Preferred and Common Stock

12 Months Ended

Dec. 31, 2019

Preferred Stock. Arconic has two classes of preferred stock: Class A Preferred Stock and Class B Serial Preferred Stock. Class A Preferred Stock has 660,000 shares authorized at a par value of $100 per share with an annual $3.75 cumulative dividend preference per share. There were 546,024 shares of Class A Preferred Stock outstanding at December 31, 2019 and 2018. Class B Serial Preferred Stock has 10,000,000 shares authorized at a par value of $1 per share. There were no shares of Class B Serial Preferred Stock outstanding at December 31, 2019 and 2018 (see below).

In September 2014, Arconic completed a public offering under its shelf registration statement for $1,250 of 25 million depositary shares, each of which represented a 1/10th interest in a share of Arconic’s 5.375% Class B Mandatory Convertible Preferred Stock, Series 1, par value $1 per share, liquidation preference $500 per share (the “Mandatory Convertible Preferred Stock”). The 25 million depositary shares were equivalent to 2.5 million shares of Mandatory Convertible Preferred Stock. Each depositary share entitled the holder, through the depositary, to a proportional fractional interest in the rights and preferences of a share of Mandatory Convertible Preferred Stock, including conversion, dividend, liquidation, and voting rights, subject to terms of the deposit agreement. Arconic received $1,213 in net proceeds from the public offering reflecting an underwriting discount. The net proceeds were used, together with the net proceeds of issued debt, to finance the cash portion of the acquisition of Firth Rixson. The underwriting discount was recorded as a decrease to Additional capital. The Mandatory Convertible Preferred Stock constituted a series of Arconic’s Class B Serial Preferred Stock, which ranks senior to Arconic’s common stock and junior to Arconic’s Class A Preferred Stock and existing and future indebtedness. Holders of the Mandatory Convertible Preferred Stock generally had no voting rights.

Dividends on the Mandatory Convertible Preferred Stock were cumulative in nature and paid at the rate of $26.8750 per annum per share in 2016 and 2015, which commenced January 1, 2015 (paid on December 30, 2014).

On October 2, 2017, all outstanding 24,975,978 depositary shares (each depositary share representing a 1/10th interest in a share of the mandatory convertible preferred stock) were converted at a rate of 1.56996 into 39,211,286 common shares; 24,022 depositary shares were previously tendered for early conversion into 31,420 shares of Arconic common stock. No gain or loss was recognized associated with this equity transaction. Dividends on the Mandatory Convertible Preferred Stock were paid at the rate of $20.1563 per share in 2017.

Common Stock. At December 31, 2019, there were 600,000,000 shares authorized and 432,855,183 shares issued and outstanding. Dividends paid of $0.12 per annum ($0.06 dividend in the first quarter of 2019 and $0.02 per quarter for the remainder of the year) in 2019 and $0.24 per annum or $0.06 per quarter in 2018 and 2017.

As of December 31, 2019, 47 million shares of common stock were reserved for issuance under Arconic’s stock-based compensation plans. As of December 31, 2019, 37 million shares remain available for issuance. Arconic issues new shares to satisfy the exercise of stock options and the conversion of stock awards.

In July 2015, through the acquisition of RTI International Metals Inc. (RTI), Arconic assumed the obligation to repay two tranches of convertible debt; one tranche was due and settled in cash on December 1, 2015 (principal amount of $115) and the other tranche was due on October 15, 2019 (principal amount of $403), unless earlier converted or purchased by Arconic at the holder’s option under specific conditions. No shares of the Company’s common stock were issued in connection with the maturity or final conversion of this convertible debt. See Note P for additional details.

Share Activity (number of shares)



	Common stock
	Treasury	Outstanding
Balance at end of 2016	—	438,519,780
Conversion of convertible notes	—	39,242,706
Issued for stock-based compensation plans	—	3,654,051
Balance at end of 2017	—	481,416,537
Issued for stock-based compensation plans	—	1,854,180
Balance at end of 2018	—	483,270,717
Issued for stock-based compensation plans	—	4,436,830
Repurchase and retirement of common stock	—	(54,852,364	)
Balance at end of 2019	—	432,855,183

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 (the “February 2019 ASR”), pursuant to the share repurchase programs

previously authorized by its Board of Directors (the Board). Under the February 2019 ASR, Arconic received an initial delivery of shares on February 21, 2019 and additional shares on April 29, 2019. On May 2, 2019, the Company entered into an ASR agreement with JPMorgan Chase Bank to repurchase $200 of its common stock (the “May 2019 ASR”), pursuant to the share repurchase programs previously authorized by its Board. Under the May 2019 ASR, Arconic received an initial delivery of shares on May 6, 2019 and additional shares on June 12, 2019. On May 14, 2019, the Board authorized an additional share repurchase program of up to $500 of its outstanding common stock. On August 6, 2019, the Company entered into an ASR agreement with Goldman Sachs & Co. LLC to repurchase $200 of its common stock (the “August 2019 ASR”), pursuant to the share repurchase programs previously authorized by its Board. Under the August 2019 ASR, Arconic received an initial delivery of shares on August 8, 2019 and additional shares on October 3, 2019. On November 14, 2019, the Company entered into an agreement with Citigroup Global Markets Inc. to repurchase $50 of its common stock (the “November 2019 share repurchase program”), pursuant to the share repurchase programs previously authorized by its Board. All of the shares repurchased during 2019 were immediately retired. After giving effect to the February 2019 ASR, May 2019 ASR, August 2019 ASR, and November 2019 share repurchase program, $350 remains available under the prior authorizations by the Board for share repurchases through the end of 2020.

The following table provides details for the share repurchases during 2019.



Share delivery date	Number of shares	Average price	Total
February 21, 2019	31,908,831
April 29, 2019	4,525,592
February 2019 ASR total	36,434,423	$19.21	$700

May 6, 2019	7,455,732
June 12, 2019	1,561,249
May 2019 ASR total	9,016,981	$22.18	$200

August 8, 2019	6,791,172
October 3, 2019	983,107
August 2019 ASR total	7,774,279	$25.73	$200

November 18, 2019	428,000
November 19, 2019	428,000
November 20, 2019	370,000
November 21, 2019	400,681
November 2019 share repurchase program	1,626,681	$30.74	$50

2019 Share repurchase total	54,852,364	$20.97	$1,150

Stock-Based Compensation

Arconic has a stock-based compensation plan under which stock options and/or restricted stock unit awards are granted in the first quarter of each year to eligible employees. Stock options are granted at the closing market price of Arconic’s common stock on the date of grant and typically vest over a three-year service period (1/3 each year) with a ten-year contractual term. Restricted stock unit awards typically vest over a three-year service period from the date of grant. As part of Arconic’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. Certain of the restricted stock unit awards include performance and market conditions and are granted to a limited number of eligible employees. In 2019, performance stock awards were granted to the CEO that vest either based on achievement of the planned Separation of Arconic (see Note U for further details) or the achievement of certain stock price thresholds. Performance stock awards granted in the first quarter of 2019 were converted to restricted stock unit awards (at target), in order to address the planned Separation of Arconic. For performance stock awards issued in 2018 and 2017, the final number of shares earned will be based on Arconic’s achievement of sales and profitability targets over the respective performance periods and will be earned at the end of the third year. Additionally, the 2018 and 2017 performance stock awards will be scaled by a total shareholder return (“TSR”) multiplier, which depends upon relative performance against the TSRs of a group of peer companies.

In conjunction with their employment agreements, certain current and former executives were granted cash bonus awards based on the achievement of certain stock price thresholds. These awards are liability classified and were marked-to-market each

quarter using a Monte Carlo simulation. At the end of the year, the stock price thresholds have been fully reached. The cash payment of $23 will occur in 2021 in accordance with the terms of the agreements.

In 2019, 2018, and 2017, Arconic recognized stock-based compensation expense of $78 ($70 after-tax), $50 ($39 after-tax), and $54 ($36 after-tax), respectively. Cash bonus awards of $21 were recorded in 2019. Of the remaining stock-based compensation expense in 2019, more than 95% relates to restricted stock unit awards. The expense related to restricted stock unit awards in 2018 and 2017 was approximately 85%. No stock-based compensation expense was capitalized in any of those years. Stock-based compensation expense was reduced by $3 and $13 in 2019 and 2017, respectively, for certain executive pre-vest cancellations which were recorded in Restructuring and other charges within the Statement of Consolidated Operations. At December 31, 2019, there was $50 (pre-tax) of unrecognized compensation expense related to non-vested stock option grants and non-vested restricted stock unit award grants. This expense is expected to be recognized over a weighted average period of 1.3 years.

Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For restricted stock unit awards, the fair value was equivalent to the closing market price of Arconic’s common stock on the date of grant. The weighted average grant date fair value of the 2019 performance stock awards with a market condition (achievement of certain stock price thresholds) was $11.93. The grant date fair value of the 2018 performance stock awards containing a market condition (scaled by TSR multiplier) was $20.25. The 2019 and 2018 performance awards were valued using a Monte Carlo model. A Monte Carlo simulation uses assumptions of stock price behavior to estimate the probability of satisfying market conditions and the resulting fair value of the award. The risk-free interest rate (1.6% in 2019 and 2.7% in 2018) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. In 2019 volatility was estimated using implied and historical volatility (33.4%). Because of limited historical information due to the Separation of Alcoa, 2018 volatility (32.0%) was estimated using implied volatility, and the representative price return approach, which uses price returns of comparable companies, was used to develop a correlation assumption. For stock options, the fair value was estimated on the date of grant using a lattice-pricing model, which generated a result of $9.79 and $6.26 per option in 2018 and 2017, respectively. There were no stock options issued in 2019. The lattice-pricing model uses a number of assumptions to estimate the fair value of a stock option, including a risk-free interest rate, dividend yield, volatility, exercise behavior, and contractual life. The following paragraph describes in detail the assumptions used to estimate the fair value of stock options granted in 2018 (the assumptions used to estimate the fair value of stock options granted in 2017 were not materially different, except as noted below).

The risk-free interest rate (2.5%) was based on a yield curve of interest rates at the time of the grant based on the contractual life of the option. The dividend yield (0.9%) was based on a one-year average. Volatility (34.0% for 2018 and 38.1% in 2017) was based on comparable companies and implied volatilities over the term of the option. Arconic utilized historical option forfeiture data to estimate annual post-vesting forfeitures (6%). Exercise behavior (61%) was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the life of an option (6.0 years) was an output of the lattice-pricing model. The activity for stock options and stock awards during 2019 was as follows (options and awards in millions):



	Stock options				Stock awards
	Number of options		Weighted average exercise price		Number of awards		Weighted average FMV per award
Outstanding, December 31, 2018	10		$	24.95	7		$	21.13
Granted	—		—		4		19.80
Exercised	(2	)	21.34		—		—
Converted	—		—		(3	)	15.78
Expired or forfeited	(1	)	28.37		(1	)	22.10
Performance share adjustment	—		—		—		19.96
Outstanding, December 31, 2019	7		$	25.75	7		$	22.05

As of December 31, 2019, the number of stock options outstanding had a weighted average remaining contractual life of 3.4 years and a total intrinsic value of $40. Additionally, 5.9 million of the stock options outstanding were fully vested and exercisable and had a weighted average remaining contractual life of 3.0 years, a weighted average exercise price of $25.80, and a total intrinsic value of $36 as of December 31, 2019. In 2019, 2018, and 2017, the cash received from stock option exercises was $56, $16, and $50 and the total tax benefit realized from these exercises was $4, $2, and $4, respectively. The total intrinsic value of stock options exercised during 2019, 2018, and 2017 was $17, $7, and $13, respectively.