Item 8. Financial Statements and Supplementary Data.

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Item 8. Financial Statements and Supplementary Data.

Management’s Reports to Arconic Shareholders

Management’s Report on Financial Statements and Practices

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

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

Management’s Report on Internal Control over Financial Reporting

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

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

Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018, based on criteria in Internal Control—Integrated Framework (2013) issued by the COSO.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

/s/ John C. Plant
John C. Plant Chairman and Chief Executive Officer
/s/ Ken Giacobbe
Ken Giacobbe Executive Vice President and Chief Financial Officer

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Arconic Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Arconic Inc. and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive (loss) income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

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

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

/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania

February 21, 2019

We have served as the Company’s auditor since 1950.

Arconic and subsidiaries

Statement of Consolidated Operations

(in millions, except per-share amounts)

For the year ended December 31,201820172016
Sales (B and C)$14,014$12,960$12,394
Cost of goods sold (exclusive of expenses below)11,39710,2219,696
Selling, general administrative, and other expenses604715924
Research and development expenses103109130
Provision for depreciation and amortization576551535
Impairment of goodwill (A and O)—719—
Restructuring and other charges (D)9165155
Operating income1,325480954
Interest expense (E)378496499
Other expense (income), net (F)79(486)41
Income from continuing operations before income taxes868470414
Provision for income taxes (H)2265441,476
Income (loss) from continuing operations after income taxes642(74)(1,062)
Income from discontinued operations after income taxes (V)——184
Net income (loss)642(74)(878)
Less: Net income from discontinued operations attributable to noncontrolling interests (V)——63
Net income (loss) Attributable to Arconic$642$(74)$(941)
Amounts Attributable to Arconic Common Shareholders (J):
Net income (loss)$651$(127)$(1,010)
Earnings (loss) per share—basic:
Continuing operations$1.33$(0.28)$(2.58)
Discontinued operations——0.27
Net earnings (loss) per share-basic$1.33$(0.28)$(2.31)
Earnings (loss) per share—diluted
Continuing operations$1.30$(0.28)$(2.58)
Discontinued operations——0.27
Net earnings (loss) per share-diluted$1.30$(0.28)$(2.31)

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

Arconic and subsidiaries

Statement of Consolidated Comprehensive Income (Loss)

(in millions)

ArconicNoncontrolling InterestsTotal
For the year ended December 31,201820172016201820172016201820172016
Net income (loss)$642$(74)$(941)$—$—$63$642$(74)$(878)
Other comprehensive income (loss), net of tax (K):
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits255(220)(479)——(3)255(220)(482)
Foreign currency translation adjustments(146)252268—2182(146)254450
Net change in unrealized gains on available-for-sale securities(1)(134)137———(1)(134)137
Net change in unrecognized gains/losses on cash flow hedges(23)26(617)——5(23)26(612)
Total Other comprehensive income (loss), net of tax85(76)(691)—218485(74)(507)
Comprehensive income (loss)$727$(150)$(1,632)$—$2$247$727$(148)$(1,385)

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

Arconic and subsidiaries

Consolidated Balance Sheet

(in millions)

December 31,20182017
Assets
Current assets:
Cash and cash equivalents2,277$2,150
Receivables from customers, less allowances of $4 in 2018 and $8 in 2017 (L)1,0471,035
Other receivables (L)451339
Inventories (M)2,4922,480
Prepaid expenses and other current assets314374
Total current assets6,5816,378
Properties, plants, and equipment, net (N)5,7045,594
Goodwill (A and O)4,5004,535
Deferred income taxes (H)573743
Intangibles, net (O)919987
Other noncurrent assets416481
Total assets$18,693$18,718
Liabilities
Current liabilities:
Accounts payable, trade2,129$1,839
Accrued compensation and retirement costs370399
Taxes, including income taxes11875
Accrued interest payable113124
Other current liabilities356349
Short-term debt (P and R)43438
Total current liabilities3,5202,824
Long-term debt, less amount due within one year (P and R)5,8966,806
Accrued pension benefits (G)2,2302,564
Accrued other postretirement benefits (G)723841
Other noncurrent liabilities and deferred credits (Q)739759
Total liabilities13,10813,794
Contingencies and commitments (U)
Equity
Arconic shareholders’ equity:
Preferred stock (I)5555
Common stock (I)483481
Additional capital8,3198,266
Accumulated deficit (A)(358)(1,248)
Accumulated other comprehensive loss (A and K)(2,926)(2,644)
Total Arconic shareholders’ equity5,5734,910
Noncontrolling interests1214
Total equity5,5854,924
Total liabilities and equity$18,693$18,718

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

Arconic and subsidiaries

Statement of Consolidated Cash Flows

(in millions)

For the year ended December 31,201820172016
Operating activities
Net income (loss)$642$(74)$(878)
Adjustments to reconcile net income (loss) to cash provided from (used for) operations:
Depreciation and amortization5765511,132
Deferred income taxes314341,125
Equity income, net of dividends——42
Impairment of goodwill (A and O)—719—
Restructuring and other charges9165257
Net loss (gain) from investing activities - asset sales10(513)(156)
Net periodic pension benefit cost (G)130217304
Stock-based compensation506786
Other7511263
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
(Increase) in receivables (A)(1,142)(915)(1,016)
(Increase) in inventories(74)(192)(29)
(Increase) decrease in prepaid expenses and other current assets(1)11(76)
Increase in accounts payable, trade33962232
(Decrease) in accrued expenses(190)(116)(394)
Increase (decrease) in taxes, including income taxes104(23)93
Pension contributions(298)(310)(290)
(Increase) in noncurrent assets(20)(41)(152)
(Decrease) in noncurrent liabilities(24)(193)(248)
Cash provided from (used for) operations217(39)95
Financing Activities
Net change in short-term borrowings (original maturities of three months or less)(7)(2)(3)
Additions to debt (original maturities greater than three months) (P)6008161,962
Payments on debt (original maturities greater than three months) (P)(1,103)(1,634)(2,734)
Premiums paid on early redemption of debt (A and P)(17)(52)(3)
Proceeds from exercise of employee stock options16504
Dividends paid to shareholders(119)(162)(228)
Distributions to noncontrolling interests—(14)(226)
Contributions from noncontrolling interests——51
Net cash transferred from Alcoa Corporation at separation——421
Other(19)(17)(1)
Cash used for financing activities(649)(1,015)(757)
Investing Activities
Capital expenditures(768)(596)(1,125)
Acquisitions, net of cash acquired (S)——10
Proceeds from the sale of assets and businesses (S)309(9)692
Sales of investments (S and V)9890280
Cash receipts from sold receivables (A and L)1,016792778
Other (V)(1)243(44)
Cash provided from investing activities5651,320591
Effect of exchange rate changes on cash, cash equivalents and restricted cash(4)9(8)
Net change in cash, cash equivalents and restricted cash (A)129275(79)
Cash, cash equivalents and restricted cash at beginning of year (A)2,1531,8781,957
Cash, cash equivalents and restricted cash at end of year (A)$2,282$2,153$1,878

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

Arconic and subsidiaries

Statement of Changes in Consolidated Equity

(in millions, except per-share amounts)

Arconic Shareholders
Preferred stockMandatory convertible preferred stockCommon stockAdditional capitalRetained earnings (deficit)Treasury stockAccumulated Other Comprehensive LossNoncontrolling interestsTotal equity
Balance at December 31, 2015$55$3$1,391$10,019$8,834$(2,825)$(5,431)$2,085$14,131
Net (loss) income————(941)——63(878)
Other comprehensive (loss) income (K)——————(691)184(507)
Cash dividends declared:
Preferred–Class A @ $3.75 per share————(2)———(2)
Preferred–Class B @ $26.8750 per share————(67)———(67)
Common @ $0.36 per share————(159)———(159)
Stock-based compensation (I)———86————86
Common stock issued: compensation plans (I)———(205)—186——(19)
Retirement of Treasury stock (I)(76)(2,563)2,639—
Reverse stock split (I)(877)877—
Distribution of Alcoa Corporation(8,692)3,554(2,133)(7,271)
Distributions———————(226)(226)
Contributions———————5151
Other———————22
Balance at December 31, 2016$55$3$438$8,214$(1,027)$—$(2,568)$26$5,141
Net loss————(74)———(74)
Other comprehensive loss (K)——————(76)2(74)
Cash dividends declared:
Preferred–Class A @ $3.75 per share————(2)———(2)
Preferred–Class B @ $20.1563 per share————(51)———(51)
Common @ $0.24 per share————(109)———(109)
Stock-based compensation (I)———67————67
Common stock issued: compensation plans (I)———21————21
Conversion of mandatory convertible preferred stock (I)—(3)39(36)—————
Issuance of common stock (I)——4—————4
Distributions———————(14)(14)
Other————15———15
Balance at December 31, 2017$55$—$481$8,266$(1,248)$—$(2,644)$14$4,924
Adoption of accounting standard (A)————367—(367)——
Net income————642———642
Other comprehensive income (K)——————85—85
Cash dividends declared:
Preferred–Class A @ $3.75 per share————(2)———(2)
Common @ $0.24 per share————(117)———(117)
Stock-based compensation (I)———50————50
Common stock issued: compensation plans (I)——23————5
Other———————(2)(2)
Balance at December 31, 2018$55$—$483$8,319$(358)$—$(2,926)$12$5,585

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

Arconic and subsidiaries

Notes to the Consolidated Financial Statements

(dollars in millions, except per-share amounts)

A. Summary of Significant Accounting Policies

Basis of Presentation. The Consolidated Financial Statements of Arconic Inc. and subsidiaries (“Arconic” or the “Company”) are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and require management to make certain judgments, estimates, and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see below and Note C)

On January 1, 2018, Arconic adopted new guidance issued by the Financial Accounting Standards Board (FASB) related to the following: presentation of net periodic pension cost and net periodic postretirement benefit cost that required a reclassification of costs within the Statement of Consolidated Operations; presentation of certain cash receipts and cash payments within the Statement of Consolidated Cash Flows that required a reclassification of amounts between operating and either financing or investing activities; the classification of restricted cash within the Statement of Consolidated Cash Flows; and the reclassification from Accumulated other comprehensive loss to Accumulated deficit in the Consolidated Balance Sheet of stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. See Recently Adopted Accounting Guidance below for further details.

Also on January 1, 2018, the Company changed its primary measure of segment performance from Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) to Segment operating profit, which more closely aligns segment performance with Operating income as presented in the Statement of Consolidated Operations. See Note C for further details.

The separation of Alcoa Inc. into two standalone, publicly-traded companies, Arconic Inc. (the new name for Alcoa Inc.) and Alcoa Corporation, became effective on November 1, 2016 (the “Separation Transaction”). The financial results of Alcoa Corporation for 2016 have been retrospectively reflected in the Statement of Consolidated Operations as discontinued operations and, as such, have been excluded from continuing operations and segment results for 2016. The cash flows and comprehensive income related to Alcoa Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows and Statement of Consolidated Comprehensive Income (Loss), respectively, for 2016. See Note V for additional information related to the Separation Transaction and discontinued operations.

Principles of Consolidation. The Consolidated Financial Statements include the accounts of Arconic and companies in which Arconic has a controlling interest. Intercompany transactions have been eliminated. Investments in affiliates in which Arconic cannot exercise significant influence are accounted for on the cost method.

Management also evaluates whether an Arconic entity or interest is a variable interest entity and whether Arconic is the primary beneficiary. Consolidation is required if both of these criteria are met. Arconic does not have any variable interest entities requiring consolidation.

Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.

Inventory Valuation. Inventories are carried at the lower of cost and net realizable value, with cost for approximately half of U.S. inventories determined under the last-in, first-out (LIFO) method. The cost of other inventories is determined under a combination of the first-in, first-out (FIFO) and average-cost methods.

Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets. The following table details the weighted-average useful lives of structures and machinery and equipment by reporting segment (numbers in years):

StructuresMachinery and equipment
Engineered Products and Solutions2917
Global Rolled Products3121
Transportation and Construction Solutions2718

Gains or losses from the sale of asset groups are generally recorded in Restructuring and other charges while the sale of individual assets are recorded in Other expense (income), net (see policy below for assets classified as held for sale and discontinued operations). Repairs and maintenance are charged to expense as incurred. Interest related to the construction of qualifying assets is capitalized as part of the construction costs.

Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of the assets also require significant judgments. See Note N for further information.

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. Arconic had eight reporting units for 2017 and 2016, of which four were included in the Engineered Products and Solutions segment (Arconic Fastening Systems and Rings, Arconic Power and Propulsion, Arconic Forgings and Extrusions, and Arconic Titanium and Engineered Products), three were included in the Transportation and Construction Solutions segment (Arconic Wheel and Transportation Products, Building and Construction Systems, and Latin America Extrusions), and the remaining reporting unit was the Global Rolled Products segment.

In January 2018, management changed the organizational structure of the businesses in the Engineered Products and Solutions segment from four business units to three business units with a focus on aligning its internal structure to core markets and customers and reducing cost. As a result, management assessed and concluded that each of the three new business units (Arconic Fastening Systems (AFS), Arconic Engines (AEN), and Arconic Engineered Structures (AES)) represent reporting units for goodwill impairment evaluation purposes. Goodwill was reallocated to the three new reporting units and both the historical and new Engineered Products and Solutions reporting units were evaluated for impairment during the first quarter of 2018. The estimated fair value of each reporting unit substantially exceeded its carrying value; thus, there was no goodwill impairment. In April 2018, Arconic completed the sale of its Latin America extrusions business and, therefore, it is no longer a reporting unit for the Company. More than 90% of Arconic’s total goodwill at December 31, 2018 was allocated to the three Engineered Products and Solutions reporting units: AEN ($2,065), AFS ($1,607), and AES ($507).

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 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 2018 annual review of goodwill, management proceeded directly to the quantitative impairment test for all six of its reporting units. The estimated fair values for each of the six reporting units exceeded their respective carrying values by more than 25%, 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 model (DCF) 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 connection with the interim impairment evaluation of long-lived assets for the disks operations (an asset group within the AEN business unit) 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 the AEN reporting unit. 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 2017 and 2016 indicated that goodwill was not impaired for any of the Company’s reporting units, except for the Arconic Forgings and Extrusions (AFE) business 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. The decrease in the AFE fair value 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.

Other Intangible Assets. Intangible assets with indefinite useful lives are not amortized while intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited. The following table details the weighted-average useful lives of software and other intangible assets by reporting segment (numbers in years):

SoftwareOther intangible assets
Engineered Products and Solutions533
Global Rolled Products59
Transportation and Construction Solutions516

Revenue Recognition. The Company's contracts with customers are comprised of acknowledged purchase orders incorporating the Company’s standard terms and conditions, or for larger customers, may also generally include terms under negotiated multi-year agreements. These contracts with customers typically consist of the manufacture of products which represent single performance obligations that are satisfied upon transfer of control of the product to the customer. The Company produces fastening systems; seamless rolled rings; investment castings, including airfoils and forged jet engine components; extruded, machined and formed aircraft parts; aluminum sheet and plate; integrated aluminum structural systems; architectural extrusions; and forged aluminum commercial vehicle wheels. Transfer of control is assessed based on alternative use of the products we produce and our enforceable right to payment for performance to date under the contract terms. Transfer of control and revenue recognition generally occur upon shipment or delivery of the product, which is when title, ownership and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck, train, or vessel). An invoice for payment is issued at time of shipment. The Company’s objective is to have net 30-day terms. Our business units set commercial terms on which Arconic sells products to its customers. These terms are influenced by industry custom, market conditions, product line (specialty versus commodity products), and other considerations.

In certain circumstances, Arconic receives advanced payments from its customers for product to be delivered in future periods. These advanced payments are recorded as deferred revenue until the product is delivered and title and risk of loss have passed to the customer in accordance with the terms of the contract. Deferred revenue is included in Other current liabilities and Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet.

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

Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is

deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.

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

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

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 Global Intangible Low Taxed Income (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 recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

Stock-Based Compensation. Arconic recognizes compensation expense for employee equity grants using the non-substantive vesting period approach, in which the expense 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.

Foreign Currency. The local currency is the functional currency for Arconic’s significant operations outside the United States, except for certain operations in Canada and Russia, where the U.S. dollar is used as the functional currency. The determination of the functional currency for Arconic’s operations is made based on the appropriate economic and management indicators.

Acquisitions. Arconic’s business acquisitions are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included in the Statement of Consolidated Operations from the date of the acquisition.

Discontinued Operations and Assets Held for Sale. For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale. Businesses to be divested are generally classified in the Consolidated Financial Statements as either discontinued operations or held for sale.

For businesses classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities of discontinued operations on the Consolidated Balance Sheet and to discontinued operations on the Statement of Consolidated Operations, respectively, for all periods presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the Statement of Consolidated Operations. The Statement of Consolidated Cash Flows is not required to be reclassified for discontinued operations for any period. Segment information does not include the assets or operating results of businesses classified as discontinued operations for all periods presented. These businesses are expected to be disposed of within one year.

For businesses classified as held for sale that do not qualify for discontinued operations treatment, the balance sheet and cash flow amounts are reclassified from their historical presentation to assets and liabilities of operations held for sale for all periods presented. The results of operations continue to be reported in continuing operations. The gains or losses associated with these divested businesses are recorded in Restructuring and other charges on the Statement of Consolidated Operations. The segment information includes the assets and operating results of businesses classified as held for sale for all periods presented.

Recently Adopted Accounting Guidance. In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. These changes became effective for Arconic on January 1, 2018. Arconic adopted this new guidance using the modified retrospective transition approach applied to those contracts that were not completed as of January 1, 2018. There was no cumulative effect adjustment to the opening balance of retained earnings in the Consolidated Balance Sheet in 2018, as the adoption did not result in a change to our timing of revenue recognition, which continues to be at a point in time. See the Revenue Recognition policy above.

In January 2016, the FASB issued changes to equity investments. These changes require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values using the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Also, the impairment assessment of equity investments without readily determinable fair values has been simplified by requiring a qualitative assessment to identify impairment. Also, the new guidance required changes in fair value of equity securities to be recognized immediately as a component of net income instead of being reported in accumulated other comprehensive loss until the gain (loss) is realized. These changes became effective for Arconic on January 1, 2018 and have been applied on a prospective basis. Arconic elected the measurement alternative for its equity investments that do not have readily determinable fair values. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements.

In August 2016, the FASB issued changes to the classification of certain cash receipts and cash payments within the statement of cash flows. The guidance identifies eight specific cash flow items and the sections where they must be presented within the statement of cash flows. These changes became effective for Arconic on January 1, 2018 and have been be applied retrospectively. As a result of the adoption, Arconic reclassified cash received related to beneficial interest in previously transferred trade accounts receivable from operating activities to investing activities in the Statement of Consolidated Cash Flows. This new accounting standard does not reflect a change in our underlying business or activities. The reclassification of cash received related to beneficial interest in previously transferred trade accounts receivable was $792 and $778 for 2017 and

2016, respectively. In addition, Arconic reclassified $52 and $3 of cash paid for debt prepayments including extinguishment costs from operating activities to financing activities for 2017 and 2016, respectively.

In November 2016, the FASB issued changes to the classification of cash and cash equivalents within the statement of cash flow. Restricted cash and cash equivalents will be included within the cash and cash equivalents line on the cash flow statement and a reconciliation must be prepared to the statement of financial position. Transfers between restricted cash and cash equivalents and cash and cash equivalents will no longer be presented as cash flow activities in the Statement of Consolidated Cash Flows and for material balances of restricted cash and cash equivalents, Arconic will disclose information regarding the nature of the restrictions. These changes became effective for Arconic on January 1, 2018 and have been applied retrospectively. Management has determined that the adoption of this guidance did not have a material impact on the Statement of Consolidated Cash Flows. Restricted cash was $6, $4, and $15 in 2018, 2017, and 2016, respectively.

In March 2017, the FASB issued changes to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires registrants to present the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. Also, only the service cost component will be eligible for asset capitalization. Registrants will present the other components of net periodic benefit cost separately from the service cost component; and, the line item or items used in the income statement to present the other components of net periodic benefit cost must be disclosed. These changes became effective for Arconic on January 1, 2018 and were adopted retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the Statement of Consolidated Operations, and prospectively for the asset capitalization of the service cost component of net periodic benefit cost. The Company recorded the service related net periodic benefit cost within Cost of goods sold, Selling, general administrative, and other expenses and Research and development expenses and recorded the non-service related net periodic benefit cost (except for the curtailment cost which was recorded in Restructuring and other charges) separately from service cost in Other expense (income), net within the Statement of Consolidated Operations. The impact of the retrospective adoption of this guidance was an increase to consolidated Operating income of $154 and $135, while there was no impact to consolidated Net income, for 2017 and 2016, respectively.

In May 2017, the FASB issued clarification to guidance on the modification accounting criteria for share-based payment awards. The new guidance requires registrants to apply modification accounting unless three specific criteria are met. The three criteria are 1) the fair value of the award is the same before and after the modification, 2) the vesting conditions are the same before and after the modification and 3) the classification as a debt or equity award is the same before and after the modification. These changes became effective for Arconic on January 1, 2018 and were applied prospectively to new awards modified after adoption. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements.

In February 2018, the FASB issued guidance that allows an optional reclassification from Accumulated other comprehensive loss to Accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. Stranded tax effects were created when deferred taxes, originally established in Other comprehensive income at 35%, were revalued to 21% as a component of income tax expense from continuing operations. The Company elected to early adopt this provision in the fourth quarter of 2018 and reclassified $367 of beneficial stranded tax effects in Accumulated other comprehensive loss to Accumulated deficit in its Consolidated Balance Sheet and Statement of Changes in Consolidated Equity.

In August 2018, the FASB issued guidance which requires cloud computing arrangement implementation costs to be accounted for in accordance with the software stage model, regardless of whether or not the cloud computing arrangement contains a license. Arconic adopted this guidance in the third quarter of 2018. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements.

Also, in August 2018, the Securities and Exchange Commission (SEC) issued guidance to eliminate or modify certain disclosure requirements that have become redundant, overlapping, outdated or superseded in light of other SEC rules, GAAP or changes in the information environment. This guidance became effective on November 5, 2018 and will be applied to filings thereafter. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements.

Recently Issued Accounting Guidance. In February 2016, the FASB issued changes to the accounting and presentation of leases. These changes require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. Also, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option, or not exercise an option to terminate the lease. As originally released, the standards update required application at the beginning of the earliest comparative period presented at the time of adoption. However, in July 2018, the FASB provided entities the option to instead apply the provisions of the new leases guidance at the effective date, without adjusting the comparative periods presented. The Company expects to apply the provisions of the new

leases guidance at the effective date, without adjusting the comparative periods presented. These changes became effective for Arconic on January 1, 2019.

Arconic’s current operating lease portfolio is primarily comprised of land and buildings, plant equipment, vehicles, and computer equipment. A cross-functional implementation team has determined the scope of arrangements that will be subject to this standard and continues to assess the impact to the Company’s systems, processes and internal controls. Arconic has contracted with a third-party vendor to implement a software solution. Concurrently, Arconic has been compiling and uploading lease data into the software solution to account for leases under the new standard. Management continues to evaluate the impact of these changes on the Consolidated Balance Sheet, which will require right of use assets and lease liabilities be recorded for operating leases. Arconic anticipates the impact of adoption on January 1, 2019 will result in a right of use asset and total lease liability related to operating leases in the range of $300 to $340, while the accounting for capital leases will remain unchanged. The adoption is not expected to have a material impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows.

In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective for Arconic on January 1, 2020. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.

In August 2017, the FASB issued guidance that will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. These changes became effective for Arconic on January 1, 2019. For cash flow and net investment hedges existing at the date of adoption, Arconic will apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to Accumulated other comprehensive loss with a corresponding adjustment to the opening balance of Accumulated deficit as of the beginning of the fiscal year in which the amendment is adopted. The amended presentation and disclosure guidance is required only prospectively. Arconic has engaged a third-party consultant to assist with a review of the Company’s risk management and hedging strategies, with any changes to be implemented in conjunction with the adoption of the new guidance. Under the new guidance, Management expects to utilize cash flow hedge accounting of its variable priced purchases and sales. Management determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

In August 2018, the FASB issued guidance that impacts disclosures for defined benefit pension plans and other postretirement benefit plans. These changes become effective for Arconic's annual report for the year ending December 31, 2020, with early adoption permitted. Management has determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements. 20.

B. Revenue from Contracts with Customers

The following table disaggregates revenue by major end market served. Differences between segment totals and consolidated Arconic are in Corporate. In 2018, Corporate included $38 of costs related to settlements of certain customer claims primarily related to product introductions.

For the year ended December 31,Engineered Products and SolutionsGlobal Rolled ProductsTransportation and Construction SolutionsTotal Segment
2018
Aerospace$4,947$891$—$5,838
Transportation4402,4439693,852
Building and construction—2171,1501,367
Industrial and Other9292,05372,989
Total end-market revenue$6,316$5,604$2,126$14,046
2017
Aerospace$4,572$883$—$5,455
Transportation3831,9818053,169
Building and construction—2041,1131,317
Industrial and Other9881,932933,013
Total end-market revenue$5,943$5,000$2,011$12,954
2016
Aerospace$4,358$942$—$5,300
Transportation3471,5777082,632
Building and construction—2001,0601,260
Industrial and Other1,0232,146343,203
Total end-market revenue$5,728$4,865$1,802$12,395

C. Segment and Geographic Area Information

Arconic is a global leader in lightweight metals engineering and manufacturing. Arconic’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, building and construction, industrial applications, defense, and packaging. Arconic’s segments are organized by product on a worldwide basis. In the first quarter of 2018, the Company changed its primary measure of segment performance from Adjusted earnings before interest, tax, depreciation, and amortization (“Adjusted EBITDA”) to Segment operating profit, which more closely aligns segment performance with Operating income as presented in the Statement of Consolidated Operations. 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 also includes certain items that, under the previous segment performance measure, were recorded in Corporate, such as the impact of LIFO inventory accounting, metal price lag, intersegment profit eliminations, and derivative activities. Segment operating profit may not be comparable to similarly titled measures of other companies. Differences between segment totals and consolidated Arconic are in Corporate. Prior period financial information has been recast to conform to current year presentation.

The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note A). Transactions among segments are established based on negotiation among the parties. Differences between segment totals and Arconic’s consolidated totals for line items not reconciled are in Corporate.

Arconic’s operations consist of three worldwide reportable segments as follows:

Engineered Products and Solutions. This 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 (titanium, steel, and nickel superalloys); seamless rolled rings (mostly nickel superalloys); investment castings (nickel superalloys, titanium, and aluminum), including airfoils and forged jet engine components (e.g., jet engine disks); and extruded,

machined and formed aircraft parts (titanium and aluminum), all of which are sold directly to customers and through distributors. More than 75% of the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forged, extruded, and machined metal products (titanium, aluminum and steel) for the oil and gas, automotive, and land and sea defense end markets. Seasonal decreases in sales are generally experienced in the third quarter of the year due to the European summer slowdown across all end markets.

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

Transportation and Construction Solutions. This segment 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, which are sold both directly to customers and through distributors. A small part of this segment also produces aluminum products for the industrial products end market.

The operating results and assets of Arconic’s reportable segments were as follows:

Engineered Products and SolutionsGlobal Rolled ProductsTransportation and Construction SolutionsTotal
2018
Sales:
Third-party sales$6,316$5,604$2,126$14,046
Intersegment sales—160—160
Total sales$6,316$5,764$2,126$14,206
Profit and loss:
Segment operating profit$891$386$304$1,581
Restructuring and other charges71(156)1(84)
Provision for depreciation and amortization28221250544
2017
Sales:
Third-party sales$5,943$5,000$2,011$12,954
Intersegment sales—148—148
Total sales$5,943$5,148$2,011$13,102
Profit and loss:
Segment operating profit$964$424$290$1,678
Restructuring and other charges307252154
Provision for depreciation and amortization26820550523
2016
Sales:
Third-party sales$5,728$4,865$1,802$12,395
Intersegment sales—118—118
Total sales$5,728$4,983$1,802$12,513
Profit and loss:
Segment operating profit$955$421$246$1,622
Restructuring and other charges784014132
Provision for depreciation and amortization25520148504
2018
Assets:
Capital expenditures$349$255$111$715
Goodwill4,179245764,500
Total assets10,3463,9341,08915,369
2017
Assets:
Capital expenditures$308$178$57$543
Goodwill4,205252784,535
Total assets10,3253,9551,04115,321

The following tables reconcile certain segment information to consolidated totals:

For the year ended December 31,201820172016
Sales:
Total segment sales$14,206$13,102$12,513
Elimination of intersegment sales(160)(148)(118)
Corporate(32)6(1)
Consolidated sales$14,014$12,960$12,394
For the year ended December 31,201820172016
Total segment operating profit$1,581$1,678$1,622
Unallocated amounts:
Impairment of goodwill—(719)—
Restructuring and other charges(9)(165)(155)
Corporate expense(247)(314)(513)
Consolidated operating income$1,325$480$954
Interest expense(378)(496)(499)
Other (expense) income, net(79)486(41)
Consolidated income before income taxes$868$470$414
December 31,20182017
Assets:
Total segment assets$15,369$15,321
Unallocated amounts:
Cash and cash equivalents2,2772,150
Deferred income taxes573743
Corporate fixed assets, net305310
Fair value of derivative contracts3791
Other132103
Consolidated assets$18,693$18,718

Sales by major product grouping were as follows:

For the year ended December 31,201820172016
Sales:
Innovative flat-rolled products$5,588$4,992$4,864
Engines2,9402,7082,560
Engineered structures1,8391,7431,683
Fastening systems1,5311,4841,463
Architectural aluminum systems1,1401,0651,010
Aluminum wheels969805689
Other7163125
$14,014$12,960$12,394

Geographic information for sales was as follows (based upon the country where the point of sale occurred):

For the year ended December 31,201820172016
Sales:
United States$9,137$8,167$7,823
France936965930
Hungary823739619
United Kingdom737721711
China632615582
Russia553500433
Germany302309284
Canada285261262
Brazil214285250
Japan170141145
Other225257355
$14,014$12,960$12,394

Geographic information for long-lived assets was as follows (based upon the physical location of the assets):

December 31,20182017
Long-lived assets:
United States$4,148$4,005
China326347
Hungary257227
Russia253276
United Kingdom253259
France163159
Germany8488
Canada6163
Brazil5462
Other105108
$5,704$5,594

D. Restructuring and Other Charges

Restructuring and other charges for each year in the three-year period ended December 31, 2018 were comprised of the following:

201820172016
Asset impairments$13$58$80
Layoff costs206468
Pension and Other postretirement benefits - net settlement and curtailment charges91—2
Net (gain) loss on divestitures of assets and businesses (T)(109)573
Other13(3)27
Reversals of previously recorded layoff costs(19)(11)(25)
Restructuring and other charges$9$165$155

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

2018 Actions. In 2018, Arconic recorded Restructuring and other charges of $9 ($9 after-tax), which included a net gain on the sale of several assets and businesses of $109 ($81 after-tax), primarily made up of a gain on the asset sale of Texarkana of $154 ($119 after-tax) and loss on the sale of the Eger, Hungary forgings business of $43 ($39 after-tax) (see note T); charges of $96 ($75 after-tax) for pension settlement and $23 ($18 after-tax) for pension curtailment; a postretirement curtailment benefit of $28 ($22 after-tax) (see note G); and a charge of $20 ($17 after-tax) for layoff costs, including the separation of approximately 125 employees (89 in the Engineered Products and Solutions segment and 36 in Corporate); a charge of $12 ($9 after-tax) for contract termination costs and asset impairments associated with the shutdown of a facility in Acuna, Mexico; a charge of $6 ($4 after-tax) for contract termination costs related to the New York office; a charge of $8 ($4 after-tax) for other miscellaneous items including accelerated depreciation and asset impairments; and a benefit of $19 ($15 after-tax) for the reversal of a number of layoff reserves related to prior periods.

As of December 31, 2018, approximately 110 of the 125 employees were separated. The remaining separations for 2018 restructuring programs are expected to be completed by the end of 2019. In 2018, cash payments of $9 were made against layoff reserves related to the 2018 restructuring programs.

2017 Actions. In 2017, Arconic recorded Restructuring and other charges of $165 ($143 after-tax), which were comprised of the following components: $69 ($47 after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately 880 employees (400 in the Engineered Products and Solutions segment, 245 in the Global Rolled Products segment, 135 in the Transportation and Construction Solutions segment, and 100 in Corporate), a charge of $60 ($60 after-tax) related to the sale of the Fusina, Italy rolling mill; a charge of $41 ($41 after-tax) for the impairment of assets associated with the sale of the Latin America extrusions business (see Note T); a net benefit of $6 ($4 after-tax) for the reversal of forfeited executive stock compensation of $13, partially offset by a charge of $7 for the related severance; a net charge of $12 ($7 after-

tax) for other miscellaneous items; and a favorable benefit of $11 ($8 after-tax) for the reversal of a number of small layoff reserves related to prior periods.

As of December 31, 2018, approximately 570 of the 660 employees (previously 760) were separated. The total number of employees associated with 2017 restructuring programs was updated to reflect employees, who were initially identified for separation, accepting other positions within Arconic and natural attrition. The remaining separations for 2017 restructuring programs are expected to be completed by the end of 2019. In 2018 and 2017, cash payments of $34 and $28, respectively, were made against layoff reserves related to 2017 restructuring programs.

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

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

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

As of December 31, 2018, the separations associated with the 2016 restructuring programs were essentially complete. In 2018, 2017, and 2016, cash payments of $4, $26, and $16, respectively, were made against layoff reserves related to 2016 restructuring programs.

Activity and reserve balances for restructuring charges were as follows:

Layoff costsOther exit costsTotal
Reserve balances at December 31, 2015$84$9$93
2016
Cash payments(73)(13)(86)
Restructuring charges702797
Other(1)(31)(14)(45)
Reserve balances at December 31, 2016$50$9$59
2017
Cash payments$(59)$(6)$(65)
Restructuring charges64165
Other(2)1(2)(1)
Reserve balances at December 31, 2017$56$2$58
2018
Cash payments$(47)$(2)$(49)
Restructuring charges11113124
Other(3)(110)2(108)
Reserve balances at December 31, 2018$10$15$25
(1)In 2016, Other for layoff costs included reversals of previously recorded restructuring charges of $25, effects of foreign currency translation and other of $4, and a reclassification of $2 in pension costs, as the impact was reflected in Arconic’s separate liability for Accrued pension benefits. Other for other exit costs included reclassifications of $8 in asset retirement and $2 in environmental obligations, as the impacts were reflected in Arconic’s separate liabilities

for asset retirement obligations and environmental remediation, and a reclassification of $4 in legal obligations, as the impact was included in Arconic’s separate liability for legal costs.

(2)In 2017, Other for layoff costs included a reclassification of a stock awards reversal of $13, offset by reversals of previously recorded restructuring charges of $11 and foreign currency translation of $1.
(3)In 2018, Other for layoff costs included reclassifications of $119 in pension costs and a $28 credit in postretirement benefits, as the impacts were reflected in Arconic's separate liabilities for Accrued pension benefits and Accrued postretirement benefits, and reversals of previously recorded restructuring charges of $19.

The remaining reserves are expected to be paid in cash during 2019, with the exception of approximately $5 to $7, which is expected to be paid over the next several years for lease termination costs.

E. Interest Cost Components

For the year ended December 31,201820172016
Amount charged to expense$378$496$499
Amount capitalized232232
$401$518$531

F. Other Expense (Income), Net

For the year ended December 31,201820172016
Non-service related net periodic benefit cost$112$154$135
Interest income(23)(19)(16)
Foreign currency losses (gains), net26(5)(4)
Net loss (gain) from asset sales10(513)11
Other, net(46)(103)(85)
$79$(486)$41

In 2018, Non-service related net periodic benefit cost included lower net actuarial losses as a result of pension actions taken during 2018 (see Note G) and Other, net included a benefit from establishing a tax indemnification receivable of $29 reflecting Alcoa Corporation’s 49% share of a Spanish tax reserve (see Note U). In 2017, Net loss (gain) from asset sales included a gain on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock of $351 (see Note V) and a gain of $167 on the Debt-for-Equity Exchange (see Note V). In 2017, Other, net included an adjustment of $81 to the contingent earn-out liability related to the 2014 acquisition of Firth Rixson (see Note T) and an adjustment of $25 associated with a separation-related guarantee liability (see Note U). In 2016, Non-service related net periodic benefit cost included a reduction of the recognition of actuarial losses and a methodology change in the calculation of interest cost, which were partially offset by the reduction in the expected return on plan assets. In 2016, Other, net included an adjustment of $56 to the contingent earn-out liability and a post-closing adjustment of $20, both related to the acquisition of Firth Rixson.

G. Pension and Other Postretirement Benefits

Arconic maintains pension plans covering most U.S. employees and certain employees in foreign locations. Pension benefits generally depend on length of service, job grade, and remuneration. Substantially all benefits are paid through pension trusts that are sufficiently funded to ensure that all plans can pay benefits to retirees as they become due. Most salaried and non-bargaining hourly U.S. employees hired after March 1, 2006 participate in a defined contribution plan instead of a defined benefit plan.

Arconic also maintains health care and life insurance postretirement benefit plans covering eligible U.S. retired employees and certain retirees from foreign locations. Generally, the medical plans are unfunded and pay a percentage of medical expenses, reduced by deductibles and other coverage. Life benefits are generally provided by insurance contracts. Arconic retains the right, subject to existing agreements, to change or eliminate these benefits. All salaried and certain non-bargaining hourly U.S. employees hired after January 1, 2002 and certain bargaining hourly U.S. employees hired after July 1, 2010 are not eligible for postretirement health care benefits. All salaried and certain hourly U.S. employees that retire on or after April 1, 2008 are not eligible for postretirement life insurance benefits.

Effective January 1, 2015, Arconic no longer offers postretirement health care benefits to Medicare-eligible, primarily non-bargaining, U.S. retirees through Company-sponsored plans. Qualifying retirees (hired prior to January 1, 2002), both current and future, may access these benefits in the marketplace by purchasing coverage directly from insurance carriers.

In the first quarter of 2018, the Company announced that, effective April 1, 2018, benefit accruals for future service and compensation under all of the Company's qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargaining hourly employees ceased. As a result of this change, in the first quarter of 2018, the Company recorded a decrease to the Accrued pension benefits liability of $136 related to the reduction of future benefits, $141 offset in Accumulated other comprehensive loss, and curtailment charges of $5 in Restructuring and other charges.

On April 13, 2018, the United Auto Workers ratified a new five-year labor agreement, covering approximately 1,300 U.S. employees of Arconic, which expires on March 31, 2023. A provision within the agreement includes a retirement benefit increase for future retirees that participate in a defined benefit pension plan, which impacts approximately 300 of those employees. In addition, effective January 1, 2019, benefit accruals for future service will cease. As result of these changes, a curtailment charge of $9 was recorded in Restructuring and other charges in the second quarter of 2018.

In the third quarter of 2018, the Company announced that effective December 31, 2018, it will end all pre-Medicare medical, prescription drug and vision coverage for current and future salaried and non-bargained hourly employees and retirees of the Company and its subsidiaries. As a result of this change, in the third quarter of 2018, the Company recorded a decrease to the Accrued other postretirement benefits liability of $32 related to the reduction of future benefits, $4 offset in Accumulated other comprehensive loss, and a curtailment benefit of $28 in Restructuring and other charges.

In the fourth quarter, the company communicated to plan participants that effective in the first quarter of 2019, benefit accruals for future service and compensation for employees in the United Kingdom defined benefit pension plans will cease. The plan curtailment resulted in a $13 decrease in the Accrued pension benefits liability which was offset in Accumulated other comprehensive loss. Additionally, on October 29, 2018, the United Kingdom High Court ruled that defined benefit pension plans offering Guaranteed Minimum Pensions must review benefits accrued between May 1990 to April 1997 to ensure gender pay equality. The review resulted in an increase to the Accrued pension benefits liability of $9 and a corresponding curtailment charge that was recorded in Restructuring and other charges.

In the third and fourth quarters of 2018, settlement accounting applied to certain U.S. pension plans due to lump sum payments to participants, resulting in settlement charges of $96 that were recorded in Restructuring and other charges.

The funded status of all of Arconic’s pension and other postretirement benefit plans are measured as of December 31 each calendar year.

Obligations and Funded Status

Pension benefitsOther postretirement benefits
December 31,2018201720182017
Change in benefit obligation
Benefit obligation at beginning of year$7,359$7,026$927$980
Service cost469077
Interest cost2192342830
Amendments181(25)—
Actuarial (gains) losses(372)311(51)1
Settlements(146)———
Curtailments(154)———
Benefits paid(422)(425)(86)(98)
Medicare Part D subsidy receipts——67
Foreign currency translation impact(72)122——
Benefit obligation at end of year(1)$6,476$7,359$806$927
Change in plan assets(1)
Fair value of plan assets at beginning of year$4,862$4,666$—$—
Actual return on plan assets(144)212——
Employer contributions298310——
Benefits paid(397)(404)——
Administrative expenses(33)(33)——
Settlements(178)———
Foreign currency translation impact(74)111——
Fair value of plan assets at end of year(1)$4,334$4,862$—$—
Net funded status$(2,142)$(2,497)$(806)$(927)
Amounts recognized in the Consolidated Balance Sheet consist of:
Noncurrent assets$111$89$—$—
Current liabilities(23)(22)(83)(86)
Noncurrent liabilities(2,230)(2,564)(723)(841)
Net amount recognized$(2,142)$(2,497)$(806)$(927)
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
Net actuarial loss$2,957$3,240$87$146
Prior service cost (benefit)310(27)(37)
Net amount recognized, before tax effect$2,960$3,250$60$109
Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss consist of:
Net actuarial (gain) loss$(19)$481$(52)$1
Amortization of accumulated net actuarial loss(264)(220)(7)(5)
Prior service cost (benefit)19—(25)—
Amortization of prior service (cost) benefit(26)(5)358
Net amount recognized, before tax effect$(290)$256$(49)$4
(1)At December 31, 2018, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $5,282, $3,123, and $(2,159), respectively. At December 31, 2017, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $6,018, $3,544, and $(2,474) respectively.

Pension Plan Benefit Obligations

Pension benefits
20182017
The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans was as follows:
Projected benefit obligation$6,476$7,359
Accumulated benefit obligation6,4447,169
The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets was as follows:
Projected benefit obligation5,4356,600
Fair value of plan assets3,1824,016
The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets was as follows:
Accumulated benefit obligation5,4156,422
Fair value of plan assets3,1793,998

Components of Net Periodic Benefit Cost

Pension benefits(1)Other postretirement benefits(2)
For the year ended December 31,201820172016201820172016
Service cost$46$90$155$7$7$13
Interest cost219234431283063
Expected return on plan assets(306)(332)(677)———
Recognized net actuarial loss1682203807524
Amortization of prior service cost (benefit)3513(7)(8)(24)
Settlements(3)96—19———
Curtailments(4)23——(28)——
Special termination benefits(5)——2———
Net periodic benefit cost(6)$249$217$323$7$34$76
Discontinued operations——122——41
Net amount recognized in Statement of Consolidated Operations$249$217$201$7$34$35
Note:the footnotes below include components of Net Periodic Benefit Cost related to Alcoa Corporation through the completion of the Separation Transaction in 2016.
(1)In 2018, 2017 and 2016, net periodic benefit cost for U.S. pension plans was $239, $206, and $261, respectively.
(2)In 2018, 2017 and 2016, net periodic benefit cost for other postretirement benefits reflects a reduction of $10, $11, and $22, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.
(3)In 2018 and 2016, settlements were due to workforce reductions (see Note D) and the payment of lump sum benefits and/or purchases of annuity contracts.
(4)In 2018, curtailments were due to a reduction of future benefits, resulting in the recognition of favorable and unfavorable plan amendments.
(5)In 2016, special termination benefits were due to workforce reductions (see Note D).
(6)Amounts attributed to joint venture partners are not included. Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses, and Research and development expenses; curtailments and settlements were included in Restructuring and other charges; and all other cost components were recorded in Other expense (income), net in the Statement of Consolidated Operations.

Amounts Expected to be Recognized in Net Periodic Benefit Cost

Pension benefitsOther postretirement benefits
December 31,20192019
Net actuarial loss recognition$139$3
Prior service cost (benefit) recognition2(4)

Assumptions

Weighted average assumptions used to determine benefit obligations for U.S. pension and other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):

December 31,20182017
Discount rate4.35%3.75%
Rate of compensation increase3.503.50
Cash balance plan interest crediting rate3.003.00

The discount rate is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, 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.

The rate of compensation increase is based upon actual experience. For 2019, the rate of compensation increase will be 3.5%, which approximates the five-year average.

Weighted average assumptions used to determine net periodic benefit cost for U.S. pension and other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):

201820172016
Discount rate to calculate service cost(1)3.75%4.20%4.29%
Discount rate to calculate interest cost(1)3.303.603.15
Expected long-term rate of return on plan assets7.007.757.75
Rate of compensation increase3.503.503.50
Cash balance plan interest crediting rate3.003.003.00
(1)In all periods presented, the respective discount rates were used to determine net periodic benefit cost for most U.S. pension plans for the full annual period. However, the discount rates for a limited number of plans were updated during 2018, 2017, and 2016 to reflect the remeasurement of these plans due to new union labor agreements, settlements, and/or curtailments. The updated discount rates used were not significantly different from the discount rates presented.

In conjunction with the annual measurement of the funded status of Arconic’s pension and other postretirement benefit plans at December 31, 2015, management elected to change the manner in which the interest cost component of net periodic benefit costs is determined in 2016 and beyond. Previously, the interest component was determined by multiplying the single equivalent rate and the aggregate discounted cash flows of the plans’ projected benefit obligations. Under the new methodology, the interest cost component is determined by aggregating the product of the discounted cash flows of the plans’ projected benefit obligations for each year and an individual spot rate (referred to as the “spot rate” approach). This change resulted in a lower interest cost component of net periodic benefit cost under the new methodology compared to the previous methodology in 2018, 2017, and 2016 of $24, $34, and $84, respectively, for pension plans and $4, $6, and $14, respectively, for other postretirement benefit plans. Management believes this new methodology, which represents a change in an accounting estimate, is a better measure of the interest cost as each year’s cash flows are specifically linked to the interest rates of bond payments in the same respective year.

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 2018, 2017, and 2016, the expected long-term rate of return used by management was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. These rates fell within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. In 2018, management reduced the expected long-term rate of return by 75 basis points due to a decrease in the expected return by asset class and the 20-year moving average. For 2019, management anticipates that 7.00% will be the expected long-term rate of return.

Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):

201820172016
Health care cost trend rate assumed for next year5.50%5.50%5.50%
Rate to which the cost trend rate gradually declines4.504.504.50
Year that the rate reaches the rate at which it is assumed to remain202220212020

The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by Arconic’s other postretirement benefit plans. For 2019, a 5.5% trend rate will be used, reflecting management’s best estimate of the change in future health care costs covered by the plans. The plans’ actual annual health care cost trend experience over the past three years has ranged from (3.3)% to (0.5)%. Management does not believe this three-year range is indicative of expected increases for future health care costs over the long-term.

Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage point change in these assumed rates would have the following effects:

1% increase1% decrease
Effect on other postretirement benefit obligations$22$(22)
Effect on total of service and interest cost components1(1)

Plan Assets

Arconic’s pension plans’ investment policy and weighted average asset allocations at December 31, 2018 and 2017, by asset class, were as follows:

Plan assets at December 31,
Asset classPolicy range20182017
Equities20–55%29%28%
Fixed income25–55%4847
Other investments15–35%2325
Total100%100%

The principal objectives underlying the investment of the pension plans’ assets are to ensure that Arconic can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify investments across and within various asset classes to protect asset values against adverse movements. Specific objectives for long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities and achieving diversification across the balance of the asset portfolio. The use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. The investment strategy has used long duration cash bonds and derivative instruments to offset a portion of the interest rate sensitivity of U.S. pension liabilities. Exposure to broad equity risk has been decreased and diversified through investments in discretionary and systematic macro hedge funds, long/short equity hedge funds, high yield bonds, emerging market debt and global and emerging market equities. Investments are further diversified by strategy, asset class, geography, and sector to enhance returns and mitigate downside risk. A large number of external investment managers are used to gain broad exposure to the financial markets and to mitigate manager-concentration risk.

Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and other applicable laws and regulations.

The following section describes the valuation methodologies used by the trustees to measure the fair value of pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified (see Note R for the definition of fair value and a description of the fair value hierarchy).

Equities. These securities consist of: (i) direct investments in the stock of publicly traded U.S. and non-U.S. companies, and equity derivatives, that are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (ii) the plans’ share of commingled funds that are invested in the stock of publicly traded companies and are valued at the net asset value of shares held at December 31 (included in Level 1); and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) that are valued at net asset value.

Fixed income. These securities consist of: (i) U.S. government debt that are generally valued using quoted prices (included in Level 1); (ii) cash and cash equivalents invested in publicly-traded funds and are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (iii) publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds and debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data (included in Level 2); (iv) fixed income derivatives that are generally valued using industry standard models with market-based observable inputs (included in Level 2); and (v) cash and cash equivalents invested in institutional funds and are valued at net asset value.

Other investments. These investments include, among others: (i) exchange traded funds, such as gold, and real estate investment trusts and are valued based on the closing price reported in an active market on which the investments are traded (included in Level 1) and (ii) direct investments of discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued at net asset value.

The fair value methods described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Arconic believes the valuation methods used by the plans’ trustees are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table presents the fair value of pension plan assets classified under the appropriate level of the fair value hierarchy or net asset cost:

December 31, 2018Level 1Level 2Net asset valueTotal
Equities:
Equity securities$318$—$578$896
Long/short equity hedge funds——232232
Private equity——147147
$318$—$957$1,275
Fixed income:
Intermediate and long duration government/credit$200$934$770$1,904
Other99152170
$209$943$922$2,074
Other investments:
Real estate$81$—$164$245
Discretionary and systematic macro hedge funds——471471
Other56—212268
$137$—$847$984
Net plan assets(1)$664$943$2,726$4,333
December 31, 2017Level 1Level 2Net Asset ValueTotal
Equities
Equity securities$379$—$593$972
Long/short equity hedge funds——230230
Private equity——155155
$379$—$978$1,357
Fixed income:
Intermediate and long duration government/credit$201$981$779$1,961
Other1648145317
$365$989$924$2,278
Other investments:
Real estate$85$—$172$257
Discretionary and systematic macro hedge funds——583583
Other777275359
$162$7$1,030$1,199
Net plan assets(2)$906$996$2,932$4,834
(1)As of December 31, 2018, the total fair value of pension plans’ assets excludes a net receivable of $1, which represents securities purchased and sold but not yet settled plus interest and dividends earned on various investments.
(2)As of December 31, 2017, the total fair value of pension plans’ assets excludes a net receivable of $28, which represents assets due from Alcoa Corporation as a result of plan separations and securities sold not yet settled plus interest and dividends earned on various investments.

Funding and Cash Flows

It is Arconic’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws. Periodically, Arconic contributes additional amounts as deemed appropriate. In 2018 and 2017, cash contributions to Arconic’s pension plans were $298 and $310, respectively. The $298 includes $72 contributed to the Company’s U.S. plans that was in excess of the minimum required under ERISA.

The minimum required contribution to pension plans in 2019 is estimated to be $255 (of which $230 is for U.S. plans) and includes $34 related to an agreement reached with the Pension Benefit Guaranty Corporation (PBGC), as discussed in the following paragraph.

During the third quarter of 2016, the PBGC approved management’s plan to separate the Alcoa Inc. pension plans between Arconic Inc. and Alcoa Corporation. The plan stipulates that Arconic will make cash contributions over a period of 30 months (from November 1, 2016) to its two largest pension plans. Payments are expected to be made in three increments of no less than $50 each ($150 total) over this 30-month period. The Company made payments of $50 in March 2018 and $50 in April 2017. In the third quarter of 2018, the 2018 U.S. pension plan valuations were completed and additional pension contributions of $16 that were made in the first quarter of 2018 were able to be used to partially satisfy the third $50 requirement. The remaining $34 payment is expected to be made in 2019. Through the end of 2018, $116 of pension contributions have been made toward the $150 requirement.

Benefit payments expected to be paid to pension and other postretirement benefit plans’ participants and expected Medicare Part D subsidy receipts are as follows utilizing the current assumptions outlined above:

For the year ended December 31,Pension benefits paidGross Other post- retirement benefitsMedicare Part D subsidy receiptsNet Other post- retirement benefits
2019$460$90$5$85
202046085580
202145585580
202245585580
202345085580
Thereafter2,17030025275
$4,450$730$50$680

Defined Contribution Plans

Arconic sponsors savings and investment plans in various countries, primarily in the United States. Arconic’s contributions and expenses related to these plans were $123 in 2018, $89 in 2017, and $71 in 2016. In the United States, employees may contribute a portion of their compensation to the plans, and Arconic matches a portion of these contributions in equivalent form of the investments elected by the employee.

H. Income Taxes

The components of income from continuing operations before income taxes were as follows:

For the year ended December 31,201820172016
United States$518$500$84
Foreign350(30)330
$868$470$414

The provision for income taxes consisted of the following:

For the year ended December 31,201820172016
Current:
Federal(1)$45$—$—
Foreign13898133
State and local4(2)1
18796134
Deferred:
Federal1464891,208
Foreign(94)37136
State and local(13)(78)(2)
394481,342
Total$226$544$1,476
(1)Includes U.S. taxes related to foreign income

Arconic has unamortized tax-deductible goodwill of $26 resulting from intercompany stock sales and reorganizations. Arconic recognizes the tax benefits (at a 25% rate) associated with this tax-deductible goodwill when it is amortized for local income tax purposes rather than in the period in which the transaction is consummated.

A reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate was as follows (the effective tax rate for all periods was a provision on income):

For the year ended December 31,201820172016
U.S. federal statutory rate21.0%35.0%35.0%
Taxes on foreign operations4.0(8.8)(11.5)
U.S. State and local taxes1.50.7(0.4)
Federal benefit of state tax(0.3)3.70.4
Permanent differences on restructuring and other charges and asset disposals(1)(16.9)(167.4)(107.8)
Non-deductible acquisition costs—0.38.4
Statutory tax rate and law changes(2)6.552.5(15.7)
Tax holidays(1.6)(3.0)(0.8)
Changes in valuation allowances0.9137.9426.8
Impairment of goodwill—53.5—
Company-owned life insurance/split-dollar net premiums——23.0
Changes in uncertain tax positions12.810.12.1
Prior year tax adjustments(2.6)(0.9)(1.7)
Other0.72.1(1.3)
Effective tax rate26.0%115.7%356.5%
(1)Additional losses were reported in Spain's 2017 tax return related to the Separation Transaction which are offset by an increased valuation allowance.
(2)In 2018, the Company finalized its accounting for the Tax Cuts and Jobs Act of 2017 ("the 2017 Act”) and recorded an additional $59 charge. In December 2017, an estimated $272 tax charge was recorded with respect to the enactment of the 2017 Act. In December 2016, Spain and the United States enacted tax law changes which resulted in the remeasurement of certain deferred tax liabilities recorded by Arconic.

On December 22, 2017, the 2017 Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017. Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118"), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, was issued by the SEC to address the application of U.S. GAAP for financial reporting. SAB 118 permitted the use of provisional amounts based on reasonable estimates in the financial statements. SAB

118 also provided that the tax impact may be considered incomplete in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act.

The Company calculated a reasonable estimate of the impact of the 2017 Act’s tax rate reduction and one-time transition tax in its 2017 year end income tax provision in accordance with its understanding of the 2017 Act and guidance available and, as a result, recorded a $272 tax charge in the fourth quarter of 2017, the period in which the legislation was enacted.

In 2018, the Company included a $59 tax charge in income from continuing operations as a result of finalizing its accounting for the 2017 Tax Act in accordance with SAB 118. This charge primarily related to a $16 charge for the one-time transition tax and a $43 charge to update deferred tax balances.

The components of net deferred tax assets and liabilities were as follows:

20182017
December 31,Deferred tax assetsDeferred tax liabilitiesDeferred tax assetsDeferred tax liabilities
Depreciation$38$694$31$693
Employee benefits8362793623
Loss provisions94—13414
Deferred income/expense221,102191,144
Tax loss carryforwards3,159—3,305—
Tax credit carryforwards579—638—
Other94202433
$4,822$1,843$5,087$1,907
Valuation allowance(2,486)—(2,584)—
$2,336$1,843$2,503$1,907

The following table details the expiration periods of the deferred tax assets presented above:

December 31, 2018Expires within 10 yearsExpires within 11-20 yearsNo expiration(1)Other(2)Total
Tax loss carryforwards$300$461$2,398$—$3,159
Tax credit carryforwards4977012—579
Other——641,0201,084
Valuation allowance(752)(287)(1,390)(57)(2,486)
$45$244$1,084$963$2,336
(1)Deferred tax assets with no expiration may still have annual limitations on utilization.
(2)Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference. A substantial amount of Other relates to employee benefits that will become deductible for tax purposes over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.

The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (24%) and taxable temporary differences that reverse within the carryforward period (76%).

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation

allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.

In 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.

Arconic’s foreign tax credits in the United States have a 10-year carryforward period with expirations ranging from 2019 to 2027 (as of December 31, 2018). Valuation allowances were initially established in prior years on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. After consideration of all available evidence including potential tax planning strategies, incremental valuation allowances of $46, $9 and $302 were recognized in 2018, 2017 and 2016, respectively. Foreign tax credits of $8, $57, and $128 expired at the end of 2018, 2017, and 2016, respectively, resulting in a corresponding decrease to the valuation allowance. At December 31, 2018, the cumulative amount of the valuation allowance was $417. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.

Arconic released $10 and $98 of certain U.S. state valuation allowances in 2018 and 2017, respectively. After weighing all available positive and negative evidence, management determined that the underlying net deferred tax assets were more likely than not realizable based on projected taxable income estimates taking into account expected post-separation apportionment data. Valuation allowances of $675 remain against other net state deferred tax assets expected to expire before utilization. The need for valuation allowances against net state deferred tax assets will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.

In 2018, Arconic reduced a valuation allowance by $92 as a result of increasing a tax reserve for unrecognized tax benefits in Spain. The valuation allowance reduction was partially offset by a $20 charge with respect to losses no longer supported by reversing temporary differences. Arconic also recorded an additional valuation allowance of $61 and $675 in 2018 and 2017, respectively, which offsets a deferred tax asset recorded for additional losses reported on the Spanish tax return related to the Separation Transaction that are not more likely than not to be realized.

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

In 2016, Arconic also recorded additional valuation allowances in Australia of $93 related to the Separation Transaction, in Spain of $163 related to a tax law change and in Luxembourg of $280 related to the Separation Transaction as well as a tax law change. These valuation allowances fully offset current year changes in deferred tax asset balances of each respective jurisdiction, resulting in no net impact to tax expense. The need for a valuation allowance will be reassessed on a continuous basis in future periods by each jurisdiction and, as a result, the allowances may increase or decrease based on changes in facts and circumstances.

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

The following table details the changes in the valuation allowance:

December 31,201820172016
Balance at beginning of year$2,584$1,940$1,291
Increase to allowance136831772
Release of allowance(154)(246)(209)
Acquisitions and divestitures—(1)(1)
Tax apportionment, tax rate and tax law changes(14)(24)106
Foreign currency translation(66)84(19)
Balance at end of year$2,486$2,584$1,940

As a result of the 2017 Act, the non-previously taxed post-1986 foreign earnings and profits (calculated based on U.S. tax principles) of certain U.S.-owned foreign corporations has been subject to U.S. tax under the one-time transition tax provisions. The 2017 Act also created a new requirement that certain income earned by foreign subsidiaries, 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). In the first quarter of 2018, Arconic made a final accounting policy election to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred. Arconic has estimated a GILTI inclusion for 2018 and recorded tax expense accordingly. Arconic does not anticipate being subject to BEAT for 2018.

Foreign U.S. GAAP earnings that have not otherwise been subject to U.S. tax, will generally be exempt from future U.S. tax under the 2017 Act when distributed. Such distributions, as well as distributions of previously taxed foreign earnings, could potentially be subject to U.S. state tax in certain states, and foreign withholding taxes. Foreign currency gains/losses related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed. At this time, Arconic has no plans to distribute such earnings in the foreseeable future. If such earnings were to be distributed, Arconic would expect the potential U.S. state tax and withholding tax impacts to be immaterial and the potential deferred tax liability associated with future foreign currency gains to be impracticable to determine.

Arconic and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Arconic is no longer subject to income tax examinations by tax authorities for years prior to 2006. All U.S. tax years prior to 2018 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining Arconic’s income tax returns for various tax years through 2017.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:

December 31,201820172016
Balance at beginning of year$73$28$18
Additions for tax positions of the current year—2312
Additions for tax positions of prior years14327—
Reductions for tax positions of prior years(42)——
Settlements with tax authorities——(1)
Expiration of the statute of limitations(6)(5)(1)
Foreign currency translation(2)——
Balance at end of year$166$73$28

For all periods presented, a portion of the balance pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2018, 2017, and 2016 would be approximately 5%, 15%, and 6%, respectively, of pre-tax book income. Arconic does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2019.

It is Arconic’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes on the accompanying Statement of Consolidated Operations. Arconic recognized interest of $22 and $1 for 2018 and 2017, respectively, but did not recognize any interest or penalties in 2016. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Arconic recognized interest income of $1 and $2 in 2018 and 2017, respectively, but did not recognize any interest income in 2016. As of December 31, 2018, and 2017, the amount accrued for the payment of interest and penalties was $21 and $2, respectively.

I. Preferred and Common Stock

Preferred Stock. Arconic has two classes of preferred stock: Class A Preferred Stock and Class B Serial Preferred Stock. Class A Preferred Stock has 660,000 shares authorized at a par value of $100 per share with an annual $3.75 cumulative dividend preference per share. There were 546,024 shares of Class A Preferred Stock outstanding at December 31, 2018 and 2017. Class B Serial Preferred Stock has 10,000,000 shares authorized at a par value of $1 per share. There were no shares of Class B Serial Preferred Stock outstanding at December 31, 2018 and 2017 (see below).

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

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

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

Common Stock. Pursuant to the authorization provided at a special meeting of Arconic common shareholders held on October 5, 2016, shareholders approved a 1-for-3 reverse stock split of Arconic’s outstanding and authorized shares of common stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, every three shares of issued and outstanding common stock were combined into one issued and outstanding share of common stock. The Reverse Stock Split reduced the number of shares of common stock outstanding from approximately 1.3 billion shares to approximately 0.4 billion shares. The par value of the common stock remained at $1 per share. Accordingly, Common stock and Additional capital in the accompanying Consolidated Balance Sheet at December 31, 2016 reflected a decrease and increase of $877, respectively. The number of authorized shares of common stock was also decreased from 1.8 billion shares to 0.6 billion shares. The Company’s common stock began trading on a reverse stock split-adjusted basis on the NYSE on October 6, 2016.

In August 2016, Arconic retired its outstanding treasury stock consisting of approximately 25 million shares (76 million shares pre-Reverse Stock Split). As a result, Common stock and Additional capital in the accompanying 2016 Consolidated Balance Sheet were decreased by $76 and $2,563, respectively, to reflect the retirement of the treasury shares. As of December 31, 2018, and 2017, there was no outstanding treasury stock.

In July 2015, through the acquisition of RTI International Metals Inc. (RTI), Arconic assumed the obligation to repay two tranches of convertible debt; one tranche was due and settled in cash on December 1, 2015 (principal amount of $115) and the other tranche is due on October 15, 2019 (principal amount of $403), unless earlier converted or purchased by Arconic at the holder’s option under specific conditions. Upon conversion of the 2019 convertible notes, holders will receive, at Arconic’s election, cash, shares of common stock (approximately 14,453,000 shares using the December 31, 2018 conversion rate of 35.9125 shares per $1,000 (not in millions) bond or per-share conversion price of $27.8455), or a combination of cash and shares. On the maturity date, each holder of outstanding notes will be entitled to receive $1,000 (not in millions) in cash for each $1,000 (not in millions) bond, together with accrued and unpaid interest.

At December 31, 2018, 483,270,717 shares were issued and outstanding. Dividends paid in 2018 and 2017 were $0.24 per annum or $0.06 per quarter and $0.36 per annum or $0.09 per quarter in 2016.

As of December 31, 2018, 47 million shares of common stock were reserved for issuance under Arconic’s stock-based compensation plans. As of December 31, 2018, 41 million shares remain available for issuance. Arconic issues new shares to satisfy the exercise of stock options and the conversion of stock awards.

See Note W for further information on common stock repurchases.

Share Activity (number of shares)

Common stock
TreasuryOutstanding
Balance at end of 201581,051,1031,310,160,141
Issued for stock-based compensation plans(5,219,660)5,302,128
Treasury stock retirement(75,831,443)—
Reverse Stock Split—(876,942,489)
Balance at end of 2016—438,519,780
Conversion of convertible notes—39,242,706
Issued for stock-based compensation plans—3,654,051
Balance at end of 2017—481,416,537
Issued for stock-based compensation plans—1,854,180
Balance at end of 2018—483,270,717

Stock-Based Compensation

Arconic has a stock-based compensation plan under which stock options and restricted stock unit awards are granted in January each year to eligible employees. Stock options are granted at the closing market price of Arconic’s common stock on the date of grant and typically vest over a three-year service period (1/3 each year) with a ten-year contractual term. In 2018, there were stock options granted that vest over a four-year cliff service period. Restricted stock unit awards typically vest over a three-year service period from the date of grant. As part of Arconic’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. Certain of these awards also include performance and market conditions. For the majority of performance stock awards issued in 2018, 2017, and 2016, the final number of shares earned will be based on Arconic’s achievement of sales and profitability targets over the respective three-year performance periods. For awards issued in 2018 and 2017, the award will be earned at the end of the three-year performance period. For awards issued in 2016, one-third of the award will be earned each year based on the performance against the pre-established targets for that year. The performance stock awards earned over the three-year period vest at the end of the third year. Additionally, the 2018 and 2017 awards will be scaled by a total shareholder return (“TSR”) multiplier, which depends upon relative three-year performance against the TSRs of a group of peer companies.

In 2018, 2017 and 2016, Arconic recognized stock-based compensation expense of $50 ($39 after-tax), $54 ($36 after-tax), and $76 ($51 after-tax), respectively. The expense related to restricted stock unit awards in 2018, 2017 and 2016 was approximately 85%, 85% and 80%, respectively. No stock-based compensation expense was capitalized in any of those years. 2017 stock-based compensation expense was reduced by $13 for certain executive pre-vest cancellations which were recorded in Restructuring and other charges within the Statement of Consolidated Operations. At December 31, 2018, there was $52 (pre-tax) of unrecognized compensation expense related to non-vested stock option grants and non-vested restricted stock unit award grants. This expense is expected to be recognized over a weighted average period of 1.8 years.

Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For restricted stock unit awards, the fair value was equivalent to the closing market price of Arconic’s common stock on the date of grant. The grant date fair value of the 2018 and 2017 performance awards containing a market condition was $20.25 and $21.99, respectively, and was valued using a Monte Carlo model. A Monte Carlo simulation uses assumptions of stock price behavior to estimate the probability of satisfying market conditions and the resulting fair value of the award. The risk-free interest rate (2.7% in 2018 and 1.5% in 2017) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. Because of limited historical information due to the Separation Transaction, volatility (32.0% in 2018 and 38.0% in 2017) was estimated using implied volatility and the representative price return approach, which uses price returns of comparable companies, was used to develop a correlation assumption. For stock options, the fair value was estimated on the date of grant using a lattice-pricing model, which generated a result of $9.79 ($10.99 for four-year cliff options), $6.26, and $4.78 per option in 2018, 2017, and 2016, respectively. The lattice-pricing model uses a number of assumptions to estimate the fair value of a stock option, including a risk-free interest rate, dividend yield, volatility, exercise behavior, and contractual life. The following paragraph describes in detail the assumptions used to estimate the fair value of stock options granted in 2018 (the assumptions used to estimate the fair value of stock options granted in 2017 and 2016 were not materially different, except as noted below).

The risk-free interest rate (2.5%) was based on a yield curve of interest rates at the time of the grant based on the contractual life of the option. The dividend yield (0.9%) was based on a one-year average. Volatility (34.0% for 2018, 38.1% for 2017, and 44.5% in 2016) was based on comparable companies in 2018 and 2017 (except 2016 historical volatilities were used) and implied volatilities over the term of the option. Arconic utilized historical option forfeiture data to estimate annual pre- and

post-vesting forfeitures (6%). Exercise behavior (61%) was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the life of an option (6.0 years (7.3 years for four-year cliff options)) was an output of the lattice-pricing model. The activity for stock options and stock awards during 2018 was as follows (options and awards in millions):

Stock optionsStock awards
Number of optionsWeighted average exercise priceNumber of awardsWeighted average FMV per award
Outstanding, January 1, 201811$23.947$21.49
Granted129.97226.48
Exercised(1)18.95——
Converted——(1)32.75
Expired or forfeited(1)26.96(1)21.10
Performance share adjustment———18.47
Outstanding, December 31, 201810$24.957$21.13

As of December 31, 2018, the number of stock options outstanding had a weighted average remaining contractual life of 4.8 years and a total intrinsic value of $3. Additionally, 7.8 million of the stock options outstanding were fully vested and exercisable and had a weighted average remaining contractual life of 3.7 years, a weighted average exercise price of $25.49, and a total intrinsic value of $2 as of December 31, 2018. In 2018, 2017, and 2016, the cash received from stock option exercises was $16, $50, and $4 and the total tax benefit realized from these exercises was $2, $4, and $0, respectively. The total intrinsic value of stock options exercised during 2018, 2017 and 2016 was $7, $13, and $1, respectively.

J. Earnings Per Share

Basic earnings per share (EPS) amounts are computed by dividing earnings (loss), after the deduction of preferred stock dividends declared, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.

The information used to compute basic and diluted EPS attributable to Arconic common shareholders was as follows (shares in millions):

For the year ended December 31,201820172016
Net income (loss) from continuing operations attributable to Arconic$642$(74)$(1,062)
Less: preferred stock dividends declared(2)(53)(69)
Income (loss) from continuing operations available to Arconic common shareholders640(127)(1,131)
Income from discontinued operations after income taxes and noncontrolling interests(1)——121
Net income (loss) available to Arconic common shareholders—basic640(127)(1,010)
Add: interest expense related to convertible notes11——
Net income (loss) available to Arconic common shareholders - diluted$651$(127)$(1,010)
Average shares outstanding - basic483451438
Effect of dilutive securities:
Stock options1——
Stock and performance awards5——
Convertible notes14——
Average shares outstanding - diluted503451438
(1)Calculated from the Statement of Consolidated Operations as Income from discontinued operations after income taxes less Net income from discontinued operations attributable to noncontrolling interests.

The following shares were excluded from the calculation of average shares outstanding – diluted as their effect was anti-dilutive (shares in millions).

201820172016
Mandatory convertible preferred stockn/a3939
Convertible notes—1414
Stock options(1)91113
Stock awards—78
(1)The average exercise price of options per share was $26.79, $33.32, and $26.93 for 2018, 2017, and 2016, respectively.

In 2017, had Arconic generated sufficient net income, 30 million, 14 million, 5 million, and 1 million potential shares of common stock related to the mandatory convertible preferred stock, convertible notes, stock awards, and stock options, respectively, would have been included in diluted average shares outstanding. The mandatory convertible preferred stock converted on October 2, 2017 (see Note I).

In 2016, had Arconic generated sufficient net income, 28 million, 10 million, 4 million, and 1 million potential shares of common stock related to the mandatory convertible preferred stock, convertible notes, stock awards, and stock options, respectively, would have been included in diluted average shares outstanding.

K. Accumulated Other Comprehensive Loss

The following table details the activity of the four components that comprise Accumulated other comprehensive loss for both Arconic’s shareholders and noncontrolling interests:

ArconicNoncontrolling Interests
201820172016201820172016
Pension and other postretirement benefits (G)
Balance at beginning of period$(2,230)$(2,010)$(3,611)$—$—$(56)
Adoption of accounting standard (A)(369)—————
Other comprehensive income (loss):
Unrecognized net actuarial loss and prior service cost/benefit70(466)(1,112)——(9)
Tax (expense) benefit(19)102380——3
Total Other comprehensive income (loss) before reclassifications, net of tax51(364)(732)——(6)
Amortization of net actuarial loss and prior service cost(1)262222389——4
Tax expense(2)(58)(78)(136)——(1)
Total amount reclassified from Accumulated other comprehensive loss, net of tax(8)204144253——3
Total Other comprehensive income (loss)255(220)(479)——(3)
Transfer to Alcoa Corporation——2,080——59
Balance at end of period$(2,344)$(2,230)$(2,010)$—$—$—
Foreign currency translation
Balance at beginning of period$(437)$(689)$(2,412)$—$(2)$(780)
Other comprehensive (loss) income(3)(146)252268—2182
Transfer to Alcoa Corporation——1,455——596
Balance at end of period$(583)$(437)$(689)$—$—$(2)
Available-for-sale securities
Balance at beginning of period$(2)$132$(5)$—$—$—
Other comprehensive (loss) income(4)(1)(134)137———
Balance at end of period$(3)$(2)$132$—$—$—
Cash flow hedges
Balance at beginning of period$25$(1)$597—$—$(3)
Adoption of accounting standard (A)2—————
Other comprehensive (loss) income:
Net change from periodic revaluations(15)37(843)——36
Tax benefit (expense)3(9)252——(10)
Total Other comprehensive (loss) income before reclassifications, net of tax(12)28(591)——26
Net amount reclassified to earnings
Aluminum contracts(5)(8)(2)1———
Energy contracts(6)——(49)——(34)
Interest rate contracts(7)(2)—9——5
Nickel contracts(6)(4)(1)1———
Sub-total(14)(3)(38)——(29)
Tax benefit(2)3112——8
Total amount reclassified from Accumulated other comprehensive loss, net of tax(8)(11)(2)(26)——(21)
Total Other comprehensive (loss) income(23)26(617)——5
Transfer to Alcoa Corporation——19——(2)
Balance at end of period$4$25$(1)$—$—$—
Total balance at end of period$(2,926)$(2,644)$(2,568)$—$—$(2)
(1)These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note G).
(2)These amounts were included in Provision for income taxes on the accompanying Statement of Consolidated Operations.
(3)In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
(4)Realized gains and losses were included in Other expense (income), net, net on the accompanying Statement of Consolidated Operations.
(5)These amounts were included in Sales on the accompanying Statement of Consolidated Operations.
(6)These amounts were included in Cost of goods sold on the accompanying Statement of Consolidated Operations.
(7)These amounts were included in Interest expense on the accompanying Statement of Consolidated Operations.
(8)A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings. These amounts were reflected on the accompanying Statement of Consolidated Operations in the line items indicated in footnotes 1 through 7.

L. Receivables

Sale of Receivables Program

Arconic has an arrangement with three financial institutions to sell certain customer receivables without recourse on a revolving basis. The sale of such receivables is completed using a bankruptcy remote special purpose entity, which is a consolidated subsidiary of Arconic. This arrangement provides up to a maximum funding of $400 for receivables sold. Arconic maintains a beneficial interest, or a right to collect cash, on the sold receivables that have not been funded (deferred purchase program). On March 30, 2012, Arconic initially sold $304 of customer receivables in exchange for $50 in cash and $254 of deferred purchase program under the arrangement. Arconic has received additional net cash funding of $300 ($2,958 in draws and $2,658 in repayments) since the program’s inception, including net cash draws totaling $0 ($600 in draws and $600 in repayments) in 2018 and net cash draws totaling $0 ($600 in draws and $600 in repayments) in 2017.

As of December 31, 2018, and 2017, the deferred purchase program receivable was $234 and $187, respectively, which was included in Other receivables on the accompanying Consolidated Balance Sheet. The deferred purchase program receivable is reduced as collections of the underlying receivables occur; however, as this is a revolving program, the sale of new receivables will result in an increase in the deferred purchase program receivable. The gross amount of receivables sold and total cash collected under this program since its inception was $41,784 and $41,200 respectively. Arconic services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.

In 2018 and 2017, the gross cash outflows and inflows associated with the deferred purchase program receivable were $6,375 and $6,328 respectively, and $5,471 and $5,367, respectively.

Cash receipts from customer payments on sold receivables (which are cash receipts on the underlying trade receivables that have been previously sold in this program) as well as cash receipts and cash disbursements from draws and repayments under the program are presented as cash receipts from sold receivables within investing activities in the Statement of Consolidated Cash Flows. See Note A for additional information on new accounting guidance that impacts the Company.

Allowance for Doubtful Accounts

The following table details the changes in the allowance for doubtful accounts related to customer receivables and other receivables:

Customer receivablesOther receivables
201820172016201820172016
Balance at beginning of year$8$13$8$34$32$34
Provision for doubtful accounts217796
Write off of uncollectible accounts(2)(5)(3)(2)(1)(1)
Recoveries of prior write-offs——(1)(3)(3)1
Other(4)(1)2(5)(3)(8)
Balance at end of year$4$8$13$31$34$32

M. Inventories

December 31,20182017
Finished goods$668$669
Work-in-process1,3711,349
Purchased raw materials366381
Operating supplies8781
Total inventories$2,492$2,480

At December 31, 2018 and 2017, the portion of inventories valued on a LIFO basis was $1,292 and $1,208, respectively. If valued on an average-cost basis, total inventories would have been $530 and $481 higher at December 31, 2018 and 2017, respectively. During 2018 and 2017, reductions in LIFO inventory quantities caused partial liquidations of the lower cost LIFO inventory base. These liquidations resulted in the recognition of immaterial income amounts in 2018, 2017, and 2016.

In the second quarter of 2018, a charge of $23 was recorded in Cost of goods sold and Inventories to reflect a physical inventory adjustment at one plant in the Engineered Products and Solutions segment. While a portion of this charge relates to prior years, the majority relates to 2018. The out-of-period amounts were not material to any interim or annual periods.

N. Properties, Plants, and Equipment, Net

December 31,20182017
Land and land rights$136$140
Structures:
Engineered Products and Solutions796784
Global Rolled Products1,0681,090
Transportation and Construction Solutions248268
Other252253
2,3642,395
Machinery and equipment:
Engineered Products and Solutions3,4373,054
Global Rolled Products4,6294,641
Transportation and Construction Solutions748777
Other420358
9,2348,830
11,73411,365
Less: accumulated depreciation and amortization6,7696,392
4,9654,973
Construction work-in-progress739621
$5,704$5,594

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 operations, an asset group within the Arconic Engines business unit. 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 operations, resulting in an estimated fair value in excess of their carrying value of approximately 13%; thus, there was no impairment. If the disks operations do not achieve the revised forecasted financial performance or if there are changes in any significant assumptions, a material non-cash impairment of long-lived assets may occur in future periods. These significant assumptions include sales growth, cost of raw materials, ramp up of additional production capacity, and working capital. A 1% decrease in the forecasted net cash flows would reduce the undiscounted cash flows by approximately $6. There were no indicators of impairment identified for the disks operations during the third or fourth quarters of 2018 and, as such, the Company did not evaluate the recoverability of its long-lived assets.

O. Goodwill and Other Intangible Assets

The following table details the changes in the carrying amount of goodwill:

Engineered Products and SolutionsGlobal Rolled ProductsTransportation and Construction SolutionsTotal
Balances at December 31, 2016
Goodwill$4,832$241$128$5,201
Accumulated impairment losses——(53)(53)
Goodwill, net4,832241755,148
Impairment (A)(719)——(719)
Translation and other92113106
Balances at December 31, 2017
Goodwill4,9242521315,307
Accumulated impairment losses(719)—(53)(772)
Goodwill, net4,205252784,535
Divestitures (T)(1)——(1)
Translation and other(25)(7)(2)(34)
Balances at December 31, 2018
Goodwill4,8982451295,272
Accumulated impairment losses(719)—(53)(772)
Goodwill, net$4,179$245$76$4,500

In 2017, Arconic recognized an impairment of goodwill in the amount of $719 related to the annual impairment review of the Arconic Forgings and Extrusions business. See Goodwill policy in Note A.

Other intangible assets were as follows:

December 31, 2018Gross carrying amountAccumulated amortizationIntangibles, net
Computer software$768$(657)$111
Patents and licenses110(107)3
Other intangibles922(149)773
Total amortizable intangible assets1,800(913)887
Indefinite-lived trade names and trademarks32—32
Total other intangible assets$1,832$(913)$919
December 31, 2017Gross carrying amountAccumulated amortizationIntangibles, net
Computer software$789$(674)$115
Patents and licenses110(107)3
Other intangibles953(116)837
Total amortizable intangible assets1,852(897)955
Indefinite-lived trade names and trademarks32—32
Total other intangible assets$1,884$(897)$987

Computer software consists primarily of software costs associated with an enterprise business solution within Arconic to drive common systems among all businesses.

Amortization expense related to the intangible assets in the tables above for the years ended December 31, 2018, 2017, and 2016 was $81, $71, and $65, respectively, and is expected to be in the range of approximately $63 to $70 annually from 2019 to 2023.

P. Debt

Long-Term Debt.

December 31,20182017
5.72% Notes, due 2019$—$500
1.63% Convertible Notes, due 2019403403
6.150% Notes, due 20201,0001,000
5.40% Notes, due 20211,2501,250
5.87% Notes, due 2022627627
5.125% Notes, due 20241,2501,250
5.90% Notes, due 2027625625
6.75% Bonds, due 2028300300
5.95% Notes due 2037625625
Iowa Finance Authority Loan, due 2042 (4.75%)250250
Other(1)(29)(23)
6,3016,807
Less: amount due within one year4051
$5,896$6,806
(1)Includes various financing arrangements related to subsidiaries, unamortized debt discounts related to outstanding notes and bonds listed in the table above, an equity option related to the convertible notes due in 2019, and unamortized debt issuance costs.

The principal amount of long-term debt maturing in each of the next five years is $405 in 2019, $1,000 in 2020, $1,250 in 2021, $627 in 2022, and $0 in 2023.

Public Debt – During the first quarter of 2018, the Company completed the early redemption of its remaining outstanding 5.72% Notes due in 2019, with aggregate principal amount of $500, for $518 in cash including accrued and unpaid interest. As a result, the Company recorded a charge of $19 in Interest expense in the accompanying Statement of Consolidated Operations for 2018 primarily for the premium paid on the early redemption of these notes in excess of their carrying value.

During the second quarter of 2017, the Company announced three separate cash tender offers by the Investment Banks for the purchase of the Company’s 6.50% Bonds due 2018 (the “6.50% Bonds”), 6.75% Notes due 2018 (the “6.75% Notes”), and 5.72% Notes due 2019 (the “5.72% Notes”), up to a maximum purchase amount of $1,000 aggregate principal amount of notes, subject to certain conditions. The Investment Banks purchased notes totaling $805 aggregate principal amount, including $150 aggregate principal amount of 6.50% Bonds, $405 aggregate principal amount of 6.75% Notes, and $250 aggregate principal amount of 5.72% Notes.

Also, during the second quarter of 2017, the Company agreed to acquire the notes from the Investment Banks for $409 in cash plus its remaining investment in Alcoa Corporation common stock (12,958,767 shares valued at $35.91 per share) for total consideration of $874 including accrued and unpaid interest. The Company recorded a charge of $58 ($27 in cash) primarily for the premium for the early redemption of the notes, a benefit of $8 for the proceeds of a related interest rate swap agreement, and a charge of $2 for legal fees associated with the transaction in Interest expense, and recorded a gain of $167 in Other income, net in the accompanying Statement of Consolidated Operations for the Debt-for-Equity Exchange.

Finally, during the second quarter of 2017, the Company completed the early redemption of its remaining outstanding 6.50% Bonds, with aggregate principal amount of $100, and its remaining outstanding 6.75% Notes, with aggregate principal amount of $345, for $479 in cash including accrued and unpaid interest. As a result of the early redemption of the 6.50% Bonds and 6.75% Notes, the Company recorded a charge of $24 in Interest expense in the accompanying Statement of Consolidated Operations for the premium paid for the early redemption of these notes in excess of their carrying value.

The Company has the option to redeem certain of its Notes and Bonds in whole or part, at any time at a redemption price equal to the greater of principal amount or the sum of the present values of the remaining scheduled payments, discounted using a defined treasury rate plus a spread, plus in either case accrued and unpaid interest to the redemption date.

Credit Facilities. On July 25, 2014, Arconic entered into a Five-Year Revolving Credit Agreement with a syndicate of lenders and issuers named therein, which provides for a senior unsecured revolving credit facility (the “Credit Facility”). By an Extension Request and Amendment Letter dated as of June 5, 2015, the maturity date of the Credit Facility was extended to July 25, 2020. On September 16, 2016, Arconic entered into Amendment No. 1 to the Five-Year Revolving Credit Agreement to permit the Separation Transaction and to amend certain terms of the Credit Agreement, including the replacement of the

existing financial covenant with a leverage ratio and reduction of total commitments available from $4,000 to $3,000. On June 29, 2018, Arconic entered into Amendment No. 2 (“Amendment No. 2”) to amend and restate the Five-Year Revolving Credit Agreement. The Five-Year Revolving Credit Agreement, as so amended and restated, is herein referred to as the “Credit Agreement.”

The Credit Agreement provides a $3,000 Credit Facility, the proceeds of which are to be used to provide working capital or for other general corporate purposes of Arconic. Subject to the terms and conditions of the Credit Agreement, Arconic may from time to time request increases in lender commitments under the Credit Facility, not to exceed $500 in aggregate principal amount, and may also request the issuance of letters of credit, subject to a letter of credit sublimit of $1,000 of the Credit Facility. Pursuant to the Credit Agreement, Arconic shall not permit the ratio of Consolidated Net Debt to Consolidated EBITDA (each as defined in the Credit Agreement) as of the end of each fiscal quarter for the period of the four fiscal quarters most recently ended, to be greater than 4.50 to 1.00, which maximum level will step down successively to 4.00 to 1.00 on December 31, 2018, and to 3.50 to 1.00 on December 31, 2019 and thereafter.

The Credit Agreement includes additional covenants, including, among others, (a) limitations on Arconic’s ability to incur liens securing indebtedness for borrowed money, (b) limitations on Arconic’s ability to consummate a merger, consolidation or sale of all or substantially all of its assets, and (c) limitations on Arconic’s ability to change the nature of its business. As of December 31, 2018, Arconic was in compliance with all such covenants.

The Credit Facility matures on June 29, 2023, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. Arconic may make two one-year extension requests during the term of the Credit Facility, subject to the lender consent requirements set forth in the Credit Agreement. Under the provisions of the Credit Agreement, Arconic will pay a fee of 0.25% per annum (based on Arconic’s current long-term debt ratings) of the total commitment to maintain the Credit Facility.

The Credit Facility is unsecured and amounts payable under it will rank pari passu with all other unsecured, unsubordinated indebtedness of Arconic. Borrowings under the Credit Facility may be denominated in U.S. dollars or euros. Loans will bear interest at a base rate or a rate equal to LIBOR, plus, in each case, an applicable margin based on the credit ratings of Arconic’s outstanding senior unsecured long-term debt. The applicable margin on base rate loans and LIBOR loans will be 0.50% and 1.50% per annum, respectively, based on Arconic’s current long-term debt ratings. Loans may be prepaid without premium or penalty, subject to customary breakage costs.

The obligation of Arconic to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an “Event of Default” as defined in the Credit Agreement. Such Events of Default include, among others, (a) non-payment of obligations; (b) breach of any representation or warranty in any material respect; (c) non-performance of covenants and obligations; (d) with respect to other indebtedness in a principal amount in excess of $100 million, a default thereunder that causes such indebtedness to become due prior to its stated maturity or a default in the payment at maturity of any principal of such indebtedness; (e) the bankruptcy or insolvency of Arconic; and (f) a change in control of Arconic.

There were no amounts outstanding at December 31, 2018 and 2017 and no amounts were borrowed during 2018, 2017, or 2016 under the Credit Facility.

In addition to the Credit Agreement above, Arconic has a number of other credit agreements that provide a combined borrowing capacity of $715 as of December 31, 2018, of which $465 is due to expire in 2019 and $250 is due to expire in 2020. The purpose of any borrowings under these credit arrangements is to provide for working capital requirements and for other general corporate purposes. The covenants contained in all these arrangements are the same as the Credit Agreement. In 2018, 2017, and 2016, Arconic borrowed and repaid $600, $810, and $1,950, respectively, under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during 2018, 2017, and 2016 were 3.3%, 2.6%, and 1.9%, respectively, and 46 days, 46 days, and 49 days, respectively.

Short-Term Debt. At December 31, 2018 and 2017, short-term debt was $29 and $38, respectively. These amounts included $29 and $33 at December 31, 2018 and 2017, respectively, related to accounts payable settlement arrangements with certain vendors and third-party intermediaries. These arrangements provide that, at the vendor’s request, the third-party intermediary advances the amount of the scheduled payment to the vendor, less an appropriate discount, before the scheduled payment date and Arconic makes payment to the third-party intermediary on the date stipulated in accordance with the commercial terms negotiated with its vendors. Arconic records imputed interest related to these arrangements in Interest expense on the accompanying Statement of Consolidated Operations.

Commercial Paper. Arconic had no outstanding commercial paper at December 31, 2018 and 2017. In 2018 and 2017, the average outstanding commercial paper was $49 and $67, respectively. Commercial paper matures at various times within one year and had an annual weighted average interest rate of 2.5%, 1.6%, and 1.1% during 2018, 2017, and 2016, respectively.

Q. Other Noncurrent Liabilities and Deferred Credits

December 31,20182017
Environmental remediation (U)$185$253
Income taxes (H)146162
Accrued compensation and retirement costs195218
Sale-leaseback financing obligation119—
Other94126
$739$759

The sale-leaseback financing obligation represents the cash received from the sale of the Texarkana, Texas cast house. The transaction has been accounted for as a deferred gain due to continuing involvement. See Note T.

R. Other Financial Instruments

Fair Value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

The carrying values of Cash and cash equivalents, Restricted cash, Derivatives, Noncurrent receivables and Short-term debt included in the Consolidated Balance Sheet approximate their fair values. The Company holds exchange-traded fixed income securities which are considered available-for-sale securities that are carried at fair value which is based on quoted market prices which are classified in Level 1 of the fair value hierarchy. The fair value of Long-term debt, less amount due within one year was based on quoted market prices for public debt and on interest rates that are currently available to Arconic for issuance of debt with similar terms and maturities for non-public debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.

20182017
December 31,Carrying valueFair valueCarrying valueFair value
Long-term debt, less amount due within one year5,8965,8736,8067,443

S. Cash Flow Information

Cash paid for interest and income taxes was as follows:

201820172016
Interest, net of amount capitalized$391$508$524
Income taxes, net of amount refunded$74$118$324

As it relates to cash paid for acquisitions, during 2016, Arconic made a $10 cash payment for a working capital adjustment from a prior period acquisition.

During 2016, Arconic sold various securities held by its captive insurance company for $130, and an equity interest in a natural gas pipeline of $145 (Alcoa Corporation), both of which were included in Sales of investments on the accompanying Statement of Consolidated Cash Flows.

In 2016, Arconic received $457 in proceeds from the redemption of certain company-owned life insurance policies, sold its Intalco smelter wharf property (Alcoa Corporation) for $120, and sold the Remmele Medical business (see Note T) for $102. These amounts were included in Proceeds from the sale of assets and businesses on the accompanying Statement of Consolidated Cash Flows.

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 I).

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).

On October 5, 2016, Arconic completed a 1-for-3 Reverse Stock Split (see Note I). The Reverse Stock Split reduced the number of shares of common stock outstanding from approximately 1.3 billion shares to approximately 0.4 billion shares. The par value of the common stock remained at $1.00 per share. Accordingly, Common stock and Additional capital in the Company’s Statement of Changes in Consolidated Equity at December 31, 2016 reflect a decrease and increase of $877, respectively.

In August 2016, Arconic retired its outstanding treasury stock consisting of approximately 76 million shares (see Note I). As a result, Common stock and Additional capital were decreased by $76 and $2,563, respectively, in the Company’s Statement of Changes in Consolidated Equity at December 31, 2016, to reflect the retirement of the treasury shares.

T. Acquisitions and Divestitures

2018 Divestitures. On April 2, 2018, Arconic completed the sale of its Latin America extrusions business to a subsidiary of Hydro Extruded Solutions AS for $2, following the settlement of post-closing and other adjustments in December 2018. As a result of entering into the agreement to sell the Latin America extrusions business in December 2017, a charge of $41 was recognized in the fourth quarter of 2017 in Restructuring and other charges in the Statement of Consolidated Operations related to the non-cash impairment of the net book value of the business and an additional charge of $2 related to a post-closing adjustment was recognized in the fourth quarter of 2018. The operating results and assets and liabilities of the business were included in the Transportation and Construction Solutions segment. This business generated sales of $25, $115, and $103 in 2018, 2017, and 2016 respectively, and had 612 employees at the time of the divestiture.

On July 31, 2018, the Company announced that it had initiated a sale process of its Building and Construction Systems (BCS) business, as part of the Company’s ongoing strategy and portfolio review that commenced in January 2018. BCS is part of the Transportation and Construction Solutions segment and generated third-party sales of approximately $1,140, $1,070, and $1,010 for 2018, 2017, and 2016, respectively. The sale process continues to progress. The Company’s decision regarding whether to sell the business will not be finalized until final binding offers are evaluated at a later stage in the sale process. Until the Company makes that final decision, the BCS business will remain classified as held and in-use in the Consolidated Financial Statements.

On October 31, 2018, the Company sold its Texarkana, Texas rolling mill and cast house, which had a combined net book value of $63, to Ta Chen International, Inc. for $302 in cash, subject to post-closing adjustments, plus additional contingent consideration of up to $50. 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 operating results and assets and liabilities of the business were included in the Global Rolled Products segment. 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.

The sale of the rolling mill and cast house has been accounted for separately. The gain on the sale of the rolling mill of $154, including the fair value of contingent consideration of $5, was recorded in Restructuring and other charges in the Statement of Consolidated Operations in the fourth quarter of 2018. The Company will reevaluate its estimate of the amount of contingent consideration to which it will be entitled at the end of each reporting period and recognize any changes thereto in the Statement of Consolidated Operations. The Company has continuing involvement related to the lease back of the cast house, and, therefore has deferred the gain associated with the cast house in 2018. As a result, the Company continues to treat the cast house building and equipment that it sold to Ta Chen as owned and therefore reflected these assets in its Consolidated Balance Sheet and has been depreciating them over their remaining useful life. Additionally, the Company recorded the cash proceeds associated with the sale of the cast house assets as a noncurrent liability in its Consolidated Balance Sheet which included a deferred gain of $95. The Company will adopt the new lease accounting standard in the first quarter of 2019, under which the

Company's continuing involvement no longer requires deferral of the cast house gain. As such, the deferred gain on the sale of the cast house will be treated as a cumulative effect of an accounting change within retained earnings on January 1, 2019.

On December 31, 2018, as part of the Company’s ongoing strategy and portfolio review, Arconic completed the sale of its Eger, Hungary forgings business to Angstrom Automotive Group LLC for $2, which resulted in a loss of $43 recorded in Restructuring and other charges in the Statement of Consolidated Operations. The operating results and assets and liabilities of the business were included in the Engineered Products and Solutions segment. This business generated sales of $32, $38, and $29 in 2018, 2017, and 2016 respectively, and had 180 employees at the time of the divestiture.

2017 Divestitures. In March 2017, Arconic completed the sale of its Fusina, Italy rolling mill to Slim Aluminium. While owned by Arconic, the operating results and assets and liabilities of the Fusina, Italy rolling mill were included in the Global Rolled Products segment. As part of the transaction, Arconic injected $10 of cash into the business and provided a third-party guarantee with a fair value of $5 related to Slim Aluminium’s environmental remediation. The Company recorded a loss on the sale of $60, which was recorded in Restructuring and other charges on the Statement of Consolidated Operations for 2017. The rolling mill generated sales of approximately $54 and $165 for 2017 and 2016, respectively. At the time of the divestiture, the rolling mill had approximately 312 employees.

2016 Divestitures. In April 2016, Arconic completed the sale of the Remmele Medical business to LISI MEDICAL for $102 in cash ($99 net of transaction costs), which was included in Proceeds from the sale of assets and businesses on the accompanying Statement of Consolidated Cash Flows. This business, which was part of the RTI acquisition in 2015, manufactured precision-machined metal products for customers in the minimally invasive surgical device and implantable device markets. Since this transaction occurred within a year of the completion of the RTI acquisition, no gain was recorded on this transaction as the excess of the proceeds over the carrying value of the net assets of this business was reflected as a purchase price adjustment (decrease to goodwill of $44) to the final allocation of the purchase price related to Arconic’s acquisition of RTI. While owned by Arconic, the operating results and assets and liabilities of this business were included in the Engineered Products and Solutions segment. This business generated sales of approximately $20 from January 1, 2016 through the divestiture date, April 29, 2016, and, at the time of the divestiture, had approximately 330 employees.

2014 Acquisitions. In November 2014, Arconic acquired Firth Rixson. The purchase price included an earn-out agreement that required Arconic to make earn-out payments up to an aggregate maximum amount of $150 through December 31, 2020 upon certain conditions. This earn-out was contingent on the Firth Rixson forging business in Savannah, Georgia achieving certain identified financial targets through December 31, 2020. During the fourth quarter of 2016, management determined that payment of the maximum amount was not probable based on the forecasted financial performance of this location. Therefore, the fair value of this liability was reduced by $56 with a corresponding credit to Other income, net on the accompanying Statement of Consolidated Operations. During the fourth quarter of 2017, management determined that payment of the remaining amount of the contingent liability was not probable based on the forecasted financial performance of this location. Therefore, the fair value of this liability was reduced by $81 to zero at December 31, 2017 with a corresponding credit to Other income, net on the accompanying Statement of Consolidated Operations. The fair value of this liability remains at zero at December 31, 2018 based on the forecasted financial performance of this location.

U. Contingencies and Commitments

Contingencies

Environmental Matters. Arconic participates in environmental assessments and cleanups at more than 100 locations. These include owned or operating facilities and adjoining properties, previously owned or operating facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites.

A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, and technological changes, among others.

Arconic’s remediation reserve balance was $266 at December 31, 2018 and $294 at December 31, 2017 (of which $81 and $41, respectively, was classified as a current liability), and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. In 2018, the Company has seen higher expenditures with the start of construction related to the Grasse River project. Arconic expects that trend to continue for 2019 as reflected by the increase in the portion of the reserve that is considered a current liability. Payments related to remediation expenses applied against the reserve were $32 in 2018 and $26 in 2017 and includes expenditures currently mandated, as well as those not required by any regulatory authority or third party.

Included in annual operating expenses are the recurring costs of managing hazardous substances and environmental programs.

These costs are estimated to be approximately 1% or less of cost of goods sold.

The following discussion provides details regarding the current status of the most significant remediation reserves related to a current Arconic site.

Massena West, NY—Arconic has an ongoing remediation project related to the Grasse River, which is adjacent to Arconic’s Massena plant site. Many years ago, it was determined that sediments and fish in the river contain varying levels of polychlorinated biphenyls (PCBs). The project, which was selected by the U.S. Environmental Protection Agency (EPA) in a Record of Decision issued in April 2013, is aimed at capping PCB contaminated sediments with concentration in excess of one part per million in the main channel of the river and dredging PCB contaminated sediments in the near-shore areas where total PCBs exceed one part per million. At December 31, 2018 and December 31, 2017, the reserve balance associated with this matter was $198 and $215, respectively. Arconic is in the planning and design phase of the project, which is expected to be completed early in 2019. Following EPA’s approval of the final design, the actual remediation fieldwork is expected to commence and take approximately four years. The majority of the expenditures related to the project are expected to be incurred between 2019 and 2022.

Tax. Pursuant to the Tax Matters Agreement entered into between Arconic and Alcoa Corporation in connection with the separation transaction with Alcoa Corporation, Arconic shares responsibility with Alcoa Corporation, and Alcoa Corporation has agreed to partially indemnify Arconic for 49% of the ultimate liability, with respect to the following matter.

As previously reported, in July 2013, following a Spanish corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received mainly disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by the Company. In August 2013, the Company filed an appeal of this assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. Arconic filed another appeal in Spain’s National Court in March 2015 which was denied in July 2018. The National Court’s decision requires the assessment for the 2006 through 2009 tax years to be reissued to take into account the outcome of the 2003 to 2005 audit which was closed in 2017. The Company estimates the revised assessment to be $174 (€152), including interest.

The Company has petitioned to the Supreme Court of Spain to review the National Court’s decision. If the petition is accepted, the Supreme Court will review the assessment on its merits and render a final decision. In the event the Company is unsuccessful in appealing the assessment to the Supreme Court of Spain, a portion of the assessment may be offset with existing net operating losses and tax credits available to the Spanish consolidated tax group, which would be shared between the Company and Alcoa Corporation as provided for in the Tax Matters Agreement. As a result of the National Court decision, an income tax reserve, including interest, of $60 (€52) was established in 2018. Concurrent with the establishment of the reserve, an indemnification receivable of $29 (€25), representing Alcoa Corporation’s 49% share of the liability, was also recorded in 2018.

Additionally, while the tax years 2010 through 2013 are closed to audit, it is possible that the Company may receive assessments for tax years subsequent to 2013. Any potential assessment for an individual tax year is not expected to be material to the Company’s consolidated operations.

Reynobond PE. As previously reported, on June 13, 2017, the Grenfell Tower in London, UK caught fire resulting in fatalities, injuries and damage. A French subsidiary of Arconic, Arconic Architectural Products SAS (AAP SAS), supplied a product, Reynobond PE, to its customer, a cladding system fabricator, which used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supplied its portion of the cladding system to the façade installer, who then completed and installed the system under the direction of the general contractor. Neither Arconic nor AAP SAS was involved in the design or installation of the system used at the Grenfell Tower, nor did it have a role in any other aspect of the building’s refurbishment or original design. Regulatory investigations into the overall Grenfell Tower matter are being conducted, including a criminal investigation by the London Metro Police, a Public Inquiry by the British government and a consumer protection inquiry by a French public authority. AAP SAS has sought and received core participant status in the Public Inquiry. The Company will no longer sell the PE product for architectural use on buildings.

Howard v. Arconic Inc. et al. As previously reported, a purported class action complaint related to the Grenfell Tower fire was filed on August 11, 2017 in the United States District Court for the Western District of Pennsylvania against Arconic Inc. and Klaus Kleinfeld. A related purported class action complaint was filed in the United States District Court for the Western District of Pennsylvania on August 25, 2017, under the caption Sullivan v. Arconic Inc. et al., against Arconic Inc., two former Arconic executives, several current and former Arconic directors, and banks that acted as underwriters for Arconic’s September 18, 2014 preferred stock offering (the “Preferred Offering”). The plaintiff in Sullivan had previously filed a purported class action against the same defendants on July 18, 2017 in the Southern District of New York and, on August 25, 2017, voluntarily dismissed that action without prejudice. On February 7, 2018, on motion from certain putative class members, the court consolidated Howard and Sullivan, closed Sullivan, and appointed lead plaintiffs in the consolidated case. On April 9, 2018, the lead plaintiffs in the consolidated purported class action filed a consolidated amended complaint. The consolidated amended complaint alleges that the registration statement for the Preferred Offering contained false and misleading statements and

omitted to state material information, including by allegedly failing to disclose material uncertainties and trends resulting from sales of Reynobond PE for unsafe uses and by allegedly expressing a belief that appropriate risk management and compliance programs had been adopted while concealing the risks posed by Reynobond PE sales. The consolidated amended complaint also alleges that between November 4, 2013 and June 23, 2017 Arconic and Kleinfeld made false and misleading statements and failed to disclose material information about the Company’s commitment to safety, business and financial prospects, and the risks of the Reynobond PE product, including in Arconic’s Form 10-Ks for the fiscal years ended December 31, 2013, 2014, 2015 and 2016, its Form 10-Qs and quarterly financial press releases from the fourth quarter of 2013 through the first quarter of 2017, its 2013, 2014, 2015 and 2016 Annual Reports, and its 2016 Annual Highlights Report. The consolidated amended complaint seeks, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On June 8, 2018, all defendants moved to dismiss the consolidated amended complaint for failure to state a claim. Briefing on that motion is now closed and the parties await a ruling.

Raul v. Albaugh, et al. As previously reported, on June 22, 2018, a derivative complaint was filed nominally on behalf of Arconic by a purported Arconic shareholder against all current members of Arconic’s Board of Directors, Klaus Kleinfeld and Ken Giacobbe, naming Arconic as a nominal defendant, in the United States District Court for the District of Delaware. The complaint raises similar allegations as the consolidated amended complaint in Howard, as well as allegations that the defendants improperly authorized the sale of Reynobond PE for unsafe uses, and asserts claims under Section 14(a) of the Securities Exchange Act of 1934 and Delaware state law. On July 13, 2018, the parties filed a stipulation agreeing to stay this case until the final resolution of the Howard case, the Grenfell Tower public inquiry in London, and the investigation by the London Metropolitan Police Service and on June 23, 2018, the Court approved the stay.

While the Company believes that these cases are without merit and intends to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters. Given the preliminary nature of these matters and the uncertainty of litigation, the Company cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome. The Board of Directors has also received letters, purportedly sent on behalf of shareholders, reciting allegations similar to those made in the federal court lawsuits and demanding that the Board authorize the Company to initiate litigation against members of management, the Board and others. The Board of Directors has appointed a Special Litigation Committee of the Board to review and make recommendations to the Board regarding the appropriate course of action with respect to these shareholder demand letters. The Special Litigation Committee and the Board are continuing to consider the appropriate responses to the shareholder demand letters in view of developments in proceedings concerning the Grenfell Tower fire.

Other. In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Arconic, including those pertaining to environmental, product liability, safety and health, employment, tax and antitrust matters. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot currently be determined because of the considerable uncertainties that exist. Therefore, it is possible that the Company’s liquidity or results of operations in a period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the results of operations, financial position or cash flows of the Company.

Commitments

Purchase Obligations. Arconic has entered into purchase commitments for raw materials, energy and other goods and services, which total $770 in 2019, $169 in 2020, $27 in 2021, $24 in 2022, $8 in 2023, and $5 thereafter.

Operating Leases. Certain land and buildings, plant equipment, vehicles, and computer equipment are under operating lease agreements. Total expense for all leases was $144 in 2018, $113 in 2017, and $110 in 2016. Under long-term operating leases, minimum annual rentals are $94 in 2019, $74 in 2020, $54 in 2021, $40 in 2022, $30 in 2023, and $87 thereafter.

Guarantees. At December 31, 2018, 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 2019 and 2026 was $37 at December 31, 2018.

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 $6 and $8 at December 31, 2018 and 2017, respectively, and were included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. Arconic was required to provide payment guarantees for Alcoa Corporation issued on behalf of a third party related to project financing for Alcoa Corporation’s aluminum complex in Saudi Arabia. During the third quarter of 2018, Arconic was released from this guarantee. Furthermore, 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 $1,087 and $1,297 at December 31, 2018 and December 31, 2017, 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 2016, Arconic entered into a one-year claims purchase agreement with a bank covering claims up to $245 related to the Saudi Arabian joint venture and two long-term energy supply agreements. The majority of the premium was paid by Alcoa Corporation. The agreement matured in December 2017 and was not renewed in 2018 due to the decline in exposure to guarantee claims including a substantial reduction in the guarantees related to the Saudi Arabian joint venture and also the elimination of the guarantee related to the Rockdale energy contract. In December 2018, 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.

Letters of Credit. 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 2019, was $136 at December 31, 2018.

Pursuant to the Separation and Distribution Agreement, Arconic was required to retain letters of credit of $54 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.

Surety Bonds. Arconic has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, and customs duties. The total amount committed under these surety bonds, which expire at various dates, primarily in 2019, was $50 at December 31, 2018.

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 $25 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconic are being proportionately billed to and are being fully reimbursed by Alcoa Corporation.

V. Separation Transaction and Discontinued Operations

On November 1, 2016, Arconic completed the Separation Transaction. Alcoa Inc., which was re-named Arconic Inc., continues to own the Global Rolled Products (except for the Warrick, IN rolling operations and the equity interest in the rolling mill at the joint venture in Saudi Arabia), Engineered Products and Solutions, and Transportation and Construction Solutions segments. Alcoa Corporation includes the Alumina and Primary Metals segments and the aforementioned Warrick, IN rolling operations and equity interest in the rolling mill at the joint venture in Saudi Arabia, both of which were formally part of the Global Rolled Products segment.

Arconic completed the Separation Transaction by distribution on November 1, 2016 of 80.1% of the outstanding common stock of Alcoa Corporation to the Company’s shareholders of record (the “Distribution”) as of the close of business on October 20, 2016 (the “Record Date”). Arconic retained 19.9% of the Alcoa Corporation common stock (36,311,767 shares). In the Distribution, each Company shareholder received one share of Alcoa Corporation common stock for every three shares of Arconic common stock held as of the close of business on the Record Date. Shareholders received cash in lieu of fractional shares of Alcoa Corporation common stock. The Company had recorded the retained interest as a cost method investment in Investment in common stock of Alcoa Corporation in the December 2016 Consolidated Balance Sheet. The fair value of Arconic’s retained interest in Alcoa Corporation was $1,020 at December 31, 2016 and was based on the closing stock price of Alcoa Corporation as of December 31, 2016 multiplied by the number of shares of Alcoa Corporation common stock owned by the Company at that date.

In February 2017, Arconic sold 23,353,000 of its shares of Alcoa Corporation common stock at $38.03 per share, which resulted in cash proceeds of $888 which were recorded in Sales of investments within Investing Activities in the accompanying Statement of Consolidated Cash Flows, and a gain of $351 which was recorded in Other expense (income), net in the accompanying Statement of Consolidated Operations. 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 Alcoa Corporation shares (valued at $35.91 per share) (the “Debt-for-Equity Exchange”) (See Note P). A gain of $167 on the Debt-for-Equity Exchange was recorded in Other expense (income), net in the accompanying Statement of Consolidated Operations. As of May 4, 2017, the Company no longer maintained a retained interest in Alcoa Corporation

common stock.

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

Effective November 1, 2016, Arconic entered into a Toll Processing Agreement with Alcoa Corporation for the tolling of metal for the Warrick, IN rolling mill which became a part of Alcoa Corporation upon completion of the Separation Transaction. As part of this arrangement, Arconic provided a toll processing service to Alcoa Corporation to produce can sheet products at its facility in Tennessee through the end date of the contract, December 31, 2018. Alcoa Corporation supplied all required raw materials to Arconic and Arconic processed the raw materials into finished can sheet coils ready for shipment to the end customer. Tolling revenues for 2018, 2017, and the two-month period ended December 31, 2016 and accounts receivable at December 31, 2018, December 31, 2017, and December 31, 2016 were not material to the consolidated results of operations and financial position for the years ended December 31, 2018, December 31, 2017, and December 31, 2016.

As part of the Separation Transaction, Arconic was required to provide maximum potential future payment guarantees for Alcoa Corporation issued on behalf of a third party, guarantees related to two long-term Alcoa Corporation energy supply agreements, guarantees related to certain Alcoa Corporation environmental liabilities and energy supply contracts, letters of credit and surety bonds related to Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016, and letters of credit for certain Alcoa Corporation equipment leases and energy contracts (see Note U).

As part of the Separation Transaction, Arconic had recorded a receivable in the December 2016 Consolidated Balance Sheet for the net after-tax proceeds from Alcoa Corporation’s sale of the Yadkin Hydroelectric Project. The transaction closed and the Company received proceeds of $238 in the first quarter of 2017 and the remaining $5 in the second quarter of 2017. The $243 proceeds were included in Other within Investing Activities in the Statement of Consolidated Cash Flows.

The results of operations of Alcoa Corporation were presented as discontinued operations in the Statement of Consolidated Operations as summarized below (the amounts presented in the table below have not been recast to reflect the adoption of new guidance issued by the FASB related to the presentation of net periodic pension cost and net periodic postretirement benefit cost as detailed in Note A):

Ten months ended October 31,
2016
Sales$6,752
Cost of goods sold (exclusive of expenses below)5,655
Selling, general administrative, and other expenses164
Research and development28
Provision for depreciation, depletion and amortization593
Restructuring and other charges102
Interest expense28
Other (income) expenses, net(75)
Income from discontinued operations before income taxes257
Provision for income taxes73
Income from discontinued operations after income taxes184
Less: Net income from discontinued operations attributable to noncontrolling interests63
Net income from discontinued operations$121

During 2017 and 2016, Arconic recognized $18 ($12 after-tax) and $193 ($158 after-tax), respectively, in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations for costs related to the Separation Transaction. In addition, Arconic also incurred capital expenditures and debt issuance costs of $110 during 2016 related to the Separation Transaction. None of the aforementioned costs and expenses related to the Separation Transaction were reclassified into discontinued operations.

On November 1, 2016, management evaluated the net assets of Alcoa Corporation for potential impairment and determined that no impairment charge was required.

The cash flows related to Alcoa Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows for 2016. The following table presents depreciation, depletion and amortization, restructuring and other charges, and purchases of property, plant and equipment of the discontinued operations related to Alcoa Corporation:

For the year ended December 31,2016
Depreciation, depletion and amortization$593
Restructuring and other charges$102
Capital expenditures$298

W. Subsequent Events

Management evaluated all activity of Arconic and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements, except as noted below:

On 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.

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 8, 2019, the Company announced the following key initiatives as part of its ongoing strategy and portfolio review: plans to reduce operating costs, designed to maximize the impact in 2019; the planned separation of its portfolio into Engineered Products and Forgings (EP&F) and Global Rolled Products (GRP), with a spin-off of one of the businesses; the potential sale of businesses that do not best fit into EP&F or GRP; execute its previously authorized $500 share repurchase program in the first half of 2019; the Board authorized an additional $500 of share repurchases, effective through the end of 2020; and plans to reduce its quarterly common stock dividend from $0.06 to $0.02 per share.

On February 19, 2019, the Company entered into an accelerated share repurchase (“ASR”) agreement with JPMorgan Chase Bank to repurchase $700 of its common stock, 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.

Supplemental Financial Information (unaudited)

Quarterly Data

(in millions, except per-share amounts)

FirstSecondThirdFourth(2)Year
2018
Sales$3,445$3,573$3,524$3,472$14,014
Net income$143$120$161$218$642
Earnings per share attributable to Arconic common shareholders(1):
Basic
Net income per share—basic$0.30$0.25$0.33$0.45$1.33
Diluted
Net income per share—diluted$0.29$0.24$0.32$0.44$1.30
2017
Sales$3,192$3,261$3,236$3,271$12,960
Net income (loss)$322$212$119$(727)$(74)
Earnings (loss) per share attributable to Arconic common shareholders(1):
Basic
Net income (loss) per share—basic$0.69$0.44$0.23$(1.51)$(0.28)
Diluted
Net income (loss) per share—basic$0.65$0.43$0.22$(1.51)$(0.28)
(1)Per share amounts are calculated independently for each period presented; therefore, the sum of the quarterly per share amounts may not equal the per share amounts for the year.
(2)In the fourth quarter of 2018, Arconic recorded a gain of $119 ($154 pre-tax) on the sale of the Texarkana rolling mill, offset by pension plan settlement charges of $72 ($92 pre-tax) associated with significant lump sum payments made to participants and a loss of $39 ($43 pre-tax) on the sale of the Eger, Hungary forgings business. Additionally, Arconic recorded discrete tax items primarily comprised of a benefit related to certain prior year foreign investment losses no longer recapturable. In the fourth quarter of 2017, Arconic recorded an impairment of goodwill related to the forgings and extrusions business of $719 ($719 pre-tax); a provisional charge of $272 associated with the revaluation of U.S. net deferred tax assets due to a decrease in the U.S. corporate tax rate from 35% to 21%, as well as a one-time transition tax on the non-previously taxed earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017; a favorable adjustment to the Firth Rixson earn-out liability of $81 ($81 pre-tax); and a favorable adjustment to a separation-related guarantee liability of $16 ($25 pre-tax).

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