ARCONIC : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

(dollars in millions, except per-share amounts; shipments in thousands of metric
tons [kmt])
Overview
Our Business
Arconic Inc. ("Arconic" or the "Company") is a global leader in lightweight
metals engineering and manufacturing. Arconic's innovative, multi-material
products, which include aluminum, titanium, and nickel, are used worldwide in
aerospace, automotive, commercial transportation, building and construction,
industrial applications, defense, and packaging.
Arconic is a global company operating in 18 countries. Based upon the country
where the point of sale occurred, the United States and Europe generated 67% and
23%, respectively, of Arconic's sales in 2019. In addition, Arconic has
operating activities in numerous countries and regions outside the United
States, including Europe, Canada, China, Japan, and Russia. 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 countries with such operating activities.
Management Review of 2019 and Outlook for the Future
In 2019, Sales increased 1% over 2018 as a result of volume growth in the
aerospace, packaging, commercial transportation, and industrial end markets; and
favorable product pricing in the Global Rolled Products (GRP) and Engineered
Products and Forgings (EP&F) segments; partially offset by lower aluminum
prices; and lower sales of $216 from divestitures of forgings businesses in the
United Kingdom (divested in December 2019) and Eger, Hungary (divested in
December 2018), Latin America extrusions (divested in April 2018), and the
completed ramp down of Arconic's North American packaging operations (in
December 2018). In the segments, Segment operating profit increased 27% from
2018 due to favorable product pricing, net cost savings, lower raw material
costs including aluminum price, and higher volumes, partially offset by the
impact of the Tennessee plant transition to industrial production, operational
challenges at one aluminum extrusions plant, and higher variable compensation
costs.
Management continued its focus on liquidity and cash flows as well as improving
its operating performance through cost reductions, streamlined organizational
structures, margin enhancement, and profitable revenue generation. Management
has continued its intensified focus on capital efficiency. This focus and the
related results enabled Arconic to end 2019 with a solid financial position.
The following financial information reflects certain key highlights of Arconic's
2019 results:
•      Sales of $14,192, up 1% from 2018, with growth in key end markets, and Net
       income of $470, or $1.03 per diluted share;


•      Total segment operating profit of $2,015, an increase of $429, or 27%,
       from 20181;

• Cash provided from operations of $406; cash used for financing activities

of $1,568, reflecting the Company's repurchase of $1,150 of its common

stock and the repayment of convertible notes in 2019; and cash provided

from investing activities of $583;

• Cash on hand at the end of the year of $1,648; and

• Total debt of $5,940, a decrease of $390 from 2018, reflecting repayment

of $403 of convertible notes in October 2019.

(1) For the reconciliation of Total segment operating profit to Consolidated
income before income taxes and related information, see page 43.
The Company rapidly executed on the separation plan that was announced in
February 2019 and is targeting completion of the separation on April 1,
2020. The company will separate into two independent, publicly-traded companies,
to be named Howmet Aerospace Inc. (Remain Co.) and Arconic Corporation (Spin
Co.) (the "Separation of Arconic"). Remain Co. will be comprised of the
Company's Engineered Products and Forgings businesses (engine products,
fastening systems, engineered structures and forged wheels) and will be renamed
Howmet Aerospace Inc. at separation and change its stock ticker from "ARNC" to
"HWM."  Spin Co. will be comprised of the Company's Global Rolled Products
businesses (global rolled products, aluminum extrusions and building and
construction systems) and will be held by a new company that will be named
Arconic Corporation at separation and that intends to list its common stock on
the New York Stock Exchange under the symbol "ARNC."
On February 5, 2020, Arconic's Board of Directors approved the completion of the
Separation of Arconic by means of a pro rata distribution by the Company of all
of the outstanding common stock of Arconic Corporation, with each Arconic Inc.
stockholder of record as of the close of business on March 19, 2020 receiving
one share of Arconic Corporation common stock for every four shares of the
Company's common stock held as of the record date.  On February 7, 2020, the
Company announced that Arconic Rolled Products Corporation (the "Issuer"), which
is currently a wholly-owned subsidiary of Arconic,

                                       37

--------------------------------------------------------------------------------

Table of Contents

closed its offering of $600 aggregate principal amount of 6.125% second-lien
notes due 2028.  The proceeds will be used to make a payment to Arconic to fund
the transfer of certain assets to the Issuer in connection with the separation
and for general corporate purposes.  On February 13, 2020, the Registration
Statement on Form 10 for Arconic Rolled Products Corporation was declared
effective by the Securities and Exchange Commission.
In conjunction with the Separation of Arconic, the Company realigned its
reporting segments in the third quarter of 2019 by eliminating its
Transportation and Construction Solutions segment and transferring the forged
wheels business to the EP&F segment and transferring the building and
construction systems business to the GRP segment. The Company also executed on
its plan to sell businesses that do not best fit into one of its two segments,
having signed or closed on divestitures in 2019 resulting in proceeds of
approximately $190.
Results of Operations
Earnings Summary
Sales. Sales for 2019 were $14,192 compared with $14,014 in 2018, an increase of
$178, or 1%. The increase was primarily due to volume growth in the aerospace,
packaging, commercial transportation, and industrial end markets; favorable
product pricing and mix in the GRP segment; and favorable product pricing in the
EP&F segment when fulfilling volume above contractual share, renewing contracts,
and selling non-contractual spot business; partially offset by lower aluminum
prices; lower sales of $216 from the completed ramp down of Arconic's North
American packaging operations (in December 2018) and the divestitures of
forgings businesses in the United Kingdom (divested in December 2019) and
Hungary (divested in December 2018), and the Latin America extrusions business
(divested in April 2018); and unfavorable foreign currency movements.
Sales for 2018 were $14,014 compared with $12,960 in 2017,
an increase of $1,054, or 8%. The increase was the result of strong volume
growth across both segments, primarily in the aerospace engines and defense,
automotive, commercial transportation, industrial, and building and construction
end markets; higher aluminum prices and favorable product mix primarily in the
GRP segment; and favorable foreign currency movements; partially offset by a
decline in volumes in the industrial gas turbine end market; lower sales of $190
from the divestitures of the Latin America extrusions business, the rolling mill
in Fusina, Italy (divested in March 2017), and the ramp down of Arconic's North
American packaging operations; and costs of $38 in 2018 related to settlements
of certain customer claims primarily related to product introductions.
Cost of Goods Sold (COGS). COGS as a percentage of Sales was 79.1% in 2019
compared with 81.3% in 2018. The decrease was primarily due to lower raw
material costs including aluminum prices; net cost savings; favorable product
pricing; and costs incurred in 2018 that did not recur in 2019 related to
settlements of certain customer claims of $38 noted above and a charge related
to a physical inventory adjustment at one plant in the GRP segment of $23. These
positive impacts were partially offset by unfavorable product mix; a charge for
environmental remediation at Grasse River of $25; the impairment of energy
business assets of $10; and a charge primarily for a one-time signing bonus for
employees associated with the collective bargaining agreement negotiation of $9.
In June of 2019 the Company and the United Steelworkers reached a tentative
three-year labor agreement covering approximately 3,400 employees at four U.S.
locations; the previous labor agreement expired on May 15, 2019. The tentative
agreement was ratified on July 11, 2019. Additionally, in 2019, the Company
sustained a fire at a fasteners plant in France and recorded charges of $26 for
higher operating costs, equipment and inventory damage, and repairs and cleanup
costs. The Company submitted an insurance claim and received a partial
settlement of $25, which was in excess of its $10 insurance deductible. The
insurance claim included $8 of margin not recognized from lost revenue due to
the fire. The Company anticipates a charge of approximately $10 to $15 in the
first quarter of 2020, with additional impacts in subsequent quarters as the
business continues to recover from the fire, which are also expected to be
covered by insurance proceeds.
COGS as a percentage of Sales was 81.3% in 2018 compared with 78.9% in 2017. The
increase was the result of higher aluminum prices; unfavorable aerospace product
mix; higher transportation costs; manufacturing inefficiencies in Engineered
Structures; performance shortfalls in the Disks asset group; costs related to
settlements of certain customer claims noted above; and the impact of a charge
related to a physical inventory adjustment at one plant in the GRP segment of
$23 that was recorded in the second quarter of 2018. While a portion of this
charge for the physical inventory adjustment related to prior years,
the majority related to the first half of 2018. The out-of-period amounts were
not material to any interim or annual periods.
Selling, General Administrative, and Other Expenses (SG&A). SG&A expenses were
$704, or 5.0% of Sales, in 2019 compared with $604, or 4.3% of Sales, in 2018.
The increase in SG&A of $100, or 17%, was primarily due to costs associated with
the planned Separation of Arconic of $78 and higher annual incentive
compensation accruals and executive compensation costs, partially offset by
lower costs driven by overhead cost reductions and lower net legal and other
advisory costs related to Grenfell Tower of $10, primarily due to insurance
reimbursements.
SG&A expenses were $604, or 4.3% of Sales, in 2018 compared with $715,
or 5.5% of Sales, in 2017. The decrease in SG&A of $111, or 16%, was the result
of proxy, advisory and governance-related costs of $58, costs related to the
Separation of Alcoa Inc. of $18, and costs associated with the Company's
Delaware reincorporation of $3 in 2017, none of which recurred in 2018.

                                       38

--------------------------------------------------------------------------------

Table of Contents

Additionally, lower expenses driven by lower annual incentive compensation
accruals and overhead cost reductions were somewhat offset by an increase in
legal and other advisory costs related to Grenfell Tower of $4 as well as
strategy and portfolio review costs of $7 in 2018.
Research and Development Expenses (R&D). R&D expenses were $70 in 2019 compared
with $103 in 2018. The decrease of $33, or 32%, was primarily due to the
consolidation of the Company's primary R&D facility in conjunction with ongoing
cost reduction efforts.
R&D expenses were $103 in 2018 compared with $109 in 2017. The decrease of $6,
or 6%, was the result of lower spending.
Provision for Depreciation and Amortization (D&A). The provision for D&A was
$536 in 2019 compared with $576 in 2018. The decrease of $40, or 7%, was
primarily due to the impact of divestitures, as well as asset impairments in the
EP&F segment during the second quarter of 2019 (see Note   M   to the
Consolidated Financial Statements in Part II, Item 8. (Financial Statements and
Supplementary Data) of this Form 10-K).
The provision for D&A was $576 in 2018 compared with $551 in 2017. The increase
of $25, or 5%, was primarily due to capital projects placed into service.
Impairment of Goodwill. In 2017, the Company recognized an impairment of
goodwill of $719 related to the annual impairment review of its Arconic Forgings
and Extrusions (AFE) business (see Goodwill under Critical Accounting Policies
and Estimates below).
Restructuring and Other Charges. Restructuring and other charges were $620 in
2019 compared with $9 in 2018 and $165 in 2017.
Restructuring and other charges in 2019 primarily included asset impairments of
$556, related to the Disks asset group of $428, agreements to sell the Company's
Brazilian rolling mill operations, the U.K. forgings business, and a small
additive business of $112, and a trade name intangible asset and properties,
plant, and equipment related to the Company's primary research and development
facility of $25; and a charge for layoff costs of $103, including the separation
of approximately 1,310 employees; partially offset by a benefit from the
elimination of the life insurance benefit for the U.S. salaried and
non-bargaining hourly retirees of the Company and its subsidiaries of $58; and a
gain for contingent consideration received from the sale of the Texarkana
rolling mill of $20.
Restructuring and other charges in 2018 primarily included a charge for pension
and other postretirement benefits net settlements and curtailments of $91; a
loss on the sale of the Hungary forgings business of $43; and a charge for
layoff costs of $20, including the separation of approximately 125 employees;
partially offset by a gain on the asset sale of the Texarkana rolling mill of
$154.
Restructuring and other charges in 2017 primarily included a charge for layoff
costs of $69, including the separation of approximately 880 employees; a charge
related to the sale of the Italy rolling mill of $60; and a charge for the
impairment of assets associated with the sale of the Latin America extrusions
business of $41.
See Note   C   to the to the Consolidated Financial Statements in Part II, Item
8. (Financial Statements and Supplementary Data) of this Form 10-K.
Interest Expense. Interest expense was $338 in 2019 compared with $378 in 2018.
The decrease of $40, or 11%, was primarily due to lower debt outstanding, driven
by the repayment of the aggregate outstanding principal amount of the 1.63%
Convertible Notes of approximately $403 on October 15, 2019, as well as costs
incurred of $19 in 2018 related to the premium paid on the early redemption of
the Company's then outstanding 5.72% Senior Notes due 2019 that did not recur in
2019.
Interest expense was $378 in 2018 compared with $496 in 2017.
The decrease of $118, or 24%, was the result of higher costs incurred in 2017
related to the early redemption of the Company's outstanding debt than were
incurred during 2018, as well as lower debt outstanding.
Other Expense (Income), Net. Other expense, net was $122 in 2019 compared with
$79 in 2018. The increase of $43 was primarily due to an increase in deferred
compensation arrangements and related investment performance and the benefit
recognized in 2018 from establishing a tax indemnification receivable reflecting
Alcoa Corporation's 49% share of a Spanish tax reserve of $29 that did not recur
in 2019, partially offset by favorable foreign currency movements.
Other expense, net was $79 in 2018 compared with Other income, net of
$486 in 2017. The decrease in Other income, net of $565 was the result of gains
recorded during 2017 related to the sale of a portion of Arconic's investment in
Alcoa Corporation common stock of $351, the Debt-for-Equity Exchange (in April
and May 2017, the Company acquired a portion of its outstanding notes held by
two investment banks (the "Investment Banks") in exchange for cash and the
Company's remaining 12,958,767 shares (valued at $35.91 per share) in Alcoa
Corporation stock and recorded a gain of $167), income associated with an
adjustment to the contingent earn-out liability related to the Firth Rixson
acquisition of $81 (see Note   S   to the Consolidated Financial Statements in
Part II, Item 8. (Financial Statements and Supplementary Data) of this Form
10-K), and

                                       39

--------------------------------------------------------------------------------

Table of Contents

income due to the reversal of a liability associated with a separation-related
guarantee of $25, none of which recurred in 2018, and unfavorable foreign
currency movements, somewhat offset by lower non-service related net periodic
benefit cost and the benefit of $29 from establishing a tax indemnification
receivable reflecting Alcoa Corporation's 49% share of a Spanish tax reserve
(see Note   T   to the Consolidated Financial Statements in Part II, Item 8.
(Financial Statements and Supplementary Data) of this Form 10-K).
Income Taxes. Arconic's effective tax rate was 18.3% in 2019 compared with the
U.S. federal statutory rate of 21%. The effective rate differs from the U.S.
federal statutory rate primarily as a result of a $94 net benefit related to a
U.S. tax election which caused the deemed liquidation of a foreign subsidiary's
assets into its U.S. tax parent, a $24 net benefit associated with the deduction
of foreign taxes that were previously claimed as a U.S. foreign tax credit, and
a $12 net benefit for foreign tax rate changes, partially offset by the tax
impact of $89 of non-deductible executive compensation and transaction costs,
$53 of impairment charges related to the Company's Brazilian rolling mill
operations and other foreign losses with no tax benefit, a $14 charge for U.S.
state taxes, and by foreign income subject to U.S. taxes.
Arconic's effective tax rate was 26.0% in 2018 compared with the U.S. federal
statutory rate of 21%. The effective tax rate differs from the U.S. federal
statutory rate primarily as a result of a $60 charge to establish a tax reserve
in Spain, a $59 net charge resulting from the Company's finalized analysis of
the U.S. Tax Cuts and Jobs Acts of 2017 ("the 2017 Act"), a $13 charge for U.S.
state taxes, foreign income taxed in higher rate jurisdictions, and foreign
losses with no tax benefit, partially offset by a $74 benefit related to the
reversal of a foreign recapture obligation, a $38 benefit to reverse a foreign
tax reserve that is effectively settled, and a $10 benefit for the release of
U.S. valuation allowances.
Arconic's effective tax rate was 115.7% in 2017 compared with the U.S. federal
statutory rate of 35%. The effective tax rate differs from the U.S. federal
statutory rate primarily as a result of a $719 impairment of goodwill, a $41
impairment of assets in the Latin America extrusions business, and a $60 charge
related to the sale of a rolling mill in Italy that are nondeductible for income
tax purposes, a $272 tax charge as a provisional impact of the 2017 Act, and a
$23 tax charge for an increase in an uncertain tax position in Germany,
partially offset by a $73 tax benefit related to the sale and Debt-for-Equity
Exchange of the Alcoa Corporation stock, a $69 tax benefit for the release of
U.S. state valuation allowances net of the federal tax benefit, a $27 favorable
tax impact associated with a non-taxable earn-out liability adjustment in
connection with the Firth Rixson acquisition, and by foreign income taxed in
lower rate jurisdictions. Arconic's effective tax rate was 356.5% in 2016
compared with the U.S. fed
Arconic anticipates that the effective tax rate in 2020 will be between 26.5%
and 28.5%. However, the planned Separation of Arconic, other 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.
Net Income. Net income was $470 for 2019, or $1.03 per diluted share, compared
to Net income of $642 for 2018, or $1.33 per share. The decrease in results of
$172 was primarily due to higher Restructuring and other charges; higher SG&A
expenses due to costs associated with the planned Separation of Arconic of $70
($78 before-tax) and higher annual incentive compensation accruals and executive
compensation costs; and higher Other expense, net due to an increase in deferred
compensation arrangements and related investment performance and the benefit
recognized in 2018 from establishing a tax indemnification receivable reflecting
Alcoa Corporation's 49% share of a Spanish tax reserve of $28 ($29 before-tax)
that did not recur in 2019; partially offset by volume growth; favorable product
pricing; net cost savings; lower D&A due to the impact of divestitures as well
as asset impairments in the EP&F segment; lower Interest expense due to lower
debt outstanding and costs incurred of $15 ($19 before-tax) in 2018 related to
the premium paid on the early redemption of debt that did not recur in 2019;
lower R&D expenses due to the consolidation of the Company's primary R&D
facility in conjunction with ongoing cost reduction efforts; and lower Income
taxes primarily as a result of a benefit related to a U.S. tax election which
caused the deemed liquidation of a foreign subsidiary's assets into its U.S. tax
parent.
Net income was $642 for 2018, or $1.30 per diluted share, compared to a Net loss
of $74 for 2017, or $0.28 per share. The increase in results of $716 was due in
part to the following items that occurred in 2017 but did not recur in 2018: a
charge for goodwill impairment of $719 ($719 pre-tax); gains related to the sale
of a portion of Arconic's investment in Alcoa Corporation common stock and the
Debt-for-Equity Exchange of $405 ($518 pre-tax); and favorable adjustments to
contingent earn-out and guarantee liabilities of $97 ($106 pre-tax). Additional
favorable impacts in 2018 included: volume growth across both segments; lower
SG&A expenses due to proxy and separation costs incurred in 2017 and not
recurring in 2018, as well as lower incentive compensation accruals; lower
Restructuring and other charges driven primarily by the gain on sale of the
Texarkana rolling mill, offset by pension settlement charges and the loss on
sale of the forgings business in Hungary; lower Interest expense due to lower
debt levels; lower pension expenses; and lower Income taxes. These favorable
impacts were partially offset by unfavorable aerospace product mix, higher
aluminum prices, manufacturing inefficiencies in Engineered Structures,
performance shortfalls in the Disks asset group, settlements of certain customer
claims, and an unfavorable physical inventory adjustment at one plant.

                                       40

--------------------------------------------------------------------------------

Table of Contents

Segment Information
Arconic's operations consist of two worldwide reportable segments: Engineered
Products and Forgings (EP&F) and Global Rolled Products (GRP). Segment
performance under Arconic's management reporting system is evaluated based on a
number of factors; however, the primary measure of performance is Segment
operating profit. Arconic's definition of Segment operating profit is Operating
income excluding Special items. Special items include Restructuring and other
charges and Impairment of goodwill. Segment operating profit may not be
comparable to similarly titled measures of other companies. Differences between
segment totals and consolidated Arconic are in Corporate.
In the third quarter of 2019, the Company realigned its operations by
eliminating its Transportation and Construction Solutions (TCS) segment and
transferring the Forged Wheels business to its EP&F segment and the Building and
Solutions Systems (BCS) business to its GRP segment, consistent with how the
Chief Executive Officer is assessing operating performance and allocating
capital in conjunction with the planned Separation of Arconic (see Note   U 

to

the Consolidated Financial Statements in Part II, Item 8. (Financial Statements
and Supplementary Data) of this Form 10-K). The Latin America extrusions
business, which was formerly part of the Company's TCS segment until its sale in
April of 2018 (see Note   S   to the Consolidated Financial Statements in Part
II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K),
was moved to Corporate. In the first quarter of 2019, management transferred its
aluminum extrusions operations from its Engineered Structures business unit
within the EP&F segment to the GRP segment, based on synergies with the GRP
segment including similar customer base, technologies, and manufacturing
capabilities. Prior period financial information has been recast to conform to
current year presentation.
Arconic produces aerospace engine parts and components, aerospace fastening
systems, and aluminum sheet and plate products for Boeing 737 MAX airplanes. The
temporary reduction in the production rate of the 737 MAX airplanes that was
announced by Boeing in April 2019 did not have a significant impact on the
Company's sales or segment operating profit in 2019. In late December 2019,
Boeing announced a temporary suspension of production of the 737 MAX airplanes.
In 2020, the Company expects a reduction in production rate to have a negative
impact on sales of approximately $400 along with a corresponding impact on
segment operating profit in the EP&F and GRP segments.
Segment operating profit for all reportable segments totaled $2,015 in 2019,
$1,586 in 2018, and $1,689 in 2017. The following information provides Sales and
Segment operating profit for each reportable segment, as well as certain
shipment data for GRP, for each of the three years in the period ended
December 31, 2019. See Note   B   to the Consolidated Financial Statements in
Part II, Item 8. (Financial Statements and Supplementary Data) of this Form
10-K.
Engineered Products and Forgings
                           2019       2018       2017

Third-party sales $ 7,105 $ 6,798 $ 6,300 Segment operating profit $ 1,390 $ 1,105 $ 1,119

The Engineered Products and Forgings segment produces products that are used
primarily in the aerospace (commercial and defense), industrial, commercial
transportation, and power generation end markets. Such products include
fastening systems (aluminum, titanium, steel, and nickel superalloys) and
seamless rolled rings (mostly nickel superalloys); investment castings (nickel
superalloys, titanium, and aluminum), including airfoils; forged jet engine
components (e.g., jet engine disks); extruded, machined and forged aircraft
parts (titanium and aluminum); and forged aluminum commercial vehicle wheels,
all of which are sold directly to customers and through distributors.
Approximately 70% of the third-party sales in this segment are from the
aerospace end market. A small part of this segment also produces various forged
and machined metal products (titanium and aluminum) for various end markets.
Seasonal decreases in sales are experienced for certain products in the third
quarter of the year due to the European summer slowdown. 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.
On December 1, 2019, Arconic completed the divestiture of its forgings business
in the United Kingdom. The forgings business primarily produces steel, titanium,
and nickel based forged components for aerospace, mining, and off-highway
markets. This business generated third-party sales of $116, $131, and $127 in
2019, 2018, and 2017, respectively, and had 540 employees at the time of the
divestiture.
On December 31, 2018, as part of the Company's then ongoing strategy and
portfolio review, Arconic completed the sale of its forgings business in Hungary
that manufactured high volume steel forgings for drivetrain components in the
European heavy-duty truck and automotive market. This business generated
third-party sales of $32 and $38 in 2018 and 2017, respectively, and had 180
employees at the time of the divestiture.
Third-party sales for the Engineered Products and Forgings segment increased
$307, or 5%, in 2019 compared with 2018, primarily as a result of higher
aerospace and commercial transportation volumes and favorable product pricing,
partially offset by unfavorable foreign currency movements and lower sales of
$47 from divestitures of forgings businesses in the United Kingdom (divested in
December 2019) and Hungary (divested in December 2018).

                                       41

--------------------------------------------------------------------------------

Table of Contents

Third-party sales for this segment increased $498, or 8%, in 2018 compared with
2017, primarily attributable to higher volumes in the aerospace engines,
defense, and commercial transportation end markets and favorable foreign
currency movements, partially offset by a decline in volumes in the industrial
gas turbine market and lower aerospace pricing principally in the fasteners
business.
Segment operating profit for the Engineered Products and Forgings segment
increased $285, or 26%, in 2019 compared with 2018, due to net cost savings,
higher volumes as noted previously, favorable product pricing, and lower raw
material costs, partially offset by the unfavorable impact of new product
introductions in aerospace engines and unfavorable product mix.
Segment operating profit for this segment decreased $14, or 1%, in 2018 compared
with 2017, primarily attributable to performance shortfalls in the Disks asset
group; manufacturing inefficiencies in the Engineered Structures business,
associated with the now resolved forging press outage at the Cleveland facility
that impacted the fourth quarter of 2018 with higher costs of $10; unfavorable
aerospace engine mix and new product introductions; and lower aerospace pricing
principally in the fasteners business; partly offset by the strength in
aerospace engine, defense, and commercial transportation volumes and net cost
savings.
In 2020 compared to 2019, demand in the commercial aerospace end market,
excluding the impact of Boeing 737 MAX, is expected to remain strong, driven by
the ramp-up of new aerospace engine platforms. Demand in the defense end market
is expected to continue to grow due to the ramp-up of certain aerospace
programs, while the commercial transportation end market is expected to be
down. Net cost savings and favorable pricing are expected to continue.
In mid-February 2020, a fire occurred at the Company's forged wheels plant
located in Barberton, Ohio. While some equipment has safely been returned to
service at reduced production levels, the extent of the damage and the financial
impact are not yet known as the investigation into the cause of the fire and its
full impact continues. The Company has insurance with a deductible of $10.
Global Rolled Products
                                       2019       2018       2017
Third-party sales                    $ 7,082    $ 7,223    $ 6,540
Intersegment sales                       183        205        183
Total sales                          $ 7,265    $ 7,428    $ 6,723
Segment operating profit             $   625    $   481    $   570

Third-party aluminum shipments (kmt) 1,379 1,301 1,249

The Global Rolled Products segment produces aluminum sheet and plate, aluminum
extruded and machined parts, integrated aluminum structural systems, and
architectural extrusions used in the automotive, aerospace, building and
construction, industrial, packaging, and commercial transportation end markets.
Products are sold directly to customers and through distributors. 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. 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 2017, Arconic completed the sale of its Fusina, Italy rolling mill. The
rolling mill generated third-party sales of $54 in 2017 and had approximately
312 employees.
Third-party sales for the Global Rolled Products segment decreased $141, or 2%,
in 2019 compared with 2018, primarily as a result of lower aluminum prices, the
absence of sales of $144 from the completed ramp down of Arconic's North
American packaging operations (completed in December 2018), and unfavorable
foreign currency movements, partially offset by favorable product pricing and
mix and higher volumes in the packaging, aerospace, and industrial end markets.
Third-party sales for this segment increased $683, or 10%, in 2018 compared with
2017, primarily attributable to higher aluminum prices; higher volumes in the
automotive, commercial transportation, and industrial end markets; and favorable
product mix; partially offset by the absence of sales of $54 from the rolling
mill in Fusina, Italy and the planned ramp down of Arconic's North American
packaging operations.
Segment operating profit for the Global Rolled Products segment increased $144,
or 30%, in 2019 compared with 2018, due to favorable pricing adjustments on
industrial and commercial transportation products; favorable aluminum price
impacts; net cost savings; favorable product mix; and the impact of a charge
incurred in 2018 related to a physical inventory adjustment at one plant that
did not recur in 2019; partially offset by operational challenges at one
aluminum extrusions plant and the impact of the Tennessee plant transition to
industrial production.

                                       42

--------------------------------------------------------------------------------

Table of Contents

Segment operating profit for this segment decreased $89, or 16%, in 2018
compared with 2017, primarily driven by operational challenges at one plant,
higher aluminum prices, unfavorable aerospace wide-body production mix, higher
transportation costs and scrap spreads, and a physical inventory adjustment of
$23; partially offset by higher automotive, commercial transportation and
industrial volumes.
On February 1, 2020, Arconic sold its aluminum rolling mill in Itapissuma,
Brazil. This rolling mill generated sales of $143 in 2019 and had 513 employees
at the time of divestiture.
In 2020 compared to 2019, demand from the automotive end market is expected to
be up, while headwinds will continue in the commercial transportation end
market. The aerospace airframe end market will be heavily influenced by the 737
MAX situation. Growth is expected with the Tennessee industrial products
ramp-up. The BCS business expects continued growth and margin expansion. Net
productivity improvements are also anticipated to continue.
Reconciliation of Total segment operating profit to Consolidated income from
continuing operations before income taxes
                                                    2019           2018     

2017

Total segment operating profit                  $    2,015     $    1,586     $    1,689
Unallocated amounts:
Impairment of goodwill                                   -              -           (719 )
Restructuring and other charges                       (620 )           (9 )         (165 )
Corporate expense                                     (360 )         (252 )         (325 )
Consolidated operating income                   $    1,035     $    1,325     $      480
Interest expense                                      (338 )         (378 )         (496 )
Other (expense) income, net                           (122 )          (79 )          486

Consolidated income from continuing operations $ 575 $ 868

   $      470
before income taxes


See Impairment of Goodwill, Restructuring and Other Charges, Interest Expense,
and Other Expense (Income), Net, discussions above under Results of Operations
for reference.
Corporate expense increased $108, or 43%, in 2019 compared with 2018 primarily
due to costs associated with the planned Separation of Arconic of $78; higher
annual incentive compensation accruals and executive compensation costs;
environmental remediation costs for Grasse River of $25; impairment of energy
business assets of $10; net impacts associated with a fire at a fasteners plant
of $9 (net of insurance reimbursements); and collective bargaining agreement
negotiation costs of $9; partially offset by costs incurred in 2018 that did not
recur in 2019 related to settlements of certain customer claims of $38; lower
costs driven by overhead cost reductions; lower research and development
expenses; and lower net legal and other advisory costs related to Grenfell Tower
of $10 primarily due to insurance reimbursements.
Corporate expense decreased $73, or 22%, in 2018 compared with 2017 primarily
due to proxy, advisory and governance-related costs of $58 and costs related to
the Separation of Alcoa Inc. of $18 in 2017, neither of which recurred in 2018.
Also, lower expenses driven by lower annual incentive compensation accruals and
overhead cost reductions were partially offset by costs incurred in the second
quarter of 2018 related to the settlements of certain customer claims primarily
related to product introductions of $38, an increase in legal and other advisory
costs related to Grenfell Tower of $4, and strategy and portfolio review costs
of $7 in 2018.
Environmental Matters
See the Environmental Matters section of Note   T   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. Management continued to focus on actions to improve Arconic's
cost structure and liquidity, providing the Company with the ability to operate
effectively. Such actions included procurement efficiencies and overhead
rationalization to reduce costs, working capital initiatives, and maintaining a
sustainable level of capital expenditures.
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.

                                       43

--------------------------------------------------------------------------------

Table of Contents

At December 31, 2019, cash and cash equivalents of Arconic were $1,648, of which
$414 was held by Arconic's non-U.S. subsidiaries. If the cash held by non-U.S.
subsidiaries were to be repatriated to the U.S., the company does not expect
there to be additional material income tax consequences.
Operating Activities
Cash provided from operations in 2019 was $406 compared with $217 in 2018. The
increase of $189, or 87%, was primarily due to higher operating results and
lower pension contributions of $30, partially offset by higher working capital
of $112. The components of the change in working capital included unfavorable
changes in accounts payable of $395 and taxes, including income taxes of $106,
partially offset by favorable changes in receivables of $165 and accrued
expenses of $148.
Cash provided from operations in 2018 was $217 compared with Cash used for
operations $39 in 2017. The increase of $256 was primarily due to lower working
capital of $209 and a favorable change in noncurrent liabilities of $169 due
primarily to reversals in 2017 related to the Firth Rixson earn-out liability of
$81 and separation-related guarantee liability of $25, partially offset by lower
operating results. The components of the change in working capital included
favorable changes in accounts payable of $277, taxes, including income taxes of
$127, and inventories of $118, partially offset by unfavorable changes in
receivables of $227, accrued expenses of $74, and prepaid expenses and other
current assets of $12.
Financing Activities
Cash used for financing activities was $1,568 in 2019 compared with $649 in 2018
and $1,015 in 2017.
The use of cash in 2019 was primarily related to the repurchase of $1,150 of
common stock (see Note   H   to the Consolidated Financial Statements in Part
II, Item 8. (Financial Statements and Supplementary Data); repayments on
borrowings under certain revolving credit facilities (see below) and repayments
on debt, primarily the aggregate outstanding principal amount of the 1.63%
Convertible Notes of approximately $403 (see Note   P   to the Consolidated
Financial Statements in Part II, Item 8. (Financial Statements and Supplementary
Data); and dividends paid to shareholders of $57. These items were partially
offset by additions to debt for borrowings under certain revolving credit
facilities of $400 and proceeds from the exercise of employee stock options of
$56.
The use of cash in 2018 was principally the result of $1,103 in repayments on
borrowings under certain revolving credit facilities (see below) and repayments
on debt, primarily related to the early redemption of the then remaining
outstanding 5.72% Notes due in 2019 (see Note   P   to the Consolidated
Financial Statements in Part II, Item 8. (Financial Statements and Supplementary
Data) of this Form 10-K) and $119 in dividends to shareholders. These items were
partially offset by $600 in additions to debt, primarily from borrowings under
certain revolving credit facilities.
The use of cash in 2017 was principally the result of $1,634 in repayments on
borrowings under certain revolving credit facilities (see below) and repayments
on debt, primarily related to the early redemption of the Company's 6.50% Bonds
due 2018, 6.75% Notes due 2018, and a portion of the 5.72% Notes due 2019 (see
Note   P   to the Consolidated Financial Statements in Part II, Item 8.
(Financial Statements and Supplementary Data) of this Form 10-K); $162 in
dividends to shareholders; and $52 in premiums paid on early redemption of debt.
These items were partially offset by $816 in additions to debt, primarily from
borrowings under certain revolving credit facilities, and $50 of proceeds from
the exercise of stock options.
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. On October 2, 2017, all outstanding 24,975,978
depositary shares were converted at a rate of 1.56996 into 39,211,286 common
shares; 24,022 depositary shares were previously tendered for early conversion
into 31,420 shares of Arconic common stock. No gain or loss was recognized
associated with this noncash equity transaction.
Arconic maintains a Five-Year Revolving Credit Agreement (the "Credit
Agreement") with a syndicate of lenders and issuers named therein that expires
on June 29, 2023 and provides for a senior unsecured revolving credit facility
of $3,000. In addition to the Credit Agreement, Arconic has a number of other
credit agreements that provide a combined borrowing capacity of $640 as of
December 31, 2019. See Note   P   to the Consolidated Financial Statements in
Part II, Item 8. (Financial Statements and Supplementary Data) of this Form
10-K.
Arconic's costs of borrowing and ability to access the capital markets are
affected not only by market conditions but also by the short- and long-term debt
ratings assigned to Arconic by the major credit rating agencies.
On May 1, 2017, Standard and Poor's Ratings Services (S&P) affirmed Arconic's
long-term debt at BBB-, an investment grade rating, with a stable outlook, and
its short-term debt at A-3. On February 7, 2019, S&P placed the rating on
negative credit watch and, subsequently, on April 26, S&P affirmed the long-term
debt rating at BBB- but changed the outlook to negative. On January 28, 2020,
S&P affirmed the long-term debt rating at BBB- but changed the outlook to stable
in expectation of the separation impact. On November 1, 2016, Moody's Investor
Service (Moody's) downgraded Arconic's long-term debt rating

                                       44

--------------------------------------------------------------------------------

Table of Contents

from Ba1, a non-investment grade, to Ba2 with a stable outlook and its
short-term debt rating from Speculative Grade Liquidity-1 to Speculative Grade
Liquidity-2. Moody's ratings and outlooks were affirmed on November 2, 2017,
October 8, 2018, and October 9, 2019. On January 24, 2020, Moody's affirmed the
long-term debt rating at Ba2 but changed the outlook to negative. On April 21,
2016, Fitch affirmed Arconic's long-term debt rating at BB+, a non-investment
grade, and short-term debt at B. Additionally, Fitch changed the outlook from
positive to evolving. On July 7, 2016, Fitch changed the outlook from evolving
to stable (ratings and outlook were affirmed on July 3, 2017). On September 27,
2018, Fitch changed the outlook from stable to positive (ratings and outlook
were affirmed on October 8, 2019).
Investing Activities
Cash provided from investing activities was $583 in 2019 compared with $565 in
2018 and $1,320 in 2017.
The source of cash in 2019 was primarily due to cash receipts from sold
receivables of $995, proceeds from the sale of assets and businesses of $103
(see Note   S   to the Consolidated Financial Statements in Part II, Item 8.
(Financial Statements and Supplementary Data), and the sale of fixed income
securities of $73, partially offset by capital expenditures of $586, including
expansion of a wheels plant in Hungary, expansion of aerospace airfoils capacity
in the United States, and transition of the Tennessee plant to industrial
production.
The source of cash in 2018 included cash receipts from sold receivables of
$1,016 and proceeds from the sale of the Texarkana, Texas rolling mill and cast
house of $302, partially offset by capital expenditures of $768, including the
horizontal heat treat furnace at the Davenport, Iowa plant and an expansion of a
wheels plant in Szekesfehervar, Hungary.
The source of cash in 2017 included proceeds of $888 from the sale of a portion
of Arconic's investment in Alcoa Corporation common stock, cash receipts from
sold receivables of $792, and the receipt of proceeds from the sale of the
Yadkin Hydroelectric Project of $243 (see Note U to the Consolidated Financial
Statements in Part II, Item 8. (Financial Statements and Supplementary Data) of
this Form 10-K), somewhat offset by cash used for capital expenditures of $596,
including the aerospace expansion (very thick plate stretcher and horizontal
heat treat furnace) at the Davenport, Iowa plant and a titanium aluminide
furnace at the Niles, Ohio facility, and the injection of $10 into the rolling
business in Italy prior to its sale.
Noncash Financing and Investing Activities
On October 2, 2017, all outstanding 24,975,978 depositary shares (each
depositary share representing a 1/10th interest in a share of the mandatory
convertible preferred stock) were converted at a rate of 1.56996 into 39,211,286
common shares; 24,022 depositary shares were previously tendered for early
conversion into 31,420 shares of Arconic common stock. No gain or loss was
recognized associated with this equity transaction. See Note   H   to the
Consolidated Financial Statements in Part II, Item 8. (Financial Statements and
Supplementary Data) of this Form 10-K.
In the second quarter of 2017, the Company completed a Debt-for-Equity Exchange
with the Investment Banks for the remaining portion of Arconic's retained
interest in Alcoa Corporation common stock for a portion of the Company's
outstanding notes held by the Investment Banks for $465 including accrued and
unpaid interest. See Note   P   to the Consolidated Financial Statements in Part
II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K.

                                       45

--------------------------------------------------------------------------------

Table of Contents

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, 2019, a summary of Arconic's outstanding
contractual obligations is as follows (these contractual obligations are grouped
in the same manner as they are classified in the Statement of Consolidated Cash
Flows in order to provide a better understanding of the nature of the
obligations and to provide a basis for comparison to historical information):
                                    Total         2020         2021-2022       2023-2024       Thereafter
Operating activities:
Energy-related purchase          $      57     $      29     $        25     $         3     $          -
obligations
Raw material purchase                  569           495              64               8                2
obligations
Other purchase obligations             134            80              49               5                -
Operating leases                       317            81             108              58               70
Interest related to total debt       1,975           344             444             344              843
Estimated minimum required           1,705           475             655             575                -
pension funding
Other postretirement benefit           655            80             160             155              260

payments

Layoff and other restructuring          34            34               -               -                -

payments

Deferred revenue arrangements           36             6              30               -                -
Uncertain tax positions                220             -               -               -              220
Financing activities:
Total debt                           5,940         1,028           1,871           1,246            1,795
Dividends to shareholders                -             -               -               -                -
Investing activities:
Capital projects                       401           247             121              33                -
Totals                           $  12,043     $   2,899     $     3,527     $     2,427     $      3,190


Obligations for Operating Activities
Energy-related purchase obligations consist primarily of electricity and natural
gas contracts with expiration dates ranging from one year to five 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
six 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, 2019 and is calculated on debt with maturities that extend to 2042.
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, and health care cost trend rates, among
others. 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. Periodically, Arconic contributes additional amounts as deemed
appropriate. The estimates reported in the preceding table include amounts
sufficient to meet the minimum required, along with approximately $60 of
contributions in 2020 related to actions designed to reduce future obligations.
Arconic has determined that it is not practicable to present pension funding and
other postretirement benefit payments beyond 2024 and 2029, respectively.
Layoff and other restructuring payments to be paid within one year primarily
relate to severance costs, special layoff benefit payments, and lease
termination costs.
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.

                                       46

--------------------------------------------------------------------------------

Table of Contents

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, 2019. 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
Arconic has historically paid quarterly dividends on its preferred and common
stock. Including dividends on preferred stock, Arconic paid $57 in dividends to
shareholders during 2019. 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. As of December 31, 2019, there were
432,855,183 shares of outstanding common stock and 546,024 shares of outstanding
Class A preferred stock. In 2019, the preferred stock dividend was $3.75 per
share and the common stock dividend was $0.12 per share.
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by
management as of December 31, 2019. 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
less than four percent of sales in 2020.
Off-Balance Sheet Arrangements
At December 31, 2019, Arconic had outstanding bank guarantees related to tax
matters, outstanding debt, workers' compensation, environmental obligations,
energy contracts, and customs duties, among others. The total amount committed
under these guarantees, which expire at various dates between 2020 and 2040 was
$31 at December 31, 2019.
Pursuant to the Separation and Distribution Agreement between Arconic and Alcoa
Corporation, Arconic was required to provide certain guarantees for Alcoa
Corporation, which had a combined fair value of $9 and $6 at December 31, 2019
and 2018, respectively, and were included in Other noncurrent liabilities and
deferred credits on the accompanying Consolidated Balance Sheet. Arconic was
required to provide guarantees related to two long-term supply agreements for
energy for Alcoa Corporation facilities in the event of an Alcoa Corporation
payment default. In October 2017, Alcoa Corporation announced that it had
terminated one of the two agreements, the electricity contract with Luminant
Generation Company LLC that was tied to its Rockdale Operations, effective as of
October 1, 2017. As a result of the termination of the Rockdale electricity
contract, Arconic recorded income of $25 in the fourth quarter of 2017
associated with reversing the fair value of the electricity contract guarantee.
For the remaining long-term supply agreement, Arconic is required to provide a
guarantee up to an estimated present value amount of approximately $1,353 and
$1,087 at December 31, 2019 and December 31, 2018, respectively, in the event of
an Alcoa Corporation payment default. This guarantee expires in 2047. For this
guarantee, subject to its provisions, Arconic is secondarily liable in the event
of a payment default by Alcoa Corporation. Arconic currently views the risk of
an Alcoa Corporation payment default on its obligations under the contract to be
remote. In December 2019, Arconic entered into a one-year insurance policy with
a limit of $80 relating to the remaining long-term energy supply agreement. The
premium is expected to be paid by Alcoa Corporation. The decision to enter into
a claims purchase agreement or insurance policy will be made on an annual basis
going forward.
Arconic has outstanding letters of credit primarily related to workers'
compensation, environmental obligations, and leasing obligations. The total
amount committed under these letters of credit, which automatically renew or
expire at various dates, mostly in 2020, was $142 at December 31, 2019.
Pursuant to the Separation and Distribution Agreement, Arconic was required to
retain letters of credit of $52 that had previously been provided related to
both Arconic and Alcoa Corporation workers' compensation claims which occurred
prior to November 1, 2016. Alcoa Corporation workers' compensation claims and
letter of credit fees paid by Arconic are being proportionally billed to and are
being fully reimbursed by Alcoa Corporation.
Arconic has outstanding surety bonds primarily related to tax matters, contract
performance, workers' compensation, environmental-related matters, and customs
duties. The total amount committed under these surety bonds, which expire at
various dates, primarily in 2020, was $50 at December 31, 2019.
Pursuant to the Separation and Distribution Agreement, Arconic was required to
provide surety bonds related to Alcoa Corporation workers' compensation claims
which occurred prior to November 1, 2016 and, as a result, Arconic has $24 in
outstanding surety bonds relating to these liabilities. Alcoa Corporation
workers' compensation claims and surety bond fees paid by Arconic are being
proportionally billed to and are being fully reimbursed by Alcoa Corporation.

                                       47

--------------------------------------------------------------------------------

Table of Contents

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. 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 sales, 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.
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 realign 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. For 2019, Arconic had seven reporting units, of which four were
included in the EP&F segment (Fastening Systems, Engineered Structures, Engine
Products, and Forged Wheels), and three were included in the GRP segment (Global
Rolled Products, Aluminum Extrusions, and BCS.)
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 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
quantitative impairment test. The ultimate outcome of the goodwill impairment

                                       48

--------------------------------------------------------------------------------

Table of Contents

review for a reporting unit should be the same whether an entity chooses to
perform the qualitative assessment or proceeds directly to the quantitative
impairment test.
Arconic determines annually, based on facts and circumstances, which of its
reporting units will be subject to the qualitative assessment. For those
reporting units where a qualitative assessment is either not performed or for
which the conclusion is that an impairment is more likely than not, a
quantitative impairment test will be performed. Arconic's policy is that a
quantitative impairment test be performed for each reporting unit 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
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 2019 annual review of goodwill, management proceeded directly to the
quantitative impairment test for all seven of its reporting units. The estimated
fair values for each of the seven reporting units exceeded their respective
carrying values by more than 50%, thus, there was no goodwill impairment. Under
the 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 sales
growth (volumes and pricing), production costs, capital spending, and discount
rate. 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 WACC
rate for the individual reporting units is estimated with the assistance of
valuation experts. Arconic would recognize an impairment charge for the amount
by which the carrying amount exceeds the reporting unit's fair value without
exceeding the total amount of goodwill allocated to that reporting unit.
In the first quarter of 2019, management transferred its aluminum extrusions
business (Aluminum Extrusions) from Engineered Structures within the EP&F
segment to the GRP segment, based on synergies with the GRP segment including
similar customer base, technologies, and manufacturing capabilities. Management
assessed and concluded that the remaining Engineered Structures business unit
and the Aluminum Extrusions business unit represent reporting units. As a result
of the reorganization, goodwill of $110 was reallocated from Engineered
Structures to Aluminum Extrusions and these reporting units were evaluated for
impairment during the first quarter of 2019. The estimated fair value of each of
these reporting units substantially exceeded their carrying value; thus, there
was no goodwill impairment. In the second quarter of 2019, management
transferred its castings operations from Engineered Structures to Engine
Products within the EP&F segment based on process expertise for investment
castings that existed within Engine Products. As a result, goodwill of $105 was
reallocated from Engineered Structures to Engine Products and these reporting
units were evaluated for impairment during the second quarter of 2019. The
estimated fair value of each of these reporting units substantially exceeded
their carrying value; thus, there was no impairment. As a result of the
elimination of the TCS segment in the third quarter of 2019 (see Segment
Information above), the Company transferred $7 of Forged Wheels goodwill and $68
of BCS goodwill from the TCS segment to the EP&F and GRP segments, respectively.
Both Forged Wheels and BCS are considered reporting units.
In the second quarter of 2019, as a result of the decline in the forecasted
financial performance and related impairment of long-lived assets of the Disks
asset group within Engine Products, the Company also performed an interim
impairment evaluation of goodwill for Engine Products. The estimated fair value
of the reporting unit was substantially in excess of its carrying value; thus,
there was no impairment of goodwill.
In connection with the interim impairment evaluation of long-lived assets for
the Disks asset group within Engine Products in the second quarter of 2018,
which resulted from a decline in forecasted financial performance for the
business in connection with its updated three-year strategic plan, the Company
also performed an interim impairment evaluation of goodwill for Engine Products.
The estimated fair value of the reporting unit was substantially in excess of
the carrying value; thus, there was no impairment of goodwill.
Goodwill impairment tests in 2018 and 2017 indicated that goodwill was not
impaired for any of the Company's reporting units, except for the AFE business
(the AFE operations were realigned and transferred to Aluminum Extrusions and
Engine Products) whose estimated fair value was lower than its carrying value.
As such, Arconic recorded an impairment for the full amount of goodwill in the
AFE reporting unit of $719 in 2017. The decrease in fair value of AFE was
primarily due to unfavorable performance that was impacting operating margins
and a higher discount rate due to an increase in the risk-free rate of return,
while the carrying value increased compared to prior year.

                                       49

--------------------------------------------------------------------------------

Table of Contents

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 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 measured 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 the assets also
require significant judgments.
During the second quarter of 2019, the Company updated its five-year strategic
plan and determined that there was a decline in the forecasted financial
performance for the Disks asset group within the EP&F segment. As such, the
Company evaluated the recoverability of the Disks asset group long-lived assets
by comparing the carrying value to the undiscounted cash flows of the Disks
asset group. The carrying value exceeded the undiscounted cash flows and
therefore the Disks asset group long-lived assets were deemed to be
impaired. The impairment charge was measured as the amount of carrying value in
excess of fair value of the long-lived assets, with fair value determined using
a DCF model and a combination of sales comparison and cost approach valuation
methods including an estimate for economic obsolescence. The impairment charge
of $428 recorded in the second quarter of 2019 impacted properties, plants, and
equipment; intangible assets; and certain other noncurrent assets by $198, $197,
and $33, respectively. The impairment charge was recorded in Restructuring and
other charges in the Statement of Consolidated Operations.
During the second quarter of 2018, the Company updated its three-year strategic
plan and determined that there was a decline in the forecasted financial
performance for the Disks asset group within the EP&F segment. As such, the
Company evaluated the recoverability of the long-lived assets by comparing their
carrying value of approximately $515 to the estimated undiscounted net cash
flows of the Disks asset group, resulting in an estimated fair value in excess
of their carrying value of approximately 13%; thus, there was no impairment.
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
(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, industrials,
transportation, and utilities, among others. The yield curve model parallels the
plans' projected cash flows, which have an average duration of 10 years. 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 2019,
2018, and 2017, the discount rate used to determine benefit obligations for U.S.
pension and other postretirement benefit plans was 3.30%, 4.35%, and 3.75%,
respectively. The impact on the liabilities of a change in the discount rate of
1/4 of 1% would be approximately $220 and either a charge or credit of
approximately $1 to after-tax earnings in the following 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 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 2019, 2018, and 2017, management used 7.00%, 7.00%, and 7.75%, respectively,
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

                                       50

--------------------------------------------------------------------------------

Table of Contents

return developed by asset class. For 2020, management anticipates that 7.00%
will be the expected long-term rate of return. The decrease of 75 basis points
in the 2018 expected long-term rate of return was due to a decrease in the
expected return by asset class and the 20-year moving average. 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 $9 for 2020.
In 2019, a net loss of $388 (after-tax) was recorded in other comprehensive
loss, primarily due to the decrease in the discount rate of 105 basis points,
which was partially offset by the plan asset performance that was greater than
expected, and by the amortization of actuarial losses. In 2018, a net loss of
$114 (after-tax) was recorded in other comprehensive loss, primarily due to the
impact of the adoption of new accounting guidance that permits a
reclassification to Retained earnings (accumulated deficit) for stranded tax
effects resulting from the Tax Cuts and Jobs Act of 2017, as well as the plan
asset performance that was less than expected, which were partially offset by
the increase in the discount rate of 60 basis points and the amortization of
actuarial losses. In 2017, a net loss of $220 (after-tax) was recorded in other
comprehensive loss, primarily due to the decrease in the discount rate of 45
basis points and plan asset performance less than expected, which were partially
offset by 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 is recognized ratably over the requisite service period based on the
grant date fair value. Forfeitures are accounted for as they occur. The fair
value of new stock options is estimated on the date of grant using a
lattice-pricing model. The fair value of performance awards containing a market
condition is valued using a Monte Carlo valuation model. Determining the fair
value 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.
Compensation expense recorded in 2019, 2018, and 2017 was $78 ($70 after-tax),
$50 ($39 after-tax), and $54 ($36 after-tax), respectively.
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.
The 2017 Act created a new requirement that certain income earned by foreign
subsidiaries, Global Intangible Low Taxed Income (GILTI), must be included in
the gross income of the U.S. shareholder. The 2017 Act also established the Base
Erosion and Anti-Abuse Tax (BEAT). Until regulations are finalized, judgement
will be required to apply preliminary guidance, including proposed regulations,
to Arconic's facts and circumstances.
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 2018, Arconic made a final accounting policy election to apply a tax law
ordering approach when considering the need for a valuation allowance on net
operating losses expected to offset GILTI income inclusions. Under this
approach, reductions in cash tax savings are not considered as part of the
valuation allowance assessment. Instead, future GILTI inclusions are considered
a source of taxable income that support the realizability of deferred tax
assets.
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

                                       51

--------------------------------------------------------------------------------

Table of Contents

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.
Recently Adopted Accounting Guidance. See the Recently Adopted Accounting
Guidance section of Note   A   to the Consolidated Financial Statements in Part
II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K.
Recently Issued Accounting Guidance. See the Recently Issued Accounting Guidance
section of Note   A   to the Consolidated Financial Statements in Part II, Item
8. (Financial Statements and Supplementary Data) of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not material.

                                       52

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses