filings.toolsItem 1. Business.
57K characters. Original on sec.gov · Markdown
Item 1. Business.
General
Arconic Inc. is a Delaware corporation with its principal office in New York, New York and the successor to Arconic Pennsylvania (as defined below) which was formed in 1888 and formerly known as Alcoa Inc. In this report, unless the context otherwise requires, “Arconic” or the “Company” means Arconic Inc., a Delaware corporation, 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 U 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 (“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 65% and 24%, respectively, of Arconic’s sales in 2018. 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: Engineered Products and Solutions, Global Rolled Products and Transportation and Construction Solutions.
Background
Arconic Inc. Reincorporation
On December 31, 2017 (the “Effective Date”), Arconic Inc., a Pennsylvania corporation (“Arconic Pennsylvania” or, prior to the Reincorporation (as defined below), the “Company”), effected the change of the Company’s jurisdiction of incorporation from Pennsylvania to Delaware (the “Reincorporation”) by merging (the “Reincorporation Merger”) with a direct wholly owned Delaware subsidiary, Arconic (in this section, “Arconic Delaware” or, following the Reincorporation, the “Company”), pursuant to an Agreement and Plan of Merger (the “Reincorporation Merger Agreement”), dated as of October 12, 2017, by and
between Arconic Pennsylvania and Arconic Delaware. Arconic Pennsylvania shareholders approved the Reincorporation Merger to effect the Reincorporation at a Special Meeting of Shareholders held on November 30, 2017. As a result of the Reincorporation, (i) Arconic Pennsylvania has ceased to exist, (ii) Arconic Delaware automatically inherited the reporting obligations of Arconic Pennsylvania under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (iii) Arconic Delaware is deemed to be the successor issuer to Arconic Pennsylvania.
The common stock, par value $1.00 per share, of Arconic Pennsylvania (the “Arconic Pennsylvania Common Stock”) was listed for trading on the New York Stock Exchange and traded under the symbol “ARNC.” As of the Effective Date, this symbol, without interruption, represents shares of common stock, par value $1.00 per share, of Arconic Delaware (the “Arconic Delaware Common Stock”). There was no change in the Exchange Act File Number assigned by the SEC as a result of the Reincorporation.
As of the Effective Date, the rights of the Company’s stockholders began to be governed by the General Corporation Law of the State of Delaware, the Certificate of Incorporation of Arconic Delaware (the “Delaware Certificate”) and the Bylaws of Arconic Delaware (the “Delaware Bylaws”).
Other than the change in corporate domicile, the Reincorporation did not result in any change in the business, physical location, management, financial condition or number of authorized shares of the Company, nor did it result in any change in location of its current employees, including management. On the Effective Date, (i) the directors and officers of Arconic Pennsylvania prior to the Reincorporation continued as the directors and officers of Arconic Delaware after the Reincorporation, (ii) each outstanding share of Arconic Pennsylvania Common Stock was automatically converted into one share of Arconic Delaware Common Stock, (iii) each outstanding share of Serial Preferred Stock, par value $100 per share, of Arconic Pennsylvania (the “Arconic Pennsylvania Preferred Stock”) was automatically converted into one share of Serial Preferred Stock, par value $100 per share, of Arconic Delaware (the “Arconic Delaware Preferred Stock”) and (iv) all of Arconic Pennsylvania’s employee benefit and compensation plans immediately prior to the Reincorporation were continued by Arconic Delaware, and each outstanding equity award and notional share unit relating to shares of Arconic Pennsylvania Common Stock was converted into an equity award or notional share unit, as applicable, relating to an equivalent number of shares of Arconic Delaware Common Stock on the same terms and subject to the same conditions. Beginning at the effective time of the Reincorporation, each certificate representing Arconic Pennsylvania Common Stock or Arconic Pennsylvania Preferred Stock was deemed for all corporate purposes to evidence ownership of Arconic Delaware Common Stock or Arconic Delaware Preferred Stock, as applicable. The Company’s stockholders may, but are not required to, exchange their stock certificates as a result of the Reincorporation.
The foregoing descriptions of the Arconic Delaware Common Stock, the Arconic Delaware Preferred Stock, the Delaware Certificate and the Delaware Bylaws are qualified in their entirety by the full text of the Delaware Certificate and the Delaware Bylaws, which are filed as Exhibits 3(a) and 3(b), respectively, to this report.
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 became 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.
During 2017, the Company disposed of its retained interest in Alcoa Corporation. In February 2017, the Company sold 23,353,000 shares of Alcoa Corporation stock at $38.03 per share, which resulted in cash proceeds of $888 million and a gain of $351 million. 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 (the “Debt-for-Equity Exchange”) and recorded a gain of $167 million. The gains of $351 million and $167 million associated with the disposition of the Alcoa Corporation shares were recorded in Other Income, Net in the accompanying Statement of Consolidated Operations in Part II, Item 8 (Financial Statements and Supplementary Data).
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. The Toll Processing and Services Agreement expired by its terms at the end of 2018.
Recent Developments
On January 22, 2019, the Company announced that its Board of Directors (the Board) had determined to no longer pursue a potential sale of Arconic as part of its strategy and portfolio review. Management and the Board have been conducting a rigorous and comprehensive strategy and portfolio review over the past year and as part of that process had considered a sale of the Company, among other matters. However, the Company did not receive a proposal for a full-Company transaction that management and the Board believed would be in the best interest of Arconic’s shareholders and other stakeholders. Management and the Board remain confident in Arconic’s significant potential and are strongly focused on enhancing value for shareholders, through continued operational improvements and through other potential initiatives which have been previously identified in the strategy and portfolio review. The Company has announced the following key initiatives as part of its ongoing strategy and portfolio review:
| • | Commenced plans to reduce operating costs by approximately $200 million on an annual run-rate basis, designed to maximize the impact in 2019; |
| • | Announced the planned separation of its portfolio into Engineered Products and Forgings and Global Rolled Products, with a spin-off of one of the businesses; |
| • | Considering the potential sale of businesses that do not best fit into one of the two segments above; |
| • | Intends to execute its previously authorized $500 million share repurchase program in the first half of 2019; |
| • | The Board also authorized an additional $500 million of share repurchases, effective through the end of 2020; and |
| • | Expects to reduce its quarterly common stock dividend from $0.06 to $0.02 per share. |
On February 6, 2019, the Company announced that the Board appointed John C. Plant, current Chairman of the Board, as Chairman and Chief Executive Officer of the Company, effective February 6, 2019, to succeed Chip Blankenship, who ceased to serve as Chief Executive Officer of the Company and resigned as a member of the Board, in each case as of that date. In addition, the Company announced that the Board appointed Elmer L. Doty, current member of the Board, as President and Chief Operating Officer, a newly created position, effective February 6, 2019. Mr. Doty will remain a member of the Board. The Company also announced that Arthur D. Collins, Jr., current member of the Board, has been appointed interim Lead Independent Director of the Company, effective February 6, 2019.
On February 19, 2019, the Company entered into an accelerated share repurchase (“ASR”) agreement with JPMorgan Chase Bank to repurchase $700 million of its common stock, pursuant to the share repurchase program previously authorized by the Board. Under the ASR agreement, Arconic will receive initial delivery of approximately 32 million shares on February 21, 2019. The final number of shares to be repurchased will be based on the volume-weighted average price of Arconic’s common stock during the term of the transaction, less a discount. The ASR agreement is expected to be completed during the first half of 2019.
The Company will evaluate its organizational structure in conjunction with the planned separation of its portfolio and changes to its reportable segments are expected in the first half of 2019.
Description of the Business
Information describing Arconic’s businesses can be found on the indicated pages of this report:
| Item | Page(s) | |
| Discussion of Recent Business Developments: | ||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations: | ||
| Overview and Results of Operations | 35 | |
| Notes to Consolidated Financial Statements: | ||
| Note D. Restructuring and Other Charges | 70 | |
| Note G. Pension and Other Postretirement Benefits | 73 | |
| Note H. Income Taxes | 80 | |
| Note T. Acquisitions and Divestitures | 96 | |
| Note U. Contingencies and Commitments | 97 | |
| Segment Information: | ||
| Business Descriptions, Principal Products, Principal Markets, Methods of Distribution, Seasonality and Dependence Upon Customers: | ||
| Engineered Products and Solutions | 40 | |
| Global Rolled Products | 41 | |
| Transportation and Construction Solutions | 42 | |
| Financial Information about Segments and Geographic Areas: | ||
| Note C. Segment and Geographic Area Information | 66 |
Major Product Revenues
Products that contributed 10% or more to consolidated revenues for the years ended December 31, 2018, 2017 and 2016, were:
| For the Year Ended December 31, | ||||||||
| 2018 | 2017 | 2016 | ||||||
| Innovative flat-rolled products | 40 | % | 39 | % | 39 | % | ||
| Engines | 21 | % | 21 | % | 21 | % | ||
| Engineered structures | 13 | % | 13 | % | 14 | % | ||
| Fastening systems | 11 | % | 11 | % | 12 | % |
Arconic has no customer that accounts for 10% or more 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.
Engineered Products and Solutions
Arconic’s Engineered Products and Solutions segment (“EP&S”) develops and manufactures high performance products mainly 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 (nickel superalloys, steel and titanium); investment castings (nickel superalloys, titanium, and aluminum), including airfoils and structural components; forged airframe and jet engine components (nickel superalloys, titanium, aluminum), including bulkheads, disks and shafts; extruded airframe components (aluminum); and various other forged and extruded metallic components for the oil and gas, industrial products, automotive, and land and sea defense end markets.
In January 2018, EP&S announced a change in the organizational structure of the segment, from four business units to three business units, with a focus on aligning its internal structure to core markets and customers and reducing costs. The three business units are Arconic Engines; Arconic Fastening Systems; and Arconic Engineered Structures.
Arconic Engines (AEN). AEN produces investment cast airfoils, seamless rolled rings and closed-die (including isothermal) forged turbine disks for aero engine and industrial gas turbines, as well as other structural aero engine components. AEN also provides additive manufacturing technologies, superalloy ingots, open-die forging, machining, performance coatings, and hot isostatic pressing for high performance parts.
Arconic Fastening Systems (AFS). AFS produces aerospace fastening systems, as well as commercial transportation fasteners. The business’s 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.
Arconic Engineered Structures (AES). AES produces titanium and aluminum ingots and mill products for aerospace and defense applications and is vertically integrated to produce structural investment castings, forgings and extrusions, for airframe, wing, aero-engine, and landing gear components, as well as lightweight drive shafts for the commercial transportation industries. AES also 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 EP&S 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 C to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).
In July 2018, Arconic announced a two-year Joint Development Agreement with Lockheed Martin to develop customized lightweight material systems and advanced manufacturing processes, such as metal 3D printing, to advance current and next-generation aerospace and defense solutions - including new structures and systems.
In December 2018, as part of the Company’s ongoing strategy and portfolio review, Arconic completed the sale of its Eger, Hungary forgings business that manufactured high volume steel forgings for drivetrain components in the European heavy-duty truck and automotive market to Angstrom Automotive Group LLC.
Engineered Products and Solutions Principal Facilities1
| Country | Facility | Products | ||
| Australia | Oakleigh | Fasteners | ||
| Canada | Georgetown, Ontario2 | Aerospace Castings | ||
| Laval, Québec | Aerospace Castings and Machining | |||
| China | Suzhou2 | Fasteners and Rings | ||
| France | Dives-sur-Mer | Aerospace and Industrial Gas Turbine Castings | ||
| Evron | Aerospace and Specialty Castings | |||
| Gennevilliers | Aerospace and Industrial Gas Turbine Castings | |||
| Montbrison | Fasteners | |||
| St. Cosme-en-Vairais2 | Fasteners | |||
| Toulouse | Fasteners | |||
| Us-par-Vigny | Fasteners | |||
| Germany | Bestwig | Aerospace Castings | ||
| Erwitte | Aerospace Castings | |||
| Hannover2 | Extrusions | |||
| Hildesheim-Bavenstedt2 | Fasteners | |||
| Kelkheim2 | Fasteners | |||
| Hungary | Nemesvámos | Fasteners | ||
| Székesfehérvár | Aerospace and Industrial Gas Turbine Castings and Forgings | |||
| Japan | Nomi | Aerospace and Industrial Gas Turbine Castings | ||
| Mexico | Ciudad Acuña2 | Aerospace Castings/Fasteners and Rings | ||
| Morocco | Casablanca2 | Fasteners | ||
| South Korea | Kyoungnam | Extrusions | ||
| United Kingdom | Darley Dale | Forgings | ||
| Ecclesfield | Ingot Castings | |||
| Exeter2 | Aerospace and Industrial Gas Turbine Castings and Alloy | |||
| Glossop | Ingot Castings | |||
| Ickles | Ingot Castings | |||
| Leicester2 | Fasteners | |||
| Low Moor | Extrusions | |||
| Meadowhall | Forgings | |||
| Provincial Park | Forgings | |||
| Redditch2 | Fasteners | |||
| River Don | Forgings | |||
| Telford | Fasteners | |||
| Welwyn Garden City | Aerospace Formed Parts |
| Country | Facility | Products | ||
| United States | Chandler, AZ | Extrusions | ||
| Tucson, AZ2 | Fasteners | |||
| Carson, CA2 | Fasteners | |||
| City of Industry, CA2 | Fasteners | |||
| Fontana, CA | Rings | |||
| Fullerton, CA2 | Fasteners | |||
| Rancho Cucamonga, CA | Rings | |||
| Sylmar, CA | Fasteners | |||
| Torrance, CA | Fasteners | |||
| Branford, CT | Aerospace Coatings | |||
| Winsted, CT | Aerospace Machining | |||
| Savannah, GA | Forgings | |||
| Lafayette, IN | Extrusions | |||
| La Porte, IN | Aerospace and Industrial Gas Turbine Castings | |||
| Baltimore, MD2 | Extrusions | |||
| Whitehall, MI | Aerospace and Industrial Gas Turbine Castings and Coatings, Titanium Alloy and Specialty Products | |||
| Washington, MO | Aerospace Formed Parts, Titanium Mill Products | |||
| Big Lake, MN | Aerospace Machining | |||
| New Brighton, MN | Aerospace Machining | |||
| Dover, NJ | Aerospace and Industrial Gas Turbine Castings and Alloy | |||
| Verdi, NV | Rings | |||
| Kingston, NY2 | Fasteners | |||
| Massena, NY | Extrusions | |||
| Rochester, NY | Rings | |||
| Canton, OH2 | Ferro-Titanium Alloys and Titanium Mill Products | |||
| Cleveland, OH | Investment Casting Equipment, Aerospace Components, Castings, Forgings and Oil & Gas Drilling Products | |||
| Niles, OH | Titanium Mill Products | |||
| Morristown, TN2 | Aerospace and Industrial Gas Turbine Ceramic Products | |||
| Austin, TX2 | Additively Manufactured Parts | |||
| Houston, TX2 | Extrusions | |||
| Spring, TX | Deep Water Drilling Machining | |||
| Waco, TX2 | Fasteners | |||
| Wichita Falls, TX | Aerospace and Industrial Gas Turbine Castings | |||
| Hampton, VA2 | Aerospace and Industrial Gas Turbine Castings | |||
| Martinsville, VA | Titanium Mill Products |
| 1 | Principal facilities are listed, and do not include 14 locations that serve as sales and administrative offices, distribution centers or warehouses. |
| 2 | Leased property or partially leased property. |
Global Rolled Products
Arconic’s Global Rolled Products segment (“GRP”) has a single group organization structure and produces a range of aluminum sheet and plate products for the following markets:
Aerospace and Automotive - GRP provides a wide range of products, including many highly-differentiated sheet and plate products, for the worldwide aerospace and regional automotive markets.
Brazing, Commercial Transportation and Industrial - GRP provides specialty aluminum sheet and plate products for automotive, commercial transportation and industrial applications including proprietary heat exchanger products like multilayer brazing sheet.
Packaging - GRP serves the packaging market in Russia, Asia and Latin America through regional facilities.
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 C to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).
In July 2018, the Company announced it had signed a new long-term contract with Boeing to supply aluminum sheet and plate for all models produced by Boeing Commercial Airplanes. The multiyear contract, which extends and adds to the Companies’ 2014 contract, is the largest to date and captures growth in the build rate increases of the Boeing 737 program.
On October 31, 2018, the Company sold its Texarkana, Texas rolling mill and cast house to Ta Chen International, Inc. for $302 million in cash, subject to post-closing adjustments, plus additional contingent consideration of up to $50 million. The contingent consideration relates to the achievement of various milestones within 36 months of the transaction closing date associated with operationalizing the rolling mill equipment. The Texarkana rolling mill facility had previously been idle since late 2009. In early 2016, the Company restarted the Texarkana cast house to meet demand for aluminum slab. As part of the agreement, the Company will continue to produce aluminum slab at the facility for a period of 18 months through a lease back of the cast house building and equipment, after which time, Ta Chen will perform toll processing of metal for the Company for a period of six months. The Company will supply Ta Chen with cold-rolled aluminum coil during this 24-month period.
In February 2019, the Company announced an investment of approximately $100 million to expand its hot mill capability and add downstream equipment capabilities to manufacture industrial and automotive aluminum products in its Tennessee Operations facility near Knoxville, Tennessee. The project, which is expected to create 70 new jobs, is already underway and is expected to be complete by the fourth quarter of 2020.
Global Rolled Products Principal Facilities
| Country | Location | Products | ||
| Brazil | Itapissuma | Specialty Foil | ||
| China | Kunshan | Sheet and Plate | ||
| Qinhuangdao1 | Sheet and Plate | |||
| Hungary | Székesfehérvár | Sheet and Plate/Slabs and Billets | ||
| Russia | Samara | Sheet and Plate/Extrusions and Forgings | ||
| United Kingdom | Birmingham | Plate | ||
| United States | Davenport, IA | Sheet and Plate | ||
| Danville, IL2 | Sheet and Plate | |||
| Hutchinson, KS2 | Sheet and Plate | |||
| Lancaster, PA | Sheet and Plate | |||
| Alcoa, TN | Sheet | |||
| Texarkana, TX1, 3 | Slabs | |||
| San Antonio, TX4 | Micromill™ |
| 1 | Leased property or partially leased property. |
| 2 | Properties are satellite locations of the Davenport, Iowa facility. |
| 3 | 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. See discussion above concerning the sale of this facility. |
| 4 | Micromill™ production facility produces sheet for automotive and industrial applications using Arconic innovative production process. |
Transportation and Construction Solutions
Arconic’s Transportation and Construction Solutions segment ("TCS") produces products that are used mostly in the commercial transportation and nonresidential building and construction end markets. Such products include integrated aluminum structural systems, architectural extrusions and forged aluminum commercial vehicle wheels.
The Transportation and Construction Solutions segment is comprised of two business units: Arconic Wheel and Transportation Products; and Building and Construction Systems.
Arconic Wheel and Transportation Products (AWTP). AWTP provides forged aluminum wheels and related products for heavy-duty trucks and the commercial transportation markets.
Building and Construction Systems (BCS). BCS provides building and construction architectural framing products and aluminum curtain wall and front entry systems.
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 C to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).
In April 2018, the Company completed the sale of its Latin America Extrusions business to a subsidiary of Hydro Extruded Solutions AS. The sale is part of Arconic’s continued drive to streamline its business portfolio, reduce complexity and further focus on its higher-margin products and profitable growth.
On July 31, 2018, the Company announced that it had initiated a sale process of its BCS business, as part of the Company’s ongoing strategy and portfolio review that commenced in January 2018.
Transportation and Construction Solutions Principal Facilities1
| Country | Facility | Products | ||
| Canada | Lethbridge, Alberta | Architectural Products | ||
| China | Suzhou2 | Forgings | ||
| France | Merxheim2 | Architectural Products | ||
| Hungary | Székesfehérvár | Forgings | ||
| Japan | Jôetsu City2 | Forgings | ||
| Mexico | Monterrey | Forgings | ||
| United Kingdom | Runcorn | Architectural Products | ||
| United States | Springdale, AR | Architectural Products | ||
| Visalia, CA | Architectural Products | |||
| Eastman, GA | Architectural Products | |||
| Barberton, OH | Forgings | |||
| Cleveland, OH | Forgings | |||
| Bloomsburg, PA | Architectural Products | |||
| Cranberry, PA | Architectural Products |
| 1 | Principal facilities are listed, and do not include 8 locations that serve as sales and administrative offices, distribution centers or warehouses. In addition to the facilities listed above, TCS has 20 service centers. These centers perform light manufacturing, such as assembly and fabrication of certain products. |
| 2 | Leased property or partially leased property. |
Sources and Availability of Raw Materials
Important raw materials purchased in 2018 for each of the Company’s reportable segments are listed below.
| Engineered Products and Solutions | Global Rolled Products | |
| Alloying materials | Alloying materials | |
| Cobalt | Aluminum scrap | |
| Electricity | Coatings | |
| Natural gas | Electricity | |
| Nickel alloys | Lube oil | |
| Primary aluminum (ingot, billet, P1020, high purity) | Natural gas | |
| Stainless steel | Packaging materials | |
| Steel | Primary aluminum (ingot, slab, billet, P1020, high purity) | |
| Titanium alloys | Steam | |
| Titanium sponge | ||
| Transportation and Construction Solutions | ||
| Aluminum coil | ||
| Aluminum scrap | ||
| Electricity | ||
| Natural gas | ||
| Paint/Coating | ||
| Primary aluminum (billet) | ||
| 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.
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 metal alloys, particular products, 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 2018, the Company’s worldwide patent portfolio consists of approximately 1,863 granted patents and 824 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 2018, the Company’s worldwide trademark portfolio consists of approximately 1,967 registered trademarks and 465 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
Engineered Products and Solutions (EP&S)
EP&S’s business units - AFS, AEN and AES -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 as well as alternative forms of manufacturing. 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.
Principal competitors in the EP&S segment include Berkshire Hathaway Inc., through its acquisition of Precision Castparts Corporation and subsidiaries, for titanium and titanium-based alloys, precision forgings, seamless rolled rings, investment castings and aerospace fasteners; VSMPO (Russia) for titanium and titanium-based alloys and precision forgings; the High-Performance Materials & Components segment of Allegheny Technologies, Inc. (ATI) for titanium and titanium-based alloys, precision forgings, and investment castings; Lisi Aerospace (France) for aerospace fasteners; and Aubert & Duval (part of Eramet Group in France) for precision forgings.
Other competitors include:
| • | Kaiser Aluminum - for extruded products |
| • | Universal Alloy Corp., part of Montana Tech Components - for extruded products |
| • | Doncasters Group Ltd. (UK) - for investment castings |
| • | Consolidated Precision Products Corp., part of Warburg Pincus - for investment castings |
| • | Weber Metals, part of Otto Fuchs - for precision forgings |
| • | Forgital - for seamless rings |
| • | Frisa (Mexico) - for seamless rings |
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 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.
International competition in the investment castings, fasteners, rings and forgings markets may also increase in the future as a result of strategic alliances among engine original equipment manufacturers (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.
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, commercial transportation, industrial markets (including brazing sheet) and packaging. 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, unique technology 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 aerospace alloys, differentiated products such as the Company’s 5-layer brazing products and break-through processes such as Arconic Micromill® technology.
Some of GRP’s 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 competing in automotive, but it 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, Hydro, Kaiser, Kobe, Nanshan, and UACJ. The competitive landscape is changing - in this past year, Novelis announced the acquisition of aluminum rolled products producer Aleris and Braidy Industries announced its intention to build a new aluminum mill near Ashland, Kentucky for automotive production.
Additionally, there are a number of new competitors emerging, particularly in China and other developing economies. 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.
Summary of Major Competitors for GRP:
| • | Constellium (The Netherlands) |
| • | Novelis |
| • | Kaiser Aluminum |
| • | AMAG (Austria) |
| • | UACJ (Japan) |
| • | Aleris |
| • | Hydro (Norway) |
| • | Nanshan (China) |
| • | Granges (Sweden) |
| • | Kobe (Japan) |
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, Wheels India Limited and Speedline (member of the Ronal Group). AWTP has continued to see aluminum wheel suppliers (both forged and cast aluminum wheels) from China, Taiwan, India and South Korea attempting to penetrate the commercial transportation market.
BCS is a manufacturer of aluminum architectural systems and products in North America and Europe. In North America, BCS primarily competes in the nonresidential building segment. In Europe, 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 sales 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, 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 primary product categories are aluminum composite material and coil coated sheet. 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.
Summary of Major Competitors:
AWTP:
| • | Accuride Corporation |
| • | Nippon Steel & Sumitomo Metal Corporation (Japan) |
| • | Zhejiang Dicastal Hongxin Technology Co. Ltd (China) |
| • | Wheels India Limited (India) |
| • | Speedline (member of the Ronal Group in Switzerland) |
BCS:
| • | Apogee, Oldcastle and YKK |
| • | Alpolic, Alucobond and Alucoil |
| • | Schüco (Germany), Hydro/SAPA (Norway), Reynaers (Belgium) and Corialis (Belgium) |
| • | Alucobond, Alucoil, Euramax and Novelis |
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.
Throughout 2018, 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 Ampliforge™ process-to improve production speeds, reduce costs, and achieve material properties not possible through other additive flowpaths. The Company’s powder production facility was completed at the Arconic Technology Center (ATC) in 2016. This facility will continue its focus on material development in aluminum, nickel and titanium alloys.
The Company is also producing and qualifying additively manufactured aerospace, automotive and defense components via laser powder bed printing technology. It also is developing more formable titanium plate based wrought products for customers.
Arconic’s Micromill® technology, which enables aluminum sheet to be produced in a matter of minutes rather than weeks and with enhanced structural properties, continues to grow. Specifically, the Arconic Micromill® technology located in San Antonio continues to transition to commercial production. In addition, the Company has invested in further developing Micromill™ technology, including installation of a pilot line at the ATC.
The Company continues to develop differentiated pretreatment technology, for example, by continuing to improve on its A951 technology, which enables aluminum to be joined with steel (e.g., in automotive applications). In addition, the Company continues to advance its joining methods/fasteners (like RSR™) and highly formable and high strength automotive sheet products for automotive original equipment manufacturer applications in both cosmetic hang on parts and structural body-in-white applications. A pilot coating line was installed at ATC in 2018.
The Company continued its differentiation in the commercial transportation market with Dura-Bright® EVO, UltraOne™ and European UltraOne™ wheel products.
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 which enable automated assembly operations.
Environmental Matters
Information relating to environmental matters is included in Note U to the Consolidated Financial Statements under the caption “Environmental Matters”. Approved capital expenditures for new or expanded facilities for environmental control are $28 million for 2019 and estimated expenditures for such purposes are $8 million for 2020.
Employees
Total worldwide employment at the end of 2018 was approximately 43,000 employees in 29 countries. About 18,600 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 7,900 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 8,900 employees in Europe and Russia, 8,100 employees in North America, 600 employees in South America, and 1,000 employees in Asia.
Executive Officers of the Registrant
The names, ages, positions and areas of responsibility of the executive officers of the Company as of February 21, 2019 are listed below.
Elmer L. Doty, 64, Director, President and Chief Operating Officer. Mr. Doty was appointed President and Chief Operating Officer of Arconic effective February 6, 2019, and has served on the Arconic Board of Directors since May 2017. From March 2016 until February 2019, Mr. Doty was an Operating Executive at The Carlyle Group LP, multinational private equity, alternative asset management and financial services corporation, where he held a similar position from March 2012 to December 2012. From December 2012 to February 2016, Mr. Doty was President and Chief Executive Officer of Accudyne Industries LLC, a provider of precision-engineered flow control systems and industrial compressors. Mr. Doty also was the President and Chief Executive Officer of Vought Aircraft Industries, Inc. from 2006 until its acquisition in 2010 by Triumph Group, a leader in manufacturing and overhauling aerospace structures, systems and components. Prior to Vought, Mr. Doty was Executive Vice President and General Manager of the Land Systems Division of United Defense Industries, Inc. (now BAE Systems). Earlier in his career, Mr. Doty held executive positions at General Electric Company and FMC Corporation.
Ken Giacobbe, 53, 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 segment. From January 2013 until October 2016, Mr. Giacobbe served as Chief Financial Officer of the Engineered Products and Solutions segment. Before joining Arconic, Mr. Giacobbe held senior finance roles at Avaya and Lucent Technologies.
Timothy D. Myers, 53, Executive Vice President and Group President, Global Rolled Products and Transportation and Construction Solutions. Mr. Myers was appointed Executive Vice President and Group President, Global Rolled Products and Transportation and Construction Solutions in October 2017. Prior to being appointed to his current role, he was Executive Vice President and Group President, Transportation and Construction Solutions from May 2016 to October 2017. Prior to that assignment, he was President of Alcoa Wheel and Transportation Products, from June 2009 to May 2016. Mr. Myers was Vice President and General Manager, Commercial Vehicle Wheels for the Alcoa Wheel Products business from January 2006 to June 2009. 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, 52, 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 named 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 segment, 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.
John C. Plant, 65, Chairman and Chief Executive Officer. Mr. Plant was appointed Chief Executive Officer of Arconic effective February 6, 2019. He has served as Arconic's Chairman since October 2017 and as a member of the Board since February 2016. Mr. Plant previously served as Chairman of the Board, President and Chief Executive Officer of TRW Automotive from 2011 to 2015, and as its President and Chief Executive Officer from 2003 to 2011. TRW Automotive was acquired by ZF Friedrichshafen AG in May 2015. Mr. Plant was a co-member of the Chief Executive Office of TRW Inc. from 2001 to 2003 and an Executive Vice President of TRW from the company's 1999 acquisition of Lucas Varity to 2003. Prior to TRW, Mr. Plant was President of Lucas Varity Automotive and managing director of the Electrical and Electronics division from 1991 through 1997.
Katherine H. Ramundo, 51, 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.
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.
Previous: Cover and table of contents · Next: Item 1A. Risk Factors.