total
First quarter ended March 31,
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net income
$
187

 
$
143

 
$

 
$

 
$
187

 
$
143

Other comprehensive income, net of tax (J):
 
 
 
 
 
 
 
 
 
 
 
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits
40

 
143

 

 

 
40

 
143

Foreign currency translation adjustments
26

 
122

 

 

 
26

 
122

Net change in unrealized gains on available-for-sale securities
3

 

 

 

 
3

 

Net change in unrecognized losses/gains on cash flow hedges
7

 
(7
)
 

 

 
7

 
(7
)
Total Other comprehensive income, net of tax
76

 
258

 

 


76

 
258

Comprehensive income
$
263

 
$
401

 
$

 
$


$
263

 
$
401

The accompanying notes are an integral part of the consolidated financial statements.

3



Arconic and subsidiaries
Consolidated Balance Sheet (unaudited)
(in millions)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,319

 
$
2,277

Receivables from customers, less allowances of $4 in 2019 and 2018 (K)
1,170

 
1,047

Other receivables (K)
646

 
451

Inventories (L)
2,612

 
2,492

Prepaid expenses and other current assets
306

 
314

Total current assets
6,053

 
6,581

Properties, plants, and equipment, net (M)
5,727

 
5,704

Goodwill (C)
4,509

 
4,500

Deferred income taxes
480

 
573

Intangibles, net
912

 
919

Other noncurrent assets (N)
680

 
416

Total assets
$
18,361

 
$
18,693

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable, trade
$
2,193

 
$
2,129

Accrued compensation and retirement costs
339

 
370

Taxes, including income taxes
114

 
118

Accrued interest payable
97

 
113

Other current liabilities (N)
481

 
356

Short-term debt
435

 
434

Total current liabilities
3,659

 
3,520

Long-term debt, less amount due within one year (O and P)
5,899

 
5,896

Accrued pension benefits (F)
2,172

 
2,230

Accrued other postretirement benefits (F)
636

 
723

Other noncurrent liabilities and deferred credits (B and N)
817

 
739

Total liabilities
13,183

 
13,108

Contingencies and commitments (R)


 


Equity
 
 
 
Arconic shareholders’ equity:
 
 
 
Preferred stock
55

 
55

Common stock
453

 
483

Additional capital
7,644

 
8,319

Accumulated deficit
(134
)
 
(358
)
Accumulated other comprehensive loss (J)
(2,852
)
 
(2,926
)
Total Arconic shareholders’ equity
5,166

 
5,573

Noncontrolling interests
12

 
12

Total equity
5,178

 
5,585

Total liabilities and equity
$
18,361

 
$
18,693

The accompanying notes are an integral part of the consolidated financial statements.

4



Arconic and subsidiaries
Statement of Consolidated Cash Flows (unaudited)
(in millions)
 
Three months ended
 
March 31,
 
2019
 
2018
Operating activities
 
 
 
Net income
$
187

 
$
143

Adjustments to reconcile net income to cash used for operations:
 
 
 
Depreciation and amortization
137

 
142

Deferred income taxes
8

 
18

Restructuring and other charges
12

 
7

Net loss from investing activities - asset sales
2

 
3

Net periodic pension benefit cost (F)
29

 
41

Stock-based compensation
10

 
15

Other
11

 
49

Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
 
 
 
(Increase) in receivables
(489
)
 
(403
)
(Increase) in inventories
(118
)
 
(141
)
(Increase) in prepaid expenses and other current assets
(14
)
 
(12
)
Increase in accounts payable, trade
65

 
14

(Decrease) in accrued expenses
(69
)
 
(118
)
Increase in taxes, including income taxes
47

 
8

Pension contributions
(55
)
 
(177
)
(Increase) decrease in noncurrent assets
(1
)
 
1

(Decrease) in noncurrent liabilities
(20
)
 
(26
)
Cash used for operations
(258
)
 
(436
)
Financing Activities
 
 

Net change in short-term borrowings (original maturities of three months or less)
1

 
5

Additions to debt (original maturities greater than three months)
150

 
150

Payments on debt (original maturities greater than three months)
(151
)
 
(651
)
Premiums paid on early redemption of debt

 
(17
)
Proceeds from exercise of employee stock options
1

 
12

Dividends paid to shareholders
(29
)
 
(30
)
Repurchase of common stock (H)
(700
)
 

Other
(13
)
 
(11
)
Cash used for financing activities
(741
)
 
(542
)
Investing Activities
 
 

Capital expenditures
(168
)
 
(117
)
Proceeds from the sale of assets and businesses
4

 

Sales of investments
47

 
9

Cash receipts from sold receivables (K)
160

 
136

Other
(1
)
 
1

Cash provided from investing activities
42

 
29

Effect of exchange rate changes on cash, cash equivalents and restricted cash
1

 
4

Net change in cash, cash equivalents and restricted cash
(956
)
 
(945
)
Cash, cash equivalents and restricted cash at beginning of year
2,282

 
2,153

Cash, cash equivalents and restricted cash at end of period
$
1,326

 
$
1,208

The accompanying notes are an integral part of the consolidated financial statements.

5



Arconic and subsidiaries
Statement of Changes in Consolidated Equity (unaudited)
(in millions, except per-share amounts)
 
Arconic Shareholders
 
 
 
 
 
Preferred
stock
 
Common
stock
 
Additional
capital
 
Accumulated deficit
 
Accumulated
other
comprehensive
loss
 
Noncontrolling
interests
 
Total
Equity
Balance at December 31, 2017
$
55

 
$
481

 
$
8,266

 
$
(1,248
)
 
$
(2,644
)
 
$
14

 
$
4,924

Net income

 

 

 
143

 

 

 
143

Other comprehensive income (J)

 

 

 

 
258

 

 
258

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred-Class A @ $0.9375 per share

 

 

 
(1
)
 

 

 
(1
)
Common @ $0.12 per share

 

 

 
(58
)
 

 

 
(58
)
Stock-based compensation

 

 
15

 

 

 

 
15

Common stock issued: compensation plans

 
2

 
(1
)
 

 

 

 
1

Balance at March 31, 2018
$
55


$
483


$
8,280


$
(1,164
)

$
(2,386
)

$
14


$
5,282

 
Arconic Shareholders
 
 
 
 
 
Preferred
stock
 
Common
stock
 
Additional
capital
 
Accumulated deficit
 
Accumulated
other
comprehensive
loss
 
Noncontrolling
interests
 
Total
Equity
Balance at December 31, 2018
$
55

 
$
483

 
$
8,319

 
$
(358
)
 
$
(2,926
)
 
$
12

 
$
5,585

Adoption of accounting standards (B)

 

 

 
75

 
(2
)
 

 
73

Net income

 

 

 
187

 

 

 
187

Other comprehensive income (J)

 

 

 

 
76

 

 
76

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred-Class A @ $0.9375 per share

 

 

 
(1
)
 

 

 
(1
)
Common @ $0.08 per share

 

 

 
(38
)
 

 

 
(38
)
Repurchase and retirement of common stock (H)

 
(32
)
 
(668
)
 

 

 

 
(700
)
Stock-based compensation

 

 
8

 

 

 

 
8

Common stock issued: compensation plans

 
2

 
(15
)
 

 

 

 
(13
)
Other

 

 

 
1

 

 

 
1

Balance at March 31, 2019
$
55

 
$
453

 
$
7,644


$
(134
)

$
(2,852
)

$
12


$
5,178

The accompanying notes are an integral part of the consolidated financial statements.
 
 

6



Arconic and subsidiaries
Notes to the Consolidated Financial Statements (unaudited)
(dollars in millions, except per-share amounts)
A. Basis of Presentation
The interim Consolidated Financial Statements of Arconic Inc. and its subsidiaries (“Arconic” or the “Company”) are unaudited. These Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position, and cash flows. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The 2018 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). This Form 10-Q report should be read in conjunction with Arconic’s Annual Report on Form 10-K for the year ended December 31, 2018, which includes all disclosures required by GAAP. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see Note C).
B. Recently Adopted and Recently Issued Accounting Guidance
Adopted
In February 2016, the Financial Accounting Standards Board (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, initially measured at the present value of the future lease payments for all operating leases with a term greater than 12 months.
These changes became effective for Arconic on January 1, 2019 and have been applied using the modified retrospective approach as of the date of adoption, under which leases existing at, or entered into after, January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company also elected to separate lease components from non-lease components for all classes of assets.
The adoption of this new standard resulted in the Company recording operating lease right-of-use assets and lease liabilities of approximately $320 on the Consolidated Balance Sheet as of January 1, 2019. Also, the Company reclassified cash proceeds of $119 from Other noncurrent liabilities and deferred credits, assets of $24 from Properties, plants, and equipment, net, and deferred tax assets of $22 from Other noncurrent assets to Accumulated deficit reflecting the cumulative effect of an accounting change related to the sale-leaseback of the Texarkana, Texas cast house (see Note Q). The adoption of the standard had no impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows.
In August 2017, the FASB issued guidance that made more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amended the presentation and disclosure requirements and changed 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 became effective for Arconic on January 1, 2019. For cash flow hedges, Arconic recorded a cumulative effect adjustment of $2 related to eliminating the separate measurement of ineffectiveness by decreasing Accumulated other comprehensive loss and increasing Accumulated deficit on the accompanying Consolidated Balance Sheet. The amendments to presentation and disclosure are required prospectively. Arconic has determined that under the new accounting guidance it will be able to more broadly use cash flow hedge accounting for its variable priced inventory purchases and customer sales.
Issued
In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective for Arconic on January 1, 2020. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
In August 2018, the FASB issued guidance that impacts disclosures for defined benefit pension plans and other postretirement benefit plans. These changes become effective for Arconic's annual report for the year ending December 31, 2020, with early adoption permitted. Management has determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

7



C. Segment Information
Arconic is a global leader in lightweight metals engineering and manufacturing. Arconic’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, building and construction, industrial applications, defense, and packaging. Arconic’s segments are organized by product on a worldwide basis. In the first quarter of 2019, management transferred its aluminum extrusions operations (Aluminum Extrusions) from the Arconic Engineered Structures (AES) business unit within the Engineered Products and Solutions (EP&S) segment to the Global Rolled Products (GRP) segment, based on synergies with GRP including similar customer base, technologies, and manufacturing capabilities. Prior period financial information has been recast to conform to current year presentation.
Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Segment operating profit. Arconic’s definition of Segment operating profit is Operating income excluding Special items. Special items include Restructuring and other charges. Segment operating profit includes the impact of LIFO inventory accounting, metal price lag, intersegment profit eliminations, and derivative activities. Segment operating profit may not be comparable to similarly titled measures of other companies. Differences between segment totals and consolidated Arconic are in Corporate.
As a result of the reorganization of the business noted above, management assessed and concluded that the remaining AES business unit within the EP&S segment and the Aluminum Extrusions business unit within the GRP segment represent reporting units for purposes of evaluating goodwill for impairment. Goodwill of approximately $110 was reallocated from the AES reporting unit to the Aluminum Extrusions reporting unit and these reporting units were evaluated for impairment during the first quarter of 2019. The estimated fair value of each of these reporting units substantially exceeded their carrying value; thus, there was no goodwill impairment.
The Company will continue to evaluate its organizational structure and portfolio in conjunction with its planned separation (see Note S), which may result in further changes to its reportable segments and the need to evaluate assets for impairment in future periods.
The operating results of Arconic’s reportable segments were as follows:
 
Engineered
Products and
Solutions
 
Global Rolled
Products
 
Transportation
and Construction
Solutions
 
Total
Segment
First quarter ended March 31, 2019
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
Third-party sales
$
1,502

 
$
1,503

 
$
535

 
$
3,540

Intersegment sales

 
55

 

 
55

Total sales
$
1,502

 
$
1,558

 
$
535

 
$
3,595

Profit and loss:
 
 
 
 
 
 
 
Segment operating profit
$
253

 
$
107

 
$
87

 
$
447

Restructuring and other charges
14

 
6

 
9

 
29

Provision for depreciation and amortization
64

 
54

 
13

 
131

 
 
 
 
 
 
 
 
First quarter ended March 31, 2018
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
Third-party sales
$
1,426


$
1,481

 
$
537

 
$
3,444

Intersegment sales

 
57

 

 
57

Total sales
$
1,426

 
$
1,538

 
$
537

 
$
3,501

Profit and loss:
 
 
 
 
 
 
 
Segment operating profit
$
209

 
$
124

 
$
67

 
$
400

Restructuring and other charges
1

 
(1
)
 

 

Provision for depreciation and amortization
65

 
56

 
13

 
134

 

8



The following table reconciles Total segment operating profit to Consolidated income before income taxes:
 
First quarter ended
 
March 31,
 
2019
 
2018
Total segment operating profit
$
447

 
$
400

Unallocated amounts:
 
 
 
Restructuring and other charges
(12
)
 
(7
)
Corporate expense
(61
)
 
(60
)
Consolidated operating income
$
374

 
$
333

Interest expense
(85
)
 
(114
)
Other expense, net
(32
)
 
(20
)
Consolidated income before income taxes
$
257

 
$
199

The total assets of Arconic's reportable segment were as follows:
 
March 31, 2019
 
December 31, 2018
Engineered Products and Solutions
$
10,153

 
$
9,797

Global Rolled Products
4,768

 
4,486

Transportation and Construction Solutions
1,206

 
1,089

Total segment assets
$
16,127

 
$
15,372

Segment assets at March 31, 2019 included operating lease right-of-use assets (see Notes B and N).
The following table reconciles Total segment assets to Consolidated assets:
 
March 31, 2019
 
December 31, 2018
Total segment assets
$
16,127

 
$
15,372

Unallocated amounts:
 
 
 
Cash and cash equivalents
1,319

 
2,277

Deferred income taxes
480

 
573

Corporate fixed assets, net
308

 
305

Fair value of derivative contracts
8

 
37

Other
119

 
129

Consolidated assets
$
18,361

 
$
18,693


9



The following table disaggregates revenue by major end market served. Differences between segment totals and consolidated Arconic are in Corporate:
 
Engineered
Products and
Solutions
 
Global Rolled
Products
 
Transportation
and Construction
Solutions
 
Total
Segment
First quarter ended March 31, 2019
 
 
 
 
 
 
 
Aerospace
$
1,250

 
$
302

 
$

 
$
1,552

Transportation
87

 
649

 
255

 
991

Building and construction

 
49

 
281

 
330

Industrial and Other
165

 
503

 
(1
)
 
667

Total end-market revenue
$
1,502

 
$
1,503

 
$
535

 
$
3,540

 
 
 
 
 
 
 
 
First quarter ended March 31, 2018
 
 
 
 
 
 
 
Aerospace
$
1,141

 
$
248

 
$

 
$
1,389

Transportation
73

 
622

 
243

 
938

Building and construction

 
48

 
285

 
333

Industrial and Other
212

 
563

 
9

 
784

Total end-market revenue
$
1,426

 
$
1,481

 
$
537

 
$
3,444

D. Restructuring and Other Charges
In the first quarter of 2019, Arconic recorded Restructuring and other charges of $12 ($10 after-tax), which included $65 ($51 after-tax) for layoff costs, including the separation of approximately 800 employees (425 in Corporate, 168 in the Engineered Products and Solutions segment, 121 in the Transportation and Construction Solutions segment, and 86 in the Global Rolled Products segment); a $2 ($1 after-tax) net charge for executive severance net of the benefit of forfeited executive stock compensation; a pension settlement charge of $2 ($2 after-tax); and $1 ($1 after-tax) for other miscellaneous items; offset by a benefit of $58 ($45 after-tax) related to the elimination of life insurance benefits for U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries.
In the first quarter of 2018, Arconic recorded Restructuring and other charges of $7 ($5 after-tax), which included $5 ($4 after-tax) for pension curtailment charges; $4 ($3 after-tax) for layoff costs, including the separation of approximately 16 employees (all in Corporate); a charge of $2 ($1 after-tax) for other miscellaneous items; and a benefit of $4 ($3 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
As of March 31, 2019, approximately 247 of the 800 employees associated with 2019 restructuring programs, approximately 115 of the 125 employees associated with 2018 restructuring programs, and approximately 570 of the 660 employees associated with 2017 restructuring programs were separated. Most of the remaining separations for the 2019 restructuring programs and all of the remaining separations for the 2018 and 2017 restructuring programs, are expected to be completed by the end of 2019.
For the first quarter of 2019, cash payments of $7, $3, and $4 were made against the layoff reserves related to the 2019, 2018, and 2017 restructuring programs, respectively.

10



Activity and reserve balances for restructuring and other charges were as follows:
 
Layoff
costs
 
Other exit
costs
 
Total
Reserve balances at December 31, 2017
$
56

 
$
2

 
$
58

Cash payments
(47
)
 
(2
)
 
(49
)
Restructuring charges
111

 
13

 
124

Other(1)
(110
)
 
2

 
(108
)
Reserve balances at December 31, 2018
10

 
15

 
25

Cash payments
(14
)
 
(3
)
 
(17
)
Restructuring charges
11

 

 
11

Other(1)
57

 
(9
)
 
48

Reserve balances at March 31, 2019
$
64

 
$
3

 
$
67

(1) 
Other includes adjustments of previously recorded restructuring charges and credits, and the effects of foreign currency translation. In 2019, Other for layoff costs included reclassifications of a $58 credit for elimination of life insurance benefits for U.S. salaried and non-bargaining hourly retirees and a $2 pension settlement charge, as the impacts were reflected in Arconic's separate liabilities for Accrued pension benefits and Accrued postretirement benefits. Other for other exit costs included a reclassification of $9 in lease exit costs to right-of-use assets within Other noncurrent assets in accordance with the new lease accounting standard. In 2018, Other for layoff costs included reclassifications of $119 in pension costs and a $28 credit in postretirement benefits, as the impacts were reflected in Arconic's separate liabilities for Accrued pension benefits and Accrued postretirement benefits, and reversals of previously recorded restructuring charges of $19.
The remaining reserves are expected to be paid in cash during 2019, with the exception of approximately $3, which is expected to be paid in 2020 related to severance payments.
E. Other Expense, Net

First quarter ended
 
March 31,

2019

2018
Non-service related net periodic benefit cost
$
29

 
$
28

Interest income
(10
)
 
(6
)
Foreign currency gains, net

 
(3
)
Net loss from asset sales
2

 
3

Other, net
11

 
(2
)
 
$
32

 
$
20


11



F. Pension and Other Postretirement Benefits
The components of net periodic benefit cost were as follows:
 
First quarter ended
 
March 31,
 
2019
 
2018
Pension benefits
 
 
 
Service cost
$
7

 
$
20

Interest cost
59

 
55

Expected return on plan assets
(72
)
 
(77
)
Recognized net actuarial loss
35

 
42

Amortization of prior service cost (benefit)

 
1

Settlements
2

 

Curtailments

 
5

Net periodic benefit cost(1)
$
31

 
$
46

 
 
 
 
Other postretirement benefits
 
 
 
Service cost
$
2

 
$
2

Interest cost
7

 
7

Recognized net actuarial loss
1

 
2

Amortization of prior service cost (benefit)
(1
)
 
(2
)
Curtailments
(58
)
 

Net periodic benefit cost(1)
$
(49
)
 
$
9

 
(1) 
Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses, and Research and development expenses; curtailments were included in Restructuring and other charges; and all other cost components were recorded in Other expense, net in the Statement of Consolidated Operations.
In the first quarter of 2019, the Company communicated to plan participants that, effective May 1, 2019, it will eliminate the life insurance benefit for its U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries. As a result of this change, in the first quarter of 2019, the Company recorded a decrease to the Accrued other postretirement benefits liability of $63 which was offset by a curtailment benefit of $58 in Restructuring and other charges and $5 in Accumulated other comprehensive loss.
Additionally, in the first quarter of 2019, the Company communicated to plan participants that, effective December 31, 2019, it will eliminate certain health care subsidies for its U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries. As a result of this change, in the first quarter of 2019, the Company recorded a decrease to the Accrued other postretirement benefits liability of $12 which was offset in Accumulated other comprehensive loss.
In the first quarter of 2019, the Company applied settlement accounting to a U.S. pension plan due to lump sum payments to participants which resulted in a settlement charge of $2 that was recorded in Restructuring and other charges.
On April 1, 2018, benefit accruals for future service and compensation under all of the Company's qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargaining hourly employees ceased. As a result of this change, in the first quarter of 2018, the Company recorded a decrease to the Accrued pension benefit liability of $136 related to the reduction of future benefits ($141 offset in Accumulated other comprehensive loss) and curtailment charges of $5 in Restructuring and other charges.
During the third quarter of 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate the Alcoa Inc. pension plans between Arconic Inc. and Alcoa Corporation. The plan stipulated that Arconic make cash contributions of $150 over a period of 30 months (from November 1, 2016) to its two largest pension plans. The Company satisfied the requirements of the plan by making payments of $34, $66, and $50 in April 2019, March 2018, and April 2017, respectively.

12



G. Income Taxes
Arconic’s year-to-date tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date pre-tax ordinary income. The tax impact of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur. In addition, the tax provision is adjusted for the interim period impact of non-benefited pre-tax losses.
For the first quarter of 2019 and 2018, the estimated annual effective tax rate, before discrete items, applied to ordinary income was 25.9% and 26.5%, respectively. The rate in each period was higher than the U.S. federal statutory rate of 21% primarily due to additional estimated U.S. tax on Global Intangible Low-Taxed Income, domestic taxable income in certain U.S. states no longer subject to valuation allowance, and foreign income taxed in higher rate jurisdictions.
For the first quarter of 2019 and 2018, the tax rate including discrete items was 27.2% and 28.1%, respectively and included a discrete charge of $1 related to other items in the first quarter of 2019 and a discrete tax charge of $2 related to stock compensation in the first quarter of 2018.
The tax provisions for the first quarter of 2019 and 2018 were comprised of the following:
 
First quarter ended
 
March 31,
 
2019
 
2018
Pre-tax income at estimated annual effective income tax rate before discrete items
$
67

 
$
53

Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized
2

 
1

Other discrete items
1

 
2

Provision for income taxes
$
70

 
$
56

H. Common Stock
On February 19, 2019, the Company entered into an accelerated share repurchase (ASR) agreement with JPMorgan Chase Bank to repurchase $700 of its common stock, pursuant to the share repurchase programs previously authorized by its Board of Directors (the Board). Under the ASR agreement, Arconic received an initial delivery of 31,908,831 shares on February 21, 2019, which were immediately retired. On April 25, 2019, the ASR concluded with the Company receiving 4,525,592 additional shares on April 29, 2019, which were immediately retired. A total of 36,434,423 shares, at an average price of $19.21 per share, were repurchased under the agreement. As of April 29, 2019, there were 448,629,078 shares of common stock outstanding.
After giving effect to the ASR, $300 remains available under the prior authorizations by the Board for share repurchases through the end of 2020.

13



I. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings, after the deduction of preferred stock dividends declared, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The information used to compute basic and diluted EPS attributable to Arconic common shareholders was as follows (shares in millions):
 
First quarter ended
 
March 31,
 
2019
 
2018
Net income
$
187

 
$
143

Less: preferred stock dividends declared
(1
)
 
(1
)
Net income available to Arconic common shareholders - basic
186

 
142

Add: Interest expense related to convertible notes
4

 
3

Net income available to Arconic common shareholders - diluted
$
190

 
$
145

 
 
 
 
Average shares outstanding - basic
471

 
482

Effect of dilutive securities:
 
 
 
Stock options

 
5

Stock and performance awards
4

 
2

Convertible notes
14

 
14

Average shares outstanding - diluted
489

 
503

Common stock outstanding at March 31, 2019 and 2018 was 453 and 483, respectively. The decrease in common stock outstanding at March 31, 2019 was due to the impact of share repurchases of approximately 32 in the first quarter of 2019 (see Note H). As average shares outstanding are used in the calculation for both basic and diluted EPS, the full impact of share repurchases was not realized in the first quarter of 2019 EPS as the share repurchases occurred midway through the quarter on February 21, 2019.
The following shares were excluded from the calculation of average shares outstanding – diluted as their effect was anti-dilutive (shares in millions).
 
First quarter ended
 
March 31,
 
2019
 
2018
Stock options(1)
8

 
6

(1) 
The average exercise price per share of options was $26.67 and $30.75 for the first quarter of 2019 and 2018, respectively.

14



J. Accumulated Other Comprehensive Loss
The following table details the activity of the four components that comprise Accumulated other comprehensive loss for both Arconic’s shareholders and noncontrolling interests:
First quarter ended March 31,
2019
 
2018
Pension and other postretirement benefits (F)
 
 
 
Balance at beginning of period
$
(2,344
)
 
$
(2,230
)
Other comprehensive income:
 
 
 
Unrecognized net actuarial loss and prior service cost/benefit
72

 
137

Tax expense
(16
)
 
(31
)
Total Other comprehensive income before reclassifications, net of tax
56

 
106

Amortization of net actuarial loss and prior service cost(1)
(21
)
 
48

Tax benefit (expense)(2)
5

 
(11
)
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5)
(16
)
 
37

Total Other comprehensive income
40

 
143

Balance at end of period
$
(2,304
)
 
$
(2,087
)
Foreign currency translation
 
 
 
Balance at beginning of period
$
(583
)
 
$
(437
)
Other comprehensive income(3)
26

 
122

Balance at end of period
$
(557
)
 
$
(315
)
Available-for-sale securities
 
 
 
Balance at beginning of period
$
(3
)
 
$
(2
)
Other comprehensive income(4)
3

 

Balance at end of period
$

 
$
(2
)
Cash flow hedges
 
 
 
Balance at beginning of period
$
4

 
$
25

Adoption of accounting standards (B)
(2
)
 

Other comprehensive income (loss):
 
 
 
Net change from periodic revaluations
8

 
(6
)
Tax (expense) benefit
(1
)
 
1

Total Other comprehensive income (loss) before reclassifications, net of tax
7

 
(5
)
Net amount reclassified to earnings

 
(3
)
Tax benefit(2)

 
1

Total amount reclassified from Accumulated other comprehensive income, net of tax(5)

 
(2
)
Total Other comprehensive income (loss)
7

 
(7
)
Balance at end of period
$
9

 
$
18

 
 
 
 
Total balance at end of period
$
(2,852
)
 
$
(2,386
)
 
(1) 
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note F).
(2) 
These amounts were included in Provision for income taxes on the accompanying Statement of Consolidated Operations.
(3) 
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
(4) 
Realized gains and losses were included in Other expense, net on the accompanying Statement of Consolidated Operations.
(5) 
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.
 

15



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 up to a maximum funding of $400 for receivables sold. Arconic maintains a beneficial interest, or a right to collect cash, on the sold receivables that have not been funded (deferred purchase program). On March 30, 2012, Arconic initially sold $304 of customer receivables in exchange for $50 in cash and $254 of deferred purchase program under the arrangement. Arconic has received additional net cash funding of $300 ($3,108 in draws and $2,808 in repayments) since the program’s inception, including net cash draws totaling $0 ($150 in draws and $150 in repayments) for the first quarter of 2019.
As of March 31, 2019 and December 31, 2018, the deferred purchase program receivable was $430 and $234, respectively, which was included in Other receivables on the accompanying Consolidated Balance Sheet. The deferred purchase program receivable is reduced as collections of the underlying receivables occur; however, as this is a revolving program, the sale of new receivables will result in an increase in the deferred purchase program receivable. The gross amount of receivables sold and total cash collected under this program since its inception was $43,899 and $43,190, respectively. Arconic services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.
Cash receipts from customer payments on sold receivables (which are cash receipts on the underlying trade receivables that have been previously sold in this program) as well as cash receipts and cash disbursements from draws and repayments under the program are presented as cash receipts from sold receivables within investing activities in the Statement of Consolidated Cash Flows.
L. Inventories
 
March 31, 2019
 
December 31, 2018
Finished goods
$
699

 
$
668

Work-in-process
1,448

 
1,371

Purchased raw materials
371

 
366

Operating supplies
94

 
87

Total inventories
$
2,612

 
$
2,492

At March 31, 2019 and December 31, 2018, the portion of inventories valued on a last-in, first-out (LIFO) basis was $1,340 and $1,292, respectively. If valued on an average-cost basis, total inventories would have been $527 and $530 higher at March 31, 2019 and December 31, 2018, respectively.
M. Properties, Plants, and Equipment, Net
 
March 31, 2019
 
December 31, 2018
Land and land rights
$
137

 
$
136

Structures
2,357

 
2,364

Machinery and equipment:
9,267

 
9,234

 
11,761

 
11,734

Less: accumulated depreciation and amortization
6,811

 
6,769

 
4,950

 
4,965

Construction work-in-progress
777

 
739

 
$
5,727

 
$
5,704


16



N. Leases
The Company determines whether or not a contract contains a lease at inception. The Company leases land and buildings, plant equipment, vehicles, and computer equipment which have been classified as operating leases. Certain real estate leases include one or more options to renew; the exercise of lease renewal options is at the Company’s discretion. The Company includes renewal option periods in the lease term when it is determined that the options are reasonably certain to be exercised. Certain of Arconic's real estate lease agreements include rental payments that either have fixed contractual increases over time or adjust periodically for inflation. Certain of the Company's lease agreements include variable lease payments. The variable portion of payments is not included in the initial measurement of the right-of-use asset or lease liability due to the uncertainty of the payment amount and is recorded as lease cost in the period incurred. The Company also rents or subleases certain real estate to third parties, which is not material to the consolidated financial statements.
Operating lease right-of-use assets and lease liabilities with an initial term greater than 12 months are recorded on the balance sheet at the present value of the future minimum lease payments over the lease term at the lease commencement date and are recognized as lease expense on a straight-line basis over the lease term. The Company uses an incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, as most of its leases do not provide an implicit rate. The operating lease right-of-use assets also include any lease prepayments made and were reduced by lease incentives and accrued exit costs as of the adoption date.
Operating lease cost, which includes short-term leases and variable lease payments and approximates cash paid, was $37 and $38 in the first quarter ended March 31, 2019 and 2018, respectively.
Operating lease right-of-use assets and lease liabilities in the Consolidated Balance Sheet were as follows:
 
March 31, 2019
Right-of-use assets classified in Other noncurrent assets
$
302

 
 
Current portion of lease liabilities classified in Other current liabilities
94

Long-term portion of lease liabilities classified in Other noncurrent liabilities and deferred credits
215

Total lease liabilities
$
309

Future minimum contractual operating lease obligations were as follows:
 
March 31, 2019
 
December 31, 2018
2019
$
75

 
$
94

2020
79

 
74

2021
59

 
54

2022
43

 
40

2023
31

 
30

Thereafter
91

 
87

Total lease payments
$
378

 
$
379

Less: Imputed interest
(69
)
 
 
Present value of lease liabilities
$
309

 

Right-of-use assets obtained in exchange for operating lease obligations in the first quarter ended March 31, 2019 was $6. The weighted-average remaining lease term and weighted-average discount rate at March 31, 2019 was 6 years and 6.2%, respectively.

17



O. Debt
 
March 31, 2019
 
December 31, 2018
1.63% Convertible Notes, due 2019
403

 
403

6.150% Notes, due 2020
1,000

 
1,000

5.40% Notes due 2021
1,250

 
1,250

5.87% Notes, due 2022
627

 
627

5.125% Notes, due 2024
1,250

 
1,250

5.90% Notes, due 2027
625

 
625

6.75% Bonds, due 2028
300

 
300

5.95% Notes, due 2037
625

 
625

Iowa Finance Authority Loan, due 2042
250

 
250

Other(1)
(26
)
 
(29
)
 
6,304

 
6,301

Less: amount due within one year
405

 
405

Total long-term debt
$
5,899

 
$
5,896

 
(1) 
Includes various financing arrangements related to subsidiaries, unamortized debt discounts related to outstanding notes and bonds listed in the table above, an equity option related to the convertible notes due in 2019, and unamortized debt issuance costs.
Credit Facilities. Arconic maintains a Five-Year Revolving Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and issuers named therein that matures on June 29, 2023 and provides for a senior unsecured revolving credit facility of $3,000. There were no amounts outstanding at March 31, 2019 or December 31, 2018, and no amounts were borrowed during 2019 or 2018 under the Credit Agreement. In addition to the Credit Agreement, Arconic has a number of other credit agreements that provide a combined borrowing capacity of $715 as of March 31, 2019, of which $465 is due to expire in 2019 and $250 is due to expire in 2020. 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 three months ended March 31, 2019, Arconic borrowed and repaid $150 and $150, respectively, under these other credit facilities. The weighted-average interest rate and weighted-average days outstanding during the first quarter of 2019 were 3.9% and 14 days, respectively.
P. Fair Value of Financial Instruments
The carrying values of Cash and cash equivalents, Restricted cash, Derivatives, Noncurrent receivables, and Short-term debt included in the Consolidated Balance Sheet approximate their fair values. The Company holds exchange-traded fixed income securities which are considered available-for-sale securities that are carried at fair value which is based on quoted market prices which are classified in Level 1 of the fair value hierarchy. The fair value of Long-term debt, less amount due within one year 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.
 
March 31, 2019
 
December 31, 2018
 
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
Long-term debt, less amount due within one year
$
5,899

 
$
6,125

 
$
5,896

 
$
5,873

Restricted cash was $7 and $6 at March 31, 2019 and December 31, 2018, respectively.

18



Q. Acquisitions and Divestitures
2018 Divestitures. On April 2, 2018, Arconic completed the sale of its Latin America extrusions business to a subsidiary of Hydro Extruded Solutions AS for $2 following the settlement of post-closing and other adjustments in December 2018. As a result of entering into the agreement to sell the Latin America extrusions business in December 2017, a charge of $41 was recognized in the fourth quarter of 2017 in Restructuring and other charges in the Statement of Consolidated Operations related to the non-cash impairment of the net book value of the business and an additional charge of $2 related to a post-closing adjustment was recognized in the fourth quarter of 2018. The operating results and assets and liabilities of the business were included in the Transportation and Construction Solutions segment. This business generated sales of $25 in the first quarter of 2018 and had 612 employees at the time of divestiture.
On July 31, 2018, the Company announced that it had initiated a sale process of its Building and Construction Systems (BCS) business, as part of the Company’s ongoing strategy and portfolio review. In the first quarter of 2019, the Company decided to no longer pursue the sale of BCS and the business continues to be reported in the Transportation and Construction Solutions segment.
On October 31, 2018, the Company sold its Texarkana, Texas rolling mill and cast house, which had a combined net book value of $63, to Ta Chen International, Inc. for $302 in cash, including the settlement of post-closing adjustments, plus additional contingent consideration of up to $50. The contingent consideration relates to the achievement of various milestones within 36 months of the transaction closing date associated with operationalizing the rolling mill equipment. The operating results and assets and liabilities of the business were included in the Global Rolled Products segment. The Texarkana rolling mill facility had previously been idle since late 2009. In early 2016, the Company restarted the Texarkana cast house to meet demand for aluminum slab. As part of the agreement, the Company will continue to produce aluminum slab at the facility for a period of 18 months through a lease back of the cast house building and equipment, after which time, Ta Chen will perform toll processing of metal for the Company for a period of six months. The Company will supply Ta Chen with cold-rolled aluminum coil during this 24-month period.
The sale of the rolling mill and cast house has been accounted for separately. The gain on the sale of the rolling mill of $154, including the fair value of contingent consideration of $5, was recorded in Restructuring and other charges in the Statement of Consolidated Operations in the fourth quarter of 2018. The Company will reevaluate its estimate of the remaining $45 of contingent consideration to which it will be entitled at the end of each reporting period and recognize any changes thereto in the Statement of Consolidated Operations.
The Company has continuing involvement related to the lease back of the cast house. As a result, in 2018, the Company continued to treat the cast house building and equipment that it sold to Ta Chen as owned and therefore reflected the following balances in its Consolidated Balance Sheet at December 31, 2018: assets of $24 in Properties, plants, and equipment, net; cash proceeds of $119 in Other noncurrent liabilities and deferred credits (which included a deferred gain of $95); and a deferred tax asset of $22 in Other noncurrent assets. In the first quarter of 2019, in conjunction with the adoption of the new lease accounting standard (see Note B), the Company's continuing involvement no longer requires deferral of the recognition of the cast house sale. As such, the cash proceeds, fixed assets, and deferred tax asset related to the cast house were reclassified to Accumulated deficit as a cumulative effect of an accounting change.
R. Contingencies and Commitments
Contingencies
Environmental Matters
Arconic participates in environmental assessments and cleanups at more than 100 locations. These include owned or operating facilities and adjoining properties, previously owned or operating facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, and technological changes, among others.
Arconic’s remediation reserve balance was $261 at March 31, 2019 and $266 at December 31, 2018 (of which $79 and $81, respectively, was classified as a current liability), and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. Payments related to remediation expenses applied against the reserve were $3 in the first quarter of 2019 and includes expenditures currently mandated, as well as those not required by any regulatory authority or third party.

19



Included in annual operating expenses are the recurring costs of managing hazardous substances and environmental programs. These costs are estimated to be approximately 1% or less of cost of goods sold.
The following discussion provides details regarding the current status of the most significant remediation reserves related to a current Arconic site.
Massena, NY—Arconic has an ongoing remediation project related to the Grasse River, which is adjacent to Arconic’s Massena plant site. Many years ago, it was determined that sediments and fish in the river contain varying levels of polychlorinated biphenyls (PCBs). The project, which was selected by the U.S. Environmental Protection Agency (EPA) in a Record of Decision issued in April 2013, is aimed at capping PCB contaminated sediments with concentration in excess of one part per million in the main channel of the river and dredging PCB contaminated sediments in the near-shore areas where total PCBs exceed one part per million. At March 31, 2019 and December 31, 2018, the reserve balance associated with this matter was $195 and $198, respectively. In the first quarter of 2019, Arconic received approval from the EPA of its final remedial design which is now under construction and is expected to be completed in 2022. As the project proceeds, the liability may be updated due to factors such as changes in remedial requirements, site restoration costs, and ongoing operation and maintenance costs, among others.
Tax
Pursuant to the Tax Matters Agreement entered into between Arconic and Alcoa Corporation in connection with the separation transaction with Alcoa Corporation, Arconic shares responsibility with Alcoa Corporation, and Alcoa Corporation has agreed to partially indemnify Arconic for 49% of the ultimate liability, with respect to the following matter.
As previously reported, in July 2013, following a Spanish corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received mainly disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by the Company. In August 2013, the Company filed an appeal of this assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. Arconic filed another appeal in Spain’s National Court in March 2015 which was denied in July 2018. The National Court’s decision requires the assessment for the 2006 through 2009 tax years to be reissued to take into account the outcome of the 2003 to 2005 audit which was closed in 2017. The Company estimates the revised assessment to be $171 (€152), including interest.
In March 2019, the Supreme Court of Spain accepted the Company's petition to review the National Court’s decision. The Company will proceed with filing a formal appeal of the assessment with the Supreme Court of Spain, who will review the assessment on its merits and render a final decision. In the event the Company receives an unfavorable ruling from the Supreme Court of Spain, a portion of the assessment may be offset with existing net operating losses and tax credits available to the Spanish consolidated tax group, which would be shared between the Company and Alcoa Corporation as provided for in the Tax Matters Agreement.
Arconic has an income tax reserve, including interest, of $59 (€52) and an indemnification receivable of $28 (€25), representing Alcoa Corporation’s 49% share of the liability. The reserve and indemnification receivable were established in the third quarter of 2018.
Additionally, while the tax years 2010 through 2013 are closed to audit, it is possible that the Company may receive assessments for tax years subsequent to 2013. Any potential assessment for an individual tax year is not expected to be material to the Company’s consolidated operations.
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 sought and received core participant status in the Public Inquiry. The Company will no longer sell the PE product for architectural use on buildings.
Howard v. Arconic Inc. et al. As previously reported, a purported class action complaint related to the Grenfell Tower fire was filed on August 11, 2017 in the United States District Court for the Western District of Pennsylvania against Arconic Inc. and Klaus Kleinfeld. A related purported class action complaint was filed in the United States District Court for the Western District of Pennsylvania on August 25, 2017, under the caption Sullivan v. Arconic Inc. et al., against Arconic Inc., two former Arconic

20



executives, several current and former Arconic directors, and banks that acted as underwriters for Arconic’s September 18, 2014 preferred stock offering (the “Preferred Offering”). The plaintiff in Sullivan had previously filed a purported class action against the same defendants on July 18, 2017 in the Southern District of New York and, on August 25, 2017, voluntarily dismissed that action without prejudice. On February 7, 2018, on motion from certain putative class members, the court consolidated Howard and Sullivan, closed Sullivan, and appointed lead plaintiffs in the consolidated case. On April 9, 2018, the lead plaintiffs in the consolidated purported class action filed a consolidated amended complaint. The consolidated amended complaint alleges that the registration statement for the Preferred Offering contained false and misleading statements and omitted to state material information, including by allegedly failing to disclose material uncertainties and trends resulting from sales of Reynobond PE for unsafe uses and by allegedly expressing a belief that appropriate risk management and compliance programs had been adopted while concealing the risks posed by Reynobond PE sales. The consolidated amended complaint also alleges that between November 4, 2013 and June 23, 2017 Arconic and Kleinfeld made false and misleading statements and failed to disclose material information about the Company’s commitment to safety, business and financial prospects, and the risks of the Reynobond PE product, including in Arconic’s Form 10-Ks for the fiscal years ended December 31, 2013, 2014, 2015 and 2016, its Form 10-Qs and quarterly financial press releases from the fourth quarter of 2013 through the first quarter of 2017, its 2013, 2014, 2015 and 2016 Annual Reports, and its 2016 Annual Highlights Report. The consolidated amended complaint seeks, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On June 8, 2018, all defendants moved to dismiss the consolidated amended complaint for failure to state a claim. Briefing on that motion is now closed and the parties await a ruling.
Raul v. Albaugh, et al. As previously reported, on June 22, 2018, a derivative complaint was filed nominally on behalf of Arconic by a purported Arconic shareholder against all current members of Arconic’s Board of Directors, Klaus Kleinfeld and Ken Giacobbe, naming Arconic as a nominal defendant, in the United States District Court for the District of Delaware. The complaint raises similar allegations as the consolidated amended complaint in Howard, as well as allegations that the defendants improperly authorized the sale of Reynobond PE for unsafe uses, and asserts claims under Section 14(a) of the Securities Exchange Act of 1934 and Delaware state law. On July 13, 2018, the parties filed a stipulation agreeing to stay this case until the final resolution of the Howard case, the Grenfell Tower public inquiry in London, and the investigation by the London Metropolitan Police Service and on June 23, 2018, the Court approved the stay.
While the Company believes that these cases are without merit and intends to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters. Given the preliminary nature of these matters and the uncertainty of litigation, the Company cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome. The Board of Directors has also received letters, purportedly sent on behalf of shareholders, reciting allegations similar to those made in the federal court lawsuits and demanding that the Board authorize the Company to initiate litigation against members of management, the Board and others. The Board of Directors has appointed a Special Litigation Committee of the Board to review and make recommendations to the Board regarding the appropriate course of action with respect to these shareholder demand letters. The Special Litigation Committee and the Board are continuing to consider the appropriate responses to the shareholder demand letters in view of developments in proceedings concerning the Grenfell Tower fire.
Other
In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Arconic, including those pertaining to environmental, product liability, safety and health, employment, tax and antitrust matters. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot currently be determined because of the considerable uncertainties that exist. Therefore, it is possible that the Company’s liquidity or results of operations in a period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the results of operations, financial position or cash flows of the Company.
Commitments
Guarantees
At March 31, 2019, Arconic had outstanding bank guarantees related to tax matters, outstanding debt, workers’ compensation, environmental obligations, energy contracts, and customs duties, among others. The total amount committed under these guarantees, which expire at various dates between 2019 and 2026, was $29 at March 31, 2019.
Pursuant to the Separation and Distribution Agreement between Arconic and Alcoa Corporation, Arconic was required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of $7 and $6 at March 31, 2019 and December 31, 2018, respectively, and were included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. Arconic was required to provide a guarantee up to an estimated present value amount of

21



approximately $1,143 and $1,087 at March 31, 2019 and December 31, 2018, respectively, related to a long-term supply agreement for energy for an Alcoa Corporation facility in the event of an Alcoa Corporation payment default. This guarantee expires in 2047. For this guarantee, subject to its provisions, Arconic is secondarily liable in the event of a payment default by Alcoa Corporation. Arconic currently views the risk of an Alcoa Corporation payment default on its obligations under the contract to be remote.
Letters of Credit
Arconic has outstanding letters of credit, primarily related to workers’ compensation, environmental obligations, and leasing obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2019, was $136 at March 31, 2019.
Pursuant to the Separation and Distribution Agreement, Arconic was required to retain letters of credit of $54 that had previously been provided related to both Arconic and Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016. Alcoa Corporation workers’ compensation claims and letter of credit fees paid by Arconic are being proportionally billed to and are being fully reimbursed by Alcoa Corporation.
Surety Bonds
Arconic has outstanding surety bonds, primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, and customs duties. The total amount committed under these surety bonds, which expire at various dates, primarily in 2019, was $50 at March 31, 2019.
Pursuant to the Separation and Distribution Agreement, Arconic was required to provide surety bonds related to Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016 and, as a result, Arconic has $25 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconic are being proportionately billed to and are being fully reimbursed by Alcoa Corporation.
S. Proposed Separation Transaction
On February 8, 2019, Arconic announced, as part of its strategy and portfolio review, a separation of its portfolio into two independent, publicly-traded companies. One company will comprise the Engineered Products and Forgings businesses and the other company will comprise the Global Rolled Products businesses. The Company will also consider the sale of businesses that do not best fit into Engineered Products and Forgings and Global Rolled Products. The businesses of the current Transportation and Construction Solutions segment will be divided, with BCS to become part of Global Rolled Products and the Arconic Wheel and Transportation Products business to become part of Engineered Products and Forgings. Arconic is targeting to complete the separation in the second quarter of 2020. The separation transaction is subject to a number of conditions, including, but not limited to, final approval by Arconic’s Board of Directors, receipt of a favorable opinion of legal counsel with respect to the tax-free nature of the transaction for U.S. federal income tax purposes, completion of financing, and the effectiveness of a Form 10 registration statement to be filed with the U.S. Securities and Exchange Commission. Arconic may, at any time and for any reason until the proposed transaction is complete, abandon the separation plan or modify or change its terms. In the first quarter of 2019, Arconic recognized $3 pre-tax in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations for costs related to the proposed separation transaction.
T. Subsequent Events
Management evaluated all activity of Arconic and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements, except as noted below:
See Note F for details of the final cash contribution the Company made to its pension plan associated with the separation of Alcoa Inc.
See Note H for details of the completed ASR.
On April 30, 2019, Arconic reached an agreement to sell a small manufacturing facility.  The sale is expected to close in the second quarter of 2019 and the Company expects to record a restructuring-related charge of approximately $10 to $15 pre-tax.  The charge primarily relates to the non-cash impairment of the net book value of the business.


22



Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Arconic Inc.

Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Arconic Inc. and its subsidiaries (the “Company”) as of March 31, 2019, and the related statements of consolidated operations, consolidated comprehensive income, changes in consolidated equity, and consolidated cash flows for the three-month periods ended March 31, 2019 and 2018, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2018, and the related statements of consolidated operations, consolidated comprehensive income (loss), changes in consolidated equity, and consolidated cash flows for the year then ended (not presented herein), and in our report dated February 21, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
May 1, 2019

23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in millions, except per share amounts; shipments in thousands of metric tons [kmt])
Overview
Our Business
Arconic (“Arconic” or the “Company”) is a global leader in lightweight metals engineering and manufacturing. Arconic’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, building and construction, industrial applications, defense, and packaging.
Results of Operations
Earnings Summary:
Sales. Sales were $3,541 in the first quarter of 2019 compared to $3,445 in the first quarter of 2018. The increase of $96, or 3%, was primarily due to volume growth across all segments, primarily in the aerospace, commercial transportation, automotive, packaging, and building and construction end markets; favorable product pricing and mix in the Global Rolled Products segment; and favorable aerospace product pricing in the Engineered Products and Solutions segment when fulfilling volume above contractual share, renewing contracts, and selling non-contractual spot business; partially offset by lower sales of $78 related to the completed ramp down of Arconic's North American packaging operations (in December 2018) and the divestitures of the extrusions business in Latin America (divested in April 2018) and the forgings business in Eger, Hungary (divested in December 2018); lower aluminum prices; and unfavorable foreign currency movements.
Cost of goods sold (COGS). COGS as a percentage of Sales was 79.6% in the first quarter of 2019 compared to 80.3% in the first quarter of 2018. The decrease was primarily due to favorable product pricing, net cost savings, and lower aluminum prices, partially offset by unfavorable product mix.
Selling, general administrative, and other expenses (SG&A). SG&A expenses were $178 in the first quarter of 2019 compared to $172 in the first quarter of 2018. The increase of $6, or 3%, was primarily due to higher annual incentive compensation accruals and executive compensation costs, strategy and portfolio review costs of $6, and costs associated with the planned separation of Arconic of $3, partially offset by lower costs driven by overhead cost reductions and a decrease of $3 in legal and other advisory costs related to Grenfell Tower.
Restructuring and other charges. Restructuring and other charges was $12 in the first quarter of 2019 compared to $7 in the first quarter of 2018. The increase of $5, or 71%, was primarily due to an increase in layoff charges of $61, partially offset by a credit of $58 related to the elimination of life insurance benefits for U.S. salaried and non-bargaining hourly retirees of the Company and its subsidiaries. See Note D to the Consolidated Financial Statements.
Interest expense. Interest expense was $85 in the first quarter of 2019 compared to $114 in the first quarter of 2018. The decrease of $29, or 25%, was primarily due to a charge of $19 related to the premium paid on the early redemption of the Company’s outstanding 5.72% Senior Notes due 2019 incurred during 2018 that did not recur during 2019 and lower debt outstanding.
Other expense, net. Other expense, net was $32 in the first quarter of 2019 compared to $20 in the first quarter of 2018. The increase of $12, or 60%, was primarily due to an increase in deferred compensation arrangements related to investment performance.
Provision for income taxes. The tax rate, including discrete items, was 27.2% and 28.1% for the first quarter of 2019 and 2018, respectively. Discrete charges of $1 and $2 were recorded in the first quarter of 2019 and 2018, respectively. The estimated annual effective tax rate, before discrete items, applied to ordinary income was 25.9% and 26.5% in the first quarter ended March 31, 2019 and 2018, respectively.
Net income. Net income was $187 in the first quarter of 2019 or $0.39 per diluted share, compared to $143 in the first quarter of 2018, or $0.29 per diluted share. The increase of $44, or 31%, was primarily due to volume growth, favorable product pricing, net cost savings, and lower Interest expense, partially offset by unfavorable product mix, higher Provision for income taxes, and higher Other expense, net.
Segment Information
In the first quarter of 2019, the Company transferred its aluminum extrusions operations (Aluminum Extrusions) from the Arconic Engineered Structures (AES) business unit within the Engineered Products and Solutions (EP&S) segment to the Global Rolled Products (GRP) segment, based on synergies with GRP including similar customer base, technologies, and manufacturing capabilities. Prior period financial information has been recast to conform to current year presentation. Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary

24



measure of performance is Segment operating profit. Arconic’s definition of Segment operating profit is Operating income excluding Special items. Special items include Restructuring and other charges. Segment operating profit includes the impact of LIFO inventory accounting, metal price lag, intersegment profit eliminations, and derivative activities. Segment operating profit may not be comparable to similarly titled measures of other companies. Differences between segment totals and consolidated Arconic are in Corporate.
Arconic produces aerospace engine parts and components, aerospace fastening systems, and aluminum sheet and plate products for Boeing 737 MAX airplanes. The Company does not expect a significant impact to revenues or segment operating profit in the second quarter based on the temporary reduction in the production rate of the 737 MAX airplanes that was announced by Boeing in April. A prolonged reduction in the production rate could have a negative impact on revenues and segment operating profit in the second half of 2019 in the EP&S and GRP segments.
Engineered Products and Solutions
 
First quarter ended
 
March 31,
 
2019
 
2018
Third-party sales
$
1,502

 
$
1,426

Segment operating profit
253

 
209

Third-party sales for the Engineered Products and Solutions segment increased $76, or 5%, in the first quarter of 2019 compared to the first quarter of 2018, primarily as a result of higher volumes and favorable product pricing in the aerospace end market, partially offset by unfavorable foreign currency movements and the absence of sales of $10 from the forgings business in Eger, Hungary (divested in December 2018).
Segment operating profit for the Engineered Products and Solutions segment increased $44, or 21%, in the first quarter of 2019 compared to the first quarter of 2018 due to higher aerospace volumes and pricing, as well as net cost savings, partially offset by the unfavorable impact of new product introductions in aerospace engines.
On December 31, 2018, as part of the Company’s ongoing strategy and portfolio review, Arconic completed the sale of its Eger, Hungary forgings business to Angstrom Automotive Group LLC.
In 2019, demand in the commercial aerospace end market is expected to remain strong, driven by the ramp-up of new aerospace engine platforms. Demand in the defense end market is expected to grow due to the continuing ramp-up of certain aerospace programs, while declines in the industrial gas turbine market are expected to continue, albeit at lower levels than in 2018. Net cost savings and favorable pricing are expected.
Global Rolled Products
 
First quarter ended
 
March 31,
 
2019
 
2018
Third-party sales
$
1,503

 
$
1,481

Intersegment sales
55

 
57

Total sales
$
1,558

 
$
1,538

Segment operating profit
107

 
124

Third-party aluminum shipments (kmt)
331

 
322

 
Third-party sales for the Global Rolled Products segment increased $22, or 1%, in the first quarter of 2019 compared to the first quarter of 2018, primarily as a result of higher volumes in the packaging, commercial transportation, and aerospace end markets and favorable product mix and pricing, partially offset by lower aluminum prices, the absence of sales of $43 from the completed ramp down of Arconic's North American packaging operations (completed in December 2018), and unfavorable foreign currency movements.
Segment operating profit for the Global Rolled Products segment decreased $17, or 14%, in the first quarter of 2019 compared to the first quarter of 2018, principally driven by the Tennessee plant transition to enable industrial production, operational headwinds in the Aluminum Extrusions business, and unfavorable product mix, partially offset by favorable pricing adjustments on industrial and commercial transportation products and higher volumes as noted previously.

25



In 2019, demand in the North America commercial transportation, brazing, and industrial end markets is expected to grow as a result of the International Trade Commission initiated common alloy trade case. Demand in the automotive end market is expected to be flat. Demand from the commercial airframe end market is expected to be up as the ramp-up of new programs is partially offset by lower build rates for aluminum intensive wide-body programs. Favorable pricing on industrial and commercial transportation as well as net productivity improvements are anticipated to continue.
Transportation and Construction Solutions
 
First quarter ended
 
March 31,
 
2019
 
2018
Third-party sales
$
535

 
$
537

Segment operating profit
87

 
67

Third-party sales for the Transportation and Construction Solutions segment decreased $2 in the first quarter of 2019 compared to the first quarter of 2018 as higher volumes in the commercial transportation and building and construction end markets were more than offset by the absence of sales of $25 from the extrusions business in Latin America (divested in April 2018) and unfavorable foreign currency movements.
Segment operating profit for the Transportation and Construction Solutions segment increased $20, or 30%, in the first quarter of 2019 compared to the first quarter of 2018, principally as a result of higher volumes as noted previously, and net cost savings.
On April 2, 2018, Arconic completed the sale of its Latin America extrusions business to a subsidiary of Hydro Extruded Solutions AS.
On July 31, 2018, the Company announced that it had initiated a sale process of its Building and Construction Systems (BCS) business, as part of the Company’s ongoing strategy and portfolio review. In the first quarter of 2019, the Company decided to no longer pursue the sale of BCS and the business continues to be reported in the Transportation and Construction Solutions segment.
In 2019, we expect continued growth in the North American and European commercial transportation and building and construction markets and continued demand for innovative products. Net productivity improvements are anticipated to continue.
Reconciliation of Total segment operating profit to Consolidated income before income taxes
 
First quarter ended
 
March 31,
 
2019
 
2018
Total segment operating profit
$
447


$
400

Unallocated amounts:



Restructuring and other charges
(12
)

(7
)
Corporate expense
(61
)

(60
)
Consolidated operating income
$
374

 
$
333

Interest expense
(85
)

(114
)
Other expense, net
(32
)

(20
)
Consolidated income before income taxes
$
257

 
$
199

See Restructuring and other charges, Interest expense, and Other expense, net discussions above under Results of Operations for reference.
Corporate expense increased $1, or 2%, in the first quarter of 2019 compared to the first quarter of 2018, primarily as a result of strategy and portfolio review costs of $6 and costs associated with the planned separation of Arconic of $3, partially offset by lower costs due to overhead cost reductions and a decrease of $3 in legal and other advisory costs related to Grenfell Tower.
Environmental Matters
See the Environmental Matters section of Note R to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.

26



Subsequent Events
See Note T to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
Liquidity and Capital Resources
Operating Activities
Cash used for operations was $258 in the first quarter of 2019 compared to $436 in the first quarter of 2018. The decrease in cash used of $178, or 41%, was primarily due to lower pension contributions of $122 and lower working capital of $74. The components of the change in working capital included favorable changes of $51 in accounts payable, $49 in accrued expenses, $39 in taxes, including income taxes, and $23 in inventories, partially offset by an unfavorable change of $86 in receivables.
Financing Activities
Cash used for financing activities was $741 in the first quarter of 2019 compared to $542 in the first quarter of 2018. The increase in cash used of $199 was primarily related to the repurchase of $700 of common stock (see Note H to the Consolidated Financial Statements), partially offset by a decrease in payments on debt of $500 due to the redemption in the first quarter of 2018 of the then outstanding 5.72% Notes due in 2019 with aggregate principal amount of $500 and premiums on early redemption of $17.
Arconic maintains a Five-Year Revolving Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and issuers named therein. In addition to the Credit Agreement, Arconic has a number of other credit agreements. See Note O to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q for reference.
Arconic’s costs of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short- and long-term debt ratings assigned to Arconic by the major credit rating agencies.
Arconic’s credit ratings from the three major credit rating agencies are as follows: 
 
Long-Term Debt
Short-Term Debt
Outlook
Date of Last Update
Standard and Poor’s
BBB-
A-3
Negative
April 26, 2019
Moody’s
Ba2
Speculative Grade Liquidity-2
Stable
October 8, 2018
Fitch
BB+
B
Positive
September 27, 2018
Investing Activities
Cash provided from investing activities was $42 in the first quarter of 2019 compared to $29 in the first quarter of 2018. The increase in cash provided of $13 was primarily due to the sale of fixed-income securities of $47 and an increase in cash receipts from sold receivables of $24, partially offset by higher capital expenditures of $51.
Recently Adopted and Recently Issued Accounting Guidance
See Note B to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
Forward-Looking Statements
This report contains statements that relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect Arconic’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts and expectations relating to the growth of the aerospace, automotive, commercial transportation and other end markets; statements and guidance regarding future financial results or operating performance; statements regarding future strategic actions, including share repurchases, which may be subject to market conditions, legal requirements and other considerations; and statements about Arconic’s strategies, outlook, business and financial prospects. These statements reflect beliefs and assumptions that are based on Arconic’s perception of historical trends, current conditions and expected future developments, as well as other factors Arconic believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict, which could cause actual results to differ materially from those indicated by these statements. Such risks and uncertainties include, but are not limited to: (a) uncertainties regarding the planned separation, including whether it will be completed pursuant to the targeted timing, asset

27



perimeters, and other anticipated terms, if at all; (b) the impact of the separation on the businesses of Arconic; (c) the risk that the businesses will not be separated successfully or such separation may be more difficult, time-consuming or costly than expected, which could result in additional demands on Arconic’s resources, systems, procedures and controls, disruption of its ongoing business, and diversion of management’s attention from other business concerns; (d) deterioration in global economic and financial market conditions generally; (e) unfavorable changes in the markets served by Arconic; (f) the inability to achieve the level of revenue growth, cash generation, cost savings, improvement in profitability and margins, fiscal discipline, or strengthening of competitiveness and operations anticipated or targeted; (g) competition from new product offerings, disruptive technologies or other developments; (h) political, economic, and regulatory risks relating to Arconic’s global operations, including compliance with U.S. and foreign trade and tax laws, sanctions, embargoes and other regulations; (i) manufacturing difficulties or other issues that impact product performance, quality or safety; (j) Arconic’s inability to realize expected benefits, in each case as planned and by targeted completion dates, from acquisitions, divestitures, facility closures, curtailments, expansions, or joint ventures; (k) the impact of potential cyber attacks and information technology or data security breaches; (l) the loss of significant customers or adverse changes in customers’ business or financial conditions; (m) adverse changes in discount rates or investment returns on pension assets; (n) the impact of changes in aluminum prices and foreign currency exchange rates on costs and results; (o) the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation, which can expose Arconic to substantial costs and liabilities; and (p) the other risk factors summarized in Arconic’s Form 10-K for the year ended December 31, 2018 and other reports filed with the U.S. Securities and Exchange Commission. Market projections are subject to the risks discussed above and other risks in the market. Arconic disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not material.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures

Arconic’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the first quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
See the Tax section of Note R to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents information with respect to Arconic common stock purchases made by the Company during the quarter ended March 31, 2019.
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - January 31, 2019
 

 

 

 
$
1,000,000,000

February 1 - February 28, 2019(2)
 
31,908,831

 
$
17.55

 
31,908,831

 
$
300,000,000

March 1 - March 31, 2019
 

 

 

 
$
300,000,000

Total for quarter ended March 31, 2019
 
31,908,831

 

 
31,908,831

 
 
(1) 
On February 5, 2018, the Company announced that its Board of Directors had authorized the repurchase of up to $500

28



million of the Company's outstanding common stock. There was no stated expiration for the share repurchase program, and no shares were repurchased during 2018. On February 8, 2019, the Company announced that its Board of Directors had authorized the repurchase of an additional $500 million of the Company's outstanding common stock, effective through the end of 2020.
(2) 
On February 19, 2019, the Company entered into an accelerated share repurchase (ASR) agreement with JPMorgan Chase Bank (“JPM”) to repurchase $700 million of its common stock, and received an initial delivery of 31,908,831 shares. The term of the ASR concluded on April 25, 2019, with JPM delivering 4,525,592 additional shares to Arconic on April 29, 2019. A total of 36,434,423 shares, at an average price of $19.21 per share, were repurchased under the agreement.
Item 6. Exhibits. 
Letter Agreement, by and between Arconic Inc. and John C. Plant, dated as of February 6, 2019.
Letter Agreement, by and between Arconic Inc. and Elmer L. Doty, dated as of February 6, 2019.
Letter Agreement, by and between Arconic Inc. and Neil E. Marchuk, dated as of February 13, 2019.
Special Retention Award Agreement - Paul Myron, effective February 28, 2019.
Separation Agreement between Arconic Inc. and Charles P. Blankenship, dated as of March 14, 2019, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 18, 2019.
Restricted Share Unit Award Agreement - Executive Vice President, Human Resources (Neil E. Marchuk) Annual Equity Award, effective March 15, 2019.
Restricted Share Unit Award Agreement - Executive Vice President, Human Resources (Neil E. Marchuk) Sign-on Equity Award, effective March 15, 2019.

Letter regarding unaudited interim financial information.
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
Arconic Inc.
 
 
May 1, 2019
/s/ Ken Giacobbe
Date
Ken Giacobbe
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
May 1, 2019
/s/ Paul Myron
Date
Paul Myron
 
Vice President and Controller
 
(Principal Accounting Officer)


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EX-10.A 2 ex10a_1q19.htm EXHIBIT 10.A Exhibit


Exhibit 10(a)


  ex10a_1q19.jpg 
Arconic
390 Park Avenue
New York, NY 10022
 

 
February 13, 2019
 
John C. Plant
c/o Arconic Inc.
390 Park Avenue
New York, NY 10022
 
Dear John:
 
You presently serve as Chairman of the Board of Directors (the “Board”) of Arconic Inc. (“Arconic” or the “Company”). This letter memorializes our recent discussions concerning your assumption of the additional position of Chief Executive Officer of the Company, effective February 6, 2019 (the “Effective Date”).

Position:

It is expected that you will serve as Chief Executive Officer of the Company from the Effective Date through and including the first anniversary thereof (such period, the “Term,” provided that the Term shall automatically conclude upon termination of your employment as Chief Executive Officer for any reason prior to such first anniversary). During the Term, you will report directly and solely to the Board. During the Term, you will devote substantially all of your working time and attention to the business and affairs of the Company (excluding any vacation and sick time to which you are entitled) and you will comply with the Company’s policies and rules, as in effect from time to time. Your principal place of employment will be at the Company’s offices in Pittsburgh, Pennsylvania, subject to travel to Company headquarters and other Company offices as necessary to perform your duties hereunder, as well as to reasonable travel requirements.
 
Base Salary:

During the Term, you will receive a base salary at an annual rate of $1,600,000, payable in accordance with the Company’s normal payroll practices, and subject to all applicable taxes and withholdings.
 
Incentive Compensation:

Your incentive compensation opportunity for the Term will consist of a one-time restricted stock unit award on the terms set forth below (the “RSU Award”) and a cash-denominated performance incentive on the terms set forth below (the “Outperformance Bonus”). You will not be eligible for annual bonuses during the Term or for any equity-based compensation other than the RSU Award.
 

    



RSU Award:
Grant of RSU Award. As soon as practicable following the Effective Date, the Company will grant you the RSU Award, which is a restricted stock unit award in respect of 1,000,000 shares of common stock of the Company, par value $1 (“Shares”) on the terms set forth below.

Vesting Conditions. The RSU Award will vest on the first anniversary of the Effective Date, subject to your continued employment as Chief Executive Officer through such date, and will be forfeited upon the termination of your employment as Chief Executive Officer prior to such first anniversary for any reason; provided that upon a Proration Event (as defined below), 50% of the RSU Award shall vest as of such Proration Event (and the remainder shall be forfeited) if such Proration Event occurs prior to August 6, 2019, and the RSU Award shall vest in full if such Proration Event occurs on or after August 6, 2019.

For purposes hereof, a “Proration Event” shall mean the first to occur of (i) a termination of your service as Chief Executive Officer due to your death or disability (as customarily defined in award agreements under the 2013 Arconic Stock Incentive Plan, as Amended and Restated (the “Equity Plan”)), (ii) a termination of your service as Chief Executive Officer by the Company without Cause (as defined in the Company’s Executive Severance Plan) or by you for Good Reason (as defined below), or (iii) the occurrence of a Change in Control prior to the first anniversary of the Effective Date while you are serving as Chief Executive Officer.

For purposes of this letter, “Good Reason” means the occurrence of any of the following events without your express prior written consent: (A) a reduction in your base salary; (B) a material diminution in your title, role or responsibilities with the Company resulting from an action taken by the Company or one of its affiliates (including, without limitation and for the avoidance of doubt, the Company’s failure to maintain your position as the sole Chief Executive Officer of the Company, you ceasing to report solely to the Board, and the Company’s failure to maintain your Board position, but excluding, for the avoidance of doubt, your failure to be reelected to the Board by the Company’s shareholders); or (C) the relocation of your principal place of employment to a location that is more than 50 miles from both Pittsburgh, PA and the then-current Company headquarters; provided that no event will constitute “Good Reason” unless (x) you provide the Company written notice of your objection to such event within 30 days following such event, (y) such event is not corrected, in all material respects, by the Company within 30 days following the Company’s receipt of such notice and (z) you resign from your employment with the Company not more than 10 days following the expiration of the 30-day correction period.

Other Terms and Conditions. The RSU Award (i) will not be granted pursuant to the Equity Plan and (ii) may, at the Company’s election, be settled in cash rather than Shares. The RSU Award shall be subject to the additional terms and conditions contained in the award agreement attached to this letter as Annex A. The Company agrees to file with the Securities Exchange Commission a registration statement on Form S-8 covering the Shares underlying the RSU Award on, or promptly following, the grant date of the RSU Award.
 

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Outperformance Bonus:

Eligibility and Calculation. Subject to your continued employment as Chief Executive Officer through the first anniversary of the Effective Date, you will be eligible to receive an Outperformance Bonus payable in a cash lump sum, the amount of which will be determined, except as otherwise provided below, based upon the average of the five highest daily per-share closing prices of the Shares on the New York Stock Exchange occurring during any 20 consecutive trading days during the period commencing on the Effective Date and ending on the second anniversary of the Effective Date (such highest average closing price, the “Highest Average Price,” and such period, the “Performance Period”). The Outperformance Bonus will be determined in accordance with the following matrix and will be payable, except as otherwise provided below, within ten days following the last day of the Performance Period.

Highest Average Price
Amount of Outperformance Bonus
<$22.20
$0
≥$22.20 but <$24
$2,500,000
≥$24 but <$25
$5,000,000
≥$25 but <$26
$7,500,000
≥$26 but <$27
$10,000,000
≥$27 but <$28
$12,500,000
≥$28 but <$29
$15,000,000
≥$29 but <$30
$17,500,000
≥$30
$20,000,000

In the event of an adjustment event of the type described in Section 4(f) of the Equity Plan (including without limitation (for purposes of clarity and the avoidance of doubt) a split-off or a spin-off involving the equity of the Company), the Committee (as defined in the Equity Plan) will make such adjustments as it reasonably and in good faith deems equitable to the amounts of the Highest Average Price targets and/or to actual Share values.

Vesting Conditions. Your right to any Outperformance Bonus will be forfeited upon termination of your employment as Chief Executive Officer prior to the first anniversary of the Effective Date for any reason, provided that, upon a Proration Event, you shall remain eligible to receive a portion of the Outperformance Bonus equal to the product of (i) either (a) if a Change in Control does not occur during the Performance Period, the Outperformance Bonus amount calculated based on the level of achievement of the Highest Average Price targets during the Performance Period, or (b) if a Change in Control occurs during the Performance Period, the CIC Amount (as defined below), multiplied by (ii) the Proration Factor (as defined in the next sentence). For purposes hereof, the “Proration Factor” shall equal a fraction, the numerator of which is the number of days from the Effective Date through the Proration Event and the denominator of which is 365; provided, further, that in the event that the applicable Proration Event is your death or disability, the Proration Factor shall be deemed to equal 50% if such Proration Event occurs prior to August 6, 2019, and shall be deemed to equal 100% if such Proration Event occurs on or after August 6, 2019.

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Effect of Change in Control. In the event a Change in Control occurs during the Performance Period, the Outperformance Bonus shall be determined as of the date of such Change in Control and shall be equal to the greater of the amount of the Outperformance Bonus (i) determined based on the level of achievement of the Highest Average Price targets during the portion of the Performance Period that ends on the date of the Change in Control and (ii) that would be earned by deeming the Highest Average Price to equal the value of the per-Share consideration delivered to shareholders of the Company in the Change in Control transaction (which value shall be reasonably determined by the Committee to the extent that it is not in the form of cash) (such greater amount, the “CIC Amount”). The CIC Amount (subject to the proration described above if a Proration Event has occurred) shall be payable immediately upon the applicable Change in Control, except that if such Change in Control is not a “change in control event” within the meaning of Treasury Regulation § 1.409A-3(i)(5), payment shall be made upon the end of the Performance Period.

Employee Benefits:

During the Term, you will be eligible to participate in Company benefit plans as in effect from time to time on the terms applicable to Company senior executives generally (subject to the applicable eligibility and other requirements set forth therein), including health care, life insurance, and disability coverage, provided that, as set forth below, you will not participate in any severance plans or programs. You will be reimbursed for business-related expenses incurred by you in performing your duties hereunder in accordance with the Company’s policies and procedures as in effect from time to time. In addition, the Company will pay directly to your attorney, within ten days following the full execution of this letter, all reasonable and documented attorneys’ fees incurred in the negotiation and drafting of this letter in an amount not to exceed $15,000.

No Severance; No Nonqualified Deferred Compensation:

You will not participate in the Company’s Executive Severance Plan or in its Change in Control Severance Plan, nor will you be eligible for severance under any other severance plan or program of the Company and its affiliates. You will not participate in any nonqualified deferred compensation plan sponsored by the Company or any of its affiliates, except as provided hereunder. You hereby waive any right to participate in any severance plans or programs and any nonqualified deferred compensation plans (except as provided hereunder) of the Company, notwithstanding the terms of any such plans.

Confidentiality, Developments, Non-Competition and Non-Solicitation Agreement:

In consideration of your employment with the Company, you agree to execute the Confidentiality, Developments, Non-Competition and Non-Solicitation Agreement attached hereto as Annex B.
  
Indemnification:

You will be covered as an insured officer under the Company’s director and officer liability insurance policy, as in effect from time to time, to the same extent, and on the same terms, as other executive

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officers and directors of the Company. In addition, the Company acknowledges the continued force and effect of the Indemnification Agreement between the Company and you dated January 19, 2018.

Board Service:

During the Term, you will not be eligible to receive compensation and/or benefits (including, without limitation, director fees and equity awards) pursuant to any non-employee director plans or programs maintained by the Company, provided that your service hereunder will qualify as service for all purposes, including vesting, of any equity awards previously granted to you in your capacity as a member of the Board.
 
Section 409A:

The payments and benefits provided under this letter are intended to comply with, or be exempt from, the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the provisions of this letter shall be interpreted and applied consistently with such intent. All reimbursements under this letter that constitute deferred compensation within the meaning of Section 409A will be made or provided in accordance with the requirements of Section 409A, including, without limitation, that (i) in no event will any reimbursement payments be made later than the end of the calendar year next following the calendar year in which the applicable expenses were incurred, (ii) the amount of reimbursement payments that the Company is obligated to pay in any given calendar year shall not affect the amount of reimbursement payments that the Company is obligated to pay in any other calendar year, (iii) your right to have the Company pay such reimbursements may not be liquidated or exchanged for any other benefit, and (iv) any reimbursement is for expenses incurred during your lifetime (or during a shorter period of time specified in this letter). Any payments that qualify for the “short-term deferral” exception or another exception under Section 409A of the Code shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under Section 409A of the Code, each payment of compensation under this letter shall be treated as a separate payment of compensation for purposes of applying the exclusion under Section 409A of the Code for short-term deferral amounts, the separation pay exception or any other exception or exclusion under Section 409A of the Code. In no event may you, directly or indirectly, designate the calendar year of any payment under this letter.

Miscellaneous:

You hereby represent that you are not subject or party to any agreement, understanding or undertaking, including any restrictive covenant with any prior employer, that would prohibit you from accepting, and serving in, the positions contemplated hereby. Your employment with the Company will at all times be at-will, subject to the provisions of this letter. Upon your termination of employment for any reason, you will, if requested by the Board, immediately resign from the Board, your position as an officer of the Company, and all offices and directorships of all subsidiaries and affiliates of the Company.

Neither party hereto may assign any rights or delegate any duties under this letter without the prior written consent of the other party; provided, that this letter shall inure to the benefit of and be binding

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upon the successors and assigns of the Company upon any sale of all or substantially all of the Company’s assets, or upon any merger, consolidation or reorganization of the Company with or into any other corporation, all as though such successors and assigns of the Company and their respective successors and assigns were the Company.
 
Except as otherwise contemplated herein, this letter (including attachments hereto) contains the entire agreement between you and the Company with respect to the subject matter hereof. No modification or termination of this letter may be made orally, but must be made in writing and signed by you and the Company.
 
Governing Law; Jurisdiction:

This letter will be governed and interpreted in accordance with the laws of the State of New York without reference to its choice of law principles. Any action arising out of or related to this letter will be brought in the state or federal courts with jurisdiction in New York, New York, and you and the Company consent to the jurisdiction and venue of such courts.
 
This offer is contingent upon you signing the attached Confidentiality, Developments, Non-Competition and Non-Solicitation Agreement.

[Signature Page Follows.]


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To accept our offer, please sign and date the bottom of this letter.
 

Best Regards,
 
/s/ Arthur D. Collins, Jr.
 
 
 
Arthur D. Collins, Jr.
 
Lead Independent Director
 
Arconic Board of Directors
 
 
 
 
 
 

 

 

 

I, John C. Plant, am pleased to accept your offer of employment dated February 13, 2019, for the position of Chief Executive Officer on the terms detailed in this letter.
 
Accepted by:
 
Date:
 
 
 
/s/ John C. Plant
 
February 13, 2019
John C. Plant

 




[Signature Page to Chief Executive Officer Employment Letter Agreement]



Annex A


ARCONIC INC.
CHIEF EXECUTIVE OFFICER INITIAL EQUITY AWARD
Grant Date: February 15, 2019
This Restricted Share Unit Award represents a grant of Restricted Share Units relating to 1,000,000 shares of common stock of the Company, par value $1. The terms and conditions of this Restricted Share Unit Award Agreement, as set forth in this agreement between the Company and John C. Plant (the “Participant”, and this agreement, the “Award Agreement”) are authorized by the Compensation and Benefits Committee of the Board of Directors. The Restricted Share Unit award is not granted pursuant to the 2013 Arconic Stock Incentive Plan, as amended and restated and as may be further amended from time to time (the “Plan”), but shall be subject to the terms of the Plan, other than Sections 4(a), 9(b)(ii), and Section 13, as if granted thereunder and such terms shall be deemed incorporated herein. Capitalized terms used but not defined in the Award Agreement shall have the meaning given to such terms in the Plan. Reference is made to the employment letter agreement dated as of February 13, 2019 between the Company and the Participant (the “Letter Agreement”).
General Terms and Conditions
1.    The Restricted Share Units are subject to the provisions of the Award Agreement (including the provisions of the Plan deemed to be incorporated by reference herein). Interpretations of the Award Agreement by the Committee are binding on the Participant and the Company. A Restricted Share Unit is an undertaking by the Company to issue a Share or an equivalent cash amount in accordance with Section 3 of the Award Agreement, subject to the fulfillment of certain conditions, except to the extent otherwise provided in the Plan or herein. A Participant has no voting rights or rights to receive dividends on Restricted Share Units, but the Board of Directors may authorize that dividend equivalents be accrued and paid on Restricted Share Units upon vesting in accordance with Section 2 of the Award Agreement.
Vesting and Payment
2.    The Restricted Share Units will be subject to the vesting terms and conditions set forth in the Letter Agreement which are deemed to be incorporated herein.
3.    Upon the vesting of the Restricted Share Units in accordance with the terms of the Award Agreement, Participant will receive, within 30 days following the vesting date, one Share for each vested Restricted Share Unit; provided, that the Company may instead make a cash payment in settlement of all or a portion of such vested Restricted Share Units that equals, for each applicable Restricted Share Unit, the Fair Market Value of a Share on the date of such settlement. Subject to Section 14 of the Award Agreement, the Company shall have sole discretion to determine whether to settle Restricted Share Units in Shares, cash or a combination thereof.

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Taxes
4.    All taxes required to be withheld under applicable tax laws in connection with the Restricted Share Units must be paid by the Participant at the appropriate time under applicable tax laws. The Company will satisfy applicable tax withholding obligations by withholding from the Shares to be issued (or cash to be paid) upon payment of the Restricted Share Units, unless an alternative withholding method is approved by the Committee or withholding in Shares is problematic under applicable tax or securities law or has materially adverse accounting consequences, in which case withholding will be made pursuant to Section 15(l) of the Plan. The number of Shares or amount of cash withheld will be that number or amount with a fair market value equal to the taxes required to be withheld at the minimum required rates or, to the extent permitted under applicable accounting principles and approved by the Committee, at up to the maximum individual tax rate for the applicable tax jurisdiction, which include applicable income taxes, federal and state unemployment compensation taxes and FICA/FUTA taxes. Further, notwithstanding anything herein to the contrary, the Company may cause a portion of the Restricted Share Units to vest prior to the stated vesting date set forth in the Letter Agreement in order to satisfy any tax-related items that arise prior to the date of settlement of the Restricted Share Units; provided, that to the extent necessary to avoid a prohibited distribution under Section 409A of the Code, the number of Restricted Share Units so accelerated and settled shall be with respect to a number of Shares with a value that does not exceed the liability for such tax-related items.
Beneficiaries
5.    If permitted by the Company, Participants will be entitled to designate one or more beneficiaries to receive the amounts payable in respect of any Restricted Share Units that are outstanding and have not been settled at the time of death of the Participant. All beneficiary designations will be on beneficiary designation forms approved for the Plan. Copies of the form are available from the Communications Center on Merrill Lynch’s OnLine® website www.benefits.ml.com.
6.    Beneficiary designations on an approved form will be effective at the time received by the Communications Center on Merrill Lynch’s OnLine® website www.benefits.ml.com. A Participant may revoke a beneficiary designation at any time by written notice to the Communications Center on Merrill Lynch’s OnLine® website www.benefits.ml.com or by filing a new designation form. Any designation form previously filed by a Participant will be automatically revoked and superseded by a later-filed form.
7.    A Participant will be entitled to designate any number of beneficiaries on the form, and the beneficiaries may be natural or corporate persons.
8.    The failure of any Participant to obtain any recommended signature on the form will not prohibit the Company from treating such designation as valid and effective. No beneficiary will

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acquire any beneficial or other interest in any Restricted Share Unit prior to the death of the Participant who designated such beneficiary.
9.    Unless the Participant indicates on the form that a named beneficiary is to receive Restricted Share Units only upon the prior death of another named beneficiary, all beneficiaries designated on the form will be entitled to share equally in the amounts payable in respect of the Restricted Share Units upon settlement. Unless otherwise indicated, all such beneficiaries will have an equal, undivided interest in all such Restricted Share Units.
10.    Should a beneficiary die after the Participant but before the Restricted Share Unit is paid, such beneficiary’s rights and interest in the Award will be transferable by the beneficiary’s last will and testament or by the laws of descent and distribution. A named beneficiary who predeceases the Participant will obtain no rights or interest in a Restricted Share Unit, nor will any person claiming on behalf of such individual. Unless otherwise specifically indicated by the Participant on the beneficiary designation form, beneficiaries designated by class (such as “children,” “grandchildren” etc.) will be deemed to refer to the members of the class living at the time of the Participant’s death, and all members of the class will be deemed to take “per capita.”
11.    If a Participant does not designate a beneficiary or if the Company does not permit a beneficiary designation, the Restricted Share Units that have not yet vested or been paid at the time of death of the Participant will be paid to the Participant’s legal heirs pursuant to the Participant’s last will and testament or by the laws of descent and distribution.
Adjustments
12.    In the event of an Equity Restructuring, the Committee will equitably adjust the Restricted Share Unit as it deems appropriate to reflect the Equity Restructuring, which may include (i) adjusting the number and type of securities subject to the Restricted Share Unit; and (ii) adjusting the terms and conditions of the Restricted Share Unit. The adjustments provided under this Section 12 will be nondiscretionary and final and binding on all interested parties, including the affected Participant and the Company; provided that the Committee will determine whether an adjustment is equitable.
Repayment/Forfeiture
13.    As an additional condition of receiving the Restricted Share Unit, the Participant agrees that the Restricted Share Unit and any benefits or proceeds the Participant may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required (i) under the terms of any recoupment or “clawback” policy adopted by the Company to comply with applicable laws or with the Company’s Corporate Governance Guidelines or other similar requirements, as such policy may be amended from time to time (and such requirements shall be deemed incorporated into the Award Agreement without the Participant’s consent) or (ii) to comply with any requirements imposed under applicable laws and/or the rules and regulations of the securities exchange or inter-dealer quotation system on which the Shares are listed or quoted, including, without limitation, pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Further, if the Participant receives any amount in excess of

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what the Participant should have received under the terms of the Restricted Share Unit for any reason (including without limitation by reason of a financial restatement, mistake in calculations or administrative error), all as determined by the Committee, then the Participant shall be required to promptly repay any such excess amount to the Company.
Miscellaneous Provisions
14.    Stock Exchange Requirements; Applicable Laws. Notwithstanding anything to the contrary in the Award Agreement, no Shares issuable upon vesting of the Restricted Share Units, and no certificate representing all or any part of such Shares, shall be issued or delivered if, in the opinion of counsel to the Company, such issuance or delivery would cause the Company to be in violation of, or to incur liability under, any securities law, or any rule, regulation or procedure of any U.S. national securities exchange upon which any securities of the Company are listed, or any listing agreement with any such securities exchange, or any other requirement of law or of any administrative or regulatory body having jurisdiction over the Company or a Subsidiary. This Restricted Share Unit award is granted pursuant to the employment inducement exception to the shareholder approval requirement provided under New York Stock Exchange Rule 303A.08, in connection with the Participant’s commencement of service as Chief Executive Officer of the Company.
15.    Non-Transferability. The Restricted Share Units are non-transferable and may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant other than by will or the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company; provided, that, the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.
16.    Shareholder Rights. No person or entity shall be entitled to vote, receive dividends or be deemed for any purpose the holder of any Shares unless the Restricted Share Unit shall have vested and been paid in the form of Shares in accordance with the provisions of the Award Agreement.
17.    Notices. Any notice required or permitted under the Award Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed email, telegram, or fax or five days after being deposited in the mail, as certified or registered mail, with postage prepaid, and addressed to the Company at the Company’s principal corporate offices or to the Participant at the address maintained for the Participant in the Company’s records or, in either case, as subsequently modified by written notice to the other party.
18.    Severability and Judicial Modification. If any provision of the Award Agreement is held to be invalid or unenforceable under the applicable laws of any country, state, province, territory or other political subdivision or the Company elects not to enforce such restriction, the remaining provisions shall remain in full force and effect and the invalid or unenforceable provision shall be modified only to the extent necessary to render that provision valid and enforceable to the fullest extent permitted by law. If the invalid or unenforceable provision cannot be, or is not,

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modified, that provision shall be severed from the Award Agreement and all other provisions shall remain valid and enforceable.
19.    Successors. The Award Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, on the one hand, and the Participant and his or her heirs, beneficiaries, legatees and personal representatives, on the other hand.
20.    Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Restricted Share Unit and on any Shares acquired under the Award Agreement, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
21.    Compliance with Code Section 409A. It is intended that the Restricted Share Right granted pursuant to the Award Agreement be compliant with Section 409A of the Code and the Award Agreement shall be interpreted, construed and operated to reflect this intent. Notwithstanding the foregoing, the Award Agreement and the Plan may be amended at any time, without the consent of any party, to the extent necessary or desirable to satisfy any of the requirements under Section 409A of the Code, but the Company shall not be under any obligation to make any such amendment. Further, the Company and its Subsidiaries do not make any representation to the Participant that the Restricted Share Right granted pursuant to the Award Agreement satisfies the requirements of Section 409A of the Code, and the Company and its Subsidiaries will have no liability or other obligation to indemnify or hold harmless the Participant or any other party for any tax, additional tax, interest or penalties that the Participant or any other party may incur in the event that any provision of the Award Agreement or any amendment or modification thereof or any other action taken with respect thereto, is deemed to violate any of the requirements of Section 409A of the Code.
22.    Waiver. A waiver by the Company of breach of any provision of the Award Agreement shall not operate or be construed as a waiver of any other provision of the Award Agreement, or of any subsequent breach by the Participant or any other Participant.
23.    No Advice Regarding Award. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Participant’s acceptance of the Restricted Share Unit, or the Participant’s acquisition or sale of the underlying Shares. The Participant is hereby advised to consult with the Participant’s own personal tax, legal and financial advisors regarding the Participant’s acceptance of the Restricted Share Unit before taking any action related thereto.
24.    Governing Law and Venue. As stated in the Plan, the Restricted Share Unit and the provisions of the Award Agreement and all determinations made and actions taken thereunder, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of New York, United States of America, without reference to principles of conflict of laws, and construed accordingly. The jurisdiction and venue for any disputes arising under, or any actions brought to enforce (or otherwise relating to), the Restricted Share Unit will be

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exclusively in the courts in the State of New York, County of New York, including the Federal Courts located therein (should Federal jurisdiction exist).
25.    Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to the Restricted Share Unit by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Restricted Share Unit through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
26.    Entire Agreement. The Award Agreement and the Plan embody the entire understanding and agreement of the parties with respect to the subject matter hereof, and no promise, condition, representation or warranty, express or implied, not stated or incorporated by reference herein, shall bind either party hereto.

[Signature Page Follows.]


IN WITNESS WHEREOF, the parties have duly executed the Award Agreement as of the Grant Date first written above.

ARCONIC INC.
by
 
/s/ Katherine Hargrove Ramundo
 
 
 
Name: Katherine Hargrove Ramundo
 
Title: Executive Vice President
            Chief Legal Officer and Secretary
 
 

 
 
 
 
John C. Plant

 
 
 
/s/ John C. Plant
 
 
 


Annex B
 
Confidentiality, Developments, Non-Competition, and Non-Solicitation Agreement
 
As an employee of Arconic Inc. (“Arconic”) or one of its subsidiaries (Arconic, collectively with its subsidiaries, the “Company”), you (“you” or “Employee”) will have access to or may develop confidential and proprietary information (as defined below) of the Company. Therefore, in consideration of your employment, and recognizing the highly competitive nature of the Company’s business, you enter into this Confidentiality, Non-Competition, and Non-Solicitation Agreement (this “Agreement”) intending to be legally bound.
 
Confidentiality
 
You acknowledge that, as an employee of the Company, you have access, and are privy, to information which is confidential and proprietary to the Company and which is not generally available to the public from sources outside of the Company.
 
You agree to regard and preserve as confidential any and all Confidential Information pertaining to the Company’s operations and affairs and all information which is either learned or obtained by you during your employment, and which you know, or have reason to believe, includes Confidential Information. You agree that you will use Confidential Information only for the performance of your duties for the Company and you agree not to disclose any Confidential Information you acquire, except as expressly permitted below. You understand and agree that this obligation of confidentiality shall continue indefinitely following the termination of your employment with the Company.
 
Nothing in this Agreement shall prohibit or restrict you from: (i) making any disclosure of relevant and necessary information or documents in any action, investigation, or proceeding relating to this Agreement, or as required by law or legal process; or (ii) participating, cooperating, or testifying in any action, investigation, or proceeding with, or reporting possible violations or providing information to, any governmental agency or legislative body regarding this Agreement or the Company, including, but not limited to, the Company’s Legal Department, the Securities & Exchange Commission, and/or pursuant to the Dodd-Frank Act (including without limitations the whistleblower provisions thereof) or Sarbanes-Oxley Act; provided that, other than with respect to providing information to a governmental agency and to the extent permitted by law, upon receipt of any subpoena, court order or other legal process compelling the disclosure of any such information or documents, you will give the General Counsel of the Company prompt written notice so as to permit the Company to protect its interests in confidentiality to the fullest extent possible. Notwithstanding any provision of this Agreement to the contrary, the provisions of this Agreement are not intended to, and shall be interpreted in a manner that does not, limit or restrict you from exercising any legally protected whistleblower rights (including pursuant to Rule 21F under the Securities Exchange Act of 1934, as amended).
 
Upon termination of your employment or at any time requested by the Company, you will deliver promptly to the Company all memoranda, notes, records, reports and other documents (whether in paper or electronic form and all copies thereof) relating to the business of the Company and all other Company property which you obtained or developed while employed by, or otherwise serving or acting on behalf of, the Company and which you may then possess or have under your control, whether directly or indirectly.
 
Disclosure of Developments and Other Inventions
 
Without disclosing any third party confidential information, Employee shall promptly disclose to Company all Developments and any inventions or developments that Employee believes do not constitute a Development, so that Company can make an independent assessment. Employee represents and warrants that if Employee developed, conceived or created any Development or other Intellectual Property prior to the date hereof that relates to Company’s Business, Employee has listed such Intellectual Property on Appendix I in a manner that does not violate any third party rights or disclose any third party confidential information.
 
Ownership of Developments
 
Ownership: All right, title and interest (including all Intellectual Property rights of any sort throughout the world) relating to any and all Developments (other than Employee Statutorily Exempt Developments) shall be the exclusive property of Company.
 
Assignment of Rights: In consideration of Employee’s employment by Company as set forth in the Employment Agreement, Employee hereby assigns to Company or its designee any and all right, title and/or interest (including all Intellectual Property rights of any sort throughout the world) in and to any Developments that Employee has or may in the future acquire with respect to any Developments, provided that this section shall not apply to any Employee Statutorily Exempt Developments.
 
Further Assistance and Assurances: Employee shall, both during and after his/her employment by Company, at the expense of Company, perform all lawful acts requested by, or on behalf of, Company to enable Company to obtain, perfect, sustain, and enforce its ownership interest in any Development(s) in accordance with this Section and to obtain and maintain patents, copyrights and other Intellectual Property rights for such Development(s) throughout the world.
 
Attorney-In-Fact: Employee hereby irrevocably designates and appoints Company as Employee’s agent and attorney-in-fact, coupled with an interest and with full power of substitution, to act for and on Employee’s behalf to execute and file any document and to do all other lawfully permitted acts to further the purposes of this Section with the same legal force and effect as if executed by Employee.
 
Acknowledgement of Employee Statutorily Exempt Developments: Employee acknowledges and agrees that, by executing this Agreement, nothing in this Agreement is intended to expand the scope of protection provided to Employee by Sections 2870 through 2872 of the California Labor Code or any other statute of like effect. Employee agrees to promptly advise the Company in writing of any developments that Employee believes may qualify under Sections 2870 through 2872 of the California Labor Code or any other statute of like effect.
 
Records: Employee agrees to keep and maintain adequate and current records (in the form of notes, sketches, drawings, and in any other form that may be required by the Company) of all Developments made, written, conceived and/or reduced to practice by Employee during the period of employment by Company, which records shall be available to and remain the sole property of the Company at all times.
  
Employee IP – Ownership and Restrictions; License: Any discovery, invention, improvement, computer program and related documentation or other work that (i) is created during the term of Employee’s employment with the Company and does not fall within the definition of the term “Development” as defined herein, (ii) is an Employee Statutorily Exempt Development, or (iii) was developed, created, or conceived prior to Employee’s employment with Company shall, as between Company and Employee, belong to Employee and shall not be used by Employee in his or her performance on behalf of the Company. Without limiting Company’s other rights and remedies, if, when acting within the scope of Employee’s employment or otherwise on behalf of Company, Employee uses or discloses Employee’s own or any third party’s confidential information or other Intellectual Property in violation of this Agreement (or if any Development cannot be fully made, used, reproduced, distributed and otherwise exploited without using or violating the foregoing), Employee hereby: (a) grants to Company a perpetual, irrevocable, worldwide, fully-paid, royalty-free, non-exclusive, sub-licensable right and license to use, exploit and exercise all such confidential information and/or Intellectual Property rights; and (b) warrants that he/she is entitled to grant such license to the extent the confidential information or Intellectual Property used by Employee in violation of this Section belongs to a third party.
 
Restrictive Covenants
 
Non-Competition: During your employment and for a period of one year thereafter (regardless of whether the termination of your employment is voluntary or involuntary), you will not directly or indirectly (i) engage in, carry on, or provide services (paid or unpaid) whether as a director, officer, partner, owner, employee, inventor, consultant, advisor, or agent, to any Competitive Business (as defined below) or (ii) hold any economic interest in any Competitive Business. However, notwithstanding the foregoing, you may own up to five percent (5%) of the outstanding securities of any publicly traded company and you shall not be prohibited from becoming employed by, or associated with, a private equity firm or hedge fund (or one of their portfolio companies) that has an investment in a Competitive Business as long as you have no involvement whatsoever with such Competitive Business (including the formation, planning, or acquisition of, or investment in, any such Competitive Business).
 
It is not the Company’s intention to restrict or limit your activities following your termination of employment with the Company unless it is believed that there is a substantial possibility that your future services or activities in any of the lines of business in which the Company is engaged may be detrimental to the Company. So as to not unduly restrict your future employment, if you desire to enter into any employment arrangement or relationship with any potential Competitive Business within the one-year restricted period, please consult with the Executive Vice President of Human Resources of Arconic to discuss your intended relationship with the entity. Due to the many different businesses in which the Company presently engages, or which in the future the Company may engage, we will discuss your desire to enter into a business or professional relationship with any manufacturer or firm which is a Competitive Business. The Company’s consent will not be unreasonably withheld.
 
Also, as a reminder, Arconic stock incentive awards continue to be subject to forfeiture, under the terms of that program, to the extent you become associated with, employed by, render services to, or own any interest in any business that is in competition with the Company or if you engage in willful conduct that is injurious to the Company.
 
Non-Solicitation: During your employment and for a period of one year thereafter (regardless of whether the termination of your employment was voluntary or involuntary), you will not directly or indirectly (i) solicit, induce or attempt to solicit or induce any employee of the Company to leave the Company for any reason; (ii) hire or attempt to hire any employee of the Company; or (iii) solicit business from, or engage in business with, any customer or supplier of the Company that you met and/or dealt with during your employment with the Company for any purpose. In the event that you become aware that any employee of the Company has been hired by any business or firm with which you are then affiliated, you will immediately notify the Executive Vice President of Human Resources of Arconic to confirm your non-solicitation of said employee
 
You acknowledge and agree that given the nature of the Company’s business, which is conducted throughout the world, the unique and extraordinary services you will be providing to the Company and your position of confidence and trust with the Company, the scope and duration of the covenants included in this Agreement (the “Restrictive Covenants”) are reasonable and necessary to protect the legitimate business interests of the Company. You further acknowledge that you have received substantial consideration from the Company and that your general skills and abilities are such that you can be gainfully employed in noncompetitive employment, and that this Agreement will in no way prevent you from earning a living following your employment with the Company.
 
You also recognize and agree that any breach or threatened or anticipated breach of any part of these Restrictive Covenants will result in irreparable harm to the Company, and that the remedy at law for any such breach or threatened breach will be inadequate. Accordingly, in addition to any other legal or equitable remedies that may be available to the Company, you agree that the Company will be entitled to obtain an injunction, without posting a bond, to prevent any breach or threatened breach of any part of these Restrictive Covenants.
 
In the event that any court of competent jurisdiction finds that the limitations set forth in these Restrictive Covenants are overly broad with respect to duration, geographic scope or scope of prohibited activities, such court will have the authority to reduce the duration, area or activities of such provisions so as to be enforceable to the maximum extent compatible with applicable law, and such provisions will then be enforced as modified.
 
Notice of Immunity – Defend Trade Secrets Act of 2016
 
Company employees, contractors, and consultants may disclose Trade Secrets in confidence, either directly or indirectly, to a Federal, State, or local government official, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Additionally, Company employees, contractors, and consultants who file retaliation lawsuits for reporting a suspected violation of law may disclose related Trade Secrets to their attorney and use them in related court proceedings, as long as the individual files documents containing the Trade Secret under seal and does not otherwise disclose the Trade Secret except pursuant to court order.
 
Definitions for Purposes of this Agreement
 
“Business” means areas of actual or demonstrably anticipated research and development conducted (or to be conducted) by, or for the benefit of, Company as well as all products or services sold by, on behalf of, or for the benefit of Company worldwide.
 
“Competitive Business” means any domestic or international business or firm (including any business in the process of being formed or planned) that is engaged, or has active plans to become engaged, in any line of business of the Company with which you have had direct functional accountability, or for which you provided leadership or support, during your last eighteen (18) months of employment with the Company.
 
“Confidential Information” includes, but is not limited to strategic plans, trade secrets, inventions, discoveries, technical and operating know-how, accounting information, product information, marketing and sales data, business strategies, customer information, and employee data of the Company that is proprietary in nature, and any similar information, data or materials of third parties that the Company has a duty to keep confidential
  
“Developments” means all discoveries, inventions, innovations, improvements, computer programs and related documentation, and other works of authorship, mask works, designs, know-how, ideas and information made, written, conceived and/or reduced to practice, in whole or in part, (whether or not patentable or subject to other forms of protection) by Employee, individually or with any other person, during and after the period of Employee’s employment by Company that: (a) relate in any manner to the Business or activities of Company; and/or (b) are created: (i) at any time using Company resources, including, but not limited to, Company computers, cellphones, smartphones, etc.; (ii) during working hours; (iii) at a Company facility; (iv) by, or on behalf of, Company; and/or (v) using Confidential Information.
 
“Employee Statutorily Exempt Developments” means any Developments which qualify fully under the provisions of any applicable statute (including, e.g., Section 2870 of the California Labor Code) that prohibits the assignment to Company of Employee’s rights in any inventions developed entirely on Employee’s own time without using the Company’s equipment, supplies, facilities, resources, trade secrets or Confidential Information (i.e., excluding inventions that either (i) relate at the time of conception or reduction to practice of the invention to the Company’s Business, or actual or demonstrably anticipated research or development; or (ii) result from any work performed by Employee for the Company).
 
“Intellectual Property” means any intellectual and industrial property and all rights thereof, including, but not limited to, patents, utility models, semi-conductor topography rights; copyrights, mask works, authors’ rights, registered and unregistered trademarks, brands, domain names, trade secrets, know-how and other rights in information, drawings, logos, plans, database rights, technical notes, prototypes, processes, methods, algorithms, any technical-related documentation, any software, registered designs and other designs, in each case, whether registered or unregistered and including applications for registration, and all rights or forms of protection having equivalent or similar effect anywhere in the world.
 
Governing Law; Jurisdiction
 
This Agreement will be governed and interpreted in accordance with the laws of the State of New York without reference to its choice of law principles. Any action arising out of or related to this Agreement will be brought in the state or Federal courts located in New York, and you and the Company consent to the jurisdiction and venue of such courts.
 
Amendment; Waiver
 
No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is in writing. Any failure by you or the Company to enforce any of the provisions of this Agreement should not be construed to be a waiver of such provisions or any right to enforce each and every provision in the future. A waiver of any breach of this Agreement will not be construed as a waiver of any other or subsequent breach.
 
Successors; Binding Agreement
 
The Company has the right to assign its rights and obligations under this Agreement to any entity that acquires all or substantially all of the assets of the business for which you work, and continues your employment. The rights and obligations of the Company under this Agreement will inure to the benefit and be binding upon the successors and assigns of the Company
 
Severability
 
In the event that any one or more of the provisions of this Agreement is held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remainder of this Agreement will not in any way be affected or impaired thereby.
 
This Agreement is the