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, 2019, 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, 2019 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 Board of Directors and Shareholders of Arconic Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of Arconic Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Assessment - Engine Products and Engineered Structures Reporting Units

As described in Notes A and N to the consolidated financial statements, the Company’s consolidated goodwill balance was $4,493 million as of December 31, 2019, and the amount of the goodwill associated with the Engine Products and Engineered Structures reporting units was $2,164 million and $289 million, respectively. Goodwill is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist. The evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Fair value is estimated using a discounted cash flow model. The determination of fair value using this technique requires management to use significant estimates and assumptions related to forecasting operating cash flows, including sales growth (volumes and pricing), production costs, capital spending, and discount rate.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Engine Products and Engineered Structures reporting units is a critical audit matter are there was significant judgment by management when developing the fair value measurements of the reporting units. This in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s cash flow projections and significant assumptions, including sales growth (volumes and pricing), production costs, and discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model and performing sensitivity analyses over the assumptions in the model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including sales growth (volumes and pricing), production costs, and discount rates. Evaluating management’s assumptions related to sales growth (volumes and pricing) and production costs involved evaluating whether the assumptions used by management were reasonable by considering the current and past performance of the reporting units, obtaining evidence to support the reasonableness of the assumptions, and considering whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the discounted cash flow models and certain significant assumptions, including the discount rates.

Properties, Plants, and Equipment Impairment Assessment - Disks Asset Group

As described in Notes A and M to the consolidated financial statements, the Company’s consolidated properties, plants and equipment balance was $5,463 million as of December 31, 2019. During the second quarter of 2019, management recorded an impairment charge of $428 million to reduce the carrying value of the long-lived assets in the Disks asset group to their fair value, which included impairment charges to properties, plants and equipment of $198 million. Long-lived assets are reviewed for impairment whenever events indicate that the carrying amount of the asset group may not be recoverable. The impairment charge was measured as the amount of carrying value in excess of fair value of the long-lived assets, with fair value determined using a discounted cash flow model and a combination of sales comparison and cost approach valuation methods, including an estimate for economic obsolescence.

The principal considerations for our determination that performing procedures relating to the properties, plants, and equipment impairment assessment of the Disks asset group is a critical audit matter are there was significant judgment by management when developing the fair value of the properties, plants and equipment in the Disks asset group. This in turn led to a high

degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s valuation methods and significant assumptions, including economic obsolescence. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania

February 26, 2020

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,	2019		2018		2017
Sales (B)	$	14,192	$	14,014	$	12,960
Cost of goods sold (exclusive of expenses below)	11,227		11,397		10,221
Selling, general administrative, and other expenses	704		604		715
Research and development expenses	70		103		109
Provision for depreciation and amortization	536		576		551
Impairment of goodwill (A and N)	—		—		719
Restructuring and other charges (C)	620		9		165
Operating income	1,035		1,325		480
Interest expense (D)	338		378		496
Other expense (income), net (E)	122		79		(486		)
Income before income taxes	575		868		470
Provision for income taxes (G)	105		226		544
Net income (loss)	$	470	$	642	$	(74	)

Amounts Attributable to Arconic Common Shareholders (I):
Net income (loss)	$	477	$	651	$	(127	)
Earnings (loss) per share - basic	$	1.05	$	1.33	$	(0.28	)
Earnings (loss) per share - diluted	$	1.03	$	1.30	$	(0.28	)
Average Shares Outstanding (I):
Average shares outstanding - basic	446		483		451
Average shares outstanding - diluted	463		503		451

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

Arconic and subsidiaries

Statement of Consolidated Comprehensive Income (Loss)

(in millions)



	Arconic									Noncontrolling Interests						Total
For the year ended December 31,	2019			2018			2017			2019		2018		2017		2019			2018			2017
Net income (loss)	$	470		$	642		$	(74	)	$	—	$	—	$	—	$	470		$	642		$	(74	)
Other comprehensive income (loss), net of tax (J):
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits	(388		)	255			(220		)	—		—		—		(388		)	255			(220		)
Foreign currency translation adjustments	(13		)	(146		)	252			—		—		2		(13		)	(146		)	254
Net change in unrealized gains on debt securities	3			(1		)	(134		)	—		—		—		3			(1		)	(134		)
Net change in unrecognized gains/losses on cash flow hedges	(3		)	(23		)	26			—		—		—		(3		)	(23		)	26
Total Other comprehensive (loss) income, net of tax	(401		)	85			(76		)	—		—		2		(401		)	85			(74		)
Comprehensive income (loss)	$	69		$	727		$	(150	)	$	—	$	—	$	2	$	69		$	727		$	(148	)

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

Arconic and subsidiaries

Consolidated Balance Sheet

(in millions)



December 31,	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	1,648		$	2,277
Receivables from customers, less allowances of $3 in 2019 and $4 in 2018 (K)	967			1,047
Other receivables (K)	484			451
Inventories (L)	2,429			2,492
Prepaid expenses and other current assets	314			314
Total current assets	5,842			6,581
Properties, plants, and equipment, net (M)	5,463			5,704
Goodwill (A and N)	4,493			4,500
Deferred income taxes (G)	608			573
Intangibles, net (N)	658			919
Other noncurrent assets (A and O)	514			416
Total assets	$	17,578		$	18,693
Liabilities
Current liabilities:
Accounts payable, trade	$	2,043		$	2,129
Accrued compensation and retirement costs	432			370
Taxes, including income taxes	87			118
Accrued interest payable	112			113
Other current liabilities (A and O)	418			356
Short-term debt (P and Q)	1,034			434
Total current liabilities	4,126			3,520
Long-term debt, less amount due within one year (P and Q)	4,906			5,896
Accrued pension benefits (F)	2,460			2,230
Accrued other postretirement benefits (F)	714			723
Other noncurrent liabilities and deferred credits (A and O)	751			739
Total liabilities	12,957			13,108
Contingencies and commitments (T)
Equity
Arconic shareholders’ equity:
Preferred stock (H)	55			55
Common stock (H)	433			483
Additional capital (H)	7,319			8,319
Retained earnings (accumulated deficit) (A)	129			(358		)
Accumulated other comprehensive loss (A and J)	(3,329		)	(2,926		)
Total Arconic shareholders’ equity	4,607			5,573
Noncontrolling interests	14			12
Total equity	4,621			5,585
Total liabilities and equity	$	17,578		$	18,693

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,	2019			2018			2017
Operating activities
Net income (loss)	$	470		$	642		$	(74	)
Adjustments to reconcile net income (loss) to cash provided from (used for) operations:
Depreciation and amortization	536			576			551
Deferred income taxes	(19		)	31			434
Impairment of goodwill (A and N)	—			—			719
Restructuring and other charges	620			9			165
Net loss (gain) from investing activities - asset sales	7			10			(513		)
Net periodic pension benefit cost (F)	115			130			217
Stock-based compensation	60			50			67
Other	13			75			112
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
(Increase) in receivables	(977		)	(1,142		)	(915		)
(Increase) in inventories	(3		)	(74		)	(192		)
Decrease (increase) in prepaid expenses and other current assets	4			(1		)	11
(Decrease) increase in accounts payable, trade	(56		)	339			62
(Decrease) in accrued expenses	(42		)	(190		)	(116		)
(Decrease) increase in taxes, including income taxes	(2		)	104			(23		)
Pension contributions	(268		)	(298		)	(310		)
(Increase) in noncurrent assets	(7		)	(20		)	(41		)
(Decrease) in noncurrent liabilities	(45		)	(24		)	(193		)
Cash provided from (used for) operations	406			217			(39		)
Financing Activities
Net change in short-term borrowings (original maturities of three months or less)	2			(7		)	(2		)
Additions to debt (original maturities greater than three months) (P)	400			600			816
Payments on debt (original maturities greater than three months) (P)	(806		)	(1,103		)	(1,634		)
Premiums paid on early redemption of debt (P)	—			(17		)	(52		)
Proceeds from exercise of employee stock options	56			16			50
Dividends paid to shareholders	(57		)	(119		)	(162		)
Distributions to noncontrolling interests	—			—			(14		)
Repurchase of common stock (H)	(1,150		)	—			—
Other	(13		)	(19		)	(17		)
Cash used for financing activities	(1,568		)	(649		)	(1,015		)
Investing Activities
Capital expenditures	(586		)	(768		)	(596		)
Proceeds from the sale of assets and businesses (S)	103			309			(9		)
Sales of investments (U)	73			9			890
Cash receipts from sold receivables (K)	995			1,016			792
Other (U)	(2		)	(1		)	243
Cash provided from investing activities	583			565			1,320
Effect of exchange rate changes on cash, cash equivalents and restricted cash	—			(4		)	9
Net change in cash, cash equivalents and restricted cash	(579		)	129			275
Cash, cash equivalents and restricted cash at beginning of year	2,282			2,153			1,878
Cash, cash equivalents and restricted cash at end of year	$	1,703		$	2,282		$	2,153

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 stock		Mandatory convertible preferred stock			Common stock			Additional capital			Retained earnings (accumulated deficit)			Accumulated Other Comprehensive Loss			Noncontrolling interests			Total equity
Balance at December 31, 2016	$	55	$	3		$	438		$	8,214		$	(1,027	)	$	(2,568	)	$	26		$	5,141
Net loss	—		—			—			—			(74		)	—			—			(74		)
Other comprehensive (loss) income (J)	—		—			—			—			—			(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 (H)	—		—			—			67			—			—			—			67
Common stock issued: compensation plans (H)	—		—			—			21			—			—			—			21
Conversion of mandatory convertible preferred stock (H)	—		(3		)	39			(36		)	—			—			—			—
Issuance of common stock (H)	—		—			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 (J)	—		—			—			—			—			85			—			85
Cash dividends declared:
Preferred–Class A @ $3.75 per share	—		—			—			—			(2		)	—			—			(2		)
Common @ $0.24 per share	—		—			—			—			(117		)	—			—			(117		)
Stock-based compensation (H)	—		—			—			50			—			—			—			50
Common stock issued: compensation plans (H)	—		—			2			3			—			—			—			5
Other	—		—			—			—			—			—			(2		)	(2		)
Balance at December 31, 2018	$	55	$	—		$	483		$	8,319		$	(358	)	$	(2,926	)	$	12		$	5,585
Adoption of accounting standard (A)	—		—			—			—			75			(2		)	—			73
Net income	—		—			—			—			470			—			—			470
Other comprehensive loss (J)	—		—			—			—			—			(401		)	—			(401		)
Cash dividends declared:
Preferred–Class A @ $3.75 per share	—		—			—			—			(2		)	—			—			(2		)
Common @ $0.12 per share	—		—			—			—			(56		)	—			—			(56		)
Repurchase and retirement of common stock (H)	—		—			(55		)	(1,095		)	—			—			—			(1,150		)
Stock-based compensation (H)	—		—			—			57			—			—			—			57
Common stock issued: compensation plans (H)	—		—			5			36			—			—			—			41
Other	—		—			—			2			—			—			2			4
Balance at December 31, 2019	$	55	$	—		$	433		$	7,319		$	129		$	(3,329	)	$	14		$	4,621

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 sales 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 Note B).

In the third quarter of 2019, the Company realigned its operations by eliminating its Transportation and Construction Solutions (TCS) segment and transferring the Forged Wheels business to the Engineered Products and Forgings (EP&F) segment and the Building and Construction Systems (BCS) business to the Global Rolled Products (GRP) segment. See Note B for further details.

On February 8, 2019, the Company announced the separation of its portfolio into two independent, publicly-traded companies (the "Separation of Arconic"). The EP&F segment will remain in the existing company (Remain Co.) which will be renamed Howmet Aerospace Inc. at separation. The GRP segment will comprise Spin Co. and will be named Arconic Corporation at separation. The Company is targeting to complete the Separation of Arconic on April 1, 2020. See Note U for further details.

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 that do not have readily determinable fair values are accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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):



	Structures	Machinery and equipment
Engineered Products and Forgings	29	17
Global Rolled Products	31	21

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 measured as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a 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 M 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. For 2019, Arconic had seven reporting units, of which four were included in the Engineered Products and Forgings (EP&F) segment (Fastening Systems, Engineered Structures, Engine Products, and Forged Wheels), and three were included in the Global Rolled Products (GRP) segment (Global Rolled Products, Aluminum Extrusions, and BCS). More than 90% of Arconic’s total goodwill at December 31, 2019 was allocated to the four EP&F reporting units: Engine Products ($2,164), Fastening Systems ($1,607), Engineered Structures ($289), and Forged Wheels ($7).

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 2019 annual review of goodwill, management proceeded directly to the quantitative impairment test for all seven of its reporting units. The estimated fair values for each of the seven reporting units exceeded their respective carrying values by more than 50%, thus, there was no goodwill impairment. Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Arconic uses a DCF model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including sales growth (volumes and pricing), production costs, capital spending, and discount rate. Most of these assumptions vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The WACC rate for the individual reporting units is estimated with the assistance of valuation experts. Arconic would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value without exceeding the total amount of goodwill allocated to that reporting unit.

In the first quarter of 2019, management transferred its aluminum extrusions business (Aluminum Extrusions) from Engineered Structures within the EP&F segment to the GRP segment, based on synergies with the GRP segment including similar customer base, technologies, and manufacturing capabilities. Management assessed and concluded that the remaining Engineered Structures business unit and the Aluminum Extrusions business unit represent reporting units. As a result of the reorganization, goodwill of $110 was reallocated from Engineered Structures to Aluminum Extrusions and these reporting units were evaluated for impairment during the first quarter of 2019. The estimated fair value of each of these reporting units substantially exceeded their carrying value; thus, there was no goodwill impairment. In the second quarter of 2019, management transferred its castings operations from Engineered Structures to Engine Products within the EP&F segment based on process expertise for investment castings that existed within Engine Products. As a result, goodwill of $105 was reallocated from Engineered Structures to Engine Products and these reporting units were evaluated for impairment during the second quarter of 2019. The estimated fair value of each of these reporting units substantially exceeded their carrying value; thus, there was no impairment. As a result of the elimination of the TCS segment in the third quarter of 2019 (see Note B), the Company transferred $7 of

Forged Wheels goodwill and $68 of BCS goodwill from the TCS segment to the EP&F and GRP segments, respectively. Both Forged Wheels and BCS are considered reporting units.

In the second quarter of 2019, as a result of the decline in the forecasted financial performance and related impairment of long-lived assets of the Disks asset group within Engine Products (see Note M), the Company also performed an interim impairment evaluation of goodwill for Engine Products. The estimated fair value of the reporting unit was substantially in excess of its carrying value; thus, there was no impairment of goodwill.

In connection with the interim impairment evaluation of long-lived assets for the Disks asset group within Engine Products in the second quarter of 2018 (see Note M), which resulted from a decline in forecasted financial performance for the business in connection with its updated three-year strategic plan, the Company also performed an interim impairment evaluation of goodwill for Engine Products. The estimated fair value of the reporting unit was substantially in excess of the carrying value; thus, there was no impairment of goodwill.

Goodwill impairment tests in 2018 and 2017 indicated that goodwill was not impaired for any of the Company’s reporting units, except for the Arconic Forgings and Extrusions business (AFE) (the AFE operations were realigned and transferred to Aluminum Extrusions and Engine Products) whose estimated fair value was lower than its carrying value. As such, Arconic recorded an impairment for the full amount of goodwill in the AFE reporting unit of $719 in 2017. The decrease in fair value of AFE was primarily due to unfavorable performance that was impacting operating margins and a higher discount rate due to an increase in the risk-free rate of return, while the carrying value increased compared to prior year.

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):



	Software	Other intangible assets
Engineered Products and Forgings	5	32
Global Rolled Products	5	13

Leases. The Company determines whether a contract contains a lease at inception. The Company leases land and buildings, plant equipment, vehicles, and computer equipment which have been classified as operating leases. Certain real estate leases include one or more options to renew; the exercise of lease renewal options is at the Company’s discretion. The Company includes renewal option periods in the lease term when it is determined that the options are reasonably certain to be exercised. Certain of Arconic's real estate lease agreements include rental payments that either have fixed contractual increases over time or adjust periodically for inflation. Certain of the Company's lease agreements include variable lease payments. The variable portion of payments is not included in the initial measurement of the right-of-use asset or lease liability due to the uncertainty of the payment amount and is recorded as lease cost in the period incurred. The Company also rents or subleases certain real estate to third parties, which is not material to the consolidated financial statements.

Operating lease right-of-use assets and lease liabilities with an initial term greater than 12 months are recorded on the balance sheet at the present value of the future minimum lease payments over the lease term at the lease commencement date and are recognized as lease expense on a straight-line basis over the lease term. The Company uses an incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, as most of its leases do not provide an implicit rate. The operating lease right-of-use assets also include any lease prepayments made and were reduced by lease incentives and accrued exit costs.

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

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

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

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. 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.

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 should be 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 should be 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 February 2016, the Financial Accounting Standards Board (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, initially measured at the present value of the future lease payments for all operating leases with a term greater than 12 months.

These changes became effective for Arconic on January 1, 2019 and have been applied using the modified retrospective approach as of the date of adoption, under which leases existing at, or entered into after, January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company also elected to separate lease components from non-lease components for all classes of assets.

The adoption of this new lease standard resulted in the Company recording operating lease right-of-use assets and lease liabilities of approximately $320 on the Consolidated Balance Sheet as of January 1, 2019. Also, the Company reclassified cash proceeds of $119 from Other noncurrent liabilities and deferred credits, assets of $24 from Properties, plants, and equipment, net, and deferred tax assets of $22 from Other noncurrent assets to Retained earnings (accumulated deficit) reflecting the cumulative effect of an accounting change related to the sale-leaseback of the Texarkana, Texas cast house (see Note S). The adoption of the standard had no impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows.

In August 2017, the FASB issued guidance that made more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amended the presentation and disclosure requirements and changed 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 hedges, Arconic recorded a cumulative effect adjustment of $2 related to eliminating the separate measurement of ineffectiveness by decreasing Accumulated other comprehensive loss and increasing Retained earnings (accumulated deficit) on the accompanying Consolidated Balance Sheet. The amendments to presentation and disclosure are required prospectively. Arconic has determined that under the new accounting guidance it is able to more broadly use cash flow hedge accounting for its variable priced inventory purchases and customer sales.

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 Retained earnings (accumulated deficit) in its Consolidated Balance Sheet and Statement of Changes in Consolidated Equity.

In March 2019, the Securities and Exchange Commission (SEC) issued guidance to modernize and simplify certain disclosure requirements in a manner that reduces the costs and burdens on preparers while continuing to provide all material information to investors. This guidance became effective on May 2, 2019 and has been applied to filings thereafter. The adoption of this guidance did not have a material impact on the Notes to the Consolidated Financial Statements.

Recently Issued Accounting Guidance. 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 became effective for Arconic on January 1, 2020. Management has determined that the adoption of this guidance did 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.

In December 2019, the FASB issued guidance that is intended to simplify various aspects related to the accounting for income taxes. These changes become effective on January 1, 2021, with early adoption permitted. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.

B. 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 operations consist of two worldwide reportable segments: EP&F and GRP. Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Segment operating profit. Arconic’s definition of Segment operating profit is Operating income excluding Special items. Special items include Restructuring and other charges and Impairment of goodwill. Segment operating profit may not be comparable to similarly titled measures of other companies. Differences between segment totals and consolidated Arconic are in Corporate.

In the third quarter of 2019, the Company realigned its operations by eliminating its TCS segment and transferring the Forged Wheels business to its EP&F segment and BCS to its GRP segment, consistent with how the Chief Executive Officer is assessing operating performance and allocating capital in conjunction with the planned Separation of Arconic (see Note U). The Latin America extrusions business, which was formerly part of the Company's TCS segment until its sale in April of 2018 (see Note S), was moved to Corporate. In the first quarter of 2019, management transferred its aluminum extrusions operations from its Engineered Structures business unit within the EP&F segment to the GRP segment, based on synergies with the GRP segment including similar customer base, technologies, and manufacturing capabilities. Prior period financial information has been recast to conform to current year presentation.

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.

Engineered Products and Forgings**.** 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 (aluminum, titanium, steel, and nickel superalloys) and seamless rolled rings (mostly nickel superalloys); investment castings (nickel superalloys, titanium, and aluminum), including airfoils; forged jet engine components (e.g., jet engine disks); extruded, machined and forged aircraft parts (titanium and aluminum); and forged aluminum commercial vehicle wheels, all of which are sold directly to customers and through distributors. Approximately 70% of the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forged and machined metal products (titanium and aluminum) for various end markets. Seasonal decreases in sales are experienced for certain products in the third quarter of the year due to the European summer slowdown.

Global Rolled Products. This segment produces aluminum sheet and plate, aluminum extruded and machined parts, integrated aluminum structural systems, and architectural extrusions used in the automotive, aerospace, building and construction, industrial, packaging, and commercial transportation end markets. Products are sold directly to customers and through distributors. While the customer base for flat-rolled products is large, a significant amount of sales of sheet and plate are to a relatively small number of customers.

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



	Engineered Products and Forgings		Global Rolled Products			Total
2019
Sales:
Third-party sales	$	7,105	$	7,082		$	14,187
Intersegment sales	—		183			183
Total segment sales	$	7,105	$	7,265		$	14,370
Profit and loss:
Segment operating profit	$	1,390	$	625		$	2,015
Restructuring and other charges	509		81			590
Provision for depreciation and amortization	269		233			502
2018
Sales:
Third-party sales	$	6,798	$	7,223		$	14,021
Intersegment sales	—		205			205
Total segment sales	$	6,798	$	7,428		$	14,226
Profit and loss:
Segment operating profit	$	1,105	$	481		$	1,586
Restructuring and other charges	70		(157		)	(87		)
Provision for depreciation and amortization	289		253			542
2017
Sales:
Third-party sales	$	6,300	$	6,540		$	12,840
Intersegment sales	—		183			183
Total segment sales	$	6,300	$	6,723		$	13,023
Profit and loss:
Segment operating profit	$	1,119	$	570		$	1,689
Restructuring and other charges	30		83			113
Provision for depreciation and amortization	275		243			518
2019
Assets:
Capital expenditures	$	344	$	189		$	533
Goodwill	4,067		426			4,493
Total assets(1)	10,034		4,907			14,941
2018
Assets:
Capital expenditures	$	407	$	308		$	715
Goodwill	4,186		314			4,500
Total assets	10,494		4,845			15,339

(1) Segment assets at December 31, 2019 included operating lease right-of-use assets (see Notes A and O). Segment assets for the EP&F segment at December 31, 2019 were impacted by a long-lived asset impairment charge of $428 recorded in the second quarter of 2019 (see Note M).

The following tables reconcile certain segment information to consolidated totals:



For the year ended December 31,	2019			2018			2017
Sales:
Total segment sales	$	14,370		$	14,226		$	13,023
Elimination of intersegment sales	(183		)	(205		)	(183		)
Corporate	5			(7		)	120
Consolidated sales	$	14,192		$	14,014		$	12,960



For the year ended December 31,	2019			2018			2017
Total segment operating profit	$	2,015		$	1,586		$	1,689
Unallocated amounts:
Impairment of goodwill	—			—			(719		)
Restructuring and other charges	(620		)	(9		)	(165		)
Corporate expense	(360		)	(252		)	(325		)
Consolidated operating income	$	1,035		$	1,325		$	480
Interest expense	(338		)	(378		)	(496		)
Other (expense) income, net	(122		)	(79		)	486
Consolidated income before income taxes	$	575		$	868		$	470



December 31,	2019		2018
Assets:
Total segment assets	$	14,941	$	15,339
Unallocated amounts:
Cash and cash equivalents	1,648		2,277
Deferred income taxes	608		573
Corporate fixed assets, net	326		334
Fair value of derivative contracts	6		37
Other	49		133
Consolidated assets	$	17,578	$	18,693

Sales by major product grouping were as follows:



For the year ended December 31,	2019		2018			2017
Sales:
Innovative flat-rolled products	$	5,471	$	5,604		$	5,000
Engine products	3,452		3,220			2,965
Fastening systems	1,561		1,531			1,484
Engineered structures	1,123		1,081			1,023
Architectural aluminum systems	1,118		1,135			1,069
Forged wheels	969		966			828
Aluminum extrusions	493		484			471
Other	5		(7		)	120
	$	14,192	$	14,014		$	12,960

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



For the year ended December 31,	2019		2018		2017
Sales:
United States	$	9,548	$	9,137	$	8,167
France	864		936		965
United Kingdom	732		737		721
Hungary	719		823		739
China	630		632		615
Russia	511		553		500
Germany	322		302		309
Canada	313		285		261
Japan	190		170		141
Brazil	159		214		285
Other	204		225		257
	$	14,192	$	14,014	$	12,960

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



December 31,	2019		2018
Long-lived assets:
United States	$	4,193	$	4,148
China	338		326
Hungary	302		257
Russia	233		253
United Kingdom	189		253
France	185		163
Germany	86		84
Canada	57		61
Mexico	57		45
Brazil	5		54
Other	69		60
	$	5,714	$	5,704

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 Forgings		Global Rolled Products		Total Segment
2019
Aerospace	$	5,075	$	1,251	$	6,326
Transportation	1,289		2,418		3,707
Building and construction	—		1,300		1,300
Industrial and Other	741		2,113		2,854
Total end-market revenue	$	7,105	$	7,082	$	14,187

2018
Aerospace	$	4,722	$	1,116	$	5,838
Transportation	1,302		2,550		3,852
Building and construction	—		1,357		1,357
Industrial and Other	774		2,200		2,974
Total end-market revenue	$	6,798	$	7,223	$	14,021

2017
Aerospace	$	4,347	$	1,109	$	5,456
Transportation	1,098		2,072		3,170
Building and construction	—		1,269		1,269
Industrial and Other	855		2,090		2,945
Total end-market revenue	$	6,300	$	6,540	$	12,840

C. Restructuring and Other Charges

Restructuring and other charges for each year in the three-year period ended December 31, 2019 were comprised of the following:



	2019			2018			2017
Non-cash asset impairments	$	570		$	13		$	58
Layoff costs	103			20			64
Pension and Other postretirement benefits - net settlement and curtailment charges	(49		)	91			—
Net (gain) loss on divestitures of assets and businesses (S)	(20		)	(109		)	57
Other	26			13			(3		)
Reversals of previously recorded layoff costs	(10		)	(19		)	(11		)
Restructuring and other charges	$	620		$	9		$	165

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.

2019 Actions. In 2019, Arconic recorded Restructuring and other charges of $620 ($512 after-tax), this included a non-cash charge for asset impairments of $570 ($477 after-tax), primarily comprised of $428 ($345 after-tax) for impairment of the Disks long-lived asset group, a charge of $112 ($109 after-tax) for impairment of assets associated with agreements to sell the Company’s Brazilian rolling mill operations ($53), the U.K. forgings business ($46), and a small additive business ($13), a charge of $25 ($19 after-tax) for impairment of a trade name intangible asset and properties, plant, and equipment related to the Company’s primary research and development facility, and a charge of $5 ($4 after-tax) for an impairment of a cost method investment of the GRP segment; a charge of $103 ($78 after-tax) for layoff costs, including the separation of approximately

1,310 employees (484 in the GRP segment, 460 in Corporate, and 366 in the EP&F segment); a charge of $26 ($21 after-tax) for other miscellaneous items including lease terminations of $12 primarily related to a corporate aircraft, accelerated depreciation of $9, a net charge of $2 for executive severance net of the benefit of forfeited executive stock compensation, and a charge for various other exit costs of $4; and a charge of $9 ($7 after-tax) for pension settlement accounting. These charges were partially offset by a benefit of $58 ($45 after-tax) from the elimination of the life insurance benefit for the U.S. salaried and non-bargaining hourly retirees of the Company and its subsidiaries; a benefit of $10 ($9 after-tax) from the reversal of a number of current year layoff reserves; and a gain of $20 ($17 after-tax) for contingent consideration received from the Texarkana sale.

As of December 31, 2019, approximately 947 of the 1,310 employees were separated. The remaining separations for the 2019 restructuring programs are expected to be completed in 2020. In 2019, cash payments of $65 were made against layoff reserves related to 2019 restructuring programs.

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 Hungary forgings business of $43 ($39 after-tax) (see note S); 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 F); and a charge of $20 ($17 after-tax) for layoff costs, including the separation of approximately 125 employees (89 in the EP&F 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, 2019, the separations associated with the 2018 restructuring programs were essentially complete. In 2019 and 2018, cash payments of $4 and $9, respectively, 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: a charge of $69 ($47 after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately 880 employees (403 in the EP&F segment, 336 in the GRP segment, and 141 in Corporate), a charge of $60 ($60 after-tax) related to the sale of the 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 S); 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 benefit of $11 ($8 after-tax) for the reversal of a number of small layoff reserves related to prior periods.

As of December 31, 2019, the separations associated with the 2017 restructuring programs were essentially complete. In 2019, 2018, and 2017, cash payments of $5, $34, and $28, respectively, were made against layoff reserves related to the 2017 restructuring programs.

Activity and reserve balances for restructuring charges were as follows:



	Layoff costs			Other exit costs			Total
Reserve balances at December 31, 2016	$	50		$	9		$	59
2017
Cash payments	(59		)	(6		)	(65		)
Restructuring charges	64			1			65
Other(1)	1			(2		)	(1		)
Reserve balances at December 31, 2017	$	56		$	2		$	58
2018
Cash payments	$	(47	)	$	(2	)	$	(49	)
Restructuring charges	111			13			124
Other(2)	(110		)	2			(108		)
Reserve balances at December 31, 2018	$	10		$	15		$	25
2019
Cash payments	$	(74	)	$	(5	)	$	(79	)
Restructuring charges	56			574			630
Other(3)	39			(581		)	(542		)
Reserve balances at December 31, 2019	$	31		$	3		$	34


(1)	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.


(2)	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.


(3)	In 2019, Other for layoff costs included reclassifications of a $58 credit for elimination of life insurance benefits for U.S. salaried and non-bargaining hourly retirees, a charge of $9 for pension plan settlement accounting, 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 $10.

(3)

In 2019, Other for layoff costs included reclassifications of a $58 credit for elimination of life insurance benefits for U.S. salaried and non-bargaining hourly retirees, a charge of $9 for pension plan settlement accounting, 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 $10.

In 2019, Other for other exit costs included a charge of $428 for impairment of the Disks long-lived asset group; a charge of $112 for impairment of assets associated with agreement to sell the Company’s Brazilian rolling mill operations, the U.K. forgings business, and a small additive business; a charge of $25 for impairment of properties, plants, and equipment related to the Company’s primary research and development facility and a trade name intangible asset; a charge of $12 for lease terminations; a charge of $9 for accelerated depreciation as the impacts were primarily reflected in various noncurrent asset accounts; a charge of $5 related to the impairment of a cost method investment of GRP, and a charge of $1 related to other miscellaneous items; partially offset by a gain of $20 related to contingent consideration from the Texarkana sale. Additionally, Other included the reclassification of $9 in lease exit costs to reduce right-of-use assets within Other noncurrent assets in accordance with the new lease accounting standard.

The remaining reserves are expected to be paid in cash during 2020.

D. Interest Cost Components



For the year ended December 31,	2019		2018		2017
Amount charged to expense	$	338	$	378	$	496
Amount capitalized	33		23		22
	$	371	$	401	$	518

E. Other Expense (Income), Net



For the year ended December 31,	2019			2018			2017
Non-service related net periodic benefit cost	$	116		$	112		$	154
Interest income	(25		)	(23		)	(19		)
Foreign currency (gains) losses, net	(1		)	26			(5		)
Net loss (gain) from asset sales	7			10			(513		)
Other, net	25			(46		)	(103		)
	$	122		$	79		$	(486	)

In 2019, Other, net included an increase in deferred compensation arrangements and related investment performance. 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 F) 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 T). 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 U) and a gain of $167 on the Debt-for-Equity Exchange (see Note U). 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 S) and an adjustment of $25 associated with a separation-related guarantee liability (see Note T).

F. 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 and job grade. 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.

On 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 2018, the Company recorded a decrease to the Accrued pension benefit 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 ceased. As result of these changes, in 2018, a curtailment charge of $9 was recorded in Restructuring and other charges.

In 2018, the Company announced that effective December 31, 2018, it would 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 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 2018, 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 2019, the Company communicated to plan participants that for its U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries, it would eliminate the life insurance benefit effective May 1, 2019, and certain health care subsidies effective December 31, 2019. As a result of these changes, in 2019, the Company recorded a decrease to the Accrued other postretirement benefits liability of $75, which was offset by a curtailment benefit of $58 in Restructuring and other charges and $17 in Accumulated other comprehensive loss.

In June 2019, the Company and the United Steelworkers (USW) reached a tentative three-year labor agreement that was ratified on July 11, 2019 covering approximately 3,400 employees at four U.S. locations; the previous labor agreement expired on May 15, 2019. In 2019, the Company recognized $9 in Cost of goods sold on the accompanying Statement of Consolidated Operations primarily for a one-time signing bonus for employees. Additionally, on July 25, 2019, the USW ratified a new four-year labor agreement covering approximately 560 employees at the Company’s Niles, Ohio facility. The prior labor agreement expired on June 30, 2018.

In 2019 and 2018, the Company applied settlement accounting to U.S. pension plans due to lump sum payments to participants which resulted in settlement charges of $9 and $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 benefits						Other postretirement benefits
December 31,	2019			2018			2019			2018
Change in benefit obligation
Benefit obligation at beginning of year	$	6,476		$	7,359		$	806		$	927
Service cost	25			46			7			7
Interest cost	235			219			28			28
Amendments	—			18			(78		)	(25		)
Actuarial losses (gains)	974			(372		)	100			(51		)
Settlements	(23		)	(146		)	—			—
Curtailments	—			(154		)	—			—
Benefits paid	(477		)	(422		)	(82		)	(86		)
Medicare Part D subsidy receipts	—			—			5			6
Foreign currency translation impact	39			(72		)	—			—
Benefit obligation at end of year(1)	$	7,249		$	6,476		$	786		$	806
Change in plan assets(1)
Fair value of plan assets at beginning of year	$	4,334		$	4,862		$	—		$	—
Actual return on plan assets	731			(144		)	—			—
Employer contributions	268			298			—			—
Benefits paid	(453		)	(397		)	—			—
Administrative expenses	(34		)	(33		)	—			—
Settlements	(22		)	(178		)	—			—
Foreign currency translation impact	44			(74		)	—			—
Fair value of plan assets at end of year(1)	$	4,868		$	4,334		$	—		$	—
Net funded status	$	(2,381	)	$	(2,142	)	$	(786	)	$	(806	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Noncurrent assets	$	104		$	111		$	—		$	—
Current liabilities	(25		)	(23		)	(72		)	(83		)
Noncurrent liabilities	(2,460		)	(2,230		)	(714		)	(723		)
Net amount recognized	$	(2,381	)	$	(2,142	)	$	(786	)	$	(806	)
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
Net actuarial loss	$	3,375		$	2,957		$	179		$	87
Prior service cost (benefit)	1			3			(37		)	(27		)
Net amount recognized, before tax effect	$	3,376		$	2,960		$	142		$	60
Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss consist of:
Net actuarial loss (gain)	$	566		$	(19	)	$	100		$	(52	)
Amortization of accumulated net actuarial loss	(148		)	(264		)	(8		)	(7		)
Prior service cost (benefit)	—			19			(78		)	(25		)
Amortization of prior service (cost) benefit	(2		)	(26		)	68			35
Net amount recognized, before tax effect	$	416		$	(290	)	$	82		$	(49	)


(1)	At December 31, 2019, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $5,884, $3,513, and $(2,371), respectively. 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.

Pension Plan Benefit Obligations



	Pension benefits
	2019		2018
The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans were as follows:
Projected benefit obligation	$	7,249	$	6,476
Accumulated benefit obligation	7,219		6,444
The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets was as follows:
Projected benefit obligation	6,064		5,435
Fair value of plan assets	3,579		3,182
The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets was as follows:
Accumulated benefit obligation	6,045		5,415
Fair value of plan assets	3,579		3,179

Components of Net Periodic Benefit Cost



	Pension benefits(1)									Other postretirement benefits(2)
For the year ended December 31,	2019			2018			2017			2019			2018			2017
Service cost	$	25		$	46		$	90		$	7		$	7		$	7
Interest cost	235			219			234			28			28			30
Expected return on plan assets	(286		)	(306		)	(332		)	—			—			—
Recognized net actuarial loss	139			168			220			4			7			5
Amortization of prior service cost (benefit)	2			3			5			(6		)	(7		)	(8		)
Settlements(3)	9			96			—			—			—			—
Curtailments(4)	—			23			—			(58		)	(28		)	—
Net periodic benefit cost(5)	$	124		$	249		$	217		$	(25	)	$	7		$	34


(1)	In 2019, 2018 and 2017, net periodic benefit cost for U.S. pension plans was $127, $239, and $206, respectively.


(2)	In 2019, 2018 and 2017, net periodic benefit cost for other postretirement benefits reflects a reduction of $11, $10, and $11, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.


(3)	In 2019 and 2018, settlements were due to workforce reductions (see Note C) and the payment of lump sum benefits.


(4)	In 2019 and 2018, curtailments were due to a reduction of future benefits, resulting in the recognition of favorable and unfavorable plan amendments.


(5)	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 benefits		Other postretirement benefits
December 31,	2020		2020
Net actuarial loss recognition	$	176	$	8
Prior service cost (benefit) recognition	—		(7		)

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,	2019		2018
Discount rate	3.30	%	4.35	%
Rate of compensation increase	—		3.50
Cash balance plan interest crediting rate	3.00		3.00

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.

Benefit accruals for future compensation under the Company’s major salaried and non-bargained hourly defined benefit pension plans have ceased. The rate of compensation increase no longer impacts the determination of the benefit obligation and is not reported in the preceding table effective December 31, 2019.

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):



	2019		2018		2017
Discount rate to calculate service cost(1)	4.35	%	3.75	%	4.20	%
Discount rate to calculate interest cost(1)	4.00		3.30		3.60
Expected long-term rate of return on plan assets	7.00		7.00		7.75
Rate of compensation increase	3.50		3.50		3.50
Cash balance plan interest crediting rate	3.00		3.00		3.00


(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 2019, 2018, and 2017 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.

(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 2019, 2018, and 2017 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.

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

For 2019, 2018, and 2017, 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 2020, 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):



	2019		2018		2017
Health care cost trend rate assumed for next year	5.50	%	5.50	%	5.50	%
Rate to which the cost trend rate gradually declines	4.50		4.50		4.50
Year that the rate reaches the rate at which it is assumed to remain	2023		2022		2021

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 2020, 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 (3.8)% to 0.7%. 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% increase		1% decrease
Effect on other postretirement benefit obligations	$	23	$	(22	)
Effect on total of service and interest cost components	1		(1		)

Plan Assets

Arconic’s pension plans’ investment policy and weighted average asset allocations at December 31, 2019 and 2018, by asset class, were as follows:



		Plan assets at December 31,
Asset class	Policy range	2019		2018
Equities	20–55%	31	%	29	%
Fixed income	25–55%	50		48
Other investments	15–35%	19		23
Total		100	%	100	%

The principal objectives underlying the investment of the pension plans’ assets are to ensure that Arconic can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify investments across and within various asset classes to protect asset values against adverse movements. Specific objectives for long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities and achieving 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 uses 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 is 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 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 Q 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, 2019	Level 1		Level 2		Net asset value		Total
Equities:
Equity securities	$	590	$	—	$	508	$	1,098
Long/short equity hedge funds	—		—		260		260
Private equity	—		—		155		155
	$	590	$	—	$	923	$	1,513
Fixed income:
Intermediate and long duration government/credit	$	121	$	1,047	$	1,003	$	2,171
Other	126		7		144		277
	$	247	$	1,054	$	1,147	$	2,448
Other investments:
Real estate	$	104	$	—	$	165	$	269
Discretionary and systematic macro hedge funds	—		—		405		405
Other	—		—		240		240
	$	104	$	—	$	810	$	914
Net plan assets(1)	$	941	$	1,054	$	2,880	$	4,875



December 31, 2018	Level 1		Level 2		Net Asset Value		Total
Equities
Equity securities	$	318	$	—	$	578	$	896
Long/short equity hedge funds	—		—		232		232
Private equity	—		—		147		147
	$	318	$	—	$	957	$	1,275
Fixed income:
Intermediate and long duration government/credit	$	200	$	934	$	770	$	1,904
Other	9		9		152		170
	$	209	$	943	$	922	$	2,074
Other investments:
Real estate	$	81	$	—	$	164	$	245
Discretionary and systematic macro hedge funds	—		—		471		471
Other	56		—		212		268
	$	137	$	—	$	847	$	984
Net plan assets(2)	$	664	$	943	$	2,726	$	4,333


(1)	As of December 31, 2019, the total fair value of pension plans’ assets excludes a net payable of $7, which represents securities purchased and sold but not yet settled plus interest and dividends earned on various investments.


(2)	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.

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 2019 and 2018, cash contributions to Arconic’s pension plans were $268 and $298, respectively. The $268 includes $53 contributed to the Company’s U.S. plans that was in excess of the minimum required under ERISA.

The contribution to the Company’s pension plans in 2020 is estimated to be $475 (of which $403 is for U.S. plans). The minimum required is $415, along with approximately $60 of contributions related to actions designed to reduce future obligations.

During the third quarter of 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate the Alcoa Inc. pension plans between Arconic Inc. and Alcoa Corporation. The plan stipulated that Arconic make cash contributions of $150 over a period of 30 months (from November 1, 2016) to its two largest pension plans. The Company satisfied the requirements of the plan by making payments of $34, $66, and $50 in April 2019, March 2018, and April 2017, respectively.

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 paid		Gross Other post- retirement benefits		Medicare Part D subsidy receipts		Net Other post- retirement benefits
2020	$	470	$	80	$	5	$	75
2021	465		80		5		75
2022	460		80		5		75
2023	455		80		5		75
2024	450		75		5		70
Thereafter	2,120		260		25		235
	$	4,420	$	655	$	50	$	605

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 $125, $123, and $89 in 2019, 2018, and 2017, respectively. 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.

G. Income Taxes

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



For the year ended December 31,	2019		2018		2017
United States	$	275	$	518	$	500
Foreign	300		350		(30		)
	$	575	$	868	$	470

The provision for income taxes consisted of the following:



For the year ended December 31,	2019			2018			2017
Current:
Federal(1)	$	4		$	45		$	—
Foreign	108			138			98
State and local	5			4			(2		)
	117			187			96
Deferred:
Federal	65			146			489
Foreign	(53		)	(94		)	37
State and local	(24		)	(13		)	(78		)
	(12		)	39			448
Total	$	105		$	226		$	544


(1)	Includes U.S. taxes related to foreign income

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,	2019		2018		2017
U.S. federal statutory rate	21.0	%	21.0	%	35.0	%
Foreign tax rate differential	2.6		2.4		(8.7	)
U.S. and residual tax on foreign earnings	6.0		1.6		(0.1	)
U.S. State and local taxes	2.5		1.5		0.7
Federal benefit of state tax	0.4		(0.3	)	3.7
Permanent differences related to asset disposals and items included in restructuring and other charges(1)	(22.9	)	(16.9	)	(167.4	)
Non-deductible transaction costs	1.6		—		0.3
Non-deductible officer compensation	1.8		0.1		—
Statutory tax rate and law changes(2)	(0.2	)	6.5		52.5
Tax holidays	(3.2	)	(1.6	)	(3.0	)
Changes in valuation allowances(3)	(14.2	)	0.9		137.9
Impairment of goodwill	—		—		53.5
Changes in uncertain tax positions	6.1		12.8		10.1
Prior year tax adjustments(4)	15.2		(2.6	)	(0.9	)
Other	1.6		0.6		2.1
Effective tax rate	18.3	%	26.0	%	115.7	%


(1)	In 2019, a net tax benefit was recognized related to a U.S. tax election which caused the deemed liquidation of a foreign subsidiary's assets into its U.S. tax parent. The benefit is partially offset by an increase in uncertain tax positions. Losses reported in Spain's 2017 tax return related to the Separation of Alcoa 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.


(3)	In 2019, the Company released a valuation allowance related to 2015 and 2016 foreign tax credits, subsequent to filing U.S. amended tax returns to deduct, rather than credit, foreign taxes.


(4)	In 2019, the Company filed U.S. amended tax returns to deduct, rather than credit, 2015 and 2016 foreign taxes resulting in a tax cost associated with the write-off of the deferred tax asset for the credit, partially offset by a tax benefit for the deduction.

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:



	2019					2018
December 31,	Deferred tax assets			Deferred tax liabilities		Deferred tax assets			Deferred tax liabilities
Depreciation	$	25		$	729	$	38		$	694
Employee benefits	887			16		836			27
Loss provisions	92			—		94			—
Deferred income/expense	96			943		22			1,102
Interest	56			—		—			—
Tax loss carryforwards	2,932			—		3,159			—
Tax credit carryforwards	379			—		579			—
Other	52			16		94			20
	$	4,519		$	1,704	$	4,822		$	1,843
Valuation allowance	(2,256		)	—		(2,486		)	—
	$	2,263		$	1,704	$	2,336		$	1,843

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



December 31, 2019	Expires within 10 years			Expires within 11-20 years			No expiration(1)			Other(2)			Total
Tax loss carryforwards	$	452		$	235		$	2,245		$	—		$	2,932
Tax credit carryforwards	300			69			10			—			379
Other	—			—			120			1,088			1,208
Valuation allowance	(711		)	(176		)	(1,306		)	(63		)	(2,256		)
	$	41		$	128		$	1,069		$	1,025		$	2,263


(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 (27%) and taxable temporary differences that reverse within the carryforward period (73%).

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 2020 to 2028 (as of December 31, 2019). 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 and $9 were recognized in 2018 and 2017, respectively. No additional valuation allowance was recorded in 2019 as the Company intends to deduct, rather than credit, foreign taxes. Foreign tax credits of $88, $8, and $57 expired at the end of 2019, 2018, and 2017, respectively, resulting in a corresponding decrease to the valuation allowance. The valuation allowance was also reduced by $113 as a result of Arconic deducting foreign taxes that were previously claimed as a U.S. foreign tax credit. At December 31, 2019, the cumulative amount of the valuation allowance was $216. 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 also recorded a valuation allowance of $10 related to capital losses and capital investments in 2019. Capital losses can only offset capital gain income. Arconic does not have sufficient sources of capital gain income to support the utilization of these losses and investments. The need for valuation allowances against capital losses and investments will be reassessed on a continuing basis.

Arconic released $13 and $10 of certain U.S. state valuation allowances in 2019 and 2018, respectively. After weighing all available positive and negative evidence, the Company determined that the underlying net deferred tax assets were more likely than not realizable based on projected taxable income estimates. Valuation allowances of $672 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 of Alcoa that are not more likely than not to be realized.

The following table details the changes in the valuation allowance:



December 31,	2019			2018			2017
Balance at beginning of year	$	2,486		$	2,584		$	1,940
Increase to allowance	37			136			831
Release of allowance	(222		)	(154		)	(246		)
Acquisitions and divestitures	(2		)	—			(1		)
Tax apportionment, tax rate and tax law changes	(13		)	(14		)	(24		)
Foreign currency translation	(30		)	(66		)	84
Balance at end of year	$	2,256		$	2,486		$	2,584

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 2019 and 2018 and recorded tax expense accordingly. Arconic does not anticipate being subject to BEAT for 2019 and 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 2019 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 2018.

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



December 31,	2019			2018			2017
Balance at beginning of year	$	166		$	73		$	28
Additions for tax positions of the current year	34			—			23
Additions for tax positions of prior years	3			143			27
Reductions for tax positions of prior years	—			(42		)	—
Settlements with tax authorities	—			—			—
Expiration of the statute of limitations	(2		)	(6		)	(5		)
Foreign currency translation	(4		)	(2		)	—
Balance at end of year	$	197		$	166		$	73

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 2019, 2018, and 2017 would be approximately 13%, 5%, and 15%, 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 2020.

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 $6, $22 and $1 for 2019, 2018, and 2017, respectively. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Arconic recognized interest income of $0, $1, and $2 in 2019, 2018, and 2017, respectively. As of December 31, 2019, 2018, and 2017, the amount accrued for the payment of interest and penalties was $23, $21, and $2, respectively.

H. 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, 2019 and 2018. 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, 2019 and 2018 (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 represented 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 were 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. At December 31, 2019, there were 600,000,000 shares authorized and 432,855,183 shares issued and outstanding. Dividends paid of $0.12 per annum ($0.06 dividend in the first quarter of 2019 and $0.02 per quarter for the remainder of the year) in 2019 and $0.24 per annum or $0.06 per quarter in 2018 and 2017.

As of December 31, 2019, 47 million shares of common stock were reserved for issuance under Arconic’s stock-based compensation plans. As of December 31, 2019, 37 million shares remain available for issuance. Arconic issues new shares to satisfy the exercise of stock options and the conversion of stock awards.

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 was due on October 15, 2019 (principal amount of $403), unless earlier converted or purchased by Arconic at the holder’s option under specific conditions. No shares of the Company’s common stock were issued in connection with the maturity or final conversion of this convertible debt. See Note P for additional details.

Share Activity (number of shares)



	Common stock
	Treasury	Outstanding
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
Issued for stock-based compensation plans	—	4,436,830
Repurchase and retirement of common stock	—	(54,852,364	)
Balance at end of 2019	—	432,855,183

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 (the “February 2019 ASR”), pursuant to the share repurchase programs

previously authorized by its Board of Directors (the Board). Under the February 2019 ASR, Arconic received an initial delivery of shares on February 21, 2019 and additional shares on April 29, 2019. On May 2, 2019, the Company entered into an ASR agreement with JPMorgan Chase Bank to repurchase $200 of its common stock (the “May 2019 ASR”), pursuant to the share repurchase programs previously authorized by its Board. Under the May 2019 ASR, Arconic received an initial delivery of shares on May 6, 2019 and additional shares on June 12, 2019. On May 14, 2019, the Board authorized an additional share repurchase program of up to $500 of its outstanding common stock. On August 6, 2019, the Company entered into an ASR agreement with Goldman Sachs & Co. LLC to repurchase $200 of its common stock (the “August 2019 ASR”), pursuant to the share repurchase programs previously authorized by its Board. Under the August 2019 ASR, Arconic received an initial delivery of shares on August 8, 2019 and additional shares on October 3, 2019. On November 14, 2019, the Company entered into an agreement with Citigroup Global Markets Inc. to repurchase $50 of its common stock (the “November 2019 share repurchase program”), pursuant to the share repurchase programs previously authorized by its Board. All of the shares repurchased during 2019 were immediately retired. After giving effect to the February 2019 ASR, May 2019 ASR, August 2019 ASR, and November 2019 share repurchase program, $350 remains available under the prior authorizations by the Board for share repurchases through the end of 2020.

The following table provides details for the share repurchases during 2019.



Share delivery date	Number of shares	Average price	Total
February 21, 2019	31,908,831
April 29, 2019	4,525,592
February 2019 ASR total	36,434,423	$19.21	$700

May 6, 2019	7,455,732
June 12, 2019	1,561,249
May 2019 ASR total	9,016,981	$22.18	$200

August 8, 2019	6,791,172
October 3, 2019	983,107
August 2019 ASR total	7,774,279	$25.73	$200

November 18, 2019	428,000
November 19, 2019	428,000
November 20, 2019	370,000
November 21, 2019	400,681
November 2019 share repurchase program	1,626,681	$30.74	$50

2019 Share repurchase total	54,852,364	$20.97	$1,150

Stock-Based Compensation

Arconic has a stock-based compensation plan under which stock options and/or restricted stock unit awards are granted in the first quarter of 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. 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 the restricted stock unit awards include performance and market conditions and are granted to a limited number of eligible employees. In 2019, performance stock awards were granted to the CEO that vest either based on achievement of the planned Separation of Arconic (see Note U for further details) or the achievement of certain stock price thresholds. Performance stock awards granted in the first quarter of 2019 were converted to restricted stock unit awards (at target), in order to address the planned Separation of Arconic. For performance stock awards issued in 2018 and 2017, the final number of shares earned will be based on Arconic’s achievement of sales and profitability targets over the respective performance periods and will be earned at the end of the third year. Additionally, the 2018 and 2017 performance stock awards will be scaled by a total shareholder return (“TSR”) multiplier, which depends upon relative performance against the TSRs of a group of peer companies.

In conjunction with their employment agreements, certain current and former executives were granted cash bonus awards based on the achievement of certain stock price thresholds. These awards are liability classified and were marked-to-market each

quarter using a Monte Carlo simulation. At the end of the year, the stock price thresholds have been fully reached. The cash payment of $23 will occur in 2021 in accordance with the terms of the agreements.

In 2019, 2018, and 2017, Arconic recognized stock-based compensation expense of $78 ($70 after-tax), $50 ($39 after-tax), and $54 ($36 after-tax), respectively. Cash bonus awards of $21 were recorded in 2019. Of the remaining stock-based compensation expense in 2019, more than 95% relates to restricted stock unit awards. The expense related to restricted stock unit awards in 2018 and 2017 was approximately 85%. No stock-based compensation expense was capitalized in any of those years. Stock-based compensation expense was reduced by $3 and $13 in 2019 and 2017, respectively, for certain executive pre-vest cancellations which were recorded in Restructuring and other charges within the Statement of Consolidated Operations. At December 31, 2019, there was $50 (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 1.3 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 weighted average grant date fair value of the 2019 performance stock awards with a market condition (achievement of certain stock price thresholds) was $11.93. The grant date fair value of the 2018 performance stock awards containing a market condition (scaled by TSR multiplier) was $20.25. The 2019 and 2018 performance awards were 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 (1.6% in 2019 and 2.7% in 2018) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. In 2019 volatility was estimated using implied and historical volatility (33.4%). Because of limited historical information due to the Separation of Alcoa, 2018 volatility (32.0%) 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 and $6.26 per option in 2018 and 2017, respectively. There were no stock options issued in 2019. 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 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 and 38.1% in 2017) was based on comparable companies and implied volatilities over the term of the option. Arconic utilized historical option forfeiture data to estimate annual 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) was an output of the lattice-pricing model. The activity for stock options and stock awards during 2019 was as follows (options and awards in millions):



	Stock options				Stock awards
	Number of options		Weighted average exercise price		Number of awards		Weighted average FMV per award
Outstanding, December 31, 2018	10		$	24.95	7		$	21.13
Granted	—		—		4		19.80
Exercised	(2	)	21.34		—		—
Converted	—		—		(3	)	15.78
Expired or forfeited	(1	)	28.37		(1	)	22.10
Performance share adjustment	—		—		—		19.96
Outstanding, December 31, 2019	7		$	25.75	7		$	22.05

As of December 31, 2019, the number of stock options outstanding had a weighted average remaining contractual life of 3.4 years and a total intrinsic value of $40. Additionally, 5.9 million of the stock options outstanding were fully vested and exercisable and had a weighted average remaining contractual life of 3.0 years, a weighted average exercise price of $25.80, and a total intrinsic value of $36 as of December 31, 2019. In 2019, 2018, and 2017, the cash received from stock option exercises was $56, $16, and $50 and the total tax benefit realized from these exercises was $4, $2, and $4, respectively. The total intrinsic value of stock options exercised during 2019, 2018, and 2017 was $17, $7, and $13, respectively.

I. 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,	2019			2018			2017
Net income (loss)	$	470		$	642		$	(74	)
Less: preferred stock dividends declared	(2		)	(2		)	(53		)
Net income (loss) available to Arconic common shareholders - basic	468			640			(127		)
Add: interest expense related to convertible notes	9			11			—
Net income (loss) available to Arconic common shareholders - diluted	$	477		$	651		$	(127	)
Average shares outstanding - basic	446			483			451
Effect of dilutive securities:
Stock options	1			1			—
Stock and performance awards	5			5			—
Convertible notes(1)	11			14			—
Average shares outstanding - diluted	463			503			451

(1)

The convertible notes matured on October 15, 2019 (see Note P). No shares of the Company’s common stock were issued in connection with the maturity or the final conversion of the convertible notes. As of October 15, 2019, the calculation of average diluted shares outstanding ceased to include the approximately 15 million shares of common stock and the corresponding interest expense previously attributable to the convertible notes.

Common stock outstanding at December 31, 2019 and 2018 was 433 million and 483 million, respectively. The decrease in common stock outstanding at December 31, 2019 was primarily due to the impact of share repurchases of approximately 55 million in 2019 (see Note H). As average shares outstanding are used in the calculation for both basic and diluted EPS, the full impact of share repurchases was not realized in EPS in 2019 as the share repurchases occurred at varying points during 2019.

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



	2019	2018	2017
Mandatory convertible preferred stock	n/a	n/a	39
Convertible notes	—	—	14
Stock options(1)	1	9	11
Stock awards	—	—	7


(1)	The average exercise price of options per share was $35.75, $26.79, and $33.32 for 2019, 2018, and 2017, 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 H).

J. 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:



	Arconic									Noncontrolling Interests
	2019			2018			2017			2019		2018		2017
Pension and other postretirement benefits (F)
Balance at beginning of period	$	(2,344	)	$	(2,230	)	$	(2,010	)	$	—	$	—	$	—
Adoption of accounting standard (A)	—			(369		)	—			—		—		—
Other comprehensive (loss) income:														—
Unrecognized net actuarial gain and prior service cost/benefit	(587		)	70			(466		)	—		—		—
Tax benefit (expense)	129			(19		)	102			—		—		—
Total Other comprehensive (loss) income before reclassifications, net of tax	(458		)	51			(364		)	—		—		—
Amortization of net actuarial loss and prior service cost(1)	90			262			222			—		—		—
Tax expense(2)	(20		)	(58		)	(78		)	—		—		—
Total amount reclassified from Accumulated other comprehensive loss, net of tax(3)	70			204			144			—		—		—
Total Other comprehensive (loss) income	(388		)	255			(220		)	—		—		—
Balance at end of period	$	(2,732	)	$	(2,344	)	$	(2,230	)	$	—	$	—	$	—
Foreign currency translation
Balance at beginning of period	$	(583	)	$	(437	)	$	(689	)	$	—	$	—	$	(2	)
Other comprehensive (loss) income(4)	(13		)	(146		)	252			—		—		2
Balance at end of period	$	(596	)	$	(583	)	$	(437	)	$	—	$	—	$	—
Debt securities
Balance at beginning of period	$	(3	)	$	(2	)	$	132		$	—	$	—	$	—
Other comprehensive income (loss)(5)	3			(1		)	(134		)	—		—		—
Balance at end of period	$	—		$	(3	)	$	(2	)	$	—	$	—	$	—
Cash flow hedges
Balance at beginning of period	$	4		$	25		$	(1	)	$	—	$	—	$	—
Adoption of accounting standard (A)	(2		)	2			—			—		—		—
Other comprehensive (loss) income:
Net change from periodic revaluations	(9		)	(15		)	37			—		—		—
Tax benefit (expense)	3			3			(9		)	—		—		—
Total Other comprehensive (loss) income before reclassifications, net of tax	(6		)	(12		)	28			—		—		—
Net amount reclassified to earnings
Aluminum contracts(6)	5			(8		)	(2		)	—		—		—
Interest rate contracts(8)	—			(2		)	—			—		—		—
Nickel contracts(7)	(1		)	(4		)	(1		)	—		—		—
Sub-total	4			(14		)	(3		)	—		—		—
Tax (expense) benefit(2)	(1		)	3			1			—		—		—
Total amount reclassified from Accumulated other comprehensive loss, net of tax(3)	3			(11		)	(2		)	—		—		—
Total Other comprehensive (loss) income	(3		)	(23		)	26			—		—		—
Balance at end of period	$	(1	)	$	4		$	25		$	—	$	—	$	—

Accumulated other comprehensive loss	$	(3,329	)	$	(2,926	)	$	(2,644	)	$	—	$	—	$	—


(1)	These amounts were recorded in Other expense (income), net (see Note E).


(2)	These amounts were included in Provision for income taxes on the accompanying Statement of Consolidated Operations.


(3)	A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.


(4)	In all periods presented, no amounts were reclassified to earnings.


(5)	Realized gains and losses were included in Other expense (income), net, on the accompanying Statement of Consolidated Operations.


(6)	These amounts were included in Sales on the accompanying Statement of Consolidated Operations.


(7)	These amounts were included in Cost of goods sold on the accompanying Statement of Consolidated Operations.


(8)	These amounts were included in Interest expense on the accompanying Statement of Consolidated Operations.

K. 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 ($3,558 in draws and $3,258 in repayments) since the program’s inception, including net cash draws totaling $0 ($600 in draws and $600 in repayments) in 2019 and net cash draws totaling $0 ($600 in draws and $600 in repayments) in 2018.

As of December 31, 2019, and 2018, the deferred purchase program receivable was $246 and $234, 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 $48,383 and $47,787 respectively. Arconic services the customer receivables for the financial institutions at market rates; therefore, no servicing asset or liability was recorded.

In 2019 and 2018, the gross cash outflows and inflows associated with the deferred purchase program receivable were $6,599 and $6,586 respectively, and $6,375 and $6,328, 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.

On January 2, 2020, the Company entered into an amendment to remove subsidiaries of the GRP business from the sale of receivables program in preparation for the planned Separation of Arconic and repurchased the remaining $282 unpaid receivables of GRP customers in a non-cash transaction by reducing the amount of the deferred purchase program receivable.

Allowance for Doubtful Accounts

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



	Customer receivables									Other receivables
	2019			2018			2017			2019			2018			2017
Balance at beginning of year	$	4		$	8		$	13		$	31		$	34		$	32
Provision for doubtful accounts	3			2			1			13			7			9
Write off of uncollectible accounts	(2		)	(2		)	(5		)	(2		)	(2		)	(1		)
Recoveries of prior write-offs	—			—			—			(5		)	(3		)	(3		)
Other	(2		)	(4		)	(1		)	(4		)	(5		)	(3		)
Balance at end of year	$	3		$	4		$	8		$	33		$	31		$	34

L. Inventories



December 31,	2019		2018
Finished goods	$	671	$	668
Work-in-process	1,316		1,371
Purchased raw materials	343		366
Operating supplies	99		87
Total inventories	$	2,429	$	2,492

At December 31, 2019 and 2018, the portion of inventories valued on a LIFO basis was $1,257 and $1,292, respectively. If valued on an average-cost basis, total inventories would have been $445 and $530 higher at December 31, 2019 and 2018, respectively. During 2019 and 2018, 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 2019, 2018, and 2017.

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 GRP segment (this plant was previously included in the EP&F segment prior to the transfer of the aluminum extrusions operations from the EP&F segment to the GRP segment in the first quarter of 2019 - see Note C). 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.

M. Properties, Plants, and Equipment, Net



December 31,	2019		2018
Land and land rights	$	128	$	136
Structures:
Engineered Products and Forgings	812		769
Global Rolled Products	1,304		1,317
Other	269		278
	2,385		2,364
Machinery and equipment:
Engineered Products and Forgings	3,514		3,433
Global Rolled Products	5,401		5,356
Other	378		445
	9,293		9,234
	11,806		11,734
Less: accumulated depreciation and amortization	7,074		6,769
	4,732		4,965
Construction work-in-progress	731		739
	$	5,463	$	5,704

During the second quarter of 2019, the Company updated its five-year strategic plan and determined that there was a decline in the forecasted financial performance for the Disks asset group within the EP&F segment. As such, the Company evaluated the recoverability of the Disks asset group long-lived assets by comparing the carrying value to the undiscounted cash flows of the Disks asset group. The carrying value exceeded the undiscounted cash flows and therefore the Disks asset group long-lived assets were deemed to be impaired. The impairment charge was measured as the amount of carrying value in excess of fair value of the long-lived assets, with fair value determined using a DCF model and a combination of sales comparison and cost approach valuation methods including an estimate for economic obsolescence. The impairment charge of $428 recorded in the second quarter of 2019 impacted properties, plants, and equipment; intangible assets; and certain other noncurrent assets by $198, $197, and $33, respectively. The impairment charge was recorded in Restructuring and other charges in the Statement of Consolidated Operations in 2019.

During the second quarter of 2018, the Company updated its three-year strategic plan and determined that there was a decline in the forecasted financial performance for the Disks asset group within the EP&F segment. As such, the Company evaluated the recoverability of the long-lived assets by comparing their carrying value of approximately $515 to the estimated undiscounted net cash flows of the Disks asset group, resulting in an estimated fair value in excess of their carrying value of

approximately 13%; thus, there was no impairment. There were no indicators of impairment identified for the Disks asset group during the third or fourth quarters of 2018 and, as such, the Company did not evaluate the recoverability of its long-lived assets.

N. Goodwill and Other Intangible Assets

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



	Engineered Products and Forgings			Global Rolled Products			Total
Balances at December 31, 2017
Goodwill	$	4,931		$	351		$	5,282
Accumulated impairment losses(1)	(719		)	(28		)	(747		)
Goodwill, net	4,212			323			4,535
Acquisitions and Divestitures (F)	(1		)	—			(1		)
Translation and other	(25		)	(9		)	(34		)
Balances at December 31, 2018
Goodwill	4,905			342			5,247
Accumulated impairment losses	(719		)	(28		)	(747		)
Goodwill, net	4,186			314			4,500
Divestitures (T)	(13		)	—			(13		)
Translation and other	4			2			6
Transfer from Engineered Structures to Aluminum Extrusions	(110		)	110			—
Balances at December 31, 2019
Goodwill	4,786			454			5,240
Accumulated impairment losses	(719		)	(28		)	(747		)
Goodwill, net	$	4,067		$	426		$	4,493


(1)	$25 of fully impaired goodwill related to Latin America Extrusions has been moved to Corporate. See Note B.

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, 2019	Gross carrying amount		Accumulated amortization			Intangibles, net
Computer software	$	744	$	(659	)	$	85
Patents and licenses	95		(93		)	2
Other intangibles	714		(175		)	539
Total amortizable intangible assets	1,553		(927		)	626
Indefinite-lived trade names and trademarks	32		—			32
Total other intangible assets	$	1,585	$	(927	)	$	658



December 31, 2018	Gross carrying amount		Accumulated amortization			Intangibles, net
Computer software	$	768	$	(657	)	$	111
Patents and licenses	110		(107		)	3
Other intangibles	922		(149		)	773
Total amortizable intangible assets	1,800		(913		)	887
Indefinite-lived trade names and trademarks	32		—			32
Total other intangible assets	$	1,832	$	(913	)	$	919

During the second quarter of 2019, the Company recorded a charge of $197 for intangible asset impairments associated with the Disks long-lived asset group. See Note M for additional details.

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, 2019, 2018, and 2017 was $70, $81, and $71, respectively, and is expected to be in the range of approximately $50 to $60 annually from 2020 to 2024.

O. Leases

Operating lease cost, which includes short-term leases and variable lease payments and approximates cash paid, was $145, $144, and $113 in 2019, 2018, and 2017, respectively.

Operating lease right-of-use assets and lease liabilities in the Consolidated Balance Sheet were as follows:



	December 31, 2019
Right-of-use assets classified in Other noncurrent assets	$	252

Current portion of lease liabilities classified in Other current liabilities	71
Long-term portion of lease liabilities classified in Other noncurrent liabilities and deferred credits	194
Total lease liabilities	$	265

Future minimum contractual operating lease obligations were as follows:



	December 31, 2019			December 31, 2018
2019	$	—		$	94
2020	81			74
2021	62			54
2022	46			40
2023	34			30
2024	24			—
Thereafter	70			87
Total lease payments	$	317		$	379
Less: Imputed interest	(52		)
Present value of lease liabilities	$	265

Right-of-use assets obtained in exchange for operating lease obligations in 2019 were $41. The weighted-average remaining lease term and weighted-average discount rate at December 31, 2019 was 6 years and 6.0%, respectively.

P. Debt

Long-Term Debt.



December 31,	2019			2018
1.63% Convertible Notes, due 2019	$	—		$	403
6.150% Notes, due 2020	1,000			1,000
5.40% Notes, due 2021	1,250			1,250
5.87% Notes, due 2022	627			627
5.125% Notes, due 2024	1,250			1,250
5.90% Notes, due 2027	625			625
6.75% Bonds, due 2028	300			300
5.95% Notes due 2037	625			625
Iowa Finance Authority Loan, due 2042 (4.75%)	250			250
Other(1)	(18		)	(29		)
	5,909			6,301
Less: amount due within one year	1,003			405
	$	4,906		$	5,896


(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 $1,000 in 2020, $1,250 in 2021, $627 in 2022, $0 in 2023, and $1,250 in 2024.

Public Debt. On October 15, 2019, the 1.63% Convertible Notes ("the Notes") matured in accordance with their terms and the Company repaid in cash on the maturity date the aggregate outstanding principal amount of the Notes of approximately $403 together with accrued and unpaid interest, pursuant to the terms of the Notes.

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 expense (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 of Alcoa 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, 2019, 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, 2019 and 2018 and no amounts were borrowed during 2019, 2018, or 2017 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 $640 as of December 31, 2019, all of which 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 2019, 2018, and 2017, Arconic borrowed and repaid $400, $600, and $810, respectively, under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during 2019, 2018, and 2017 were 3.7%, 3.3%, and 2.6%, respectively, and 49 days, 46 days, and 46 days, respectively.

Short-Term Debt. At December 31, 2019 and 2018, short-term debt was $31 and $29, respectively. These amounts included $29 and $29 at December 31, 2019 and 2018, 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, 2019 and 2018. In 2019, Arconic did not issue commercial paper. In 2018, the average outstanding commercial paper was $49. Commercial paper matures at various times within one year and had an annual weighted average interest rate of 2.5% during 2018.

Q. 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 value. 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.



	2019				2018
December 31,	Carrying value		Fair value		Carrying value		Fair value
Long-term debt, less amount due within one year	$	4,906	$	5,337	$	5,896	$	5,873

Restricted cash was $55 (see Note S), $6, and $4 in 2019, 2018, and 2017, respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheet.

R. Cash Flow Information

Cash paid for interest and income taxes was as follows:



	2019		2018		2017
Interest, net of amount capitalized	$	340	$	391	$	508
Income taxes, net of amount refunded	$	122	$	74	$	118

Noncash Financing and Investing Activities. On October 2, 2017, all outstanding 24,975,978 depositary shares (each depositary share representing a 1/10th interest in a share of the mandatory convertible preferred stock) were converted at a rate of 1.56996 into 39,211,286 common shares; 24,022 depositary shares were previously tendered for early conversion into 31,420 shares of Arconic common stock. No gain or loss was recognized associated with this equity transaction (see Note H).

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).

S. Acquisitions and Divestitures

2019 Divestitures. On May 31, 2019, Arconic sold a small additive manufacturing facility within the EP&F segment for $1 in cash, which resulted in a loss of $13 recorded in Restructuring and other charges in the Statement of Consolidated Operations. The sale is subject to certain post-closing adjustments.

On August 15, 2019, Arconic sold inventories and properties, plants, and equipment related to a small energy business within the EP&F segment for $13 in cash. Arconic recognized a charge of $10 related to inventory impairment and recorded the charge in Cost of goods sold in the Statement of Consolidated Operations.

On October 30, 2019, Arconic reached an agreement to sell its hard alloy extrusions plant in South Korea for $61 in cash, subject to working capital and other adjustments. The operating results and assets and liabilities of this plant are included in the GRP segment. The sale transaction is expected to close in the first quarter of 2020, subject to regulatory approvals and customary closing conditions. Arconic expects to recognize a gain of $25 to $30 upon the sale, which will be recorded in Restructuring and other charges in the Statement of Consolidated Operations.

On December 1, 2019, Arconic completed the sale of its forgings business in the United Kingdom for $64 in cash, which resulted in a loss on sale of $46 which was recorded in Restructuring and other charges in the Statement of Consolidated Operations. Of the cash proceeds received, $53 was recorded as Restricted cash within Prepaid expenses and other current assets on the Consolidated Balance Sheet at December 31, 2019 as its use is subject to restriction by the U.K. pension authority until certain U.K. pension plan changes have been made and approved. The forgings business primarily produces steel, titanium, and nickel based forged components for aerospace, mining, and off-highway markets and its operating results and assets and liabilities are included in the EP&F segment. The sale remains subject to certain post-closing adjustments. This business generated sales of $116, $131, and $127 in 2019, 2018, and 2017, and had 540 employees at the time of divestiture.

On February 1, 2020, Arconic sold its aluminum rolling mill in Itapissuma, Brazil for $50 in cash, subject to working capital and other adjustments. The rolling mill produces specialty foil and sheet products and its operating results and assets and liabilities were included in the GRP segment. As a result of entering into the agreement to sell in August 2019, Arconic recognized a charge of $53 in 2019 related to a non-cash impairment of the net book value of the business, primarily properties, plants, and equipment. This charge was recorded in Restructuring and other charges in the Statement of Consolidated Operations. This business generated sales of $143, $179, and $162 in 2019, 2018, and 2017 respectively, and had 513 employees at the time of divestiture.

2018 Divestitures. On April 2, 2018, Arconic completed the sale of the 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 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 recorded in 2018. The operating results and assets and liabilities of the business were included in the TCS segment at the time of divestiture, but were transferred to Corporate in connection with a segment change (see Note B). This business generated sales of $25 and $115 in 2018 and 2017 and had 612 employees at the time of divestiture.

On July 31, 2018, the Company announced that it had initiated a sale process of BCS, as part of the Company’s then ongoing strategy and portfolio review. In the first quarter of 2019, the Company decided to no longer pursue the sale of BCS.

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, including the settlement of 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 GRP 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 may 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 had 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 the fourth quarter of 2018. In the fourth quarter of 2019, the Company received additional contingent consideration of $20 and recorded a gain. These amounts were recorded in Restructuring and other charges in the Statement of Consolidated Operations. The Company continues to reevaluate its estimate of the remaining $25 of contingent consideration to which it will be entitled at the end of each reporting period and will recognize any changes thereto in the Statement of Consolidated Operations.

The Company had continuing involvement related to the lease back of the cast house. As a result, in 2018, the Company continued to treat the cast house building and equipment that it sold to Ta Chen as owned and therefore reflected the following balances in its Consolidated Balance Sheet at December 31, 2018: assets of $24 in Properties, plants, and equipment, net; cash proceeds of $119 in Other noncurrent liabilities and deferred credits (which included a deferred gain of $95); and a deferred tax asset of $22 in Other noncurrent assets. In conjunction with the adoption of the new lease accounting standard (see Note A), the Company's continuing involvement no longer requires deferral of the recognition of the cast house sale. As such, the cash

proceeds, fixed assets, and deferred tax asset related to the cast house were reclassified to Retained earnings (accumulated deficit) as a cumulative effect of an accounting change.

On December 31, 2018, as part of the Company’s then ongoing strategy and portfolio review, Arconic completed the sale of its forgings business in Hungary 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. While owned by Arconic, the operating results and assets and liabilities of the business were included in the EP&F segment. This business generated sales of $32 and $38 in 2018 and 2017, respectively, and had 180 employees at the time of the divestiture.

2017 Divestitures. In March 2017, Arconic completed the sale of its rolling mill in Italy to Slim Aluminium. While owned by Arconic, the operating results and assets and liabilities of the Fusina, Italy rolling mill were included in the GRP 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 in 2017. The rolling mill generated sales of approximately $54 in 2017 and had approximately 312 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 forgings business in Savannah, Georgia achieving certain identified financial targets through December 31, 2020. During 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 expense (income), net on the accompanying Statement of Consolidated Operations. During 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 expense (income), net on the accompanying Statement of Consolidated Operations. The fair value of this liability has remained at zero at December 31, 2019 and December 31, 2018 based on the forecasted financial performance of this location.

T. 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 $230 at December 31, 2019 and $266 at December 31, 2018 recorded in Other noncurrent liabilities and deferred credits in the Consolidated Balance Sheet (of which $94 and $81, respectively, were classified as a current liability), and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. Payments related to remediation expenses applied against the reserve were $65 in 2019 and $32 in 2018 and included expenditures currently mandated, as well as those not required by any regulatory authority or third party. The higher payments in 2019 compared with 2018 reflect the start of construction related to the Grasse River project. Arconic expects that trend to continue for 2020 as reflected by the increase in the portion of the reserve that is considered a current liability.

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, 2019 and 2018, the reserve balances associated with this matter were $171 and $198, respectively. In the first quarter of 2019, Arconic received approval from the EPA of its final remedial design which

is now under construction and is expected to be completed in 2022. During the second quarter of 2019, Arconic recorded a charge of $25 due to changes required in the remedial design and post-construction monitoring. As the project proceeds, the liability may be updated due to factors such as changes in remedial requirements, site restoration costs, and ongoing operation and maintenance costs, among others.

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

As previously reported, in 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 $172 (€154), including interest.

In March 2019, the Supreme Court of Spain accepted the Company's petition to review the National Court’s decision, and the Company has filed a formal appeal of the assessment. The Supreme Court is reviewing the assessment on its merits and will render a final decision. In the event the Company receives an unfavorable ruling from 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.

In the third quarter of 2018, Arconic established an income tax reserve and an indemnification receivable representing Alcoa Corporation’s 49% share of the liability. As of the end of 2019, the balances of the reserve, including interest, and the receivable are $59 million (€53 million) and $29 million (€26 million), respectively.

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, U.K. 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 Metropolitan Police Service (the “Police”), a Public Inquiry by the British government and a consumer protection inquiry by a French public authority. The Public Inquiry was announced by the U.K. Prime Minister on June 15, 2017 and subsequently was authorized to examine the circumstances leading up to and surrounding the Grenfell Tower fire in order to make findings of fact and recommendations to the U.K. Government on matters such as the design, construction and modification of the building, the role of relevant public authorities and contractors, the implications of the fire for the adequacy and enforcement of relevant regulations, arrangements in place for handling emergencies and the handling of concerns from residents, among other things. Hearings for Phase 1 of the Public Inquiry began on May 21, 2018 and concluded on December 12, 2018. Phase 2 hearings of the Public Inquiry began in early 2020, following which a final report will be written and subsequently published. AAP SAS is participating as a Core Participant in the Public Inquiry and is also cooperating with the ongoing parallel investigation by the Police. The Company no longer sells the PE product for architectural use on buildings. Given the preliminary nature of these investigations and the uncertainty of potential future 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.

Behrens et al. v. Arconic Inc. et al. As previously reported, on June 6, 2019, 247 plaintiffs comprised of survivors and estates of decedents of the Grenfell Tower fire filed a complaint against “Arconic Inc., Alcoa Inc. and Arconic Architectural Products, LLC” (collectively, for purposes of the description of such proceeding, the “Arconic Defendants”), as well as Saint-Gobain Corporation, d/b/a Celotex and Whirlpool Corporation, in the Court of Common Pleas of Philadelphia County. The complaint alleges claims under Pennsylvania state law for products liability and wrongful death related to the fire. In particular, the plaintiffs allege that the Arconic Defendants knowingly supplied a dangerous product (Reynobond PE) for installation on the Grenfell Tower despite knowing that Reynobond PE was unfit for use above a certain height. The Arconic Defendants removed the case to the United States District Court for the Eastern District of Pennsylvania on June 19, 2019. On August 29, 2019, the Arconic Defendants moved to dismiss the complaint on the bases, among other things, that: (i) the case should be heard in the United Kingdom, not the United States; (ii) there is no jurisdiction over necessary parties; and (iii) Pennsylvania products

liability law does not apply to manufacture and sale of product overseas. On December 23, 2019, the Court issued an order denying the motion to dismiss the complaint on bases (ii) and (iii) and suggesting a procedure for limited discovery followed by further briefing on those subjects. Discovery is ongoing on defendants’ motion to have the case dismissed in favor of a UK forum (forum non conveniens). On January 23, 2020, the Court ordered that the parties complete discovery relating to forum non conveniens by March 16, 2020, and that briefing conclude on April 13, 2020. The Court will hold oral argument on this motion on May 7, 2020. Given the preliminary nature of this matter 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.

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 September 15, 2017, under the caption Sullivan v. Arconic Inc. et al., against Arconic Inc., three 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 alleged 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 alleged 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, its 2016 Annual Highlights Report, and on its official website. The consolidated amended complaint sought, 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. On June 21, 2019, the Court granted the defendants’ motion to dismiss in full, dismissing the consolidated amended complaint in its entirety without prejudice. On July 23, 2019, the lead plaintiffs filed a second amended complaint. The second amended complaint alleges generally the same claims as the consolidated amended complaint with certain additional allegations, as well as claims that the risk factors set forth in the registration statement for the Preferred Offering were inadequate and that certain additional statements in the sources identified above were misleading. The second amended complaint seeks, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On September 11, 2019, all defendants moved to dismiss the second amended complaint. Plaintiffs’ opposition to that motion was filed by November 1, 2019 and all defendants filed a reply brief on November 26, 2019. Given the preliminary nature of this matter 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.

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 stockholder against the then members of Arconic’s Board of Directors and 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 and second 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 Exchange Act 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 Police and on July 23, 2018, the Court approved the stay. Given the preliminary nature of this matter 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.

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.

Stockholder Demands. As previously noted, the Board of Directors also received letters, purportedly sent on behalf of stockholders, 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 appointed a Special Litigation Committee of the Board to review, investigate, and make recommendations to the Board regarding the appropriate course of action with respect to these stockholder demand letters. On May 22, 2019, the Special Litigation

Committee, following completion of its investigation into the claims demanded in the demand letters, recommended to the Board that it reject the demands to authorize commencement of litigation. On May 28, 2019, the Board adopted the Special Litigation Committee’s findings and recommendations and rejected the demands that it authorize commencement of actions to assert the claims set forth in the demand letters.

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 $604 in 2020, $93 in 2021, $45 in 2022, $12 in 2023, $4 in 2024, and $2 thereafter.

Operating Leases. See Note O for the operating lease future minimum contractual obligations.

Guarantees. At December 31, 2019, Arconic had outstanding bank guarantees related to tax matters, outstanding debt, workers’ compensation, environmental obligations, energy contracts, and customs duties, among others. The total amount committed under these guarantees, which expire at various dates between 2020 and 2040 was $31 at December 31, 2019.

Pursuant to the Separation and Distribution Agreement between Arconic and Alcoa Corporation, Arconic was required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of $9 and $6 at December 31, 2019 and 2018, respectively, and were included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. 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 $1,353 and $1,087 at December 31, 2019 and December 31, 2018, respectively, in the event of an Alcoa Corporation payment default. This guarantee expires in 2047. For this guarantee, subject to its provisions, Arconic is secondarily liable in the event of a payment default by Alcoa Corporation. Arconic currently views the risk of an Alcoa Corporation payment default on its obligations under the contract to be remote. In December 2019, Arconic entered into a one-year insurance policy with a limit of $80 relating to the remaining long-term energy supply agreement. The premium is expected to be paid by Alcoa Corporation. The decision to enter into a claims purchase agreement or insurance policy will be made on an annual basis going forward.

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 2020, was $142 at December 31, 2019.

Pursuant to the Separation and Distribution Agreement, Arconic was required to retain letters of credit of $52 that had previously been provided related to both Arconic and Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016. Alcoa Corporation workers’ compensation claims and letter of credit fees paid by Arconic are being proportionally billed to and are being fully reimbursed by Alcoa Corporation.

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 2020, was $50 at December 31, 2019.

Pursuant to the Separation and Distribution Agreement, Arconic was required to provide surety bonds related to Alcoa Corporation workers’ compensation claims which occurred prior to November 1, 2016 and, as a result, Arconic has $24 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconic are being proportionately billed to and that portion billed is being fully reimbursed by Alcoa Corporation.

U. Separation Transactions

2019 Proposed Separation Transaction. On February 8, 2019, Arconic announced, as part of its strategy and portfolio review, a separation of its portfolio into two independent, publicly-traded companies (the "Separation of Arconic"). The EP&F segment will remain in the existing company (Remain Co.) which will be renamed Howmet Aerospace Inc. at separation. The GRP segment will comprise Spin Co. and will be named Arconic Corporation at separation. The Company has also executed on the sale of businesses that do not best fit into the EP&F and GRP segments. The Company is targeting to complete the Separation of Arconic on April 1, 2020. The Separation of Arconic remains subject to the satisfaction of certain conditions and may change if certain conditions are not satisfied by that date, as described in Arconic Rolled Products Corporation’s (“Arconic Corporation”) information statement filed with the Form 10.

On February 5, 2020, Arconic’s Board of Directors approved the completion of the separation by means of a pro rata distribution (the “Distribution”) by the Company of all of the outstanding common stock of Arconic Corporation. To consummate the separation and the Distribution, the Board declared a pro rata distribution of Arconic Corporation common stock, which is expected to be effective at 12:01 a.m. Eastern Time on April 1, 2020, to Company stockholders of record as of the close of business on March 19, 2020 (the “Record Date”). In the Distribution, each Company stockholder will receive one share of Arconic Corporation common stock for every four shares of the Company’s common stock held as of the close of business on the Record Date. Stockholders will receive cash in lieu of fractional shares of Arconic Corporation common stock.

Timothy D. Myers will serve as Arconic Corporation Chief Executive Officer. Arconic’s Board of Directors has also named new directors to the Arconic Corporation and Howmet Aerospace Boards. Joining the Arconic Corporation Board of Directors will be: Timothy Myers; William Austen; Christopher Ayers; Margaret Billson; Austin Camporin; Jacques Croisetiere; Elmer Doty; Carol Eicher; Fritz Henderson; E. Stanley O’Neal; and Jeffrey Stafeil. Christopher Ayers, Elmer Doty and Stanley O’Neal will resign from the Arconic Inc. Board of Directors. Joining the Howmet Aerospace Board of Directors will be: Joseph Cantie; Robert Leduc; Jody Miller; and Nicole Piasecki.

On February 7, 2020, the Company announced that Arconic Rolled Products Corporation (the “Issuer”), which is currently a wholly-owned subsidiary of Arconic, closed its offering of $600 aggregate principal amount of 6.125% second-lien notes due 2028 (the “Notes”). The Issuer intends to use the proceeds from the offering to make a payment to Arconic to fund the transfer of certain assets from Arconic to the Issuer in connection with the Separation of Arconic and for general corporate purposes. The net proceeds from the offering will be held in escrow until the completion of the separation and the satisfaction of certain other escrow release conditions. Prior to the separation, the Notes will not be guaranteed. Following the separation, the Notes will be guaranteed by certain of the Issuer’s wholly-owned domestic subsidiaries. Each of the Notes and the related guarantees will be secured on a second-priority basis by liens on certain assets of the Issuer and the guarantors.

On February 13, 2020, the Form 10 for Arconic Rolled Products Corporation was declared effective by the SEC.

In 2019, Arconic recognized $78 in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations for costs related to the Separation of Arconic.

2016 Separation Transaction. 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 of Alcoa”). As part of the Separation of Alcoa, Arconic retained 19.9% of the Alcoa Corporation common stock (36,311,767 shares). 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.

As part of the Separation of Alcoa, 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 T).

As part of the Separation of Alcoa, Arconic received proceeds of $243 in 2017 related to Alcoa Corporation’s sale of its Yadkin Hydroelectric Project, which were included in Other within Investing Activities in the Statement of Consolidated Cash Flows.

During 2017, Arconic recognized $18 ($12 after-tax) in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations for costs related to the Separation of Alcoa.

V. 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:

See Note K for details of an amendment to remove GRP from the sale of receivables program.

See Note S for details of the divestiture of the Company's aluminum rolling mill in Itapissuma, Brazil.

See Note U for updates on the planned Separation of Arconic.

On February 25, 2020, the Company announced that its current Chief Executive Officer, John C. Plant, and Tolga Oal, who currently serves as President of the Company’s Engineered Structures business unit, will serve as Co-Chief Executive Officers of the Company following the Separation of Arconic. Until the Separation of Arconic, Mr. Plant will continue to serve as sole Chief Executive Officer of the Company and Mr. Oal will hold the title of Co-Chief Executive Officer Designate. Mr. Plant will serve as Executive Chairman of the Board of Directors of Howmet Aerospace following the Separation of Arconic.

Supplemental Financial Information (unaudited)

Quarterly Data

(in millions, except per-share amounts)



	First		Second(2)			Third		Fourth(3)		Year
2019
Sales	$	3,541	$	3,691		$	3,559	$	3,401	$	14,192
Net income (loss)	$	187	$	(121	)	$	95	$	309	$	470
Earnings (loss) per share attributable to Arconic common shareholders(1):
Basic
Net income (loss) per share—basic	$	0.40	$	(0.27	)	$	0.22	$	0.71	$	1.05
Diluted
Net income (loss) per share—diluted	$	0.39	$	(0.27	)	$	0.21	$	0.70	$	1.03
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—basic	$	0.29	$	0.24		$	0.32	$	0.44	$	1.30


(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 second quarter of 2019, the Company recorded an impairment charge of $428 related to its disks business (see Note M).

(3)

In the fourth quarter of 2019, the Company incurred costs associated with the planned Separation of Arconic of $28 ($34 pre-tax), recorded a gain for contingent consideration received related to the 2018 sale of the Texarkana rolling mill of $15 ($20 pre-tax), and recorded several discrete tax items principally related to a benefit for a U.S. tax election which caused the deemed liquidation of a foreign subsidiary’s assets into its U.S. tax parent. 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 forging business in Hungary. Additionally, Arconic recorded discrete tax items primarily comprised of a benefit related to certain prior year foreign investment losses no longer recapturable.

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