10-K 1 d293282d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2016

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)

 

Pennsylvania    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)

Registrant’s telephone numbers:

Investor Relations------------— (212) 836-2758

Office of the Secretary-------—(212) 836-2732

Securities registered pursuant to Section 12(b) of the Act:

 

 Title of each class 

  

 Name of each exchange on which registered 

Common Stock, par value $1.00 per share    New York Stock Exchange
Depositary Shares, each representing a 1/10th ownership interest in a share of 5.375% Class B Mandatory Convertible Preferred Stock, Series 1, par value $1.00 per share    New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ✓  No     .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes        No  .

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, 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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes   No     .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [✓]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [✓]       Accelerated filer [    ]       Non-accelerated filer [    ]       Smaller reporting company [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes       No .

The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $12 billion. As of February 23, 2017, there were 440,535,657 shares of common stock, par value $1.00 per share, of the registrant outstanding.

Documents incorporated by reference.

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for its 2017 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (Proxy Statement).


Table of Contents

TABLE OF CONTENTS

 

          Page(s)  

Part I

     

Item 1.

   Business      1  

Item 1A.

   Risk Factors      18  

Item 1B.

   Unresolved Staff Comments      31  

Item 2.

   Properties      31  

Item 3.

   Legal Proceedings      31  

Item 4.

   Mine Safety Disclosures      33  

Part II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      34  

Item 6.

   Selected Financial Data      36  

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37  

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      64  

Item 8.

   Financial Statements and Supplementary Data      65  

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      125  

Item 9A.

   Controls and Procedures      125  

Item 9B.

   Other Information      125  

Part III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      127  

Item 11.

   Executive Compensation      127  

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      127  

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      128  

Item 14.

   Principal Accounting Fees and Services      128  

Part IV

     

Item 15.

   Exhibits, Financial Statement Schedules      129  

Item 16.

   Form 10-K Summary      137  
  

Signatures

     138  

Note on Incorporation by Reference

In this Form 10-K, selected items of information and data are incorporated by reference to portions of the Proxy Statement. Unless otherwise provided herein, any reference in this report to disclosures in the Proxy Statement shall constitute incorporation by reference of only that specific disclosure into this Form 10-K.


Table of Contents

PART I

Item 1. Business.

General

Formed in 1888, Arconic Inc. (formerly known as Alcoa Inc.) is a Pennsylvania corporation with its principal office in New York, New York. In this report, unless the context otherwise requires, “Arconic” or the “Company” means Arconic Inc. and all subsidiaries consolidated for the purposes of its financial statements.

The Company’s Internet address is http://www.arconic.com. Arconic makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). The information on the Company’s Internet site is not a part of, or incorporated by reference in, this annual report on Form 10-K. The SEC maintains an Internet site that contains these reports at http://www.sec.gov.

Forward-Looking Statements

This report contains (and oral communications made by Arconic may contain) 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 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 about Arconic’s strategies, outlook, business and financial prospects; and statements regarding potential share gains. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict. Although Arconic believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.

For a discussion of some of the specific factors that may cause Arconic’s actual results to differ materially from those projected in any forward-looking statements, see the following sections of this report: Part I, Item 1A. (Risk Factors), Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations), including the disclosures under Segment Information and Critical Accounting Policies and Estimates, and Note L and the Derivatives Section of Note V to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data). Market projections are subject to the risks discussed in this report 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.

Overview

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, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.

 

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Arconic is a global company operating in 19 countries. Based upon the country where the point of sale occurred, the United States and Europe generated 63% and 26%, respectively, of Arconic’s sales in 2016. In addition, Arconic has operating activities in Brazil, Canada, China, Japan, and Russia, among others. Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.

Arconic’s operations consist of three worldwide reportable segments: Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions.

Alcoa Corporation Separation Transaction

On November 1, 2016, Alcoa Inc. completed the separation of its business into two independent, publicly traded companies (the “Separation”) – Alcoa Corporation and Arconic Inc. (the new name for Alcoa Inc.). Following the Separation, Alcoa Corporation holds the Alumina and Primary Metals segments, the rolling mill at the Warrick, Indiana, operations and the 25.1% stake in the Ma’aden Rolling Company in Saudi Arabia previously held by the Company. The Company retained the Global Rolled Products (other than the rolling mill at the Warrick, Indiana, operations and the 25.1% ownership stake in the Ma’aden Rolling Company), Engineered Products and Solutions and Transportation and Construction Solutions segments.

The Separation was effected by a pro rata distribution of 80.1% of the outstanding shares of Alcoa Corporation common stock to the Company’s shareholders (the “Distribution”). The Company’s shareholders of record as of the close of business on October 20, 2016 (the “Record Date”) received one share of Alcoa Corporation common stock for every three shares of the Company’s common stock held as of the Record Date. The Company did not issue fractional shares of Alcoa Corporation common stock in the Distribution. Instead, each shareholder otherwise entitled to receive a fractional share of Alcoa Corporation common stock received cash in lieu of fractional shares.

The Company distributed 146,159,428 shares of common stock of Alcoa Corporation in the Distribution and retained 36,311,767 shares, or approximately 19.9%, of the common stock of Alcoa Corporation immediately following the Distribution. As a result of the Distribution, Alcoa Corporation is now an independent public company trading under the symbol “AA” on the New York Stock Exchange, and the Company trades under the symbol “ARNC” on the New York Stock Exchange.

On October 31, 2016, in connection with the Separation and the Distribution, Arconic entered into several agreements with Alcoa Corporation or its subsidiaries that govern the relationship of the parties following the Distribution, including the following: Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, certain Patent, Know-How, Trade Secret License and Trademark License Agreements, Toll Processing and Services Agreement, Master Agreement for the Supply of Primary Aluminum, Massena Lease and Operations Agreement, Fusina Lease and Operations Agreement, and Stockholder and Registration Rights Agreement.

 

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Description of the Business

Information describing Arconic’s businesses can be found on the indicated pages of this report:

 

Item

   Page(s)  

Discussion of Recent Business Developments:

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations:

  

Overview—Results of Operations (Earnings Summary)

     37  

Notes to Consolidated Financial Statements:

  

Note C. Separation Transaction and Discontinued Operations

     82  

Note D. Restructuring and Other Charges

     85  

Note F. Acquisitions and Divestitures

     89  

Note L. Contingencies and Commitments

     96  

Segment Information:

  

Business Descriptions, Principal Products, Principal Markets, Methods of Distribution, Seasonality and Dependence Upon Customers:

  

Global Rolled Products

     44  

Engineered Products and Solutions

     46  

Transportation and Construction Solutions

     47  

Financial Information about Segments and Financial Information about Geographic Areas:

  

Note O. Segment and Geographic Area Information

     100  

Major Product Revenues

Products that contributed 10% or more to consolidated revenues for the years ended December 31, 2016, 2015 and 2014, were:

 

     For the Years Ended  
     December 31,  
     2016     2015     2014  

Flat-rolled aluminum

     39     42     51

Fastening systems

     17     18     13

Investment castings

     15     15     14

Other extruded and forged products

     12     11     8

See Note O to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data) for operating results of the Company’s reportable segments. Arconic has no customers that account for more than 10% of its consolidated revenues. However, certain of the Company’s businesses are dependent upon a few significant customers. The loss of any such significant customer could have a material adverse effect on such businesses.

Global Rolled Products

Arconic’s Global Rolled Products segment produces a range of aluminum sheet and plate products for the aerospace, automotive, commercial transportation, brazing and industrial markets. This segment comprises Aerospace and Automotive Products; Brazing, Commercial Transportation and Industrial Solutions; and Micromill™ Products and Services. As part of the Separation of Alcoa Corporation from the Company, the Global Rolled Products segment integrated its Bohai (China), Itapissuma (Brazil), and Samara (Russia) facilities into Brazing, Commercial Transportation and Industrial Solutions and its Tennessee (U.S.) facility into Aerospace and Automotive Products.

Aerospace and Automotive Products (AAP). AAP provides a wide range of products, including many highly-differentiated sheet and plate products, for the worldwide aerospace and North American automotive markets.

 

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Brazing, Commercial Transportation and Industrial Solutions (BCI). BCI provides aluminum brazing sheet, brazing sheet product innovations, and proprietary multi-layer sheet solutions for multiple applications, including for commercial transportation and industrial customers.

Arconic Micromill™ Products and Services (MPS). MPS includes the Company’s Micromill™ technology that produces an aluminum alloy that is 40 percent more formable and 30 percent stronger than incumbent automotive aluminum and twice as formable and at least 30 percent lighter than high-strength steel. Micromill also reduces a 20-day production process to 20 minutes, and allows the Company’s customers to create lighter, more fuel-efficient vehicles.

For additional discussion of the Global Rolled Products segment’s business, see “Results of Operations—Segment Information” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note O to the Consolidated Financial Statements—Segment and Geographic Area Information in Part II, Item 8. (Financial Statements and Supplementary Data).

In November 2016, Arconic entered into a multi-year contract with Airbus valued at approximately $1 billion. The agreement puts Arconic sheet and plate on every Airbus platform and is the first to include material from Arconic’s new state-of-the art “very thick plate stretcher” at its facility in Davenport, Iowa. Arconic expects the Davenport very thick plate stretcher to be commissioned by the second quarter of 2017 and to enable the Company to produce the largest high-strength monolithic wing ribs in the industry.

In June 2016, Arconic entered into a $470 million multi-year contract with Embraer under which Arconic will supply sheet and plate using proprietary alloys for Embraer’s new E2s, the second generation of the E-Jets family of commercial aircraft.

In 2016, Arconic entered into multi-year contracts with Nissan North America to be the sole supplier of aluminum sheet for seven programs, including Altima, Murano, Maxima and Titan; and with Fiat Chrysler Automobiles, for the 2017 Chrysler Pacifica. Arconic’s newly expanded facilities in Alcoa, Tennessee and Davenport, Iowa, and its Micromill facility in San Antonio, Texas, continue to support Ford Motor Company to supply its Ford F-150 and F-250 models.

Additionally, in 2016, Arconic’s Micromill technology was recognized with a 2016 R&D 100 Award. The annual R&D 100 Awards is an international competition that recognizes the 100 most technologically significant products introduced in the marketplace over the past year, as selected by the editors of R&D Magazine.

 

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Global Rolled Products Principal Facilities

 

Country   Location  

Owners1

(% Of Ownership)

  Products

Brazil

  Itapissuma   Arconic (100%)   Specialty Foil

China

  Kunshan   Arconic (100%)   Sheet and Plate
    Qinhuangdao2   Arconic (100%)   Sheet and Plate

Hungary

  Székesfehérvár   Arconic (100%)   Sheet and Plate/Slabs and Billets

Italy

  Fusina2   Arconic (100%)   Sheet and Plate

Russia

  Samara   Arconic (100%)   Sheet and Plate

United Kingdom

  Birmingham   Arconic (100%)   Plate

United States

  Davenport, IA   Arconic (100%)   Sheet and Plate
    Danville, IL3   Arconic (100%)   Sheet and Plate
    Hutchinson, KS3   Arconic (100%)   Sheet and Plate
    Lancaster, PA   Arconic (100%)   Sheet and Plate
    Alcoa, TN   Arconic (100%)   Sheet
    Texarkana, TX4   Arconic (100%)   Slabs
    San Antonio, TX   Arconic (100%)   Micromill

 

1 

Facilities with ownership described as “Arconic (100%)” are either leased or owned directly or indirectly by the Company.

 

2 

Leased property or partially leased property.

 

3 

Properties are satellite locations of the Davenport, IA facility.

 

4 

The Texarkana rolling mill facility had been idle since September 2009 due to a continued weak outlook in common alloy markets. In January 2016, the Company restarted its Texarkana cast house to meet demand for aluminum slab for the automotive industry. The aluminum slab that is cast at Texarkana is turned into aluminum sheets at Arconic’s expanded automotive facility in Davenport, Iowa and its rolling mill in Lancaster, Pennsylvania.

Engineered Products and Solutions

Arconic’s Engineered Products and Solutions segment develops and manufactures high performance products for the aerospace (commercial and defense), commercial transportation, and power generation end markets. Such products include fastening systems (titanium, steel, and nickel superalloys); seamless rolled rings (mostly nickel superalloys); investment castings (nickel superalloys, titanium, and aluminum), including airfoils and forged jet engine components (e.g., jet engine disks); and various forging and extrusion metal products for the oil and gas, industrial products, automotive, and land and sea defense end markets.

The Engineered Products and Solutions segment is comprised of four business units: Arconic Power and Propulsion; Arconic Fastening Systems and Rings; Arconic Forgings and Extrusions; and Arconic Titanium and Engineered Products.

Arconic Power and Propulsion (APP). APP produces investment cast airfoils for aero engine and industrial gas turbines and structural aero engine and airframe components. APP also provides additive manufacturing technologies, superalloy and titanium ingots, machining, performance coatings, and hot isostatic pressing for high performance parts.

Arconic Fastening Systems and Rings (AFSR). AFSR produces aerospace fastening systems and rings, as well as commercial transportation fasteners. The business’s rings and high-tech, multi-material fastening systems are found nose to tail on aircraft and aero engines. The business’s products are also critical components of industrial gas turbines, automobiles, commercial transportation vehicles, and construction and industrial equipment.

 

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Arconic Forgings and Extrusions (AFE). AFE produces defense airframe forgings and extrusions, such as forged bulkheads, wing and landing gear components, and lightweight drive shafts for the aerospace and commercial transportation industries.

Arconic Titanium and Engineered Products (ATEP). ATEP produces titanium aero ingots and mill products, and provides multi-material airframe subassemblies and solutions related to advanced technologies and materials, such as 3D printing and titanium aluminides.

For additional discussion of the Engineered Products and Solutions segment’s business, see “Results of Operations—Segment Information” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note O to the Consolidated Financial Statements—Segment and Geographic Area Information in Part II, Item 8. (Financial Statements and Supplementary Data).

In April 2016, Arconic completed the sale of its Remmele Medical business to Lisi Medical for $102 million in cash ($99 million net of transaction costs). This business, which was acquired by the Company in July 2015 in conjunction with its acquisition of RTI International Metals, Inc., manufactures precision-machined metal products for customers in the minimally invasive surgical device and implantable device markets.

In June 2015, Arconic announced its investment of $22 million in Hot Isotopic Pressing (HIP) technology at its facility in Whitehall, Michigan. The investment is expected to enable Arconic to capture growing demand for advanced titanium, nickel and additive manufactured parts for the world’s bestselling engines. Arconic completed installation of the HIP technology investment at its Whitehall facility in 2016 and expects that the new technology will be ready for product qualification by the end of the first quarter of 2017.

Arconic and VSMPO-AVISMA Corporation signed a cooperation agreement in October 2013 to form a new joint venture that will focus on manufacturing high-end titanium and aluminum aerospace products, such as landing gear and forged wing components, at Arconic’s plant in Samara, Russia. The definitive Shareholders’ Agreement was executed by the parties on July 16, 2014, and the deal closed in the third quarter of 2016. The facility is now operational.

Engineered Products and Solutions Principal Facilities1

 

Country   Facility  

Owners2

(% Of Ownership)

  Products
Australia   Oakleigh   Arconic (100%)   Fasteners
Canada   Georgetown, Ontario3   Arconic (100%)   Aerospace Castings
    Laval, Québec   Arconic (100%)   Aerospace Castings and Machining
China   Nantong   Arconic (100%)   Aerospace Castings
    Suzhou3   Arconic (100%)   Fasteners and Rings
France   Dives-sur-Mer   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings
    Evron   Arconic (100%)   Aerospace and Specialty Castings
    Gennevilliers   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings
    Montbrison   Arconic (100%)   Fasteners
    St.  Cosme-en-Vairais3   Arconic (100%)   Fasteners
    Toulouse   Arconic (100%)   Fasteners
    Us-par-Vigny   Arconic (100%)   Fasteners
Germany   Bestwig   Arconic (100%)   Aerospace Castings
    Erwitte   Arconic (100%)   Aerospace Castings
    Hannover3   Arconic (100%)   Extrusions
    Hildesheim-Bavenstedt3   Arconic (100%)   Fasteners
    Kelkheim3   Arconic (100%)   Fasteners

 

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Country   Facility  

Owners2

(% Of Ownership)

  Products
Hungary   Eger   Arconic (100%)   Forgings
    Nemesvámos   Arconic (100%)   Fasteners
    Székesfehérvár   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings and Forgings
Japan   Nomi   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings
Mexico   Ciudad Acuña3   Arconic (100%)   Aerospace Castings/Fasteners
Morocco   Casablanca3   Arconic (100%)   Fasteners
Russia   Samara4   Arconic (100%)   Extrusions and Forgings
South Korea   Kyoungnam   Arconic (100%)   Extrusions
United Kingdom   Darley Dale   Arconic (100%)   Forgings
    Ecclesfield   Arconic (100%)   Ingot Castings
    Exeter3   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings and Alloy
    Glossop   Arconic (100%)   Ingot Castings
    Ickles   Arconic (100%)   Ingot Castings
    Leicester3   Arconic (100%)   Fasteners
    Low Moor   Arconic (100%)   Extrusions
    Meadowhall   Arconic (100%)   Forgings
    Provincial Park   Arconic (100%)   Forgings
    Redditch3   Arconic (100%)   Fasteners
    River Don   Arconic (100%)   Forgings
    Telford   Arconic (100%)   Fasteners
    Welwyn Garden City   Arconic (100%)   Aerospace Formed Parts
United States   Chandler, AZ   Arconic (100%)   Extrusions
    Tucson, AZ3   Arconic (100%)   Fasteners
    Carson, CA3   Arconic (100%)   Fasteners
    City of Industry, CA3   Arconic (100%)   Fasteners
    Fontana, CA   Arconic (100%)   Rings
    Fullerton, CA3   Arconic (100%)   Fasteners
    Newbury Park, CA   Arconic (100%)   Fasteners
    Rancho Cucamonga, CA   Arconic (100%)   Rings
    Sylmar, CA   Arconic (100%)   Fasteners
    Torrance, CA   Arconic (100%)   Fasteners
    Tracy, CA   Arconic (100%)   Fasteners
    Branford, CT   Arconic (100%)   Aerospace Coatings
    Winsted, CT   Arconic (100%)   Aerospace Machining
    Savannah, GA   Arconic (100%)   Forgings
    Lafayette, IN   Arconic (100%)   Extrusions
    La Porte, IN   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings
    Burlington, MA   Arconic (100%   Powdered Metal Parts
    Baltimore, MD3   Arconic (100%)   Extrusions

 

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Country   Facility  

Owners2

(% Of Ownership)

  Products
    Whitehall, MI   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings and Coatings, Titanium Alloy and Specialty Products
    Sullivan, MO   Arconic (100%)   Titanium Mill Products
    Washington, MO   Arconic (100%)   Aerospace Formed Parts
    Big Lake, MN   Arconic (100%)   Aerospace Machining
    New Brighton, MN   Arconic (100%)   Aerospace Machining
    Roseville, MN3   Arconic (100%)   Aerospace Machining
    Dover, NJ   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings and Alloy
    Verdi, NV   Arconic (100%)   Rings
    Kingston, NY3   Arconic (100%)   Fasteners
    Massena, NY   Arconic (100%)   Extrusions
    Rochester, NY   Arconic (100%)   Rings
    Canton, OH   Arconic (100%)   Ferro-Titanium Alloys and Titanium Mill Products
    Cleveland, OH   Arconic (100%)   Investment Casting Equipment, Aerospace Components, Castings, Forgings and Oil & Gas Drilling Products
    Niles, OH   Arconic (100%)   Titanium Mill Products
    New Kensington, PA   Arconic (100%)   Ingot Castings
    Morristown, TN3   Arconic (100%)   Aerospace and Industrial Gas Turbine Ceramic Products
    Austin, TX   Arconic (100%)   Additively Manufactured Parts
    Houston, TX   Arconic (100%)   Extrusions
    Spring, TX   Arconic (100%)   Deep Water Drilling Machining
    Waco, TX3   Arconic (100%)   Fasteners
    Wichita Falls, TX   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings
    Hampton, VA3   Arconic (100%)   Aerospace and Industrial Gas Turbine Castings
    Martinsville, VA   Arconic (100%)   Titanium Mill Products

 

1 

Principal facilities are listed, and do not include additional locations that serve as sales offices, distribution centers or warehouses.

 

2 

Unless otherwise noted, facilities with ownership described as “Arconic (100%)” are owned by the Company.

 

3 

Leased property or partially leased property.

 

4 

The operating results of this facility are reported in the Global Rolled Products segment.

Transportation and Construction Solutions

Arconic’s Transportation and Construction Solutions segment produces products that are used mostly in the nonresidential building and construction and commercial transportation end markets. Such products include integrated aluminum structural systems, architectural extrusions, forged aluminum commercial vehicle wheels, and aluminum products for the industrial products end market.

The Transportation and Construction Solutions segment is comprised of three business units: Arconic Wheel and Transportation Products; Building and Construction Systems; and Latin American Extrusions.

Arconic Wheel and Transportation Products (AWTP). AWTP provides forged aluminum wheels and related products for heavy-duty trucks and the commercial transportation markets.

 

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Building and Construction Systems (BCS). BCS provides building and construction architectural framing products and aluminum curtain wall and front entry systems.

Latin American Extrusions (LAE). LAE serves both the building and construction and the industrial markets in Latin America, with products including aluminum architectural systems for doors, windows and curtain walls, and a wide range of extruded solutions for the automotive, defense and other industrial industries.

For additional discussion of the Transportation and Construction Solutions segment’s business, see “Results of Operations—Segment Information” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note O to the Consolidated Financial Statements—Segment and Geographic Area Information in Part II, Item 8. (Financial Statements and Supplementary Data).

In September 2016, Arconic announced the expansion of its wheels manufacturing plant in Hungary, increasing polishing capacity to produce the Company’s patented LvL ONE® and Dura-Bright® EVO products and building a machining line to expand capacity for a variety of Alcoa® Wheel products.1 Production is expected to begin in early 2017.

In 2016, Arconic signed more than $450 million in long term agreements with customers in North America, South America, Europe and Asia for its forged aluminum wheels. The largest is a long-term agreement with PACCAR, a global leader in the design, manufacture and customer support of high-quality light-, medium- and heavy-duty trucks. Arconic will supply forged aluminum Alcoa Wheels for PACCAR trucks under the Kenworth and Peterbilt nameplates.

1 The “Alcoa” trademark is owned by Alcoa USA Corp. and used by Arconic under license from Alcoa USA Corp.

Transportation and Construction Solutions Principal Facilities1

 

Country   Facility  

Owners2

(% Of Ownership)

   Products

Brazil

  Itapissuma3   Arconic (100%)    Extrusions
    Tubarão   Arconic (100%)    Extrusions
    Utinga   Arconic (100%)    Extrusions

Canada

  Lethbridge, Alberta   Arconic (100%)    Architectural Products
    Pointe Claire, Quebec   Arconic (100%)    Architectural Products
    Vaughan, Ontario   Arconic (100%)    Architectural Products

China

  Suzhou4   Arconic (100%)    Forgings

France

  Guerande   Arconic (100%)    Architectural Products
    Lézat-sur-Lèze 4   Arconic (100%)    Architectural Products
    Merxheim4   Arconic (100%)    Architectural Products
    Vendarques   Arconic (100%)    Architectural Products

Germany

  Iserlohn   Arconic (100%)    Architectural Products

Hungary

  Székesfehérvár   Arconic (100%)    Forgings

Japan

  Jōetsu City4   Arconic (100%)    Forgings

Mexico

  Monterrey   Arconic (100%)    Forgings

Morocco

 

Casablanca4

 

Arconic (67%)

Ahmed Hattabi (33%)

  

Architectural Products

Netherlands

  Harderwijk   Arconic (100%)    Architectural Products

Spain

  Irutzun   Arconic (100%)    Architectural Products

United Kingdom

  Runcorn   Arconic (100%)    Architectural Products

United States

  Springdale, AR   Arconic (100%)    Architectural Products

 

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Country   Facility  

Owners2

(% Of Ownership)

   Products
    Visalia, CA   Arconic (100%)    Architectural Products
    Eastman, GA   Arconic (100%)    Architectural Products
    Barberton, OH   Arconic (100%)    Forgings
    Chillicothe, OH   Arconic (100%)    Forgings
    Cleveland, OH   Arconic (100%)    Forgings
    Bloomsburg, PA   Arconic (100%)    Architectural Products
    Cranberry, PA   Arconic (100%)    Architectural Products
    Denton, TX4   Arconic (100%)    Forgings

 

1 

Principal facilities are listed, and do not include additional locations that serve as sales offices, distribution centers or warehouses.

 

2 

Facilities with ownership described as “Arconic (100%)” are owned by the Company.

 

3 

This facility was permanently closed in December 2016 due to changes in production demand in the Brazilian market.

 

4 

Leased property or partially leased property.

In addition to the facilities listed above, BCS has 10 U.S. service centers. These centers perform light manufacturing, such as assembly and fabrication of certain products.

Sources and Availability of Raw Materials

The major raw materials purchased in 2016 for each of the Company’s reportable segments are listed below.

 

Global Rolled Products

 

Engineered Products and Solutions

Alloying materials

 

Alloying materials

Aluminum scrap

 

Electricity

Coatings

 

Natural gas

Electricity

 

Nickel alloys

Lube oil

 

Primary aluminum (ingot, billet, P1020, high purity)

Natural gas

 

Resin

Packaging materials

 

Stainless steel

Primary aluminum (ingot, slab, billet, P1020, high purity)

 

Steel

Steam

 

Titanium alloys

 

Titanium sponge

Transportation and Construction Solutions

   
Aluminum coil  
Aluminum scrap  
Electricity  
Natural gas  
Paint/Coating  
Polyethylene  
Primary aluminum  
Resin  

Generally, other materials are purchased from third-party suppliers under competitively priced supply contracts or bidding arrangements. The Company believes that the raw materials necessary to its business are and will continue to be available.

 

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Patents, Trade Secrets and Trademarks

The Company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The Company’s rights under its patents, as well as the products made and sold under them, are important to the Company as a whole and, to varying degrees, important to each business segment. The patents owned by Arconic generally concern particular products or manufacturing equipment or techniques. Arconic’s business as a whole is not, however, materially dependent on any single patent, trade secret or trademark. As a result of product development and technological advancement, the Company continues to pursue patent protection in jurisdictions throughout the world. As of the end of 2016, the Company’s worldwide patent portfolio consists of approximately 1,458 granted patents and 697 pending patent applications.

The Company also has a significant number of trade secrets, mostly regarding manufacturing processes and material compositions that give many of its businesses important advantages in their markets. The Company continues to strive to improve those processes and generate new material compositions that provide additional benefits.

With respect to domestic and international registered trademarks, the Company has many that have significant recognition within the markets that are served. Examples include the name “Arconic” and the Arconic symbol for aluminum, nickel, and titanium products, Howmet® metal castings, Huck® fasteners, Kawneer® building panels and Dura-Bright® wheels with easy-clean surface treatments. A significant trademark filing campaign for the name “Arconic” was completed in 2016, in support of the corporate launch of Arconic Inc. As of the end of 2016, the Company’s worldwide trademark portfolio consists of approximately 1,394 registered trademarks and 913 pending trademark applications. The Company’s rights under its trademarks are important to the Company as a whole and, to varying degrees, important to each business segment.

Competitive Conditions

Global Rolled Products (GRP)

GRP is one of the leaders in many of the aluminum flat rolled products markets in which it participates, including aerospace, automotive, brazing sheet, commercial transportation, industrial markets and regional specialties. However, much like other Arconic businesses, GRP is subject to substantial and intense competition in all of its markets.

While GRP participates in markets where Arconic believes the Company has a significant competitive advantage due to customer intimacy, advanced manufacturing capability and/or differentiated products, in certain cases, the Company’s competitors are capable of making products similar to Arconic’s. The Company continuously works to maintain and enhance its competitive advantage through innovation: new alloys such as Arconic’s new aerospace alloys, new products such as the Company’s 5 layer brazing products and break-through processes such as Arconic Micromill™ technology.

GRP comprises AAP, BCI and MPS, each serving defined segments. Some of the markets are worldwide and some are more regionally focused. Participation in these segments by GRP’s competitors varies. For example, Novelis is the largest flat rolled products producer but does not participate in the aerospace market. On the other hand, Constellium participates in all major market segments including aerospace, brazing, industrial, commercial transportation and packaging. Granges participates only in the brazing sheet market. Other GRP competitors include Aleris, AMAG, Kaiser, Kobe, Nanshan, and UACJ.

Additionally, there are a number of new competitors emerging, particularly in China and other developing economies. For example, in the brazing business, the number of viable competitors has doubled over a five-year period. Arconic expects that this competitive pressure will continue and increase in the future as customers seek to globalize their supply bases in order to reduce costs. The Company continually monitors and plans for these new emerging players.

 

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Summary of Major Competitors for GRP (both AAP and BCI)

 

   

Constellium (The Netherlands)

 

   

Novelis

 

   

UACJ (Japan)

 

   

Aleris

 

   

Hydro (Norway)

 

   

Nanshan (China)

 

   

Granges (Sweden)

 

   

Kobe (Japan)

Engineered Products and Solutions (EPS)

EPS’s business units—APP, AFSR, AFE and ATEP —are subject to substantial and intense competition in the markets they serve. Although Arconic believes its advanced technology, manufacturing processes and experience provide advantages to Arconic’s customers, such as high quality and superior mechanical properties that meet the Company’s customers’ most stringent requirements, many of the products Arconic makes can be produced by competitors using similar types of manufacturing processes (e.g., closed die forgings) as well as alternative forms of manufacturing (e.g., machining out of plate). Despite intense competition, Arconic continues as a market leader in most of its principal markets. Several factors, including Arconic’s legacy of technical innovation, state-of-the-art capabilities, engaged employees and long-standing customer relationships, enable the Company to maintain its competitive position.

In the investment castings business served by APP (Nickel, Titanium and Aluminum Investment Castings), Arconic’s principal competitor is Precision Cast Parts Corp. (PCC). PCC produces superalloy, titanium and aluminum investment castings principally for the aerospace and industrial gas turbine markets. In addition, Doncasters Group Ltd. (UK) produces superalloy investment castings for engine applications, and Pacific Cast Technologies (a subsidiary of Allegheny Technologies, Inc. (ATI)) and Selmet both manufacture titanium investment castings for jet engine and airframe applications and Consolidated Precision Products (CPP) produces superalloy and aluminum investment castings principally for the aerospace and industrial gas turbine (IGT) markets. Several of Arconic’s largest customers have captive superalloy furnaces for producing airfoil investment castings for their own use. Many other companies around the world also produce superalloy, titanium, and aluminum investment castings, and some of these companies currently compete with Arconic in the aerospace and other markets, while others are capable of competing with the Company should they choose to do so.

In the fasteners markets served by AFSR, the two principal competitors in the aerospace fastener business are PCC and Lisi Aerospace (France), with additional competition from Consolidated Aerospace Manufacturing-“CAM”, and TriMas. These companies together offer a comprehensive array of products in a broad range of materials (including superalloys) that directly compete in AFSR’s key segments including airframe, aero-engine, aerospace, and IGT. As aerospace original equipment manufacturers (OEMs) seek to balance product supply across large and small suppliers, they view smaller and emerging competition as essential in their efforts to manage sourcing costs.

In the rings products market served by AFSR, Arconic’s principal competitor is PCC, especially through their Carlton facility. PCC produces superalloy, titanium and aluminum rings principally for the aerospace market. In addition, Forgital (France and Italy) produces rings in multiple materials, and Frisa (Mexico) manufactures rings in superalloys and titanium. Several smaller competitors around the world compete with Arconic in specific markets, depending on the equipment capability and metallurgical expertise.

 

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In the forged products market served by AFE, Arconic’s largest competitors are PCC, Weber Metals (a division of Otto Fuchs KG in Germany), Aubert & Duval (a group member of Eramet in France), VSMPO-AVISMA (Russia) and Ladish Co. (a subsidiary of ATI). In the extruded products market served by AFE, the Company faces increased competition from emerging international companies, such as Nanshan (China), as customers seek lower cost sources of production.

International competition in the investment casting, fastener, ring and forging markets may also increase in the future as a result of strategic alliances among engine OEMs, aero-structure prime contractors, and overseas companies, especially in developing markets, particularly where “offset” or “local content” requirements create purchase obligations with respect to products manufactured in or directed to a particular country.

In the titanium milled and engineered products market served by ATEP, Arconic’s largest competitors are PCC (through its TiMet division), ATI, and VSMPO-AVISMA (Russia). ATEP also competes in the highly fragmented machining market with numerous small players throughout North America and Europe. In the highly competitive milled products space, cost and service are the differentiators, and there is continual effort to reduce prices for input raw material. For engineered products, such as the ATEP-supplied 787 seat tracks for Boeing, advanced capabilities as well as an efficient supply chain are the key differentiators.

Summary of Major Competitors:

APP: Superalloy, Titanium and Aluminum Investment Castings

 

   

PCC

 

   

Doncasters Group Ltd. (UK)

 

   

Pacific Cast Technologies (a subsidiary of ATI)

 

   

CPP

 

   

Selmet

AFSR:

Fasteners

 

   

Lisi Aerospace (France)

 

   

PCC

 

   

Consolidated Aerospace Manufacturing-“CAM”

 

   

TriMas

Rings

 

   

PCC

 

   

Forgital (Italy, France)

 

   

Frisa (Mexico)

AFE:

Nickel, Titanium, Steel and Aluminum Forged Products

 

   

PCC

 

   

Weber Metals (a subsidiary of Otto Fuchs KG in Germany).

 

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Aubert & Duval (a group member of Eramet in France)

 

   

VSMPO-AVISMA (Russia)

 

   

Ladish Co. (a subsidiary of ATI)

Aluminum Extruded Products

 

   

Universal Alloys Corporation

 

   

Kaiser Aluminum

 

   

Constellium (The Netherlands)

 

   

Nanshan (China)

ATEP:

 

   

TiMet (a division of PCC)

 

   

ATI

 

   

VSMPO-AVISMA (Russia)

Transportation and Construction Solutions (TCS)

In the forged aluminum wheels business, AWTP competes in commercial transportation, under the product brand name Alcoa® Wheels, for the major regions that it serves (Americas, Europe, Japan, China, and Australia). AWTP competes against steel wheels, as well as aluminum. Its larger competitors are Accuride Corporation, Nippon Steel & Sumitomo Metal Corporation, Zhejiang Dicastal Hongxin Technology Co. Ltd, and Speedline (member of the Ronal Group). In recent years, AWTP has seen an increase in the number of aluminum wheel suppliers (both forged and cast aluminum wheels) from China, Taiwan, and South Korea attempting to penetrate the commercial transportation market.

BCS is a manufacturer and marketer of aluminum architectural systems and products in North America and with a growing presence in Europe, Asia and the Middle East. In North America, BCS primarily competes in the nonresidential building segment. In Europe, Asia and the Middle East, it competes in both the residential and the nonresidential building segments. BCS competes with regional and local players in the architectural systems and more global companies in the products markets. BCS’s competitive advantage is the cornerstone to its strong brand, innovative products, customer intimacy and technical services. Over the past decade, the regional competitors, primarily in North America, have narrowed the product portfolio and technical services advantages. However, BCS has maintained its competitive advantage through innovative products like highly energy-efficient high-thermal products and differentiated services. BCS revenues are derived mainly from the retail, office, education and healthcare building segments.

BCS is organized into two business segments: architectural systems and architectural products. The primary product categories in architectural systems are storefront, framing and entrances (SEF), curtain walls, and windows. In the SEF and curtain wall businesses, BCS competes with competitors like Apogee, YKK, EFCO, Oldcastle, Schüco, Hydro/SAPA and Reynaers in their aluminum framing systems business. The architectural products business is more global and is primarily served by subsidiaries of larger companies like Alpolic (Mitsubishi Corporation), Alucobond (Schweiter Technologies) and Novelis (Aditya Birla Group). The competitive landscape in the architectural systems market has been relatively stable since the mid-2000s, with the major competitors in North America and Europe still operating in their markets, despite some industry consolidation in North America during the late 2000s.

LAE participates in two distinct segments: building and construction and industrial. In the building and construction market, LAE develops and markets aluminum architectural systems for both commercial and residential buildings. LAE’s product portfolio provides extensive coverage of all types of buildings, from more complex projects requiring special engineering to multi-family residential buildings. In the industrial business market, LAE manufactures and sells

 

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soft alloy extruded profiles and solutions, mainly for the automotive, consumer goods, machinery and equipment segments. Overall, LAE holds a strong presence in Brazil, where competition is very fragmented, composed mainly of small local extruders and a few multinationals such as CBA (Votorantim Group) and SAPA.

Summary of Major Competitors:

AWTP:

 

   

Accuride Corporation

 

   

Nippon Steel & Sumitomo Metal Corporation (Japan)

 

   

Zhejiang Dicastal Hongxin Technology Co. Ltd (China)

 

   

Speedline (member of the Ronal Group in Switzerland)

BCS:

 

   

North America Systems – Apogee, Oldcastle, YKK and EFCO

 

   

North America Products – Alpolic, Alucobond and Alucoil

 

   

Europe Systems - Schüco (Germany), Hydro/SAPA (Norway), Reynaers (Belgium) and Corialis (Belgium)

 

   

Europe Products – Alucobond, Alucoil, Euramax and Novelis

LAE:

 

   

Belmetal (Brazil)

 

   

CBA (Brazil)

 

   

SAPA (Norway)

 

   

Aluk (Brazil)

Research and Development

Arconic, at its light metals research center, engages in research and development (R&D) programs that include process and product development, and basic and applied research. R&D expenditures were $132 million, $169 million and $123 million in 2016, 2015 and 2014, respectively.

Throughout 2016, the Company continued working on new developments in all business segments and leveraging new technologies. The Company has continued investing in additive manufacturing, with a focus on producing metal powder materials tailored for a range of additive process technologies, and furthering its development of advanced 3D printing design and manufacturing techniques—such as Arconic’s AmpliforgeTM process—to improve production speeds, reduce costs, and achieve geometries not possible through traditional methods. The Company’s new powder production facility was completed at the Arconic Technology Center in 2016. This facility will continue its focus on material development in aluminum, nickel and titanium alloys.

Arconic’s Micromill™ technology was awarded an R&D 100 Award, as one of the top innovations in 2016; the Company’s second such award in three years. Notably, there are 13 OEMs that have signed Micromill nondisclosure agreements and 12 potential licensees engaged, including potential joint ventures.

The Company continued its differentiation in the commercial transportation market with Dura-Bright® EVO, UltraOne™ and European UltraOne™ wheel products.

 

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The Company also continues to develop and deploy proprietary processing technologies in the manufacture of aerospace components, as well as a continued commitment and commercialization of a portfolio of proprietary aerospace fasteners. One such example is Ergo-Tech® blind fasteners.

Environmental Matters

Information relating to environmental matters is included in Note L to the Consolidated Financial Statements under the caption “Environmental Matters” on pages 96-97. Approved capital expenditures for new or expanded facilities for environmental control are approximately $11 million for 2017 and estimated expenditures for such purposes are $12.5 million for 2018.

Employees

Total worldwide employment at the end of 2016 was approximately 41,500 employees in 25 countries. About 24,600 of these employees are represented by labor unions. The Company believes that relations with its employees and any applicable union representatives generally are good.

In the United States, approximately 7,500 employees are represented by various labor unions. The largest collective bargaining agreement is the master collective bargaining agreement between Arconic and the United Steelworkers (USW). The USW master agreement covers approximately 3,400 employees at four U.S. locations; the current labor agreement expires on May 15, 2019. There are 17 other collective bargaining agreements in the United States with varying expiration dates.

On a regional basis, collective bargaining agreements with varying expiration dates cover approximately 9,300 employees in Europe and Russia, 13,100 employees in North America, 1,200 employees in Central and South America, and 1,000 employees in China.

Executive Officers of the Registrant

The names, ages, positions and areas of responsibility of the executive officers of the Company as of February 28, 2017 are listed below.

Ken Giacobbe, 50, Executive Vice President and Chief Financial Officer. Mr. Giacobbe was elected Executive Vice President and Chief Financial Officer of Arconic effective November 1, 2016. Mr. Giacobbe joined Arconic in 2004 as Vice President of Finance for Global Extruded Products, part of Alcoa Forgings and Extrusions. He then served as Vice President of Finance for the Company’s Building and Construction Systems business from 2008 until 2011. In 2011, he assumed the role of Group Controller for the Engineered Products and Solutions business. From January 2013 until October 2016, Mr. Giacobbe served as Chief Financial Officer of the Engineered Products and Solutions business. Before joining Arconic, Mr. Giacobbe held senior finance roles at Avaya and Lucent Technologies.

Klaus Kleinfeld, 59, Director, Chairman of the Board and Chief Executive Officer. Mr. Kleinfeld was elected to Arconic’s Board of Directors in November 2003 and became Chairman on April 23, 2010. He has been Chief Executive Officer of the Company since May 8, 2008. He was President and Chief Executive Officer from May 8, 2008 to April 23, 2010. He was President and Chief Operating Officer of Arconic from October 1, 2007 to May 8, 2008. Mr. Kleinfeld was President and Chief Executive Officer of Siemens AG, the global electronics and industrial conglomerate, from January 2005 to June 2007. He served as Deputy Chairman of the Managing Board and Executive Vice President of Siemens AG from 2004 to January 2005. He was President and Chief Executive Officer of Siemens Corporation, the U.S. arm of Siemens AG, from 2002 to 2004.

Christoph Kollatz, 56, Executive Vice President, Corporate Development, Strategy and New Ventures. Mr. Kollatz joined Arconic in May 2015 and was elected an Executive Vice President in September 2015. Before joining the Company, Mr. Kollatz was Chief Information and Process Officer at Lufthansa from 2012 to 2015, overseeing the information technology infrastructure, as well as IT applications, supporting financial and customer operations. Prior to

 

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Lufthansa, from 2011 to 2012, Mr. Kollatz created and led a start-up business within SAP, introducing a new database technology to the market. Mr. Kollatz held a series of leadership, strategy and technology positions at Siemens from 1989 to 2011, including as CEO of Siemens IT Solutions and Services.

Kay H. Meggers, 52, Executive Vice President and Group President, Global Rolled Products. Mr. Meggers was elected an Executive Vice President in December 2011. He was named Group President, Global Rolled Products effective November 14, 2011. Before his most recent appointment, he led Arconic’s Business Excellence and Corporate Strategy resource unit and was also responsible for overseeing Arconic’s Asia-Pacific region. He joined Arconic in February 2010 as Vice President, Corporate Initiatives, a position responsible for planning and coordinating major strategic initiatives from enhancing technology and innovation as part of the Alcoa Technology Advantage program to spearheading growth strategies for China and Brazil. He was elected a Vice President of Arconic in June 2011. Before joining Arconic, Mr. Meggers was Senior Vice President at Siemens U.S. Building Technologies Division and served for three years as Business Unit Head of Building Automation. In 2006, he served for nine months as Division Head of Fire Safety, also part of Siemens U.S. Building Technologies Division. Between 2002 and 2005, he served as Vice President of Strategic Planning at Siemens U.S.

Timothy D. Myers, 51, Executive Vice President and Group President, Transportation and Construction Solutions. Mr. Myers was appointed Executive Vice President and Group President, Transportation and Construction Solutions in May 2016. Prior to being appointed to his current role, he was President of Alcoa Wheel and Transportation Products, from June 2009 to May 2016. Prior to that assignment, Mr. Myers was Vice President and General Manager, Commercial Vehicle Wheels for the Alcoa Wheel Products business from January 2006. Mr. Myers joined Arconic in 1991 as an automotive applications engineer in the Commercial Rolled Products Division, and held a series of engineering, marketing, sales and management positions with the Company since that time.

Paul Myron, 50, Vice President and Controller. Mr. Myron was elected Vice President and Controller of Arconic effective November 1, 2016. Mr. Myron joined Arconic as a systems analyst in Pittsburgh and in 1992 relocated to the Company’s Davenport, Iowa facility as a product accountant. He served in numerous financial management positions from 1995 until 2000 when he was named Commercial Manager and Controller for the Atlantic division of the Alcoa World Alumina and Chemicals business. In 2002, Mr. Myron was appointed Vice President of Finance, Alcoa Primary Metals and later became Vice President of Finance, Alcoa World Alumina and Chemicals. In 2005 Mr. Myron was elected Director of Financial Planning and Analysis, accountable for Arconic’s financial planning, analysis, and reporting worldwide. In February 2012, he became Director of Finance Initiatives for the Engineered Products and Solutions business, overseeing specific financial initiatives and projects within the group. From July 2012 until his most recent appointment, Mr. Myron served as Vice President, Finance and Business Excellence for the Arconic Power and Propulsion business.

Vas Nair, 51, Executive Vice President, Human Resources and Environment, Health, Safety and Sustainability. Ms. Nair was appointed Executive Vice President, Human Resources and Environment, Health, Safety and Sustainability in November 2015. Prior to being appointed to her current role, Ms. Nair was Arconic’s Chief Talent and Diversity Officer, with global responsibility for diversity and inclusion from February 2015 to October 2015. Prior to joining Arconic, Ms. Nair was VP of Global Learning and Talent Development at Estee Lauder from November 2010 to January 2015. Ms. Nair was Vice President and Chief Learning Officer at Schering-Plough from November 2003 to October 2009.

Katherine H. Ramundo, 49, Executive Vice President, Chief Legal Officer and Secretary. Ms. Ramundo was elected to her current position effective November 1, 2016. Prior to joining Arconic, from January 2013 through August 2015, she was Executive Vice President, General Counsel and Secretary of ANN INC., the parent company of ANN TAYLOR and LOFT brands, based in New York. Prior to ANN INC., she served as Vice President, Deputy General Counsel and Assistant Secretary at Colgate-Palmolive, where she held various legal roles from November 1997 to January 2013. She began her career as a litigator in New York, practicing at major law firms, including Cravath, Swaine & Moore and Sidley & Austin.

 

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Karl Tragl, 54, is Executive Vice President and Group President, Engineered Products and Solutions. Mr. Tragl was appointed to his current position effective May 1, 2016. Prior to his current role, Mr. Tragl served as Group President, Transportation and Construction Solutions (TCS) from February 2016 through April 2016. Previously, Mr. Tragl was the Chief Executive Officer of Bosch Rexroth AG, Bosch’s $6 billion automation solutions company, based in Germany, from 2010 to 2016. Mr. Tragl served in a progression of roles at Bosch Rexroth, joining the company in 2000 as head of the Automations Services business, and then advancing through the Electric Drives and Controls Business to assume responsibility for Factory Automation and Global Sales for the entire company. Earlier in his career, he was managing director of the Siemens Standard Drives business and a partner in the Siemens in-house Management Consulting Group.

The Company’s executive officers are elected or appointed to serve until the next annual meeting of the Board of Directors (held in conjunction with the annual meeting of shareholders) except in the case of earlier death, retirement, resignation or removal.

 

Item 1A. Risk Factors.

Arconic’s business, financial condition and results of operations may be impacted by a number of factors. In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm its business, financial condition or results of operations, including causing Arconic’s actual results to differ materially from those projected in any forward-looking statements. The following list of significant risk factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties not presently known to Arconic or that Arconic currently deems immaterial also may materially adversely affect the Company in future periods.

The markets for Arconic’s products are highly cyclical and are influenced by a number of factors, including global economic conditions.

Arconic is subject to cyclical fluctuations in global economic conditions and lightweight metals end-use markets. Arconic sells many products to industries that are cyclical, such as the aerospace, automotive, and commercial construction and transportation industries, and the demand for its products is sensitive to, and quickly impacted by, demand for the finished goods manufactured by its customers in these industries, which may change as a result of changes in regional or worldwide economies, currency exchange rates, energy prices or other factors beyond its control.

In particular, Arconic derives a significant portion of its revenue from products sold to the aerospace industry, which can be highly cyclical and reflective of changes in the general economy. The commercial aerospace industry is historically driven by the demand from commercial airlines for new aircraft. The U.S. and international commercial aviation industries may face challenges arising from competitive pressures and fuel costs. Demand for commercial aircraft is influenced by airline industry profitability, trends in airline passenger traffic, the state of U.S., regional and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors including the effects of terrorism, health and safety concerns, environmental constraints imposed upon aircraft operators, the retirement of older aircraft, and technological improvements to new engines. The military aerospace cycle is highly dependent on U.S. and foreign government funding; however, it is also driven by the effects of terrorism, a changing global political environment, U.S. foreign policy, the retirement of older aircraft, and technological improvements to new engines.

Further, the demand for Arconic’s automotive and ground transportation products is driven by the number of vehicles produced by automotive manufacturers and Arconic content per vehicle. The automotive industry is sensitive to general economic conditions, including credit markets and interest rates, and consumer spending and preferences regarding vehicle ownership and usage, vehicle size, configuration and features. Automotive sales and production can also be affected by other factors including the age of the vehicle fleet and related scrappage rates, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements and levels of competition.

 

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While Arconic believes that the long-term prospects for its products are positive, the Company is unable to predict the future course of industry variables, the strength of the U.S., regional or global economies, or the effects of government intervention. Negative economic conditions, such as a major economic downturn, a prolonged recovery period, or disruptions in the financial markets, could have a material adverse effect on Arconic’s business, financial condition or results of operations.

Arconic’s business could be adversely affected by increases in the cost of aluminum.

Arconic derives a significant portion of its revenue from aluminum-based products. The price of primary aluminum has historically been subject to significant cyclical price fluctuations and the timing of changes in the market price of aluminum is largely unpredictable. Although the Company’s pricing of products is generally intended to pass the risk of metal price fluctuations on to the Company’s customers, Arconic may not be able to pass on the entire cost of increases to its customers and there can be a potential time lag on certain products between increases in costs for aluminum and the point when the Company can implement a corresponding increase in price to its customers. As a result, Arconic may be exposed to such price fluctuations during the time lag. If this occurs, it could have a material adverse effect on Arconic’s financial position, results of operations and cash flows.

Arconic’s customers may reduce their demand for aluminum products in favor of alternative materials.

Certain applications of Arconic’s aluminum-based products compete with products made from other materials, such as steel, titanium and composites. The willingness of customers to pursue materials other than aluminum depends upon the desire to achieve specific attributes. For example, the commercial aerospace industry has used and continues to evaluate the further use of alternative materials to aluminum, such as titanium and composites, in order to reduce the weight and increase the fuel efficiency of aircraft. Additionally, the automotive industry, while motivated to reduce vehicle weight through the use of aluminum, may revert to steel or other materials for certain applications. Further, the decision to use aluminum may be impacted by aluminum prices. The willingness of customers to accept other materials in lieu of aluminum could adversely affect the demand for certain of Arconic’s products, and thus adversely affect Arconic’s financial position, results of operations and cash flows.

Arconic’s profitability could be adversely affected by volatility in the availability or cost of raw materials.

Arconic’s results of operations may be affected by changes in the availability or cost of raw materials, as well as freight costs associated with transportation of raw materials. The availability and costs of certain raw materials necessary for the production of Arconic’s products may be influenced by private or government cartels, changes in world politics or regulatory requirements, labor relations between the producers and their work forces, unstable governments in exporting nations, export quotas, new or increased import duties, market forces of supply and demand, and inflation. In addition, from time to time, commodity prices may fall rapidly. When this happens, suppliers may withdraw capacity from the market until prices improve, which may cause periodic supply interruptions. Arconic may not be able to fully offset the effects of raw material shortages or higher costs through price increases, productivity improvements or cost reduction programs. Shortages or price fluctuations in raw materials could have a material adverse effect on Arconic’s operating results.

Arconic could encounter manufacturing difficulties, which could affect Arconic’s reputation, business and financial statements.

The manufacture of many of Arconic’s products is a highly exacting and complex process. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, supply chain interruptions, natural disasters, labor unrest and environmental factors. Such problems could have an adverse impact on the Company’s ability to fulfill orders or on product performance. Product manufacturing issues could result in recalls, customer penalties, contract cancellation and product liability exposure. Because of approval and license requirements applicable to manufacturers and/or their

 

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suppliers, alternatives to mitigate manufacturing disruptions may not be readily available to the Company or its customers. Accordingly, manufacturing problems could result in significant costs to and liability for Arconic, as well as negative publicity and damage to the Company’s reputation which could impact product demand.

Arconic’s business depends, in part, on its ability to successfully meet increased program demand and mitigate the impact of program cancellations, reductions and delays.

The success of Arconic’s aerospace business will depend, in part, on the success of commercial and military aircraft programs. Arconic is currently under contract to supply components for a number of new and existing commercial, general aviation and military aircraft programs. Many of these programs are scheduled for production increases over the next several years. Arconic’s failure to successfully meet production levels could have a material adverse effect on the Company’s business. Similarly, cancellations, reductions or delays could also have a material adverse effect on Arconic’s business.

Arconic could be adversely affected by reductions in defense spending.

Arconic’s products are used in a variety of military applications, including military aircraft and armored vehicles. Although many of the programs in which Arconic participates extend several years, they are subject to annual funding through congressional appropriations. Changes in military strategy and priorities, or reductions in defense spending, may affect current and future funding of these programs and could reduce the demand for Arconic’s products, which could adversely affect Arconic’s financial position, results of operations and cash flows.

Arconic’s global operations expose the Company to risks that could adversely affect Arconic’s business, financial condition, operating results or cash flows.

Arconic has operations or activities in numerous countries and regions outside the United States, including Europe, Brazil, Canada, China, Japan, and Russia. The Company’s global operations are subject to a number of risks, including:

 

   

economic and commercial instability risks, including those caused by sovereign and private debt default, corruption, and changes in local government laws, regulations and policies, such as those related to tariffs and trade barriers, taxation, exchange controls, employment regulations and repatriation of earnings;

 

   

geopolitical risks such as political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions, and renegotiation or nullification of existing agreements;

 

   

war or terrorist activities;

 

   

major public health issues such as an outbreak of a pandemic or epidemic (such as Sudden Acute Respiratory Syndrome, Avian Influenza, H7N9 virus, or the Ebola virus), which could cause disruptions in Arconic’s operations or workforce;

 

   

difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and

 

   

unexpected events, including fires or explosions at facilities, and natural disasters.

While the impact of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect Arconic’s business, financial condition, operating results or cash flows. Existing insurance arrangements may not provide protection for the costs that may arise from such events.

Arconic may face challenges to its intellectual property rights which could adversely affect the Company’s reputation, business and financial position.

Arconic owns important intellectual property, including patents, trademarks, copyrights and trade secrets. The Company’s intellectual property plays an important role in maintaining Arconic’s competitive position in a number of the markets that the Company serves. Arconic’s competitors may develop technologies that are similar or superior to Arconic’s proprietary technologies or design around the patents Arconic owns or licenses. Further, as the Company expands its operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of

 

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others duplicating Arconic’s proprietary technologies increases, despite efforts the Company undertakes to protect them. Developments or assertions by or against Arconic relating to intellectual property rights, and any inability to protect or enforce these rights, could adversely affect Arconic’s business and competitive position.

Arconic is exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, and other economic factors in the countries in which it operates.

Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, competitive factors in the countries in which Arconic operates, and continued volatility or deterioration in the global economic and financial environment could affect Arconic’s revenues, expenses and results of operations. Changes in the valuation of the U.S. dollar against other currencies, including the British pound, Chinese yuan (renminbi), Euro and Russian ruble, may affect Arconic’s profitability as some important inputs are purchased in other currencies, while the Company’s products are generally sold in U.S. dollars.

Arconic may not be able to realize the expected benefits from its strategy of growing its precision engineering and advanced manufacturing businesses.

Arconic is continuing to execute on its strategy of growing its precision engineering and advanced manufacturing business to capture profitable growth as a lightweight metals innovation leader. It is investing in its manufacturing and engineering businesses to capture growth opportunities in strong end markets like automotive and aerospace. Arconic is building out its businesses, including by introducing innovative new products and technology solutions, and investing in expansions of capacity. Arconic’s recent organic growth projects include the automotive expansions in Davenport, Iowa and Alcoa, Tennessee; the aluminum lithium capacity expansion in Lafayette, Indiana, at the Arconic Technology Center in Pennsylvania and at the Kitts Green plant in the United Kingdom; and the expansion in aerospace capabilities in La Porte, Indiana, Hampton, Virginia and Davenport, Iowa. From time to time, Arconic also pursues growth opportunities that are strategically aligned with its objectives, such as the acquisition of the Firth Rixson business (completed in November 2014), the acquisition of TITAL (completed in March 2015) and the acquisition of RTI International Metals (completed in July 2015). In addition, Arconic is optimizing its rolling mill portfolio as part of its strategy for profitable growth.

Arconic has made, and may continue to plan and execute, acquisitions and divestitures and take other actions to grow or streamline its portfolio. Although management believes that its strategic actions are beneficial to Arconic, there is no assurance that anticipated benefits will be realized. Adverse factors may prevent Arconic from realizing the benefits of its growth projects, including unfavorable global economic conditions, currency fluctuations, or unexpected delays in target timelines. Acquisitions present significant challenges and risks, including the effective integration of the business into the Company, unanticipated costs and liabilities, and the ability to realize anticipated benefits, such as growth in market share, revenue or margins, at the levels or in the timeframe expected. The Company may be unable to manage acquisitions successfully.

With respect to portfolio optimization actions such as divestitures, curtailments and closures, Arconic may face barriers to exit from unprofitable businesses or operations, including high exit costs or objections from various stakeholders. In addition, Arconic may retain unforeseen liabilities for divested entities if a buyer fails to honor all commitments. Arconic’s business operations are capital intensive, and curtailment or closure of operations or facilities may include significant charges, including employee separation costs, asset impairment charges and other measures.

There can be no assurance that acquisitions, growth investments, divestitures or closures will be undertaken or completed in their entirety as planned or that they will be beneficial to Arconic.

Arconic may not be able to successfully realize future targets or goals established for its business segments, at the levels or by the dates targeted.

From time to time, Arconic may announce future targets or goals for its business, which are based on the Company’s then current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which Arconic operates. Future targets and goals reflect the Company’s beliefs and assumptions and its perception

 

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of historical trends, then current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances. As such, targets and goals are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events, including the risks discussed in this report. The actual outcome may be materially different. There can be no assurance that any targets or goals established by the Company will be accomplished at the levels or by the dates targeted, if at all. Failure to achieve the targets or goals by the Company may have a material adverse effect on its business, financial condition, results of operations or the market price of its securities.

Arconic faces significant competition, which may have an adverse effect on profitability.

As discussed in Part I, Item 1. (Business—Competitive Conditions) of this report, the markets for Arconic’s products are highly competitive. Arconic’s competitors include a variety of both U.S. and non-U.S. companies in all major markets. New product offerings or new technologies in the marketplace may compete with or replace Arconic products. The willingness of customers to accept substitutes for the products sold by Arconic, the ability of large customers to exert leverage in the marketplace to affect the pricing for Arconic’s products, and technological advancements or other developments by or affecting Arconic’s competitors or customers could affect Arconic’s results of operations. In addition, Arconic’s competitive position depends, in part, on the Company’s ability to leverage its innovation expertise across its businesses and key end markets.

A downgrade of Arconic’s credit ratings could limit Arconic’s ability to obtain future financing, increase its borrowing costs, increase the pricing of its credit facilities, adversely affect the market price of its securities, trigger letter of credit or other collateral postings, or otherwise impair its business, financial condition, and results of operations.

Arconic’s credit ratings are important to the Company’s cost of capital. The major rating agencies routinely evaluate Arconic’s credit profile and assign debt ratings to the Company. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. Standard and Poor’s Ratings Services (S&P) currently rates Arconic’s long-term debt at BBB-, the lowest level of investment grade rating, with a stable ratings outlook, and its short-term debt at A-3 (ratings and outlook were affirmed on April 29, 2016 and September 19, 2016). On November 1, 2016, Moody’s Investor Service (Moody’s) downgraded Arconic’s long-term debt rating from Ba1, which is below investment grade, to Ba2 and its short-term debt rating from Speculative Grade Liquidity Rating-1 to Speculative Grade Liquidity-2, based upon the completion of the Separation. Additionally, Moody’s changed the outlook from negative to stable. On April 21, 2016, Fitch affirmed Arconic’s long-term debt rating at BB+, which is below investment grade, and short-term debt at B. Additionally, Fitch changed the current outlook from positive to evolving. On July 7, 2016, Fitch changed the current outlook from evolving to stable based on the filing of a Form 10 registration statement related to the planned separation of Alcoa Corporation from Arconic.

There can be no assurance that one or more of these or other rating agencies will not take negative actions with respect to Arconic’s ratings. Increased debt levels, macroeconomic conditions, a deterioration in the Company’s debt protection metrics, a contraction in the Company’s liquidity, or other factors could potentially trigger such actions. A rating agency may lower, suspend or withdraw entirely a rating or place it on negative outlook or watch if, in that rating agency’s judgment, circumstances so warrant.

A downgrade of Arconic’s credit ratings by one or more rating agencies could adversely impact the market price of Arconic’s securities; adversely affect existing financing (for example, a downgrade by Standard and Poor’s or a further downgrade by Moody’s would subject Arconic to higher costs under Arconic’s Five-Year Revolving Credit Agreement and certain of its other revolving credit facilities); limit access to the capital (including commercial paper) or credit markets or otherwise adversely affect the availability of other new financing on favorable terms, if at all; result in more restrictive covenants in agreements governing the terms of any future indebtedness that the Company incurs; increase the cost of borrowing or fees on undrawn credit facilities; result in vendors or counterparties seeking collateral or letters of credit from Arconic; or otherwise impair Arconic’s business, financial condition and results of operations.

 

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Joint ventures and other strategic alliances may not be successful.

Arconic may participate in joint ventures, strategic alliance and other similar arrangements from time to time. Although the Company has, in connection with its existing joint venture, sought to protect its interests, joint ventures and strategic alliances inherently involve special risks. Whether or not Arconic holds majority interests or maintains operational control in such arrangements, its partners may:

 

   

have economic or business interests or goals that are inconsistent with or opposed to those of the Company;

 

   

exercise veto rights so as to block actions that Arconic believes to be in its or the joint venture’s or strategic alliance’s best interests;

 

   

take action contrary to Arconic’s policies or objectives with respect to its investments; or

 

   

as a result of financial or other difficulties, be unable or unwilling to fulfill their obligations under the joint venture, strategic alliance or other agreements, such as contributing capital to expansion or maintenance projects.

There can be no assurance that any Arconic joint venture or strategic alliance will be beneficial to the Company, whether due to the above-described risks, unfavorable global economic conditions, increases in construction costs, currency fluctuations, political risks, or other factors.

Arconic’s business and growth prospects may be negatively impacted by limits in its capital expenditures.

Arconic requires substantial capital to invest in growth opportunities and to maintain and prolong the life and capacity of its existing facilities. Insufficient cash generation or capital project overruns may negatively impact Arconic’s ability to fund as planned its sustaining and return-seeking capital projects. Over the long term, Arconic’s ability to take advantage of improved market conditions or growth opportunities in its businesses may be constrained by earlier capital expenditure restrictions, which could adversely affect the long-term value of its business and the Company’s position in relation to its competitors.

An adverse decline in the liability discount rate, lower-than-expected investment return on pension assets and other factors could affect Arconic’s results of operations or amount of pension funding contributions in future periods.

Arconic’s results of operations may be negatively affected by the amount of expense Arconic records for its pension and other postretirement benefit plans, reductions in the fair value of plan assets and other factors. Arconic calculates income or expense for its plans using actuarial valuations in accordance with accounting principles generally accepted in the United States of America (GAAP).

These valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions used by Arconic to estimate pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the expected long-term rate of return on plan assets. In addition, Arconic is required to make an annual measurement of plan assets and liabilities, which may result in a significant charge to shareholders’ equity. For a discussion regarding how Arconic’s financial statements can be affected by pension and other postretirement benefits accounting policies, see “Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note U to the Consolidated Financial Statements—Pension and Other Postretirement Benefits in Part II, Item 8. (Financial Statements and Supplementary Data). Although GAAP expense and pension funding contributions are impacted by different regulations and requirements, the key economic factors that affect GAAP expense would also likely affect the amount of cash or securities Arconic would contribute to the pension plans.

Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve the plans’ funded status. The Moving Ahead for Progress in the 21st Century Act (“MAP- 21”), enacted in 2012, provided temporary relief for employers like Arconic who sponsor defined benefit pension plans

 

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related to funding contributions under the Employee Retirement Income Security Act of 1974 by allowing the use of a 25-year average discount rate within an upper and lower range for purposes of determining minimum funding obligations. In 2014, the Highway and Transportation Funding Act (HATFA) was signed into law. HATFA extended the relief provided by MAP-21 and modified the interest rates that had been set by MAP-21. In 2015, the Bipartisan Budget Act of 2015 (BBA 2015) was signed into law. BBA 2015 extends the relief period provided by HAFTA. Arconic believes that the relief provided by BBA 2015 will moderately reduce the cash flow sensitivity of the Company’s U.S. pension plans’ funded status to potential declines in discount rates over the next several years. However, higher than expected pension contributions due to a decline in the plans’ funded status as a result of declines in the discount rate or lower-than-expected investment returns on plan assets could have a material negative effect on the Company’s cash flows. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase the Company’s liabilities related to such plans, which could adversely affect Arconic’s liquidity and results of operations.

Unanticipated changes in Arconic’s tax provisions or exposure to additional tax liabilities could affect Arconic’s future profitability.

Arconic is subject to income taxes in both the United States and various non-U.S. jurisdictions. Its domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Changes in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect the Company’s tax expense and profitability. Arconic’s tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions. The assumptions include assessments of future earnings of the Company that could impact the valuation of its deferred tax assets. The Company’s future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of tax audits and examinations of previously filed tax returns or related litigation and continuing assessments of its tax exposures. Corporate tax reform and tax law changes continue to be analyzed in the United States and in many other jurisdictions. Significant changes to the U.S. corporate tax system in particular could have a substantial impact, positive or negative, on Arconic’s effective tax rate, cash tax expenditures, and deferred tax assets and liabilities.

Union disputes and other employee relations issues could adversely affect Arconic’s financial results.

A significant portion of Arconic’s employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. For more information, see “Employees” in Part I, Item 1. (Business) of this report. While Arconic was previously successful in renegotiating its collective bargaining agreements with various unions, Arconic may not be able to satisfactorily renegotiate collective bargaining agreements in the United States and other countries when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at Arconic’s facilities in the future. Arconic may also be subject to general country strikes or work stoppages unrelated to its business or collective bargaining agreements. Any such work stoppages (or potential work stoppages) could have a material adverse effect on Arconic’s financial results.

Arconic could be adversely affected by changes in the business or financial condition or the loss of a significant customer or customers.

A significant downturn or deterioration in the business or financial condition or loss of a key customer or customers supplied by Arconic could affect Arconic’s results of operations in a particular period. Arconic’s customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products, or other difficulties in their businesses. Arconic’s customers may also change their business strategies or modify their business relationships with Arconic, including to reduce the amount of Arconic’s products they purchase or to switch to alternative suppliers. If Arconic is not successful in replacing business lost from such customers, profitability may be adversely affected.

 

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Arconic may not be able to successfully develop and implement technology initiatives.

Arconic is working on new developments for a number of strategic projects in all business segments, including additive manufacturing, alloy development, engineered finishes and product design, high speed continuous casting and rolling technology, and other advanced manufacturing technologies. For more information on Arconic’s research and development programs, see “Research and Development” in Part I, Item 1. (Business) of this report. There can be no assurance that such developments or technologies will be commercially feasible or beneficial to Arconic.

Arconic’s human resource talent pool may not be adequate to support the Company’s growth.

Arconic’s existing operations and development projects require highly skilled executives and staff with relevant industry and technical experience. The inability of the Company or the industry to attract and retain such people may adversely impact Arconic’s ability to adequately meet project demands and fill roles in existing operations. Skills shortages in engineering, technical service, construction and maintenance contractors and other labor market inadequacies may also impact activities. These shortages may adversely impact the cost and schedule of development projects and the cost and efficiency of existing operations.

Arconic may not realize expected benefits from its productivity and cost-reduction initiatives.

Arconic has undertaken, and may continue to undertake, productivity and cost-reduction initiatives to improve performance and conserve cash, including deployment of company-wide business process models, such as Arconic’s degrees of implementation process in which ideas are executed in a disciplined manner to generate savings, and overhead cost reductions. There is no assurance that these initiatives will be successful or beneficial to Arconic or that estimated cost savings from such activities will be realized.

Arconic may be exposed to significant legal proceedings, investigations or changes in U.S. federal, state or foreign law, regulation or policy.

Arconic’s results of operations or liquidity in a particular period could be affected by new or increasingly stringent laws, regulatory requirements or interpretations, or outcomes of significant legal proceedings or investigations adverse to Arconic. The Company may experience a change in effective tax rates or become subject to unexpected or rising costs associated with business operations or provision of health or welfare benefits to employees due to changes in laws, regulations or policies. The Company is also subject to a variety of legal compliance risks. These risks include, among other things, potential claims relating to product liability, health and safety, environmental matters, intellectual property rights, government contracts, taxes, and compliance with U.S. and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. Arconic could be subject to fines, penalties, damages (in certain cases, treble damages), or suspension or debarment from government contracts.

While Arconic believes it has adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of its operations means that these risks will continue to exist, and additional legal proceedings and contingencies may arise from time to time. In addition, various factors or developments can lead the Company to change current estimates of liabilities or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the Company cannot predict with certainty could have a material adverse effect on the Company’s results of operations or cash flows in a particular period. For additional information regarding the legal proceedings involving the Company, see the discussion in Part I, Item 3. (Legal Proceedings) of this report and in Note L to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).

 

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Arconic is subject to a broad range of health, safety and environmental laws and regulations in the jurisdictions in which it operates and may be exposed to substantial costs and liabilities associated with such laws and regulations.

Arconic’s operations worldwide are subject to numerous complex and increasingly stringent health, safety and environmental laws and regulations. The costs of complying with such laws and regulations, including participation in assessments and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Environmental laws may impose cleanup liability on owners and occupiers of contaminated property, including past or divested properties, regardless of whether the owners and occupiers caused the contamination or whether the activity that caused the contamination was lawful at the time it was conducted. Environmental matters for which Arconic may be liable may arise in the future at its present sites, where no problem is currently known, at previously owned sites, sites previously operated by the Company, sites owned by its predecessors or sites that it may acquire in the future. Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than the Company anticipates. Arconic’s results of operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to certain sites. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows.

Arconic may be affected by global climate change or by legal, regulatory, or market responses to such change.

Increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap-and-trade systems and additional limits on emissions of greenhouse gases. New laws enacted could directly and indirectly affect Arconic’s customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or business (through an impact on Arconic’s inventory availability, cost of sales, operations or demand for Arconic products), which could result in an adverse effect on our financial condition, results of operations and cash flows. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by the Company or its customers or suppliers. Also, Arconic relies on natural gas, electricity, fuel oil and transport fuel to operate its facilities. Any increased costs of these energy sources because of new laws could be passed along to the Company and its customers and suppliers, which could also have a negative impact on Arconic’s profitability.

Cyber attacks and security breaches may threaten the integrity of Arconic’s intellectual property and other sensitive information, disrupt its business operations, and result in reputational harm and other negative consequences that could have a material adverse effect on its financial condition and results of operations.

Arconic faces global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures, known as advanced persistent threats, directed at the Company. Cyber attacks and security breaches may include, but are not limited to, attempts to access information, computer viruses, denial of service and other electronic security breaches.

The Company believes that it faces a heightened threat of cyber attacks due to the industries it serves, the locations of its operations and its technological innovations. The Company has experienced cybersecurity attacks in the past, including breaches of its information technology systems in which information was taken, and may experience them in the future, potentially with more frequency or sophistication. Based on information known to date, past attacks have not had a material impact on Arconic’s financial condition or results of operations. However, due to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While the Company continually works to safeguard its systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches that manipulate or improperly use its systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt its operations. The occurrence of such events could negatively impact Arconic’s reputation and its competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased

 

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remediation costs, any of which could have a material adverse effect on its financial condition and results of operations. In addition, such attacks or breaches could require significant management attention and resources, and result in the diminution of the value of the Company’s investment in research and development.

Anti-takeover provisions could prevent or delay a change in control of Arconic, including a takeover attempt by a third party and limit the power of Arconic’s shareholders.

Arconic’s Articles of Incorporation and By-laws contain, and Pennsylvania law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Arconic’s Board of Directors rather than to attempt a hostile takeover. For example, Arconic is subject to Subchapters E-J of Chapter 25 and Section 2538 of Subchapter D of Chapter 25 of the Pennsylvania Business Corporation Law, which could make it more difficult for another party to acquire Arconic. Additionally, the Company’s Articles of Incorporation authorize Arconic’s Board of Directors to issue preferred stock or adopt other anti-takeover measures without shareholder approval. These provisions may apply even if an offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that Arconic’s Board of Directors determines is not in the best interests of Arconic’s shareholders. These provisions may also limit the price that investors might be willing to pay in the future for shares of Arconic common stock, or prevent or discourage attempts to remove and replace incumbent directors.

Dividends on Arconic common stock could be reduced or eliminated in the event of material future deterioration in business conditions or in other circumstances.

The existence, timing, declaration, amount and payment of future dividends to Arconic’s shareholders falls within the discretion of Arconic’s Board of Directors. The Arconic Board of Director’s decisions regarding the payment of dividends will depend on many factors, such as Arconic’s financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of the Company’s debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that Arconic’s Board of Directors deems relevant. Arconic’s Board of Directors may determine to reduce or eliminate Arconic’s common stock dividend in the event of material future deteriorations in business conditions.

Arconic may not achieve some or all of the expected benefits of the Separation, and failure to realize such benefits in a timely manner may materially adversely affect Arconic’s business.

Arconic may not be able to achieve the full strategic and financial benefits expected to result from the Separation, or such benefits may be delayed or not occur at all. The Separation is expected to provide the following benefits, among others: (i) enabling the management of each company to more effectively pursue its own distinct operating priorities and strategies, to focus on strengthening its core business and its unique needs, and to pursue distinct and targeted opportunities for long-term growth and profitability; (ii) permitting each company to allocate its financial resources to meet the unique needs of its own business, allowing each company to intensify its focus on its distinct strategic priorities and to more effectively pursue its own distinct capital structures and capital allocation strategies; (iii) allowing each company to more effectively articulate a clear investment thesis to attract a long-term investor base suited to its business and providing investors with two distinct and targeted investment opportunities; (iv) creating an independent equity currency tracking each company’s underlying business, affording Arconic and Alcoa Corporation direct access to the capital markets and facilitating each company’s ability to consummate future acquisitions or other restructuring transactions utilizing its common stock; (v) allowing each company more consistent application of incentive structures and targets, due to the common nature of the underlying businesses; and (vi) separating and simplifying the structures required to manage two distinct and differing underlying businesses.

Arconic may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (i) Arconic may be more susceptible to market fluctuations and other adverse events than if Alcoa Corporation were still a part of the Company because Arconic’s business is less diversified than it was prior to the completion of the Separation; and (ii) as a smaller, independent company, Arconic may be unable to obtain certain goods, services and technologies at prices or on terms as favorable as those it obtained prior to completion of the Separation. If Arconic

 

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fails to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, it could have a material adverse effect on Arconic’s competitive position, business, financial condition, results of operations and cash flows.

Alcoa Corporation may fail to perform under various transaction agreements that were executed as part of the Separation.

In connection with the Separation, Arconic and Alcoa Corporation entered into a Separation and Distribution Agreement and also entered into various other agreements, including a Transition Services Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Stockholder and Registration Rights Agreement with respect to Arconic’s continuing ownership of Alcoa Corporation common stock, intellectual property license agreements, a metal supply agreement, real estate and office leases, a spare parts loan agreement and an agreement relating to the North American packaging business. The Separation and Distribution Agreement, the Tax Matters Agreement and the Employee Matters Agreement, together with the documents and agreements by which the internal reorganization of the Company prior to the Separation was effected, determined the allocation of assets and liabilities between the companies following the Separation for those respective areas and included any necessary indemnifications related to liabilities and obligations. The Separation and Distribution Agreement also provides that Alcoa Corporation will pay over to Arconic the proceeds in respect of the sale of Alcoa Corporation’s Yadkin hydroelectric project. The Transition Services Agreement provides for the performance of certain services by each company for the benefit of the other for a period of time after the Separation. Arconic will rely on Alcoa Corporation to satisfy its performance and payment obligations under these agreements. If Alcoa Corporation is unable or unwilling to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties and/or losses.

In connection with the Separation, Alcoa Corporation has agreed to indemnify Arconic for certain liabilities and Arconic has agreed to indemnify Alcoa Corporation for certain liabilities. If Arconic is required to pay under these indemnities to Alcoa Corporation, Arconic’s financial results could be negatively impacted. The Alcoa Corporation indemnity may not be sufficient to hold Arconic harmless from the full amount of liabilities for which Alcoa Corporation will be allocated responsibility, and Alcoa Corporation may not be able to satisfy its indemnification obligations in the future.

Pursuant to the Separation and Distribution Agreement and certain other agreements with Alcoa Corporation, Alcoa Corporation has agreed to indemnify Arconic for certain liabilities, and Arconic has agreed to indemnify Alcoa Corporation for certain liabilities, in each case for uncapped amounts. Indemnities that Arconic may be required to provide Alcoa Corporation are not subject to any cap, may be significant and could negatively impact Arconic’s business. Third parties could also seek to hold Arconic responsible for any of the liabilities that Alcoa Corporation has agreed to retain. Any amounts Arconic is required to pay pursuant to these indemnification obligations and other liabilities could require Arconic to divert cash that would otherwise have been used in furtherance of the Company’s operating business. Further, the indemnity from Alcoa Corporation may not be sufficient to protect Arconic against the full amount of such liabilities, and Alcoa Corporation may not be able to fully satisfy its indemnification obligations. Moreover, even if Arconic ultimately succeeds in recovering from Alcoa Corporation any amounts for which Arconic is held liable, Arconic may be temporarily required to bear such losses. Each of these risks could negatively affect Arconic’s business, results of operations and financial condition.

The Separation could result in substantial tax liability.

It was a condition to the Distribution that (i) the private letter ruling from the Internal Revenue Service (the “IRS”) regarding certain U.S. federal income tax matters relating to the Separation and the Distribution received by Arconic remain valid and be satisfactory to Arconic’s Board of Directors and (ii) Arconic receive an opinion of its outside counsel, satisfactory to the Board of Directors, regarding the qualification of the Distribution, together with certain related transactions, as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). Both of these conditions were

 

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satisfied prior to the Distribution. However, the IRS private letter ruling and the opinion of counsel were based upon and relied on, among other things, various facts and assumptions, as well as certain representations, statements and undertakings of Arconic and Alcoa Corporation, including those relating to the past and future conduct of Arconic and Alcoa Corporation. If any of these representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if Arconic or Alcoa Corporation breaches any of its representations or covenants contained in any of the Separation–related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel, the IRS private letter ruling and/or the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.

Notwithstanding Arconic’s receipt of the IRS private letter ruling and the opinion of counsel, the IRS could determine that the Distribution and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings upon which the IRS private letter ruling or the opinion of counsel was based are false or have been violated. In addition, the IRS private letter ruling does not address all of the issues that are relevant to determining whether the Distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes, and the opinion of counsel represents the judgment of such counsel and is not binding on the IRS or any court and the IRS or a court may disagree with the conclusions in the opinion of counsel. Accordingly, notwithstanding receipt by Arconic of the IRS private letter ruling and the opinion of counsel, there can be no assurance that the IRS will not assert that the Distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes or that a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, Arconic, Alcoa Corporation and Arconic shareholders could be subject to significant U.S. federal income tax liability.

If the Distribution, together with certain related transactions, fails to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code, in general, for U.S. federal income tax purposes, Arconic would recognize taxable gain as if it had sold the Alcoa Corporation common stock in a taxable sale for its fair market value and Arconic shareholders who received Alcoa Corporation shares in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

Under current U.S. federal income tax law, even if the Distribution, together with certain related transactions, otherwise qualifies for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code, the Distribution may nevertheless be rendered taxable to Arconic and its shareholders as a result of certain post-Distribution transactions, including certain acquisitions of shares or assets of Arconic or Alcoa Corporation. The possibility of rendering the Distribution taxable as a result of such transactions may limit Arconic’s ability to pursue certain equity issuances, strategic transactions or other transactions that would otherwise maximize the value of Arconic’s business. Under the Tax Matters Agreement that Arconic entered into with Alcoa Corporation, Alcoa Corporation may be required to indemnify Arconic against any additional taxes and related amounts resulting from (i) an acquisition of all or a portion of the equity securities or assets of Alcoa Corporation, whether by merger or otherwise (and regardless of whether Alcoa Corporation participated in or otherwise facilitated the acquisition), (ii) issuing equity securities beyond certain thresholds, (iii) repurchasing shares of Alcoa Corporation stock other than in certain open-market transactions, (iv) ceasing to actively conduct certain of its businesses, (v) other actions or failures to act by Alcoa Corporation or (vi) any of Alcoa Corporation’s representations, covenants or undertakings contained in any of the Separation-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel being incorrect or violated. However, the indemnity from Alcoa Corporation may not be sufficient to protect Arconic against the full amount of such additional taxes or related liabilities, and Alcoa Corporation may not be able to fully satisfy its indemnification obligations. Moreover, even if Arconic ultimately succeeds in recovering from Alcoa Corporation any amounts for which Arconic is held liable, Arconic may be temporarily required to bear such losses. In addition, Arconic and Arconic’s subsidiaries may incur certain tax costs in connection with the Separation, including tax costs resulting from separations in non-U.S. jurisdictions, which may be material. Each of these risks could negatively affect Arconic’s business, results of operations and financial condition.

 

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The value of Arconic’s retained interest in Alcoa Corporation is subject to certain risks and uncertainties which could make it difficult to liquidate some or all of Arconic’s retained interest at favorable market prices.

In the Separation, Arconic retained a passive ownership interest in approximately 19.9 percent of Alcoa Corporation common stock then outstanding. As of the date of this report, Arconic owned approximately 7.0 percent of Alcoa Corporation common stock then outstanding after giving effect to a retained shares transaction.

As with any investment in a publicly traded company, Arconic’s investment in Alcoa Corporation shares is subject to risks and uncertainties relating to Alcoa Corporation’s business and ownership of Alcoa Corporation stock, some of which are disclosed in Alcoa Corporation’s filings with the SEC, as well as risks and uncertainties relating to fluctuations in the global economy and public equity markets generally.

Any such risk or uncertainty may cause the share price of Alcoa Corporation common stock to fall, which could impair Arconic’s ability to sell its shares of Alcoa Corporation common stock in the future at a favorable market price or reduce the value of Arconic’s retained interest in Alcoa Corporation.

Changes in the United Kingdom’s economic and other relationships with the European Union could adversely affect Arconic.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum (also referred to as “Brexit”). The ultimate effects of Brexit on Arconic are difficult to predict, but because the Company currently operates and conducts business in the United Kingdom and in Europe, the results of the referendum and any eventual withdrawal could cause disruptions and create uncertainty to Arconic’s businesses, including affecting the business of and/or our relationships with Arconic’s customers and suppliers, as well as altering the relationship among tariffs and currencies, including the value of the British pound and the Euro relative to the U.S. dollar. Such disruptions and uncertainties could adversely affect Arconic’s financial condition, operating results and cash flows. In addition, Brexit could result in legal uncertainty and potentially divergent national laws and regulations as new legal relationships between the United Kingdom and the European Union are established. The ultimate effects of Brexit on Arconic will also depend on the terms of any agreements the United Kingdom and the European Union make to retain access to each other’s respective markets either during a transitional period or more permanently.

 

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Arconic’s principal office is located at 390 Park Avenue, New York, New York 10022-4608. Arconic’s corporate center is located at 201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858. The Arconic Technology Center for research and development is located at 100 Technical Drive, New Kensington, Pennsylvania 15069-0001.

Arconic leases some of its facilities; however, it is the opinion of management that the leases do not materially affect the continued use of the properties or the properties’ values.

Arconic believes that its facilities are suitable and adequate for its operations. Although no title examination of properties owned by Arconic has been made for the purpose of this report, the Company knows of no material defects in title to any such properties. See Notes A and H to the financial statements for information on properties, plants and equipment.

Arconic has active plants and holdings under the following segments and in the following geographic areas:

GLOBAL ROLLED PRODUCTS

See the table and related text in the Global Rolled Products Facilities section on pages 3-5 of this report.

ENGINEERED PRODUCTS AND SOLUTIONS

See the table and related text in the Engineered Products and Solutions Facilities section on pages 5-8 of this report.

TRANSPORTATION AND CONSTRUCTION SOLUTIONS

See the table and related text in the Transportation and Construction Solutions section on pages 8-10 of this report.

Item 3. Legal Proceedings.

In the ordinary course of its business, Arconic is involved in a number of lawsuits and claims, both actual and potential.

Environmental Matters

Arconic is involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund (CERCLA) or analogous state provisions regarding the usage, disposal, storage or treatment of hazardous substances at a number of sites in the U.S. The Company has committed to participate, or is engaged in negotiations with federal or state authorities relative to its alleged liability for participation, in clean-up efforts at several such sites. The most significant of these matters, including the remediation of the Grasse River in Massena, NY, are discussed in the Environmental Matters section of Note L to the Consolidated Financial Statements under the caption “Environmental Matters” on pages 96-97.

As previously reported, by an amended complaint filed April 21, 2005, Alcoa Global Fasteners, Inc. (now known as Arconic Global Fasteners & Rings, Inc.) was added as a defendant in Orange County Water District (OCWD) v. Northrop Corporation, et al., civil action 04cc00715 (Superior Court of California, County of Orange). OCWD alleges contamination or threatened contamination of a drinking water aquifer by Arconic, certain of the entities that preceded Arconic at the same locations as property owners and/or operators, and other current and former industrial and manufacturing businesses that operated in Orange County in past decades. OCWD seeks to recover the cost of aquifer remediation and attorney’s fees. Trial on statutory, non-jury claims commenced on February 10, 2012. On October 29,

2013, the court issued its final Statement of Decision (“SOD”) in favor of Arconic and the other Phase I trial defendants dismissing the statutory law liability claims. On June 20, 2014, following the full briefing by the parties, the trial court entered final judgment in favor of Arconic and the other trial defendants on the remaining tort claims. On

 

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August 18, 2014, the OCWD appealed the dismissal of the statutory law claims and common law claims (except for negligence). The appellate argument has not been scheduled, but is likely to occur by the first half of 2017 and could produce a decision during the second half of 2017.

Other Matters

As previously reported, Arconic Inc. and its subsidiaries and former subsidiaries are defendants in lawsuits filed on behalf of persons alleging injury as a result of occupational or other exposure to asbestos. Arconic, its subsidiaries and former subsidiaries have numerous insurance policies over many years that provide coverage for asbestos related claims. Arconic has significant insurance coverage and believes that Arconic’s reserves are adequate for its known asbestos exposure related liabilities. The costs of defense and settlement have not been and are not expected to be material to the results of operations, cash flows, and financial position of the Company.

Tax

Pursuant to the Tax Matters Agreement, dated as of October 31, 2016, entered into between the Company and Alcoa Corporation in connection with the Separation, the Company shares responsibility with Alcoa Corporation for, and Alcoa Corporation has agreed to partially indemnify the Company with respect to, the following matter.

As previously reported, in September 2010, following a corporate income tax audit covering the 2003 through 2005 tax years, an assessment was received as a result of Spain’s tax authorities disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by the Company. An appeal of this assessment in Spain’s Central Tax Administrative Court by the Company was denied in October 2013. In December 2013, the Company filed an appeal of the assessment in Spain’s National Court.

Additionally, following a corporate income tax audit of the same Spanish tax group for the 2006 through 2009 tax years, Spain’s tax authorities issued an assessment in July 2013, similarly disallowing certain interest deductions. In August 2013, the Company filed an appeal of this second assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. The Company filed an appeal of this second assessment in Spain’s National Court in March 2015.

The combined assessments (remeasured for a tax rate change enacted in November 2014) total $258 million (€ 246 million). On January 16, 2017, Spain’s National Court issued a decision in favor of the Company related to the assessment received in September 2010. It is not yet known if Spain’s tax authorities will appeal this decision. Spain’s National Court has not yet rendered a decision related to the assessment received in July 2013.

The Company believes it has meritorious arguments to support its tax position and intends to vigorously litigate the assessments through Spain’s court system. However, in the event the Company is unsuccessful, a portion of the assessments may be offset with existing net operating losses available to the Spanish consolidated tax group, which would be shared between the Company and Alcoa Corporation as provided for in the Tax Matters Agreement. Additionally, it is possible that the Company may receive similar assessments for tax years subsequent to 2009. At this time, the Company is unable to reasonably predict an ultimate outcome for this matter.

Matters Previously Reported – Alcoa Corporation

We have included the matters discussed below in which the Company remains party to proceedings relating to Alcoa Corporation in accordance with SEC regulations. The Separation and Distribution Agreement, dated October 31, 2016, entered into between the Company and Alcoa Corporation in connection with the Separation, provides for cross-indemnities between the Company and Alcoa Corporation for claims subject to indemnification. The Company does not expect any of such matters to result in a net claim against it.

Squaw Creek Mine Proceedings

As previously reported, in October 2006, in Barnett, et al. v. Alcoa and Alcoa Fuels, Inc., Warrick Circuit Court, County of Warrick, Indiana; 87-C01-0601-PL-499, 41 plaintiffs sued Arconic Inc. and a subsidiary, asserting claims similar to those asserted in Musgrave v. Alcoa, et al., Warrick Circuit Court, County of Warrick, Indiana; 87-

 

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C01-0601-CT-006. In Musgrave, in January 2006, Arconic Inc. and a subsidiary were sued by an individual, on behalf of himself and all persons similarly situated, claiming harm from alleged exposure to waste that had been disposed in designated pits at the Squaw Creek Mine in the 1970s. In November 2007, Arconic and its subsidiary filed a motion to dismiss the Barnett cases. In October 2008, the Warrick County Circuit Court granted Arconic’s motions to dismiss, dismissing all claims arising out of alleged occupational exposure to wastes at the Squaw Creek Mine, but in November 2008, the trial court clarified its ruling, indicating that the order does not dispose of plaintiffs’ personal injury claims based upon alleged “recreational” or non-occupational exposure. Plaintiffs also filed a “second amended complaint” in response to the court’s orders granting Arconic’s motion to dismiss. On July 7, 2010, the court granted the parties’ joint motions for a general continuance of trial settings. Discovery in this matter remains stayed. The Company is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss because plaintiffs have merely alleged that their medical condition is attributable to exposure to materials at the Squaw Creek Mine but no further information is available due to the discovery stay.

St. Croix Proceedings

Abednego and Abraham cases. As previously reported, on January 14, 2010, Arconic was served with a multi-plaintiff action complaint involving several thousand individual persons claiming to be residents of St. Croix who are alleged to have suffered personal injury or property damage from Hurricane Georges or winds blowing material from the St. Croix Alumina, L.L.C. (“SCA”) facility on the island of St. Croix (U.S. Virgin Islands) since the time of the hurricane. This complaint, Abednego, et al. v. Alcoa, et al. was filed in the Superior Court of the Virgin Islands, St. Croix Division. Following an unsuccessful attempt by Arconic and SCA to remove the case to federal court, the case has been lodged in the Superior Court. The complaint names as defendants the same entities that were sued in a February 1999 action arising out of the impact of Hurricane Georges on the island and added as a defendant the current owner of the alumina facility property.

Also as previously reported, on March 1, 2012, Arconic was served with a separate multi-plaintiff action complaint involving approximately 200 individual persons alleging claims essentially identical to those set forth in the Abednego v. Alcoa complaint. This complaint, Abraham, et al. v. Alcoa, et al., was filed on behalf of plaintiffs previously dismissed in the federal court proceeding involving the original litigation over Hurricane Georges impacts. The matter was originally filed in the Superior Court of the Virgin Islands, St. Croix Division, on March 30, 2011.

Arconic and other defendants in the Abraham and Abednego cases filed or renewed motions to dismiss each case in March 2012 and August 2012 following service of the Abraham complaint on Arconic and remand of the Abednego complaint to Superior Court, respectively. By order dated August 10, 2015, the Superior Court dismissed plaintiffs’ complaints without prejudice to re-file the complaints individually, rather than as a multi-plaintiff filing. The order also preserves the defendants’ grounds for dismissal if new, individual complaints are filed.

Other Contingencies

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, and tax 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 particular 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 financial position of the Company.

Item 4. Mine Safety Disclosures.

Not applicable.

 

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is listed on the New York Stock Exchange. Prior to the Separation of Alcoa Corporation from the Company, the Company’s common stock traded under the symbol “AA.” In connection with the separation, on November 1, 2016, the Company changed its stock symbol and its common stock began trading under the symbol “ARNC.”

On October 5, 2016, the Company’s common shareholders approved a 1-for-3 reverse stock split of the Company’s outstanding and authorized shares of common stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, every 3 shares of issued and outstanding common stock were combined into one issued and outstanding share of common stock, without any change in the par value per share. The Reverse Stock Split reduced the number of shares of common stock outstanding from approximately 1.3 billion shares to approximately 0.4 billion shares, and proportionately decreased the number of authorized shares of common stock from 1.8 billion to 0.6 billion shares. The Company’s common stock began trading on a Reverse Stock Split-adjusted basis on October 6, 2016.

On November 1, 2016, the Company completed the Separation of its business into two independent, publicly traded companies: the Company and Alcoa Corporation. The Separation was effected by means of a pro rata distribution by the Company of 80.1% of the outstanding shares of Alcoa Corporation common stock to the Company’s shareholders. The Company’s shareholders of record as of the close of business on October 20, 2016 (the “Record Date”) received one share of Alcoa Corporation common stock for every three shares of the Company’s common stock held as of the Record Date. The Company retained 19.9% of the outstanding common stock of Alcoa Corporation immediately following the Separation.

The following table sets forth, for the periods indicated, the high and low sales prices and quarterly dividend amounts per share of the Company’s common stock as reported on the New York Stock Exchange, adjusted to take into account the Reverse Stock Split effected on October 6, 2016. The prices listed below for the fourth quarter of 2016 do not reflect any adjustment for the impact of the separation of Alcoa Corporation from the Company on November 1, 2016, and therefore are not comparable to pre-separation prices from earlier periods.

 

      2016      2015  
Quarter    High      Low      Dividend      High      Low      Dividend  

First

   $ 30.66      $ 18.42      $ 0.09      $ 51.30      $ 37.95      $ 0.09  

Second

     34.50        26.34        0.09        42.87        33.45        0.09  

Third

     32.91        27.09        0.09        33.69        23.91        0.09  

Fourth (Separation occurred on November 1, 2016)

     32.10        16.75        0.09        33.54        23.43        0.09  

Year

   $ 34.50      $ 16.75      $ 0.36      $ 51.30      $ 23.43      $ 0.36  

The number of holders of record of common stock was approximately 12,885 as of February 23, 2017.

 

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Stock Performance Graph

The following graph compares the most recent five-year performance of the Company’s common stock with (1) the Standard & Poor’s 500® Index and (2) the Standard & Poor’s 500® Materials Index, a group of 27 companies categorized by Standard & Poor’s as active in the “materials” market sector. The graph assumes, in each case, an initial investment of $100 on December 31, 2011, and the reinvestment of dividends. Historical prices prior to the separation of Alcoa Corporation from the Company on November 1, 2016, have been adjusted to reflect the value of the Separation transaction. The graph, table and related information shall not be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

LOGO

Copyright© 2017 Standard & Poor’s, a division of S&P Global. All rights reserved.

 

As of December 31,   2011     2012     2013     2014     2015     2016  

Arconic Inc.

  $ 100     $ 102     $ 126     $ 189     $ 119     $ 101  

S&P 500® Index

    100     $ 116     $ 154     $ 175     $ 177     $ 198  

S&P 500® Materials Index

    100     $ 115     $ 144     $ 154     $ 141     $ 165  

Copyright© 2017 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights reserved. Source: Research Data Group, Inc. (www.researchdatagroup.com/S&P.htm)

 

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Item 6. Selected Financial Data

The separation of Alcoa Inc. into two standalone, publicly-traded companies, Arconic Inc. (the new name for Alcoa Inc.) and Alcoa Corporation, became effective on November 1, 2016 (the “Separation Transaction”). The financial results of Alcoa Corporation for all periods prior to the Separation Transaction have been retrospectively reflected in the Statement of Consolidated Operations as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Additionally, the related assets and liabilities associated with Alcoa Corporation in the December 2015 Consolidated Balance Sheet are classified as assets and liabilities of discontinued operations. The cash flows related to Alcoa Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows for all periods presented.

(dollars in millions, except per-share amounts)

 

For the year ended December 31,    2016     2015     2014     2013     2012  

Sales

   $ 12,394     $ 12,413     $ 12,542     $ 11,997     $ 10,640  

Amounts attributable to Arconic:

          

(Loss) income from continuing operations(1)

   $ (1,062   $ (157   $ (61   $ (63   $ 410  

Income (loss) from discontinued operations(2)

     121       (165     329       (2,222     (219

Net (loss) income

   $ (941   $ (322   $ 268     $ (2,285   $ 191  

Earnings per share attributable to Arconic common shareholders:(3)

          

Basic:

          

(Loss) income from continuing operations

   $ (2.58   $ (0.54   $ (0.21   $ (0.18   $ 1.15  

Income (loss) from discontinued operations

     0.27       (0.39     0.85       (6.23     (0.62

Net (loss) income

   $ (2.31   $ (0.93   $ 0.64     $ (6.41   $ 0.53  

Diluted:

          

(Loss) income from continuing operations

   $ (2.58   $ (0.54   $ (0.21   $ (0.18   $ 1.13  

Income (loss) from discontinued operations

     0.27       (0.39     0.84       (6.23     (0.60

Net (loss) income

   $ (2.31   $ (0.93   $ 0.63     $ (6.41   $ 0.53  

Cash dividends declared per common share(3)

   $ 0.36     $ 0.36     $ 0.36     $ 0.36     $ 0.36  

Total assets(4)

     20,038       36,477       37,298       35,623       40,044  

Total debt(4)

     8,084       8,827       8,445       7,826       8,237  

Cash provided from operations(5)

     870       1,582       1,674       1,578       1,497  

Capital expenditures:

          

Capital expenditures—continuing operations

     827       789       775       626       (6 ) 

Capital expenditures—discontinued operations

     298       391       444       567       (6 )  

Total capital expenditures

   $ 1,125     $ 1,180     $ 1,219     $ 1,193     $ 1,261  

 

(1) 

Calculated from the accompanying Statement of Consolidated Operations as (Loss) income from continuing operations after income taxes less Net income from continuing operations attributable to noncontrolling interests.

(2) 

Calculated from the accompanying Statement of Consolidated Operations as Income (loss) from discontinued operations after income taxes less Net income (loss) from discontinued operations attributable to noncontrolling interests.

(3) 

Per share data for all periods presented has been retroactively restated to reflect the 1-for-3 reverse stock split which became effective on October 6, 2016 (see Basis of Presentation section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K).

(4) 

In January 2016, Arconic adopted changes issued by the Financial Accounting Standards Board to the balance sheet classification of deferred financing costs (see the Recently Adopted Accounting Guidance section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K). Management has retroactively applied this change to all periods presented. As a result, $51, $65, $73, and $85 of debt issuance costs were reflected as deductions in Total debt and deductions in Total assets for 2015, 2014, 2013, and 2012, respectively, in the table above.

 

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(5) 

Cash provided from operations has not been restated for discontinued operations presentation for any period presented (see Basis of Presentation section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K).

(6) 

Capital expenditures for 2012 have not been split between continuing operations and discontinued operations because it is impracticable to do so.

The data presented in the Selected Financial Data table should be read in conjunction with the information provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II Item 7 and the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(dollars in millions, except per-share amounts and aluminum prices; shipments in thousands of metric tons [kmt])

Overview

Our Business

Arconic (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, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.

Arconic is a global company operating in 19 countries. Based upon the country where the point of sale occurred, the United States and Europe generated 63% and 26%, respectively, of Arconic’s sales in 2016. In addition, Arconic has operating activities in Brazil, Canada, China, Japan, and Russia, among others. Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.

Management Review of 2016 and Outlook for the Future

Separation Transaction. On November 1, 2016, the Company completed the previously announced separation of its business into two standalone, publicly-traded companies, Arconic Inc. and Alcoa Corporation. Following the Separation Transaction, Arconic comprises the Global Rolled Products (other than the rolling mill in Warrick, Indiana, and the 25.1% equity ownership stake in the Ma’aden Rolling Company), the Engineered Products and Solutions, and the Transportation and Construction Solutions segments. Alcoa Corporation comprises the Alumina and Primary Metals segments, the rolling mill in Warrick, Indiana, and the 25.1% equity ownership stake in the Ma’aden Rolling Company in Saudi Arabia.

The Separation Transaction was effected by the distribution of 80.1% of the outstanding shares of Alcoa Corporation common stock to the Company’s shareholders (the “Distribution”). The Company’s shareholders of record as of the close of business on October 20, 2016 (the “Record Date”) received one share of Alcoa Corporation common stock for every three shares of the Company’s common stock held as of the Record Date. The Company distributed 146,159,428 shares of common stock of Alcoa Corporation in the Distribution and retained 36,311,767 shares, or approximately 19.9%, of the common stock of Alcoa Corporation immediately following the Distribution. As a result of the Distribution, Alcoa Corporation is now an independent public company trading under the symbol “AA” on the New York Stock Exchange, and the Company trades under the symbol “ARNC” on the New York Stock Exchange.

On October 31, 2016, Arconic entered into several agreements with Alcoa Corporation that govern the relationship of the parties following the completion of the Separation Transaction. These agreements include the following: Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, Alcoa Corporation to Arconic Inc. Patent, Know-How, and Trade Secret License Agreement, Arconic Inc. to Alcoa Corporation Patent, Know-How, and Trade Secret License Agreement, Alcoa Corporation to Arconic Inc. Trademark License Agreement, Toll Processing and Services Agreement, Master Agreement for the Supply of Primary Aluminum, Massena Lease and Operations Agreement, Fusina Lease and Operations Agreement, and Stockholder and Registration Rights Agreement.

 

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Review of 2016 Operating Results and 2017 Outlook. In 2016, Arconic’s revenues were stable compared to 2015 as volume growth in aerospace due to the RTI acquisition (see Engineered Products and Solutions in Segment Information under Results of Operations below) and volume growth in automotive markets were offset by lower demand in commercial transportation and packaging markets in addition to lower aluminum prices impacting Global Rolled Products. Despite stable revenues, after-tax operating income (“ATOI”) was higher in each segment in 2016 versus 2015. Net productivity improvements across all operations exceeded cost headwinds and an unfavorable product mix as well as pricing pressures with various aerospace customers and in the global can sheet market.

Arconic’s 2016 results were negatively impacted by costs associated with the Separation Transaction as well as significant tax valuation allowance charges related to an assessment of the realizability of certain deferred tax assets including Alcoa Corporation’s net deferred tax assets and Arconic’s foreign tax credits in the U.S. Additionally, significant restructuring charges (see Restructuring and Other Charges under Results of Operations below) caused unfavorable impacts in the 2016 results.

Management continued its focus on liquidity and cash flows as well as improving its operating performance through cost reductions, margin enhancement, and profitable revenue generation. Management has also intensified its focus on capital efficiency, with an owner’s mindset. This focus and the related results enabled Arconic to end 2016 with a solid financial position.

The following financial information reflects certain key measures of Arconic’s 2016 results:

 

   

Sales of $12,394 and Loss from continuing operations of $1,062, or $2.58 per diluted share;

 

   

Total segment after-tax operating income of $1,087, an increase of 10% from 2015;

 

   

Cash from operations of $870 (includes Alcoa Corporation results of operations for the ten months ended October 31, 2016);

 

   

Capital expenditures of $1,125 (includes Alcoa Corporation capital expenditures for the ten months ended October 31, 2016);

 

   

Cash on hand at the end of the year of $1,863;

 

   

Total Debt of $8,084, a decrease in total debt of $743 from 2015; and

 

   

Depreciation and amortization of $535, an increase of 5% from 2015.

In 2017, management is projecting that sales will be stable to down 5% as the unfavorable impact from the North American packaging ramp-down (approximately $400 reduction in sales from $552 in 2016 to approximately $150 in 2017) will continue (see Restructuring and Other Charges under Results of Operations below). Each segment is anticipated to grow sales in 2017 excluding the impact of ramping down North American packaging in the Global Rolled Products segment. In aerospace, it is anticipated that the favorable impact of share gains on new platforms and engines will be somewhat offset by airframe destocking, supply chain risks, and engine ramp-up challenges that are expected to continue throughout 2017. Management also expects strong growth in automotive sheet as well as growth in the building and construction market. Finally, it is anticipated that the decline of North American heavy duty truck build rates will continue, although not quite at the same level as 2016; that the mining and oil and gas markets will not recover in 2017; and that pressures from market mix and competitive pricing will continue.

 

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Looking ahead over the next year, management will continue to focus on improving operating performance through cost reductions, margin enhancement, and profitable revenue generation. Each of the segments are projected to achieve stable to improved operating margins through net productivity savings in 2017, including from procurement and overhead programs.

On a company-wide basis, management has established and is committed to achieving the following specific goals in 2017:

 

   

Improving Adjusted EBITDA(1) margin(2) excluding costs associated with the Separation Transaction by approximately 130 basis points to 15%;

 

   

Achieving return on net assets (RONA)(2) of approximately 9%, or 190 basis points better than 2016;

 

   

Spending no more than $650 on capital expenditures;

 

   

Reducing debt by $1,000; and

 

   

Generating cash from operations that will exceed capital expenditures by a minimum of $350.

 

(1) 

Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) is calculated as net margin plus an add-back for depreciation and amortization. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation and amortization.

(2) 

Expectations for adjusted EBITDA margin and RONA on a forward-looking basis are being provided, however, a reconciliation of the differences between the non-GAAP expectations and the corresponding GAAP measures generally is not available without unreasonable effort.

Results of Operations

Earnings Summary

Loss from continuing operations after income taxes and noncontrolling interests was $1,062 for 2016, or $2.58 per diluted share, compared with a loss from continuing operations after income taxes and noncontrolling interests of $157 for 2015, or $0.54 per share. The decrease in results of $905 was primarily due to charges for tax valuation allowances and costs related to the Separation Transaction primarily offset by a full-year effect of 2015 acquisitions (see Engineered Products and Solutions in Segment Information below) and productivity improvements across all segments.

Loss from continuing operations after income taxes and noncontrolling interests was $157 for 2015, or $0.54 per diluted share, compared with a loss from continuing operations after income taxes and noncontrolling interests of $61 for 2014, or $0.21 per share. The decrease in results of $96 was mostly due to unfavorable price and product mix across all segments, net unfavorable foreign currency movements, and higher costs. These negative impacts were partially offset by net productivity improvements, higher volume across all segments, and lower charges and expenses related to a number of portfolio actions (e.g., divestitures and acquisitions).

Sales—Sales for 2016 were $12,394 compared with sales of $12,413 in 2015, a decline of $19, or less than 1%. The relatively flat performance was the result of a full-year effect of two 2015 acquisitions in the Engineered Products and Solutions segment and automotive volume increases in the Global Rolled Products segment, offset by the ramp-down of the Tennessee packaging business and the impact of metal prices in the Global Rolled Products segment and unfavorable price and product mix across all segments.

Sales for 2015 were $12,413 compared with sales of $12,542 in 2014, a decline of $129, or 1%. The decrease was primarily due to the absence of sales related to capacity that was closed or sold in the Global Rolled Products segment (see Global Rolled Products in Segment Information below), a lower average realized price for aluminum in the Global Rolled Products segment and unfavorable foreign currency movements across all segments. These negative impacts were partially offset by the addition of sales from three acquired businesses (see Engineered Products and Solutions in Segment Information below), higher volume across all segments, and favorable product mix in the Global Rolled Products segment.

 

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Cost of Goods Sold (COGS)—COGS as a percentage of Sales was 79.2% in 2016 compared with 81.4% in 2015. The primary drivers in the improvement in COGS as a percentage of sales were productivity gains across all segments and higher volume in the Engineered Products and Solutions segment due to the benefit of a full-year effect of two 2015 acquisitions. This benefit was somewhat offset by overall cost increases across all segments and unfavorable pricing and product mix impacts primarily in the Engineered Products and Solutions and Global Rolled Products segments.

COGS as a percentage of Sales was 81.4% in 2015 compared with 82.5% in 2014. The percentage was favorably impacted by net productivity improvements and higher volume across all segments and a favorable LIFO (last in, first out) adjustment due to lower prices for aluminum in the Global Rolled Products segment. These positive impacts were partially offset by unfavorable price and product mix across all segments and higher costs.

Selling, General Administrative, and Other Expenses (SG&A) — SG&A expenses were $942, or 7.6% of Sales, in 2016 compared with $765, or 6.2% of Sales, in 2015. The increase in SG&A was primarily due to costs related to the Separation Transaction of $193 in 2016, an increase of $169 from 2015 separation costs.

SG&A expenses were $765, or 6.2% of Sales, in 2015 compared with $770, or 6.1% of Sales, in 2014. The relatively flat expense was principally the result of favorable foreign currency movements due to a stronger U.S. dollar, the absence of SG&A related to closed and sold locations, and lower acquisition costs ($15), primarily offset by expenses for professional and consulting services related to the Separation Transaction ($24) and SG&A related to inorganic growth in the Engineered Products and Solutions segment.

Research and Development Expenses (R&D)—R&D expenses were $132 in 2016 compared with $169 in 2015 and $123 in 2014. The decrease in 2016 as compared to 2015 was driven by the decrease in spending for the Micromill™ in San Antonio, TX which was completed in 2015 and began production of automotive sheet, on a limited basis, for the Global Rolled Products segment. The increase in 2015 as compared to 2014 was mainly driven by additional spending related to the upgrade of the Micromill™.

Provision for Depreciation and Amortization (D&A)—The provision for D&A was $535 in 2016 compared with $508 in 2015. The increase of $27, or 5.3%, related to a full year of D&A related to two acquisitions which occurred during 2015 (see Engineered Products and Solutions in Segment Information below).

The provision for D&A was $508 in 2015 compared with $436 in 2014. The increase of $72, or 16.5%, related primarily to new D&A ($93) associated with three acquisitions that occurred from November 2014 through July 2015 (see Engineered Products and Solutions in Segment Information below). This increase was partially offset by the absence of D&A related to the divestiture and/or permanent closure of six rolling mills (see Global Rolled Products in Segment Information below).

Impairment of Goodwill—In 2015, Arconic recognized an impairment of goodwill in the amount of $25, related to the annual impairment review of the soft alloy extrusion business in Brazil (see Goodwill in Critical Accounting Policies and Estimates below).

Restructuring and Other Charges—Restructuring and other charges for each year in the three-year period ended December 31, 2016 were comprised of the following:

 

      2016     2015     2014  

Asset impairments

   $ 80     $ -     $ 65  

Layoff costs

     70       97       105  

Net loss on divestitures of businesses

     3       136       111  

Other

     27       (11     43  

Reversals of previously recorded layoff costs

     (25     (8     (10

Restructuring and other charges

   $ 155     $ 214     $ 314  

 

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Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans.

2016 Actions. In 2016, Arconic recorded Restructuring and other charges of $155 ($114 after-tax), which were comprised of the following components: $57 ($46 after-tax) for costs related to the exit of certain legacy Firth Rixson operations in the U.K.; $37 ($24 after-tax) for exit costs related to the decision to permanently shut down a can sheet facility; $20 ($14 after-tax) for costs related to the closures of five facilities, primarily in the Transportation and Construction Solutions segment and Engineered Products and Solutions segment, including the separation of approximately 280 employees; $53 ($33 after-tax) for other layoff costs, including the separation of approximately 1,315 employees (30 in TCS, 1,045 in EPS, 30 in GRP and 210 in Corporate); $11 ($8 after-tax) for other miscellaneous items, including $3 ($2 after-tax) for the sale of Remmele Medical, an RTI subsidiary; $2 ($1 after-tax) for a pension settlement; and $25 ($12 after-tax) for the reversal of a number of small layoff reserves related to prior periods.

In 2016, management made the decision to exit certain legacy Firth Rixson facilities in the U.K. Costs related to these actions included asset impairments and accelerated depreciation of $51; other exit costs of $4; and $2 for the separation of 60 employees.

Also in 2016, management approved the shutdown and demolition of the can sheet facility in Tennessee upon completion of the Toll Processing and Services Agreement with Alcoa Corporation (see Global Rolled Products in Segment Information below). Costs related to this action included $21 in asset impairments; $9 in other exit costs; and $7 for the separation of 145 employees. The other exit costs of $9 represent $4 in asset retirement obligations and $3 in environmental remediation, both of which were triggered by the decision to permanently shut down and demolish the can sheet facility in Tennessee, and $2 in other exit costs.

As of December 31, 2016, approximately 880 of the 1,800 employees were separated. The remaining separations for 2016 restructuring programs are expected to be completed by the end of 2017. In 2016, cash payments of $16 were made against layoff reserves related to 2016 restructuring programs.

2015 Actions. In 2015, Arconic recorded Restructuring and other charges of $214 ($192 after-tax), which were comprised of the following components: a $136 ($134 after-tax) net loss related to the March 2015 divestiture of a rolling mill in Russia and post-closing adjustments associated with the December 2014 divestitures of three rolling mills located in Spain and France; $97 ($70 after-tax) for layoff costs, including the separation of approximately 1,505 employees (425 in the Transportation and Construction Solutions segment, 590 in the Engineered Products and Solutions segment, 90 in the Global Rolled Products segment, and 400 in Corporate); an $18 ($13 after-tax) gain on the sale of land related to one of the rolling mills in Australia that was permanently closed in December 2014 (see 2014 Actions below); a net charge of $7 ($4 after-tax) for other miscellaneous items; and $8 ($3 after-tax) for the reversal of a number of small layoff reserves related to prior periods.

As of December 31, 2016, approximately 1,100 of the 1,240 (previously 1,505) employees were separated. The total number of employees associated with 2015 restructuring programs was updated to reflect employees, who were initially identified for separation, accepting other positions within Arconic and natural attrition. The remaining separations for 2015 restructuring programs are expected to be completed by the end of 2017. In 2016 and 2015, cash payments of $55 and $18, respectively, were made against layoff reserves related to 2015 restructuring programs.

2014 Actions. In 2014, Arconic recorded Restructuring and other charges of $314 ($249 after-tax), which were comprised of the following components: $154 ($107 after-tax) for exit costs related to the decision to permanently shut down and demolish two rolling mills (see below); a $111 ($112 after-tax) net loss primarily for the divestitures of three rolling mills in Spain and France; $49 ($28 after-tax) for other layoff costs, including the separation of approximately 1,035 employees (470 in the Engineered Products and Solutions segment, 410 in the Transportation and Construction

 

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Solutions segment, 45 in the Global Rolled Products segment, and 110 in Corporate); a net charge of $10 ($7 after-tax) for other miscellaneous items; and $10 ($5 after-tax) for the reversal of a number of layoff reserves related to prior periods.

In early 2014, management approved the permanent shutdown of Arconic’s two rolling mills in Australia, Point Henry and Yennora. This decision was made due to the significant impact of excess can sheet capacity in both Australia and Asia. The two rolling mills had a combined can sheet capacity of 200,000 metric-tons-per-year and were closed by the end of 2014. Costs related to the shutdown of the two rolling mills included $56 for the separation of approximately 470 employees; accelerated depreciation of $58 as the rolling mills continued to operate during 2014; asset impairments of $7 representing the write-off of the remaining book value of all related properties, plants, and equipment; and $33 in other exit costs. Additionally, in 2014, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $13 ($9 after-tax), which was recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. The other exit costs of $33 represent $18 in environmental remediation and $8 in asset retirement obligations, both of which were triggered by the decisions to permanently shut down and demolish the aforementioned structures in Australia, and $7 in other related costs, including supplier and customer contract-related costs. Demolition and remediation activities related to the two rolling mills began in mid-2015 and are expected to be completed by the end of 2018.

As of December 31, 2016, the separations associated with 2014 restructuring programs were essentially complete. In 2016, 2015, and 2014, cash payments of $3, $27, and $54, respectively, were made against layoff reserves related to 2014 restructuring programs.

Arconic does not include Restructuring and other charges in the results of its reportable segments. The pretax impact of allocating such charges to segment results would have been as follows:

 

      2016      2015      2014  

Global Rolled Products

   $ 40      $ 121      $ 267  

Engineered Products and Solutions

     78        46        13  

Transportation and Construction Solutions

     14        8        10  

Segment total

     132        175        290  

Corporate

     23        39        24  

Total restructuring and other charges

   $ 155      $ 214      $ 314  

Interest Expense—Interest expense was $499 in 2016 compared with $473 in 2015. The increase of $26, or 5%, was primarily due to debt issuance costs of $9 that were expensed in connection with the Separation Transaction and costs associated with the early redemption of $750 of 5.55% Notes due February 2017, completed on December 30, 2016, which included a $3 purchase premium, and a full-year of interest related to RTI International Metals, Inc. (RTI) debt of $6.

Interest expense was $473 in 2015 compared with $442 in 2014. The increase of $31, or 7%, was primarily due to an 8% higher average debt level, somewhat offset by the absence of fees paid associated with the execution and termination of a 364-day senior unsecured bridge term loan facility related to the then-planned acquisition of Firth Rixson ($13—see Engineered Products and Solutions in Segment Information below). The higher average debt level was mostly attributable to higher outstanding long-term debt due to the September 2014 issuance of $1,250 in 5.125% Notes, the proceeds of which were used to pay a portion of the purchase price of the Firth Rixson acquisition.

Other Income, Net—Other income, net was $94 in 2016 compared with $28 in 2015. The increase of $66 was mainly the result of a favorable adjustment to the contingent earn-out liability and a post-closing adjustment, both of which related to the November 2014 acquisition of Firth Rixson ($76), and favorable foreign currency movements ($55). These items were partially offset by the absence of gains on the sales of land in the United States and equity investment in a China rolling mill ($38) in 2015.

Other income, net was $28 in 2015 compared with $5 in 2014. The increase of $23 was mainly the result of a gain on the sale of land around Arconic’s former Sherwin, TX refinery site ($19) and the remaining equity investment in a

 

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China rolling mill ($19) and a favorable change in deferred compensation. These items were somewhat offset by the absence of a gain on a portion of an equity investment in a China rolling mill ($14) and an unfavorable change in the cash surrender value of company-owned life insurance.

Income Taxes—Arconic’s effective tax rate was 356.5% (provision on income) in 2016 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate primarily due to a $1,267 discrete income tax charge for valuation allowances related to the Separation Transaction (see Income Taxes in Critical Accounting Policies and Estimates below), a $95 tax charge associated with the redemption of company-owned life insurance policies whose tax basis was less than the redemption amount resulting in a taxable gain, a $51 net charge for the remeasurement of certain deferred tax assets and liabilities due to tax rate and tax law changes, a $34 unfavorable tax impact related to certain separation costs which are nondeductible for income tax purposes, somewhat offset by a $39 discrete income tax benefit for the release of valuation allowances in Canada and Russia, a $38 tax benefit related to currency impacts of a distribution of previously taxed income, and a $26 favorable tax impact associated with non-taxable settlement proceeds and earn-out liability adjustments in connection with the Firth Rixson acquisition.

Arconic’s effective tax rate was 185.2% (provision on income) in 2015 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate principally due to a $190 discrete income tax charge for valuation allowances on certain deferred tax assets in the U.S. and Iceland (see Income Taxes in Critical Accounting Policies and Estimates below), a $25 impairment of goodwill (see Impairment of Goodwill above) that is nondeductible for income tax purposes, a loss on the sale of a rolling mill in Russia (see Global Rolled Products in Segment Information below) for which no tax benefit was recognized, and a $34 net discrete income tax charge as described below.

In 2015, Alcoa World Alumina and Chemicals (AWAC), the former joint venture owned 60% by Arconic and 40% by Alumina Limited, recognized an $85 discrete income tax charge for a valuation allowance on certain deferred tax assets in Suriname (see Income Taxes in Critical Accounting Policies and Estimates below), which were related mostly to employee benefits and tax loss carryforwards. Arconic also had a $51 deferred tax liability related to its 60%-share of these deferred tax assets that was written off as a result of the valuation allowance recognized by AWAC.

Arconic’s effective tax rate was 154.0% (provision on income) in 2014 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate mainly due to restructuring charges related to operations in Australia (benefit at a lower tax rate) (see Restructuring and Other Charges above), a $52 ($31 after noncontrolling interests) discrete income tax charge related to a tax rate change in Brazil (see below), a loss on the sale of three rolling mills in Europe (no tax benefit) (see Global Rolled Products in Segment Information below), and a $27 ($16 after noncontrolling interests) discrete income tax charge for the remeasurement of certain deferred tax assets of a subsidiary in Spain due to a November 2014 enacted tax rate change (from 30% in 2014 to 28% in 2015 to 25% in 2016). These items were somewhat offset by foreign income taxed in lower rate jurisdictions and a $9 discrete income tax benefit for the release of a valuation allowance related to operations in Germany due to the initiation of a tax planning strategy.

In December 2011, one of Arconic’s former subsidiaries in Brazil applied for a tax holiday related to its expanded mining and refining operations. During 2013, the application was amended and re-filed and, separately, a similar application was filed for another one of Arconic’s former subsidiaries in Brazil. The deadline for the Brazilian government to deny the application was July 11, 2014. Since Arconic did not receive notice that its applications were denied, the tax holiday took effect automatically on July 12, 2014. As a result, the tax rate applicable to qualified holiday income for these subsidiaries decreased significantly (from 34% to 15.25%), resulting in future cash tax savings over the 10-year holiday period (retroactively effective as of January 1, 2013). Additionally, a portion of one of the subsidiaries net deferred tax asset that reverses within the holiday period was remeasured at the new tax rate (the net deferred tax asset of the other subsidiary was not remeasured since it could still be utilized against the subsidiary’s future earnings not subject to the tax holiday). This remeasurement resulted in a decrease to that subsidiary’s net deferred tax assets and a noncash charge to earnings of $52 ($31 after noncontrolling interests).

 

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Management anticipates that the effective tax rate in 2017 will be between 32% and 35%. However, business portfolio actions, changes in the current economic environment, tax legislation or rate changes, currency fluctuations, ability to realize deferred tax assets, movements in stock price impacting tax benefits or deficiencies on stock-based payment awards, and the results of operations in certain taxing jurisdictions may cause this estimated rate to fluctuate.

Segment Information

Arconic’s operations consist of three worldwide reportable segments: Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions (see below). Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the after-tax operating income (ATOI) of each segment. Certain items such as the impact of LIFO inventory accounting; metal price lag (the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by the respective segment—generally when the price of metal increases, metal lag is favorable and when the price of metal decreases, metal lag is unfavorable); interest expense; noncontrolling interests; corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; and other items, including intersegment profit eliminations, differences between tax rates applicable to the segments and the consolidated effective tax rate, and other nonoperating items such as foreign currency transaction gains/losses and interest income are excluded from segment ATOI.

ATOI for all reportable segments totaled $1,087 in 2016, $986 in 2015, and $983 in 2014. The following information provides shipment, sales and ATOI data for each reportable segment, as well as certain realized price data, for each of the three years in the period ended December 31, 2016. See Note O to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.

Beginning in the first quarter of 2017, Arconic’s segment reporting metric will change from ATOI to Adjusted EBITDA.

Global Rolled Products(1)

 

      2016      2015      2014  

Third-party aluminum shipments (kmt)

     1,339        1,375        1,598  

Average realized price per metric ton of aluminum (2)

   $ 3,633      $ 3,820      $ 3,970  

Third-party sales

   $ 4,864      $ 5,253      $ 6,344  

Intersegment sales

     118        125        185  

Total sales

   $ 4,982      $ 5,378      $ 6,529  

ATOI

   $ 269      $ 225      $ 224  
(1) 

Excludes the Warrick, IN rolling operations and the equity interest in the rolling mill at the joint venture in Saudi Arabia, both of which were previously part of the Global Rolled Products segment but became part of Alcoa Corporation effective November 1, 2016.

 

(2) 

Generally, average realized price per metric ton of aluminum includes two elements: a) the price of metal (the underlying base metal component based on quoted prices from the LME, plus a regional premium which represents the incremental price over the base LME component that is associated with physical delivery of metal to a particular region), and b) the conversion price, which represents the incremental price over the metal price component that is associated with converting primary aluminum into sheet and plate. In this circumstance, the metal price component is a pass-through to this segment’s customers with limited exception (e.g., fixed-priced contracts, certain regional premiums).

The Global Rolled Products segment produces aluminum sheet and plate for a variety of end markets. Sheet and plate is sold directly to customers and through distributors related to the aerospace, automotive, commercial transportation, packaging, building and construction, and industrial products (mainly used in the production of machinery and equipment and consumer durables) end markets. A small portion of this segment also produces aseptic foil for the packaging end market. While the customer base for flat-rolled products is large, a significant amount of sales of sheet

 

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and plate is to a relatively small number of customers. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar, Chinese yuan, the euro, the Russian ruble, the Brazilian real, and the British pound.

In March 2015, Arconic completed the sale of a rolling mill located in Belaya Kalitva, Russia to a wholly-owned subsidiary of Stupino Titanium Company. While owned by Arconic, the operating results and assets and liabilities of the rolling mill were included in the Global Rolled Products segment. The rolling mill generated sales of approximately $130 in 2014 and, at the time of divestiture, had approximately 1,870 employees. See Restructuring and Other Charges in Results of Operations above.

In December 2014, Arconic completed the sale of three rolling mills located in Spain (Alicante and Amorebieta) and France (Castelsarrasin) to a subsidiary of Atlas Holdings LLC. While owned by Arconic, the operating results and assets and liabilities of the rolling mills were included in the Global Rolled Products segment. The rolling mills combined generated sales of approximately $500 in 2013 and, at the time of divestiture, had approximately 750 employees. See Restructuring and Other Charges in Results of Operations above.

In February 2014, management approved the permanent shutdown of Arconic’s two rolling mills in Australia, Point Henry and Yennora. This decision was made due to the significant impact of excess can sheet capacity in both Australia and Asia. The two rolling mills had a combined can sheet capacity of 200 kmt-per-year and were closed by the end of 2014. See Restructuring and Other Charges in Results of Operations above.

Third-party sales for the Global Rolled Products segment declined 7% in 2016 compared with 2015, primarily due to the ramp-down of Tennessee packaging ($251); lower aluminum prices; and lower demand in the industrial products, packaging, commercial aerospace, commercial transportation, and North American heavy duty truck markets. These decreases were partially offset by higher volume in the automotive market.

Third-party sales for this segment declined 17% in 2015 compared with 2014, primarily driven by the absence of sales ($1,052) from six rolling mills in Australia, Spain, Russia, and France (see above), unfavorable pricing, mostly due to a decrease in metal prices (both LME and regional premium components), and unfavorable foreign currency movements, mainly the result of a weaker euro, Russian ruble, and Brazilian real. These negative impacts were somewhat offset by increased demand of the remaining rolling portfolio and favorable product mix (automotive and aerospace versus industrial products). The volume improvement of the remaining portfolio was largely attributable to the automotive (North America) and can sheet packaging (China) end markets, slightly offset by lower demand in the industrial products end market.

ATOI for the Global Rolled Products segment increased $44, or 20%, in 2016 compared with 2015, primarily driven by strong productivity improvements, which significantly exceeded cost increases, partially offset by lower pricing, primarily due to overall pricing pressure in the global can sheet market, unfavorable product mix and lower volumes as detailed above.

ATOI for this segment increased $1 in 2015 compared with 2014, primarily attributable to net productivity improvements across most businesses and higher volumes principally driven by higher demand in the automotive end market, offset by unfavorable price and product mix, largely the result of overall pricing pressure in the global can sheet packaging end market, and higher costs related to growth projects, including research and development as Arconic develops and qualifies products from a new Micromill™ production process and the ramp-up of the Tennessee automotive expansion.

On November 1, 2016, Arconic entered into a Toll Processing and Services Agreement with Alcoa Corporation for the tolling of metal for the Warrick, IN rolling mill which became a part of Alcoa Corporation upon the completion of the Separation Transaction. As part of this arrangement, Arconic will provide a toll processing service to Alcoa Corporation to produce can sheet products at its facility in Tennessee through the expected end date of the contract,

 

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December 31, 2018. Alcoa Corporation will supply all required raw materials to Arconic and Arconic will process the raw materials into finished can sheet coils ready for shipment to the end customer. Tolling revenue for the two months ended December 31, 2016 was approximately $37 million.

In 2017, demand in the automotive end market is expected to continue to grow due to the growing demand for innovative products and aluminum-intensive vehicles. Demand from the commercial airframe end market is expected to be flat in 2017 as the ramp up of new programs is offset by customer destocking and lower build rates for aluminum intensive wide-body programs. Sales to the packaging market are expected to decline due to continuing pricing pressure within this market and the ramp-down of the North American packaging operations. Net productivity improvements are anticipated to continue.

Engineered Products and Solutions

 

      2016      2015      2014  

Third-party sales

   $ 5,728      $ 5,342      $ 4,217  

ATOI

   $ 642      $ 595      $ 579  

The Engineered Products and Solutions segment produces products that are used primarily in the aerospace (commercial and defense), commercial transportation, and power generation end markets. Such products include fastening systems (titanium, steel, and nickel superalloys) and seamless rolled rings (mostly nickel superalloys); investment castings (nickel superalloys, titanium, and aluminum), including airfoils and forged jet engine components (e.g., jet engine disks), and extruded, machined and formed aircraft parts (titanium and aluminum), all of which are sold directly to customers and through distributors. More than 75% of the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forged, extruded, and machined metal products (titanium, aluminum and steel) for the oil and gas, industrial products, automotive, and land and sea defense end markets. Seasonal decreases in sales are generally experienced in the third quarter of the year due to the European summer slowdown across all end markets. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar, British pound and the euro.

In July 2015, Arconic completed the acquisition of RTI, a global supplier of titanium and specialty metal products and services for the commercial aerospace, defense, energy, and medical device end markets. The purpose of the acquisition was to expand Arconic’s range of titanium offerings and add advanced technologies and materials, primarily related to the aerospace end market. In 2014, RTI generated net sales of $794 and had approximately 2,600 employees. The operating results and assets and liabilities of RTI have been included within the Engineered Products and Solutions segment since the date of acquisition.

In March 2015, Arconic completed the acquisition of TITAL, a privately held aerospace castings company with approximately 650 employees based in Germany. TITAL produces aluminum and titanium investment casting products for the aerospace and defense end markets. In 2014, TITAL generated sales of approximately $100. The purpose of the acquisition was to capture increasing demand for advanced jet engine components made of titanium, establish titanium-casting capabilities in Europe, and expand existing aluminum casting capacity. The operating results and assets and liabilities of TITAL have been included within the Engineered Products and Solutions segment since the date of acquisition.

In November 2014, Arconic completed the acquisition of Firth Rixson, a global leader in aerospace jet engine components. Firth Rixson manufactures rings, forgings, and metal products for the aerospace end market, as well as other markets requiring highly-engineered material applications. The purpose of the acquisition was to strengthen Arconic’s aerospace business and position the Company to capture additional aerospace growth with a broader range of high-growth, value-add jet engine components. Firth Rixson generated sales of approximately $970 in 2014 and had 13 operating facilities in the United States, United Kingdom, Europe, and Asia employing approximately 2,400 people combined. The operating results and assets and liabilities of Firth Rixson have been included within the Engineered Products and Solutions segment since the date of acquisition.

 

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Third-party sales for the Engineered Products and Solutions segment improved 7% in 2016 compared with 2015, primarily attributable to higher third-party sales of the two acquired businesses ($457), primarily related to the aerospace end market, and increased demand from the industrial gas turbine end market, partially offset by lower volumes in the oil and gas end market and commercial transportation end market as well as pricing pressures in aerospace.

Third-party sales for this segment improved 27% in 2015 compared with 2014, largely attributable to the third-party sales ($1,310) of the three acquired businesses (see above), and higher volumes in this segment’s legacy businesses, both of which were primarily related to the aerospace end market. These positive impacts were slightly offset by unfavorable foreign currency movements, principally driven by a weaker euro.

ATOI for the Engineered Products and Solutions segment increased $47, or 8%, in 2016 compared with 2015, primarily related to net productivity improvements across all businesses as well as the volume increase from both the RTI acquisition and organic revenue growth, partially offset by a lower margin product mix and pricing pressures in the aerospace end market.

ATOI for this segment increased $16, or 3%, in 2015 compared with 2014, principally the result of net productivity improvements across most businesses, a positive contribution from acquisitions, and overall higher volumes in this segment’s legacy businesses. These positive impacts were partially offset by unfavorable price and product mix, higher costs related to growth projects, and net unfavorable foreign currency movements, primarily related to a weaker euro.

In 2017, demand in the commercial aerospace end market is expected to remain strong, driven by the ramp up of new aerospace engine platforms, somewhat offset by continued customer destocking and engine ramp-up challenges. Demand in the defense end market is expected to grow due to the continuing ramp-up of certain aerospace programs. Additionally, net productivity improvements are anticipated while pricing pressure across all markets is likely to continue.

Transportation and Construction Solutions

 

      2016      2015      2014  

Third-party sales

   $ 1,802      $ 1,882      $ 2,021  

ATOI

   $ 176      $ 166      $ 180  

The Transportation and Construction Solutions segment produces products that are used mostly in the nonresidential building and construction and commercial transportation end markets. Such products include integrated aluminum structural systems, architectural extrusions, and forged aluminum commercial vehicle wheels, which are sold both directly to customers and through distributors. A small part of this segment also produces aluminum products for the industrial products end market. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are primarily the U.S. dollar, the euro, and the Brazilian real.

Third-party sales for the Transportation and Construction Solutions segment decreased 4% in 2016 compared with 2015, primarily driven by lower demand from the North American commercial transportation end market, which was partially offset by rising demand from the building and construction end market.

Third-party sales for this segment decreased 7% in 2015 compared with 2014, primarily driven by unfavorable foreign currency movements, principally caused by a weaker euro and Brazilian real, and lower volume related to the building and construction end market, somewhat offset by higher volume related to the commercial transportation end market.

ATOI for the Transportation and Construction Solutions segment increased $10, or 6%, in 2016 compared with 2015, principally driven by net productivity improvements across all businesses and growth in the building and construction segment, partially offset by lower demand in the North American heavy duty truck and Brazilian markets.

 

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ATOI for this segment declined $14, or 8%, in 2015 compared with 2014, mainly due to higher costs, net unfavorable foreign currency movements, primarily related to a weaker euro and Brazilian real, and unfavorable price and product mix. These negative impacts were mostly offset by net productivity improvements across all businesses.

In 2017, we expect continued growth in the North American and European non-residential building and construction end markets and continued demand for innovative products. It will be partially offset by the expected year-over-year decline in the North American build rates in the commercial transportation end market. Additionally, net productivity improvements are anticipated.

Reconciliation of ATOI to Consolidated Net (Loss) Income Attributable to Arconic

Items required to reconcile total segment ATOI to consolidated net (loss) income attributable to Arconic include: the impact of LIFO inventory accounting; metal price lag (the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by the respective segment – generally when the price of metal increases, metal lag is favorable and when the price of metal decreases, metal lag is unfavorable); interest expense; noncontrolling interests; corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, corporate research and development expenses, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; and other items, including intersegment profit eliminations, differences between tax rates applicable to the segments and the consolidated effective tax rate, and other nonoperating items such as foreign currency transaction gains/losses and interest income.

The following table reconciles total segment ATOI to consolidated net (loss) income attributable to Arconic:

 

      2016     2015     2014  

Total segment ATOI

   $ 1,087     $ 986     $ 983  

Unallocated amounts (net of tax):

      

Impact of LIFO

     (11     66       (52

Metal price lag

     21       (115     68  

Interest expense

     (324     (307     (287

Noncontrolling interests

     -       (1     -  

Corporate expense

     (306     (252     (268

Impairment of goodwill

     -       (25     -  

Restructuring and other charges

     (114     (192     (249

Discontinued operations

     121       (165     329  

Other

     (1,415     (317     (256

Consolidated net (loss) income attributable to Arconic

   $ (941   $ (322   $ 268  

The significant changes in the reconciling items between total segment ATOI and Consolidated net (loss) income attributable to Arconic for 2016 compared with 2015 consisted of:

 

   

a change in the impact of LIFO, mostly due to higher aluminum prices, driven by higher base metal prices (LME) (increase in price at December 31, 2016 indexed to December 31, 2015 compared to a decrease in price at December 31, 2015 indexed to December 31, 2014);

 

   

a change in Metal price lag, the result of higher prices for aluminum;

 

   

an increase in Interest expense, due to debt issuance costs expensed associated with the Separation Transaction, a full year of interest related to the RTI debt and costs associated with the early redemption of $750 of 5.55% Notes due February 2017, completed on December 30, 2016, which included a purchase premium;

 

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an increase in Corporate expense, largely attributable to an increase in costs related to the Separation Transaction ($134), partially offset by decreases in corporate research and development expenses and other various expenses;

 

   

a decrease in Restructuring and other charges, due to fewer portfolio actions; and

 

   

a decrease in Other, primarily due to a charge for tax valuation allowances related to the Separation Transaction ($1,267), slightly offset by a favorable adjustment to the contingent earn-out liability and a post-closing adjustment, both of which related to the November 2014 acquisition of Firth Rixson ($76).

The significant changes in the reconciling items between total segment ATOI and Consolidated net (loss) income attributable to Arconic for 2015 compared with 2014 consisted of:

 

   

a change in the impact of LIFO, mostly due to lower prices for aluminum, driven by both lower base metal prices (LME) and regional premiums (decrease in price at December 31, 2015 indexed to December 31, 2014 compared to an increase in price at December 31, 2014 indexed to December 31, 2013);

 

   

a change in Metal price lag, the result of lower prices for aluminum;

 

   

an increase in Interest expense, principally caused by an 8% higher average debt level, which was largely attributable to higher outstanding long-term debt due to the September 2014 issuance of $1,250 in 5.125% Notes, somewhat offset by the absence of fees paid associated with the execution and termination of a 364-day senior unsecured bridge term loan facility related to the then-planned acquisition of Firth Rixson ($8);

 

   

a decline in Corporate expense, largely attributable to decreases in various expenses, including lower acquisition costs ($13), partially offset by expenses related to the Separation Transaction ($24);

 

   

a decrease in Restructuring and other charges, mostly the result of lower restructuring and other charges associated with a number of portfolio actions (e.g. divestitures); and

 

   

a change in Other, primarily due to a discrete income tax charge for valuation allowances on certain deferred tax assets in the United States and Iceland ($190) partially offset by gains on various asset sales, a tax rate change in Brazil, and a net benefit for a number of small items.

Environmental Matters

See the Environmental Matters section of Note L to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

Liquidity and Capital Resources

Arconic maintains a disciplined approach to cash management and strengthening of its balance sheet. In 2016, as has been the focus since 2008, management initiated actions to significantly improve Arconic’s cost structure and liquidity, providing the Company with the ability to operate effectively. Such actions include procurement efficiencies and overhead rationalization to reduce costs, working capital initiatives to yield significant cash improvements, and maintaining a sustainable level of capital expenditures. In 2017, this approach is expected to continue with the ultimate goal of generating cash from operations that exceeds capital expenditures by more than $350 and debt pay down of approximately $1 billion.

Along with the foregoing actions, cash provided from operations and financing activities is expected to be adequate to cover Arconic’s operational and business needs over the next 12 months. For an analysis of long-term liquidity, see Contractual Obligations and Off-Balance Sheet Arrangements below.

At December 31, 2016, cash and cash equivalents of Arconic were $1,863, of which $640 was held outside the United States. Arconic has a number of commitments and obligations related to the Company’s growth strategy in foreign jurisdictions, resulting in the need for cash outside the United States. As such, management does not have a current expectation of repatriating cash held in foreign jurisdictions.

 

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The Statement of Consolidated Cash Flows has not been restated for discontinued operations, therefore the discussion below concerning Cash from Operations, Financing Activities, and Investing Activities includes the results of both Arconic and Alcoa Corporation up through the completion of the Separation Transaction on November 1, 2016.

Cash from Operations

Cash provided from operations in 2016 was $870 compared with $1,582 in 2015. The decrease of $712, or 45%, was primarily due to lower operating results (net loss plus net add-back for noncash transactions in earnings) of $985 and a negative change in working capital of $104 and noncurrent liabilities of $21, partially offset by a positive change associated with noncurrent assets of $218 and a decrease in pension contributions of $180.

The components of the negative change in working capital were as follows:

 

   

an unfavorable change of $450 in receivables;

 

   

a positive change of $35 in inventories;

 

   

an unfavorable change of $122 in prepaid expenses and other current assets;

 

   

a positive change of $322 in accounts payable, trade, principally the result of the impact of purchasing metal from Alcoa Corporation and the timing of payments;

 

   

a positive change of $43 in accrued expenses; and

 

   

a favorable change of $68 in taxes, including income taxes.

Cash provided from operations in 2015 was $1,582 compared with $1,674 in 2014. The decrease of $92, or 5%, was due to a negative change in noncurrent assets of $328, lower operating results (net (loss) income plus net add-back for noncash transactions in earnings) and a negative change in noncurrent liabilities of $18, mostly offset by a positive change associated with working capital of $572 and lower pension contributions of $31.

The components of the positive change in working capital were as follows:

 

   

a favorable change of $524 in receivables, mostly driven by lower customer sales as a result of closed, divested, and curtailed locations and lower metal prices;

 

   

a positive change of $291 in inventories, largely attributable to the absence of inventory build related to the ramp-up of automotive production at the Davenport, IA plant and customer requirements related to smelters (Alcoa Corporation) that have been curtailed or shut down;

 

   

a favorable change of $71 in prepaid expenses and other current assets;

 

   

a negative change of $346 in accounts payable, trade, principally the result of timing of payments;

 

   

a positive change of $14 in accrued expenses, mainly caused by a smaller payment to the United States government due to the resolution of a legal matter (Alcoa Corporation); and

 

   

a favorable change of $18 in taxes, including income taxes.

The unfavorable change in noncurrent assets was mostly related to a $300 prepayment made under a natural gas supply agreement in Australia (Alcoa Corporation).

Financing Activities

Cash used for financing activities was $754 in 2016 compared with cash used from financing of $441 in 2015 and cash provided from financing activities of $2,250 in 2014.

 

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The use of cash of $754 in 2016 was principally the result of $2,734 in payments on debt, mostly related to the repayment of borrowings under certain revolving credit facilitates (see below) and the repayment in December 2016 of $750 of outstanding principal of 5.55% notes due February 2017; $228 in dividends to shareholders; and $175 in net cash paid to noncontrolling interests. These items were mostly offset by $1,962 in additions to debt, virtually all of which was the result of borrowing under certain revolving credit facilities and $421 in net cash transferred from Alcoa Corporation at the completion of the Separation Transaction.

The use of cash in 2015 was principally the result of $2,030 in payments on debt, mostly related to the repayment of borrowings under certain revolving credit facilities (see below) and the repayment of convertible notes assumed in conjunction with the acquisition of RTI (see below); $223 in dividends paid to shareholders; and $104 in net cash paid to a noncontrolling interest. These items were mostly offset by $1,901 in additions to debt, virtually all of which was the result of borrowings under certain revolving credit facilities (see below).

The source of cash in 2014 was mostly driven by $2,878 in additions to debt, driven by $1,238 in net proceeds from the issuance of new senior debt securities used for the acquisition of Firth Rixson (see below) and $1,640 in borrowings under certain revolving credit facilities (see below); net proceeds of $1,211 from the issuance of mandatory convertible preferred stock related to the aforementioned acquisition; and $150 in proceeds from employee exercises of 17.3 million stock options at a weighted average exercise price of $8.70 (not in millions). These items were somewhat offset by $1,723 in payments on debt, mostly related to $1,640 for the repayment of borrowings under certain revolving credit facilities (see below), and $161 in dividends paid to shareholders.

In July 2015, through the acquisition of RTI (see Engineered Products and Solutions in Segment Information above), 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 is due on October 15, 2019 (principal amount of $403), unless earlier converted or purchased by Arconic at the holder’s option upon a fundamental change. Upon conversion of the 2019 convertible notes in accordance with their terms, holders will receive, at Arconic’s election, cash, shares of common stock (approximately 14,156,000 shares currently), or a combination of cash and shares. On the maturity date, each holder of outstanding notes will be entitled to receive on such date $1,000 (not in millions) in cash for each $1,000 (not in millions) in principal amount of notes, together with accrued and unpaid interest to, but not including, the maturity date.

On July 25, 2014, Arconic entered into a Five-Year Revolving Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and issuers named therein which provides for a senior unsecured revolving credit facility (the “Credit Facility”). The proceeds are to be used to provide working capital or for other general corporate purposes of Arconic. In September 2016, Arconic entered into an amendment to the Credit Agreement to permit the Separation Transaction and to amend certain terms of the Credit Facility including the replacement of the existing financial covenant with a leverage ratio and reduction of total commitments available from $4,000 to $3,000. The amendment became effective on the separation date of November 1, 2016. The previous financial covenant, based upon Consolidated Net Worth (as defined in the Credit Agreement) was replaced. Arconic will be required to maintain a ratio of Indebtedness (as defined in the Credit Agreement), to Consolidated EBITDA (as defined in the Credit Agreement) of 5.50 to 1.00 for the period of the four fiscal quarters most recently ended, declining to 3.50 to 1.00 on December 31, 2019 and thereafter.

The Credit Agreement includes additional covenants, including, among others, (a) limitations on Arconic’s ability to incur liens securing indebtedness for borrowed money, (b) limitations on Arconic’s ability to consummate a merger, consolidation or sale of all or substantially all of its assets, and (c) limitations on Arconic’s ability to change the nature of its business. As of December 31, 2016, Arconic was in compliance with all such covenants.

The Credit Agreement matures on July 25, 2020, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. Arconic may make one additional one-year extension request during the remaining term of the Credit Agreement, subject to the lender consent requirements set forth in the Credit Agreement. Under the provisions of the Credit Agreement, Arconic will pay a fee of 0.30% (based on Arconic’s long-term debt ratings as of December 31, 2016) of the total commitment per annum to maintain the Credit Facility.

 

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The Credit Facility is unsecured and amounts payable under it will rank pari passu with all other unsecured, unsubordinated indebtedness of Arconic. Borrowings under the Credit Facility may be denominated in U.S. dollars or euros. Loans will bear interest at a base rate or a rate equal to LIBOR, plus, in each case, an applicable margin based on the credit ratings of Arconic’s outstanding senior unsecured long-term debt. The applicable margin on base rate loans and LIBOR loans will be 0.70% and 1.70% per annum, respectively, based on Arconic’s long-term debt ratings as of December 31, 2016. Loans may be prepaid without premium or penalty, subject to customary breakage costs.

The obligation of Arconic to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an “Event of Default” as defined in the Credit Agreement. Such Events of Default include, among others, (a) Arconic’s failure to pay the principal of, or interest on, borrowings under the Credit Facility, (b) any representation or warranty of Arconic in the Credit Agreement proving to be materially false or misleading, (c) Arconic’s breach of any of its covenants contained in the Credit Agreement, and (d) the bankruptcy or insolvency of Arconic.

There were no amounts outstanding at December 31, 2016 and 2015 and no amounts were borrowed during 2016, 2015 or 2014 under the Credit Facility In addition to the Credit Facility above, Arconic has a number of other credit facilities that provide a combined borrowing capacity of $715 as of December 31, 2016, of which $465 is due to expire in 2017 and $250 is due to expire in 2018. The purpose of any borrowings under these credit arrangements is to provide for working capital requirements and for other general corporate purposes. The covenants contained in all these arrangements are the same as the Credit Agreement (see above).

In 2016, 2015 and 2014, Arconic borrowed and repaid $1,950, $1,890, and $1,640, respectively, under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during 2016, 2015, and 2014 were 1.88%, 1.61%, and 1.54%, respectively, and 49 days, 69 days, and 67 days, respectively.

In February 2014, Arconic’s automatic shelf registration statement filed with the Securities and Exchange Commission expired. On July 11, 2014, Arconic filed a new shelf registration statement, which was amended on July 25, 2014 and became effective on July 30, 2014, for up to $5,000 of securities on an unallocated basis for future issuance. As of December 31, 2016, $2,500 in securities were issued under the new shelf registration statement.

In September 2014, Arconic completed two public securities offerings under its shelf registration statement for (i) $1,250 of 25 million depositary shares, each representing 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, and (ii) $1,250 of 5.125% Notes due 2024. The net proceeds of the offerings were used to finance the cash portion of the acquisition of Firth Rixson (see Engineered Products and Solutions in Segment Information above).

Arconic’s cost 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’s debt by the major credit rating agencies.

On March 31, 2016, Moody’s Investor Service (Moody’s) affirmed the following ratings for Arconic: long-term debt at Ba1 and short-term debt at Speculative Grade Liquidity Rating-1. Additionally, Moody’s changed the current outlook from rating under review to negative. On June 30, 2016, Moody’s maintained the current outlook as negative based on the filing of a Form 10 registration statement related to the planned separation of Arconic. On September 22, 2016, Moody’s placed the long-term debt rating Ba1 as under review for possible downgrade. On November 1, 2016, Moody’s downgraded Arconic’s long-term debt to Ba2 and short-term debt to Speculative Grade Liquidity-2 based upon the completion of the Separation Transaction. Additionally, Moody’s changed the current outlook to stable.

On April 21, 2016, Fitch affirmed the following ratings for Arconic: long-term debt at BB+ and short-term debt at B. Additionally, Fitch changed the current outlook from positive to evolving. On July 7, 2016, Fitch changed the current outlook from evolving to stable based on the filing of a Form 10 registration statement related to the planned separation of Arconic.

 

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On April 29, 2016, Standard and Poor’s Ratings Service (S&P) affirmed the following ratings for Arconic: long-term debt at BBB- and short-term debt at A-3. Additionally, S&P maintained the current outlook as stable. On September 19, 2016, S&P affirmed its ratings for Arconic: long-term debt at BBB- and short-term debt at A-3. Additionally, S&P maintained the current outlook as stable.

Investing Activities

Cash used for investing activities was $165 in 2016 compared with $1,060 in 2015 and $3,460 in 2014.

The use of cash in 2016 was mainly due to $1,125 in capital expenditures ($298 Alcoa Corporation), 29% of which related to growth projects, including the aerospace expansion (very thick plate stretcher) at the Davenport, IA plant and a titanium aluminide furnace at the Niles, Ohio facility. This use of cash was primarily offset by $692 in proceeds from the sale of assets and businesses, including $457 from the redemption of company-owned life insurance policies, $120 in proceeds related to the sale of the Intalco smelter wharf property (Alcoa Corporation), and $102 in proceeds ($99 net of transaction costs) from the sale of the Remmele Medical business, which was part of Arconic’s acquisition of RTI in July 2015; and $280 in sales of investments, composed primarily of $145 for an equity interest in a natural pipeline in Australia (Alcoa Corporation) and $130 for fixed income and equity securities held by Arconic’s captive insurance company.

The use of cash in 2015 was mainly due to $1,180 in capital expenditures ($391 Alcoa Corporation) (includes costs related to environmental control in new and expanded facilities of $141), 38% of which related to growth projects, including the aerospace expansion at the La Porte, IN plant, the automotive expansion at the Alcoa, TN plant, the aerospace expansion (very thick plate stretcher) at the Davenport, IA plant, the aerospace expansion (isothermal press) at the Savannah, GA plant (Firth Rixson), and the specialty foil expansion at the Itapissuma plant in Brazil; $205 (net of cash acquired) for the acquisition of TITAL (see Engineered Products and Solutions in Segment Information above); and $134 in additions to investments, including the purchase of $70 in equities and fixed income securities held by Arconic’s captive insurance company and equity contributions of $29 related to the aluminum complex joint venture in Saudi Arabia (Alcoa Corporation). These items were somewhat offset by $302 in cash acquired from RTI (see Engineered Products and Solutions in Segment Information above); $112 in proceeds from the sale of assets and businesses, composed of three land sales in Australia and the United States combined and post-closing adjustments related to an ownership stake in a smelter (Alcoa Corporation), four rolling mills, and an ownership stake in a bauxite mine/alumina refinery (Alcoa Corporation) divested from December 2014 through March 2015; and $40 in sales of investments, related to the sale of $21 in equities and fixed income securities held by Arconic’s captive insurance company and $19 in proceeds from the sale of the remaining portion of an equity investment in a China rolling mill.

The use of cash in 2014 was principally due to $2,385 (net of cash acquired) for the acquisition of Firth Rixson (see Engineered Products and Solutions in Segment Information above); $1,219 in capital expenditures ($444 for Alcoa Corporation) (includes costs related to environmental control in new and expanded facilities of $129), 40% of which related to growth projects, including the automotive expansions at the Alcoa, TN and Davenport, IA fabrication plants, the aerospace expansion at the La Porte, IN plant, the aluminum-lithium capacity expansion at the Lafayette, IN plant, and the specialty foil expansion at the Itapissuma plant in Brazil; and $195 in additions to investments, including equity contributions of $120 related to the aluminum complex joint venture in Saudi Arabia (Alcoa Corporation) and the purchase of $49 in equities and fixed income securities held by Arconic’s captive insurance company. These items were slightly offset by $253 in proceeds from the sale of assets and businesses, largely attributable to the sale of an ownership stake in a bauxite mine and refinery in Jamaica (Alcoa Corporation), an ownership stake in a smelter in the United States (Alcoa Corporation), three rolling mills in Spain and France combined (see Global Rolled Products in Segment Information above), and a rod plant in Canada (Alcoa Corporation); and $57 in sales of investments, mostly related to $42 in combined proceeds from the sale of a mining interest in Suriname (Alcoa Corporation) and a portion of an equity investment in a China rolling mill.

Noncash Financing and Investing Activities. On October 5, 2016, Arconic completed a 1-for-3 Reverse Stock Split (the “Reverse Stock Split”). The Reverse Stock Split reduced the number of shares of common stock outstanding from

 

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approximately 1.3 billion shares to approximately 0.4 billion shares. The par value of the common stock remained at $1.00 per share. Accordingly, Common stock and Additional capital in the Company’s Consolidated Balance Sheet at December 31, 2016 reflect a decrease and increase of $877, respectively. This transaction was not reflected in the accompanying Statement of Consolidated Cash Flows for the year ended December 31, 2016 as it represents a noncash financing activity.

In August 2016, Arconic retired its outstanding treasury stock consisting of approximately 76 million shares. As a result, Common stock and Additional capital were decreased by $76 and $2,563, respectively, to reflect the retirement of the treasury shares. This transaction was not reflected in the accompanying Statement of Consolidated Cash Flows for the year ended December 31, 2016 as it represents a noncash financing activity.

In July 2015, Arconic purchased all outstanding shares of RTI common stock in a stock-for-stock transaction valued at $870. As a result, Arconic issued 29 million shares (87 million shares—pre-Reverse stock split) of its common stock to consummate this transaction, which was not reflected in the accompanying Statement of Consolidated Cash Flows as it represents a noncash financing activity.

In early 2014, holders of $575 principal amount of Arconic’s 5.25% Convertible Notes due March 15, 2014 (the “2014 Notes”) exercised their option to convert the 2014 Notes into 30 million shares (89 million shares—pre-Reverse Stock Split—see Note A) of Arconic common stock. This transaction was not reflected in the accompanying Statement of Consolidated Cash Flows as it represents a noncash financing activity.

In late 2014, Arconic paid $2,995 (net of cash acquired) to acquire Firth Rixson. A portion of this consideration was paid through the issuance of 12 million shares (37 million shares—pre-Reverse Stock Split) in Arconic common stock valued at $610. The issuance of common stock was not reflected in the accompanying Statement of Consolidated Cash Flows as it represents a noncash investing activity.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations. Arconic is required to make future payments under various contracts, including long-term purchase obligations, financing arrangements, and lease agreements. Arconic also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects. As of December 31, 2016, a summary of Arconic’s outstanding contractual obligations is as follows (these contractual obligations are grouped in the same manner as they are classified in the Statement of Consolidated Cash Flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information):

 

      Total      2017      2018-2019      2020-2021      Thereafter  

Operating activities:

              

Energy-related purchase obligations

   $ 42      $ 28      $ 13      $ 1      $ -  

Raw material purchase obligations

     563        379        126        58        -  

Other purchase obligations

     119        83        24        7        5  

Operating leases

     494        115        171        92        116  

Interest related to total debt

     3,197        445        804        577        1,371  

Estimated minimum required pension funding

     1,735        310        650        775        -  

Other postretirement benefit payments

     890        95        190        190        415  

Layoff and other restructuring payments

     59        59        -        -        -  

Deferred revenue arrangements

     84        20        27        37        -  

Uncertain tax positions

     29        -        -        -        29  

Financing activities:

              

Total debt

     8,137        39        2,168        2,253        3,677  

Dividends to shareholders

     -        -        -        -        -  

Investing activities:

              

Capital projects

     580        311        235        34        -  

Payments related to acquisitions

     90        -        23        67        -  

Totals

   $ 16,019      $ 1,884      $ 4,431      $ 4,091      $ 5,613  

 

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Obligations for Operating Activities

Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from one year to six years. Raw material purchase obligations consist mostly of aluminum, titanium sponge, and various other metals with expiration dates ranging from less than one year to four years. Many of these purchase obligations contain variable pricing components, and, as a result, actual cash payments may differ from the estimates provided in the preceding table. Operating leases represent multi-year obligations for certain land and buildings, plant equipment, vehicles, and computer equipment.

Interest related to total debt is based on interest rates in effect as of December 31, 2016 and is calculated on debt with maturities that extend to 2042. The effect of outstanding interest rate swaps, which are accounted for as fair value hedges, was included in interest related to total debt. As of December 31, 2016, these hedges effectively convert the interest rate from fixed to floating on $200 of debt through 2018. As the contractual interest rates for certain debt and interest rate swaps are variable, actual cash payments may differ from the estimates provided in the preceding table.

Estimated minimum required pension funding and postretirement benefit payments are based on actuarial estimates using current assumptions for discount rates, long-term rate of return on plan assets, rate of compensation increases, and health care cost trend rates, among others. The minimum required contributions for pension funding are estimated to be $310 for 2017, $325 for 2018, $325 for 2019, $425 for 2020, and $350 for 2021. These expected pension contributions reflect the impacts of the Pension Protection Act of 2006; the Worker, Retiree, and Employer Recovery Act of 2008; the Moving Ahead for Progress in the 21st Century Act of 2012; the Highway and Transportation Funding Act of 2014; and the Bipartisan Budget Act of 2015. Other postretirement benefit payments are expected to approximate $95 annually for years 2017 through 2021 and $83 annually for years 2022 through 2026. Such payments will be slightly offset by subsidy receipts related to Medicare Part D, which are estimated to be approximately $5 annually for years 2017 through 2026. Arconic has determined that it is not practicable to present pension funding and other postretirement benefit payments beyond 2021 and 2026, respectively.

Layoff and other restructuring payments to be paid within one year primarily relate to severance costs, contract termination costs and special layoff benefit payments.

Deferred revenue arrangements require Arconic to deliver product to certain customers over the specified contract period (through 2020 for a sheet and plate contract and 2021 for certain aerospace parts contracts). While these obligations are not expected to result in cash payments, they represent contractual obligations for which the Company would be obligated if the specified product deliveries could not be made.

Uncertain tax positions taken or expected to be taken on an income tax return may result in additional payments to tax authorities. The amount in the preceding table includes interest and penalties accrued related to such positions as of December 31, 2016. The total amount of uncertain tax positions is included in the “Thereafter” column as the Company is not able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.

Obligations for Financing Activities

Total debt amounts in the preceding table represent the principal amounts of all outstanding debt, including short-term borrowings and long-term debt. Maturities for long-term debt extend to 2042.

Arconic has historically paid quarterly dividends on its preferred and common stock. Including dividends on preferred stock, Arconic paid $228 in dividends to shareholders during 2016. This amount includes dividends related to a class of preferred stock issued in September 2014 (see Financing Activities in Liquidity and Capital Resources above). Because all dividends are subject to approval by Arconic’s Board of Directors, amounts are not included in the preceding table unless such authorization has occurred. There were $17 of preferred stock dividends approved to be paid on January 1,

 

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2017; however, Arconic paid the dividends on December 31, 2016. As of December 31, 2016, there were 438,519,780 shares of outstanding common stock and 546,024 and 2,500,000 shares of outstanding Class A and Class B preferred stock, respectively. The annual Class A and Class B preferred stock dividends are at the rate of $3.75 and $26.8750 per share, respectively, and the annual common stock dividend expected to be paid is $0.24 per share for 2017.

Obligations for Investing Activities

Capital projects in the preceding table only include amounts approved by management as of December 31, 2016. Funding levels may vary in future years based on anticipated construction schedules of the projects. It is expected that significant expansion projects will be funded through various sources, including cash provided from operations. Total capital expenditures are anticipated to be approximately $650 in 2017.

Payments related to acquisitions are based on provisions in certain acquisition agreements that state additional funds are due to the seller from Arconic if the businesses acquired achieve stated financial and operational thresholds. Amounts are only presented in the preceding table if it has been determined that payment is more likely than not to occur. In connection with the acquisition of Firth Rixson (see Engineered Products and Solutions in Segment Information above), Arconic entered into an earn-out agreement, which states that Arconic will make earn-out payments up to an aggregate maximum amount of $150 through 2020. Based upon the evaluation of financial and operational forecasts, the expected estimated payment has been reduced. The amounts in the preceding table represent Arconic’s best estimate of the amount and timing of payments.

Off-Balance Sheet Arrangements.

At December 31, 2016, Arconic has 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 2017 and 2026 was $51 at December 31, 2016.

As part of the Separation Transaction, Arconic was required to provide maximum potential future payment guarantees for Alcoa Corporation issued on behalf of a third party of $354. These guarantees expire at various times between 2017 and 2024 and relate to project financing for Alcoa Corporation’s aluminum complex in Saudi Arabia. Additionally, Arconic was required to provide guarantees up to an estimated present value amount of $1,600 related to two long-term supply agreements for energy for Alcoa Corporation facilities. Per the Separation and Distribution Agreement, Arconic is only liable for these guaranteed amounts in the event of an Alcoa Corporation payment default. In December 2016, Arconic entered into a one year claims purchase agreement with a bank covering claims up to $245 related to the Saudi Arabian joint venture and two long-term energy supply agreements. The majority of the premium related to this claims purchase agreement is being paid by Alcoa Corporation. At December 31, 2016, the combined fair value of the three required guarantees was $35 which was included in Other Noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet.

Arconic was also required to provide guarantees of $50 related to two Alcoa Corporation energy supply contracts. These guarantees expire in March 2017. Additionally, Arconic was required to provide guarantees of $53 related to certain Alcoa Corporation environmental liabilities. Notification of a change in guarantor has been made to the appropriate environmental agencies and Alcoa Corporation is required by the end of March 2017 to self-bond or provide collateral.

Arconic has outstanding letters of credit primarily related to workers’ compensation, energy contracts and leasing obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2017 was $212 at December 31, 2016.

As part of the Separation Transaction, Arconic was required to retain letters of credit of $62 that had previously been provided related to both Arconic and Alcoa Corporation workers’ compensation claims which occurred prior to

 

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November 1, 2016. Alcoa Corporation workers’ compensation claims and letter of credit fees paid by Arconic are being billed to and are being fully reimbursed by Alcoa Corporation. Additionally, Arconic was required to provide letters of credit for certain Alcoa Corporation equipment leases and energy contracts and, as a result, Arconic has $103 of outstanding letters of credit relating to these liabilities. The entire $103 of outstanding letters of credit were canceled in 2017 when Alcoa Corporation issued its own letters of credit to cover these obligations.

Arconic also 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 bonds, which automatically renew or expire at various dates, mostly in 2017, was $120 at December 31, 2016.

As part of the Separation Transaction, 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 $22 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconic are being billed to and are being fully reimbursed by Alcoa Corporation.

Critical Accounting Policies and Estimates

The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain judgments, estimates, and assumptions regarding uncertainties that affect the amounts reported in the Consolidated Financial Statements and disclosed in the accompanying Notes. Areas that require significant judgments, estimates, and assumptions include accounting for environmental and litigation matters; the testing of goodwill, other intangible assets, and properties, plants, and equipment for impairment; estimating fair value of businesses acquired or divested; pension plans and other postretirement benefits obligations; stock-based compensation; and income taxes.

Management uses historical experience and all available information to make these judgments, estimates, and assumptions, and actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes provide a meaningful and fair perspective of the Company.

A summary of the Company’s significant accounting policies is included in Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the Consolidated Financial Statements with useful and reliable information about the Company’s operating results and financial condition.

Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery are recognized when probable and as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that Arconic has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.

Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed

 

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probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.

Goodwill. Goodwill is not amortized; instead, it is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.

Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Arconic has eight reporting units, of which four are included in the Engineered Products and Solutions segment, three are included in the Transportation and Construction Solutions segment, and the remaining reporting unit is the Global Rolled Products segment. More than 70% of Arconic’s total goodwill is allocated to two reporting units as follows: Arconic Fastening Systems and Rings (AFSR) ($2,200) and Arconic Power and Propulsion (APP) ($1,647) businesses, both of which are included in the Engineered Products and Solutions segment. These amounts include an allocation of Corporate’s goodwill.

In November 2014, Arconic acquired Firth Rixson (see Engineered Products and Solutions in Segment Information under Results of Operations above), and, as a result recognized $1,801 in goodwill. This amount was allocated between the AFSR and Arconic Forgings and Extrusions (AFE) reporting units, both of which are part of the Engineered Products and Solutions segment. In March and July 2015, Arconic acquired TITAL and RTI, respectively, (see Engineered Products and Solutions in Segment Information under Results of Operations above) and recognized $117 and $298, respectively, in goodwill. The goodwill amount related to TITAL was allocated to the APP reporting unit and the amount related to RTI was allocated to Arconic Titanium and Engineered Products (ATEP), a new Arconic reporting unit that consists solely of the acquired RTI business and is part of the Engineered Products and Solutions segment.

In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.

Arconic’s policy for its annual review of goodwill is to perform the qualitative assessment for all reporting units not subjected directly to the two-step quantitative impairment test. Generally, management will proceed directly to the two-step quantitative impairment test for up to four reporting units (based on facts and circumstances) during each annual review of goodwill. This policy will result in each of the seven reporting units with goodwill being subjected to the two-step quantitative impairment test at least once during every three-year period.

Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on

 

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current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent two-step quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.

During the 2016 annual review of goodwill, management performed the qualitative assessment for three reporting units, the Global Rolled Products segment, ATEP, and Building and Construction Systems (within the Transportation and Construction Solutions segment). Management concluded that it was not more likely than not that the estimated fair values of the three reporting units were less than their carrying values. As such, no further analysis was required.

Under the two-step quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Arconic uses a discounted cash flow (DCF) model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes. Most of these assumptions vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The betas used in calculating the individual reporting units’ WACC rate are estimated for each business with the assistance of valuation experts.

In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, additional analysis would be required. The additional analysis would compare the carrying amount of the reporting unit’s goodwill with the implied fair value of that goodwill, which may involve the use of valuation experts. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess would be recognized, which could significantly and adversely impact reported results of operations and shareholders’ equity.

During the 2016 annual review of goodwill, management proceeded directly to the two-step quantitative impairment test for four reporting units as follows: AFSR, APP, and AFE, which are all included in the EPS segment, and Arconic Wheel and Transportation Products which is included in the Transportation and Construction Solutions segment. The estimated fair value of each of the reporting units exceeded its respective carrying value, resulting in no impairment.

Goodwill impairment tests in prior years indicated that goodwill was not impaired for any of the Company’s reporting units, except for the soft alloy extrusion business in Brazil (SAE) which is included in the Transportation and Construction Solutions segment, and there were no triggering events since that time that necessitated an impairment test.

In 2015, for SAE, the estimated fair value as determined by the DCF model was lower than the associated carrying value of the SAE reporting unit’s goodwill. As a result, management performed the second step of the impairment analysis in order to determine the implied fair value of the SAE reporting unit’s goodwill. The results of the second-step analysis showed that the implied fair value of the goodwill was zero. Therefore, in the fourth quarter of 2015, Arconic recorded a goodwill impairment of $25. The impairment of the SAE goodwill resulted from headwinds from the downturn in the Brazilian economy and the continued erosion of gross margin despite the execution of cost reduction strategies. As a result of the goodwill impairment, there is no goodwill remaining for the SAE reporting unit.

Properties, Plants, and Equipment and Other Intangible Assets. Properties, plants, and equipment and Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the

 

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estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a DCF model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of assets also require significant judgments.

Discontinued Operations and Assets Held For Sale. The fair values of all businesses to be divested are estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements.

Pension and Other Postretirement Benefits. Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, health care cost trend rates, retirement age, and mortality).

The interest rate used to discount future estimated liabilities is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, consumer products, transportation, insurance, and pharmaceutical, among others. The yield curve model parallels the plans’ projected cash flows, which have an average duration of 11 years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. In 2016, 2015, and 2014, the discount rate used to determine benefit obligations for U.S. pension and other postretirement benefit plans was 4.20%, 4.29%, and 4.00%, respectively. The impact on the liabilities of a change in the discount rate of 1/4 of 1% would be approximately $210 and either a charge or credit of approximately $6 to after-tax earnings in the following year.

In conjunction with the annual measurement of the funded status of Arconic’s pension and other postretirement benefit plans at December 31, 2015, management elected to change the manner in which the interest cost component of net periodic benefit cost will be determined in 2016 and beyond. Previously, the interest cost component was determined by multiplying the single equivalent rate described above and the aggregate discounted cash flows of the plans’ projected benefit obligations. Under the new methodology, the interest cost component will be determined by aggregating the product of the discounted cash flows of the plans’ projected benefit obligations for each year and an individual spot rate (referred to as the “spot rate” approach). This change resulted in a lower interest cost component of net periodic benefit cost under the new methodology compared to the previous methodology of $98 ($64 after-tax) in 2016. Management believes this new methodology, which represents a change in an accounting estimate, is a better measure of the interest cost as each year’s cash flows are specifically linked to the interest rates of bond payments in the same respective year.

The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (a four-year average or the fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on a combination of historical asset return information and forward-looking returns by asset class. As it relates to historical asset return information, management focuses on various historical moving averages when developing this assumption. While consideration is given to recent performance and historical returns, the assumption represents a long-term, prospective return. Management also incorporates expected future returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment.

 

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For 2016, 2015, and 2014, management used 7.75%, 7.75%, and 8.00% as its expected long-term rate of return, which was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. These rates fell within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. In 2015, the decrease of 25 basis points in the expected long-term rate of return was due to a decrease in the 20-year moving average of actual performance. For 2017, management anticipates that 7.75% will be the expected long-term rate of return.

A change in the assumption for the expected long-term rate of return on plan assets of 1/4 of 1% would impact after-tax earnings by approximately $8 for 2017.

During 2014, an independent U.S. organization that publishes standard mortality rates based on statistical analysis and studies issued updated mortality tables. The rates within these standard tables are used by actuaries as one of the many assumptions when measuring a company’s projected benefit obligation for pension and other postretirement benefit plans. The funded status of all of Arconic’s pension and other postretirement benefit plans are measured as of December 31 each calendar year. During the measurement process at the end of 2014, Arconic, with the assistance of an external actuary, considered the rates in the new mortality tables, along with specific data related to Arconic’s retiree population, to develop the mortality-related assumptions used to measure the benefit obligation of various U.S. benefit plans. As a result, Arconic recognized a charge of approximately $100 ($65 after-tax) in other comprehensive loss related to the updated mortality assumptions.

In 2016, a net benefit of $1,601 (after-tax and noncontrolling interest) was recorded in other comprehensive loss, primarily due to the transfer of $2,080 to Alcoa Corporation which was partially offset by a net charge of $479. The charge was due to the unfavorable performance of the plan assets and a 9 basis point decrease in the discount rate, which was partially offset by the amortization of actuarial losses. In 2015, a net charge of $10 (after-tax and noncontrolling interest) was recorded in other comprehensive loss, primarily due to the unfavorable performance of the plan assets, which was mostly offset by the amortization of actuarial losses and a 29 basis point increase in the discount rate. In 2014, a net charge of $69 (after-tax and noncontrolling interest) was recorded in other comprehensive loss, primarily due to an 80 basis point increase in the discount rate and a change in the mortality assumption (see above), which was mostly offset by the favorable performance of the plan assets and the amortization of actuarial losses.

Stock-based Compensation. Arconic recognizes compensation expense for employee equity grants using the non-substantive vesting period approach, in which the expense (net of estimated forfeitures) is recognized ratably over the requisite service period based on the grant date fair value. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.

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. As a result, a larger portion of expense will be recognized in the first half of each year for these retirement-eligible employees. Compensation expense recorded in 2016, 2015, and 2014 was $76 ($51 after-tax), $77 ($51 after-tax), and $70 ($47 after-tax), respectively. Of these amounts, $19, $15, and $11 in 2016, 2015, and 2014, respectively, pertains to the acceleration of expense related to retirement-eligible employees.

Most plan participants can choose whether to receive their award in the form of stock options, stock awards, or a combination of both. This choice is made before the grant is issued and is irrevocable.

Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Arconic’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.

 

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Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.

In 2016, Arconic recognized a $1,267 discrete income tax charge for valuation allowances related to the Separation Transaction, including $925 with respect to Alcoa Corporation’s net deferred tax assets in the United States, $302 with respect to Arconic’s foreign tax credits in the United States, $42 with respect to certain deferred tax assets in Luxembourg, and $(2) related to the net impact of other smaller items. After weighing all positive and negative evidence, as described above, management determined that the net deferred tax assets of Alcoa Corporation were not more likely than not to be realized due to lack of historical and projected domestic source taxable income. As such, a valuation allowance was recorded immediately prior to separation.

Upon separation, Arconic retained foreign tax credits in the United States which have a 10-year carryforward period with expirations ranging from 2017 to 2026 (as of December 31, 2016). Arconic also retained suspended foreign tax credit carryforwards whose expiration period begins when the credits become unsuspended. A valuation allowance of $135 was initially established in 2013 on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. An incremental valuation allowance of $134 was recognized in 2015. At the end of 2015 and 2016, $15 and $128 of foreign tax credits respectively expired resulting in a corresponding decrease to the valuation allowance. As a result of the Separation Transaction, management determined that it was no longer more likely than not that Arconic would realize the full tax benefit of its foreign tax credit carryforwards based on changes in the availability of foreign sourced taxable income. After consideration of all available evidence including potential tax planning strategies and earnings of foreign subsidiaries projected to be distributable as taxable foreign dividends, an incremental valuation allowance of $302 was recognized in 2016. At December 31, 2016, the cumulative amount of the valuation allowance was $427. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.

In addition, Arconic recognized a $42 discrete income tax charge in 2016 for a valuation allowance on the full value of certain net deferred tax assets in Luxembourg. Sources of taxable income which previously supported the net deferred tax asset are no longer available as a result of the Separation Transaction. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.

In 2016, Arconic also recognized discrete income tax benefits related to the release of valuation allowances on certain net deferred tax assets in Russia and Canada of $19 and $20 respectively. After weighing all available evidence, management determined that it was more likely than not that the net income tax benefits associated with the underlying deferred tax assets would be realizable based on historical cumulative income and projected taxable income.

Arconic also recorded additional valuation allowances in Australia of $93 related to the Separation Transaction, in Spain of $163 related to a tax law change and in Luxembourg of $280 related to the Separation Transaction as well as a

 

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tax law change. These valuation allowances fully offset current year changes in deferred tax asset balances of each respective jurisdiction, resulting in no net impact to tax expense. The need for a valuation allowance will be reassessed on a continuous basis in future periods by each jurisdiction and, as a result, the allowances may increase or decrease based on changes in facts and circumstances.

In 2015, Arconic recognized an additional $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Iceland and Suriname. Of this amount, an $85 valuation allowance was established on the full value of the deferred tax assets in Suriname, which were related mostly to employee benefits and tax loss carryforwards. These deferred tax assets have an expiration period ranging from 2016 to 2022 (as of December 31, 2015). The remaining $56 charge relates to a valuation allowance established on a portion of the deferred tax assets recorded in Iceland. These deferred tax assets have an expiration period ranging from 2017 to 2023. After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Arconic will realize the tax benefit of either of these deferred tax assets. This was mainly driven by a decline in the outlook of the Primary Metals business, combined with prior year cumulative losses and a short expiration period.

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

Related Party Transactions

On October 31, 2016, Arconic entered into several agreements with Alcoa Corporation that govern the relationship of the parties following the completion of the Separation Transaction. These agreements include the following: Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, Alcoa Corporation to Arconic Inc. Patent, Know-How, and Trade Secret License Agreement, Arconic Inc. to Alcoa Corporation Patent, Know-How, and Trade Secret License Agreement, Alcoa Corporation to Arconic Inc. Trademark License Agreement, Toll Processing and Services Agreement, Master Agreement for the Supply of Primary Aluminum, Massena Lease and Operations Agreement, Fusina Lease and Operations Agreement, and Stockholder and Registration Rights Agreement.

Effective November 1, 2016, Arconic entered into a Toll Processing and Services Agreement with Alcoa Corporation for the tolling of metal for the Warrick, Indiana rolling mill which became a part of Alcoa Corporation upon the completion of the Separation Transaction. As part of this arrangement, Arconic will provide a toll processing service to Alcoa Corporation to produce can sheet products at its facility in Tennessee throughout the expected end date of the contract, December 31, 2018. Alcoa Corporation will supply all required raw materials to Arconic and Arconic will process the raw materials into finished can sheet coils ready for shipment to the end customer. Tolling revenues for the two month period ending December 31, 2016 and accounts receivable at December 31, 2016 were not material to the consolidated results of operations and financial position for the year ended December 31, 2016.

Additionally, Arconic buys products from and sells products to various related companies, including Alcoa Corporation, at negotiated prices between the two parties. These transactions, including accounts payable, were not material to the financial position or results of operations of Arconic for all periods presented.

Recently Adopted Accounting Guidance

See the Recently Adopted Accounting Guidance section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

 

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Recently Issued Accounting Guidance

See the Recently Issued Accounting Guidance section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Not material.

 

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Item 8. Financial Statements and Supplementary Data.

Management’s Reports to Arconic Shareholders

Management’s Report on Financial Statements and Practices

The accompanying Consolidated Financial Statements of Arconic Inc. and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best judgments and estimates. The other financial information included in the annual report is consistent with that in the financial statements.

Management also recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2016, based on criteria in Internal Control—Integrated Framework (2013) issued by the COSO.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

 

/s/ Klaus Kleinfeld

Klaus Kleinfeld

Chairman and

Chief Executive Officer

 

/s/ Ken Giacobbe

Ken Giacobbe

Executive Vice President and

Chief Financial Officer

 

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Arconic Inc.

In our opinion, the accompanying consolidated balance sheets and the related statements of consolidated operations, consolidated comprehensive loss, changes in consolidated equity, and consolidated cash flows present fairly, in all material respects, the financial position of Arconic Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania

February 28, 2017

 

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Arconic and subsidiaries

Statement of Consolidated Operations

(in millions, except per-share amounts)

 

For the year ended December 31,    2016     2015     2014  

Sales (O)

   $ 12,394     $ 12,413     $ 12,542  

Cost of goods sold (exclusive of expenses below)

     9,811       10,104       10,349  

Selling, general administrative, and other expenses (C)

     942       765       770  

Research and development expenses

     132       169       123  

Provision for depreciation and amortization

     535       508       436  

Impairment of goodwill (A and E)

     -       25       -  

Restructuring and other charges (D)

     155       214       314  

Interest expense (T)

     499       473       442  

Other income, net (M)

     (94     (28     (5

Total costs and expenses

     11,980       12,230       12,429  

Income from continuing operations before income taxes

     414       183       113  

Provision for income taxes (R)

     1,476       339       174  

Loss from continuing operations after income taxes

     (1,062     (156     (61

Income (loss) from discontinued operations after income taxes (C)

     184       (41     238  

Net (loss) income

     (878     (197     177  

Less: Net income from continuing operations attributable to noncontrolling interests

     -       1       -  

 Net income (loss) from discontinued operations attributable to noncontrolling interests (C)

     63       124       (91

Net (Loss) Income Attributable to Arconic

   $ (941   $ (322   $ 268  

Amounts Attributable to Arconic Common Shareholders (Q):

      

Net (loss) income

   $ (1,010   $ (391   $ 247  

Earnings per share—basic:

      

Continuing operations

   $ (2.58   $ (0.54   $ (0.21

Discontinued operations

   $ 0.27     $ (0.39   $ 0.85  

Net (loss) income per share-basic

   $ (2.31   $ (0.93   $ 0.64  

Earnings per share—diluted

      

Continuing operations

   $ (2.58   $ (0.54   $ (0.21

Discontinued operations

   $ 0.27     $ (0.39   $ 0.84  

Net (loss) income per share-diluted

   $ (2.31   $ (0.93   $ 0.63  

 

 

 

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

 

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Arconic and subsidiaries

Statement of Consolidated Comprehensive Loss

(in millions)

 

    Arconic     Noncontrolling
Interests
    Total  
For the year ended December 31,   2016     2015     2014     2016     2015     2014     2016     2015     2014  

Net (loss) income

  $ (941   $ (322   $ 268     $ 63     $ 125     $ (91   $ (878   $ (197   $ 177  

Other comprehensive loss, net of tax (B):

                 

Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits

    (479     (10     (69     (3     8       (13     (482     (2     (82

Foreign currency translation adjustments

    268       (1,566     (1,025     182       (429     (241     450       (1,995     (1,266

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

    137       (5     (2     -       -       -       137       (5     (2

Net change in unrecognized losses on cash flow hedges

    (617     827       78       5       (1     -       (612     826       78  

Total Other comprehensive (loss) income, net of tax

    (691     (754     (1,018     184       (422     (254     (507     (1,176     (1,272

Comprehensive (loss) income

  $ (1,632   $ (1,076   $ (750   $ 247     $ (297   $ (345   $ (1,385   $ (1,373   $ (1,095

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

 

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Arconic and subsidiaries

Consolidated Balance Sheet

(in millions)

 

December 31,    2016     2015  

Assets

    

Current assets:

    

Cash and cash equivalents (V)

   $ 1,863     $ 1,362  

Receivables from customers, less allowances of $13 in 2016 and $8 in 2015 (S)

     974       960  

Other receivables (C and S)

     477       394  

Inventories (G)

     2,253       2,284  

Prepaid expenses and other current assets

     325       397  

Current assets of discontinued operations (C)

     -       2,556  

Total current assets

     5,892       7,953  

Properties, plants, and equipment, net (H)

     5,499       5,425  

Goodwill (A and E)

     5,148       5,249  

Deferred income taxes (R)

     1,234       1,308  

Investment in common stock of Alcoa Corporation (C and V)

     1,020       -  

Other noncurrent assets (I)

     1,245       1,944  

Noncurrent assets of discontinued operations (C)

     -       14,598  

Total Assets

   $ 20,038     $ 36,477  

Liabilities

    

Current liabilities:

    

Short-term borrowings (J and V)

   $ 36     $ 38  

Accounts payable, trade

     1,744       1,510  

Accrued compensation and retirement costs

     398       410  

Taxes, including income taxes

     85       103  

Accrued interest payable

     153       170  

Other current liabilities

     329       441  

Long-term debt due within one year (J and V)

     4       3  

Current liabilities of discontinued operations (C)

     -       2,536  

Total current liabilities

     2,749       5,211  

Long-term debt, less amount due within one year (J and V)

     8,044       8,786  

Accrued pension benefits (U)

     2,345       1,925  

Accrued other postretirement benefits (U)

     889       917  

Other noncurrent liabilities and deferred credits (K)

     870       828  

Noncurrent liabilities of discontinued operations (C)

     -       4,679  

Total liabilities

     14,897       22,346  

Contingencies and commitments (L)

    

Equity

    

Arconic shareholders’ equity:

    

Preferred stock (P)

     55       55  

Mandatory convertible preferred stock (P)

     3       3  

Common stock (P)

     438       1,391  

Additional capital

     8,214       10,019  

Retained (deficit) earnings

     (1,027     8,834  

Treasury stock, at cost (P)

     -       (2,825

Accumulated other comprehensive loss (B)

     (2,568     (5,431

Total Arconic shareholders’ equity

     5,115       12,046  

Noncontrolling interests

     26       2,085  

Total equity

     5,141       14,131  

Total Liabilities and Equity

   $ 20,038     $ 36,477  

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

 

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Arconic and subsidiaries

Statement of Consolidated Cash Flows

(in millions)

 

For the year ended December 31,    2016     2015     2014  

Cash from Operations

      

Net (loss) income

   $ (878   $ (197   $ 177  

Adjustments to reconcile net (loss) income to cash from operations:

      

Depreciation, depletion and amortization

     1,132       1,280       1,372  

Deferred income taxes

     1,125       34       (35

Equity income, net of dividends

     42       158       104  

Impairment of goodwill (A and E)

     -       25       -  

Restructuring and other charges

     257       1,195       1,168  

Net gain from investing activities—asset sales

     (156     (74     (47

Net periodic pension benefit cost

     304       485       423  

Stock-based compensation

     86       92       87  

Excess tax benefits from stock-based payment arrangements

     -       (9     (9

Other

     60       (32     66  

Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:

      

(Increase) decrease in receivables

     (238     212       (312

(Increase) in inventories

     (29     (64     (355

(Increase) decrease in prepaid expenses and other current assets

     (76     46       (25

Increase (decrease) in accounts payable, trade

     232       (90     256  

(Decrease) in accrued expenses

     (394     (437     (451

Increase in taxes, including income taxes

     93       25       7  

Pension contributions

     (290     (470     (501

(Increase) in noncurrent assets

     (152     (370     (42

(Decrease) in noncurrent liabilities

     (248     (227     (209

Cash provided from operations

     870       1,582       1,674  

Financing Activities

      

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

     (3     (16     (2

Additions to debt (original maturities greater than three months)

     1,962       1,901       2,878  

Debt issuance costs

     (1     (3     (17

Payments on debt (original maturities greater than three months)

     (2,734     (2,030     (1,723

Proceeds from exercise of employee stock options

     4       25       150  

Excess tax benefits from stock-based payment arrangements

     -       9       9  

Issuance of mandatory convertible preferred stock (P)

     -       -       1,211  

Dividends paid to shareholders

     (228     (223     (161

Distributions to noncontrolling interests

     (226     (106     (120

Contributions from noncontrolling interests

     51       2       53  

Acquisitions of noncontrolling interests

     -       -       (28

Net cash transferred from Alcoa Corporation at separation

     421       -       -  

Cash (used for) provided from financing activities

     (754     (441     2,250  

Investing Activities

      

Capital expenditures

     (1,125     (1,180     (1,219

Acquisitions, net of cash acquired (F and N)

     10       97       (2,385

Proceeds from the sale of assets and businesses

     692       112       253  

Additions to investments

     (52     (134     (195

Sales of investments

     280       40       57  

Net change in restricted cash

     14       (20     (2

Other

     16       25       31  

Cash used for investing activities

     (165     (1,060     (3,460

Effect of exchange rate changes on cash and cash equivalents

     (7     (39     (24

Net change in cash and cash equivalents

     (56     42       440  

Cash and cash equivalents at beginning of year

     1,919       1,877       1,437  

Cash and cash equivalents at end of year

   $ 1,863     $ 1,919     $ 1,877  

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

 

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Arconic and subsidiaries

Statement of Changes in Consolidated Equity

(in millions, except per-share amounts)

 

    Arconic Shareholders              
     Preferred
stock
   

Mandatory

convertible

preferred

stock

    Common
stock
    Additional
capital
    Retained
(deficit)
earnings
    Treasury
stock
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
interests
    Total
equity
 

Balance at December 31, 2013

  $ 55     $ -     $ 1,178     $ 7,509     $ 9,272     $ (3,762   $ (3,659   $ 2,929     $ 13,522  

Net (loss) income

    -       -       -       -       268       -       -       (91     177  

Other comprehensive loss (B)

    -       -       -       -       -       -       (1,018     (254     (1,272

Cash dividends declared:

                 

Preferred–Class A @ $3.75 per share

    -       -       -       -       (2     -       -       -       (2

Preferred–Class B @ 7.53993 per share

    -       -       -       -       (19     -       -       -       (19

Common @ $0.12 per share

    -       -       -       -       (140     -       -       -       (140

Stock-based compensation (P)

    -       -       -       87       -       -       -       -       87  

Common stock issued: compensation plans (P)

    -       -       -       (584     -       720       -       -       136  

Issuance of mandatory convertible preferred stock (P)

    -       3       -       1,210       -       -       -       -       1,213  

Issuance of common stock (F and P)

    -       -       126       1,059       -       -       -       -       1,185  

Distributions

    -       -       -       -       -       -       -       (120     (120

Contributions

    -       -       -       -       -       -       -       53       53  

Purchase of equity from noncontrolling interest

    -       -       -       3       -       -       -       (31     (28

Other

    -       -       -       -       -       -       -       2       2  

Balance at December 31, 2014

  $ 55     $ 3     $ 1,304     $ 9,284     $ 9,379     $ (3,042   $ (4,677   $ 2,488     $ 14,794  

Net (loss) income

    -       -       -       -       (322     -       -       125       (197

Other comprehensive loss (B)

    -       -       -       -       -       -       (754     (422     (1,176

Cash dividends declared:

                 

Preferred–Class A @
$3.75 per share

    -       -       -       -       (2     -