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2 016 A N N UA L R EP O R T
2 016 A N N UA L R EP O R T
Innovation,
Innovation,
engineered.
engineered.
High-pressure turbine blades used in the
hot section of the CFM56 jet engine
produced at Whitehall, Michigan. CFM56
engines are a product of CFM International,
a 50/50 joint company between GE and
Safran Aircraft Engines.
5058_CvrC2_SS.indd 1
3/11/17 7:53 PM
Shareholder Information
COM PANY NEWS
DIREC T DE POSIT OF DIVIDE NDS
Visit www.arconic.com for Securities and Exchange Commission
filings, quarterly earnings reports and other Company news.
Shareholders may have their quarterly dividends deposited directly
to their checking, savings or money market accounts at any financial
Copies of the annual report, and Forms 10-K and 10-Q, may be requested
to be accessed at no cost by visiting www.arconic.com/investors or by
institution that participates in the Automated Clearing House system.
writing to Corporate Communications, Arconic, 201 Isabella Street,
SHARE HOLDE R SE RVICE S
Pittsburgh, PA 15212.
INVE STOR INFORM ATION
Securities analysts and investors may write to Investor Relations,
Arconic, 390 Park Avenue, New York, NY 10022-4608, call
1.212.836.2674, or e-mail investor.relations@arconic.com.
OTHE R PU B LIC ATION S
For more information on Arconic Foundation and Arconic community
investments, visit www.arconic.com under Who We Are, How We Work,
Arconic Foundation or www.arconic.com/foundation.
For Arconic’s Sustainability Report, visit www.arconic.com under
Who We Are, How We Work, Community and Environment or
www.arconic.com/global/en/who-we-are/sustainability-report.asp
or write to Corporate Sustainability at Arconic, 201 Isabella Street,
Pittsburgh, PA 15212; or e-mail sustainability@arconic.com.
DIVIDE NDS
Cash dividend decisions are made by Arconic’s Board of Directors,
and are reviewed on a regular basis.
DIVIDE ND RE INVE STM E NT
Arconic’s transfer agent sponsors and administers a Dividend
Reinvestment and Stock Purchase Plan for shareholders of Arconic’s
common stock and $3.75 cumulative preferred stock. The plan allows
shareholders to reinvest all or part of their quarterly dividends in shares
of Arconic common stock. Shareholders may also purchase additional
shares of common stock under the plan with cash contributions.
Shareholders with questions on account balances, dividend checks,
reinvestment, direct deposit, address changes, lost or misplaced
stock certificates, or other shareholder account matters may contact
Arconic’s stock transfer agent, registrar and dividend disbursing
agent, Computershare:
By telephone:
1.888.985.2058 (in the United States and Canada)
1.201.680.6578 (all other callers)
1.800.231.5469 (Telecommunications Device for the Deaf: TDD)
On the Web:
www.computershare.com
By regular mail:
Computershare
P.O. Box 30170
College Station, TX 77842-3170
By Overnight Correspondence:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
For shareholder questions on other matters related to Arconic,
write to: Corporate Secretary’s Office, Arconic, 390 Park Avenue,
New York, NY 10022-4608, call 1.212.836.2732, or e-mail corporate.
secretary@arconic.com.
STOCK LI STING
Common Stock
New York Stock Exchange | Ticker symbol: ARNC
$3.75 Cumulative Preferred Stock (Class A)
New York Stock Exchange MKT | Ticker symbol: ARNC PR
Depositary Shares, Each a 1/10th Interest in a Share of
5.375% Mandatory Convertible Preferred Stock (Class B)
New York Stock Exchange | Ticker symbol: ARNC PRB
A RCONIC A NNUA L REP OR T 2016
3/11/17 7:53 PM
Arconic Inc. (NYSE: ARNC) creates breakthrough products that
shape industries. Working in close partnership with our customers,
we solve complex engineering challenges to transform the way we
fly, drive, build and power. Through the ingenuity of our people and
cutting-edge, advanced manufacturing techniques, we deliver these
products at a quality and efficiency that ensure customer success
and shareholder value.
For more information:
W W W. ARCONIC .COM
FOLLOW @ARCONIC:
Twitter, Instagram, Facebook, LinkedIn and YouTube
A RCONIC A NNUA L REP O R T 2016
5058_CvrC2_SS.indd 2
2016
etter
Chairman’s Letter
Dear Fellow Arconic Shareholders,
In last year’s letter to Alcoa Inc. shareholders, I outlined our conviction
To strengthen our value-add portfolio, we relentlessly drove productivity
and commitment that the separation of Alcoa Inc. would unlock the
and operational improvements, more than doubling segment margins
Company’s full value for our investors. On November 1, 2016, we
since 2008. Building on investments in new technologies, upgrading our
completed the separation into two powerful, independent companies:
plants and making strategic acquisitions, we expanded further into
Arconic and Alcoa Corporation. Within one hundred days, Arconic’s
high performance materials, such as titanium and nickel superalloys,
stock price increased 47.8 percent, signi(cid:202) cantly more than the 12.6
(cid:202)
and transformed the portfolio into a precision engineering and
percent increase of the S&P Industrials Index or the 14 percent increase
advanced manufacturing leader. In our aerospace segment, Arconic can
of the S&P Aerospace and Defense ETF.
now supply 90 percent of the structural and rotating components of a
THE SEPAR ATION WA S THE CU LM INATION OF
TR AN SFORMING ALCOA INC .
It took years of restructuring and strengthening the businesses in
Alcoa’s upstream portfolio to ensure it could stand well on its own as
an independent public company. We closed, sold or curtailed 43
percent of high-cost smelting operating capacity and 35 percent
of high-cost re(cid:202) ning operating capacity to enable the aluminum and
(cid:202)
alumina businesses to remain globally competitive throughout the
volatile swings of commodity prices. To further enhance upstream
pro(cid:202) tability, we expanded our higher-margin cast products business,
(cid:202)
introduced an alumina pricing mechanism to free our re(cid:202) neries
(cid:202)
from the London Metal Exchange price and established a third-party
bauxite business.
commercial aero engine, and on airframes our content (cid:203) ies from nose
(cid:203)
to tail on both metallic and carbon-(cid:202) ber-reinforced plastic aircraft.
(cid:202)
Our customers are responding to those investments and innovations,
awarding Arconic $13 billion in aerospace contracts during 2015 and 2016.
2016 was a pivotal year in completing the transformation. The
Company’s leaders and employees did “double duty,” successfully
executing a complex separation process on schedule and on budget,
while delivering on commitments to our customers. The Company
formed a Separation Program O(cid:238) ce to maintain tight cross-
(cid:238)
functional coordination over 35 workstreams with more than 20,000
milestones, involving 294 projects a(cid:237) ecting 266 sites in 27 countries.
At the same time, the team was able to increase pro(cid:202) ts and margins
(cid:237)
(cid:202)
of all three Arconic segments and reduce debt by $750 million. The
Company (cid:202) nished the year with $1.9 billion in cash.
(cid:202)
While we were conducting the separation, commodity prices fell to
aerospace, automotive, commercial transportation and building and
unusually low levels, resulting in a substantially reduced debt-carrying
construction. The initiatives and actions we have underway are set to
capacity of Alcoa Corporation. To allow the separation to conclude on
(cid:203)
improve margins, free cash (cid:203) ow and return on capital.
time, and for Alcoa Corporation to start with a strong balance sheet
built to weather commodity cycles, Arconic took on extra debt burden.
As a counter balance, Arconic retained a 19.9 percent stake in Alcoa
Corporation with the intention of managing it to maximize the upside
for our shareholders. On February 14, 2017, after a 65 percent rise in
Alcoa Corporation stock, Arconic monetized more than 60 percent
of its stake. The resulting proceeds of approximately $890 million
Strong balance sheet pro(cid:202) le with
(cid:202)
(cid:202)
(cid:202) nancial
(cid:203)
(cid:203) exibility.
In
addition to a strong liquidity base, Arconic’s remaining stake in Alcoa
Corporation will continue to be managed responsibly for shareholder
value. To guide investments and other allocations of capital, we have
established exacting criteria to maximize and track returns.
strengthen Arconic’s cash balance, which provides (cid:202) nancial
(cid:202)
(cid:203)
(cid:203) exibility
ARCONIC ’ S M ANAGEMENT AND BOARD ARE
to pay down debt and/or pursue share repurchases, based on an
COM M IT TE D TO M A XI M I Z E SHARE HOLDE R VALU E
assessment of relative return.
ARCONIC HA S A COM PE LLING LONG -TE RM
INVESTM E NT VALU E PROPOSITION
In launching Arconic, we have stressed an owner mindset: every leader
and employee working every day as if Arconic were their own family
business. Frugal in spending, e(cid:238) cient in allocating capital, dedicated
and passionate about helping customers win and constantly focused
(cid:238)
Arconic managers and employees understand the obligations and
expectations of an owner mindset. Having proved themselves during
a di(cid:238) cult economic downturn and a demanding transformation, they
are ready and eager to capture the many opportunities ahead for
(cid:238)
our shareholders and customers. We have a winning combination of
seasoned leaders who led the Company during those challenging times
and recruited executives with excellent track records and outstanding
experience to bring their unique talents to Arconic.
on building talent, we are committed to creating value for Arconic’s
The leadership team bene(cid:202) ts greatly from the counsel and guidance
(cid:202)
shareholders that surpasses the performance of our peers. And
of a highly quali(cid:202) ed, proactive Board of Directors. Our 12 independent
(cid:202)
we’ve only just begun. Let me outline a few of the many value creation
directors, including seven current or former CEOs, have deep
opportunities we are tapping for our shareholders.
experience relevant to our core industries, technologies and (cid:202) nancial
(cid:202)
Solid market positions and margin pro(cid:202) le. (cid:202) With approximately
80 percent of Arconic’s revenues in 2016 from businesses where the
Company holds either the number one or number two market position,
we have a highly competitive portfolio that we believe has strong margin
and cash-generation potential in pro(cid:202) table segments. We expect our
(cid:202)
adjusted EBITDA margins to continue to expand from approximately
needs. They’ve applied their experience and insights in guiding Arconic’s
strategy and reviewing and approving the Company’s goals. Based
on investor feedback and industry benchmarks, they have created an
executive compensation system that is fully aligned with shareholder
value creation. The Board also set high standards for themselves,
adopting important new governance best practices for Arconic.
15 percent in 2017 to approximately 17 percent in 2019, and our free
I greatly appreciate the strong support that our directors have given
cash (cid:203) ow is forecast to double from more than $350 million in 2017 to
(cid:203)
to me personally. In addition to generously sharing wise counsel and
approximately $700 million in 2019.
In every core market, Arconic’s businesses are positioned to capture
practical solutions, they’ve joined me in delivering the good news of
Arconic to our shareholders, prospective investors and analysts.
near-term growth tailwinds. The aerospace industry is gearing up for
On behalf of our entire Board of Directors, I hope that this (cid:202) rst Arconic
(cid:202)
the next generation of commercial aircraft engines and structures.
Annual Report demonstrates that our 2016 performance, progress
Following the dramatic success of Arconic’s innovations for Ford’s
and plans for the future reinforce our (cid:202) rm commitment and
(cid:202)
top-selling F-150, aluminum penetration is accelerating across the
unparalleled capability to create signi(cid:202) cant long-term value for you
(cid:202)
automotive industry. Energy and environmental trends are creating
and for all Arconic shareholders.
new opportunities for our commercial transportation and building and
construction businesses. Our customers’ appreciation of Arconic’s
di(cid:237) erentiated technologies are producing sustainable share gains for
our businesses in each of those segments.
(cid:237)
Clear execution path to incremental value by continuing to
improve our businesses. We are focused on major end markets like
KL AUS KLE INFELD
CH A IR M A N OF THE BOA RD A ND CHIEF E X ECUTI V E OFFICER
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
(State of incorporation)
25-0317820
(I.R.S. Employer Identification No.)
390 Park Avenue, New York, New York 10022-4608
(Zip code)
(Address of principal executive offices)
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
Common Stock, par value $1.00 per share
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
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
.
.
.
No ✓ .
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
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 [✓]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
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).
Smaller reporting company [
Non-accelerated filer [
Accelerated filer [
No ✓.
]
]
]
TABLE OF CONTENTS
Part I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Part IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page(s)
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18
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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.
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.
1
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.
2
Description of the Business
Information describing Arconic’s businesses can be found on the indicated pages of this report:
Item
Discussion of Recent Business Developments:
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
Overview—Results of Operations (Earnings Summary) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements:
Note C. Separation Transaction and Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note D. Restructuring and Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note F. Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note L. Contingencies and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment Information:
Business Descriptions, Principal Products, Principal Markets, Methods of Distribution, Seasonality and
Dependence Upon Customers:
Global Rolled Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Products and Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation and Construction Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page(s)
37
82
85
89
96
44
46
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,
2015
2016
2014
Flat-rolled aluminum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fastening systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment castings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other extruded and forged products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39%
17%
15%
12%
42%
18%
15%
11%
51%
13%
14%
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.
3
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.
4
Global Rolled Products Principal Facilities
Country
Brazil
China
Hungary
Italy
Russia
Location
Itapissuma
Kunshan
Owners1
(% Of Ownership)
Arconic (100%)
Arconic (100%)
Qinhuangdao2
Arconic (100%)
Székesfehérvár
Arconic (100%)
Fusina2
Samara
Arconic (100%)
Arconic (100%)
United Kingdom Birmingham
Arconic (100%)
United States
Davenport, IA
Arconic (100%)
Danville, IL3
Arconic (100%)
Hutchinson, KS3 Arconic (100%)
Lancaster, PA
Arconic (100%)
Alcoa, TN
Texarkana, TX4
Arconic (100%)
Arconic (100%)
San Antonio, TX Arconic (100%)
Products
Specialty Foil
Sheet and Plate
Sheet and Plate
Sheet and Plate/Slabs and Billets
Sheet and Plate
Sheet and Plate
Plate
Sheet and Plate
Sheet and Plate
Sheet and Plate
Sheet and Plate
Sheet
Slabs
Micromill
1
2
3
4
Facilities with ownership described as “Arconic (100%)” are either leased or owned directly or indirectly by the
Company.
Leased property or partially leased property.
Properties are satellite locations of the Davenport, IA facility.
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.
5
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
Australia
Canada
China
France
Germany
Facility
Owners2
(% Of Ownership)
Arconic (100%)
Oakleigh
Arconic (100%)
Georgetown, Ontario3
Arconic (100%)
Laval, Québec
Arconic (100%)
Nantong
Arconic (100%)
Suzhou3
Arconic (100%)
Dives-sur-Mer
Arconic (100%)
Evron
Arconic (100%)
Gennevilliers
Arconic (100%)
Montbrison
St. Cosme-en-Vairais3
Arconic (100%)
Arconic (100%)
Toulouse
Arconic (100%)
Us-par-Vigny
Arconic (100%)
Bestwig
Arconic (100%)
Erwitte
Hannover3
Arconic (100%)
Hildesheim-Bavenstedt3 Arconic (100%)
Arconic (100%)
Kelkheim3
Products
Fasteners
Aerospace Castings
Aerospace Castings and Machining
Aerospace Castings
Fasteners and Rings
Aerospace and Industrial Gas Turbine Castings
Aerospace and Specialty Castings
Aerospace and Industrial Gas Turbine Castings
Fasteners
Fasteners
Fasteners
Fasteners
Aerospace Castings
Aerospace Castings
Extrusions
Fasteners
Fasteners
6
Country
Hungary
Facility
Eger
Nemesvámos
Székesfehérvár
Nomi
Japan
Ciudad Acuña3
Mexico
Casablanca3
Morocco
Samara4
Russia
South Korea
Kyoungnam
United Kingdom Darley Dale
Ecclesfield
Exeter3
United States
Glossop
Ickles
Leicester3
Low Moor
Meadowhall
Provincial Park
Redditch3
River Don
Telford
Welwyn Garden City
Chandler, AZ
Tucson, AZ3
Carson, CA3
City of Industry, CA3
Fontana, CA
Fullerton, CA3
Newbury Park, CA
Rancho Cucamonga,
CA
Sylmar, CA
Torrance, CA
Tracy, CA
Branford, CT
Winsted, CT
Savannah, GA
Lafayette, IN
La Porte, IN
Burlington, MA
Baltimore, MD3
Products
Forgings
Fasteners
Aerospace and Industrial Gas Turbine Castings
and Forgings
Aerospace and Industrial Gas Turbine Castings
Aerospace Castings/Fasteners
Fasteners
Extrusions and Forgings
Extrusions
Forgings
Ingot Castings
Aerospace and Industrial Gas Turbine Castings
and Alloy
Ingot Castings
Ingot Castings
Fasteners
Extrusions
Forgings
Forgings
Fasteners
Forgings
Fasteners
Aerospace Formed Parts
Extrusions
Fasteners
Fasteners
Fasteners
Rings
Fasteners
Fasteners
Rings
Fasteners
Fasteners
Fasteners
Aerospace Coatings
Aerospace Machining
Forgings
Extrusions
Aerospace and Industrial Gas Turbine Castings
Powdered Metal Parts
Extrusions
Owners2
(% Of Ownership)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%
Arconic (100%)
7
Country
Facility
Whitehall, MI
Owners2
(% Of Ownership)
Arconic (100%)
Sullivan, MO
Washington, MO
Big Lake, MN
New Brighton, MN
Roseville, MN3
Dover, NJ
Verdi, NV
Kingston, NY3
Massena, NY
Rochester, NY
Canton, OH
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Cleveland, OH
Arconic (100%)
Niles, OH
New Kensington, PA
Morristown, TN3
Arconic (100%)
Arconic (100%)
Arconic (100%)
Austin, TX
Houston, TX
Spring, TX
Waco, TX3
Wichita Falls, TX
Hampton, VA3
Martinsville, VA
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Products
Aerospace and Industrial Gas Turbine Castings
and Coatings, Titanium Alloy and Specialty
Products
Titanium Mill Products
Aerospace Formed Parts
Aerospace Machining
Aerospace Machining
Aerospace Machining
Aerospace and Industrial Gas Turbine Castings
and Alloy
Rings
Fasteners
Extrusions
Rings
Ferro-Titanium Alloys and Titanium Mill
Products
Investment Casting Equipment, Aerospace
Components, Castings, Forgings and Oil & Gas
Drilling Products
Titanium Mill Products
Ingot Castings
Aerospace and Industrial Gas Turbine Ceramic
Products
Additively Manufactured Parts
Extrusions
Deep Water Drilling Machining
Fasteners
Aerospace and Industrial Gas Turbine Castings
Aerospace and Industrial Gas Turbine Castings
Titanium Mill Products
1
2
3
4
Principal facilities are listed, and do not include additional locations that serve as sales offices, distribution centers or
warehouses.
Unless otherwise noted, facilities with ownership described as “Arconic (100%)” are owned by the Company.
Leased property or partially leased property.
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.
8
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
Facility
Owners2
(% Of Ownership)
Products
Country
Brazil
Itapissuma3
Tubarão
Utinga
Canada
Lethbridge, Alberta
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Extrusions
Extrusions
Extrusions
Architectural Products
Pointe Claire, Quebec
Arconic (100%)
Architectural Products
China
France
Germany
Hungary
Japan
Mexico
Morocco
Vaughan, Ontario
Suzhou4
Guerande
Lézat-sur-Lèze4
Merxheim4
Vendarques
Iserlohn
Székesfehérvár
Jo¯etsu City4
Monterrey
Casablanca4
Netherlands
Harderwijk
Spain
Irutzun
United Kingdom Runcorn
United States
Springdale, AR
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Architectural Products
Forgings
Architectural Products
Architectural Products
Architectural Products
Architectural Products
Architectural Products
Forgings
Forgings
Forgings
Arconic (67%)
Ahmed Hattabi (33%)
Architectural Products
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Architectural Products
Architectural Products
Architectural Products
Architectural Products
9
Country
Facility
Visalia, CA
Eastman, GA
Barberton, OH
Chillicothe, OH
Cleveland, OH
Bloomsburg, PA
Cranberry, PA
Denton, TX4
Owners2
(% Of Ownership)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Arconic (100%)
Products
Architectural Products
Architectural Products
Forgings
Forgings
Forgings
Architectural Products
Architectural Products
Forgings
1
2
3
4
Principal facilities are listed, and do not include additional locations that serve as sales offices, distribution centers or
warehouses.
Facilities with ownership described as “Arconic (100%)” are owned by the Company.
This facility was permanently closed in December 2016 due to changes in production demand in the Brazilian market.
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
Aluminum scrap
Coatings
Electricity
Lube oil
Natural gas
Packaging materials
Primary aluminum (ingot, slab, billet, P1020, high purity)
Steam
Alloying materials
Electricity
Natural gas
Nickel alloys
Primary aluminum (ingot, billet, P1020, high purity)
Resin
Stainless steel
Steel
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.
10
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.
11
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)
• 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
BCS:
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.
15
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.
17
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.
18
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
19
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
20
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
21
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.
22
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
23
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.
24
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).
25
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
26
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
27
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
28
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.
29
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.
30
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
31
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-
32
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.
33
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.
Quarter
First
Second
Third
Fourth (Separation occurred on November 1, 2016)
Year
2016
2015
High
Low Dividend
High
Low Dividend
$30.66
$18.42
$0.09
$51.30
$37.95
$0.09
34.50
32.91
32.10
26.34
27.09
16.75
0.09
0.09
0.09
42.87
33.69
33.54
33.45
23.91
23.43
0.09
0.09
0.09
$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.
34
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.
CUMULATIVE TOTAL RETURN
Based upon an initial investment of $100 on December 31, 2011
with dividends reinvested
$250
$200
$150
$100
$50
$0
Dec. ’11
Dec. ’12
Dec. ’13
Dec. ’14
Dec. ’15
Dec. ’16
Arconic Inc.
S&P 500
S&P Materials
Copyright© 2017 Standard & Poor’s, a division of S&P Global. All rights reserved.
As of December 31,
2011
2012
2013
2014
2015
Arconic Inc.
S&P 500® Index
S&P 500® Materials Index
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)
$189
$175
$119
$177
$100
100
$126
$154
$102
$116
$115
$154
$141
$144
100
2016
$101
$198
$165
35
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,
Sales
Amounts attributable to Arconic:
(Loss) income from continuing operations(1)
Income (loss) from discontinued operations(2)
Net (loss) income
Earnings per share attributable to Arconic common
shareholders:(3)
Basic:
(Loss) income from continuing operations
Income (loss) from discontinued operations
Net (loss) income
Diluted:
(Loss) income from continuing operations
Income (loss) from discontinued operations
Net (loss) income
Cash dividends declared per common share(3)
Total assets(4)
Total debt(4)
Cash provided from operations(5)
Capital expenditures:
2016
2015
2014
2013
2012
$12,394
$12,413
$12,542
$11,997
$10,640
$ (1,062) $ (157) $
121
(165)
(61) $
329
(63) $
(2,222)
410
(219)
$ (941) $ (322) $
268
$ (2,285) $
191
$ (2.58) $ (0.54) $ (0.21) $ (0.18) $
0.27
(0.39)
$ (2.31) $ (0.93) $
0.85
0.64
$ (2.58) $ (0.54) $ (0.21) $ (0.18) $
0.27
(0.39)
$ (2.31) $ (0.93) $
0.84
0.63
$
0.36
20,038
8,084
870
$
0.36
36,477
8,827
1,582
$
0.36
37,298
8,445
1,674
(6.23)
1.15
(0.62)
$ (6.41) $
0.53
(6.23)
1.13
(0.60)
$ (6.41) $
0.53
$
0.36
35,623
7,826
1,578
$
0.36
40,044
8,237
1,497
Capital expenditures—continuing operations
Capital expenditures—discontinued operations
Total capital expenditures
827
298
$ 1,125
789
391
$ 1,180
775
444
$ 1,219
626
567
$ 1,193
(6)
(6)
$ 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
(3)
(4)
after income taxes less Net income (loss) from discontinued operations attributable to noncontrolling interests.
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).
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.
36
(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.
37
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.
38
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.
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.
(2)
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.
39
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:
Asset impairments
Layoff costs
Net loss on divestitures of businesses
Other
Reversals of previously recorded layoff costs
Restructuring and other charges
40
2016
2015
2014
$ 80
70
3
27
(25)
$155
$
-
97
136
(11)
(8)
$214
$ 65
105
111
43
(10)
$314
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
41
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:
Global Rolled Products
Engineered Products and Solutions
Transportation and Construction Solutions
Segment total
Corporate
Total restructuring and other charges
2016
$ 40
78
14
132
23
$155
2015
$121
46
8
175
39
$214
2014
$267
13
10
290
24
$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
42
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).
43
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)
Third-party aluminum shipments (kmt)
Average realized price per metric ton of aluminum (2)
Third-party sales
Intersegment sales
Total sales
ATOI
2016
2015
2014
1,339
$3,633
$4,864
118
1,375
$3,820
$5,253
125
1,598
$3,970
$6,344
185
$4,982
$5,378
$6,529
$ 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
44
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,
45
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
Third-party sales
ATOI
2016
2015
2014
$5,728
$ 642
$5,342
$ 595
$4,217
$ 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.
46
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
Third-party sales
ATOI
2016
2015
2014
$1,802
$ 176
$1,882
$ 166
$2,021
$ 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.
47
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:
Total segment ATOI
Unallocated amounts (net of tax):
Impact of LIFO
Metal price lag
Interest expense
Noncontrolling interests
Corporate expense
Impairment of goodwill
Restructuring and other charges
Discontinued operations
Other
Consolidated net (loss) income attributable to Arconic
2016
2015
2014
$ 1,087
$ 986
$ 983
(11)
21
(324)
-
(306)
-
(114)
121
(1,415)
66
(115)
(307)
(1)
(252)
(25)
(192)
(165)
(317)
(52)
68
(287)
-
(268)
-
(249)
329
(256)
$ (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;
48
•
•
•
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.
49
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.
50
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.
51
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.
52
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
53
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):
Operating activities:
Energy-related purchase obligations
Raw material purchase obligations
Other purchase obligations
Operating leases
Interest related to total debt
Estimated minimum required pension funding
Other postretirement benefit payments
Layoff and other restructuring payments
Deferred revenue arrangements
Uncertain tax positions
Financing activities:
Total debt
Dividends to shareholders
Investing activities:
Capital projects
Payments related to acquisitions
Totals
Total
2017
2018-2019
2020-2021 Thereafter
$
42
563
119
494
3,197
1,735
890
59
84
29
8,137
-
580
90
$
28
379
83
115
445
310
95
59
20
-
39
-
311
-
$
13
126
24
171
804
650
190
-
27
-
2,168
-
235
23
$
1
58
7
92
577
775
190
-
37
-
2,253
-
34
67
$
-
-
5
116
1,371
-
415
-
-
29
3,677
-
-
-
$16,019
$1,884
$4,431
$4,091
$5,613
54
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.
63
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.
64
Item 8.
Financial Statements and Supplementary Data.
Management’s Report on Financial Statements and Practices
Management’s Reports to Arconic Shareholders
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.
Klaus Kleinfeld
Chairman and
Chief Executive Officer
Ken Giacobbe
Executive Vice President and
Chief Financial Officer
65
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.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 28, 2017
66
Arconic and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
For the year ended December 31,
Sales (O)
Cost of goods sold (exclusive of expenses below)
Selling, general administrative, and other expenses (C)
Research and development expenses
Provision for depreciation and amortization
Impairment of goodwill (A and E)
Restructuring and other charges (D)
Interest expense (T)
Other income, net (M)
Total costs and expenses
Income from continuing operations before income taxes
Provision for income taxes (R)
Loss from continuing operations after income taxes
Income (loss) from discontinued operations after income taxes (C)
Net (loss) income
Less: Net income from continuing operations attributable to noncontrolling interests
Net income (loss) from discontinued operations attributable to noncontrolling
interests (C)
2016
2015
2014
$12,394
$12,413
$12,542
9,811
942
132
535
-
155
499
(94)
10,104
765
169
508
25
214
473
(28)
10,349
770
123
436
-
314
442
(5)
11,980
12,230
12,429
414
1,476
(1,062)
184
(878)
-
183
339
(156)
(41)
(197)
1
63
124
113
174
(61)
238
177
-
(91)
Net (Loss) Income Attributable to Arconic
$ (941) $ (322) $
268
Amounts Attributable to Arconic Common Shareholders (Q):
Net (loss) income
Earnings per share—basic:
Continuing operations
Discontinued operations
Net (loss) income per share-basic
Earnings per share—diluted
Continuing operations
Discontinued operations
Net (loss) income per share-diluted
$ (1,010) $ (391) $
247
$ (2.58) $ (0.54) $ (0.21)
0.85
$
$ (0.39) $
0.27
$ (2.31) $ (0.93) $
0.64
$ (2.58) $ (0.54) $ (0.21)
0.84
$
$ (0.39) $
0.27
$ (2.31) $ (0.93) $
0.63
The accompanying notes are an integral part of the consolidated financial statements.
67
Arconic and subsidiaries
Statement of Consolidated Comprehensive Loss
(in millions)
For the year ended December 31,
2016
Arconic
2015
Noncontrolling
Interests
2014
2016 2015
2014
2016
Total
2015
2014
Net (loss) income
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
Foreign currency translation
adjustments
Net change in unrealized gains on
available-for-sale securities
Net change in unrecognized losses
$ (941) $ (322) $
268 $ 63 $ 125 $ (91) $ (878) $ (197) $
177
(479)
(10)
(69)
(3)
8
(13)
(482)
(2)
(82)
268
(1,566)
(1,025) 182
(429)
(241)
450
(1,995)
(1,266)
on cash flow hedges
(617)
827
137
(5)
(2)
78
-
5
-
(1)
-
-
137
(5)
(612)
826
(2)
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.
68
Arconic and subsidiaries
Consolidated Balance Sheet
(in millions)
December 31,
Assets
Current assets:
Cash and cash equivalents (V)
Receivables from customers, less allowances of $13 in 2016 and $8 in 2015 (S)
Other receivables (C and S)
Inventories (G)
Prepaid expenses and other current assets
Current assets of discontinued operations (C)
Total current assets
Properties, plants, and equipment, net (H)
Goodwill (A and E)
Deferred income taxes (R)
Investment in common stock of Alcoa Corporation (C and V)
Other noncurrent assets (I)
Noncurrent assets of discontinued operations (C)
Total Assets
Liabilities
Current liabilities:
Short-term borrowings (J and V)
Accounts payable, trade
Accrued compensation and retirement costs
Taxes, including income taxes
Accrued interest payable
Other current liabilities
Long-term debt due within one year (J and V)
Current liabilities of discontinued operations (C)
Total current liabilities
Long-term debt, less amount due within one year (J and V)
Accrued pension benefits (U)
Accrued other postretirement benefits (U)
Other noncurrent liabilities and deferred credits (K)
Noncurrent liabilities of discontinued operations (C)
Total liabilities
Contingencies and commitments (L)
Equity
Arconic shareholders’ equity:
Preferred stock (P)
Mandatory convertible preferred stock (P)
Common stock (P)
Additional capital
Retained (deficit) earnings
Treasury stock, at cost (P)
Accumulated other comprehensive loss (B)
Total Arconic shareholders’ equity
Noncontrolling interests
Total equity
Total Liabilities and Equity
2016
2015
$ 1,863
974
477
2,253
325
-
5,892
5,499
5,148
1,234
1,020
1,245
-
$20,038
$
36
1,744
398
85
153
329
4
-
2,749
8,044
2,345
889
870
-
14,897
$ 1,362
960
394
2,284
397
2,556
7,953
5,425
5,249
1,308
-
1,944
14,598
$36,477
$
38
1,510
410
103
170
441
3
2,536
5,211
8,786
1,925
917
828
4,679
22,346
55
3
438
8,214
(1,027)
-
(2,568)
5,115
26
5,141
$20,038
55
3
1,391
10,019
8,834
(2,825)
(5,431)
12,046
2,085
14,131
$36,477
The accompanying notes are an integral part of the consolidated financial statements.
69
Arconic and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
For the year ended December 31,
Cash from Operations
Net (loss) income
Adjustments to reconcile net (loss) income to cash from operations:
Depreciation, depletion and amortization
Deferred income taxes
Equity income, net of dividends
Impairment of goodwill (A and E)
Restructuring and other charges
Net gain from investing activities—asset sales
Net periodic pension benefit cost
Stock-based compensation
Excess tax benefits from stock-based payment arrangements
Other
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign
currency translation adjustments:
(Increase) decrease in receivables
(Increase) in inventories
(Increase) decrease in prepaid expenses and other current assets
Increase (decrease) in accounts payable, trade
(Decrease) in accrued expenses
Increase in taxes, including income taxes
Pension contributions
(Increase) in noncurrent assets
(Decrease) in noncurrent liabilities
Cash provided from operations
Financing Activities
Net change in short-term borrowings (original maturities of three months or less)
Additions to debt (original maturities greater than three months)
Debt issuance costs
Payments on debt (original maturities greater than three months)
Proceeds from exercise of employee stock options
Excess tax benefits from stock-based payment arrangements
Issuance of mandatory convertible preferred stock (P)
Dividends paid to shareholders
Distributions to noncontrolling interests
Contributions from noncontrolling interests
Acquisitions of noncontrolling interests
Net cash transferred from Alcoa Corporation at separation
Cash (used for) provided from financing activities
Investing Activities
Capital expenditures
Acquisitions, net of cash acquired (F and N)
Proceeds from the sale of assets and businesses
Additions to investments
Sales of investments
Net change in restricted cash
Other
Cash used for investing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2016
2015
2014
$ (878) $ (197) $
177
1,132
1,125
42
-
257
(156)
304
86
-
60
(238)
(29)
(76)
232
(394)
93
(290)
(152)
(248)
870
(3)
1,962
(1)
(2,734)
4
-
-
(228)
(226)
51
-
421
(754)
1,280
34
158
25
1,195
(74)
485
92
(9)
(32)
212
(64)
46
(90)
(437)
25
(470)
(370)
(227)
1,582
(16)
1,901
(3)
(2,030)
25
9
-
(223)
(106)
2
-
-
(441)
1,372
(35)
104
-
1,168
(47)
423
87
(9)
66
(312)
(355)
(25)
256
(451)
7
(501)
(42)
(209)
1,674
(2)
2,878
(17)
(1,723)
150
9
1,211
(161)
(120)
53
(28)
-
2,250
(1,125)
10
692
(52)
280
14
16
(165)
(7)
(56)
1,919
$ 1,863
(1,180)
97
112
(134)
40
(20)
25
(1,060)
(39)
42
1,877
$ 1,919
(1,219)
(2,385)
253
(195)
57
(2)
31
(3,460)
(24)
440
1,437
$ 1,877
The accompanying notes are an integral part of the consolidated financial statements.
70
Arconic and subsidiaries
Statement of Changes in Consolidated Equity
(in millions, except per-share amounts)
Arconic Shareholders
Mandatory
convertible
preferred
stock
$ -
-
-
Preferred
stock
$55
-
-
Common
stock
$1,178
-
-
Additional
capital
$ 7,509
-
-
Retained
(deficit)
earnings
$ 9,272
268
-
Treasury
stock
$(3,762)
-
-
Accumulated
Other
Comprehensive
Loss
$(3,659)
-
(1,018)
Noncontrolling
interests
$ 2,929
(91)
(254)
Total
equity
$13,522
177
(1,272)
-
-
-
-
-
-
-
-
-
-
-
$55
-
-
-
-
-
-
-
-
-
-
-
-
$55
-
-
-
-
-
-
-
-
-
-
-
-
-
$55
-
-
-
-
-
3
-
-
-
-
-
$3
-
-
-
-
-
-
-
-
-
-
-
-
$3
-
-
-
-
-
-
-
-
-
-
-
-
-
$3
-
-
-
-
-
-
126
-
-
-
-
$1,304
-
-
-
-
-
-
-
-
-
-
87
(584)
1,210
1,059
-
-
(2)
(19)
(140)
-
-
-
-
-
-
-
-
-
-
720
-
-
-
-
-
-
-
-
-
-
-
-
-
3
-
$ 9,284
-
-
-
-
$ 9,379
(322)
-
-
-
$(3,042)
-
-
-
-
$(4,677)
-
(754)
-
-
-
55
92
(2)
(67)
(154)
-
-
-
-
-
-
-
-
87
-
-
-
$1,391
-
-
(195)
783
-
-
-
$10,019
-
-
-
-
-
-
-
$ 8,834
(941)
-
217
-
-
-
-
$(2,825)
-
-
-
-
-
-
-
-
-
86
-
(76)
(877)
-
-
-
-
$ 438
(205)
(2,563)
877
-
-
-
-
$ 8,214
(2)
(67)
(159)
-
-
-
-
(8,692)
-
-
-
$(1,027) $
-
-
-
-
186
2,639
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$(5,431)
-
(691)
-
-
-
-
-
-
-
3,554
-
-
-
$(2,568)
-
-
-
-
-
-
-
(120)
53
(31)
2
$ 2,488
125
(422)
-
-
-
-
-
-
-
(106)
2
(2)
$ 2,085
63
184
-
-
-
-
-
-
-
(2,133)
(226)
51
2
26
$
(2)
(19)
(140)
87
136
1,213
1,185
(120)
53
(28)
2
$14,794
(197)
(1,176)
(2)
(67)
(154)
55
92
22
870
(106)
2
(2)
$14,131
(878)
(507)
(2)
(67)
(159)
86
(19)
-
-
(7,271)
(226)
51
2
$ 5,141
Balance at December 31, 2013
Net (loss) income
Other comprehensive loss (B)
Cash dividends declared:
Preferred–Class A @ $3.75 per
share
Preferred–Class B @
7.53993 per share
Common @ $0.12 per share
Stock-based compensation (P)
Common stock issued:
compensation plans (P)
Issuance of mandatory convertible
preferred stock (P)
Issuance of common stock (F and P)
Distributions
Contributions
Purchase of equity from
noncontrolling interest
Other
Balance at December 31, 2014
Net (loss) income
Other comprehensive loss (B)
Cash dividends declared:
Preferred–Class A @
$3.75 per share
Preferred–Class B @
$26.8750 per share
Common @ $0.12 per share
Equity option on convertible
notes (F)
Stock-based compensation (P)
Common stock issued:
compensation plans (P)
Issuance of common stock (F and P)
Distributions
Contributions
Other
Balance at December 31, 2015
Net (loss) income
Other comprehensive loss (B)
Cash dividends declared:
Preferred–Class A @ $3.75 per
share
Preferred–Class B @ $26.8750
per share
Common @ $0.36 per share
Stock-based compensation (P)
Common stock issued:
compensation plans (P)
Retirement of Treasury stock (P)
Reverse stock split (A and P)
Distribution of Alcoa Corporation
Distributions
Contributions
Other
Balance at December 31, 2016
The accompanying notes are an integral part of the consolidated financial statements.
71
Arconic and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except per-share amounts)
A. Summary of Significant Accounting Policies
Basis of Presentation. The Consolidated Financial Statements of Arconic Inc. and subsidiaries (“Arconic” or the
“Company”) are prepared in conformity with accounting principles generally accepted in the United States of America
(GAAP) and require management to make certain judgments, estimates, and assumptions. These may affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements. They also may affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain prior year
amounts have been reclassified to conform to the current year presentation.
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 and comprehensive income related to Alcoa Corporation have not been
segregated and are included in the Statement of Consolidated Cash Flows and Statement of Consolidated
Comprehensive Loss, respectively, for all periods presented. See Note C for additional information related to the
Separation Transaction and discontinued operations.
Pursuant to the authorization provided at a special meeting of Arconic common shareholders held on October 5, 2016,
shareholders approved a 1-for-3 reverse stock split of Arconic’s 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. The Company’s common stock began trading on a reverse stock
split-adjusted basis on the NYSE on October 6, 2016.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of Arconic and companies
in which Arconic has a controlling interest. Intercompany transactions have been eliminated. Investments in affiliates
in which Arconic cannot exercise significant influence are accounted for on the cost method.
Management also evaluates whether an Arconic entity or interest is a variable interest entity and whether Arconic is the
primary beneficiary. Consolidation is required if both of these criteria are met. Arconic does not have any variable
interest entities requiring consolidation.
Related Party Transactions. 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 (see Note W).
Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months
or less.
Inventory Valuation. Inventories are carried at the lower of cost or market, with cost for approximately half of U.S.
inventories determined under the last-in, first-out (LIFO) method. The cost of other inventories is determined under a
combination of the first-in, first-out (FIFO) and average-cost methods.
72
Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Depreciation is recorded
principally on the straight-line method at rates based on the estimated useful lives of the assets. The following table
details the weighted-average useful lives of structures and machinery and equipment by reporting segment (numbers in
years):
Segment
Global Rolled Products
Engineered Products and Solutions
Transportation and Construction Solutions
Structures Machinery and equipment
31
29
27
21
17
19
Gains or losses from the sale of assets are generally recorded in Other income, net (see policy below for assets
classified as held for sale and discontinued operations). Repairs and maintenance are charged to expense as incurred.
Interest related to the construction of qualifying assets is capitalized as part of the construction costs.
Properties, plants, and equipment 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 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 discounted cash flow (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.
Goodwill and Other Intangible Assets. 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 Note F), and, as a result recognized $1,801 in goodwill. This
amount was allocated between the AFSR and Arconic Forgings and Extrusions (AFE) reporting units, which is part of
the Engineered Products and Solutions segment. In March and July 2015, Arconic acquired TITAL and RTI,
respectively, (see Note F) 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
73
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
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 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 Engineered Products and
Solutions 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.
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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.
Intangible assets with indefinite useful lives are not amortized while intangible assets with finite useful lives are
amortized generally on a straight-line basis over the periods benefited. The following table details the weighted-
average useful lives of software and other intangible assets by reporting segment (numbers in years):
Segment
Global Rolled Products
Engineered Products and Solutions
Transportation and Construction Solutions
Software Other intangible assets
8
7
6
9
34
16
Revenue Recognition. Arconic recognizes revenues when title, ownership, and risk of loss pass to the customer, all of
which occurs upon shipment or delivery of the product and is based on the applicable shipping terms. The shipping
terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck,
train, or vessel).
In certain circumstances, Arconic receives advanced payments from its customers for product to be delivered in future
periods. These advanced payments are recorded as deferred revenue until the product is delivered and title and risk of
loss have passed to the customer in accordance with the terms of the contract. Deferred revenue is included in Other
current liabilities and Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance
Sheet.
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
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.
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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.
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.
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 limitation 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.
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.
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.
Foreign Currency. The local currency is the functional currency for Arconic’s significant operations outside the
United States, except for certain operations in Canada and Russia, where the U.S. dollar is used as the functional
currency. The determination of the functional currency for Arconic’s operations is made based on the appropriate
economic and management indicators.
Acquisitions. Arconic’s business acquisitions are accounted for using the acquisition method. The purchase price is
allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price
over the fair value of the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included
in the Statement of Consolidated Operations from the date of the acquisition.
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Discontinued Operations and Assets Held For Sale. For those businesses where management has committed to a
plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the
carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is
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. Depreciation and
amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale.
Businesses to be divested are classified in the Consolidated Financial Statements as either discontinued operations or
held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations are
reclassified from their historical presentation to assets and liabilities of discontinued operations on the Consolidated
Balance Sheet and to discontinued operations on the Statement of Consolidated Operations, respectively, for all periods
presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the
Statement of Consolidated Operations. The Statement of Consolidated Cash Flows is not required to be reclassified for
discontinued operations for any period. Segment information does not include the assets or operating results of
businesses classified as discontinued operations for all periods presented. These businesses are expected to be disposed
of within one year.
For businesses classified as held for sale that do not qualify for discontinued operations treatment, the balance sheet
and cash flow amounts are reclassified from their historical presentation to assets and liabilities of operations held for
sale for all periods presented. The results of operations continue to be reported in continuing operations. The gains or
losses associated with these divested businesses are recorded in restructuring and other charges on the Statement of
Consolidated Operations. The segment information includes the assets and operating results of businesses classified as
held for sale for all periods presented.
Recently Adopted Accounting Guidance. On January 1, 2016, Arconic adopted changes issued by the Financial
Accounting Standards Board (FASB) to the presentation of extraordinary items. Such items are defined as transactions
or events that are both unusual in nature and infrequent in occurrence, and previously, were required to be presented
separately in an entity’s income statement, net of income tax, after income from continuing operations. The changes
eliminate the concept of an extraordinary item and, therefore, the presentation of such items is no longer required.
Notwithstanding this change, an entity is still required to present and disclose a transaction or event that is both unusual
in nature and infrequent in occurrence in the notes to the financial statements. The adoption of these changes had no
impact on the Consolidated Financial Statements.
On January 1, 2016, Arconic adopted changes issued by the FASB to the analysis an entity must perform to determine
whether it should consolidate certain types of legal entities. These changes (i) modify the evaluation of whether limited
partnerships and similar legal entities are variable interest entities or voting interest entities, (ii) eliminate the
presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of
reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and
related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with
interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to
those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The adoption of these
changes had no impact on the Consolidated Financial Statements.
On January 1, 2016, Arconic adopted changes issued by the FASB to the presentation of debt issuance costs.
Previously, such costs were required to be presented as a noncurrent asset in an entity’s balance sheet and amortized
into interest expense over the term of the related debt instrument. The changes require that debt issuance costs be
presented in an entity’s balance sheet as a direct deduction from the carrying value of the related debt liability. The
77
amortization of debt issuance costs remains unchanged. The FASB issued an update to these changes based on an
announcement of the staff of the U.S. Securities and Exchange Commission. This update provides an exception to the
FASB changes allowing debt issuance costs related to line-of-credit arrangements to continue to be presented as an
asset regardless of whether there are any outstanding borrowings under such arrangement. This additional change also
was adopted by Arconic on January 1, 2016. This adoption is required on a retrospective basis; therefore, the
December 31, 2015 Consolidated Balance Sheet has been updated to conform to the December 31, 2016 presentation.
As a result, $51 of debt issuance costs (previously reported in Other noncurrent assets) were reclassified to the Long-
term debt, less amount due within one year line item on the December 31, 2015 Consolidated Balance Sheet.
For the 2016 annual period, Arconic adopted changes issued by the FASB related to the evaluation of an entity’s ability
to continue as a going concern. Previously, under GAAP, continuation of a reporting entity as a going concern was
presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent.
Even if an entity’s liquidation was not imminent, there may have been conditions or events that raised substantial doubt
about the entity’s ability to continue as a going concern. Because there was no guidance in GAAP about management’s
responsibility to evaluate whether there was substantial doubt about an entity’s ability to continue as a going concern or
to provide related note disclosures, there was diversity in practice whether, when, and how an entity discloses the
relevant conditions and events in its financial statements. As a result, these changes require an entity’s management to
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that financial statements are issued.
Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as
they become due within one year after the date that financial statements are issued. If management has concluded that
substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal
conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those
conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the
initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least
mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit
statement that there is substantial doubt about the entity’s ability to continue as a going concern. The adoption of these
changes had no impact on the Consolidated Financial Statements. This guidance will need to be applied by
management at the end of each annual period and interim period therein to determine what, if any, impact there will be
on the Consolidated Financial Statements in a given reporting period.
Recently Issued Accounting Guidance. In January 2016, the FASB issued changes to equity investments. These
changes require equity investments (except those accounted for under the equity method of accounting or those that
result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost
minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or similar investment of the same issuer. Additionally, the impairment assessment of equity investments
without readily determinable fair values has been simplified by requiring a qualitative assessment to identify
impairment. These changes become effective for Arconic on January 1, 2018. Management has determined that the
potential impact of these changes on the Consolidated Financial Statements will not be material.
In February 2016, the FASB issued changes to the accounting and presentation of leases. These changes require lessees
to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months.
For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of
underlying asset not to recognize a right of use asset and lease liability. Additionally, when measuring assets and
liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise
an option to extend the lease, exercise a purchase option, or not exercise an option to terminate the lease. These
changes become effective for Arconic on January 1, 2019. Management is currently evaluating the potential impact of
these changes on the Consolidated Financial Statements.
In March 2016, the FASB issued changes to employee share-based payment accounting. Currently, an entity must
determine for each share-based payment award whether the difference between the deduction for tax purposes and the
compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency.
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Excess tax benefits are recognized in additional paid-in capital; tax deficiencies are recognized either as an offset to
accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits are not recognized until the
deduction reduces taxes payable. The changes require all excess tax benefits and tax deficiencies related to share-based
payment awards to be recognized as income tax expense or benefit in the income statement. The tax effects of
exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity
also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.
Additionally, the presentation of excess tax benefits related to share-based payment awards in the statement of cash
flows is changed. Currently, excess tax benefits must be separated from other income tax cash flows and classified as a
financing activity. The changes require excess tax benefits to be classified along with other income tax cash flows as an
operating activity. Also, the changes require cash paid by an employer when directly withholding shares for tax-
withholding purposes to be classified as a financing activity. Currently, there is no specific guidance on the
classification in the statement of cash flows of cash paid by an employer to the tax authorities when directly
withholding shares for tax-withholding purposes. Additionally, for a share-based award to qualify for equity
classification it cannot partially settle in cash in excess of the employer’s minimum statutory withholding requirements.
The changes permit equity classification of share-based awards for withholdings up to the maximum statutory tax rates
in applicable jurisdictions. These changes became effective for Arconic on January 1, 2017. Management has
determined that the adoption of this guidance will not have a material effect on the Consolidated Financial Statements.
In March 2016, the FASB issued changes eliminating the requirement for an investor to adjust an equity method
investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had
been in effect during all previous periods that the investment had been held as a result of an increase in the level of
ownership interest or degree of influence. Additionally, an entity that has an available-for-sale equity security that
becomes qualified for the equity method of accounting must recognize through earnings the unrealized holding gain or
loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity
method. These changes became effective for Arconic on January 1, 2017. Management has determined that the
adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
In March 2016, the FASB issued changes to derivative instruments designated as hedging instruments. These changes
clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument
does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting
criteria continue to be met. These changes became effective for Arconic on January 1, 2017. Management has
determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that
is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance
its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease
receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum
threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that
have a low risk of loss. These changes become effective for Arconic on January 1, 2020. Management is currently
evaluating the potential impact of these changes on the Consolidated Financial Statements.
In August 2016, the FASB issued changes to the classification of certain cash receipts and cash payments within the
statement of cash flows. The guidance identifies eight specific cash flow items and the sections where they must be
presented within the statement of cash flows. These changes become effective for Arconic on January 1, 2018.
Management does not expect these changes to have a material impact on the Consolidated Financial Statements.
In October 2016, the FASB issued changes to the accounting for Intra-Entity transactions, other than inventory. Under
current US GAAP, no immediate tax impact is recognized in the consolidated financial statements as a result of intra-
entity transfers of assets. The current standard precludes an entity from reflecting a tax benefit or expense from an
intra-entity asset transfer between entities that file separate tax returns, whether or not such entities are in different tax
jurisdictions, until the asset has been sold to a third party or otherwise recovered. The current standard also prohibits
recognition by the buyer of a deferred tax asset for the temporary difference arising from the excess of the buyer’s tax
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basis over the cost to the seller. The changes require the current and deferred income tax consequences of the intra-
entity transfer to be recorded when the transaction occurs. The exception to defer the tax consequences of inventory
transactions is maintained. These changes became effective for Arconic on January 1, 2017. Management has
determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
In November 2016, the FASB issued changes to the classification of cash and cash equivalents within the cash flow
statement. Restricted cash and restricted cash equivalents will be included within the cash and cash equivalents line on
the cash flow statement and a reconciliation must be prepared to the statement of financial position. Transfers between
restricted cash and restricted cash equivalents and cash and cash equivalents will no longer be presented as cash flow
activities in the statement of cash flows and material balances of restricted cash and restricted cash equivalents must
disclose information regarding the nature of the restrictions. These changes become effective for Arconic on January 1,
2018. Management has determined that the adoption of these changes will not have a material impact on the
Consolidated Financial Statements.
In July 2015, the FASB issued changes to the subsequent measurement of inventory. Currently, an entity is required to
measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the
lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net
realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable
costs of completion, disposal, and transportation. These changes do not apply to inventories measured using LIFO
(last-in, first-out) or the retail inventory method. Currently, Arconic applies the net realizable value market option to
measure non-LIFO inventories at the lower of cost or market. These changes became effective for Arconic on
January 1, 2017. Management has determined that the adoption of these changes will not have an impact on the
Consolidated Financial Statements.
In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes
created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize
revenue, and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This
framework is expected to result in less complex guidance in application while providing a consistent and comparable
methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply
the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the
contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the
contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the
FASB deferred the effective date by one year, making these changes effective for Arconic on January 1, 2018. The
Company has formed a project assessment and adoption team and is currently reviewing contract terms and assessing
the impact of adopting the standard on the Consolidated Financial Statements.
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B. Accumulated Other Comprehensive Loss
The following table details the activity of the four components that comprise Accumulated other comprehensive loss
for both Arconic’s shareholders and noncontrolling interests:
Pension and other postretirement benefits (U)
Balance at beginning of period
Other comprehensive (loss) income:
Unrecognized net actuarial loss and prior service cost/
benefit
Tax benefit (expense)
Total Other comprehensive (loss) income before
reclassifications, net of tax
Amortization of net actuarial loss and prior service cost/
benefit(1)
Tax expense(2)
Total amount reclassified from Accumulated other
comprehensive loss, net of tax(8)
Total Other comprehensive (loss) income
Transfer to Alcoa Corporation
Balance at end of period
Foreign currency translation
Balance at beginning of period
Other comprehensive income (loss)(3)
Transfer to Alcoa Corporation
Balance at end of period
Available-for-sale securities
Balance at beginning of period
Other comprehensive income (loss)(4)
Transfer to Alcoa Corporation
Balance at end of period
Cash flow hedges
Balance at beginning of period
Other comprehensive (loss) income:
Net change from periodic revaluations
Tax benefit (expense)
Total Other comprehensive (loss) income before
reclassifications, net of tax
Net amount reclassified to earnings:
Aluminum contracts(5)
Energy contracts(6)
Foreign exchange contracts(5)
Interest rate contracts(7)
Nickel contracts(6)
Sub-total
Tax benefit (expense)(2)
Total amount reclassified from
Accumulated other comprehensive loss,
net of tax(8)
Total Other comprehensive (loss) income
Transfer to Alcoa Corporation
Balance at end of period
Arconic
2015
2016
2014
Noncontrolling Interests
2014
2015
2016
$(3,611) $(3,601) $(3,532)
$ (56)
$ (64)
$ (51)
5
(1)
4
6
(2)
4
8
-
$ (56)
$(351)
(429)
-
$(780)
$
$
$
-
-
-
-
(2)
(1)
-
(1)
-
-
-
-
-
-
-
(22)
7
(15)
3
(1)
2
(13)
-
$ (64)
$(110)
(241)
-
$(351)
$
$
$
-
-
-
-
(2)
-
-
-
-
-
-
-
-
-
-
-
(1)
-
(3)
$
-
-
-
(2)
$
(1,112)
380
(478)
170
(492)
167
(732)
(308)
(325)
389
(136)
458
(160)
394
(138)
253
(479)
2,080
256
(69)
-
$(2,010) $(3,611) $(3,601)
298
(10)
-
268
1,455
$(2,412) $ (846) $
179
(1,025)
-
$ (689) $(2,412) $ (846)
(1,566)
-
(9)
3
(6)
4
(1)
3
(3)
59
-
$
$(780)
182
596
(2)
$
$
$
$
(5) $
137
-
132
$
$
-
(5)
-
(5) $
2
(2)
-
-
597
$ (230) $ (308)
(843)
252
1,138
(340)
78
(21)
$
$
$
(591)
798
1
(49)
-
9
1
(38)
12
21
6
5
1
2
35
(6)
57
27
-
(3)
1
-
25
(4)
(26)
(617)
19
(1) $
29
827
-
597
21
78
-
$ (230)
$
$
-
-
-
-
(3)
36
(10)
26
-
(34)
-
5
-
(29)
8
(21)
5
(2)
-
81
(1)
(2)
(3)
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement
benefits (see Note U).
These amounts were included in Provision for income taxes on the accompanying Statement of Consolidated
Operations.
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to
earnings.
(4) Realized gains and losses were included in Other income, net on the accompanying Statement of Consolidated
Operations.
These amounts were included in Sales on the accompanying Statement of Consolidated Operations.
These amounts were included in Cost of goods sold on the accompanying Statement of Consolidated Operations.
These amounts were included in Interest expense on the accompanying Statement of Consolidated Operations.
(5)
(6)
(7)
(8) A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding
benefit to earnings. These amounts were reflected on the accompanying Statement of Consolidated Operations in
the line items indicated in footnotes 1 through 7.
C. Separation Transaction and Discontinued Operations
On November 1, 2016, Arconic completed the Separation Transaction. Alcoa Inc., which was re-named Arconic Inc.,
continues to own the Global Rolled Products (except for the Warrick, IN rolling operations and the equity interest in
the rolling mill at the joint venture in Saudi Arabia), Engineered Products and Solutions, and Transportation and
Construction Solutions segments. Alcoa Corporation includes the Alumina and Primary Metals segments and the
aforementioned Warrick, IN rolling operations and equity interest in the rolling mill at the joint venture in Saudi
Arabia, both of which were formally part of the Global Rolled Products segment.
Arconic completed the Separation Transaction by distribution on November 1, 2016 of 80.1% of the outstanding
common stock of Alcoa Corporation to the Company’s shareholders of record (the “Distribution”) as of the close of
business on October 20, 2016 (the “Record Date”). Arconic retained 19.9% of the Alcoa Corporation common stock
(36,311,767 shares). In the Distribution, each Company shareholder received one share of Alcoa Corporation common
stock for every three shares of Arconic common stock held as of the close of business on the Record Date.
Shareholders received cash in lieu of fractional shares of Alcoa Corporation common stock.
Arconic has recorded the 19.9% retained interest in Alcoa Corporation common stock as a cost method investment in
Investment in common stock of Alcoa Corporation in the December 2016 Consolidated Balance Sheet. The fair value
was based on the closing stock price of Alcoa Corporation as of December 31, 2016 multiplied by the number of shares
of Alcoa Corporation common stock owned by the Company as of December 31, 2016. The changes in fair value since
November 1, 2016 were recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheet.
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, IN rolling mill which became a part of Alcoa Corporation upon 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,
December 31, 2018. Alcoa Corporation will supply all required raw materials to Arconic and Arconic will process the
82
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 were not material to the consolidated results of operations
and financial position for the year ended 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, guarantees related to two Alcoa Corporation energy supply
contracts and certain Alcoa Corporation environmental liabilities, letters of credit and surety bonds related to Alcoa
Corporation workers’ compensation claims which occurred prior to November 1, 2016, and letters of credit for certain
Alcoa Corporation equipment leases and energy contracts (see Note L).
Additionally, under the Separation and Distribution Agreement, the Company has recorded a receivable of $243 due
from Alcoa Corporation for a certain asset sale. This amount was included in Other receivables in the December 2016
Consolidated Balance Sheet.
The results of operations of Alcoa Corporation are presented as discontinued operations in the Statement of
Consolidated Operations as summarized below:
Sales
Cost of goods sold (exclusive of expenses below)
Selling, general administrative, and other expenses
Research and development
Provision for depreciation, depletion and amortization
Restructuring and other charges
Interest expense
Other (income) expenses, net
Income from discontinued operations before income taxes
Provision for income taxes
Income (loss) from discontinued operations after income taxes
Less: Net income (loss) from discontinued operations attributable to
noncontrolling interests
Net income (loss) from discontinued operations
Ten months
ended October 31, Year ended December 31,
2016
$6,752
5,655
164
28
593
102
28
(75)
257
73
184
63
$ 121
2015
2014
$10,121
$11,364
7,965
214
69
772
981
25
30
65
106
(41)
124
8,782
231
95
935
854
31
52
384
146
238
(91)
$ (165)
$
329
During 2016 and 2015, Arconic recognized $193 ($158 after-tax) and $24 ($24 after-tax), respectively, in Selling,
general administrative, and other expenses on the accompanying Statement of Consolidated Operations for costs
related to the Separation Transaction. In addition, Arconic also incurred capital expenditures and debt issuance costs of
$110 during 2016 related to the Separation Transaction. None of the aforementioned costs and expenses related to the
Separation Transaction were reclassified into discontinued operations.
On November 1, 2016, management evaluated the net assets of Alcoa Corporation for potential impairment and
determined that no impairment charge was required.
83
The carrying amount of the major classes of assets and liabilities related to Alcoa Corporation classified as assets and
liabilities of discontinued operations in the Consolidated Balance Sheet at December 31, 2015 consisted of the
following:
Total assets of discontinued operations:
Cash and cash equivalents
Receivables from customers
Other receivables
Inventories
Prepaid expenses and other current assets
Current assets of discontinued operations
Properties, plants, and equipment, net
Goodwill
Investments
Deferred income taxes
Other noncurrent assets
Noncurrent assets of discontinued operations
Total assets of discontinued operations
Total liabilities of discontinued operations:
Accounts payable, trade
Accrued compensation and retirement costs
Taxes, including income taxes
Other current liabilities
Long-term debt due within one year
Current liabilities of discontinued operations
Long-term debt less amount due within one year
Accrued pension benefits
Accrued other postretirement benefits
Other noncurrent liabilities and deferred credits
Noncurrent liabilities of discontinued operations
Total liabilities of discontinued operations
$
557
380
128
1,158
333
2,556
9,390
152
1,472
1,360
2,224
14,598
$17,154
$ 1,379
440
136
563
18
$ 2,536
207
1,373
1,189
1,910
4,679
$ 7,215
The cash flows related to Alcoa Corporation have not been segregated and are included in the Statement of
Consolidated Cash Flows for all periods presented. The following table presents depreciation, depletion and
amortization, restructuring and other charges, and purchases of property, plant and equipment of the discontinued
operations related to Alcoa Corporation:
For the year ended December 31,
Depreciation, depletion and amortization
Restructuring and other charges
Capital expenditures
2016
2015
2014
$593
$102
$298
$772
$981
$391
$935
$854
$444
84
D. 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:
Asset impairments
Layoff costs
Net loss on divestitures of businesses (F)
Other
Reversals of previously recorded layoff costs
Restructuring and other charges
2016
2015
2014
$ 80
70
3
27
(25)
$
-
97
136
(11)
(8)
$ 65
105
111
43
(10)
$155
$214
$314
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. 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.
85
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 (see Note F); $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 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:
Global Rolled Products
Engineered Products and Solutions
Transportation and Construction Solutions
Segment total
Corporate
Total restructuring and other charges
2016
2015
2014
$ 40
78
14
132
23
$121
46
8
175
39
$267
13
10
290
24
$155
$214
$314
86
Activity and reserve balances for restructuring charges were as follows:
Reserve balances at December 31, 2013
2014:
Cash payments
Restructuring charges
Other*
Reserve balances at December 31, 2014
2015:
Cash payments
Restructuring charges
Other*
Reserve balances at December 31, 2015
2016:
Cash payments
Restructuring charges
Other*
Reserve balances at December 31, 2016
Layoff
costs
$ 37
Other
exit costs Total
$ 29
$ 66
(75)
105
(19)
48
(45)
97
(16)
84
(73)
70
(31)
(16)
43
(36)
20
(12)
7
(6)
9
(13)
27
(14)
$ 50
$ 9
(91)
148
(55)
68
(57)
104
(22)
93
(86)
97
(45)
59
* Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation.
In 2016 and 2014, Other for other exit costs also included a reclassification of $8 and $8, respectively, in asset
retirement and $2 and $18, respectively, in environmental obligations, as these liabilities were included in Arconic’s
separate reserves for asset retirement obligations and environmental remediation. In 2015, Other for other exit costs
included a reclassification of $5 for certain obligations included in Arconic’s separate reserves for warranties, lease
terminations and tax indemnities. In 2016, Other for other exit costs also included a reclassification of $4 in legal
obligations, as these liabilities were included in Arconic’s separate reserves for legal costs.
87
The remaining reserves are expected to be paid in cash during 2017.
E. Goodwill and Other Intangible Assets
The following table details the changes in the carrying amount of goodwill:
Balance at December 31, 2014:
Goodwill
Accumulated impairment losses
Acquisitions and Divestitures (F)
Impairment (A)
Translation and other
Balance at December 31, 2015:
Goodwill
Accumulated impairment losses
Acquisitions and Divestitures (F)
Translation and other
Balance at December 31, 2016:
Goodwill
Accumulated impairment losses
Global
Rolled
Products
Engineered
Products
and
Solutions
Transportation
and
Construction
Solutions
Corporate* Total
$210
-
$4,458
-
$114
(28)
210
(1)
-
(8)
201
-
201
-
(20)
181
-
181
4,458
261
-
(59)
4,660
-
4,660
47
(128)
4,579
-
4,579
86
-
(25)
(3)
111
(53)
58
-
(1)
110
(53)
57
$333
-
333
-
-
(3)
330
-
330
-
1
331
-
331
$5,115
(28)
5,087
260
(25)
(73)
5,302
(53)
5,249
47
(148)
5,201
(53)
5,148
* As of December 31, 2016, the amount reflected in Corporate is allocated to Arconic’s three reportable segments ($60
to Global Rolled Products, $253 to Engineered Products and Solutions, and $18 to Transportation and Construction
Solutions) for purposes of impairment testing (see Goodwill and Other Intangible Assets policy in Note A). This
goodwill is reflected in Corporate for segment reporting purposes because it is not included in management’s
assessment of performance by the three reportable segments.
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, included in the Transportation and Construction Solutions segment (see
Goodwill and Other Intangible Assets policy in Note A).
Other intangible assets, which are included in Other noncurrent assets on the accompanying Consolidated Balance
Sheet, were as follows:
December 31, 2016
Computer software
Patents and licenses
Other intangibles (F)
Total amortizable intangible assets
Indefinite-lived trade names and trademarks
Total other intangible assets
88
Gross
carrying
amount
$ 755
110
897
1,762
32
$1,794
Accumulated
amortization
$(623)
(102)
(81)
(806)
-
$(806)
December 31, 2015
Computer software
Patents and licenses
Other intangibles (F)
Total amortizable intangible assets
Indefinite-lived trade names and trademarks
Total other intangible assets
Gross
carrying
amount
$ 793
110
961
1,864
45
$1,909
Accumulated
amortization
$(643)
(98)
(64)
(805)
-
$(805)
Computer software consists primarily of software costs associated with an enterprise business solution (EBS) within
Arconic to drive common systems among all businesses.
Amortization expense related to the intangible assets in the tables above for the years ended December 31, 2016, 2015,
and 2014 was $65, $67, and $55, respectively, and is expected to be in the range of approximately $56 to $64 annually
from 2017 to 2021.
F. Acquisitions and Divestitures
Pro forma results of the Company, assuming all acquisitions described below were made at the beginning of the earliest
prior period presented, would not have been materially different from the results reported.
2016 Divestitures. In April 2016, Arconic completed the sale of the Remmele Medical business to LISI MEDICAL for
$102 in cash ($99 net of transaction costs), which was included in Proceeds from the sale of assets and businesses on
the accompanying Statement of Consolidated Cash Flows. This business, which was part of the RTI International
Metals Inc. (RTI) acquisition (see below), manufactures precision-machined metal products for customers in the
minimally invasive surgical device and implantable device markets. Since this transaction occurred within a year of the
completion of the RTI acquisition, no gain was recorded on this transaction as the excess of the proceeds over the
carrying value of the net assets of this business was reflected as a purchase price adjustment (decrease to goodwill of
$44) to the final allocation of the purchase price related to Arconic’s acquisition of RTI. While owned by Arconic, the
operating results and assets and liabilities of this business were included in the Engineered Products and Solutions
segment. This business generated sales of approximately $20 from January 1, 2016 through the divestiture date,
April 29, 2016, and, at the time of the divestiture, had approximately 330 employees. This transaction is no longer
subject to post-closing adjustments.
2015 Acquisitions. In March 2015, Arconic completed the acquisition of an aerospace structural castings company,
TITAL, for $204 (€188) in cash (an additional $1 (€1) was paid in September 2015 to settle working capital in
accordance with the purchase agreement). TITAL, a privately held company with approximately 650 employees based
in Germany, produces aluminum and titanium investment casting products for the aerospace and defense markets. The
purpose of this acquisition is 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 assets, including
the associated goodwill, and liabilities of this business were included within Arconic’s Engineered Products and
Solutions segment since the date of acquisition. Based on the preliminary allocation of the purchase price, goodwill of
$118 was recorded for this transaction. In the first quarter of 2016, the allocation of the purchase price was finalized,
based, in part, on the completion of a third-party valuation of certain assets acquired, resulting in a $1 reduction of the
initial goodwill amount. None of the $117 in goodwill is deductible for income tax purposes and no other intangible
assets were identified. This transaction is no longer subject to post-closing adjustments.
In July 2015, Arconic completed the acquisition of RTI, a U.S. company that was publicly traded on the New York
Stock Exchange under the ticker symbol “RTI.” Arconic purchased all outstanding shares of RTI common stock in a
stock-for-stock transaction valued at $870 (based on the $9.96 per share July 23, 2015 closing price of Arconic’s
89
common stock). Each issued and outstanding share of RTI common stock prior to the completion of the transaction was
converted into the right to receive 2.8315 shares of Arconic common stock. In total, Arconic issued 29,132,471 shares
(87,397,414 shares pre-reverse stock split – see Note A and Note P) 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. The exchange ratio was the quotient of a $41 per RTI common share acquisition price and
the $14.48 per share March 6, 2015 closing price of Arconic’s common stock. In addition to the transaction price,
Arconic also paid $25 ($19 after-tax) in professional fees and costs related to this acquisition. This amount was
recorded in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated
Operations.
RTI is 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 this 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 were included within Arconic’s Engineered Products and Solutions segment since the date of acquisition. Third-
party sales and after-tax operating income (Arconic’s primary segment performance measure – see Note O) of RTI
from the acquisition date through December 31, 2015 were $309 and less than $(1), respectively. During the third
quarter of 2016, the final purchase price allocation was completed.
The following table represents the final allocation of the purchase price by major asset acquired and liability assumed,
as well as the amount of goodwill recognized:
Assets:
Cash
Receivables from customers
Inventories
Prepaid expenses and other current assets
Properties, plants, and equipment
Goodwill
Other noncurrent assets
Total assets
Liabilities:
Accounts payable
Other current liabilities
Long-term debt due within one year
Long-term debt, less amount due within one year
Other noncurrent liabilities
Total liabilities
Equity:
Additional capital
Total equity
$ 303
94
483
47
321
298
60
$1,606
$
86
94
115
387
96
$ 778
$
$
60
60
As reflected in the table above, Arconic recognized goodwill of $298, which represents the earnings growth potential
of RTI, Arconic’s ability to expand its titanium capabilities in the aerospace market, and expected synergies from
combining the operations of the two companies. This goodwill was allocated to a new Arconic reporting unit
associated with the Engineered Products and Solutions segment, Arconic Titanium and Engineered Products, which
consists solely of the acquired RTI business. None of this goodwill is deductible for income tax purposes.
The other noncurrent assets in the table above primarily represent intangible assets. These intangible assets consist
mainly of customer relationships which are being amortized over a period of 20 years.
As part of this acquisition, 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,
90
2019 (principal amount of $403). 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,
which gives the effect to the Reverse Stock Split (See Note A) and the Distribution of Alcoa Corporation), or a
combination of cash and shares. This cash conversion feature requires the convertible notes to be bifurcated into a
liability component and an equity component. The fair value of the liability component was determined by calculating
the net present value of the cash flows of the convertible notes using the interest rate of a similar instrument without a
conversion feature. The fair value of the equity component is the difference between the fair value of the entire
instrument on the date of acquisition and the fair value of the liability and is included as Additional capital on the
accompanying Consolidated Balance Sheet.
2015 Divestitures. In 2015, Arconic completed the divestiture of an operation in Russia (see below) and had post-
closing adjustments, as provided for in the respective purchase agreements, related to the divestiture completed in
December 2014 (see 2014 Divestitures below). The divestiture and post-closing adjustments combined resulted in net
cash paid of $11 and a net loss of $137, which was recorded in Restructuring and other charges (see Note D) on the
accompanying Statement of Consolidated Operations. These two divestitures are no longer subject to post-closing
adjustments.
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.
2014 Acquisitions. In June 2014, Arconic signed a purchase agreement to acquire an aerospace jet engine components
company, Firth Rixson, from Oak Hill Capital Partners for $2,850. The purchase price was composed of $2,350 in cash
and $500 of Arconic common stock. The common stock component was equivalent to 12,174,337 shares (36,523,010
shares pre-reverse stock split – see Note A and Note P) at a per share price of $41.07 ($13.69 per share pre-reverse
stock split), as determined in the agreement. In conjunction with the purchase agreement, Arconic also entered into an
earn-out agreement, which states that Arconic will make earn-out payments up to an aggregate maximum amount of
$150 through December 31, 2020 upon certain conditions (see below for additional information). On November 19,
2014, after satisfying all customary closing conditions and receiving the required regulatory approvals, Arconic
completed the acquisition of Firth Rixson for $2,995. The purchase price was composed of $2,385 in cash (net of cash
acquired) and $610 of Arconic common stock. The cash portion of the transaction price increased by $35 due to
working capital and other adjustments based on the provisions of the purchase agreement. The common stock portion
of the transaction price was based on the closing market price of $50.07 per share ($16.69 per share pre-reverse stock
split) of Arconic’s common stock on the acquisition date.
In addition to the transaction price, Arconic also paid $42 ($34 after-tax) in professional fees and costs related to this
acquisition. This amount was recorded in Selling, general administrative, and other expenses on the accompanying
Statement of Consolidated Operations. Additionally, Arconic recorded $13 ($8 after-tax) in Interest expense on the
accompanying Statement of Consolidated Operations for costs associated with the execution (in June 2014) and
termination (in September 2014) of a $2,500 364-day senior unsecured bridge term loan facility. This facility was
entered into for the purpose of financing all or a portion of the cash consideration for this acquisition and to pay fees
and expenses incurred in connection therewith. However, in September 2014, the facility was no longer necessary as
Arconic completed the issuance of $2,500 in debt and equity (see Note P) instruments to finance the acquisition.
Firth Rixson manufactures rings, forgings, and metal products for the aerospace end market, as well as other markets
requiring highly engineered material applications. At acquisition, this business had 13 operating facilities in the United
States, United Kingdom, Europe, and Asia employing approximately 2,400 people combined. The purpose of this
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. The operating results and assets and
liabilities of Firth Rixson were included within the Engineered Products and Solutions segment since the date of
acquisition. Third-party sales and after-tax operating income (Arconic’s primary segment performance measure—see
Note O) of Firth Rixson from the acquisition date through December 31, 2014 were $81 and $(12), respectively.
91
The following table represents the final allocation of the purchase price by major asset acquired and liability assumed,
as well as the amount of goodwill recognized and the net present value of the potential earn-out:
Assets:
Receivables from customers
Inventories
Prepaid expenses and other current assets
Properties, plants, and equipment
Goodwill
Other noncurrent assets
Total assets
Liabilities:
Accounts payable
Other current liabilities
Contingent consideration
Other noncurrent liabilities
Total liabilities
$ 193
227
22
493
1,801
758
$3,494
$ 162
100
130
107
$ 499
As reflected in the table above, Arconic recognized goodwill of $1,801, which represents the earnings growth potential
of Firth Rixson and expected synergies from combining the operations of the two companies. The goodwill was
allocated to two of Arconic’s reporting units associated with the Engineered Products and Solutions segment, Arconic
Fastening Systems and Rings ($1,117) and Arconic Forgings and Extrusions ($684), on a relative fair value basis.
None of the goodwill is deductible for income tax purposes.
The other noncurrent assets in the table above represent intangible assets, which were included in the other intangibles
class (see Note E). These intangible assets consist primarily of customer relationships and contracts, backlog,
qualifications, and technology, and have a weighted-average amortization period of 35 years.
The contingent consideration liability presented in the table above represents the net present value of the potential earn-
out of $150 (Level 3 in the fair value hierarchy – see Note V). This earn-out is contingent on the Firth Rixson forging
business in Savannah, Georgia achieving certain identified financial targets through December 31, 2020. During the
fourth quarter of 2016, management determined that payment of the maximum amount was not probable based on the
forecasted financial performance of this location. Therefore, the fair value of this liability was reduced by $56 with a
corresponding credit to Other income, net on the accompanying Statement of Consolidated Operations. It is estimated
that the earn-out will be paid in 2019 through 2020.
In August 2014, Arconic completed the acquisition of the 30% outstanding noncontrolling interest in the aluminum
brazing sheet venture in Kunshan City, China from Shanxi Yuncheng Engraving Group for $28.
2014 Divestitures. In 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. This transaction yielded net cash proceeds of $24 and resulted in a net loss of $116,
which was recorded in Restructuring and other charges (see Note D) on the accompanying Statement of Consolidated
Operations. This transaction was subject to certain post-closing adjustments as defined in the purchase agreement as of
December 31, 2014 (see 2015 Divestitures above).
92
G. Inventories
December 31,
Finished goods
Work-in-process
Purchased raw materials
Operating supplies
2016
2015
$ 625
1,144
408
76
$ 672
1,115
425
72
$2,253
$2,284
At December 31, 2016 and 2015, the total amount of inventories valued on a LIFO basis was $947 and $1,009,
respectively. If valued on an average-cost basis, total inventories would have been $371 and $387 higher at
December 31, 2016 and 2015, respectively. During 2016 and 2015, reductions in LIFO inventory quantities caused
partial liquidations of the lower cost LIFO inventory base. These liquidations resulted in the recognition of immaterial
income amounts in both 2016 and 2015, respectively.
H. Properties, Plants, and Equipment, Net
December 31,
Land and land rights
Structures:
Global Rolled Products
Engineered Products and Solutions
Transportation and Construction Solutions
Other
Machinery and equipment:
Global Rolled Products
Engineered Products and Solutions
Transportation and Construction Solutions
Other
Less: accumulated depreciation and amortization
Construction work-in-progress
I. Other Noncurrent Assets
December 31,
Intangibles, net (E)
Investments
Cash surrender value of life insurance
Other
93
2016
2015
$
135
$
149
1,061
733
254
248
2,296
4,570
2,728
723
337
8,358
1,042
658
239
290
2,229
4,500
2,745
682
442
8,369
10,789
6,073
4,716
783
10,747
6,143
4,604
821
$ 5,499
$ 5,425
2016
2015
$ 988
102
14
141
$1,104
193
492
155
$1,245
$1,944
Investments. As of December 31, 2016 and 2015, Investments were composed of exchange-traded fixed income and
equity securities, which are classified as available-for-sale and are carried at fair value (see Note V) with unrealized
gains and losses recognized in other comprehensive income. Unrealized and realized gains and losses related to these
securities were immaterial in 2016, 2015, and 2014.
During 2016, Arconic sold various fixed income and equity securities held by its captive insurance company for $130,
which is included in Sales of investments on the accompanying Statement of Consolidated Cash Flows, and recorded a
loss of $3 ($2 after-tax) in Other income, net on the accompanying Statement of Consolidated Operations.
Cash surrender value of life insurance. In the first quarter of 2016, Arconic received $234 in proceeds from the
redemption of certain company-owned life insurance policies. In the second quarter of 2016, Arconic liquidated
additional company-owned life insurance policies for $223 in cash. Both of these amounts were included in Proceeds
from the sale of assets and businesses on the accompanying Statement of Consolidated Cash Flows. As the cash
received was equivalent to the cash surrender value of these policies, no gain or loss was recognized on the sales of
these policies.
J. Debt
Long-Term Debt.
December 31,
5.55% Notes, due 2017
6.50% Bonds, due 2018
6.75% Notes, due 2018
5.72% Notes, due 2019
1.63% Convertible Notes, due 2019*
6.150% Notes, due 2020
5.40% Notes, due 2021
5.87% Notes, due 2022
5.125% Notes, due 2024
5.90% Notes, due 2027
6.75% Bonds, due 2028
5.95% Notes due 2037
Iowa Finance Authority Loan, due 2042 (4.75%)
Other**
Less: amount due within one year
2016
2015
$
-
250
750
750
403
1,000
1,250
627
1,250
625
300
625
250
(32)
8,048
4
$ 750
250
750
750
403
1,000
1,250
627
1,250
625
300
625
250
(41)
8,789
3
$8,044
$8,786
* Amount was assumed in conjunction with the acquisition of RTI (see Note F).
**Other includes various financing arrangements related to subsidiaries, unamortized debt discounts related to the
outstanding notes and bonds listed in the table above, an equity option related to the convertible notes due in 2019
(see Note F), adjustments to the carrying value of long-term debt related to an interest swap contract accounted for
as a fair value hedge, and unamortized debt issuance costs (see Note A).
The principal amount of long-term debt maturing in each of the next five years is $4 in 2017, $1,035 in 2018, $1,134 in
2019, $1,002 in 2020, and $1,251 in 2021.
Public Debt—In December 2016, Arconic elected to call for redemption the $750 in outstanding principal of its 5.55%
Notes due February 2017 (the “2017 Notes”) under the provisions of the 2017 Notes. The total cash paid to the holders
of the called 2017 Notes was $770, which includes $17 in accrued and unpaid interest from the last interest payment
94
date up to, but not including, the settlement date, and a $3 purchase premium. The purchase premium was recorded in
Interest expense on the accompanying Statement of Consolidated Operations. This transaction was completed on
December 30, 2016.
Credit Facilities. 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 Agreement 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 Facility 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 Facility, subject to the lender consent requirements set forth in the Credit Agreement. Under the provisions
of the Credit Agreement, Arconic will pay a fee up to 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.
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.
95
Short-Term Borrowings. At December 31, 2016 and 2015, Short-term borrowings were $36 and $38, respectively.
These amounts included $31 and $32 at December 31, 2016 and 2015, respectively, related to accounts payable
settlement arrangements with certain vendors and third-party intermediaries. These arrangements provide that, at the
vendor’s request, the third-party intermediary advances the amount of the scheduled payment to the vendor, less an
appropriate discount, before the scheduled payment date and Arconic makes payment to the third-party intermediary on
the date stipulated in accordance with the commercial terms negotiated with its vendors. Arconic records imputed
interest related to these arrangements in Interest expense on the accompanying Statement of Consolidated Operations.
Commercial Paper. Arconic had no outstanding commercial paper at December 31, 2016 and 2015. In 2016 and 2015,
the average outstanding commercial paper was $127 and $198, respectively. Commercial paper matures at various
times within one year and had an annual weighted average interest rate of 1.05%, 0.6%, and 0.6% during 2016, 2015,
and 2014, respectively.
K. Other Noncurrent Liabilities and Deferred Credits
December 31,
Environmental remediation (L)
Income taxes (R)
Accrued compensation and retirement costs
Contingent payment related to an acquisition (F)
Other
L. Contingencies and Commitments
Contingencies
2016
2015
$260
154
216
78
162
$288
13
237
130
160
$870
$828
Environmental Matters. Arconic participates in environmental assessments and cleanups at more than 100 locations.
These include owned or operating facilities and adjoining properties, previously owned or operating facilities and
adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be
reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in
determining the extent of remedial actions and related costs. The liability can change substantially due to factors such
as the nature and extent of contamination, changes in remedial requirements, and technological changes, among others.
Arconic’s remediation reserve balance was $308 and $306 at December 31, 2016 and December 31, 2015 (of which
$48 and $18 was classified as a current liability), respectively, and reflects the most probable costs to remediate
identified environmental conditions for which costs can be reasonably estimated. In 2016, the remediation reserve was
increased by $14 due to a net charge associated with a number of sites and was recorded in Cost of goods sold on the
accompanying Statement of Consolidated Operations. The change in the reserve also reflects a decrease of $2 due to
the effects of foreign currency translation and an increase of $3 related to the acquisition of RTI (see Note F).
Payments related to remediation expenses applied against the reserve were $13 in 2016 and include expenditures
currently mandated, as well as those not required by any regulatory authority or third party.
Included in annual operating expenses are the recurring costs of managing hazardous substances and environmental
programs. These costs are estimated to be approximately 1% or less of cost of goods sold.
The Separation and Distribution Agreement includes provisions for the assignment or allocation of environmental
liabilities between Arconic and Alcoa Corporation including certain remediation obligations associated with
96
environmental matters. In general, the respective parties will be responsible for the environmental matters associated
with their operations, and with the properties and other assets assigned to each. The only material and reportable matter
assigned to Arconic concerns the Grasse River at Arconic’s Massena West location, the status of which is as follows:
Massena West, NY—Arconic has an ongoing remediation project related to Grasse River, which is adjacent to
Arconic’s Massena plant site. Many years ago, it was determined that sediments and fish in the river contain varying
levels of polychlorinated biphenyls (PCBs). The project, which was selected by the U.S. Environmental Protection
Agency (EPA) in a Record of Decision (ROD) issued in April 2013, is aimed at capping PCB contaminated sediments
with concentration in excess of one part per million in the main channel of the river and dredging PCB contaminated
sediments in the near-shore areas where total PCBs exceed one part per million. At December 31, 2016 and
December 31, 2015, the reserve balance associated with this matter was $228 and $234, respectively. Arconic is in the
planning and design phase, which is expected to be completed in 2017. Following that, the actual remediation
fieldwork is expected to commence and take approximately four years. The majority of the project funding is expected
to be spent between 2017 and 2021.
Additionally, the Separation and Distribution Agreement lists environmental matters and sites where both parties,
Arconic and Alcoa Corporation, share the liability. The Separation and Distribution Agreement provides for the
allocation of responsibility between the two companies as well as identifies the lead party responsible for overall
management of the matter. One such site previously reported on was Fusina, Italy. The share for this site allocated to
Arconic is not material, and therefore, Arconic will no longer report on this matter unless and until some event in the
future causes this to become material and reportable.
Lastly, Arconic previously reported on other environmental matters associated with East St. Louis, IL, Sherwin, TX,
Baie Comeau, Quebec, Canada and Mosjoen, Norway. Under the Separation and Distribution Agreement, the legal
entities named as parties to these matters are now affiliated with Alcoa Corporation and/or Alcoa Corporation has
agreed to take full responsibility for these locations and has agreed to indemnify Arconic for any future liability
associated with these locations, including the need for any future environmental remediation. Therefore, Arconic will
also no longer report on these matters unless and until some event in the future causes any of them to become material
and reportable.
Tax. Pursuant to the Tax Matters Agreement (see Note C) entered into between Arconic and Alcoa Corporation in
connection with the Separation Transaction, Arconic shares responsibility with Alcoa Corporation, and Alcoa
Corporation has agreed to partially indemnify Arconic with 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, Arconic filed an appeal of this second assessment in Spain’s Central Tax Administrative Court, which was denied in
January 2015. Arconic filed another appeal of this second assessment in Spain’s National Court in March 2015.
The combined assessments (remeasured for a tax rate change enacted in November 2014) total $258 (€246). 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
97
would be shared between Arconic and Alcoa Corporation as provided for in the Tax Matters Agreement related to the
Separation Transaction. 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.
Other. In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be
instituted or asserted against Arconic, including those pertaining to environmental, product liability, safety and health,
and tax matters. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot now
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.
Commitments
Purchase Obligations. Arconic has entered into purchase commitments for raw materials, energy and other goods and
services, which total $490 in 2017, $90 in 2018, $73 in 2019, $64 in 2020, $2 in 2021, and $5 thereafter.
Operating Leases. Certain land and buildings, plant equipment, vehicles, and computer equipment are under operating
lease agreements. Total expense for all leases was $110 in 2016, $112 in 2015, and $112 in 2014. Under long-term
operating leases, minimum annual rentals are $115 in 2017, $96 in 2018, $75 in 2019, $54 in 2020, $38 in 2021, and
$116 thereafter.
Guarantees. 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.
Pursuant to the Separation and Distribution Agreement, 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.
Letters of Credit. 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.
Pursuant to the Separation and Distribution Agreement, 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 November 1, 2016. Alcoa Corporation workers’ compensation claims and letter of credit fees paid by
98
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.
Surety Bonds. Arconic has outstanding surety bonds primarily related to tax matters, contract performance, workers’
compensation, environmental-related matters, and customs duties. The total amount committed under these bonds,
which automatically renew or expire at various dates, mostly in 2017, was $120 at December 31, 2016.
Pursuant to the Separation and Distribution Agreement, Arconic was required to provide surety bonds related to Alcoa
Corporation workers’ compensation claims which occurred prior to November 1, 2016 and, as a result, Arconic has
$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.
M. Other Income, Net
Equity income
Interest income
Foreign currency (gains) losses, net
Net loss (gain) from asset sales
Net loss (gain) on mark-to-market derivative contracts
Other, net
2016
2015
2014
$ (7) $
(16)
(4)
11
1
(79)
-
(16)
51
(42)
(3)
(18)
$ (2)
(19)
23
(13)
2
4
$(94) $(28) $ (5)
In 2016, Other, net includes an adjustment of the contingent earn-out liability ($56) and a post-closing adjustment
($20) both related to the November 2014 acquisition of Firth Rixson. In 2015, Net gain from asset sales included a $19
gain related to the sale of land around Arconic’s former Sherwin, TX site and a $19 gain related to the sale of the
remaining equity investment in a China rolling mill. In 2014, Net gain from asset sales included a $14 gain related to
the sale of an equity investment in a China rolling mill.
N. Cash Flow Information
Cash paid for interest and income taxes was as follows:
Interest, net of amount capitalized
Income taxes, net of amount refunded
2016
2015
2014
$524
$324
$487 $441
$345 $301
The details related to cash paid for acquisitions (including of a noncontrolling interest in 2014) were as follows:
Assets acquired
Liabilities assumed
Contingent consideration liability
Equity issued
Noncontrolling interest acquired
Working capital adjustment
Increase in Arconic’s shareholders’ equity
Cash paid
Less: cash acquired
Net cash paid
99
2016
2015
2014
$
-
-
-
-
-
(10)
-
(10)
$2,003
(868)
-
(870)
-
-
(60)
$3,515
(345)
(130)
(610)
31
-
(3)
205
2,458
-
45
302
$(10) $ (97) $2,413
Noncash Financing and Investing Activities. On October 5, 2016, Arconic completed a 1-for-3 Reverse Stock Split
(see Note A). 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. 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 on the 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 (see Note
P). 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 on the 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 (see Note F). As a result, Arconic issued 29 million shares (87 million shares—pre-Reverse Stock Split—see
Note A and Note P) 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 and Note P) 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 (see Note F). A portion of this
consideration was paid through the issuance of 12 million shares (37 million shares—pre-Reverse Stock Split—see
Note A and Note P) 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.
O. Segment and Geographic Area Information
Arconic is a producer of products including precision castings and aerospace and industrial fasteners. Arconic’s
products are used worldwide in transportation (including aerospace, automotive, truck, trailer, rail, and shipping),
packaging, building and construction, oil and gas, defense, and industrial applications. Arconic’s segments are
organized by product on a worldwide basis. 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, 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 are excluded from segment ATOI. Segment assets
exclude, among others, cash and cash equivalents; deferred income taxes; goodwill not allocated to businesses for
segment reporting purposes; corporate fixed assets; and LIFO reserves.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting
Policies (see Note A). Transactions among segments are established based on negotiation among the parties.
Differences between segment totals and Arconic’s consolidated totals for line items not reconciled are in Corporate.
100
Arconic’s operations consist of three worldwide reportable segments as follows:
Global Rolled Products. This segment produces aluminum sheet and plate for a variety of end markets. This segment
includes sheet and plate 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 and plate is to a relatively small number of customers.
Engineered Products and Solutions. This segment produces products that are used mostly 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.
Transportation and Construction Solutions. This 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 directly to customers and through distributors. A small part of this segment also produces aluminum products for
the industrial products end market.
101
The operating results and assets of Arconic’s reportable segments were as follows:
Global
Rolled
Products
Engineered
Products
and
Solutions
Transportation
and Construction
Solutions
Total
2016
Sales:
Third-party sales
Intersegment sales
Total sales
Profit and loss:
Depreciation and amortization
Income taxes
ATOI
2015
Sales:
Third-party sales
Intersegment sales
Total sales
Profit and loss:
Depreciation and amortization
Income taxes
ATOI
2014
Sales:
Third-party sales
Intersegment sales
Total sales
Profit and loss:
Depreciation and amortization
Income taxes
ATOI
2016
Assets:
Capital expenditures
Goodwill
Total assets
2015
Assets:
Capital expenditures
Goodwill
Total assets
$4,864
118
$4,982
$ 5,728
-
$ 5,728
201
107
269
255
298
642
$5,253
125
$5,378
$ 5,342
-
$ 5,342
203
85
225
233
282
595
$6,344
185
$6,529
$ 4,217
-
$ 4,217
211
67
224
$ 293
181
3,891
$ 256
201
3,861
137
298
579
$
333
4,579
10,542
$
383
4,660
10,732
$1,802
-
$1,802
48
67
176
$1,882
-
$1,882
43
63
166
$2,021
-
$2,021
42
69
180
63
57
982
77
58
947
$
$
$12,394
118
$12,512
504
472
1,087
$12,477
125
$12,602
479
430
986
$12,582
185
$12,767
390
434
983
$
689
4,817
15,415
$
716
4,919
15,540
102
The following tables reconcile certain segment information to consolidated totals:
Sales:
Total segment sales
Elimination of intersegment sales
Corporate
Consolidated sales
Net (loss) income attributable to Arconic:
Total segment ATOI
Unallocated amounts (net of tax):
Impact of LIFO
Metal price lag
Interest expense
Noncontrolling interests
Corporate expense
Impairment of goodwill
Restructuring and other charges
Discontinued operations
Other (1)
Consolidated net (loss) income attributable to Arconic
2016
2015
2014
$12,512
(118)
-
$ 12,394
$12,602
(125)
(64)
$ 12,413
$12,767
(185)
(40)
$ 12,542
2016
2015
2014
$ 1,087
$ 986
$ 983
(52)
(11)
68
21
(287)
(324)
-
-
(268)
(306)
-
-
(249)
(114)
329
121
(256)
(1,415)
$ (941) $ (322) $ 268
66
(115)
(307)
(1)
(252)
(25)
(192)
(165)
(317)
(1) Other for 2016, includes a charge for 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).
December 31,
Assets:
Total segment assets
Unallocated amounts:
Cash and cash equivalents
Deferred income taxes
Corporate goodwill
Corporate fixed assets, net
LIFO reserve
Fair value of derivative contracts
Investment in common stock of Alcoa Corporation
Assets of discontinued operations
Other
Consolidated assets
2016
2015
$15,415
$15,540
1,863
1,234
331
308
(371)
24
1,020
-
214
$ 20,038
1,362
1,308
330
279
(387)
-
-
17,154
891
$ 36,477
103
Sales by major product grouping were as follows:
Sales:
Flat-rolled aluminum
Fastening systems
Investment castings
Other extruded and forged products
Architectural aluminum systems
Aluminum wheels
Other
2016
2015
2014
4,864
2,060
1,870
1,495
1,010
689
406
$12,394
5,253
2,168
1,812
1,332
951
790
107
$12,413
6,344
1,647
1,784
1,019
1,002
786
(40)
$12,542
Geographic information for sales was as follows (based upon the country where the point of sale occurred):
Sales:
United States
France
United Kingdom
Hungary
China
Russia
Germany
Canada
Brazil
Japan
Italy
Australia
Spain
Other
2016
2015
2014
$ 7,823
930
711
619
582
433
284
262
250
145
127
53
4
171
$12,394
$ 8,044
802
698
622
565
455
264
180
297
138
139
49
2
158
$12,413
$ 7,205
915
464
630
415
642
229
125
417
157
150
523
460
210
$12,542
Geographic information for long-lived assets was as follows (based upon the physical location of the assets):
December 31,
Long-lived assets:
United States
China
Russia
United Kingdom
Hungary
France
Other
2016
2015
$3,966
336
295
232
194
118
358
$5,499
$3,833
352
303
312
190
107
328
$5,425
P. Preferred and Common Stock
Preferred Stock. Arconic has two classes of preferred stock: Class A Preferred Stock and Class B Serial Preferred
Stock. Class A Preferred Stock has 660,000 shares authorized at a par value of $100 per share with an annual $3.75
104
cumulative dividend preference per share. There were 546,024 of such shares outstanding at December 31, 2016 and
2015. Class B Serial Preferred Stock has 10 million shares authorized at a par value of $1 per share. There were
2.5 million of such shares outstanding at December 31, 2016 and 2015 (see below).
In September 2014, Arconic completed a public offering under its shelf registration statement for $1,250 of 25 million
depositary shares, each of which represents a 1/10th interest in a share of Arconic’s 5.375% Class B Mandatory
Convertible Preferred Stock, Series 1, par value $1 per share, liquidation preference $500 per share (the “Mandatory
Convertible Preferred Stock”). The 25 million depositary shares are equivalent to 2.5 million shares of Mandatory
Convertible Preferred Stock. Each depositary share entitles the holder, through the depositary, to a proportional
fractional interest in the rights and preferences of a share of Mandatory Convertible Preferred Stock, including
conversion, dividend, liquidation, and voting rights, subject to terms of the deposit agreement. Arconic received $1,213
in net proceeds from the public offering reflecting an underwriting discount. The net proceeds were used, together with
the net proceeds of issued debt, to finance the cash portion of the acquisition of Firth Rixson. The underwriting
discount was recorded as a decrease to Additional capital. The Mandatory Convertible Preferred Stock constitutes a
series of Arconic’s Class B Serial Preferred Stock, which ranks senior to Arconic’s common stock and junior to
Arconic’s Class A Preferred Stock and existing and future indebtedness. Dividends on the Mandatory Convertible
Preferred Stock are cumulative in nature and are paid at the rate of $26.8750 per annum per share, which commenced
January 1, 2015 (paid on December 30, 2014). Holders of the Mandatory Convertible Preferred Stock generally have
no voting rights.
On the mandatory conversion date, October 1, 2017, all outstanding shares of Mandatory Convertible Preferred Stock
will automatically convert into shares of Arconic’s common stock. As a result of the Separation Transaction and the 1-
for-3 Reverse Stock Split (see Note A), as defined in the terms of the Mandatory Convertible Preferred Stock, the
conversion rate was adjusted and each share of Mandatory Convertible Preferred Stock is now convertible into not
more than 15.6981 shares of common stock and not less than 13.0817 shares of common stock, subject to certain anti-
dilution and other adjustments as described in the terms of the Mandatory Convertible Preferred Stock. At any time
prior to October 1, 2017, a holder may elect to convert shares of Mandatory Convertible Preferred Stock, in whole or in
part (but in no event less than one share of Mandatory Convertible Preferred Stock), at the minimum conversion rate of
13.0817 shares of common stock, subject to certain anti-dilution and other adjustments as described in the terms of the
Mandatory Convertible Preferred Stock. Arconic does not have the right to redeem the Mandatory Convertible
Preferred Stock.
If Arconic undergoes a fundamental change, as defined in the terms of the Mandatory Convertible Preferred Stock,
holders may elect to convert their Mandatory Convertible Preferred Stock, in whole or in part (but in no event less than
one share of Mandatory Convertible Preferred Stock), into shares of Arconic’s common stock. Holders who elect to
convert will also receive any accumulated and unpaid dividends and a Fundamental Change Dividend Make-whole
Amount (as defined in the terms of the Mandatory Convertible Preferred Stock) equal to the present value of all
remaining dividend payments on the Mandatory Convertible Preferred Stock.
Common Stock. As discussed in Note A, Arconic completed a 1-for-3 Reverse Stock Split on October 5, 2016. The
Reverse Stock Split reduced the number of shares of common stock outstanding from approximately 1.3 billion shares
to 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 accompanying Consolidated Balance Sheet at December 31, 2016 reflect a decrease and
increase of $877, respectively. The number of authorized shares of common stock was also decreased from 1.8 billion
shares to 0.6 billion shares.
In August 2016, Arconic retired its outstanding treasury stock consisting of approximately 25 million shares (76
million shares pre-reverse stock split). As a result, Common stock and Additional capital in the accompanying 2016
Consolidated Balance Sheet were decreased by $76 and $2,563, respectively, to reflect the retirement of the treasury
shares.
105
At December 31, 2016, 438,519,780 shares were issued and outstanding. Dividends paid in each of 2016, 2015 and
2014 were $0.36 per annum or $0.09 per quarter. The current dividend yield as authorized by Arconic’s Board of
Directors is $0.24 per annum or $0.06 per quarter.
In July 2015, Arconic issued 29 million shares (87 million shares—pre-Reverse Stock Split) of common stock as
consideration paid to acquire RTI (see Note F).
In early 2014, Arconic issued 30 million shares (89 million shares—pre-Reverse Stock Split) of common stock under
the terms of Arconic’s 5.25% Convertible Notes due March 15, 2014. Also, in November 2014, Arconic issued
12 million shares (37 million shares—pre-Reverse Stock Split) of common stock as part of the consideration paid to
acquire Firth Rixson (see Note F).
As of December 31, 2016, 45 million shares of common stock were reserved for issuance under Arconic’s stock-based
compensation plans. Arconic buys shares in the open market to satisfy the exercise of stock options and the conversion
of stock awards.
Share Activity (number of shares)
Balance at end of 2013
Conversion of convertible notes
Private placement
Issued for stock-based compensation plans
Balance at end of 2014
Acquisition of RTI
Issued for stock-based compensation plans
Balance at end of 2015
Treasury stock retirement
Reverse Stock Split (A)
Issued for stock-based compensation plans
Balance at end of 2016
Stock-based Compensation
Common stock
Treasury
Outstanding
106,895,705
-
-
(19,745,536)
1,071,011,162
89,383,953
36,523,010
19,745,536
87,150,169
-
(6,099,066)
1,216,663,661
87,397,414
6,099,066
81,051,103
(75,831,443)
-
(5,219,660)
1,310,160,141
-
(876,942,489)
5,302,128
-
438,519,780
Arconic has a stock-based compensation plan under which stock options and stock awards are granted in January each
year to eligible employees. Most plan participants can choose whether to receive their award in the form of stock
options, restricted stock unit awards, or a combination of both. This choice is made before the grant is issued and is
irrevocable. Stock options are granted at the closing market price of Arconic’s common stock on the date of grant and
vest over a three-year service period (1/3 each year) with a ten-year contractual term. Restricted stock unit awards also
vest over a three-year service period from the date of grant and certain of these awards also include performance
conditions. For the majority of performance stock awards issued in 2016, 2015, and 2014, the final number of shares
earned will be based on Arconic’s achievement of sales and profitability targets over the respective three-year
performance periods. One-third of the award will be earned each year based on the performance against the pre-
established targets for that year. The performance stock awards earned over the three-year period vest at the end of the
third year.
In 2016, 2015, and 2014, Arconic recognized stock-based compensation expense of $76 ($51 after-tax), $77 ($51 after-
tax), and $70 ($47 after-tax), respectively. For each of 2016, 2015, and 2014, approximately 80% of the stock-based
compensation expense recognized related to restricted stock unit awards and no stock-based compensation expense was
capitalized in any of those years. At December 31, 2016, there was $45 (pretax) of unrecognized compensation
106
expense related to non-vested stock option grants and non-vested restricted stock unit award grants. This expense is
expected to be recognized over a weighted average period of 1.5 years. 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. Of the total pretax compensation expense recognized in 2016, 2015, and 2014, $19, $15, and $11,
respectively, pertains to the acceleration of expense related to retirement-eligible employees.
Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For restricted
stock unit awards, the fair value was equivalent to the closing market price of Arconic’s common stock on the date of
grant. For stock options, the fair value was estimated on the date of grant using a lattice-pricing model, which
generated a result of $4.78, $10.07, and $6.40 per option in 2016, 2015, and 2014, respectively. The lattice-pricing
model uses a number of assumptions to estimate the fair value of a stock option, including a risk-free interest rate,
dividend yield, volatility, exercise behavior, and contractual life. The following paragraph describes in detail the
assumptions used to estimate the fair value of stock options granted in 2016 (the assumptions used to estimate the fair
value of stock options granted in 2015 and 2014 were not materially different, except as noted below).
The risk-free interest rate (2.06%) was based on a yield curve of interest rates at the time of the grant based on the
contractual life of the option. The dividend yield (1.1%) was based on a one-year average. Volatility (44.5% for 2016,
36.5% for 2015, and 35.0% in 2014) was based on historical and implied volatilities over the term of the option.
Arconic utilized historical option forfeiture data to estimate annual pre- and post-vesting forfeitures (7%). Exercise
behavior (60%) was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of
years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior.
Based upon the other assumptions used in the determination of the fair value, the life of an option (5.7 years) was an
output of the lattice-pricing model. The activity for stock options and stock awards during 2016 was as follows (options
and awards in millions):
Outstanding, January 1, 2016
Granted
Exercised
Converted
Expired or forfeited
Cancelled due to Separation Transaction(B)
Adjustment due to Separation Transaction(C)(D)
Performance share adjustment
Outstanding, December 31, 2016
Stock options(A)(D)
Stock awards(A)(D)
Number of
options
Weighted
average
exercise price
Number of
awards
Weighted
average FMV
per award
11
3
-
-
-
(4)
3
-
13
$35.72
$20.22
$26.89
$
-
$36.75
$32.70
$24.14
-
$
$24.14
7
4
-
(3)
-
(2)
2
-
8
$34.13
$20.64
$
-
$26.72
$31.90
$30.46
$22.20
$20.87
$22.26
(A) The number of stock options, stock awards and the weighted average exercise price has been adjusted to reflect
the Reverse Stock Split (see Note A).
(B) As a result of the Separation Transaction, all stock options and stock awards relating to Alcoa Corporation
employees were canceled.
(C) As a result of the Separation Transaction, all stock options and stock awards relating to Arconic employees were
adjusted to reflect the Separation Transaction.
(D) Both the effect of the Reverse Stock Split and the effect of the Separation Transaction were considered
modifications of the original stock options and awards and the modifications were designed such that the intrinsic
values of the stock option or stock award were the same both previous to and after the adjustments.
As of December 31, 2016, the number of stock options outstanding had a weighted average remaining contractual life
of 5.99 years and a total intrinsic value of $10. Additionally, 8.9 million of the stock options outstanding were fully
107
vested and exercisable and had a weighted average remaining contractual life of 4.75 years, a weighted average
exercise price of $26.23, and a total intrinsic value of $0.2 as of December 31, 2016. In 2016, 2015, and 2014, the cash
received from stock option exercises was $4, $25, and $150 and the total tax benefit realized from these exercises was
$0, $6, and $28, respectively. The total intrinsic value of stock options exercised during 2016, 2015, and 2014 was $1,
$19, and $84, respectively.
Q. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings, after the deduction of preferred stock
dividends declared by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of
common stock for all potentially dilutive share equivalents outstanding.
The number of shares and per share amounts for all periods presented below have been updated to reflect the Reverse
Stock Split (see Note A). The information used to compute basic and diluted EPS attributable to Arconic common
shareholders was as follows (shares in millions):
2016
2015
2014
Net loss from continuing operations attributable to Arconic
Net income from continuing operations attributable to noncontrolling interests
Less: preferred stock dividends declared
Loss from continuing operations available to Arconic common shareholders
Income (loss) from discontinued operations after income taxes and noncontrolling
interests(1)
Net (loss) income available to Arconic common shareholders—basic
Add: interest expense related to convertible notes
Add: dividends related to mandatory convertible preferred stock
Net (loss) income available to Arconic common shareholders—diluted
Average shares outstanding—basic
Effect of dilutive securities:
Stock options
Stock and performance awards
Mandatory convertible preferred stock
Convertible notes
Average shares outstanding—diluted
$(1,062) $(156) $ (61)
-
21
(1)
69
-
69
(1,131)
(226)
(82)
121
165
(329)
(1,010)
(391)
247
-
-
-
-
-
-
$(1,010) $(391) $ 247
438
420
387
-
-
-
-
-
-
-
-
2
4
-
-
438
420
393
(1) Calculated from the Statement of Consolidated Operations as Income (loss) from discontinued operations after
income taxes less Net income (loss) from discontinued operations attributable to noncontrolling interests.
In 2016, basic average shares outstanding and diluted average shares outstanding were the same because the effect of
potential shares of common stock was anti-dilutive as Arconic generated a net loss. As a result, 39 million share
equivalents related to the mandatory convertible preferred stock, 14 million share equivalents related to convertible
notes, 13 million stock options, and 8 million stock awards were not included in the computation of diluted EPS. Had
Arconic generated sufficient net income in 2016, 28 million, 10 million, 4 million, and 1 million potential shares of
common stock related to the mandatory convertible preferred stock, convertible notes, stock awards, and stock options,
respectively, would have been included in diluted average shares outstanding.
In 2015, basic average shares outstanding and diluted average shares outstanding were the same because the effect of
potential shares of common stock was anti-dilutive as Arconic generated a net loss. As a result, 26 million share
equivalents related to mandatory convertible preferred stock, 7 million stock awards, 11 million stock options, and
5 million (weighted-average) share equivalents related to convertible debt (acquired from RTI – see Note F) were not
included in the computation of diluted EPS. Had Arconic generated sufficient net income in 2015, 26 million,
108
5 million, 4 million, and 1 million potential shares of common stock related to the mandatory convertible preferred
stock, convertible notes, stock awards, and stock options, respectively, would have been included in diluted average
shares outstanding.
In 2014, 6 million and 7 million share equivalents related to convertible notes and mandatory convertible preferred
stock, respectively, were not included in the computation of diluted EPS because their effect was anti-dilutive.
Options to purchase 10 million, 9 million, and 1 million shares of common stock at a weighted average exercise price
of $26.93, $38.25, and $48.72 per share were outstanding as of December 31, 2016, 2015, and 2014, respectively, but
were not included in the computation of diluted EPS because they were anti-dilutive, as the exercise prices of the
options were greater than the average market price of Arconic’s common stock.
R. Income Taxes
The components of income from continuing operations before income taxes were as follows:
United States
Foreign
The provision for income taxes consisted of the following:
Current:
Federal*
Foreign
State and local
Deferred:
Federal*
Foreign
State and local
Total
2016
2015
2014
$ 84
330
$124
59
$207
(94)
$414
$183
$113
2016
2015
2014
$
-
133
1
134
$
-
115
(1)
114
$
-
70
1
71
1,208
136
(2)
1,342
196
29
-
225
67
37
(1)
103
$1,476
$339
$174
* Includes U.S. taxes related to foreign income
The exercise of employee stock options generated a tax benefit of $0, $2 and $8 in 2016, 2015 and 2014, respectively,
representing only the difference between compensation expense recognized for financial reporting and tax purposes.
These amounts increased equity and either decreased current taxes payable or increased deferred tax assets (net
operating losses) in the respective periods.
Arconic has unamortized tax-deductible goodwill of $23 resulting from intercompany stock sales and reorganizations.
Arconic recognizes the tax benefits (at a 25% rate) associated with this tax-deductible goodwill as it is being amortized
for local income tax purposes rather than in the period in which the transaction is consummated.
109
A reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate was as follows (the effective tax rate
for all periods was a provision on income):
U.S. federal statutory rate
Taxes on foreign operations
Permanent differences on restructuring and other charges and asset disposals
Non-deductible acquisition costs
Statutory tax rate and law changes(1)
Tax holidays(2)
Tax credits
Changes in valuation allowances
Impairment of goodwill
Company-owned life insurance/split-dollar net premiums
Changes in uncertain tax positions
Other
Effective tax rate
2016
2015
2014
35.0% 35.0% 35.0%
2.5
(10.2)
3.6
(107.8)
7.1
8.4
(1.0)
(15.7)
(3.9)
(0.8)
(2.8)
(1.2)
145.8
426.8
4.8
-
(3.0)
23.0
(2.0)
2.3
(0.9)
(3.3)
(9.4)
(1.0)
7.3
78.8
38.5
(1.9)
17.3
-
(9.6)
(5.6)
4.6
356.5% 185.2% 154.0%
(1)
(2)
In November 2014, Spain enacted corporate tax reform that changed the corporate tax rate from 30% in 2014 to
28% in 2015 to 25% in 2016. As a result, Arconic remeasured certain deferred tax assets related to Spanish
subsidiaries. In December 2016, Spain and the United States enacted tax law changes which resulted in the
remeasurement of certain deferred tax liabilities recorded by Arconic.
In 2014, a tax holiday for certain former Arconic subsidiaries in Brazil became effective (see below).
The components of net deferred tax assets and liabilities were as follows:
December 31,
Depreciation
Employee benefits
Loss provisions
Tax loss carryforwards
Tax credit carryforwards
Other
Valuation allowance
2016
2015
Deferred
tax
assets
Deferred
tax
liabilities
Deferred
tax
assets
Deferred
tax
liabilities
$
15
1,382
181
1,540
652
184
3,954
(1,940)
$ 2,014
$817
8
1
-
-
93
919
-
$919
$
8
1,521
172
926
673
311
3,611
(1,291)
$ 964
11
2
-
-
31
1,008
-
$ 2,320
$1,008
The following table details the expiration periods of the deferred tax assets presented above:
December 31, 2016
Tax loss carryforwards
Tax credit carryforwards
Other
Valuation allowance
Expires
within
10 years
Expires
within
11-20 years
$ 81
428
-
(465)
$ 44
$ 744
89
-
(663)
$ 170
No
expiration* Other*
Total
$ 715
100
72
(677)
$ 210
$
-
35
1,690
(135)
$ 1,540
652
1,762
(1,940)
$1,590
$ 2,014
* Deferred tax assets with no expiration may still have annual limitations on utilization. Other represents deferred tax
assets whose expiration is dependent upon the reversal of the underlying temporary difference. A substantial amount
110
of Other relates to employee benefits that will become deductible for tax purposes over an extended period of time as
contributions are made to employee benefit plans and payments are made to retirees.
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive
of reversing temporary differences (59%) and taxable temporary differences that reverse within the carryforward
period (41%).
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) 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.
111
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 historic 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
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.
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 assets 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).
The following table details the changes in the valuation allowance:
December 31,
Balance at beginning of year
Increase to allowance
Release of allowance
Acquisitions and divestitures (F)
Tax apportionment, tax rate and tax law changes
Foreign currency translation
Balance at end of year
2016
2015
2014
$1,291
772
(209)
(1)
106
(19)
$1,151
180
(42)
29
(15)
(12)
$1,252
102
(70)
(36)
(67)
(30)
$1,940
$1,291
$1,151
The cumulative amount of Arconic’s foreign undistributed net earnings for which no deferred taxes have been provided
was approximately $450 at December 31, 2016. Arconic has a number of commitments and obligations related to the
Company’s growth strategy in foreign jurisdictions. As such, management has no plans to distribute such earnings in
the foreseeable future, and, therefore, has determined it is not practicable to determine the related deferred tax liability.
112
Arconic and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign
jurisdictions. With a few minor exceptions, Arconic is no longer subject to income tax examinations by tax authorities
for years prior to 2006. All U.S. tax years prior to 2016 have been audited by the Internal Revenue Service. Various
state and foreign jurisdiction tax authorities are in the process of examining Arconic’s income tax returns for various
tax years through 2015.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties)
was as follows:
December 31,
Balance at beginning of year
Additions for tax positions of the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements with tax authorities
Expiration of the statute of limitations
Foreign currency translation
Balance at end of year
2016
2015
2014
$18
12
-
-
(1)
(1)
-
$28
$ 7
-
14
(2)
-
(1)
-
$18
$ 8
-
4
(3)
(1)
-
(1)
$ 7
For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented
before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the
annual effective tax rate for 2016, 2015, and 2014 would be approximately 6%, 7%, and 4%, respectively, of pretax
book income. Arconic does not anticipate that changes in its unrecognized tax benefits will have a material impact on
the Statement of Consolidated Operations during 2017 (see Tax in Note L for a matter for which no reserve has been
recognized).
It is Arconic’s policy to recognize interest and penalties related to income taxes as a component of the Provision for
income taxes on the accompanying Statement of Consolidated Operations. In 2016, 2015, and 2014, Arconic did not
recognize any interest or penalties. Due to the expiration of the statute of limitations, settlements with tax authorities,
and refunded overpayments, Arconic recognized interest income of $1 in 2015 but did not recognize any interest
income in 2016 or 2014. As of December 31, 2016 and 2015, the amount accrued for the payment of interest and
penalties was $2 and $1, respectively.
S. Receivables
Sale of Receivables Programs
Arconic has an arrangement with three financial institutions to sell certain customer receivables without recourse on a
revolving basis. The sale of such receivables is completed through the use of a bankruptcy remote special purpose
entity, which is a consolidated subsidiary of Arconic. This arrangement provides for minimum funding of $200 up to a
maximum of $400 for receivables sold. On March 30, 2012, Arconic initially sold $304 of customer receivables in
exchange for $50 in cash and $254 of deferred purchase price under this arrangement. Arconic has received additional
net cash funding of $300 for receivables sold ($1,758 in draws and $1,458 in repayments) since the program’s
inception, including $100 ($500 in draws and $400 in repayments) in 2016. No draws or repayments occurred in 2015.
As of December 31, 2016 and 2015, the deferred purchase price receivable was $83 and $249, respectively, which was
included in Other receivables on the accompanying Consolidated Balance Sheet. The deferred purchase price
receivable is reduced as collections of the underlying receivables occur; however, as this is a revolving program, the
sale of new receivables will result in an increase in the deferred purchase price receivable. The net change in the
deferred purchase price receivable was reflected in the (Increase) decrease in receivables line item on the
accompanying Statement of Consolidated Cash Flows. This activity is reflected as an operating cash flow because the
related customer receivables are the result of an operating activity with an insignificant, short-term interest rate risk.
113
In 2016 and 2015, the gross cash outflows and inflows associated with the deferred purchase price receivable were
$5,340 and $5,406, respectively, and $6,893 and $7,001, respectively. The gross amount of receivables sold and total
cash collected under this program since its inception was $29,938 and $29,505 respectively. Arconic services the
customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.
Allowance for Doubtful Accounts
The following table details the changes in the allowance for doubtful accounts related to customer receivables and
other receivables:
December 31,
Balance at beginning of year
Provision for doubtful accounts
Write off of uncollectible accounts
Recoveries of prior write-offs
Other
Balance at end of year
T. Interest Cost Components
Amount charged to expense
Amount capitalized
Customer receivables Other receivables
2015 2014
2016
2016
2014
2015
$ 8
7
(3)
(1)
2
$13
$ 6
4
(2)
-
-
$ 8
$ 8
4
(3)
(2)
(1)
$ 6
$34
6
(1)
1
(8)
$32
$24
8
2
(1)
1
$34
$28
8
(4)
(7)
(1)
$24
2016
2015
2014
$499
32
$531
$473
27
$500
$442
22
$464
U. Pension and Other Postretirement Benefits
Arconic maintains pension plans covering most U.S. employees and certain employees in foreign locations. Pension
benefits generally depend on length of service, job grade, and remuneration. Substantially all benefits are paid through
pension trusts that are sufficiently funded to ensure that all plans can pay benefits to retirees as they become due. Most
salaried and non-bargaining hourly U.S. employees hired after March 1, 2006 participate in a defined contribution plan
instead of a defined benefit plan.
Arconic also maintains health care and life insurance postretirement benefit plans covering eligible U.S. retired
employees and certain retirees from foreign locations. Generally, the medical plans are unfunded and pay a percentage
of medical expenses, reduced by deductibles and other coverage. Life benefits are generally provided by insurance
contracts. Arconic retains the right, subject to existing agreements, to change or eliminate these benefits. All salaried
and certain non-bargaining hourly U.S. employees hired after January 1, 2002 and certain bargaining hourly U.S.
employees hired after July 1, 2010 are not eligible for postretirement health care benefits. All salaried and certain
hourly U.S. employees that retire on or after April 1, 2008 are not eligible for postretirement life insurance benefits.
Effective January 1, 2015, Arconic no longer offers postretirement health care benefits to Medicare-eligible, primarily
non-bargaining, U.S. retirees through Company-sponsored plans. Qualifying retirees (hired prior to January 1, 2002),
both current and future, may access these benefits in the marketplace by purchasing coverage directly from insurance
carriers. This change resulted in the adoption of a significant plan amendment by certain Arconic U.S. postretirement
benefit plans in August 2014. Accordingly, these plans were required to be remeasured.
Effective August 1, 2016, in preparation for the Separation Transaction, certain U.S. pension and postretirement benefit
plans were separated, requiring a remeasurement as of that date. Additionally, one pension plan was required to be
remeasured as a result of settlement accounting. Together, these remeasurements resulted in an increase of $845 to
Arconic’s pension liability and an increase of $551 (net of tax) to the plans’ unrecognized net actuarial loss (included
in Accumulated other comprehensive loss).
114
The funded status of all of Arconic’s pension and other postretirement benefit plans are measured as of December 31
each calendar year.
Obligations and Funded Status
December 31,
Change in benefit obligation(1)
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Actuarial (gains) losses
Acquisitions (F)
Transfer to Alcoa Corporation
Settlements
Curtailments
Benefits paid, net of participants’ contributions
Medicare Part D subsidy receipts
Foreign currency translation impact
Benefit obligation at end of year(2)
Change in plan assets(1)
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Participants’ contributions
Benefits paid
Administrative expenses
Acquisitions (F)
Transfer to Alcoa Corporation
Settlements
Foreign currency translation impact
Fair value of plan assets at end of year(2)
Funded status*
Less: Amounts attributed to joint venture partners
Net funded status
Amounts recognized in the Consolidated Balance Sheet consist of:
Noncurrent assets
Noncurrent assets of discontinued operations
Current liabilities
Current liabilities of discontinued operations
Noncurrent liabilities
Noncurrent liabilities of discontinued operations
Net amount recognized
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
Net actuarial loss
Prior service cost (benefit)
Total, before tax effect
Less: Amounts attributed to joint venture partners
Net amount recognized, before tax effect
Other Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Loss consist of:
Net actuarial loss
Amortization of accumulated net actuarial loss
Prior service (benefit) cost
Amortization of prior service (cost) benefit
Total, before tax effect
Less: Amounts attributed to joint venture partners
Net amount recognized, before tax effect
115
Pension benefits
2015
2016
Other
postretirement benefits
2016
2015
$14,247
165
435
2
770
-
(7,577)
(82)
-
(794)
-
(140)
$ 7,026
$15,019
187
583
18
(222)
188
-
(72)
(12)
(1,033)
-
(409)
$14,247
$11,717
$10,928
24
89
479
296
21
16
(1,015)
(762)
(55)
(65)
164
-
-
(5,610)
(72)
(82)
(335)
(144)
$ 4,666
$10,928
$ (2,360) $ (3,319)
30
$ (2,360) $ (3,289)
-
$
$
6
-
(21)
-
(2,345)
-
9
35
(23)
(12)
(1,925)
(1,373)
$ (2,360) $ (3,289)
$ 2,979
15
2,994
-
$ 2,994
$ 5,351
70
5,421
38
$ 5,383
$ (1,992) $
(380)
(42)
(13)
(2,427)
(38)
$ (2,389) $
440
(468)
(7)
(25)
(60)
(5)
(55)
$ 2,319
13
63
-
112
-
(1,340)
-
-
(197)
9
1
980
$
$
-
-
-
-
-
-
-
-
-
-
$
-
$ (980)
-
$ (980)
$
-
-
(91)
-
(889)
-
$ (980)
$
$
150
(45)
105
-
105
$ (224)
(24)
37
24
(187)
-
$ (187)
$ 2,368
14
92
-
26
48
-
-
(6)
(235)
15
(3)
$ 2,319
$
-
-
-
-
-
-
-
-
-
-
$
-
$(2,319)
-
$(2,319)
$
-
-
(93)
(120)
(917)
(1,189)
$(2,319)
$
$
$
$
398
(106)
292
-
292
23
(17)
1
37
44
-
44
(1)
The roll forward of the benefit obligation and the roll forward of plan assets have not been restated for discontinued
operations for 2015 as it is impractical to do so.
(2) At December 31, 2016, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were
$5,707, $3,495, and $(2,212), respectively. At December 31, 2015, the benefit obligation, fair value of plan assets, and
funded status for U.S. pension plans were $10,983, $8,077, and $(2,906), respectively.
Pension Plan Benefit Obligations
Pension benefits
2016
2015
$7,026
6,850
$14,247
13,832
6,995
4,629
14,146
10,786
6,104
3,894
12,510
9,512
The projected benefit obligation and accumulated benefit obligation for all defined benefit pension
plans was as follows:
Projected benefit obligation
Accumulated benefit obligation
The aggregate projected benefit obligation and fair value of plan assets for pension plans with
projected benefit obligations in excess of plan assets was as follows:
Projected benefit obligation
Fair value of plan assets
The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with
accumulated benefit obligations in excess of plan assets was as follows:
Accumulated benefit obligation
Fair value of plan assets
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Amortization of prior service cost (benefit)
Settlements(3)
Curtailments(4)
Special termination benefits(5)
Net periodic benefit cost(6)
Discontinued operations
Pension benefits(1)
2014
2015
2016
$ 166
$ 175
$ 155
630
577
431
(782)
(753)
(677)
391
468
380
18
16
13
26
16
19
-
-
9
-
16
2
$ 449
$ 524
$ 323
215
248
122
Other postretirement benefits(2)
2015
$ 14
92
-
17
(37)
-
(4)
-
$ 82
43
2014
$ 15
114
-
13
(25)
-
-
-
$117
68
2016
$ 13
63
-
24
(24)
-
-
-
$ 76
41
Net amount recognized in Statement of Consolidated
Operations
$ 201
$ 276
$ 234
$ 35
$ 39
$ 49
Note: the footnotes below include components of Net Periodic Benefit Cost related to Alcoa Corporation through the
completion of the Separation Transaction.
(1)
(2)
(3)
(4)
(5)
In 2016, 2015, and 2014, net periodic benefit cost for U.S pension plans was $261, $423, and $335, respectively.
In 2016, 2015, and 2014, net periodic benefit cost for other postretirement benefits reflects a reduction of $22,
$34, and $38, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.
In 2016, settlements were due to workforce reductions (see Note D) and the payment of lump sum benefits and/or
purchases of annuity contracts. In 2015, settlements were due to workforce reductions (see Note D) and the
payment of lump sum benefits and/or purchases of annuity contracts. In 2014, settlements were due to workforce
reductions (see Note D).
In 2015, curtailments were due to elimination of benefits or workforce reductions (see Note D).
In 2016 and 2015, special termination benefits were due to workforce reductions (see Note D).
(6) Amounts attributed to joint venture partners are not included.
116
Amounts Expected to be Recognized in Net Periodic Benefit Cost
Net actuarial loss recognition
Prior service cost (benefit) recognition
Assumptions
Pension benefits Other postretirement benefits
2017
216
5
2017
8
(8)
Weighted average assumptions used to determine benefit obligations for U.S. pension and other postretirement benefit
plans were as follows (assumptions for non-U.S plans did not differ materially):
December 31,
Discount rate
Rate of compensation increase
2016
2015
4.20% 4.29%
3.5
3.5
The discount rate 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.
The rate of compensation increase is based upon actual experience. For 2017, the rate of compensation increase will be
3.5%, which approximates the five-year average.
Weighted average assumptions used to determine net periodic benefit cost for U.S. pension and other postretirement
benefit plans were as follows (assumptions for non-U.S plans did not differ materially):
Discount rate*
Expected long-term rate of return on plan assets
Rate of compensation increase
2016
2015
2014
4.29% 4.00% 4.80%
7.75
7.75
3.50
3.50
8.00
3.50
* In all periods presented, the respective discount rates were used to determine net periodic benefit cost for most U.S.
pension plans for the full annual period. However, the discount rates for a limited number of plans were updated
during 2016, 2015, and 2014 to reflect the remeasurement of these plans due to new union labor agreements,
settlements, and/or curtailments. The updated discount rates used were not significantly different from the discount
rates presented.
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 costs is determined in 2016 and beyond. Previously, the interest component was determined by
multiplying the single equivalent rate and the aggregate discounted cash flows of the plans’ projected benefit
obligations. Under the new methodology, the interest cost component is 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 $84 for pension plans and $14 for other postretirement
benefit plans. 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.
117
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.
For 2016, 2015, and 2014, the expected long-term rate of return used by management 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.
Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (assumptions for non-
U.S plans did not differ materially):
Health care cost trend rate assumed for next year
Rate to which the cost trend rate gradually declines
Year that the rate reaches the rate at which it is assumed to remain
2016
2015
2014
5.5% 5.5% 5.5%
4.5% 4.5% 4.5%
2020
2019
2018
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by
Arconic’s other postretirement benefit plans. For 2017, a 5.5% trend rate will be used, reflecting management’s best
estimate of the change in future health care costs covered by the plans. The plans’ actual annual health care cost trend
experience over the past three years has ranged from 3.6%. to 9.6% Management does not believe this three-year range
is indicative of expected increases for future health care costs over the long-term.
Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage
point change in these assumed rates would have the following effects:
Effect on other postretirement benefit obligations
Effect on total of service and interest cost components
Plan Assets
1%
increase
1%
decrease
$44
4
$(40)
(3)
Arconic’s pension plans’ investment policy and weighted average asset allocations at December 31, 2016 and 2015, by
asset class, were as follows:
Asset class
Equities
Fixed income
Other investments
Total
118
Policy range
20–55%
25–55%
15–35%
Plan assets
at
December 31,
2015
2016
30% 30%
42
28
43
27
100% 100%
The principal objectives underlying the investment of the pension plans’ assets are to ensure that Arconic can properly
fund benefit obligations as they become due under a broad range of potential economic and financial scenarios,
maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly
diversify investments across and within various asset classes to protect asset values against adverse movements.
Specific objectives for long-term investment strategy include reducing the volatility of pension assets relative to
pension liabilities and achieving risk factor diversification across the balance of the asset portfolio. The use of
derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives.
The investment strategy has used long duration cash bonds and derivative instruments to offset a portion of the interest
rate sensitivity of U.S. pension liabilities. Exposure to broad equity risk has been decreased and diversified through
investments in discretionary and systematic macro hedge funds, long/short equity hedge funds, and global and
emerging market equities. Investments are further diversified by strategy, asset class, geography, and sector to enhance
returns and mitigate downside risk. A large number of external investment managers are used to gain broad exposure to
the financial markets and to mitigate manager-concentration risk.
Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA)
and other applicable laws and regulations.
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension
plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally
classified (see Note V for the definition of fair value and a description of the fair value hierarchy).
Equities. These securities consist of: (i) direct investments in the stock of publicly traded U.S. and non-U.S. companies
and are valued based on the closing price reported in an active market on which the individual securities are traded
(generally classified in Level 1); (ii) the plans’ share of commingled funds that are invested in the stock of publicly
traded companies and are valued at the net asset value of shares held at December 31 (included in Level 1); and
(iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital
partnerships) and are valued by investment managers based on the most recent financial information available, which
typically represents significant unobservable data.
Fixed income. These securities consist of: (i) U.S. government debt and are generally valued using quoted prices
(included in Level 1); (ii) publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds and
debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted
prices and other observable market data (included in Level 2); (iii) cash and cash equivalents; and (iv) interest rate
swaps and are generally valued using industry standard models with market-based observable inputs.
Other investments. These investments include, among others: (i) exchange traded funds, such as gold, and real estate
investment trusts and are valued based on the closing price reported in an active market on which the investments are
traded (included in Level 1) and (ii) direct investments of discretionary and systematic macro hedge funds and private
real estate (includes limited partnerships) and are valued by investment managers based on the most recent financial
information available, which typically represents significant unobservable data.
The fair value methods described above may not be indicative of net realizable value or reflective of future fair values.
Additionally, while Arconic believes the valuation methods used by the plans’ trustees are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value measurement at the reporting date.
119
The following table presents the fair value of pension plan assets classified under the appropriate level of the fair value
hierarchy:
December 31, 2016
Equities:
Equity securities
Fixed income:
Intermediate and long duration government/credit
Other
Other investments:
Real estate
Other
Net plan assets subject to leveling
Plan assets measured at net asset value:
Equity securities
Long/short equity hedge funds
Private equity
Fixed income
Real estate
Discretionary and systematic macro hedge funds
Other investments
Total plan assets measured at net asset value
Net plan assets*
December 31, 2015
Equities
Equity securities
Fixed income:
Intermediate and long duration government/credit
Other
Other investments:
Real estate
Other
Net plan assets subject to leveling
Plan assets measured at net asset value:
Equity securities
Long/short equity hedge funds
Private equity
Fixed income
Real estate
Discretionary and systematic macro hedge funds
Other investments
Total plan assets measured at net asset value
Net plan assets**
120
Level 1 Level 2
Total
$ 393
$
-
$
393
$
23
1,060
$1,083
$
81
65
$ 146
$1,622
$ 95
51
$146
$
-
-
-
$
$146
$
118
1,111
$ 1,229
$
81
65
146
$
$ 1,768
$
431
406
165
729
185
784
178
$ 2,878
$ 4,646
Level 1 Level 2
Total
$ 826
$
-
$
826
$2,496
-
$2,496
$ 158
126
$ 284
$3,606
$487
307
$794
$
-
-
-
$
$794
$ 2,983
307
$ 3,290
$
158
126
284
$
$ 4,400
$ 1,099
932
466
1,413
578
1,671
367
$ 6,526
$10,926
* As of December 31, 2016, the total fair value of pension plans’ assets excludes a net receivable of $20, which
represents assets due from the Alcoa Corporation as a result of plan separations and securities sold not yet settled
plus interest and dividends earned on various investments.
**As of December 31, 2015, the total fair value of pension plans’ assets excludes a net receivable of $2 which
represents securities sold not yet settled plus interest and dividends earned on various investments.
Funding and Cash Flows
It is Arconic’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in
applicable country benefits laws and tax laws, including 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 for U.S. plans. From time to time, Arconic
contributes additional amounts as deemed appropriate. In 2016 and 2015, cash contributions to Arconic’s pension plans
were $290 and $470. The minimum required contribution to pension plans in 2017 is estimated to be $310, of which
$290 is for U.S. plans.
During the third quarter of 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate
the Alcoa Inc. pension plans between Arconic and Alcoa Corporation in connection with the Separation Transaction.
The plan stipulates that Arconic will make cash contributions totaling $150 over a period of 30 months to its two
largest pension plans. The payments are expected to be made in increments no less than $50 each over the 30-month
period, with the first payment due no later than six months after the separation date of November 1, 2016.
Benefit payments expected to be paid to pension and other postretirement benefit plans’ participants and expected
Medicare Part D subsidy receipts are as follows utilizing the current assumptions outlined above:
Year ended December 31,
2017
2018
2019
2020
2021
2022 through 2026
Defined Contribution Plans
Pension
benefits
$ 420
425
425
430
435
2,195
$4,330
Gross Other post-
retirement
benefits
Medicare Part D
subsidy receipts
Net Other post-
retirement
benefits
$ 95
95
95
95
95
415
$890
$ 5
5
5
5
5
35
$60
$ 90
90
90
90
90
380
$830
Arconic sponsors savings and investment plans in various countries, primarily in the United States. Expenses related to
these plans were $71 in 2016, $83 in 2015, and $83 in 2014. In the United States, employees may contribute a portion
of their compensation to the plans, and Arconic matches a portion of these contributions in equivalent form of the
investments elected by the employee.
V. Other Financial Instruments
Fair Value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes
between (i) market participant assumptions developed based on market data obtained from independent sources
(observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the
best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad
levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
121
(Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are
described below:
• Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
• Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted
prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally
from or corroborated by observable market data by correlation or other means.
• Level 3—Inputs that are both significant to the fair value measurement and unobservable.
The carrying values and fair values of Arconic’s financial instruments were as follows:
December 31,
Cash and cash equivalents
Restricted cash
Derivatives – current asset
Noncurrent receivables
Derivatives – noncurrent asset
Available-for-sale securities
Investment in common stock of Alcoa Corporation
Short-term borrowings
Derivatives – current liability
Commercial paper
Long-term debt due within one year
Derivatives – noncurrent liability
Contingent payment related to an acquisition
Long-term debt, less amount due within one year
2016
Carrying
value
$1,863
15
14
21
10
102
1,020
36
5
-
4
3
78
8,044
2015
Carrying
value
$1,362
37
67
17
31
193
-
38
49
-
3
19
130
8,786
Fair
value
$1,362
37
67
17
31
193
-
38
49
-
3
19
130
8,714
Fair
value
$1,863
15
14
21
10
102
1,020
36
5
-
4
3
78
8,519
The following methods were used to estimate the fair values of financial instruments:
Cash and cash equivalents, Restricted cash, Short-term borrowings, and Commercial paper. The carrying
amounts approximate fair value because of the short maturity of the instruments. The fair value amounts for Cash and
cash equivalents, Restricted cash, and Commercial paper were classified in Level 1, and Short-term borrowings were
classified in Level 2.
Derivatives. The fair value of derivative contracts classified as Level 1 was based on identical unrestricted assets and
liabilities. The fair value of derivative contracts classified as Level 2 was based on inputs other than quoted prices that
are observable for the asset or liability (e.g. interest rates).
Noncurrent receivables. The fair value of noncurrent receivables was based on anticipated cash flows, which
approximates carrying value, and was classified in Level 2 of the fair value hierarchy.
Available-for-sale securities. The fair value of such securities was based on quoted market prices. These financial
instruments consist of exchange-traded fixed income and equity securities, which are carried at fair value and were
classified in Level 1 of the fair value hierarchy.
122
Investment in common stock of Alcoa Corporation (see Note C). The fair value was based on the closing stock price
of Alcoa Corporation on the New York Stock Exchange at December 31, 2016 multiplied by the number of shares of
Alcoa Corporation stock owned by Arconic as of December 31, 2016. This investment was classified in Level 1 of the
fair value hierarchy.
Contingent payment related to an acquisition (see Note F). The fair value was based on the net present value of
expected future cash flows and was classified in Level 3 of the fair value hierarchy.
Long-term debt due within one year and Long-term debt, less amount due within one year. The fair value was
based on quoted market prices for public debt and on interest rates that are currently available to Arconic for issuance
of debt with similar terms and maturities for non-public debt. The fair value amounts for all Long-term debt were
classified in Level 2 of the fair value hierarchy.
W. 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 on 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, 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.
X. Subsequent Events
Management evaluated all activity of Arconic and concluded that no subsequent events have occurred that would
require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial
Statements, except as noted below:
On February 14, 2017, Arconic sold 23,353,000 of its shares of Alcoa Corporation common stock at $38.03 per share
which resulted in $888 in cash proceeds and a pre-tax gain of approximately $350 to be recorded in Other income in
the first quarter of 2017.
123
Supplemental Financial Information (unaudited)
Quarterly Data
(in millions, except per-share amounts)
2016
Sales
Net income (loss) attributable to Arconic
Earnings per share attributable to Arconic common
shareholders(1)(2):
Basic
Continuing operations
Discontinued operations
Net income (loss) per share—basic
Diluted
Continuing operations
Discontinued operations
Net income (loss) per share—diluted
2015
Sales
Net income (loss) attributable to Arconic
Earnings per share attributable to Arconic common
shareholders(1)(2):
Basic
Continuing operations
Discontinued operations
Net income (loss) per share—basic
Diluted
Continuing operations
Discontinued operations
Net income (loss) per share—basic
First
Second Third Fourth(3)
Year
$3,055
16
$
$3,234
$ 135
$3,138
$ 166
$ 2,967
$(1,258)
$12,394
$ (941)
$ 0.21
(0.21)
$ 0.08
0.19
$ 0.11
0.23
$ (2.98)
0.07
$ (2.58)
0.27
$ 0.00
$ 0.27
$ 0.34
$ (2.91)
$ (2.31)
$ 0.21
(0.21)
$ 0.08
0.19
$ 0.11
0.22
$ (2.98)
0.07
$ (2.58)
0.27
$ 0.00
$ 0.27
$ 0.33
$ (2.91)
$ (2.31)
$3,091
$ 195
$3,204
$ 140
$3,127
44
$
$ 2,991
$ (701)
$12,413
$ (322)
$ (0.31) $ 0.21
0.09
0.75
$ 0.05
0.01
$ (0.48)
(1.16)
$ (0.54)
(0.39)
$ 0.44
$ 0.30
$ 0.06
$ (1.64)
$ (0.93)
$ (0.31) $ 0.21
0.09
0.74
$ 0.05
0.01
$ (0.48)
(1.16)
$ (0.54)
(0.39)
$ 0.43
$ 0.30
$ 0.06
$ (1.64)
$ (0.93)
(1)
(2)
(3)
Per share amounts are calculated independently for each period presented; therefore, the sum of the quarterly per
share amounts may not equal the per share amounts for the year.
Per share amounts for all periods presented have been updated to reflect the Reverse Stock Split (see Note A).
In the fourth quarter of 2016, as a result of the Separation Transaction, Arconic recorded a charge of $1,267 for
valuation allowances on certain deferred tax assets. In the fourth quarter of 2015, operations related to Alcoa
Corporation, which were recorded in discontinued operations, recorded a loss of $508 primarily relating to
restructuring and other charges of $685.
124
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Arconic’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the
period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting is included in Part II, Item 8 of this Form 10-K
beginning on page 65.
(c) Attestation Report of the Registered Public Accounting Firm
The effectiveness of Arconic’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 in Part II, Item 8 of this Form 10-K on page 66.
(d) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of 2016, that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Item 9B. Other Information.
In connection with the Separation, Arconic’s Board of Directors conducted a special review of the Company’s
compensation arrangements, and on January 13, 2017, it approved amendments to the Company’s Change in Control
Severance Plan (the “CIC Plan”) which took effect on February 27, 2017. Certain senior executives of the Company,
including Klaus Kleinfeld, the Chief Executive Officer, and Ken Giacobbe, the Chief Financial Officer, participate in
the CIC Plan. Prior to the amendments, Mr. Kleinfeld was the sole participant in the CIC Plan who retained two
grandfathered benefits under the plan – eligibility for a golden parachute excise tax reimbursement, and the right to
resign for any reason during a window of thirty days beginning six months following a change in control and receive
severance benefits – which were previously eliminated from the CIC Plan for new participants who became eligible on
or after January 1, 2010. The amendments to the CIC Plan eliminated both of these grandfathered benefits for Mr.
Kleinfeld. In addition, the amendments reduced the level of severance benefits for participants in the CIC Plan below
the level of Chief Executive Officer. Consequently, the severance benefits for which Mr. Giacobbe is potentially
eligible under the amended CIC Plan are (i) a cash payment equal to two times annual salary plus target annual cash
incentive compensation (reduced from three times), (ii) continuation of health care benefits for two years (reduced
from three years), (iii) two additional years of pension credit calculated as described in the CIC Plan (reduced from
three years), and (iv) six months of outplacement benefits (there was no change to this benefit).
Arconic’s Board of Directors also approved, on January 13, 2017, the Arconic Inc. Executive Severance Plan (the
“Severance Plan”), which took effect on February 27, 2017. The Severance Plan covers the same executives who are
eligible to participate in the CIC Plan, other than any such executive who is party to an individual agreement providing
for severance benefits. Mr. Kleinfeld is party to an individual agreement, dated December 8, 2008, with the Company
providing for severance benefits on an involuntary termination of employment that are substantially similar to those
125
provided under the Severance Plan, which are described below. Mr. Kleinfeld has waived the severance benefits under
such individual agreement pursuant to a letter agreement dated February 27, 2017 (the “Letter Agreement”) and is
therefore eligible to participate in the Severance Plan. The Severance Plan provides for severance benefits upon a
termination of a participant’s employment without cause or resignation by a participant for good reason (unless the
participant receives severance benefits under the CIC Plan), subject to execution and non-revocation of a general
release of legal claims against the Company. The severance benefits under the Severance Plan for Messrs. Kleinfeld
and Giacobbe are: (i) a cash severance payment equal to two times, for Mr. Kleinfeld, and one times, for Mr. Giacobbe,
the sum of base salary and target annual cash incentive, (ii) continued health care benefits for a two-year period, and
(iii) two additional years of pension accrual calculated as described in the Severance Plan.
The foregoing descriptions of the amendments to the CIC Plan, the Severance Plan and the Letter Agreement do not
purport to be complete and are qualified in their entirety by reference to the full text of the applicable documents filed
as exhibits 10(x), 10(aa) and 10(y)(1), respectively, to this Form 10-K.
On February 23, 2017, Arconic’s Board of Directors approved and adopted amended and restated by-laws (the
“Amended By-laws”) in order to provide eligible shareholders with a “proxy access” mechanism for nominating
director candidates, subject to the terms and conditions set forth therein. The proxy access provision allows eligible
shareholders or groups of up to 20 shareholders, who have maintained continuous qualifying ownership of at least 3%
of the Company’s outstanding common stock for at least three years and have complied with the other requirements set
forth in the Amended By-laws, to include director nominees for up to the greater of two candidates or 20% of the
Board in the Company’s proxy materials for an annual meeting of shareholders. The amendments also include certain
conforming and ministerial changes to certain advance notice provisions of the Amended By-laws.
In addition, the Amended By-laws provide that meetings of shareholders may be held by means of the Internet or other
electronic communications technology in the manner provided by Pennsylvania law.
The Amended By-laws became effective immediately upon approval and adoption by the Board. The proxy access
provision will be first available to shareholders in connection with the Company’s 2018 Annual Meeting of
Shareholders.
The foregoing description of the Amended By-laws does not purport to be complete and is qualified in its entirety by
reference to the full text of the Amended By-laws filed as exhibit 3(b) to this Form 10-K.
126
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by Item 401 of Regulation S-K regarding directors is contained under the caption “Item 1 Election
of Directors” of the Proxy Statement and is incorporated by reference. The information required by Item 401 of Regulation
S-K regarding executive officers is set forth in Part I, Item 1 of this report under “Executive Officers of the Registrant”.
The information required by Item 405 of Regulation S-K is contained under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance” of the Proxy Statement and is incorporated by reference.
The Company’s Code of Ethics for the CEO, CFO and Other Financial Professionals is publicly available on the Company’s
Internet website at http://www.arconic.com under the section “Investors—Corporate Governance.” The remaining
information required by Item 406 of Regulation S-K is contained under the captions “Corporate Governance” and “Corporate
Governance—Business Conduct Policies and Code of Ethics” of the Proxy Statement and is incorporated by reference.
The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is included under the captions “Item
1 Election of Directors—Nominating Board Candidates—Procedures and Director Qualifications” and “Corporate
Governance—Committees of the Board—Audit Committee” of the Proxy Statement and is incorporated by reference.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K is contained under the captions “Director Compensation”,
“Executive Compensation” and “Corporate Governance—Recovery of Incentive Compensation” of the Proxy
Statement. Such information is incorporated by reference.
The information required by Items 407(e)(4) and (e)(5) of Regulation S-K is contained under the captions “Corporate
Governance—Compensation Committee Interlocks and Insider Participation” and “Item 3 Advisory Approval of
Executive Compensation—Compensation Committee Report” of the Proxy Statement. Such information (other than the
Compensation Committee Report, which shall not be deemed to be “filed”) is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table gives information about Arconic’s common stock that could be issued under the company’s equity
compensation plans as of December 31, 2016.
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
20,911,6051
0
20,911,6051
$24.14
0
$24.14
25,952,6732
0
25,952,6732
Plan Category
Equity compensation plans approved
by security holders1 . . . . . . . . . . . .
Equity compensation plans not
approved by security holders . . . . .
Total
1
Includes the 2013 Arconic Stock Incentive Plan (approved by shareholders in May 2013) (2013 ASIP) and 2009 Alcoa
Stock Incentive Plan (approved by shareholders in May 2009) (2009 ASIP). Also includes 438,157 stock options and
96,223 restricted share units resulting from the merger conversion of RTI Metals employee equity. Table amounts are
comprised of the following:
•
•
12,787,786 stock options
567,551 performance options
127
•
•
5,236,870 restricted share units
2,319,398 performance share awards (1,399,565 granted in 2016 at target)
2
The 2013 ASIP authorizes, in addition to stock options, other types of stock-based awards in the form of stock
appreciation rights, restricted shares, restricted share units, performance awards and other awards. The shares that remain
available for issuance under the 2013 ASIP may be issued in connection with any one of these awards. Up to 46,666,667
shares may be issued under the plan. Any award other than an option or a stock appreciation right shall count as 2.33
shares. Options and stock appreciation rights shall be counted as one share for each option or stock appreciation right. In
addition, the 2013 ASIP provides the following are available to grant under the 2013 ASIP: (i) shares that are issued
under the 2013 ASIP, which are subsequently forfeited, cancelled or expire in accordance with the terms of the award
and (ii) shares that had previously been issued under prior plans that are outstanding as of the date of the 2013 ASIP
which are subsequently forfeited, cancelled or expire in accordance with the terms of the award.
The information required by Item 403 of Regulation S-K is contained under the captions “Arconic Stock Ownership—
Stock Ownership of Certain Beneficial Owners” and “— Stock Ownership of Directors and Executive Officers” of the
Proxy Statement and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 404 of Regulation S-K is contained under the captions “Executive Compensation”
(excluding the information under the caption “Compensation Committee Report”) and “Corporate Governance—
Related Person Transactions” of the Proxy Statement and is incorporated by reference.
The information required by Item 407(a) of Regulation S-K regarding director independence is contained under the
captions “Item 1 Election of Directors” and “Corporate Governance” of the Proxy Statement and is incorporated by
reference.
Item 14. Principal Accounting Fees and Services.
The information required by Item 9(e) of Schedule 14A is contained under the captions “Item 2 Ratification of
Appointment of Independent Registered Public Accounting Firm—Report of the Audit Committee” and “— Audit and
Non-Audit Fees” of the Proxy Statement and in Attachment A (Pre-Approval Policies and Procedures for Audit and
Non-Audit Services) thereto and is incorporated by reference.
128
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a) The consolidated financial statements and exhibits listed below are filed as part of this report.
Independent Registered Public Accounting Firm are on pages 65 through 124 of this report.
(1) The Company’s consolidated financial statements, the notes thereto and the report of the
or the required information is included in the consolidated financial statements or notes thereto.
(2) Financial statement schedules have been omitted because they are not applicable, not required,
Exhibit
Number
2(a).
2(b).
2(c).
2(d).
2(e).
(3) Exhibits.
Description*
Share Purchase Agreement, dated as of June 25, 2014, by and among Alcoa Inc., Alcoa IH Limited, FR
Acquisition Corporation (US), Inc., FR Acquisitions Corporation (Europe) Limited, FR Acquisition
Finance Subco (Luxembourg), S.à.r.l. and Oak Hill Capital Partners III, L.P. and Oak Hill Capital
Management Partners III, L.P., collectively in their capacity as the Seller Representative, incorporated
by reference to exhibit 2.1 to the Company’s Current Report on Form 8-K (Commission file number
1-3610) dated June 26, 2014.
Separation and Distribution Agreement, dated as of October 31, 2016, by and between Arconic Inc.
and Alcoa Corporation, incorporated by reference to exhibit 2.1 to the Company’s Current Report on
Form 8-K (Commission file number 1-3610) dated November 4, 2016.
Transition Services Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa
Corporation, incorporated by reference to exhibit 2.2 to the Company’s Current Report on Form 8-K
(Commission file number 1-3610) dated November 4, 2016.
Tax Matters Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa
Corporation, incorporated by reference to exhibit 2.3 to the Company’s Current Report on Form 8-K
(Commission file number 1-3610) dated November 4, 2016.
Employee Matters Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa
Corporation, incorporated by reference to exhibit 2.4 to the Company’s Current Report on Form 8-K
(Commission file number 1-3610) dated November 4, 2016.
2(e)(1).
Amendment No. 1, dated December 13, 2016, to Employee Matters Agreement, dated as of
October 31, 2016, by and between Arconic Inc. and Alcoa Corporation.
2(f).
2(g).
Alcoa Corporation to Arconic Inc. Patent, Know-How, and Trade Secret License Agreement, dated as
of October 31, 2016, by and between Alcoa USA Corp. and Arconic Inc., incorporated by reference to
exhibit 2.5 to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated
November 4, 2016.
Arconic Inc. to Alcoa Corporation Patent, Know-How, and Trade Secret License Agreement, dated as
of October 31, 2016, by and between Arconic Inc. and Alcoa USA Corp., incorporated by reference to
exhibit 2.6 to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated
November 4, 2016.
129
2(h).
2(i).
2(j).
2(k).
2(l).
3(a).
3(b).
4(a).
4(b).
4(c).
4(c)(1).
4(c)(2).
4(d).
4(e).
Alcoa Corporation to Arconic Inc. Trademark License Agreement, dated as of October 31, 2016, by
and between Alcoa USA Corp. and Arconic Inc., incorporated by reference to exhibit 2.7 to the
Company’s Current Report on Form 8-K (Commission file number 1-3610) dated November 4, 2016.
Toll Processing and Services Agreement, dated as of October 31, 2016, by and between Arconic Inc.
and Alcoa Warrick LLC, incorporated by reference to exhibit 2.8 to the Company’s Current Report on
Form 8-K (Commission file number 1-3610) dated November 4, 2016.
Master Agreement for the Supply of Primary Aluminum, dated as of October 31, 2016, by and between
Alcoa Corporation and its affiliates and Arconic Inc., incorporated by reference to exhibit 2.9 to the
Company’s Current Report on Form 8-K (Commission file number 1-3610) dated November 4, 2016.
Massena Lease and Operations Agreement, dated as of October 31, 2016, by and between Arconic Inc.
and Alcoa Corporation, incorporated by reference to exhibit 2.10 to the Company’s Current Report on
Form 8-K (Commission file number 1-3610) dated November 4, 2016.
English Translation of Fusina Lease and Operations Agreement, dated as of August 4, 2016, by and
between Alcoa Servizi S.r.l. and Fusina Rolling S.r.l., incorporated by reference to exhibit 2(k) to the
Company’s Quarterly Report on Form 10-Q (Commission file number 1-3610) for the quarter ended
September 30, 2016.
Articles of the Registrant, as amended effective November 1, 2016, incorporated by reference to
exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q (Commission file number 1-3610) for
the quarter ended September 30, 2016.
By-Laws of the Registrant, as amended effective as of February 23, 2017.
Articles. See Exhibit 3(a) above.
By-Laws. See Exhibit 3(b) above.
Form of Indenture, dated as of September 30, 1993, between Alcoa Inc. and The Bank of New York
Trust Company, N.A., as successor to J. P. Morgan Trust Company, National Association (formerly
Chase Manhattan Trust Company, National Association), as successor Trustee to PNC Bank, National
Association, as Trustee (undated form of Indenture incorporated by reference to exhibit 4(a) to
Registration Statement No. 33-49997 on Form S-3).
First Supplemental Indenture, dated as of January 25, 2007, between Alcoa Inc. and The Bank of New
York Trust Company, N.A., as successor to J.P. Morgan Trust Company, National Association
(formerly Chase Manhattan Trust Company, National Association), as successor Trustee to PNC Bank,
National Association, as Trustee, incorporated by reference to exhibit 99.4 to the Company’s Current
Report on Form 8-K (Commission file number 1-3610) dated January 25, 2007.
Second Supplemental Indenture, dated as of July 15, 2008, between Alcoa Inc. and The Bank of New
York Mellon Trust Company, N.A., as successor in interest to J. P. Morgan Trust Company, National
Association (formerly Chase Manhattan Trust Company, National Association, as successor to PNC
Bank, National Association), as Trustee, incorporated by reference to exhibit 4(c) to the Company’s
Current Report on Form 8-K (Commission file number 1-3610) dated July 15, 2008.
Form of 5.90% Notes Due 2027, incorporated by reference to exhibit 4(d) to the Company’s Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended December 31, 2008.
Form of 5.95% Notes Due 2037, incorporated by reference to exhibit 4(d) to the Company’s Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended December 31, 2008.
130
4(f).
4(g).
4(h).
4(i).
4(j).
4(k).
4(l).
4(m).
4(n).
4(o).
4(p).
4(q).
Form of 6.75% Notes Due 2018, incorporated by reference to exhibit 4(b) to the Company’s Current
Report on Form 8-K (Commission file number 1-3610) dated July 15, 2008.
Form of 6.150% Notes Due 2020, incorporated by reference to exhibit 4 to the Company’s Current
Report on Form 8-K (Commission file number 1-3610) dated August 3, 2010.
Form of 5.40% Notes Due 2021, incorporated by reference to exhibit 4 to the Company’s Current
Report on Form 8-K (Commission file number 1-3610) dated April 21, 2011.
Form of 5.125% Notes Due 2024, incorporated by reference to exhibit 4.5 to the Company’s Current
Report on Form 8-K (Commission file number 1-3610) dated September 22, 2014.
Deposit Agreement, dated September 22, 2014, among Alcoa Inc., Computershare Trust Company,
N.A., Computershare Inc., and the holders from time to time of the depositary receipts evidencing the
Depositary Shares (including Form of Depositary Receipt), incorporated by reference to exhibit 4.1 to
the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated September 22,
2014.
Form of Depositary Receipt for Deposit Agreement, dated September 22, 2014, among Alcoa Inc.,
Computershare Trust Company, N.A., Computershare Inc., and the holders from time to time of the
depositary receipts evidencing the Depositary Shares, incorporated by reference to exhibit A to
exhibit 4.1 to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated
September 22, 2014.
Indenture, dated as of December 14, 2010, between RTI International Metals, Inc. and The Bank of
New York Trust Company, N.A., as Trustee, incorporated by reference to exhibit 4(m) to the
Company’s Annual Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 2015.
Third Supplemental Indenture, dated as of April 17, 2013, between RTI International Metals, Inc. and
The Bank of New York Trust Company, N.A., as Trustee, incorporated by reference to exhibit 4(n) to
the Company’s Annual Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 2015.
Fourth Supplemental Indenture, dated as of July 23, 2015, between RTI International Metals, Inc. and
The Bank of New York Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.1 on
Form 8-K (Commission file number 1-3610) dated July 23, 2015.
Arconic Bargaining Retirement Savings Plan (formerly known as the Alcoa Retirement Savings Plan
for Bargaining Employees), as Amended and Restated effective January 1, 2015, incorporated by
reference to exhibit 4(p) to the Company’s Annual Report on Form 10-K (Commission file number
1-3610) for the year ended December 31, 2015.
Arconic Hourly Non-Bargaining Retirement Savings Plan (formerly known as the Alcoa Retirement
Savings Plan for Hourly Non-Bargaining Employees), as Amended and Restated effective January 1,
2015, incorporated by reference to exhibit 4(q) to the Company’s Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 2015.
Arconic Fastener Systems and Rings Retirement Savings Plan (formerly known as the Alcoa
Retirement Savings Plan for Fastener Systems Employees), as Amended and Restated effective
January 1, 2015, incorporated by reference to exhibit 4(r) to the Company’s Annual Report on
Form 10-K (Commission file number 1-3610) for the year ended December 31, 2015.
131
4(r).
4(s).
10(a).
10(b).
10(c).
10(c)(1).
10(c)(2).
10(d).
10(e).
10(f).
10(g).
Arconic Salaried Retirement Savings Plan (formerly known as the Alcoa Retirement Savings Plan for
Salaried Employees), as Amended and Restated effective January 1, 2015, incorporated by reference to
exhibit 4(s) to the Company’s Annual Report on Form 10-K (Commission file number 1-3610) for the
year ended December 31, 2015.
Arconic Retirement Savings Plan for ATEP Bargaining Employees, effective January 1, 2017,
incorporated by reference to exhibit 4 to Post-Effective Amendment, dated December 30, 2016, to
Registration Statement No. 333-32516 on Form S-8.
Earnout Agreement, dated as of June 25, 2014, by and among Alcoa Inc., FR Acquisition Finance
Subco (Luxembourg), S.à.r.l. and Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management
Partners III, L.P., collectively in their capacity as the Seller Representative, incorporated by reference
to exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated
June 26, 2014.
Stockholder and Registration Rights Agreement, dated as of October 31, 2016, by and between
Arconic Inc. and Alcoa Corporation, incorporated by reference to exhibit 10.1 to the Company’s
Current Report on Form 8-K (Commission file number 1-3610) dated November 4, 2016.
Five-Year Revolving Credit Agreement, dated as of July 25, 2014, among Alcoa Inc., the Lenders and
Issuers named therein, Citibank, N.A., as Administrative Agent for the Lenders and Issuers, and
JPMorgan Chase Bank, N.A., as Syndication Agent, incorporated by reference to exhibit 10.2 to the
Company’s Current Report on Form 8-K (Commission file number 1-3610) dated July 31, 2014.
Extension Request and Amendment Letter, dated as of June 5, 2015, among Alcoa Inc., each lender
and issuer party thereto, and Citibank, N.A., as Administrative Agent, effective July 7, 2015,
incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission
file number 1-3610) dated July 13, 2015.
Amendment No. 1, dated September 16, 2016, to the Five-Year Revolving Credit Agreement dated as
of July 25, 2014, among Arconic Inc., the lenders and issuers named therein, Citibank, N.A., as
administrative agent, and JPMorgan Chase Bank, N.A. as syndication agent, incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated
September 19, 2016.
Plea Agreement dated January 8, 2014, between the United States of America and Alcoa World
Alumina LLC, incorporated by reference to exhibit 10(l) to the Company’s Annual Report on
Form 10-K (Commission file number 1-3610) for the year ended December 31, 2013.
Offer of Settlement of Alcoa Inc. before the Securities and Exchange Commission dated December 27,
2013, incorporated by reference to exhibit 10(m) to the Company’s Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 2013.
Securities and Exchange Commission Order dated January 9, 2014, incorporated by reference to
exhibit 10(n) to the Company’s Annual Report on Form 10-K (Commission file number 1-3610) for
the year ended December 31, 2013.
Agreement, dated February 1, 2016, by and between Elliott Associates, L.P., Elliott International, L.P.,
Elliott International Capital Advisors Inc. and Alcoa Inc., incorporated by reference to exhibit 10.1 to
the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated February 1,
2016.
132
10(h).
10(i).
10(i)(1).
10(i)(2).
10(j).
10(k).
10(l).
10(m).
Alcoa Internal Revenue Code Section 162(m) Compliant Annual Cash Incentive Compensation Plan,
as Amended and Restated, incorporated by reference to Exhibit 10(b) to the Company’s Current Report
on Form 8-K (Commission file number 1-3610) dated May 11, 2016.
2004 Summary Description of the Alcoa Incentive Compensation Plan, incorporated by reference to
exhibit 10(g) to the Company’s Quarterly Report on Form 10-Q (Commission file number 1-3610) for
the quarter ended September 30, 2004.
Incentive Compensation Plan of Alcoa Inc., as revised and restated effective November 8, 2007,
incorporated by reference to exhibit 10(k)(1) to the Company’s Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 2007.
Amendment to Incentive Compensation Plan of Alcoa Inc., effective December 18, 2009, incorporated
by reference to exhibit 10(n)(2) to the Company’s Annual Report on Form 10-K (Commission file
number 1-3610) for the year ended December 31, 2009.
Arconic Employees’ Excess Benefits Plan C (formerly referred to as the Alcoa Inc. Employees’ Excess
Benefits Plan, Plan C), as amended and restated effective August 1, 2016.
Deferred Fee Plan for Directors, as amended effective July 9, 1999, incorporated by reference to
exhibit 10(g)(1) to the Company’s Quarterly Report on Form 10-Q (Commission file number 1-3610)
for the quarter ended June 30, 1999.
Amended and Restated Deferred Fee Plan for Directors, effective November 1, 2016, incorporated by
reference to exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q (Commission file number
1-3610) for the quarter ended September 30, 2016.
Restricted Stock Plan for Non-Employee Directors, as amended effective March 10, 1995,
incorporated by reference to exhibit 10(h) to the Company’s Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 1994.
10(m)(1). Amendment to Restricted Stock Plan for Non-Employee Directors, effective November 10, 1995,
incorporated by reference to exhibit 10(h)(1) to the Company’s Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 1995.
10(n).
10(o).
Non-Employee Director Compensation Policy, effective November 1, 2016, incorporated by reference
to exhibit 10(d) to the Company’s Quarterly Report on Form 10-Q (Commission file number 1-3610)
for the quarter ended September 30, 2016.
Fee Continuation Plan for Non-Employee Directors, incorporated by reference to exhibit 10(k) to the
Company’s Annual Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 1989.
10(o)(1). Amendment to Fee Continuation Plan for Non-Employee Directors, effective November 10, 1995,
incorporated by reference to exhibit 10(i)(1) to the Company’s Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 1995.
10(o)(2).
Second Amendment to the Fee Continuation Plan for Non-Employee Directors, effective September
15, 2006, incorporated by reference to exhibit 10.2 to the Company’s Current Report on Form 8-K
(Commission file number 1-3610) dated September 20, 2006.
10(p).
Arconic Deferred Compensation Plan, as amended and restated effective August 1, 2016.
133
10(q).
10(r).
10(s).
10(t).
10(u).
10(v).
10(w).
Summary of the Executive Split Dollar Life Insurance Plan, dated November 1990, incorporated by
reference to exhibit 10(m) to the Company’s Annual Report on Form 10-K (Commission file number
1-3610) for the year ended December 31, 1990.
Amended and Restated Dividend Equivalent Compensation Plan, effective January 1, 1997,
incorporated by reference to exhibit 10(h) to the Company’s Quarterly Report on Form 10-Q
(Commission file number 1-3610) for the quarter ended September 30, 2004.
Form of Indemnity Agreement between the Company and individual directors or officers, incorporated
by reference to exhibit 10(j) to the Company’s Annual Report on Form 10-K (Commission file number
1-3610) for the year ended December 31, 1987.
Amended and Restated 2009 Alcoa Stock Incentive Plan, dated February 15, 2011, incorporated by
reference to exhibit 10(z)(1) to the Company’s Annual Report on Form 10-K (Commission file number
1-3610) for the year ended December 31, 2010.
Terms and Conditions for Special Retention Awards under the 2009 Alcoa Stock Incentive Plan,
effective January 1, 2010, incorporated by reference to exhibit 10(e) to the Company’s Quarterly
Report on Form 10-Q (Commission file number 1-3610) for the quarter ended March 31, 2010.
Arconic Supplemental Pension Plan for Senior Executives (formerly referred to as the Alcoa
Supplemental Pension Plan for Senior Executives), as amended and restated effective August 1, 2016.
Deferred Fee Estate Enhancement Plan for Directors, effective July 10, 1998, incorporated by
reference to exhibit 10(r) to the Company’s Annual Report on Form 10-K (Commission file number 1-
3610) for the year ended December 31, 1998.
10(x).
Arconic Inc. Change in Control Severance Plan, as amended and restated effective February 27, 2017.
10(y).
Executive Severance Agreement, as amended and restated effective December 8, 2008, between Alcoa
Inc. and Klaus Kleinfeld, incorporated by reference to exhibit 10(gg) to the Company’s Annual Report
on Form 10-K (Commission file number 1-3610) for the year ended December 31, 2008.
10(y)(1).
Letter Agreement between Arconic Inc. and Klaus Kleinfeld, dated February 27, 2017.
10(z).
Form of Executive Severance Agreement between the Company and new officers entered into after
July 22, 2010, incorporated by reference to exhibit 10(a) to the Company’s Quarterly Report on Form
10-Q (Commission file number 1-3610) for the quarter ended September 30, 2010.
10(z)(1).
Letter Agreement between Arconic Inc. and Kay Meggers, dated February 27, 2017.
10(aa).
Arconic Inc. Executive Severance Plan, as effective February 27, 2017.
10(bb).
Arconic Global Pension Plan, as amended and restated effective August 1, 2016.
10(cc).
10(dd).
Form of Award Agreement for Stock Options, effective May 8, 2009, incorporated by reference to exhibit
10.2 to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated May 13, 2009.
Terms and Conditions for Stock Options, effective January 1, 2011, incorporated by reference to
exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q (Commission file number 1-3610) for
the quarter ended June 30, 2011.
134
10(ee).
10(ff).
10(gg).
10(hh).
10(ii).
10(jj).
Form of Award Agreement for Restricted Share Units, effective May 8, 2009, incorporated by
reference to exhibit 10.3 to the Company’s Current Report on Form 8-K (Commission file number 1-
3610) dated May 13, 2009.
Terms and Conditions for Restricted Share Units, effective January 1, 2011, incorporated by reference
to exhibit 10(b) to the Company’s Quarterly Report on Form 10-Q (Commission file number 1-3610)
for the quarter ended June 30, 2011.
Summary Description of Equity Choice Program for Performance Equity Award Participants, dated
November 2005, incorporated by reference to exhibit 10.6 to the Company’s Current Report on Form
8-K (Commission file number 1-3610) dated November 16, 2005.
Global Expatriate Employee Policy (pre-January 1, 2003), incorporated by reference to exhibit 10(uu)
to the Company’s Annual Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 2005.
Form of Special Retention Stock Award Agreement, effective July 14, 2006, incorporated by reference
to exhibit 10.3 to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated
September 20, 2006.
Letter Agreement, dated August 14, 2007, between Alcoa Inc. and Klaus Kleinfeld, incorporated by
reference to exhibit 10(b) to the Company’s Quarterly Report on Form 10-Q (Commission file number
1-3610) for the quarter ended September 30, 2007.
10(kk).
Consulting Agreement, effective January 1, 2017, between Arconic Inc. and Audrey Strauss.
10(ll).
Director Plan: You Make a Difference Award, incorporated by reference to exhibit 10(uu) to the
Company’s Annual Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 2008.
10(mm).
Form of Award Agreement for Stock Options, effective January 1, 2010, incorporated by reference to
exhibit 10(ddd) to the Company’s Annual Report on Form 10-K (Commission file number 1-3610) for
the year ended December 31, 2009.
10(nn).
2013 Alcoa Stock Incentive Plan, as Amended and Restated, incorporated by reference to exhibit 10(a)
to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated May 11, 2016.
10(oo).
10(pp).
10(qq).
Alcoa Inc. Terms and Conditions for Stock Option Awards, effective May 3, 2013, incorporated by
reference to exhibit 10(b) to the Company’s Current Report on Form 8-K (Commission file number
1-3610) dated May 8, 2013.
Terms and Conditions for Stock Option Awards under the 2013 Alcoa Stock Incentive Plan, effective
July 22, 2016, incorporated by reference to Exhibit 10(d) to the Company’s Quarterly Report on Form
10-Q (Commission file number 1-3610) for the quarter ended June 30, 2016.
Alcoa Inc. Terms and Conditions for Restricted Share Units, effective May 3, 2013, incorporated by
reference to exhibit 10(c) to the Company’s Current Report on Form 8-K (Commission file number 1-
3610) dated May 8, 2013.
135
10(rr).
10(ss).
10(tt).
10(uu).
Terms and Conditions for Restricted Stock Units under the 2013 Alcoa Stock Incentive Plan, effective
July 22, 2016, incorporated by reference to Exhibit 10(c) to the Company’s Quarterly Report on Form
10-Q (Commission file number 1-3610) for the quarter ended June 30, 2016.
Terms and Conditions (Australian Addendum) 2013 Alcoa Stock Incentive Plan, effective May 3,
2013, incorporated by reference to exhibit 10(d) to the Company’s Current Report on Form 8-K
(Commission file number 1-3610) dated May 8, 2013.
Alcoa Inc. Terms and Conditions for Special Retention Awards under the 2013 Alcoa Stock Incentive
Plan, incorporated by reference to exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q
(Commission file number 1-3610) for the quarter ended June 30, 2013.
Terms and Conditions for Special Retention Awards under the 2013 Alcoa Stock Incentive Plan,
effective July 22, 2016, incorporated by reference to exhibit 10(e) to the Company’s Quarterly Report
on Form 10-Q (Commission file number 1-3610) for the quarter ended June 30, 2016.
10(vv).
Terms and Conditions for Restricted Share Units for Annual Director Awards under the 2013 Arconic
Stock Incentive Plan, effective November 30, 2016.
10(ww).
Terms and Conditions for Deferred Fee Restricted Share Units for Director Awards under the 2013
Arconic Stock Incentive Plan, effective November 30, 2016.
10(xx).
10(yy).
10(zz).
12.
21.
23.
24.
31.
32.
Terms and Conditions for Restricted Share Units issued on or after January 13, 2017, under the 2013
Arconic Stock Incentive Plan, effective January 13, 2017.
RTI International Metals, Inc. 2014 Stock and Incentive Plan, incorporated by reference to Exhibit 4(a)
to the Company’s Current Report on Form 8-K (Commission file number 1-3610) dated July 23, 2015.
RTI International Metals, Inc. 2004 Stock Plan, incorporated by reference to Exhibit 4(b) to the
Company’s Current Report on Form 8-K (Commission file number 1-3610) dated July 23, 2015.
Computation of Ratio of Earnings to Fixed Charges.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney for certain directors.
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101. INS XBRL Instance Document.
101. SCH XBRL Taxonomy Extension Schema Document.
136
101. CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101. DEF XBRL Taxonomy Extension Definition Linkbase Document.
101. LAB XBRL Taxonomy Extension Label Linkbase Document.
101. PRE XBRL Taxonomy Extension Presentation Linkbase Document.
* Exhibit Nos. 10(h) through 10(zz) are management contracts or compensatory plans required to be filed as Exhibits
to this Form 10-K.
Amendments and modifications to other Exhibits previously filed have been omitted when in the opinion of the
registrant such Exhibits as amended or modified are no longer material or, in certain instances, are no longer required
to be filed as Exhibits.
No other instruments defining the rights of holders of long-term debt of the registrant or its subsidiaries have been filed
as Exhibits because no such instruments met the threshold materiality requirements under Regulation S-K. The
registrant agrees, however, to furnish a copy of any such instruments to the Commission upon request.
Item 16. Form 10-K Summary.
None.
137
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARCONIC INC.
February 28, 2017
By
Paul Myron
Vice President and Controller (Also signing as
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
Klaus Kleinfeld
(Principal Executive Officer and
Director)
Chairman and Chief Executive Officer
February 28, 2017
Ken Giacobbe
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer)
February 28, 2017
Dr. Amy E. Alving, Arthur D. Collins, Jr., Rajiv L. Gupta, Sean O. Mahoney, E. Stanley O’Neal, John C. Plant, Dr. L.
Rafael Reif, Julie G. Richardson, Patricia F. Russo, Ulrich R. Schmidt, Sir Martin Sorrell and Ratan N. Tata, each as a
Director, on February 28, 2017, by W. Paul Myron, their Attorney-in-Fact.*
*By
W. Paul Myron
Attorney-in-Fact
138
COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in millions, except ratios)
Exhibit 12
For the year ended December 31,
Earnings:
Income (loss) from continuing operations before income taxes
Noncontrolling interests’ share of earnings of majority-owned
subsidiaries without fixed charges
Equity loss (income)
Fixed charges added to earnings
Distributed income of less than 50 percent-owned persons
Amortization of capitalized interest:
Consolidated
Proportionate share of 50 percent-owned persons
Total earnings
Fixed Charges:
Interest expense:
Consolidated
Proportionate share of 50 percent-owned persons
Amount representative of the interest factor in rents:
Consolidated
Proportionate share of 50 percent-owned persons
Fixed charges added to earnings
Interest capitalized:
Consolidated
Proportionate share of 50 percent-owned persons
Preferred stock dividend requirements of majority-owned subsidiaries
Total fixed charges
2016
2015
2014
2013
2012
$ 414
$183
$113
$ 931
$ 659
-
(22)
556
66
36
-
-
6
534
152
42
-
-
18
512
86
47
-
-
(12)
493
89
46
-
-
(99)
533
101
44
-
$1,050
$917
$776
$1,547
$1,238
$ 526
-
$498
-
$473
-
$ 453
-
$ 490
-
526
498
473
453
490
30
-
30
36
-
36
39
-
39
40
-
40
43
-
43
556
534
512
493
533
45
-
45
-
57
-
57
-
56
-
56
-
99
-
99
-
93
-
93
-
$ 601
$591
$568
$ 592
$ 626
Pretax earnings required to pay preferred stock dividends*
Combined total fixed charges and preferred stock dividends
107
$ 708
107
$698
32
$600
3
$ 595
3
$ 629
Ratio of earnings to fixed charges
Ratio of earnings to combined fixed charges and preferred stock dividends
1.7
1.5
1.6
1.3
1.4
1.3
2.6
2.6
2.0
2.0
*
Based on a U.S. statutory tax rate of 35%.
139
SUBSIDIARIES OF THE REGISTRANT
(As of December 31, 2016)
Name
Arconic Domestic LLC
Arconic Securities LLC
Howmet International Inc.
Howmet Holdings Corporation
Howmet Corporation
Howmet Castings & Services, Inc.
Arconic International Holding Company LLC
Arconic (China) Investment Company Ltd.
Arconic Luxembourg S.à r.l.
Arconic Inversiones España S.L.
Arconic Holding GmbH
Arconic Inversiones Internacionales S.L.
Arconic-Köfém Kft
OOO Arconic Rus Investment Holdings
ZAO Alcoa SMZ
Howmet SAS
Arconic Holding France SAS
Arconic UK Holdings Limited
Arconic Manufacturing (G.B.) Limited
Alumax Inc.
Alumax Mill Products, Inc.
Cordant Technologies Holding Company
Arconic Global Fasteners & Rings, Inc.
Huck International, Inc.
FR Acquisition Corporation U.S., Inc.
JFB Firth Rixson, Inc.
RTI International Metals, Inc.
RMI Titanium Company, LLC
Exhibit 21
State or
Country of
Organization
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
China
Luxembourg
Spain
Germany
Spain
Hungary
Russia
Russia
France
France
United Kingdom
United Kingdom
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Ohio
Ohio
The names of particular subsidiaries have been omitted because, considered in the aggregate as a single subsidiary, they would not constitute, as of
the end of the year covered by this report, a “significant subsidiary” as that term is defined in Regulation S-X under the Securities Exchange Act of
1934.
140
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-197371) and
Form S-8 (Nos. 333-32516, 333-106411, 333-128445, 333-146330, 333-153369, 333-155668, 333-159123,
333-168428, 333-170801, 333-182899, 333-189882, 333-205829, 333-203275, 333-209777, and 333-212246) of
Arconic Inc. and its subsidiaries of our report dated February 28, 2017 relating to the consolidated financial statements
and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 28, 2017
141
Exhibit 31
I, Klaus Kleinfeld, certify that:
1.
I have reviewed this annual report on Form 10-K of Arconic Inc.;
Certifications
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2017
Name: Klaus Kleinfeld
Title: Chairman and Chief Executive Officer
142
I, Ken Giacobbe, certify that:
1.
I have reviewed this annual report on Form 10-K of Arconic Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2017
Name: Ken Giacobbe
Title: Executive Vice President and Chief Financial
Officer
143
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code), each of the undersigned officers of Arconic Inc., a Pennsylvania corporation (the
“Company”), does hereby certify that:
The Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”) of the Company fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: February 28, 2017
Dated: February 28, 2017
Name: Klaus Kleinfeld
Title: Chairman and Chief Executive Officer
Name: Ken Giacobbe
Title: Executive Vice President and Chief Financial
Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging,
or otherwise adopting the signature that appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form
10-K and shall not be considered filed as part of the Form 10-K.
144
Calculation of Financial Measures (unaudited)
(dollars in millions)
Combined Segment Adjusted EBITDA
Segment Measures
Adjusted EBITDA
($ in millions)
After-tax operating income (ATOI)
Add:
Depreciation and amortization
Income taxes
Other
Arconic Combined Segments(1)
Year ended
December 31,
2016
$ 1,087
December 31,
2008
$
532
504
472
–
$ 2,063
361
275
6
$ 1,174
(115)
$ 1,059
$ 14,144
$ 1,206
$ 15,350
6.9%(2)
Adjusted EBITDA
Add: Wire harness and electrical distribution adjusted EBITDA
Adjusted EBITDA including wire harness and electrical distribution
Third Party Sales
Add: Wire harness and electrical distribution third party sales
Third Party Sales including wire harness and electrical distribution
Adjusted EBITDA Margin including wire harness and electrical distribution
(1) For 2008, a reconciliation of combined segments adjusted EBITDA to combined segments ATOI, which was the segment
profit metric at the time, has been provided. A reconciliation to Net loss attributable to Arconic is not available without
unreasonable efforts.
$ 12,394
16.6%
(2)
Includes the wire harness and electrical distribution business which was sold in 2009 and reflected in discontinued operations
in the 2008 historical presentation
Arconic has not provided a reconciliation of the forward-looking financial measures of adjusted EBITDA margin and free cash flow
to the most directly comparable GAAP financial measures because Arconic is unable to quantify certain amounts that would be
required to be included in the GAAP measures without unreasonable efforts, and Arconic believes such reconciliations would imply
a degree of precision that would be confusing or misleading. In particular, reconciliations of these forward-looking non-GAAP
financial measures to the most directly comparable GAAP measures are not available without unreasonable efforts due to the
variability and complexity with respect to the charges and other components excluded from these non-GAAP measures, such as the
effects of foreign currency movements, equity income, gains or losses on sales of assets, taxes and any future restructuring or
impairment charges. These reconciling items are in addition to the inherent variability already included in the GAAP measures,
which includes, but is not limited to, price/mix and volume.
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Directors
(As of March 10, 2017)
Amy E. Alving, Former Senior Vice President and Chief Technology Officer, Leidos Holdings, Inc.
Arthur D. Collins, Jr., Former Chairman and Chief Executive Officer, Medtronic, Inc.
Rajiv L. Gupta, Chairman, Delphi Automotive PLC; Senior Advisor, New Mountain Capital, LLC
David P. Hess, Former Executive Vice President and Chief Customer Officer for Aerospace, United Technologies Corporation
Klaus Kleinfeld, Chairman and Chief Executive Officer, Arconic Inc.
Sean O. Mahoney, Private Investor; Former Partner and Head of the Financial Sponsors Group, Goldman, Sachs & Co.
E. Stanley O’Neal, Former Chairman and Chief Executive Officer, Merrill Lynch & Co., Inc.
John C. Plant, Former Chairman, President and Chief Executive Officer, TRW Automotive
L. Rafael Reif, President, Massachusetts Institute of Technology
Julie G. Richardson, Former Partner and Managing Director, Providence Equity Partners LLC
Patricia F. Russo, Chairman, Hewlett Packard Enterprise Company; Former Chief Executive Officer, Alcatel-Lucent
Ulrich R. Schmidt, Former Executive Vice President and Chief Financial Officer, Spirit Aerosystems Holdings, Inc.
Ratan N. Tata, Chairman, Tata Trusts; Former Chairman, Tata Sons Limited
Officers
(As of March 10, 2017)
Elizabeth (Libby) Archell
Vice President
Chief Communications
Officer
John D. Bergen
Vice President
Corporate Projects
Jinya Chen
Vice President
President, Asia Pacific
Region
Daniel Cruise
Vice President
Global Vice President,
Business Development
and Government and
Public Affairs
Ken Giacobbe
Executive Vice President
Chief Financial Officer
Peter Hong
Vice President and
Treasurer
Raymond J. Kilmer
Executive Vice President
Chief Technology Officer
Klaus Kleinfeld
Chairman and
Chief Executive Officer
Christoph Kollatz
Executive Vice President
Corporate Development,
Strategy and New
Ventures
Max W. Laun
Vice President
General Counsel
Kay H. Meggers
Executive Vice President
Group President, Global
Rolled Products
Timothy D. Myers
Executive Vice President
Group President,
Transportation and
Construction Solutions
Paul Myron
Vice President and
Controller
Vasantha Nair
Executive Vice President
Human Resources and
Environment, Health,
Safety and Sustainability
Katherine H. Ramundo
Executive Vice President
Chief Legal Officer and
Secretary
Susan M. Ringler
Vice President
Chief Ethics and
Compliance Officer
Bruce E. Thompson
Vice President
Internal Audit
Karl Tragl
Executive Vice President
Group President,
Engineered Products and
Solutions
Kenneth P. Wisnoski
Vice President
President, International
Project Development and
Asset Management
Scott M. Zahorchak
Vice President
Tax
Assistant Officers
Julie A. Caponi
Assistant Treasurer
Janet F. Duderstadt
Assistant Secretary
Group General Counsel,
Global Rolled Products
Paul A. Hayes
Assistant Treasurer
Margaret S. Lam
Assistant Secretary
Chief Securities and
Governance Counsel
Catherine D. Parroco
Assistant Secretary
Mary Zik
Assistant Controller
Printed in USA
© 2017 Arconic
Shareholder Information
COM PANY NEWS
DIREC T DE POSIT OF DIVIDE NDS
Visit www.arconic.com for Securities and Exchange Commission
filings, quarterly earnings reports and other Company news.
Shareholders may have their quarterly dividends deposited directly
to their checking, savings or money market accounts at any financial
Copies of the annual report, and Forms 10-K and 10-Q, may be requested
to be accessed at no cost by visiting www.arconic.com/investors or by
institution that participates in the Automated Clearing House system.
writing to Corporate Communications, Arconic, 201 Isabella Street,
SHARE HOLDE R SE RVICE S
Pittsburgh, PA 15212.
INVE STOR INFORM ATION
Securities analysts and investors may write to Investor Relations,
Arconic, 390 Park Avenue, New York, NY 10022-4608, call
1.212.836.2674, or e-mail investor.relations@arconic.com.
OTHE R PU B LIC ATION S
For more information on Arconic Foundation and Arconic community
investments, visit www.arconic.com under Who We Are, How We Work,
Arconic Foundation or www.arconic.com/foundation.
For Arconic’s Sustainability Report, visit www.arconic.com under
Who We Are, How We Work, Community and Environment or
www.arconic.com/global/en/who-we-are/sustainability-report.asp
or write to Corporate Sustainability at Arconic, 201 Isabella Street,
Pittsburgh, PA 15212; or e-mail sustainability@arconic.com.
DIVIDE NDS
Cash dividend decisions are made by Arconic’s Board of Directors,
and are reviewed on a regular basis.
DIVIDE ND RE INVE STM E NT
Arconic’s transfer agent sponsors and administers a Dividend
Reinvestment and Stock Purchase Plan for shareholders of Arconic’s
common stock and $3.75 cumulative preferred stock. The plan allows
shareholders to reinvest all or part of their quarterly dividends in shares
of Arconic common stock. Shareholders may also purchase additional
shares of common stock under the plan with cash contributions.
Shareholders with questions on account balances, dividend checks,
reinvestment, direct deposit, address changes, lost or misplaced
stock certificates, or other shareholder account matters may contact
Arconic’s stock transfer agent, registrar and dividend disbursing
agent, Computershare:
By telephone:
1.888.985.2058 (in the United States and Canada)
1.201.680.6578 (all other callers)
1.800.231.5469 (Telecommunications Device for the Deaf: TDD)
On the Web:
www.computershare.com
By regular mail:
Computershare
P.O. Box 30170
College Station, TX 77842-3170
By Overnight Correspondence:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
For shareholder questions on other matters related to Arconic,
write to: Corporate Secretary’s Office, Arconic, 390 Park Avenue,
New York, NY 10022-4608, call 1.212.836.2732, or e-mail corporate.
secretary@arconic.com.
STOCK LI STING
Common Stock
New York Stock Exchange | Ticker symbol: ARNC
$3.75 Cumulative Preferred Stock (Class A)
New York Stock Exchange MKT | Ticker symbol: ARNC PR
Depositary Shares, Each a 1/10th Interest in a Share of
5.375% Mandatory Convertible Preferred Stock (Class B)
New York Stock Exchange | Ticker symbol: ARNC PRB
A RCONIC A NNUA L REP OR T 2016
3/11/17 7:53 PM
Arconic Inc. (NYSE: ARNC) creates breakthrough products that
shape industries. Working in close partnership with our customers,
we solve complex engineering challenges to transform the way we
fly, drive, build and power. Through the ingenuity of our people and
cutting-edge, advanced manufacturing techniques, we deliver these
products at a quality and efficiency that ensure customer success
and shareholder value.
For more information:
W W W. ARCONIC .COM
FOLLOW @ARCONIC:
Twitter, Instagram, Facebook, LinkedIn and YouTube
A RCONIC A NNUA L REP O R T 2016
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Innovation,
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