Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
FORM 10-Q
 
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2018
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3610
 
ARCONIC INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
25-0317820
(State of
incorporation)
 
(I.R.S. Employer
Identification No.)
 
 
390 Park Avenue, New York, New York
 
10022-4608
(Address of principal executive offices)
 
(Zip code)
Investor Relations 212-836-2758
Office of the Secretary 212-836-2732
(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ✓    No      
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ✓    No      
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
✓
Accelerated filer
line2.jpg
Non-accelerated filer
__  
Smaller reporting company
line2.jpg
 
 
Emerging growth company
line2.jpg
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes          No  ✓
As of July 25, 2018, there were 482,954,718 shares of common stock, par value $1.00 per share, of the registrant outstanding.
 



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Arconic and subsidiaries
Statement of Consolidated Operations (unaudited)
(in millions, except per-share amounts)
 
Second quarter ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Sales (C & D)
$
3,573

 
$
3,261

 
$
7,018

 
$
6,453

Cost of goods sold (exclusive of expenses below)
2,903

 
2,549

 
5,671

 
5,007

Selling, general administrative, and other expenses
158

 
200

 
330

 
417

Research and development expenses
29

 
29

 
52

 
57

Provision for depreciation and amortization
144

 
137

 
286

 
270

Restructuring and other charges (E)
15

 
26

 
22

 
99

Operating income
324

 
320

 
657

 
603

Interest expense (N)
89

 
183

 
203

 
298

Other expense (income), net (F)
41

 
(132
)
 
61

 
(448
)
Income before income taxes
194

 
269

 
393

 
753

Provision for income taxes (H)
74

 
57

 
130

 
219

Net income
$
120

 
$
212

 
$
263

 
$
534

 
 
 
 
 
 
 
 
Amounts Attributable to Arconic Common Shareholders (I):
 
 
 
 
 
 
 
Net income
$
120

 
$
194

 
$
262

 
$
499

Earnings per share - basic
$
0.25

 
$
0.44

 
$
0.54

 
$
1.13

Earnings per share - diluted
$
0.24

 
$
0.43

 
$
0.53

 
$
1.07

Dividends paid per share
$
0.06

 
$
0.06

 
$
0.12

 
$
0.12

Average Shares Outstanding (I):
 
 
 
 
 
 
 
Average shares outstanding - basic
483

 
441

 
483

 
440

Average shares outstanding - diluted
502

 
462

 
502

 
500

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


2


Arconic and subsidiaries
Statement of Consolidated Comprehensive Income (unaudited)
(in millions)
 
Arconic
 
Noncontrolling
Interests
 
Total
Second quarter ended June 30,
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Net income
$
120

 
$
212

 
$
—

 
$
—

 
$
120

 
$
212

Other comprehensive (loss) income, net of tax (J):
 
 
 
 
 
 
 
 
 
 
 
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits
29

 
48

 
—

 
—

 
29

 
48

Foreign currency translation adjustments
(201
)
 
99

 
—

 
—

 
(201
)
 
99

Net change in unrealized gains on available-for-sale securities
(2
)
 
(101
)
 
—

 
—

 
(2
)
 
(101
)
Net change in unrecognized losses/gains on cash flow hedges
4

 
(2
)
 
—

 
—

 
4

 
(2
)
Total Other comprehensive (loss) income, net of tax
(170
)
 
44

 
—

 
—


(170
)
 
44

Comprehensive (loss) income
$
(50
)
 
$
256

 
$
—

 
$
—


$
(50
)
 
$
256

 
 
 
 
 
 
 
 
 
 
 
 
 
Arconic
 
Noncontrolling
Interests
 
Total
Six months ended June 30,
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Net income
$
263

 
$
534

 
$
—

 
$
—

 
$
263

 
$
534

Other comprehensive income, net of tax (J):
 
 
 
 
 
 
 
 
 
 
 
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits
172

 
79

 
—

 
—

 
172

 
79

Foreign currency translation adjustments
(79
)
 
166

 
—

 
—

 
(79
)
 
166

Net change in unrealized gains on available-for-sale securities
(2
)
 
(134
)
 
—

 
—

 
(2
)
 
(134
)
Net change in unrecognized gains/losses on cash flow hedges
(3
)
 
3

 
—

 
—

 
(3
)
 
3

Total Other comprehensive income, net of tax
88

 
114

 
—

 
—

 
88

 
114

Comprehensive income
$
351

 
$
648

 
$
—

 
$
—

 
$
351

 
$
648

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

3


Arconic and subsidiaries
Consolidated Balance Sheet (unaudited)
(in millions)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,455

 
$
2,150

Receivables from customers, less allowances of $5 in 2018 and $8 in 2017 (K)
1,159

 
1,035

Other receivables (K)
478

 
339

Inventories (L)
2,659

 
2,480

Prepaid expenses and other current assets
324

 
374

Total current assets
6,075

 
6,378

Properties, plants, and equipment, net (M)
5,582

 
5,594

Goodwill (A & M)
4,518

 
4,535

Deferred income taxes
626

 
743

Intangibles, net
963

 
987

Other noncurrent assets
455

 
481

Total assets
$
18,219

 
$
18,718

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable, trade
$
2,024

 
$
1,839

Accrued compensation and retirement costs
364

 
399

Taxes, including income taxes
69

 
75

Accrued interest payable
113

 
124

Other current liabilities
362

 
349

Short-term debt
45

 
38

Total current liabilities
2,977

 
2,824

Long-term debt, less amount due within one year (N & O)
6,312

 
6,806

Accrued pension benefits (G)
2,184

 
2,564

Accrued other postretirement benefits
815

 
841

Other noncurrent liabilities and deferred credits
713

 
759

Total liabilities
13,001

 
13,794

Contingencies and commitments (Q)


 


Equity
 
 
 
Arconic shareholders’ equity:
 
 
 
Preferred stock
55

 
55

Common stock
483

 
481

Additional capital
8,295

 
8,266

Accumulated deficit
(1,073
)
 
(1,248
)
Accumulated other comprehensive loss (J)
(2,556
)
 
(2,644
)
Total Arconic shareholders’ equity
5,204

 
4,910

Noncontrolling interests
14

 
14

Total equity
5,218

 
4,924

Total liabilities and equity
$
18,219

 
$
18,718

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

4


Arconic and subsidiaries
Statement of Consolidated Cash Flows (unaudited)
(in millions)
 
Six months ended
 
June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
263

 
$
534

Adjustments to reconcile net income to cash used for operations:
 
 
 
Depreciation and amortization
286

 
270

Deferred income taxes
47

 
27

Restructuring and other charges
22

 
99

Net loss (gain) from investing activities - asset sales (F)
5

 
(515
)
Net periodic pension benefit cost (G)
71

 
108

Stock-based compensation
29

 
48

Other
50

 
115

Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
 
 
 
(Increase) in receivables (B)
(709
)
 
(567
)
(Increase) in inventories
(220
)
 
(150
)
Decrease in prepaid expenses and other current assets
8

 
30

Increase (decrease) in accounts payable, trade
218

 
(69
)
(Decrease) in accrued expenses
(84
)
 
(105
)
Increase in taxes, including income taxes
37

 
121

Pension contributions
(237
)
 
(163
)
(Increase) in noncurrent assets
(4
)
 
(60
)
(Decrease) in noncurrent liabilities
(42
)
 
(39
)
Cash used for operations
(260
)
 
(316
)
Financing Activities
 
 

Net change in short-term borrowings (original maturities of three months or less)
5

 
9

Additions to debt (original maturities greater than three months)
300

 
512

Premiums paid on early redemption of debt (B & N)
(17
)
 
(52
)
Payments on debt (original maturities greater than three months) (N)
(801
)
 
(1,333
)
Proceeds from exercise of employee stock options
13

 
26

Dividends paid to shareholders
(60
)
 
(88
)
Distributions to noncontrolling interests
—

 
(14
)
Other
(17
)
 
(15
)
Cash used for financing activities
(577
)
 
(955
)
Investing Activities
 
 

Capital expenditures
(288
)
 
(229
)
Proceeds from the sale of assets and businesses (P)
5

 
(9
)
Sales of investments (F)
9

 
888

Cash receipts from sold receivables (B & K)
420

 
285

Other
—

 
244

Cash provided from investing activities
146

 
1,179

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2
)
 
4

Net change in cash, cash equivalents and restricted cash (B)
(693
)
 
(88
)
Cash, cash equivalents and restricted cash at beginning of year (B)
2,153

 
1,878

Cash, cash equivalents and restricted cash at end of period (B)
$
1,460

 
$
1,790

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

5


Arconic and subsidiaries
Statement of Changes in Consolidated Equity (unaudited)
(in millions, except per-share amounts)

 
Arconic Shareholders
 
 
 
 
 
Preferred
stock
 
Mandatory
convertible
preferred
stock
 
Common
stock
 
Additional
capital
 
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 income
—

 
—

 
—

 
—

 
534

 
—

 
—

 
534

Other comprehensive income (J)
—

 
—

 
—

 
—

 
—

 
114

 
—

 
114

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Preferred-Class A @ $1.875 per share
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
(1
)
Preferred-Class B @ $13.4375 per share
—

 
—

 
—

 
—

 
(34
)
 
—

 
—

 
(34
)
Common @ $0.12 per share
—

 
—

 
—

 
—

 
(54
)
 
—

 
—

 
(54
)
Stock-based compensation
—

 
—

 
—

 
48

 
—

 
—

 
—

 
48

Common stock issued: compensation plans
—

 
—

 
3

 
—

 
—

 
—

 
—

 
3

Distributions
—

 
—

 
—

 
—

 
—

 
—

 
(14
)
 
(14
)
Other
—

 
—

 
—

 
—

 
15

 
—

 
1

 
16

Balance at June 30, 2017
$
55

 
$
3

 
$
441

 
$
8,262

 
$
(567
)
 
$
(2,454
)
 
$
13

 
$
5,753

 
Arconic Shareholders
 
 
 
 
 
Preferred
stock
 
Mandatory
convertible
preferred
stock
 
Common
stock
 
Additional
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Noncontrolling
interests
 
Total
Equity
Balance at December 31, 2017
$
55

 
$
—

 
$
481

 
$
8,266

 
$
(1,248
)
 
$
(2,644
)
 
$
14

 
$
4,924

Net income
—

 
—

 
—

 
—

 
263

 
—

 
—

 
263

Other comprehensive income (J)
—

 
—

 
—

 
—

 
—

 
88

 
—

 
88

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Preferred-Class A @ $1.875 per share
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
(1
)
Common @ $0.18 per share
—

 
—

 
—

 
—

 
(87
)
 
—

 
—

 
(87
)
Stock-based compensation
—

 
—

 
—

 
29

 
—

 
—

 
—

 
29

Common stock issued: compensation plans
—

 
—

 
2

 
—

 
—

 
—

 
—

 
2

Balance at June 30, 2018
$
55

 
$
—

 
$
483

 
$
8,295

 
$
(1,073
)
 
$
(2,556
)
 
$
14

 
$
5,218

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


6


Arconic and subsidiaries
Notes to the Consolidated Financial Statements (unaudited)
(dollars in millions, except per-share amounts)
A. Basis of Presentation
The interim Consolidated Financial Statements of Arconic Inc. and its subsidiaries (“Arconic” or the “Company”) are unaudited. These Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position, and cash flows. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The 2017 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). This Form 10-Q report should be read in conjunction with Arconic’s Annual Report on Form 10-K for the year ended December 31, 2017, which includes all disclosures required by GAAP. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see below and Note D).
On January 1, 2018, Arconic adopted new guidance issued by the Financial Accounting Standards Board (FASB) related to the following: presentation of net periodic pension cost and net periodic postretirement benefit cost that required a reclassification of costs within the Statement of Consolidated Operations; presentation of certain cash receipts and cash payments within the Statement of Consolidated Cash Flows that required a reclassification of amounts between operating and either financing or investing activities; and the classification of restricted cash within the statement of cash flows. See Note B for further details.
In January 2018, management changed the organizational structure of the businesses in its Engineered Products and Solutions (EP&S) segment, from four business units to three business units, with a focus on aligning its internal structure to core markets and customers and reducing cost. As a result of this change in the EP&S segment organizational structure, management assessed and concluded that each of the three business units represent reporting units for goodwill impairment evaluation purposes.  Also, as a result of the reorganization, goodwill was reallocated to the three new reporting units and evaluated for impairment during the first quarter of 2018.  The estimated fair value of each reporting unit substantially exceeded its carrying value; thus, there was no goodwill impairment. More than 92% of Arconic’s total goodwill at March 31, 2018 was allocated to the following three EP&S reporting units: Arconic Engines ($2,095), Arconic Fastening Systems ($1,623) and Arconic Engineered Structures ($517). See Note M for further details of an interim goodwill impairment evaluation that was performed for the Arconic Engines reporting unit during the second quarter of 2018.
B. Recently Adopted and Recently Issued Accounting Guidance
Adopted
In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue and, therefore, supersede virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. These changes became effective for Arconic on January 1, 2018. Arconic adopted this new guidance using the modified retrospective transition approach applied to those contracts that were not completed as of January 1, 2018. There was no cumulative effect adjustment to the opening balance of retained earnings in the Consolidated Balance Sheet in the first quarter of 2018, as the adoption did not result in a change to our timing of revenue recognition, which continues to be at a point in time. See Note C for further details.
In January 2016, the FASB issued changes to equity investments. These changes require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values using the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Also, the impairment assessment of equity investments without readily determinable fair values has been simplified by requiring a qualitative assessment to identify impairment. Also, the new guidance required changes in fair value of equity securities to be recognized immediately as a component of net income instead of being reported in accumulated other comprehensive loss until the gain (loss) is realized. These changes became effective for Arconic on January 1, 2018 and have been applied on a prospective basis. Arconic elected the measurement alternative for its equity investments that do not have

7


readily determinable fair values. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
In August 2016, the FASB issued changes to the classification of certain cash receipts and cash payments within the statement of cash flows. The guidance identifies eight specific cash flow items and the sections where they must be presented within the statement of cash flows. These changes became effective for Arconic on January 1, 2018 and have been be applied retrospectively. As of result of the adoption, Arconic reclassified cash received related to beneficial interest in previously transferred trade accounts receivables from operating activities to investing activities in the Statement of Consolidated Cash Flows. This new accounting standard does not reflect a change in our underlying business or activities. The reclassification of cash received related to beneficial interest in previously transferred trade accounts receivables was $285 for the six months ended June 30, 2017. In addition, Arconic reclassified $52 of cash paid for debt prepayments including extinguishment costs from operating activities to financing activities for the six months ended June 30, 2017.
In November 2016, the FASB issued changes to the classification of cash and cash equivalents within the statement of cash flow. Restricted cash and cash equivalents will be included within the cash and cash equivalents line on the cash flow statement and a reconciliation must be prepared to the statement of financial position. Transfers between restricted cash and cash equivalents and cash and cash equivalents will no longer be presented as cash flow activities in the Statement of Consolidated Cash Flows and for material balances of restricted cash and restricted cash equivalents Arconic will disclose information regarding the nature of the restrictions. These changes became effective for Arconic on January 1, 2018 and have been applied retrospectively. Management has determined that the adoption of this guidance did not have a material impact on the Statement of Consolidated Cash Flows. Restricted cash was $5, $4 and $5 at June 30, 2018, December 31, 2017 and June 30, 2017, respectively.
In March 2017, the FASB issued changes to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires registrants to present the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. Also, only the service cost component will be eligible for asset capitalization. Registrants will present the other components of net periodic benefit cost separately from the service cost component; and, the line item or items used in the income statement to present the other components of net periodic benefit cost must be disclosed. These changes became effective for Arconic on January 1, 2018 and were adopted retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the Statement of Consolidated Operations, and prospectively for the asset capitalization of the service cost component of net periodic benefit cost. The Company recorded the service related net periodic benefit cost within Cost of goods sold, Selling, general administrative, and other expenses and Research and development expenses and recorded the non-service related net periodic benefit cost (except for the curtailment cost which was recorded in Restructuring and other charges) separately from service cost in Other expense (income), net within the Statement of Consolidated Operations. The impact of the retrospective adoption of this guidance was an increase to consolidated Operating income of $39 and $77 while there was no impact to consolidated Net income for the second quarter or six months ended June 30, 2017, respectively.
In May 2017, the FASB issued clarification to guidance on the modification accounting criteria for share-based payment awards. The new guidance requires registrants to apply modification accounting unless three specific criteria are met. The three criteria are 1) the fair value of the award is the same before and after the modification, 2) the vesting conditions are the same before and after the modification and 3) the classification as a debt or equity award is the same before and after the modification. These changes became effective for Arconic on January 1, 2018 and were applied prospectively to new awards modified after adoption. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
Issued
In February 2016, the FASB issued changes to the accounting and presentation of leases. These changes require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. Also, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option, or not exercise an option to terminate the lease. As originally released, the standards update required application at the beginning of the earliest comparative period presented at the time of adoption. However, in July 2018, the FASB provided entities the option to instead apply the provisions of the new leases guidance at the effective date, without adjusting the comparative periods presented. These changes become effective for Arconic on January 1, 2019. Arconic’s current operating lease portfolio is primarily comprised of land and buildings, plant equipment, vehicles, and computer equipment.  A cross-functional implementation team is in the process of determining the scope of arrangements that will be subject to this standard as well as assessing the impact to the Company’s systems, processes and internal controls.  Arconic has contracted with a third-party vendor to implement a software solution. Concurrently, Arconic is compiling lease data to be uploaded into

8


the software solution to account for leases under the new standard. Management is evaluating the impact of these changes on the Consolidated Balance Sheet, which will require right of use assets and lease liabilities be recorded for operating leases; therefore, an estimate of the impact is not currently determinable.  However, the adoption is not expected to have a material impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows.
In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective for Arconic on January 1, 2020. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
In August 2017, the FASB issued guidance that will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. These changes become effective for Arconic on January 1, 2019. For cash flow and net investment hedges existing at the date of adoption, Arconic will apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year in which the amendment is adopted. The amended presentation and disclosure guidance is required only prospectively. Management is currently evaluating the potential impact of this guidance on the Consolidated Financial Statements.
In February 2018, the FASB issued guidance that allows an optional reclassification from Accumulated other comprehensive loss to Accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. These changes become effective for Arconic on January 1, 2019.  Management is currently evaluating the potential impact of this guidance on the Consolidated Financial Statements.


9


C. Revenue from Contracts with Customers
The Company's contracts with customers are comprised of acknowledged purchase orders incorporating the Company’s standard terms and conditions, or for larger customers, terms under negotiated multi-year agreements. These contracts with customers typically consist of the manufacture of products which represent single performance obligations that are satisfied upon transfer of control of the product to the customer. The Company produces fastening systems; seamless rolled rings; investment castings, including airfoils and forged jet engine components; extruded, machined and formed aircraft parts; aluminum sheet and plate; integrated aluminum structural systems; architectural extrusions; and forged aluminum commercial vehicle wheels. Transfer of control is assessed based on alternative use of the products we produce and our enforceable right to payment for performance to date under the contract terms. Transfer of control and revenue recognition generally occur upon shipment or delivery of the product, which is when title, ownership and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck, train, or vessel). An invoice for payment is issued at time of shipment. The Company’s objective is to have net 30-day terms. Our business units set commercial terms on which Arconic sells products to its customers. These terms are influenced by industry custom, market conditions, product line (specialty versus commodity products), and other considerations.
The following table disaggregates revenue by major end market served. Differences between segment totals and consolidated Arconic are in Corporate. In the second quarter and six months ended June 30, 2018, Corporate included $38 of costs related to settlements of certain customer claims primarily related to product introductions.  
 
Engineered
Products and
Solutions
 
Global Rolled
Products
 
Transportation
and Construction
Solutions
 
Total
Segment
Second quarter ended June 30, 2018
 
 
 
 
 
 
 
Aerospace
$
1,241

 
$
226

 
$
—

 
$
1,467

Transportation
119

 
612

 
253

 
984

Building and construction
—

 
60

 
297

 
357

Industrial and other
236


553

 
12

 
801

Total end-market revenue
$
1,596

 
$
1,451

 
$
562

 
$
3,609

 
 
 
 
 
 
 
 
Second quarter ended June 30, 2017

 

 

 

Aerospace
$
1,141

 
$
241

 
$
—

 
$
1,382

Transportation
97

 
475

 
200

 
772

Building and construction
—

 
51

 
283

 
334

Industrial and other
247

 
504

 
21

 
772

Total end-market revenue
$
1,485

 
$
1,271

 
$
504

 
$
3,260

 
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
 
 
 
 
 
 
Aerospace
$
2,431

 
$
425

 
$
—

 
$
2,856

Transportation
216

 
1,210

 
496

 
1,922

Building and construction
—

 
108

 
582

 
690

Industrial and other
490

 
1,074

 
21

 
1,585

Total end-market revenue
$
3,137

 
$
2,817

 
$
1,099

 
$
7,053

 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
 
 
 
 
 
 
Aerospace
$
2,296

 
$
456

 
$
—

 
$
2,752

Transportation
190

 
968

 
373

 
1,531

Building and construction
—

 
100

 
545

 
645

Industrial and other
486

 
995

 
42

 
1,523

Total end-market revenue
$
2,972

 
$
2,519

 
$
960

 
$
6,451



10


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

The operating results of Arconic’s reportable segments were as follows:
 
Engineered
Products and
Solutions
 
Global Rolled
Products
 
Transportation
and Construction
Solutions
 
Total
Segment
Second quarter ended June 30, 2018
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
Third-party sales
$
1,596

 
$
1,451

 
$
562

 
$
3,609

Intersegment sales
—

 
46

 
—

 
46

Total sales
$
1,596

 
$
1,497

 
$
562

 
$
3,655

Profit and loss:
 
 
 
 
 
 
 
Segment operating profit
$
212

 
$
123

 
$
97

 
$
432

Restructuring and other charges
9

 
1

 
—

 
10

Provision for depreciation and amortization
70

 
53

 
12

 
135

 
 
 
 
 
 
 
 
Second quarter ended June 30, 2017
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
Third-party sales
$
1,485

 
$
1,271

 
$
504

 
$
3,260

Intersegment sales
—

 
37

 
—

 
37

Total sales
$
1,485

 
$
1,308

 
$
504

 
$
3,297

Profit and loss:
 
 
 
 
 
 
 
Segment operating profit
$
250

 
$
133

 
$
71

 
$
454

Restructuring and other charges
8

 
17

 
6

 
31

Provision for depreciation and amortization
66

 
51

 
12

 
129


11


 
 
Engineered
Products and
Solutions
 
Global Rolled
Products
 
Transportation
and Construction
Solutions
 
Total
Segment
Six months ended June 30, 2018
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
Third-party sales
$
3,137

 
$
2,817

 
$
1,099

 
$
7,053

Intersegment sales
—

 
88

 
—

 
88

Total sales
$
3,137

 
$
2,905

 
$
1,099

 
$
7,141

Profit and loss:
 
 
 
 
 
 
 
Segment operating profit
$
433

 
$
235

 
$
164

 
$
832

Restructuring and other charges
10

 
—

 
—

 
10

Provision for depreciation and amortization
141

 
104

 
25

 
270

 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
Third-party sales
$
2,972

 
$
2,519

 
$
960

 
$
6,451

Intersegment sales
—

 
71

 
—

 
71

Total sales
$
2,972

 
$
2,590

 
$
960

 
$
6,522

Profit and loss:
 
 
 
 
 
 
 
Segment operating profit
$
497

 
$
269

 
$
139

 
$
905

Restructuring and other charges
14

 
74

 
9

 
97

Provision for depreciation and amortization
130

 
101

 
24

 
255


The following table reconciles Total segment operating profit to Consolidated income before income taxes:
 
Second quarter ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Total segment operating profit
$
432

 
$
454

 
$
832

 
$
905

Unallocated amounts:
 
 
 
 
 
 
 
Restructuring and other charges
(15
)
 
(26
)
 
(22
)
 
(99
)
Corporate expense
(93
)
 
(108
)
 
(153
)
 
(203
)
Consolidated operating income
$
324

 
$
320

 
$
657

 
$
603

Interest expense
(89
)
 
(183
)
 
(203
)
 
(298
)
Other (expense) income, net
(41
)
 
132

 
(61
)
 
448

Consolidated income before income taxes
$
194

 
$
269

 
$
393

 
$
753


12


The total assets of Arconic's reportable segment were as follows:
 
June 30, 2018
 
December 31, 2017
Engineered Products and Solutions
$
10,447

 
$
10,325

Global Rolled Products
4,153

 
3,955

Transportation and Construction Solutions
1,087

 
1,041

Total segment assets
$
15,687

 
$
15,321

The following table reconciles Total segment assets to Consolidated assets:
 
June 30, 2018
 
December 31, 2017
Total segment assets
$
15,687

 
$
15,321

Unallocated amounts:
 
 
 
Cash and cash equivalents
1,455

 
2,150

Deferred income taxes
626

 
743

Corporate fixed assets, net
304

 
310

Fair value of derivative contracts
57

 
91

Other
90

 
103

Consolidated assets
$
18,219

 
$
18,718

E. Restructuring and Other Charges
In the second quarter of 2018, Arconic recorded Restructuring and other charges of $15 ($12 after-tax), which included $9 ($7 after-tax) for pension curtailment charges; $4 ($3 after-tax) for layoff costs, including the separation of approximately 24 employees (all in the Engineered Products and Solutions segment); a charge of $5 ($4 after-tax) for exit costs primarily related to the New York office; a charge of $2 ($2 after-tax) for other miscellaneous items; and a benefit of $5 ($4 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the six months ended June 30, 2018, Arconic recorded Restructuring and other charges of $22 ($17 after-tax), which included $14 ($11 after-tax) for pension curtailment charges; $8 ($6 after-tax) for layoff costs, including the separation of approximately 40 employees (24 in the Engineered Products and Solutions segment and 16 in Corporate); a charge of $5 ($4 after-tax) for exit costs primarily related to the New York office; a charge of $4 ($3 after-tax) for other miscellaneous items; and a benefit of $9 ($7 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the second quarter of 2017, Arconic recorded Restructuring and other charges of $26 ($17 after-tax), which included $29 ($19 after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately 352 employees (129 in the Engineered Products and Solutions segment, 110 in the Global Rolled Products segment, 93 in the Transportation and Construction Solutions segment, and 20 in Corporate); a net charge of $4 ($3 after-tax) for other miscellaneous items; 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; and a favorable benefit of $1 ($1 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
In the six months ended June 30, 2017, Arconic recorded Restructuring and other charges of $99 ($86 after-tax), which included $48 ($32 after-tax) for layoff costs related to cost reduction initiatives including the separation of approximately 680 employees (243 in the Engineered Products and Solutions segment, 242 in the Global Rolled Products segment, 133 in the Transportation and Construction Solutions segment, and 62 in Corporate); a charge of $60 ($60 after-tax) related to the sale of the Fusina, Italy rolling mill; 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 benefit of $1 ($0 after-tax) for other miscellaneous items; and a favorable benefit of $2 ($2 after-tax) for the reversal of a number of small layoff reserves related to prior periods.
As of June 30, 2018, approximately 20 of the 40 employees associated with 2018 restructuring programs and approximately 530 of the 760 employees (previously 830) associated with 2017 restructuring programs (with planned departures in 2018) were separated; all of the separations associated with 2016 restructuring programs were essentially complete. Most of the remaining separations for the 2018 restructuring programs and all of the remaining separations for the 2017 restructuring programs, are expected to be completed by the end of 2018.

13


For the second quarter and six months ended June 30, 2018, cash payments of $2 and $3, respectively, were made against layoff reserves related to 2018 restructuring programs, cash payments of $8 and $23, respectively, were made against layoff reserves related to 2017 restructuring programs, and cash payments of $0 and $4, respectively, were made against the layoff reserves related to 2016 restructuring programs.
Activity and reserve balances for restructuring and other charges were as follows:
 
Layoff
costs
 
Other exit
costs
 
Total
Reserve balances at December 31, 2016
$
50

 
$
9

 
$
59

Cash payments
(59
)
 
(6
)
 
(65
)
Restructuring charges
64

 
1

 
65

Other(1)
1

 
(2
)
 
(1
)
Reserve balances at December 31, 2017
56

 
2

 
58

Cash payments
(30
)
 
—

 
(30
)
Restructuring charges
23

 
5

 
28

Other(1)
(23
)
 
—

 
(23
)
Reserve balances at June 30, 2018
$
26

 
$
7

 
$
33

(1) 
Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation.  In 2018, Other for layoff costs also included a reclassification of $14 in pension costs, as this liability was reflected in Arconic’s separate liability for pension obligations.  In 2017, Other for layoff costs also included a reclassification of a stock awards reversal of $13.
The remaining reserves are expected to be paid in cash during 2018.
F. Other Expense (Income), Net

Second quarter ended

Six months ended
 
June 30,

June 30,

2018
 
2017

2018
 
2017
Non-service related net periodic benefit cost
$
28

 
$
39

 
$
56

 
$
77

Interest income
(4
)
 
(4
)
 
(10
)
 
(8
)
Foreign currency gains (losses), net
17

 
2

 
14

 
(3
)
Net loss (gain) from asset sales
2

 
(166
)
 
5

 
(515
)
Other, net
(2
)
 
(3
)
 
(4
)
 
1

 
$
41

 
$
(132
)
 
$
61

 
$
(448
)
For the second quarter of 2017, Net loss (gain) from asset sales included a $167 gain on the debt-for-equity exchange with two investment banks (the “Investment Banks”) of 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 (the “Debt-for-Equity Exchange”). For the six months ended June 30, 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 that resulted in cash proceeds of $888 which were recorded in Sale of investments within Investing Activities in the Statement of Consolidated Cash Flows.

14


G. Pension and Other Postretirement Benefits
The components of net periodic benefit cost were as follows:
 
Second quarter ended

Six months ended
 
June 30,

June 30,
 
2018
 
2017

2018
 
2017
Pension benefits
 
 
 
 
 
 
 
Service cost
$
8

 
$
21

 
$
28

 
$
44

Interest cost
55

 
58

 
110

 
116

Expected return on plan assets
(77
)
 
(82
)
 
(154
)
 
(165
)
Recognized net actuarial loss
42

 
55

 
84

 
110

Amortization of prior service cost (benefit)
1

 
2

 
2

 
3

Curtailments
9

 
—

 
14

 
—

Net periodic benefit cost(1)
$
38

 
$
54

 
$
84

 
$
108

 
 
 
 
 
 
 
 
Other postretirement benefits
 
 
 
 
 
 
 
Service cost
$
2

 
$
2

 
$
4

 
$
4

Interest cost
7

 
7

 
14

 
15

Recognized net actuarial loss
2

 
1

 
4

 
2

Amortization of prior service cost (benefit)
(2
)
 
(2
)
 
(4
)
 
(4
)
Net periodic benefit cost(1)
$
9

 
$
8

 
$
18

 
$
17

 
(1) 
Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses, and Research and development expenses; curtailments 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.
In the first quarter of 2018, the Company announced that, effective April 1, 2018, benefit accruals for future service and compensation under all of the Company's qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargaining hourly employees ceased. As a result of this change, in the first quarter of 2018, the Company recorded a decrease to the accrued pension 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.
In conjunction with the separation of Alcoa Inc. on November 1, 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 stipulates that Arconic will make cash contributions over a period of 30 months (from November 1, 2016) to its two largest pension plans. Payments are expected to be made in three increments of no less than $50 each ($150 total) over this 30-month period. The Company made payments of $50 in March 2018 and $50 in April 2017. Upon finalization of 2018 pension plan valuations, which are expected to be complete during the third quarter of 2018, additional cash contributions that were made in the first quarter of 2018 may be used to satisfy the $150 requirement.
On April 13, 2018, the United Auto Workers ratified a new five-year labor agreement, effective May 1, 2018, covering approximately 1,300 U.S. employees of Arconic.  A provision within the agreement includes a retirement benefit increase for future retirees that participate in a defined benefit pension plan, which impacts approximately 300 of those employees. In addition, effective January 1, 2019, benefit accruals for future service will cease.  As result of these changes, a curtailment charge of $9 was recorded in Restructuring and other charges in the second quarter of 2018.
H. Income Taxes
Arconic’s year-to-date tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date pre-tax ordinary income. The tax impact of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur. In addition, the tax provision is adjusted for the interim period impact of non-benefited pre-tax losses.
For the six months ended June 30, 2018, the estimated annual effective tax rate, before discrete items, applied to ordinary income was 27.0%. This rate was higher than the federal statutory rate of 21%, which was enacted by the Tax Cuts and Jobs Act (the “2017 Act”) on December 22, 2017, primarily due to the additional estimated U.S. tax on Global Intangible Low-

15


Taxed Income (GILTI) pursuant to the 2017 Act, domestic taxable income in certain U.S. states no longer subject to valuation allowance, and foreign income tax in higher rate jurisdictions.
For the six months ended June 30, 2017, the estimated annual effective tax rate, before discrete items, applied to ordinary income was 28.4%. This rate was lower than the federal statutory rate of 35% applicable to 2017 due to foreign income taxed in lower rate jurisdictions, a tax basis in excess of book basis in Alcoa Corporation common stock sold, and a nontaxable gain on the Debt-for-Equity Exchange. These beneficial items were partially offset by a loss on the sale of a rolling mill in Fusina, Italy for which no net tax benefit was recognized and valuation allowances related to U.S. foreign tax credits.
For the second quarter ended June 30, 2018 and June 30, 2017, the tax rate including discrete items was 38.1% and 21.2%, respectively. Discrete items of $21 were recorded in the second quarter ended June 30, 2018, primarily related to revised estimates of the provisional impact of the enactment of the 2017 Act discussed further below. There were no individually material discrete items recorded in the second quarter ended June 30, 2017.
The tax provisions for the second quarter and six months ended June 30, 2018 and 2017 were comprised of the following:
 
Second quarter ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Pre-tax income at estimated annual effective income tax rate before discrete items
$
52

 
$
60

 
$
106

 
$
214

Catch-up adjustment to revalue previous quarter pre-tax income at current estimated annual effective tax rate
1

 
—

 
—

 
—

Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized
—

 
(3
)
 
1

 
4

Other discrete items
21

 
—

 
23

 
1

Provision for income taxes
$
74

 
$
57

 
$
130

 
$
219

On December 22, 2017, the 2017 Act was signed into law, making significant changes to the Internal Revenue Code. 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 Securities and Exchange Commission to address the application of U.S. GAAP for financial reporting. SAB 118 permits the use of provisional amounts based on reasonable estimates in the financial statements. SAB 118 also provides 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. Any adjustments to provisional or incomplete amounts should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period that the amounts are determined within one year.
The Company's analysis of U.S. tax reform legislation, updated through June 30, 2018, resulted in an additional charge of $21 to the 2017 year-end provisional charge of $272. A charge of $18 was recorded for an increase in the provisional estimate of the one-time transition tax. An additional charge of $3 was also recorded for the portion of Alternative Minimum Tax ("AMT") credits expected to be refunded upon filing the 2018 tax return that will result in no benefit under government sequestration. The Company's estimates of the impact of the 2017 Act remain provisional through June 30, 2018.
The impact of the rate reduction will be finalized as part of the filing of the 2017 U.S. income tax return during 2018. Arconic will continue to analyze the amount of foreign earnings and profits, the associated foreign tax credits, and additional guidance that may be issued during 2018 in order to further update the estimated deemed repatriation calculation as necessary under SAB 118. Arconic has not yet gathered, prepared and analyzed all the necessary information in sufficient detail to determine whether any excess foreign tax credits that may result from the deemed repatriation will be realizable.
Provisional estimates of the impact of the 2017 Act on the realizability of certain deferred tax assets, including, but not limited to, foreign tax credits, AMT credits, and state tax loss carryforwards have been made based on information and computations that were available, prepared, and analyzed as of February 2, 2018. Through June 30, 2018, there were no changes to the estimates used to evaluate the realizability of deferred tax assets. Further analysis, or the issuance of additional guidance, could result in changes to the realizability of deferred tax assets.
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. In the fourth quarter of 2017, Arconic had no plans to distribute such earnings in the foreseeable future and considered that conclusion to be incomplete under SAB 118. There is no change to this conclusion through June 30, 2018.
The 2017 Act creates 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). Arconic

16


anticipates that it will be subject to GILTI and has included an estimate of GILTI in the calculation of the 2018 estimated annual effective tax rate. At this time, Arconic does not anticipate being subject to BEAT for 2018. In the first quarter ended March 31, 2018, Arconic made a final accounting policy election to treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.
In July 2018, the Company received notification from a foreign tax authority that their inquiry into the 2016 tax return was completed. The uncertain tax position taken on the tax return is effectively settled, and as a result, a previously unrecognized tax benefit of up to approximately $38 would be recognized in the third quarter of 2018 after evaluating the need for a valuation allowance.
Also in July 2018, Spain’s National Court upheld an assessment against the Company related to the 2006 through 2009 tax years. Arconic is preparing to petition the Supreme Court of Spain to review the National Court’s decision (see Note Q). As a result of the National Court’s decision, the Company will reassess its recognition and measurement of tax benefits related to the uncertain tax positions in the 2006 to 2009 tax years in the third quarter of 2018. The potential impact on the Provision for income taxes could be a charge of up to approximately $59 (€51) which would be recognized in the third quarter of 2018. As discussed in Note Q, under the Tax Matters Agreement, Alcoa Corporation is responsible for 49% of the net liability.
I. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings, after the deduction of preferred stock dividends declared, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The information used to compute basic and diluted EPS attributable to Arconic common shareholders was as follows (shares in millions):
 
Second quarter ended

Six months ended
 
June 30,

June 30,
 
2018
 
2017

2018
 
2017
Net income
$
120

 
$
212

 
$
263

 
$
534

Less: Preferred stock dividends declared
—

 
(18
)
 
(1
)
 
(35
)
Net income available to Arconic common shareholders - basic
120

 
194



262

 
499

Add: Interest expense related to convertible notes
3

 
2

 
6

 
4

Add: Dividends related to mandatory convertible preferred stock
—

 
—

 
—

 
34

Net income available to Arconic common shareholders - diluted
$
123

 
$
196

—

$
268

 
$
537

 
 
 
 
 
 
 
 
Average shares outstanding - basic
483

 
441

 
483

 
440

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
—

 
2

 
—

 
2

Stock and performance awards
5

 
5

 
5

 
5

Mandatory convertible preferred stock
—

 
—

 
—

 
39

Convertible notes
14

 
14

 
14

 
14

Average shares outstanding - diluted
502

 
462

 
502

 
500

The following shares were excluded from the calculation of average shares outstanding – diluted as their effect was anti-dilutive (shares in millions).
 
Second quarter ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Mandatory convertible preferred stock
—

 
39

 
—

 
—

Stock options(1)
9

 
7

 
9

 
7

(1) 
The average exercise price of options per share was $26.80 for the second quarter and six months ended June 30, 2018 and $28.85 for the second quarter and six months ended June 30, 2017.

17


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
Second quarter ended June 30,
2018
 
2017
 
2018
 
2017
Pension and other postretirement benefits (G)
 
 
 
 
 
 
 
Balance at beginning of period
$
(2,087
)
 
$
(1,979
)

$
—

 
$
—

Other comprehensive income:
 
 
 
 
 
 
 
Unrecognized net actuarial loss and prior service cost/benefit
(15
)
 
17


—

 
—

Tax benefit (expense)
3

 
(5
)

—

 
—

Total Other comprehensive (loss) income before reclassifications, net of tax
(12
)
 
12

 
—

 
—

Amortization of net actuarial loss and prior service cost(1)
52

 
56


—

 
—

Tax expense(2)
(11
)
 
(20
)

—

 
—

Total amount reclassified from Accumulated other comprehensive loss, net of tax(5)
41

 
36

 
—

 
—

Total Other comprehensive income
29

 
48

 
—

 
—

Balance at end of period
$
(2,058
)
 
$
(1,931
)

$
—

 
$
—

Foreign currency translation
 
 
 
 
 
 
 
Balance at beginning of period
$
(315
)
 
$
(622
)

$
—

 
$
(2
)
Other comprehensive (loss) income(3)
(201
)
 
99


—

 
—

Balance at end of period
$
(516
)
 
$
(523
)
 
$
—

 
$
(2
)
Available-for-sale securities
 
 
 
 
 
 
 
Balance at beginning of period
$
(2
)
 
$
99


$
—

 
$
—

Other comprehensive loss(4)
(2
)
 
(101
)

—

 
—

Balance at end of period
$
(4
)
 
$
(2
)
 
$
—

 
$
—

Cash flow hedges
 
 
 
 
 
 
 
Balance at beginning of period
$
18

 
$
4

 
$
—

 
$
—

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net change from periodic revaluations
9

 
(4
)
 
—

 
—

Tax (expense) benefit
(1
)
 
1

 
—

 
—

Total Other comprehensive income (loss) before reclassifications, net of tax
8

 
(3
)
 
—

 
—

Net amount reclassified to earnings
(4
)
 
1

 
—

 
—

Tax benefit(2)
—

 
—

 
—

 
—

Total amount reclassified from Accumulated other comprehensive loss, net of tax(5)
(4
)
 
1

 
—

 
—

Total Other comprehensive income (loss)
4

 
(2
)
 
—

 
—

Balance at end of period
$
22

 
$
2

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Total balance at end of period
$
(2,556
)
 
$
(2,454
)
 
$
—

 
$
(2
)
 
(1) 
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note G).
(2) 
These amounts were included in Provision for income taxes on the accompanying Statement of Consolidated Operations.
(3) 
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
(4) 
Realized gains and losses were included in Other expense (income), net on the accompanying Statement of Consolidated Operations.
(5) 
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.

18


 
Arconic
 
Noncontrolling Interests
Six months ended June 30,
2018
 
2017
 
2018
 
2017
Pension and other postretirement benefits (G)
 
 
 
 
 
 
 
Balance at beginning of period
$
(2,230
)
 
$
(2,010
)
 
$
—

 
$
—

Other comprehensive income:
 
 
 
 
 
 
 
Unrecognized net actuarial loss and prior service cost/benefit
122

 
11

 
—

 
—

Tax expense
(28
)
 
(4
)
 
—

 
—

Total Other comprehensive income before reclassifications, net of tax
94

 
7

 
—

 
—

Amortization of net actuarial loss and prior service cost(1)
100

 
111

 
—

 
—

Tax expense(2)
(22
)
 
(39
)
 
—

 
—

Total amount reclassified from Accumulated other comprehensive loss, net of tax(5)
78

 
72

 
—

 
—

Total Other comprehensive income
172

 
79

 
—

 
—

Balance at end of period
$
(2,058
)
 
$
(1,931
)
 
$
—

 
$
—

Foreign currency translation
 
 
 
 
 
 
 
Balance at beginning of period
$
(437
)
 
$
(689
)
 
$
—

 
$
(2
)
Other comprehensive (loss) income(3)
(79
)
 
166

 
—

 
—

Balance at end of period
$
(516
)
 
$
(523
)
 
$
—

 
$
(2
)
Available-for-sale securities
 
 
 
 
 
 
 
Balance at beginning of period
$
(2
)
 
$
132

 
$
—

 
$
—

Other comprehensive loss(4)
(2
)
 
(134
)
 
—

 
—