Item 8. Financial Statements and Supplementary Data.
Management’s Reports to Arconic Corporation Stockholders
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Arconic Corporation and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity, in accordance with accounting principles generally accepted in the United States of America (GAAP) and include amounts that are based on management’s best judgments and estimates. The other financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 is consistent with that in the Consolidated Financial Statements.
Management 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, as defined in Rules 13a-15(f) and 15d-15(f) of the U.S. Securities Exchange Act of 1934 (as amended), for the Company. The 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 GAAP. 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 GAAP, 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.
Management conducted an assessment to evaluate the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 using the criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2022.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, as stated in their report, which is included herein.
| | |
/s/ Timothy D. Myers |
Timothy D. Myers
Chief Executive Officer
|
/s/ Erick R. Asmussen |
Erick R. Asmussen
Executive Vice President and
Chief Financial Officer |
February 21, 2023 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Arconic Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Arconic Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive (loss) income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Long-Lived Assets – Extrusions Asset Group
As described in Notes B and E to the consolidated financial statements, the long-lived assets of the Extrusions asset group include properties, plants and equipment, and intangible assets. Management reviews the properties, plants, and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. In September 2022, due to an expected decline in the forecasted financial performance for the Extrusions segment (and asset group), including continued forecasted losses, management evaluated the recoverability of the long-lived assets of the Extrusions asset group by comparing the aggregate carrying value to the undiscounted future cash flows. The result was that the long-lived assets were deemed by management to be impaired and the amount of the impairment charge was measured as the difference between the aggregate carrying value and the aggregate fair value of the long-lived assets. Fair value was determined by management using an orderly liquidation methodology for machinery and equipment and a sales comparison approach for land and structures. Significant judgments and assumptions were applied in estimating the fair value of the long-lived assets, including the use of market-based information specific to the machinery and equipment and information from recent sales or current listings of comparable properties for the land and structures. As a result of the evaluation, management recognized an impairment charge of $90 million for properties, plants, and equipment of the Extrusions asset group.
The principal considerations for our determination that performing procedures relating to the valuation of long-lived assets of the Extrusions asset group is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the machinery, equipment, land and structures of the Extrusions asset group; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s valuation methods and significant assumptions related to market based information for machinery and equipment and information from recent sales or current listings of comparable properties for land and structures; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
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 the valuation of the long-lived assets of the Extrusion asset group, including controls over valuation of the machinery, equipment, land and structures. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the machinery, equipment, land and structures; (ii) evaluating the appropriateness of the valuation methods; (iii) testing the completeness and accuracy of underlying data used in the valuation methods; and (iv) evaluating the reasonableness of the significant assumptions used by management related to market based information for machinery and equipment and information from recent sales or current listings of comparable properties for the land and structures. Evaluating management’s significant assumptions related to market based information for machinery and equipment and information from recent sales or current listings of comparable properties for the land and structures involved evaluating whether the assumptions used by management were reasonable considering (i) historical cost and salvage information of assets within the asset group; (ii) the consistency with comparable salvage values, and sales or listings of comparable properties; and (iii) 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 estimates of fair value of the machinery, equipment, land and structures of the Extrusions asset group.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 21, 2023
We have served as the Company’s auditor since 2019.
Arconic Corporation and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| | $ | 8,961 | | | $ | 7,504 | | | $ | 5,675 | |
Cost of goods sold (exclusive of expenses below) | | 8,032 | | | 6,573 | | | 4,862 | |
| Selling, general administrative, and other expenses | | 246 | | | 247 | | | 258 | |
| Research and development expenses | | 37 | | | 34 | | | 36 | |
| Provision for depreciation and amortization | | 237 | | | 253 | | | 251 | |
Impairment of goodwill (B & O) | | — | | | 65 | | | — | |
Restructuring and other charges (E) | | 456 | | | 624 | | | 188 | |
| Operating (loss) income | | (47) | | | (292) | | | 80 | |
| | 104 | | | 100 | | | 118 | |
| | 41 | | | 67 | | | 70 | |
| Loss before income taxes | | (192) | | | (459) | | | (108) | |
(Benefit) Provision for income taxes (I) | | (11) | | | (62) | | | 1 | |
| Net loss | | (181) | | | (397) | | | (109) | |
| Less: Net income attributable to noncontrolling interest | | 1 | | | — | | | — | |
| Net loss attributable to Arconic Corporation | | $ | (182) | | | $ | (397) | | | $ | (109) | |
| | | | | | |
Earnings Per Share Attributable to Arconic Corporation Common Stockholders (J): | | | | | | |
| Basic | | $ | (1.75) | | | $ | (3.65) | | | $ | (1.00) | |
| Diluted | | $ | (1.75) | | | $ | (3.65) | | | $ | (1.00) | |
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Statement of Consolidated Comprehensive (Loss) Income
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Arconic Corporation | | Noncontrolling interest | | Total |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Net loss | | $ | (182) | | | $ | (397) | | | $ | (109) | | | $ | 1 | | | $ | — | | | $ | — | | | $ | (181) | | | $ | (397) | | | $ | (109) | |
Other comprehensive income, net of tax (L): | | | | | | | | | | | | | | | | | | |
| Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | | 229 | | | 670 | | | 54 | | | — | | | — | | | — | | | 229 | | | 670 | | | 54 | |
| Foreign currency translation adjustments | | (76) | | | (4) | | | 87 | | | — | | | — | | | — | | | (76) | | | (4) | | | 87 | |
| Net change in unrecognized losses on cash flow hedges | | 21 | | | (16) | | | 5 | | | — | | | — | | | — | | | 21 | | | (16) | | | 5 | |
| Total Other comprehensive income, net of tax | | 174 | | | 650 | | | 146 | | | — | | | — | | | — | | | 174 | | | 650 | | | 146 | |
| Comprehensive (loss) income | | $ | (8) | | | $ | 253 | | | $ | 37 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | (7) | | | $ | 253 | | | $ | 37 | |
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Consolidated Balance Sheet
(in millions)
| | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 261 | | | $ | 335 | |
Receivables from customers, less allowances of $1 in both 2022 and 2021 (V) | | 791 | | | 922 | |
| Other receivables | | 183 | | | 226 | |
| | 1,622 | | | 1,630 | |
Fair value of hedging instruments and derivatives (U) | | 21 | | | 1 | |
Prepaid expenses and other current assets (T) | | 124 | | | 54 | |
| Total current assets | | 3,002 | | | 3,168 | |
Properties, plants, and equipment, net (N) | | 2,361 | | | 2,651 | |
| | 292 | | | 322 | |
Operating lease right-of-use assets (P) | | 115 | | | 122 | |
Deferred income taxes (I) | | 188 | | | 229 | |
| Other noncurrent assets | | 57 | | | 88 | |
| Total assets | | $ | 6,015 | | | $ | 6,580 | |
| Liabilities | | | | |
| Current liabilities: | | | | |
| Accounts payable, trade | | $ | 1,578 | | | $ | 1,718 | |
| Accrued compensation and retirement costs | | 119 | | | 116 | |
| Taxes, including income taxes | | 43 | | | 61 | |
Environmental remediation (T) | | 40 | | | 15 | |
Operating lease liabilities (P) | | 34 | | | 35 | |
Fair value of hedging instruments and derivatives (U) | | 7 | | | 23 | |
Other current liabilities (T) | | 150 | | | 95 | |
| Total current liabilities | | 1,971 | | | 2,063 | |
| | 1,597 | | | 1,594 | |
Accrued pension benefits (H) | | 586 | | | 717 | |
Accrued other postretirement benefits (H) | | 302 | | | 411 | |
Environmental remediation (T) | | 45 | | | 49 | |
Operating lease liabilities (P) | | 83 | | | 90 | |
Deferred income taxes (I) | | 3 | | | 12 | |
| Other noncurrent liabilities | | 71 | | | 85 | |
| Total liabilities | | 4,658 | | | 5,021 | |
Contingencies and commitments (T) | | | | |
| Equity | | | | |
| Arconic Corporation stockholders’ equity: | | | | |
| | 1 | | | 1 | |
| Additional capital | | 3,373 | | | 3,368 | |
| Accumulated deficit | | (734) | | | (552) | |
| | (346) | | | (161) | |
Accumulated other comprehensive loss (L) | | (937) | | | (1,111) | |
| Total Arconic Corporation stockholders’ equity | | 1,357 | | | 1,545 | |
Noncontrolling interest (S) | | — | | | 14 | |
| Total equity | | 1,357 | | | 1,559 | |
| Total liabilities and equity | | $ | 6,015 | | | $ | 6,580 | |
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Statement of Consolidated Cash Flows
(in millions) | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| Operating Activities | | | | | | |
| Net loss | | $ | (181) | | | $ | (397) | | | $ | (109) | |
| Adjustments to reconcile net loss to cash provided from (used for) operations: | | | | | | |
| Depreciation and amortization | | 237 | | | 253 | | | 251 | |
Impairment of goodwill (B & O) | | — | | | 65 | | | — | |
Deferred income taxes (I) | | (45) | | | (100) | | | (16) | |
Restructuring and other charges (E) | | 456 | | | 624 | | | 188 | |
Net periodic pension benefit cost (H) | | 81 | | | 68 | | | 82 | |
Stock-based compensation (K) | | 15 | | | 22 | | | 23 | |
Amortization of debt issuance costs (Q) | | 5 | | | 5 | | | 25 | |
| Other | | 4 | | | 16 | | | (1) | |
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | | | | | | |
Decrease (Increase) in receivables (V) | | 34 | | | (381) | | | (235) | |
| (Increase) Decrease in inventories | | (149) | | | (596) | | | 65 | |
| (Increase) in prepaid expenses and other current assets | | (80) | | | (1) | | | (16) | |
| (Decrease) Increase in accounts payable, trade | | (67) | | | 581 | | | 82 | |
| Increase (Decrease) in accrued expenses | | 38 | | | (129) | | | (217) | |
| Increase in taxes, including income taxes | | 2 | | | 21 | | | 99 | |
Pension contributions (H) | | (31) | | | (458) | | | (271) | |
| (Increase) Decrease in noncurrent assets | | (6) | | | (8) | | | 35 | |
| Increase in noncurrent liabilities | | 25 | | | 8 | | | 21 | |
| Cash provided from (used for) operations | | 338 | | | (407) | | | 6 | |
| Financing Activities | | | | | | |
| Net transfers from former parent company | | — | | | — | | | 216 | |
Separation payment to former parent company (A) | | — | | | — | | | (728) | |
Additions to debt (original maturities greater than three months) (Q) | | — | | | 319 | | | 2,400 | |
| | (1) | | | (5) | | | (57) | |
Payments on debt (original maturities greater than three months) (Q) | | — | | | — | | | (1,100) | |
Repurchases of common stock (K) | | (185) | | | (161) | | | — | |
| Other | | (10) | | | (18) | | | 13 | |
| Cash (used for) provided from financing activities | | (196) | | | 135 | | | 744 | |
| Investing Activities | | | | | | |
| Capital expenditures | | (245) | | | (184) | | | (163) | |
Proceeds from the sale of assets and businesses (S) | | 30 | | | (1) | | | 125 | |
| Other | | 1 | | | 4 | | | — | |
| Cash used for investing activities | | (214) | | | (181) | | | (38) | |
Effect of exchange rate changes on cash and cash equivalents
and restricted cash | | (2) | | | 1 | | | 3 | |
| Net change in cash and cash equivalents and restricted cash | | (74) | | | (452) | | | 715 | |
Cash and cash equivalents and restricted cash at beginning of year (R) | | 335 | | | 787 | | | 72 | |
Cash and cash equivalents and restricted cash at end of year (R) | | $ | 261 | | | $ | 335 | | | $ | 787 | |
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Statement of Changes in Consolidated Equity
(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common shares outstanding | | Common stock | | Additional capital | | Accumulated deficit | | Treasury stock | | Parent
Company net
investment | | Accumulated
other
comprehensive
income (loss) | | Noncontrolling
interest | | Total
equity |
| Balance at December 31, 2019 | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,664 | | | $ | 295 | | | $ | 14 | | | $ | 2,973 | |
| Net (loss) income | | — | | | — | | | — | | | (155) | | | — | | | 46 | | | — | | | — | | | (109) | |
Other comprehensive income (L) | | — | | | — | | | — | | | — | | | — | | | — | | | 146 | | | — | | | 146 | |
Establishment of additional defined benefit plans (H) | | — | | | — | | | — | | | — | | | — | | | 349 | | | (1,752) | | | — | | | (1,403) | |
| Change in ParentCo contribution | | — | | | — | | | — | | | — | | | — | | | 217 | | | — | | | — | | | 217 | |
Separation payment to former parent company (A) | | — | | | — | | | — | | | — | | | — | | | (728) | | | — | | | — | | | (728) | |
Separation-related adjustments | | — | | | — | | | 3,334 | | | — | | | — | | | (2,548) | | | (450) | | | — | | | 336 | |
Issuance of common stock (K) | | 109,021,376 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation (K) | | 183,850 | | | — | | | 15 | | | — | | | — | | | — | | | — | | | — | | | 15 | |
| Balance at December 31, 2020 | | 109,205,226 | | | $ | 1 | | | $ | 3,348 | | | $ | (155) | | | $ | — | | | $ | — | | | $ | (1,761) | | | $ | 14 | | | $ | 1,447 | |
| Net loss | | — | | | — | | | — | | | (397) | | | — | | | — | | | — | | | — | | | (397) | |
Other comprehensive
income (L) | | — | | | — | | | — | | | — | | | — | | | — | | | 650 | | | — | | | 650 | |
Repurchases of common stock (K) | | (4,912,505) | | | — | | | — | | | — | | | (161) | | | — | | | — | | | — | | | (161) | |
Stock-based compensation (K) | | 1,034,164 | | | — | | | 22 | | | — | | | — | | | — | | | — | | | — | | | 22 | |
Other | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | | | (2) | |
| Balance at December 31, 2021 | | 105,326,885 | | | $ | 1 | | | $ | 3,368 | | | $ | (552) | | | $ | (161) | | | $ | — | | | $ | (1,111) | | | $ | 14 | | | $ | 1,559 | |
| Net (loss) income | | — | | | — | | | — | | | (182) | | | — | | | — | | | — | | | 1 | | | (181) | |
Other comprehensive income (L) | | — | | | — | | | — | | | — | | | — | | | — | | | 174 | | | — | | | 174 | |
Repurchases of common stock (K) | | (6,935,507) | | | — | | | — | | | — | | | (185) | | | — | | | — | | | — | | | (185) | |
Stock-based compensation (K) | | 1,040,816 | | | — | | | 15 | | | — | | | — | | | — | | | — | | | — | | | 15 | |
| | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15) | | | (15) | |
| Other | | — | | | — | | | (10) | | | — | | | — | | | — | | | — | | | — | | | (10) | |
| Balance at December 31, 2022 | | 99,432,194 | | | $ | 1 | | | $ | 3,373 | | | $ | (734) | | | $ | (346) | | | $ | — | | | $ | (937) | | | $ | — | | | $ | 1,357 | |
| | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except per-share amounts)
A. Basis of Presentation
Arconic Corporation (“Arconic” or the “Company”) is a manufacturer of fabricated aluminum products, including sheet and plate, extrusions, and architectural products and systems, with a primary focus on the ground transportation, aerospace, building and construction, industrial products, and packaging end markets. The Company has 20 primary operating locations in 7 countries around the world, situated in the United States, Canada, China, France, Germany, Hungary, and the United Kingdom. Arconic’s previous operations in Russia were divested in November 2022 (see Note S). In the 2022 fourth quarter, Arconic recorded an adjustment of $9 in Cost of goods sold to increase its environmental reserves to correct the accrual related to anticipated costs associated with the Company’s obligations to perform future operations, maintenance, and monitoring (OM&M) activities, as required by federal, state, and/or local environmental agencies, at several environmental remediation sites. The adjustment was derived from a site-by-site analysis based upon OM&M plans submitted to respective environmental regulatory agencies, and resulted in extending the time horizon for OM&M costs. Management has concluded that the impact was not material to any previously reported periods.
In the 2022 first quarter, the Company recorded a net gain of $3 in Cost of goods sold related to the unrealized impact associated with the change in the estimated fair value of natural gas supply contracts now determined to be derivatives (see Note U). This amount was comprised of an unrealized loss of $5 for the 2022 first quarter, an unrealized gain of $6 for the 2021 annual period, and an unrealized gain of $2 for the 2020 fourth quarter. The out-of-period amounts were not material to any interim or annual period. References in these Notes to (i) “ParentCo” refer to Arconic Inc., a Delaware corporation, and its consolidated subsidiaries (through March 31, 2020, at which time it was renamed Howmet Aerospace Inc. (“Howmet”)), and (ii) “2016 Separation Transaction” refer to the November 1, 2016 separation of Alcoa Inc., a Pennsylvania corporation, into two standalone, publicly-traded companies, Arconic Inc. and Alcoa Corporation.
The Separation. On April 1, 2020 (the “Separation Date”), ParentCo separated into two standalone, publicly-traded companies, Arconic and Howmet, effective at 12:01 a.m. Eastern Daylight Time (the “Separation”). The spin-off company, Arconic, comprised the rolled aluminum products, aluminum extrusions, and architectural products operations of ParentCo, as well as the Latin America extrusions operations sold in April 2018, (collectively, the “Arconic Corporation Businesses”). The existing publicly-traded company, Howmet, continued to own the engine products, engineered structures, fastening systems, and forged wheels operations (collectively, the “Howmet Aerospace Businesses”). ParentCo common stockholders of record as of the close of business on March 19, 2020 (the “Record Date”) received one share of Arconic common stock for every four shares of ParentCo common stock (the “Separation Ratio”) held as of the Record Date (ParentCo paid cash to its common stockholders in lieu of fractional shares).
To effect the Separation, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in a cash payment of $728 to ParentCo by Arconic from a portion of the aggregate net proceeds of previously executed financing arrangements (see Note Q). In connection with the Separation, 109,021,376 shares of Arconic common stock were distributed to ParentCo stockholders. This was determined by applying the Separation Ratio to the 436,085,504 shares of ParentCo’s outstanding common stock as of the Record Date. “Regular-way” trading of Arconic’s common stock began with the opening of the New York Stock Exchange on April 1, 2020 under the ticker symbol “ARNC.” Arconic’s common stock has a par value of $0.01 per share. In connection with the Separation, Arconic and Howmet entered into several agreements to implement the legal and structural separation between the two companies; govern the relationship between Arconic and Howmet after the completion of the Separation; and allocate between Arconic and Howmet various assets, liabilities, and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities. These agreements included a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, and certain Patent, Know-How, Trade Secret License and Trademark License Agreements. The Separation and Distribution Agreement identified the assets to be transferred, the liabilities to be assumed, and the contracts to be transferred to each of Arconic and Howmet as part of the Separation, and provided for when and how these transfers and assumptions were to occur.
ParentCo incurred costs to evaluate, plan, and execute the Separation, and Arconic was allocated a pro rata portion of these costs based on segment revenue (see Cost Allocations below). ParentCo recognized $38 from January 1, 2020 through March 31, 2020 (the “2020 Pre-Separation Period”) for such costs, of which $18 was allocated to Arconic. The allocated amounts were included in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations.
Basis of Presentation. The Consolidated Financial Statements of Arconic are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience. Management has made its best estimates using all relevant information available at the time.
Principles of Consolidation. The Consolidated Financial Statements of the Company include the accounts of Arconic and companies in which Arconic has a controlling interest. Intercompany transactions have been eliminated.
Management evaluates whether an Arconic entity or interest is a variable interest entity and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met. Arconic does not have any variable interest entities requiring consolidation.
Prior to the Separation Date, the Company did not operate as a separate, standalone entity. Arconic’s operations were included in ParentCo’s financial results. Accordingly, in all periods prior to the Separation Date, the accompanying Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if the Arconic Corporation Businesses had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise the Arconic Corporation Businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to the Arconic Corporation Businesses. ParentCo’s net investment in these operations was reflected as Parent Company net investment on the accompanying Consolidated Financial Statements. All significant transactions and accounts within the Arconic Corporation Businesses were eliminated. All significant intercompany transactions between ParentCo and the Arconic Corporation Businesses were included within Parent Company net investment on the accompanying Consolidated Financial Statements.
Cost Allocations. The description and information on cost allocations is applicable for all periods prior to the Separation Date presented in the accompanying Consolidated Financial Statements.
The Consolidated Financial Statements of Arconic include general corporate expenses of ParentCo that were not historically charged to the Arconic Corporation Businesses for certain support functions that were provided on a centralized basis, such as expenses related to finance, audit, legal, information technology, human resources, communications, compliance, facilities, employee benefits and compensation, and research and development activities. These general corporate expenses were reported on the accompanying Statement of Consolidated Operations within Cost of goods sold, Selling, general administrative and other expenses, and Research and development expenses. These expenses were allocated to the Arconic Corporation Businesses on the basis of direct usage when identifiable, with the remainder allocated based on the Arconic Corporation Businesses’ segment revenue as a percentage of ParentCo’s total segment revenue, as reported in the respective periods.
All external debt not directly attributable to the Arconic Corporation Businesses was excluded from the Company’s Consolidated Balance Sheet. Financing costs related to these debt obligations were allocated to the Arconic Corporation Businesses based on the ratio of capital invested by ParentCo in the Arconic Corporation Businesses to the total capital invested by ParentCo in both the Arconic Corporation Businesses and the Howmet Aerospace Businesses and were included on the accompanying Statement of Consolidated Operations within Interest expense.
The following table reflects the allocations described above:
| | | | | | | | | | | |
| | | 2020 |
Selling, general administrative, and other expenses* | | | $ | 25 | |
| Provision for depreciation and amortization | | | 1 | |
Restructuring and other charges (E) | | | 2 | |
| | | 28 | |
Other (income), net | | | (5) | |
_____________________
*In the 2020 Pre-Separation Period, amount includes an allocation of $18 for costs incurred by ParentCo associated with the Separation (see The Separation above).
Management believes the assumptions regarding the allocation of ParentCo’s general corporate expenses and financing costs were reasonable.
Nevertheless, the Company’s Consolidated Financial Statements may not include all of the actual expenses that would have been incurred and may not reflect Arconic’s consolidated results of operations, financial position, and cash flows had it been a standalone company during the periods prior to the Separation Date. Actual costs that would have been incurred if Arconic had been a standalone company would depend on multiple factors, including organizational structure, capital structure, and strategic decisions made in various areas, including information technology and infrastructure. Transactions between the Arconic Corporation Businesses and ParentCo, including sales to the Howmet Aerospace Businesses, were considered to be effectively settled for cash at the time the transaction was recorded. The total net effect of the settlement of these transactions was reported on the accompanying Statement of Consolidated Cash Flows as a financing activity and on Arconic’s Consolidated Balance Sheet as Parent Company net investment.
Cash Management. Prior to the Separation Date, cash was managed centrally with certain net earnings reinvested locally and working capital requirements met from existing liquid funds. Accordingly, the cash and cash equivalents held by ParentCo at the corporate level were not attributed to the Arconic Corporation Businesses in any period presented in the accompanying Consolidated Financial Statements that was prior to the Separation Date. Only cash amounts specifically attributable to the Arconic Corporation Businesses were reported in the accompanying Consolidated Financial Statements for any period presented that was prior to the Separation Date. Transfers of cash, both to and from ParentCo’s centralized cash management system, were reported as a component of Parent Company net investment on Arconic’s Consolidated Balance Sheet and as a financing activity on the accompanying Statement of Consolidated Cash Flows.
B. Summary of Significant Accounting Policies
Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. In all periods prior to the Separation Date, the cash and cash equivalents held by ParentCo at the corporate level were not attributed to the Arconic Corporation Businesses. Only cash amounts specifically attributable to the Arconic Corporation Businesses were reported on the Company’s Consolidated Financial Statements.
Inventory Valuation. Inventories are carried at the lower of cost and net realizable value, with cost for most inventories determined under the average cost method. The cost of certain non-U.S. inventories is determined under the first in, first out (FIFO) method.
Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Also, interest related to the construction of qualifying assets is capitalized as part of the construction costs. Depreciation is recorded 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 |
| Rolled Products | 32 | | 22 |
| Building and Construction Systems | 25 | | 18 |
| Extrusions | 32 | | 20 |
Repairs and maintenance are charged to expense as incurred. Generally, gains or losses from the sale of asset groups are recorded in Restructuring and other charges while gains and losses from the sale of individual assets are recorded in Other expenses (income), net.
Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the related operations (asset group) to the carrying value of the associated assets. An impairment loss would be recognized when the carrying value of the assets exceeds the estimated undiscounted net cash flows of the asset group. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. In certain circumstances, Arconic may use the services of a third-party to assist with other valuation techniques. 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.
Goodwill. Goodwill is not amortized; 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, exit, or realign a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, 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. The fair value that could be realized in an actual transaction may differ from that used to evaluate goodwill for impairment.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Arconic has three reporting units, the Rolled Products segment, the Building and Construction Systems segment, and the Extrusions segment (full impairment of goodwill in 2021 – see below). At the time of the Company’s annual 2022 review of goodwill for impairment, the carrying value of goodwill for Rolled Products and Building and Construction Systems was $232 and $67, respectively.
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 a 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. The Company’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 2022 annual review of goodwill for impairment, management performed the qualitative assessment for the Building and Construction Systems reporting unit. Management concluded it was not more likely than not that the estimated fair value of this reporting unit was less than the carrying value. As such, no further analysis was required. Management last proceeded directly to the quantitative impairment test for the Building and Construction Systems reporting unit in 2021. At that time, the estimated fair value of this reporting unit was substantially in excess of its carrying value, resulting in no impairment.
Under the quantitative impairment test, the evaluation of the recoverability of goodwill 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. Several 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, working capital levels, and discount rate. Certain of these assumptions may vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit five-year operating plans and a terminal value. The WACC rate for the individual reporting units is estimated by management with the assistance of valuation experts. In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, the Company would recognize an impairment charge equal to the excess of the reporting unit’s carrying value over its fair value without exceeding the total amount of goodwill applicable to that reporting unit.
During the 2022 annual review of goodwill for impairment, management proceeded directly to the quantitative impairment test for the Rolled Products reporting unit. The result of this review indicated the estimated fair value of this reporting unit was substantially in excess of the carrying value, resulting in no impairment.
The respective annual review of goodwill for impairment in 2021 and 2020 indicated that goodwill was not impaired for any of Arconic’s reporting units, except for the Extrusions segment (see below), and there were no triggering events since that time that necessitated an interim quantitative impairment test for any of the Company’s reporting units. That said, in light of the
economic impact of the COVID-19 pandemic (i.e., stock market volatility, customer demand disruption, etc.), Arconic did perform periodic qualitative assessments throughout 2020 in which management concluded that no impairment existed and, therefore, no further analysis was required.
In 2021, the estimated fair value of the Extrusions reporting unit was lower than the associated carrying value by an amount greater than the carrying value of the Extrusions reporting unit’s goodwill. Accordingly, the Company recorded an impairment charge of $65 in the fourth quarter of 2021. As a result, there is no goodwill remaining for the Extrusions reporting unit.
The impairment of the Extrusion reporting unit’s goodwill resulted from a combination of market-based factors, including continued delays in aerospace market improvement, the expectation that significant cost inflation will extend beyond 2021 resulting in increasingly limited ability for management to drive margin expansion, and a longer than previously anticipated shift in product mix to lower margin industrial products to replace most of the lost aerospace volume. Further, current market factors also resulted in a 150-basis point increase in the WACC compared to the fourth quarter of 2020. Accordingly, given these factors, the estimated fair value of the Extrusions reporting unit was less than the carrying value resulting in a full impairment of its goodwill.
Other Intangible Assets. Intangible assets with finite useful lives are amortized 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 |
| Rolled Products | 8 | | — |
| Building and Construction Systems | 4 | | 20 |
| Extrusions | 3 | | 10 |
Leases. Arconic determines whether a contract contains a lease at inception. The Company leases certain 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 Arconic’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. Also, 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.
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 calculated at the lease commencement date and are recognized as lease expense on a straight-line basis over the lease term. Arconic 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 the Company’s leases do not provide an implicit rate. The operating lease right-of-use assets also include any lease prepayments made and are 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 revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not reduced by potential claims for recovery, which are recognized when probable and as agreements are reached with third parties. The estimates may 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. The portion of the liability associated with post-remediation operations, maintenance, and monitoring activities are discounted using a risk-free-rate.
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, among others, 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. 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, the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine the probability 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 generally comprised of acknowledged purchase orders incorporating Arconic’s standard terms and conditions, or for larger customers, may also generally include terms under negotiated multi-year agreements. These customer contracts 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 aluminum sheet and plate; extruded and machined parts; integrated aluminum architectural systems; and architectural extrusions. Transfer of control is assessed based on alternative use of the products produced and Arconic’s 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).
In certain circumstances, the Company 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 reported in Other current liabilities and Other noncurrent liabilities on the Consolidated Balance Sheet.
Pension and Other Postretirement Benefits. In all periods prior to January 1, 2020 (see below), certain employees attributable to the Arconic Corporation Businesses participated in defined benefit pension and other postretirement benefit plans sponsored by ParentCo (the “Shared Plans”), which also included participants attributable to non-Arconic Corporation Businesses. Arconic accounted for the portion of the Shared Plans related to its employees as multiemployer benefit plans. Accordingly, the Company did not record an asset or liability to recognize any portion of the funded status of the Shared Plans. However, the related expense recorded by Arconic was based primarily on pensionable compensation and estimated interest costs related to participants attributable to the Arconic Corporation Businesses.
In all periods prior to the Separation Date, certain other ParentCo plans that were entirely attributable to employees of the Arconic Corporation Businesses (“Direct Plans”) were accounted for as defined benefit pension and other postretirement benefit plans. Accordingly, the funded or unfunded position of each Direct Plan was recorded in the Consolidated Balance Sheet. Actuarial gains and losses that have not yet been recognized in earnings were recorded in accumulated other comprehensive income, net of taxes, until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to the Direct Plans is dependent on various assumptions, including, among others, discount rates, long-term expected rates of return on plan assets, and future compensation increases. ParentCo’s management developed each assumption using relevant company experience in conjunction with market-related data for each individual location in which such plans exist.
In preparation for the Separation, effective January 1, 2020, certain of the Shared Plans were separated into standalone plans for both Arconic (“New Direct Plans”) and ParentCo (see Note H). Additionally, effective April 1, 2020, portions of the other remaining Shared Plans were assumed by Arconic (“Additional New Direct Plans”) (see Note H). Accordingly, beginning on the respective effective dates, the New Direct Plans and the Additional New Direct Plans are accounted for as defined benefit pension and other postretirement plans. Additionally, the Direct Plans continue to be accounted for as defined benefit pension and other postretirement plans. Stock-Based Compensation. In all periods prior to the Separation Date, eligible employees attributable to the Arconic Corporation Businesses participated in ParentCo’s stock-based compensation plan. The compensation expense recorded by the Company included the expense associated with these employees, as well as the expense associated with an allocation of stock-based compensation expense for ParentCo’s corporate employees (see Cost Allocations in Note A). Beginning on the Separation Date, Arconic recorded stock-based compensation expense for all of the Company's employees eligible to participate in Arconic’s stock-based compensation plan. The following describes the manner in which stock-based compensation expense was initially determined for both Arconic and ParentCo. Compensation expense for employee equity grants is recognized 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. The fair value of stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance stock units 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.
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.
In all periods prior to the Separation Date, the Arconic Corporation Businesses were included in the income tax filings of ParentCo. The provision for income taxes was determined in the same manner described above, but on a separate return methodology as if the Company was a standalone taxpayer filing hypothetical income tax returns where applicable. Any additional accrued tax liability or refund arising as a result of this approach was assumed to be immediately settled with ParentCo as a component of Parent Company net investment. Deferred taxes were also determined in the same manner described above and were reported in the Consolidated Balance Sheet for net operating losses, credits or other attributes to the extent that such attributes were expected to transfer to Arconic upon the Separation. Any difference from attributes generated in a hypothetical return on a separate return basis was adjusted as a component of Parent Company net investment.
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 the Company’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 grant and lapse of tax holidays.
Arconic applies 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 its 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.
Foreign Currency. The local currency is the functional currency for the Company’s operations outside the United States with the following exception. The U.S. dollar was the functional currency for Arconic’s former operations in Russia (divested in November 2022 - see Note S). The determination of the functional currency for the Company’s operations is made based on the appropriate economic and management indicators. Recently Adopted Accounting Guidance. There was no relevant guidance previously issued by the Financial Accounting Standards Board (FASB) requiring adoption in 2022 by Arconic. FASB guidance adopted in 2021 and 2020 by the Company related to accounting and/or reporting for income taxes, credit losses, and employee defined benefit plans did not have a material impact as previously disclosed in Arconic’s Consolidated Financial Statements issued in the respective periods.
Recently Issued Accounting Guidance. In March 2020, the FASB issued guidance that provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. These expedients and exceptions may be used when applying GAAP, if certain criteria are met, to contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate (LIBOR) or
another reference rate expected to be discontinued because of such reform. The purpose of this guidance is to provide relief to entities from experiencing unintended accounting and/or financial reporting outcomes or consequences due to reference rate reform. This guidance became effective immediately on March 12, 2020 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022, after which time the expedients and exceptions expire (see below). In January 2021, the FASB issued clarifying guidance to specify that certain of the optional expedients and exceptions apply to derivatives that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This additional guidance may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively in the manner previously described for the guidance issued on March 12, 2020. In December 2022, the FASB extended the expiration of the optional expedients and exceptions to June 30, 2023. Through December 31, 2022, the Company has not experienced any unintended outcomes or consequences of reference rate reform that would necessitate the adoption of this guidance. Additionally, Arconic’s credit agreement, which previously provided a credit facility that was referenced to LIBOR in certain borrowing situations, was amended in February 2022 to replace LIBOR with the Secured Oversight Financing Rate (SOFR) (see Note Q). Management will continue to closely monitor all potential instances of reference rate reform to determine if adoption of this guidance becomes necessary in the future. In September 2022, the FASB issued guidance to enhance the transparency of supplier finance programs. Under the new guidance, a buyer in a supplier finance program must disclose at least annually qualitative and quantitative information about its supplier finance programs to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. These changes become effective for Arconic on January 1, 2023. The Company has an existing arrangement with a financial institution that provides for a capacity of up to $250. Other than complying with the disclosure requirements, management has determined that the adoption of this guidance will not have an impact on the Consolidated Financial Statements.
C. Revenue from Contracts with Customers
The following table disaggregates revenue by major end market served. Differences between segment totals and consolidated Arconic are in Corporate.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | Rolled
Products | | Building and
Construction
Systems | | Extrusions | | Total |
| 2022 | | | | | | | | |
| Ground Transportation | | $ | 3,010 | | | $ | — | | | $ | 109 | | | $ | 3,119 | |
| Packaging | | 1,603 | | | — | | | — | | | 1,603 | |
| Building and Construction | | 277 | | | 1,245 | | | — | | | 1,522 | |
| Aerospace | | 764 | | | — | | | 195 | | | 959 | |
| Industrial Products and Other | | 1,659 | | | — | | | 105 | | | 1,764 | |
| Total end-market revenue | | $ | 7,313 | | | $ | 1,245 | | | $ | 409 | | | $ | 8,967 | |
| 2021 | | | | | | | | |
| Ground Transportation | | $ | 2,697 | | | $ | — | | | $ | 102 | | | $ | 2,799 | |
| Packaging | | 1,217 | | | — | | | — | | | 1,217 | |
| Building and Construction | | 244 | | | 1,011 | | | — | | | 1,255 | |
| Aerospace | | 512 | | | — | | | 119 | | | 631 | |
| Industrial Products and Other | | 1,517 | | | — | | | 85 | | | 1,602 | |
| Total end-market revenue | | $ | 6,187 | | | $ | 1,011 | | | $ | 306 | | | $ | 7,504 | |
| 2020 | | | | | | | | |
| Ground Transportation | | $ | 1,761 | | | $ | — | | | $ | 88 | | | $ | 1,849 | |
| Packaging | | 773 | | | — | | | — | | | 773 | |
| Building and Construction | | 154 | | | 963 | | | — | | | 1,117 | |
| Aerospace | | 598 | | | — | | | 222 | | | 820 | |
| Industrial Products and Other | | 1,049 | | | — | | | 71 | | | 1,120 | |
| Total end-market revenue | | $ | 4,335 | | | $ | 963 | | | $ | 381 | | | $ | 5,679 | |
D. Segment and Related Information
Segment Information
Arconic has three operating and reportable segments, which are organized by product on a global basis: Rolled Products, Building and Construction Systems, and Extrusions (see segment descriptions below). The Company determined the chief operating decision maker to be the CEO, who regularly reviews the financial information of these three segments to assess performance and allocate resources.
Arconic’s profit or loss measure for its reportable segments is Segment Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization). The Company calculates Segment Adjusted EBITDA as Total sales (third-party and intersegment) minus each of (i) Cost of goods sold, (ii) Selling, general administrative, and other expenses, and (iii) Research and development expenses, plus each of (i) Stock-based compensation expense, (ii) Metal price lag, and (iii) Unrealized (gains) losses on mark-to-market hedging instruments and derivatives (see below). Arconic’s Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies’ reportable segments.
Effective in the first quarter of 2022, management modified the Company's definition of Segment Adjusted EBITDA to exclude the impact of unrealized gains and losses on mark-to-market hedging instruments and derivatives. This modification was deemed appropriate as Arconic is considering entering in additional hedging instruments in future reporting periods if favorable conditions exist to mitigate cost inflation. Certain of these instruments may not qualify for hedge accounting resulting in unrealized gains and losses being recorded directly to Sales or Cost of goods sold, as appropriate (i.e., mark-to-market). Additionally, this change was also applied to derivatives that do not qualify for hedge accounting for consistency purposes. The Company does not have a regular practice of entering into contracts that are treated as derivatives for accounting purposes. Ultimately, this change was made to maintain the transparency and visibility of the underlying operating performance of Arconic's reportable segments. Prior to this change, the Company had a limited number of hedging instruments and derivatives that did not qualify for hedge accounting, the unrealized impact of which was not material to Arconic’s Segment Adjusted EBITDA performance measure. Accordingly, prior period information presented was not recast to reflect this change.
Segment assets are comprised of customer receivables; inventories; properties, plants, and equipment, net; and goodwill.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note B). Transactions among segments are established based on negotiation among the parties. The following are detailed descriptions of Arconic’s reportable segments:
Rolled Products. This segment produces aluminum sheet and plate for a variety of end markets. Sheet and plate are sold directly to customers and through distributors related to the aerospace, ground transportation, packaging, building and construction, and industrial products (mainly used in the production of machinery and equipment and consumer durables) end markets. A small portion of this segment also produced aseptic foil for the packaging end market prior to February 1, 2020 (see Note S). While the customer base for flat-rolled products is large, a significant amount of sales of sheet and plate is to a relatively small number of customers. Prices for these products are generally based on the price of metal plus a premium for adding value to the aluminum to produce a semi-finished product, resulting in a business model in which the underlying price of metal is contractually passed-through to customers. Building and Construction Systems. This segment manufactures products that are used primarily in the non-residential building and construction end market. These products include integrated aluminum architectural systems and architectural extrusions, which are sold directly to customers and through distributors.
Extrusions. This segment produces a range of extruded and machined parts for the aerospace, ground transportation, and industrial products end markets. These products are sold directly to customers and through distributors. Prices for these products are generally based on the price of metal plus a premium for adding value to the aluminum to produce a semi-finished product, resulting in a business model in which the underlying price of metal is contractually passed-through to customers.
The operating results and assets of Arconic’s reportable segments were as follows (differences between segment totals and Arconic’s consolidated totals for line items not reconciled are in Corporate):
| | | | | | | | | | | | | | | | | | | | | | | |
| Rolled
Products | | Building and
Construction
Systems | | Extrusions | | Total |
| 2022 | | | | | | | |
| Sales: | | | | | | | |
| Third-party sales | $ | 7,313 | | | $ | 1,245 | | | $ | 409 | | | $ | 8,967 | |
| Intersegment sales | 44 | | | — | | | 2 | | | 46 | |
| Total sales | $ | 7,357 | | | $ | 1,245 | | | $ | 411 | | | $ | 9,013 | |
Segment Adjusted EBITDA | $ | 581 | | | $ | 195 | | | $ | (47) | | | $ | 729 | |
| Provision for depreciation and amortization | $ | 190 | | | $ | 17 | | | $ | 18 | | | $ | 225 | |
| 2021 | | | | | | | |
| Sales: | | | | | | | |
| Third-party sales | $ | 6,187 | | | $ | 1,011 | | | $ | 306 | | | $ | 7,504 | |
| Intersegment sales | 33 | | | — | | | 1 | | | 34 | |
| Total sales | $ | 6,220 | | | $ | 1,011 | | | $ | 307 | | | $ | 7,538 | |
Segment Adjusted EBITDA | $ | 655 | | | $ | 130 | | | $ | (28) | | | $ | 757 | |
| Provision for depreciation and amortization | $ | 197 | | | $ | 17 | | | $ | 23 | | | $ | 237 | |
| 2020 | | | | | | | |
| Sales: | | | | | | | |
| Third-party sales | $ | 4,335 | | | $ | 963 | | | $ | 381 | | | $ | 5,679 | |
| Intersegment sales | 19 | | | — | | | 2 | | | 21 | |
| Total sales | $ | 4,354 | | | $ | 963 | | | $ | 383 | | | $ | 5,700 | |
Segment Adjusted EBITDA | $ | 527 | | | $ | 137 | | | $ | (16) | | | $ | 648 | |
| Provision for depreciation and amortization | $ | 192 | | | $ | 18 | | | $ | 25 | | | $ | 235 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | | | | | | |
| Assets: | | | | | | | |
Segment assets(1) | $ | 4,308 | | | $ | 474 | | | $ | 312 | | | $ | 5,094 | |
| Supplemental information: | | | | | | | |
| Capital expenditures | 194 | | | 18 | | | 16 | | | 228 | |
| Goodwill | 224 | | | 68 | | | — | | | 292 | |
| 2021 | | | | | | | |
| Assets: | | | | | | | |
Segment assets(2) | $ | 4,766 | | | $ | 416 | | | $ | 381 | | | $ | 5,563 | |
| Supplemental information: | | | | | | | |
| Capital expenditures | 147 | | | 11 | | | 14 | | | 172 | |
| Goodwill | 253 | | | 69 | | | — | | | 322 | |
_____________________
(1)In the 2022 third quarter, the Extrusions segment recorded a $92 asset impairment charge comprised of $90 for Properties, plants, and equipment and $2 for intangible assets (included within Other noncurrent assets) (see Note E). Also, in November 2022, Arconic completed the sale of all of its operations in Russia (see Note S), which was previously reported in Rolled Products. (2)In the 2021 fourth quarter, the Rolled Products segment recorded a net adjustment of $10 (approximately $7 of which relates to prior quarters in 2021) related to write-downs of scrap inventory. The out-of-period amounts were not material to any interim or annual period.
The following tables reconcile certain segment information to consolidated totals:
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| Sales: | | | | | | |
| Total segment sales | | $ | 9,013 | | | $ | 7,538 | | | $ | 5,700 | |
| Elimination of intersegment sales | | (46) | | | (34) | | | (21) | |
| Other | | (6) | | | — | | | (4) | |
| Consolidated sales | | $ | 8,961 | | | $ | 7,504 | | | $ | 5,675 | |
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
Total Segment Adjusted EBITDA | | $ | 729 | | | $ | 757 | | | $ | 648 | |
| Unallocated amounts: | | | | | | |
Corporate expenses(1) | | (29) | | | (33) | | | (24) | |
Stock-based compensation expense (K) | | (15) | | | (22) | | | (23) | |
Metal price lag(2) | | 17 | | | (16) | | | (27) | |
Unrealized gains on mark-to-market hedging instruments and derivatives (U) | | 6 | | | — | | | — | |
| Provision for depreciation and amortization | | (237) | | | (253) | | | (251) | |
Impairment of goodwill (B & O) | | — | | | (65) | | | — | |
Restructuring and other charges(3),(4) (E) | | (456) | | | (624) | | | (188) | |
Other(5) | | (62) | | | (36) | | | (55) | |
Operating (loss) income | | (47) | | | (292) | | | 80 | |
| | (104) | | | (100) | | | (118) | |
| | (41) | | | (67) | | | (70) | |
Benefit (Provision) for income taxes (I) | | 11 | | | 62 | | | (1) | |
| Net income attributable to noncontrolling interest | | (1) | | | — | | | — | |
Consolidated net loss attributable to Arconic(1) | | $ | (182) | | | $ | (397) | | | $ | (109) | |
_____________________
(1)Corporate expenses are composed of general administrative and other expenses of operating the corporate headquarters and other global administrative facilities. The amounts presented for all periods prior to second quarter 2020 include an allocation of ParentCo’s corporate expenses, including research and development expenses, for the portion of the period prior to the Separation Date (see Cost Allocations in Note A). (2)Metal price lag represents the financial impact of the timing difference between when aluminum prices included in Sales are recognized and when aluminum purchase prices included in Cost of goods sold are realized. This adjustment aims to remove the effect of the volatility in metal prices and the calculation of this impact considers applicable metal hedging transactions.
(3)In 2022, Restructuring and other charges includes a loss of $306 related to the sale of the Company’s operations in Russia and a $92 asset impairment charge related to the Extrusions segment (see Note E). (4)In 2022, 2021, and 2020, Restructuring and other charges include a $47, $584, and $199, respectively, charge for the settlement of certain employee retirement benefits virtually all of which were within the United States and the United Kingdom (see Note H).
(5)Other includes certain items that impact Cost of goods sold and Selling, general administrative, and other expenses on the Company’s Statement of Consolidated Operations that are not included in Segment Adjusted EBITDA. In 2022, Other includes costs related to environmental remediation charges of $27 (see Environmental Matters in Note T) and costs related to the new labor agreement of $19 (see Note H). These charges were recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. | | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 |
| Assets: | | | | |
| Total segment assets | | $ | 5,094 | | | $ | 5,563 | |
| Unallocated amounts: | | | | |
| Cash and cash equivalents | | 261 | | | 335 | |
| Prepaid expenses and other current assets | | 124 | | | 54 | |
| Fair value of hedging instruments and derivatives | | 21 | | | 1 | |
| Corporate fixed assets, net | | 135 | | | 153 | |
| Operating lease right-of-use assets | | 115 | | | 122 | |
Deferred income taxes (I) | | 188 | | | 229 | |
| Other noncurrent assets | | 57 | | | 88 | |
| Other | | 20 | | | 35 | |
| Consolidated assets | | $ | 6,015 | | | $ | 6,580 | |
Customer Information
In 2021 and 2020 Arconic generated more than 10% of its consolidated sales from one customer, Ford Motor Company. These sales amounted to $761 and $647 in 2021, and 2020 respectively, and were included in the Rolled Products segment.
Geographic Area Information
Geographic information for sales was as follows (based upon the country where the point of sale occurred):
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| Sales: | | | | | | |
| United States | | $ | 5,972 | | | $ | 4,753 | | | $ | 3,697 | |
| Russia* | | 828 | | | 793 | | | 535 | |
| China | | 807 | | | 696 | | | 429 | |
| Hungary* | | 608 | | | 625 | | | 462 | |
| France | | 247 | | | 260 | | | 207 | |
| United Kingdom | | 245 | | | 169 | | | 144 | |
| Other | | 254 | | | 208 | | | 201 | |
| | $ | 8,961 | | | $ | 7,504 | | | $ | 5,675 | |
_____________________
*In all periods presented, sales of a portion of aluminum products from Arconic’s plant in Russia were completed through the Company’s international selling company located in Hungary. Also, in November 2022, Arconic completed the sale of all of its operations in Russia (see Note S). Geographic information for long-lived assets was as follows (based upon the physical location of the assets):
| | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 |
| Long-lived assets: | | | | |
| United States | | $ | 1,943 | | | $ | 1,998 | |
| China | | 208 | | | 242 | |
| Russia* | | — | | | 200 | |
| Hungary | | 99 | | | 98 | |
| United Kingdom | | 78 | | | 79 | |
| France | | 18 | | | 15 | |
| Other | | 15 | | | 19 | |
| | $ | 2,361 | | | $ | 2,651 | |
_____________________
*In November 2022, Arconic completed the sale of all of its operations in Russia (see Note S). E. Restructuring and Other Charges
Restructuring and other charges for each year in the three-year period ended December 31, 2022 were comprised of the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net loss (gain) on divestitures of assets and businesses (S) | $ | 306 | | | $ | 1 | | | $ | (49) | |
Asset impairments | 92 | | | 34 | | | 15 | |
Settlements related to employee retirement benefit plans (H) | 47 | | | 584 | | | 199 | |
| Layoff costs | 2 | | | 3 | | | 23 | |
Other* | 10 | | | 6 | | | 14 | |
| Reversals of previously recorded layoff and other costs | (1) | | | (4) | | | (14) | |
| Restructuring and other charges | $ | 456 | | | $ | 624 | | | $ | 188 | |
__________________
*In 2020, Other includes $2 related to the allocation of ParentCo’s corporate restructuring activity to Arconic (see Cost Allocations in Note A). 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.
2022 Actions. In 2022, Arconic recorded Restructuring and other charges of $456, which were comprised of the following components: a $306 net loss related to the sale of the Company's operations in Russia (See Russia in Note S); a $92 asset impairment charge related to the Extrusions segment (see below); a $46 charge for the settlement of certain employee retirement benefits related to U.S. pension plans (see Note H); a $5 charge related to several legacy non-U.S. matters, including $1 for an environmental remediation obligation related to Italy (see Environmental Matters in Note T) and $1 for the full settlement of certain employee retirement benefits related to Brazil (see Note H); a $2 charge related to idling certain operations in the Extrusions segment (actions initiated in 2021); and a net $5 charge for other items. In September 2022, management initiated a business review of the Extrusions segment aimed at identifying alternatives to improve financial performance of this segment in future periods. Management continues to assess alternatives and no decisions or commitments were made as of December 31, 2022. In connection with this review, the Company updated its five-year strategic plan, the results of which indicated that there is an expected decline in the forecasted financial performance for the Extrusions segment (and asset group), including continued forecasted losses. As such, management evaluated the recoverability of the long-lived assets of the Extrusions asset group by comparing the aggregate carrying value to the undiscounted future cash flows. The result of this evaluation was that the long-lived assets were deemed to be impaired as the aggregate carrying value exceeded the undiscounted future cash flows. The impairment charge was measured as the difference between the aggregate carrying value and aggregate fair value of the long-lived assets. Fair value was determined using an orderly liquidation methodology for the machinery and equipment and a sales comparison approach for the land and structures. Significant judgments and assumptions were applied in estimating the fair value of the long-lived assets, including the use of market-based information specific to the machinery and equipment and information from recent sales or current listings of comparable
properties for the land and structures. As a result, the Company recorded an impairment charge of $90 for the Properties, plants, and equipment and $2 for the intangible assets (included within Other noncurrent assets).
2021 Actions. In 2021, Arconic recorded Restructuring and other charges of $624, which were comprised of the following components: a $584 charge for the settlement of certain employee retirement benefits (see Note H); a $34 charge for the impairment of several buildings and equipment due to management’s decision to abandon these assets located at the Company’s primary research and development facility; a $7 charge related to idling certain operations in the Extrusions segment, including layoff costs associated with approximately 115 employees; a $4 net benefit for legacy tax and legal matters related to Brazil; a $4 charge related to several legal matters, including the assumption of a related environmental remediation obligation (see Environmental Matters in Note T); a $4 credit for the reversal of reserves established in prior periods (see 2020 Actions below); a $1 additional loss on the sale of an aluminum rolling mill in Brazil (see Itapissuma in Note S); and a $2 net charge for other items. As of September 30, 2021, the employee separations associated with 2021 restructuring programs were essentially complete. In 2021, the Company made cash payments of $2 against layoff reserves related to the 2021 restructuring programs.
2020 Actions. In 2020, Arconic recorded a net charge of $188 in Restructuring and other charges, which were comprised of the following components: a $199 charge for the settlement of certain employee retirement benefits, virtually all within the United States and the United Kingdom (see Note H); a $25 benefit for contingent consideration received related to the 2018 sale of the Texarkana (Texas) rolling mill (see Note S); a $25 net gain related to the sales of an extrusions plant in South Korea and an aluminum rolling mill in Brazil (see Note S); a $21 charge for costs, of which $5 is for layoff costs associated with approximately 90 employees, related to the planned closure and related reorganizations of several small facilities in the Building and Construction Systems and Extrusions segments; an $18 charge for layoff costs associated with the separation of approximately 460 employees across the Company in response to the impact of the COVID 19 pandemic; a $14 credit for the reversal of reserves established in prior periods, including $5 related to an environmental matter (see Note T); a $4 charge for legacy non-income tax matters in Brazil; a $2 charge for an allocation of ParentCo’s corporate restructuring activity (see Cost Allocations in Note A); and an $8 net charge for other items. In 2021, the total number of employees to be separated was updated to 500 from 550 to reflect employees initially identified for separation accepting other positions within the Company and natural attrition. As of December 31, 2021, the employee separations associated with 2020 restructuring programs were essentially complete. In 2021 and 2020, the Company made cash payments of $5 and $15, respectively, against layoff reserves related to the 2020 restructuring programs.
Segment Information. The Company does not include Restructuring and other charges in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| Rolled Products | | $ | 302 | | | $ | 1 | | | $ | (15) | |
| Building and Construction Systems | | 2 | | | (2) | | | 5 | |
| Extrusions | | 90 | | | 7 | | | (14) | |
| Segment total | | 394 | | | 6 | | | (24) | |
| Corporate | | 62 | | | 618 | | | 212 | |
| | $ | 456 | | | $ | 624 | | | $ | 188 | |
Reserve Activity. Activity and reserve balances for restructuring charges were as follows:
| | | | | | | | | | | | | | | | | |
| Layoff costs | | Other costs | | Total |
| Reserve balances at December 31, 2019 | $ | 20 | | | $ | 1 | | | $ | 21 | |
Separation-related adjustments(1) | 2 | | | — | | | 2 | |
| Cash payments | (24) | | | (3) | | | (27) | |
| Restructuring charges | 23 | | | 4 | | | 27 | |
Other(2) | (8) | | | (1) | | | (9) | |
| Reserve balances at December 31, 2020 | 13 | | | 1 | | | 14 | |
| Cash payments | (10) | | | (5) | | | (15) | |
| Restructuring charges | 3 | | | 6 | | | 9 | |
Other(2) | (4) | | | (1) | | | (5) | |
Reserve balances at December 31, 2021 | 2 | | | 1 | | | 3 | |
| Cash payments | (3) | | | (3) | | | (6) | |
| Restructuring charges | 2 | | | 3 | | | 5 | |
Other(2) | — | | | (1) | | | (1) | |
Reserve balances at December 31, 2022(3) | $ | 1 | | | $ | — | | | $ | 1 | |
_____________________
(1)Represents liabilities transferred from ParentCo on the Separation Date (see Note A). (2)Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation.
(3)The remaining reserves are expected to be paid in cash during 2023.
F. Interest Cost Components
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| Amount charged to expense | | $ | 104 | | | $ | 100 | | | $ | 118 | |
| Amount capitalized | | 7 | | | 4 | | | 6 | |
| | $ | 111 | | | $ | 104 | | | $ | 124 | |
In 2020 (January through March), total interest costs include an allocation of ParentCo’s financing costs of $28 (see Cost Allocations in Note A). Also, in 2020, total interest costs include $19 for the write-off and immediate expensing of certain debt issuance costs related to a debt refinancing (see Note Q). Typically, such costs are deferred and amortized to interest expense over the term of the related financing arrangement. G. Other Expenses, Net
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
Non-service costs — Pension and OPEB (H) | | $ | 75 | | | $ | 60 | | | $ | 78 | |
| Foreign currency (gains) losses, net | | (26) | | | 5 | | | 11 | |
| Net loss from asset sales | | 3 | | | — | | | — | |
| Interest income | | (5) | | | (1) | | | (4) | |
| Other, net | | (6) | | | 3 | | | (15) | |
| | $ | 41 | | | $ | 67 | | | $ | 70 | |
In 2022, Foreign currency (gains) losses, net includes a $39 gain for the remeasurement of monetary balances, primarily cash, related to the Company’s former operations in Russia (see Note S) from rubles to the U.S. dollar. This gain was the result of a significant strengthening of the Russian ruble against the U.S. dollar in the period. In 2020, Other, net includes a $20 benefit for the reversal of a liability previously established at the Separation Date related to a potential indemnification to Howmet by Arconic for an outstanding income tax matter in Spain. Under the terms of the Tax Matters Agreement (see Note A) related to the Separation, Arconic was responsible for 34% of the potential loss related to this matter should Howmet receive an unfavorable ruling from Spain’s Supreme Court. At the time of Separation, Arconic
management believed that the likelihood of the Company performing under the indemnification was probable resulting in a liability being established on Arconic’s opening balance sheet at the Separation Date. In November 2020, a favorable ruling was received from Spain’s Supreme Court bringing a final conclusion to this matter as this decision may not be appealed any further. As no further income tax payment was required of Howmet likewise Arconic no longer has a requirement to perform under the indemnification.
H. Pension and Other Postretirement Benefits
Defined Benefit Pension and Other Postretirement Benefit Plans
Arconic sponsors several defined benefit pension and other postretirement plans covering eligible employees and retirees in U.S. and 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 the related 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. The Company has one health care and life insurance postretirement benefit plan covering eligible U.S. retirees. The plan is unfunded and pays a percentage of medical expenses, reduced by deductibles and other coverage. Life benefits are provided by insurance contracts. Arconic retains the right, subject to existing agreements, to change or eliminate these benefits. Certain bargaining hourly U.S. employees hired on or after July 1, 2010 and all salaried and non-bargaining hourly U.S. employees are not eligible for postretirement health care benefits. All salaried and most hourly U.S. employees are not eligible for postretirement life insurance benefits.
United Steelworkers Labor Agreement—On May 14, 2022, the Company and the United Steelworkers reached a tentative four-year labor agreement covering approximately 3,300 employees at four U.S. locations; the previous labor agreement expired on May 15, 2022. The tentative agreement was ratified by the union employees on June 1, 2022. In 2022, Arconic recognized $19 in Cost of goods sold on the accompanying Statement of Consolidated Operations primarily for a one-time signing bonus for the covered employees. Additionally, the new labor agreement provides for, among other items, established annual wage increases and higher multipliers used to calculate the union employees' future pension benefits.
The change to the pension benefits qualifies as a significant plan amendment to the Company's U.S. hourly defined benefit pension plan, and, as a result, Arconic was required to complete a remeasurement of this plan (generally completed on an annual basis as of December 31st), including an interim actuarial valuation of the plan obligations. Communication of the benefit change to the union employees occurred on May 15, 2022, and the effective date of this amendment was May 16, 2022. For purposes of performing an interim remeasurement of the plan, the Company applied a practical expedient to the remeasurement date and selected May 31, 2022. Accordingly, the discount rate used in calculating the plan obligations increased to 4.66% at May 31, 2022 from 2.96% at December 31, 2021. The remeasurement of this plan, together with the amendment for increased benefits, resulted in a $13 net decrease to Accrued pension benefits and a $10 (after-tax) net decrease to Accumulated other comprehensive loss (see Note L) on the accompanying Consolidated Balance Sheet. Additionally, annual net periodic benefit cost to be recognized for this plan in 2022 increased by $8, comprised of a $2 decrease in service cost and a $10 increase in non-service costs. U.S. Pension Plan Interim Settlement—In September 2022, management concluded that it was probable that lump-sum benefit payments expected to be paid in 2022 under Arconic's U.S. salary defined benefit pension plan will exceed the pre-determined threshold (sum of annual service cost and interest cost) requiring settlement accounting. As a result, the Company was required to complete a remeasurement of this plan (generally completed on an annual basis as of December 31st), including an interim actuarial valuation of the plan obligations. For purposes of performing an interim remeasurement of the plan, Arconic applied a practical expedient to the remeasurement date and selected September 30, 2022. Accordingly, the discount rate used in calculating the plan obligations increased to 5.71% at September 30, 2022 from 2.82% at December 31, 2021. The remeasurement of this plan, together with the settlement of benefits, resulted in a $34 net decrease to Accrued pension benefits and a $26 (after-tax) net decrease to Accumulated other comprehensive loss (see Note L) on the accompanying Consolidated Balance Sheet. Unfavorable plan asset performance offset most of the impact of the increase in the discount rate. Also, the settlement resulted in the accelerated amortization of a portion of the existing net actuarial loss associated with this plan in the amount of $15 ($12 after-tax). This amount was reclassified to earnings through Restructuring and other charges (see Note E) from Accumulated other comprehensive loss (see Note L). Additionally, annual net periodic benefit cost to be recognized for this plan in 2022 increased by $8, all of which relates to non-service costs. U.S. Pension Plan Annuitizations—In April 2021, Arconic purchased a group annuity contract to transfer the obligation to pay the remaining retirement benefits of approximately 8,400 participants in two U.S. defined benefit pension plans to an insurance company. In connection with this transaction, the Company contributed a total of $250 to the two plans to maintain the funding level of the remaining plan obligations not transferred. This contribution was funded with the net proceeds from a
March 2021 debt offering (see 2021 Activity in Note Q). Prior to this action, these two plans had an aggregate of approximately 23,000 participants. This transaction represents a significant settlement event, and, as a result, the Company was required to complete a remeasurement of these two plans (generally completed on an annual basis as of December 31st), including an interim actuarial valuation of the plan obligations. Accordingly, the weighted-average discount rate used in calculating the plan obligations increased to 3.10% as of April 30, 2021 from 2.54% as of December 31, 2020. The remeasurement resulted in a combined projected benefit obligation and fair value of plan assets of $3,337 and $2,790, respectively, as of April 30, 2021. From these amounts, the group annuity transaction resulted in the settlement of $995 in plan obligations and the transfer of $1,007 in plan assets. The remeasurement of these two plans, together with the annuitization, resulted in a $152 net decrease to Accrued pension benefits and a $117 (after-tax) net decrease to Accumulated other comprehensive loss (see Note L). Additionally, the annuitization resulted in the accelerated amortization of a portion of the existing net actuarial loss associated with these two plans in the amount of $549 ($423 after-tax). This amount was reclassified to earnings through Restructuring and other charges (see Note E) from Accumulated other comprehensive loss (see Note L). In December 2020, Arconic purchased a group annuity contract to transfer the obligation to pay the remaining retirement benefits of approximately 7,000 participants from two U.S. defined benefit pension plans to an insurance company. On a combined basis, this transaction resulted in the settlement of approximately $240 in plan obligations and the transfer of approximately $245 in plan assets. Prior to this action, these two plans had approximately 30,000 participants combined. The Company recognized a $140 ($108 after-tax) settlement charge, which represents the accelerated amortization of a portion of the existing net actuarial loss associated with these plans. This amount was reclassified to earnings through Restructuring and other charges (see Note E) from Accumulated other comprehensive loss (see Note L). U.S. OPEB Plan Amendments—In August 2021, Arconic modified the medical benefit coverage offered to certain Medicare-eligible participants under the Company's U.S. other postretirement benefit plan. Effective January 1, 2022, this modification results in lower premiums and increased benefits to the participants. This change qualifies as a significant plan amendment to the Company's U.S. other postretirement benefit plan. Accordingly, this plan was required to be remeasured, and through this process, the discount rate was updated to 2.78% at August 31, 2021 from 2.61% at December 31, 2020. The amendment, together with the remeasurement of this plan, resulted in a $34 net decrease to the Company's other postretirement benefits liability and a $26 (after-tax) net decrease to Accumulated other comprehensive loss (see Note L) on the accompanying Consolidated Balance Sheet. The impact of this change on the Company's annual net periodic benefit cost is not material. The Company's estimated annual benefit payments will decrease by approximately $4 beginning in 2022. In July 2020, Arconic and the United Steelworkers agreed to modify the medical benefit coverage offered to certain Medicare-eligible participants under the Company's U.S. other postretirement benefit plan, as provided for in the current master collective bargaining agreement between the parties. Effective January 1, 2021, this modification results in lower premiums and increased benefits to the participants. This change qualifies as a significant plan amendment to the Company's U.S. other postretirement benefit plan. Accordingly, this plan was required to be remeasured, and through this process, the discount rate was updated to 2.54% at July 31, 2020 from 3.17% at December 31, 2019. The amendment, together with the remeasurement of this plan, resulted in a net decrease to both the Company's other postretirement benefits liability of $7 and Accumulated other comprehensive loss of $5 (after-tax). The impact of this change on the Company's annual net periodic benefit cost is not material. The Company's estimated annual benefit payments decreased by approximately $20 beginning in 2021.
U.K. Pension Plan Annuitization—In June 2020, Arconic and Howmet, together, executed several liability management actions related to approximately 1,800 participants in a U.K. defined benefit pension plan. The primary action was the purchase of a group annuity contract to transfer the obligation to pay the remaining retirement benefits of certain plan participants to an insurance company. On a combined basis, these actions resulted in the settlement of approximately $400 in plan obligations and the transfer of approximately $460 in plan assets. In the 2020 second quarter, the Company contributed $10 to the plan to facilitate these actions and maintain the funding level of the remaining plan obligations. Prior to these actions, this plan had approximately 3,350 participants combined.
Accordingly, this plan was required to be remeasured, and through this process, the discount rate was updated to 1.55% at June 30, 2020 from 2.05% at December 31, 2019. The settlement events, together with the remeasurement of the plan, resulted in an approximately $250 net reduction to the Company’s remaining plan obligation and both a decrease to the Company’s pension benefit asset and a settlement charge of $58 ($48 after-tax) in 2020. The settlement charge represents the accelerated amortization of a portion of the existing net actuarial loss associated with this plan. This amount was reclassified to earnings through Restructuring and other charges (see Note E) from Accumulated other comprehensive loss. Subsequent to this remeasurement, the remaining respective plan obligations and plan assets attributable to Arconic and Howmet were transferred into separate plans and the existing U.K. plan was terminated. Immediately following the completion of the transfer, the
Company’s remaining plan obligation was approximately $240 and the plan assets were approximately $260 related to 1,050 plan participants.
The Separation—The above descriptions of retirement benefits for Arconic participants also describe the retirement benefits provided to the employees and retirees of ParentCo prior to the Separation Date.
Prior to the Separation Date for certain non-U.S. plans, eligible employees and retirees related to the Arconic Corporation Businesses participated in ParentCo-sponsored defined benefit pension and other postretirement plans (the “Shared Plans”), which included participants related to the Howmet Aerospace Businesses and ParentCo corporate participants, as well as eligible retirees from previously closed or sold operations. Also, prior to the Separation Date, other eligible employees and retirees related to the Arconic Corporation Businesses participated in certain non-U.S. defined benefit pension and other postretirement plans (the “Direct Plans”).
The Company accounted for the portion of the Shared Plans related to its employees as multiemployer benefit plans. Accordingly, Arconic did not record an asset or liability to recognize the funded status of the Shared Plans. However, the related pension and other postretirement benefit expenses attributable to Arconic were based primarily on pensionable compensation of active Arconic participants and estimated interest costs, respectively. The Company also recorded an allocation of pension and other postretirement benefit expenses for the Shared Plans attributable to ParentCo corporate participants, as well as to participants related to closed and sold operations (see Cost Allocations in Note A). The Direct Plans were accounted for as defined benefit pension and other postretirement plans. Accordingly, the funded status of each Direct Plan was recorded in the Company’s Consolidated Balance Sheet. Actuarial gains and losses that had not yet been recognized in earnings were recorded in Accumulated other comprehensive loss until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to Direct Plans were dependent on various assumptions, including, among others, discount rates, long-term expected rates of return on plan assets, and future compensation increases. Management developed each assumption using relevant company experience in conjunction with market-related data for each of the plans.
In preparation for the Separation, effective January 1, 2020, certain U.S. pension and other postretirement benefit plans previously sponsored by ParentCo (the “U.S. Shared Plans” – see above) were separated into standalone plans for both Arconic (the “New Direct Plans”) and Howmet. Accordingly, on January 1, 2020, Arconic recognized an aggregate liability of $1,920, of which $60 was current, reflecting the combined net funded status of the New Direct Plans, comprised of a benefit obligation of $4,255 and plan assets of $2,335, as well as $1,752 (net of tax impact) in Accumulated other comprehensive loss representing a net actuarial loss.
Additionally, effective on the Separation Date, certain other Shared Plans (the “Additional New Direct Plans,” and, collectively with the Direct Plans and New Direct Plans, the “Cumulative Direct Plans”) were assumed by Arconic. Accordingly, on the Separation Date, Arconic recognized a noncurrent asset of $65 and a noncurrent liability of $15, reflecting the combined net funded status of the Additional New Direct Plans, as well as $50 (net of tax impact) in Accumulated other comprehensive loss representing a net actuarial loss.
The funded status of Arconic’s Cumulative Direct Plans is measured as of December 31 each calendar year. All the information that follows for pension and other postretirement benefit plans is only applicable to the Cumulative Direct Plans, as appropriate.
Obligations and Funded Status | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits | | Other postretirement benefits | |
| December 31, | | 2022 | | 2021 | | 2022 | | 2021 | |
| Change in benefit obligation | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 2,817 | | | $ | 4,081 | | | $ | 440 | | | $ | 514 | | |
| Service cost | | 16 | | | 21 | | | 5 | | | 6 | | |
| Interest cost | | 75 | | | 63 | | | 10 | | | 11 | | |
| Amendments | | 23 | | | — | | | — | | | (30) | | |
Actuarial gains(1) | | (722) | | | (105) | | | (96) | | | (23) | | |
| Benefits paid | | (135) | | | (183) | | | (30) | | | (38) | | |
| Settlements | | (78) | | | (1,051) | | | — | | | — | | |
| Foreign currency translation impact | | (33) | | | (9) | | | — | | | — | | |
| Divestitures | | (2) | | | — | | | — | | | — | | |
Benefit obligation at end of year(2) | | $ | 1,961 | | | $ | 2,817 | | | $ | 329 | | | $ | 440 | | |
| Change in plan assets | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 2,124 | | | $ | 2,754 | | | $ | — | | | $ | — | | |
| Actual return on plan assets | | (535) | | | 177 | | | — | | | — | | |
| Employer contributions | | 31 | | | 458 | | | — | | | — | | |
| Benefits paid | | (127) | | | (176) | | | — | | | — | | |
| Settlements | | (78) | | | (1,069) | | | — | | | — | | |
| Foreign currency translation impact | | (32) | | | (3) | | | — | | | — | | |
| Administrative expenses | | — | | | (17) | | | — | | | — | | |
Fair value of plan assets at end of year(2) | | $ | 1,383 | | | $ | 2,124 | | | $ | — | | | $ | — | | |
Funded status(2) | | $ | (578) | | | $ | (693) | | | $ | (329) | | | $ | (440) | | |
| Amounts recognized on the Consolidated Balance Sheet: | | | | | | | | | |
| Noncurrent assets | | $ | 15 | | | $ | 32 | | | $ | — | | | $ | — | | |
| Current liabilities | | (7) | | | (8) | | | (27) | | | (29) | | |
| Noncurrent liabilities | | (586) | | | (717) | | | (302) | | | (411) | | |
| Net amount recognized | | $ | (578) | | | $ | (693) | | | $ | (329) | | | $ | (440) | | |
| Amounts recognized in Accumulated Other Comprehensive Loss (pretax): | | | | | | | | | |
| Net actuarial loss | | $ | 1,165 | | | $ | 1,389 | | | $ | 62 | | | $ | 166 | | |
| Prior service cost (benefit) | | 20 | | | — | | | (77) | | | (85) | | |
| Net amount recognized | | $ | 1,185 | | | $ | 1,389 | | | $ | (15) | | | $ | 81 | | |
Other changes in plan assets and benefit obligations recognized in
Other Comprehensive Income (pretax): | | | | | | | | | |
| Net actuarial gain | | $ | (103) | | | $ | (137) | | | $ | (96) | | | $ | (23) | | |
| Amortization of net actuarial loss (includes settlements) | | (121) | | | (678) | | | (8) | | | (8) | | |
| Prior service cost (benefit) | | 23 | | | — | | | — | | | (30) | | |
| Amortization of prior service (cost) benefit | | (3) | | | — | | | 8 | | | 6 | | |
| Total | | $ | (204) | | | $ | (815) | | | $ | (96) | | | $ | (55) | | |
_____________________
(1)At December 31, 2022 and 2021, actuarial gains for pension benefits include approximately $(725) and $(130), respectively, and for other postretirement benefits includes approximately $(100) and $(15), respectively, attributable to the change in the discount rate used to determine the benefit obligation (see “Assumptions” below).
(2)At December 31, 2022, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $1,716, $1,167, and $549, respectively. At December 31, 2021, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $2,398, $1,744, and $654, respectively.
Pension Plan Benefit Obligations
| | | | | | | | | | | | | | |
| | Pension benefits |
| December 31, | | 2022 | | 2021 |
The projected benefit obligation and accumulated benefit obligation for all defined benefit
pension plans was as follows: | | | | |
| Projected benefit obligation | | $ | 1,961 | | | $ | 2,817 | |
| Accumulated benefit obligation | | 1,956 | | | 2,807 | |
The aggregate projected benefit obligation and fair value of plan assets for defined benefit
pension plans with projected benefit obligations in excess of plan assets was as follows: | | | | |
| Projected benefit obligation | | 1,759 | | | 2,472 | |
| Fair value of plan assets | | 1,167 | | | 1,747 | |
The aggregate accumulated benefit obligation and fair value of plan assets for defined
benefit pension plans with accumulated benefit obligations in excess of plan assets was as follows: | | | | |
| Accumulated benefit obligation | | 1,755 | | | 2,464 | |
| Fair value of plan assets | | 1,167 | | | 1,747 | |
Components of Net Periodic Benefit Cost
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits(1) | | Other postretirement benefits | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | | | |
| Service cost | | $ | 16 | | | $ | 21 | | | $ | 21 | | | $ | 5 | | | $ | 6 | | | $ | 5 | | | | | |
| Interest cost | | 75 | | | 63 | | | 108 | | | 10 | | | 11 | | | 13 | | | | | |
| Expected return on plan assets | | (87) | | | (110) | | | (170) | | | — | | | — | | | — | | | | | |
Amortization of net actuarial loss | | 74 | | | 94 | | | 123 | | | 8 | | | 8 | | | 8 | | | | | |
| Amortization of prior service benefit | | 3 | | | — | | | — | | | (8) | | | (6) | | | (4) | | | | | |
Settlements(2) | | 47 | | | 584 | | | 199 | | | — | | | — | | | — | | | | | |
Net periodic benefit cost(3) | | $ | 128 | | | $ | 652 | | | $ | 281 | | | $ | 15 | | | $ | 19 | | | $ | 22 | | | | | |
_____________________
(1)In 2022 and 2021, net periodic benefit cost for U.S pension plans was $127 and $653, respectively.
(2)In 2022, Settlements were due to the payment of lump-sum benefits. In 2021, Settlements were due to the purchase of a group annuity contract ($549 - see U.S. Pension Plan Annuitizations above) and the payment of lump-sum benefits ($35). In 2020, Settlements were due to two separate purchases of a group annuity contract (see U.S. Pension Plan Annuitizations and U.K. Pension Plan Annuitization above).
(3)Service cost was included within Cost of goods sold, Settlements were included within Restructuring and other charges, and all other components were included in Other expenses (income), net on the accompanying Statement of Consolidated Operations.
Assumptions
Weighted average assumptions used to determine benefit obligations and net periodic benefit cost for pension and other postretirement benefit plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit obligations | | Net periodic benefit cost |
| December 31, | | For the year ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 | | 2020 |
| Discount rate—pension plans | 5.49 | % | | 2.76 | % | | 2.76 | % | | 2.27 | % | | 2.86 | % |
| Discount rate—other postretirement benefit plans | 5.62 | | | 2.90 | | | 2.99 | | | 2.19 | | | 2.49 | |
| Rate of compensation increase—pension plans | 2.67 | | | 2.66 | | | 2.66 | | | 2.54 | | | 3.20 | |
| Expected long-term rate of return on plan assets—pension plans | — | | | — | | | 5.18 | | | 4.91 | | | 6.09 | |
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 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. The yield curve model parallels the projected plan cash flows, which have a weighted average duration of 11 years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the plan obligations multiple times. If a deep market of high quality corporate bonds does not exist in a country, then the yield on government bonds is used.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (the 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 forward-looking investment returns by asset class. Management incorporates expected future investment returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment. For 2022 and 2021, 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. For 2023, management anticipates that the weighted-average expected long-term rate of return will be in the range of 5.50% to 6.50%.
Weighted-average assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (non-U.S. plans are not material):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Health care cost trend rate assumed for next year | | 6.3 | % | | 4.5 | % |
| Rate to which the cost trend rate gradually declines | | 4.5 | % | | 4.7 | % |
| Year that the rate reaches the rate at which it is assumed to remain | | 2029 | | 2027 |
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by the Company’s other postretirement benefit plans. For 2023, a 6.3% trend rate will be used, reflecting management’s best estimate of the change in future health care costs covered by the plans.
Plan Assets
Arconic’s pension plan investment policy and weighted average asset allocations at December 31, 2022 and 2021, by asset class, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Plan assets at December 31, |
| Asset class | | Policy maximum | | 2022 | | 2021 |
| Equities | | 40% | | 22 | % | | 31 | % |
| Fixed income | | 100% | | 62 | | | 56 | |
| Other investments | | 30% | | 16 | | | 13 | |
| Total | | | | 100 | % | | 100 | % |
The principal objectives underlying the investment of the pension plan 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. The use of derivative instruments is permitted where appropriate and necessary for achieving diversification across the balance of the asset portfolio. Investment practices comply with the requirements of applicable country laws and regulations.
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension plan assets. For plan assets measured at net asset value, this refers to the net asset value of the investment on a per share basis (or its equivalent) as a practical expedient. Otherwise, an indication of the level in the fair value hierarchy in which each type of asset is generally classified is provided (see Note U 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 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 net asset value; and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) and are valued at net asset value.
Fixed income—These securities consist of: (i) U.S. government debt and are generally valued using quoted prices (included in Level 1); and (ii) 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).
Other investments—These investments include, among others: (i) real estate investment trusts valued based on the closing price reported in an active market on which the investments are traded (included in Level 1); (ii) the plans’ share of commingled funds that are invested in real estate partnerships and are valued at net asset value; (iii) direct investments in discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued at net asset value; and (iv) absolute return strategy funds 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 either the appropriate level of the fair value hierarchy or net asset value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | Net Asset Value | | Total |
| Equities: | | | | | | | | | | |
| Equity securities | | $ | 1 | | | $ | — | | | $ | — | | | $ | 120 | | | $ | 121 | |
| Long/short equity hedge funds | | — | | | — | | | — | | | 23 | | | 23 | |
| Private equity | | — | | | — | | | — | | | 156 | | | 156 | |
| | $ | 1 | | | $ | — | | | $ | — | | | $ | 299 | | | $ | 300 | |
| Fixed Income: | | | | | | | | | | |
| Intermediate and long duration government/credit | | $ | 113 | | | $ | 277 | | | $ | — | | | $ | 369 | | | $ | 759 | |
| Other | | 5 | | | — | | | — | | | 91 | | | 96 | |
| | $ | 118 | | | $ | 277 | | | $ | — | | | $ | 460 | | | $ | 855 | |
| Other investments: | | | | | | | | | | |
| Real estate | | $ | — | | | $ | — | | | $ | — | | | $ | 93 | | | $ | 93 | |
| Discretionary and systematic macro hedge funds | | — | | | — | | | — | | | 100 | | | 100 | |
| Other | | — | | | — | | | — | | | 29 | | | 29 | |
| | $ | — | | | $ | — | | | $ | — | | | $ | 222 | | | $ | 222 | |
Total* | | $ | 119 | | | $ | 277 | | | $ | — | | | $ | 981 | | | $ | 1,377 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Level 1 | | Level 2 | | Level 3 | | Net Asset Value | | Total |
| Equities: | | | | | | | | | | |
| Equity securities | | $ | 12 | | | $ | — | | | $ | — | | | $ | 392 | | | $ | 404 | |
| Long/short equity hedge funds | | — | | | — | | | — | | | 24 | | | 24 | |
| Private equity | | — | | | — | | | — | | | 224 | | | 224 | |
| | $ | 12 | | | $ | — | | | $ | — | | | $ | 640 | | | $ | 652 | |
| Fixed Income: | | | | | | | | | | |
| Intermediate and long duration government/credit | | $ | 95 | | | $ | 412 | | | $ | — | | | $ | 612 | | | $ | 1,119 | |
| Other | | 23 | | | — | | | — | | | 50 | | | 73 | |
| | $ | 118 | | | $ | 412 | | | $ | — | | | $ | 662 | | | $ | 1,192 | |
| Other investments: | | | | | | | | | | |
| Real estate | | $ | — | | | $ | — | | | $ | — | | | $ | 108 | | | $ | 108 | |
| Discretionary and systematic macro hedge funds | | — | | | — | | | — | | | 99 | | | 99 | |
| Other | | — | | | — | | | — | | | 77 | | | 77 | |
| | $ | — | | | $ | — | | | $ | — | | | $ | 284 | | | $ | 284 | |
Total* | | $ | 130 | | | $ | 412 | | | $ | — | | | $ | 1,586 | | | $ | 2,128 | |
______________________
*As of December 31, 2022 and 2021, the total fair value of pension plan assets excludes a net receivable of $7 and net payable of $4, respectively, which represents securities not yet settled plus interest and dividends earned on various investments.
Funding and Cash Flows
It is Arconic’s policy to contribute amounts to funded defined benefit pension plans sufficient to meet the minimum requirements set forth in applicable country employee benefit and tax regulations, including ERISA for U.S. plans. From time to time, Arconic may contribute additional amounts as deemed appropriate. In 2022, 2021, and 2020, cash contributions to Arconic’s funded defined benefit pension plans were $31, $458, and $271, respectively. The 2021 cash contributions include a total of $250 made by the Company in April 2021 to its two funded U.S. defined benefit pension plans to maintain the funding level of the remaining plan obligations not transferred under a group annuity contract (see U.S. Pension Plan Annuitizations above). The minimum required contributions to Arconic’s funded defined benefit pension plans in 2023 are estimated to be $38, of which $31 is for U.S. plans. Benefit payments expected to be paid to pension (funded and unfunded) and other postretirement benefit plan participants are as follows:
| | | | | | | | | | | | | | |
| For the year ended December 31, | | Pension benefits | | Other postretirement benefits |
| 2023 | | $ | 142 | | | $ | 27 | |
| 2024 | | 142 | | 27 |
| 2025 | | 143 | | 27 |
| 2026 | | 146 | | 27 |
| 2027 | | 145 | | 26 |
| 2028 through 2032 | | 719 | | 127 |
| | $ | 1,437 | | | $ | 261 | |
Defined Contribution Plans
Arconic sponsors savings and investment plans in the United States and certain other countries. Prior to the Separation Date, employees attributable to the Arconic Businesses participated in ParentCo-sponsored plans. In the United States, employees may contribute a portion of their compensation to the plans, and Arconic (ParentCo prior to the Separation Date) matches a specified percentage of these contributions in equivalent form of the investments elected by the employee. Also, Arconic (ParentCo prior to the Separation Date) makes contributions to a retirement savings account based on a percentage of eligible compensation for certain U.S. employees. Arconic’s expenses (contributions) related to all defined contribution plans were $45 in 2022, $39 in 2021, and $35 in 2020.
I. Income Taxes
(Benefit) Provision for income taxes. The components of loss before income taxes were as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| Domestic - United States | | $ | (65) | | | $ | (611) | | | $ | (126) | |
| Foreign | | (127) | | | 152 | | | 18 | |
| | $ | (192) | | | $ | (459) | | | $ | (108) | |
(Benefit) Provision for income taxes consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| Current: | | | | | | |
| U.S. federal* | | $ | 8 | | | $ | — | | | $ | — | |
| Foreign | | 23 | | | 36 | | | 13 | |
| U.S. state and local | | 3 | | | 2 | | | 4 | |
| | 34 | | | 38 | | | 17 | |
| Deferred: | | | | | | |
| U.S. federal* | | (18) | | | (86) | | | (12) | |
| Foreign | | (1) | | | (2) | | | 4 | |
| U.S. state and local | | (26) | | | (12) | | | (8) | |
| | (45) | | | (100) | | | (16) | |
| Total | | $ | (11) | | | $ | (62) | | | $ | 1 | |
__________________
* Includes U.S. income taxes related to foreign income. Also, in 2020, the Deferred amount includes a $21 charge related to income generated by the Company prior to the Separation Date that was included in ParentCo’s 2020 tax return.
A reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate was as follows (the effective tax rate was a benefit on loss in 2022, a benefit on loss in 2021, and a provision on loss in 2020):
| | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, | | 2022 | | 2021 | | 2020 |
| U.S. federal statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Taxes on foreign operations - rate differential | | 14.4 | | | 0.1 | | | (4.8) | |
Other taxes related to foreign operations(1) | | (2.4) | | | (5.0) | | | (9.4) | |
| U.S. state and local taxes, including federal benefit | | 0.1 | | | 2.6 | | | 3.3 | |
Statutory tax rate and law changes | | (2.8) | | | — | | | (2.1) | |
| Changes in valuation allowances | | 13.1 | | | (0.9) | | | (7.3) | |
Non-taxable income - indemnification liability(2) | | 0.4 | | | 0.4 | | | 3.8 | |
Subsidiary recapitalizations and reorganizations | | — | | | (1.1) | | | (3.9) | |
| Impairment of goodwill | | — | | | (3.0) | | | — | |
Non-deductible loss related to sale of Russian operations (S) | | (37.9) | | | — | | | — | |
| Changes in uncertain tax positions | | 11.2 | | | (0.1) | | | — | |
| Stock-based compensation | | 3.1 | | | 0.8 | | | 0.9 | |
Non-deductible costs related to the Separation (A) | | — | | | — | | | (2.2) | |
Write-off of deferred tax assets due to remote utilization(3) | | (13.0) | | | — | | | — | |
| Non-deductible officer compensation | | (1.3) | | | (0.2) | | | — | |
| Other | | (0.2) | | | (1.1) | | | (0.2) | |
| Effective tax rate | | 5.7 | % | | 13.5 | % | | (0.9) | % |
_____________________
(1)In 2021, this line item includes the impact of incremental income tax expense of $11 related to foreign operations that generated income subject to the global intangible low-taxed income inclusion under the U.S. Internal Revenue Code.
(2)In 2020, this line item reflects the impact of the absence of income tax expense for non-taxable income generated by the reversal of a liability previously established at the Separation Date related to a potential indemnification to Howmet by Arconic for an outstanding income tax matter in Spain (see Note G). (3)In 2022, this line item reflects the write-off of a foreign subsidiary’s deferred tax assets on the basis of remote likelihood of utilization. The deferred tax assets were previously fully offset by a reserve for an uncertain tax position (see Uncertain tax positions below) and a valuation allowance (see Deferred income taxes below). The Changes in valuation allowances and Changes in uncertain tax positions line items include 1.8% and 11.2%, respectively, related to the foreign subsidiary deferred tax write-off.
Deferred income taxes. The components of deferred tax assets and liabilities based on the underlying attributes without regard to jurisdiction were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| December 31, | | Deferred
tax
assets | | Deferred
tax
liabilities | | Deferred
tax
assets | | Deferred
tax
liabilities |
| Employee benefits | | $ | 264 | | | $ | — | | | $ | 331 | | | $ | — | |
| Tax loss carryforwards | | 181 | | | — | | | 206 | | | — | |
Deferred income/expense* | | 45 | | | — | | | 47 | | | — | |
| Interest | | 42 | | | — | | | 44 | | | — | |
| Operating lease right-of-use assets and liabilities | | 25 | | | 25 | | | 30 | | | 30 | |
| Loss provisions | | 27 | | | — | | | 24 | | | — | |
Inventory accounting method change* | | — | | | 63 | | | — | | | 97 | |
| Depreciation | | 13 | | | 245 | | | 13 | | | 267 | |
| Other | | 4 | | | 13 | | | 17 | | | 11 | |
| | $ | 601 | | | $ | 346 | | | $ | 712 | | | $ | 405 | |
| Valuation allowance | | (70) | | | — | | | (90) | | | — | |
| | $ | 531 | | | $ | 346 | | | $ | 622 | | | $ | 405 | |
_____________________
* In 2021, an accounting method change was filed to revoke the U.S. tax LIFO election. In 2022, an accounting method change was filed related to inventory cost capitalization.
The following table details the expiration periods of the deferred tax assets presented above:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Expires
within
10 years | | Expires
within
11-20 years | | No expiration(1) | | Other(2) | | Total |
| Tax loss carryforwards | | $ | 42 | | | $ | 31 | | | $ | 108 | | | $ | — | | | $ | 181 | |
| Employee benefits | | — | | | — | | | — | | | 264 | | | 264 | |
| Other | | — | | | 1 | | | 42 | | | 113 | | | 156 | |
| Valuation allowance | | (42) | | | — | | | (7) | | | (21) | | | (70) | |
| | $ | — | | | $ | 32 | | | $ | 143 | | | $ | 356 | | | $ | 531 | |
_____________________
(1)Deferred tax assets with no expiration may still have annual limitations on utilization.
(2)Employee benefits 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 participants. Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference.
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (35%) and taxable temporary differences that reverse within the carryforward period (65%).
The following table details the changes in the valuation allowance:
| | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 | | 2020 |
| Balance at beginning of year | | $ | 90 | | | $ | 91 | | | $ | 113 | |
Establishment of new allowances(1) | | 2 | | | 3 | | | — | |
Net change to existing allowances(2) | | 11 | | | (3) | | | (16) | |
| Separation-related adjustments | | — | | | — | | | 22 | |
| Acquisitions and divestitures | | (7) | | | — | | | (31) | |
Release of allowances(3) | | (21) | | | — | | | — | |
| Foreign currency translation | | (5) | | | (1) | | | 3 | |
| Balance at end of year | | $ | 70 | | | $ | 90 | | | $ | 91 | |
_____________________
(1)This line item reflects valuation allowances initially established as a result of a change in management’s judgement regarding the realizability of deferred tax assets.
(2)This line item reflects movements in previously established valuation allowances, which increase or decrease as the related deferred tax assets increase or decrease. Such movements occur as a result of remeasurement due to a tax rate change and changes in the underlying attributes of the deferred tax assets, including expiration of the attribute and reversal of the temporary difference that gave rise to the deferred tax assets.
(3)This line item reflects valuation allowances released as a result of a change in management’s judgement regarding the realizability of deferred tax assets. In 2022, Arconic released a U.S. state valuation allowance ($18) after completing a legal entity reorganization, which resulted in management concluding it is now more likely than not the Company will realize the benefits of the tax attributes. Additionally, in 2022, the Company released a foreign valuation allowance in connection with the write-off of the related deferred tax assets ($3 – see footnote 3 to the reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate above).
Undistributed net earnings. Foreign undistributed net earnings that have not otherwise previously been subject to U.S. tax are generally exempt from U.S. tax if repatriated in the future. Such future distributions, as well as distributions of previously taxed foreign earnings, may be subject to U.S. state and/or foreign withholding taxes in certain jurisdictions. Also, foreign currency gains/losses related to the translation of previously taxed foreign earnings from the functional currency to the U.S. dollar may be subject to U.S. tax if such earnings were to be distributed in the future. At this time, management has no plans to repatriate such earnings in the foreseeable future, unless it is tax efficient to do so. Management continuously evaluates the Company’s local and global cash needs for future business operations and anticipated debt facilities, which may influence future repatriation decisions. If such earnings were to be distributed in the future, management does not expect the potential U.S. state and/or foreign withholding taxes to be material to the Company’s Consolidated Financial Statements.
The undistributed earnings of the Company’s Canadian subsidiary are expected to be repatriated to the U.S. in a future period. The associated withholding tax and other costs are immaterial.
Uncertain tax positions. Arconic and its subsidiaries file income tax returns in various U.S. federal, U.S. state, and foreign jurisdictions. For U.S. federal income tax purposes, Arconic’s U.S. operations were included in the income tax filings of ParentCo’s U.S. consolidated tax group through March 31, 2020. ParentCo’s U.S. federal income tax filings have been examined for all periods through 2020. In 2021, the Company’s U.S. consolidated tax group filed a nine-month U.S. federal income tax return (April 1, 2020 through December 31, 2020). The Company’s U.S. federal income tax filings for 2020 and 2021 are subject to income tax examination. For U.S. state income tax purposes, Arconic and its subsidiaries remain open to examination for the 2019 tax year and forward. For foreign income tax purposes, Arconic and its subsidiaries remain subject to income tax examinations for the 2014 tax year and forward.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
| | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 | | 2020 |
| Balance at beginning of year | | $ | 22 | | | $ | 23 | | | $ | 21 | |
| Additions for tax positions of prior years | | — | | | 1 | | | — | |
| Reductions for tax positions of prior years* | | (20) | | | — | | | — | |
| Settlements with tax authorities | | (1) | | | — | | | — | |
| Foreign currency translation | | (1) | | | (2) | | | 2 | |
| Balance at end of year | | $ | — | | | $ | 22 | | | $ | 23 | |
_____________________
*See footnote 3 to the reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate above.
Unrecognized tax benefits, if recognized, would not impact the annual effective tax rate for 2022, 2021, and 2020. Management does not anticipate that changes in the Company's unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2023.
It is Arconic’s policy to recognize interest and penalties related to income taxes as a component of the (Benefit) Provision for income taxes on the accompanying Statement of Consolidated Operations. In 2022, 2021, and 2020, Arconic did not recognize any interest or penalties. As of December 31, 2022 and 2021, no interest and penalties were accrued.
J. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing Net loss attributable to Arconic by the weighted-average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding. Specific to Arconic, such share equivalents consist of outstanding employee stock awards (excluding out-of-the-money stock options – see below). For periods in which the Company generates net income, the diluted weighted-average number of shares include common share equivalents associated with outstanding employee stock awards. For periods in which the Company generates a net loss, common share equivalents are excluded from the diluted weighted-average number of shares as their effect is anti-dilutive.
The share information used to compute basic and diluted EPS attributable to Arconic common stockholders was as follows (shares in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Weighted-average shares outstanding – basic | | 103.6 | | 108.7 | | 109.1 |
| Effect of dilutive share equivalents: | | | | | | |
| Stock options | | — | | | — | | | — | |
| Stock units | | — | | | — | | | — | |
| Weighted-average shares outstanding – diluted | | 103.6 | | 108.7 | | 109.1 |
| | | | | | |
| Anti-dilutive share equivalents: | | | | | | |
| Stock units | | 2.6 | | | 3.3 | | | 2.6 | |
| Stock options*: | | | | | | |
| In-the-money | | 0.1 | | | 0.1 | | | — | |
| Out-of-the-money | | — | | | — | | | — | |
| | 2.7 | | | 3.4 | | | 2.6 | |
_____________________
* Stock options are in-the-money when the respective exercise price of each such option is less than the average market price of the Company’s common stock during the applicable period presented. Conversely, stock options are out-of-the-money when the respective exercise price of each such option is more than the average market price of the Company’s common stock during the applicable period presented. Out-of-the-money stock options never result in common share equivalents for purposes of diluted EPS regardless of whether a company generates net income or a net loss. As of December 31, 2022 and
December 31, 2020 there were 0.3 million and 0.5 million out-of-the money stock options outstanding, respectively, with a weighted average exercise price of $29.90 and $33.32, respectively.
K. Preferred and Common Stock
Preferred Stock. Arconic is authorized to issue 10,000,000 shares of preferred stock at a par value of $0.01 per share. At December 31, 2022 and 2021, the Company had no issued preferred stock.
Common Stock. Arconic is authorized to issue 150,000,000 shares of common stock at a par value of $0.01 per share. On the Separation Date, the Company distributed 109,021,376 shares of its common stock to ParentCo’s stockholders (see Note A). As of December 31, 2022 and 2021, Arconic had 111,280,206 and 110,239,390, respectively, issued and 99,432,194 and 105,326,885, respectively, outstanding shares of common stock. In 2022, 2021, and from the Separation Date through December 31, 2020, the Company issued 1,040,816, 1,034,164, and 183,850, respectively, shares of common stock under its employee stock-based compensation plan (see below). On May 4, 2021, Arconic announced that its Board of Directors approved a share repurchase program authorizing the Company to repurchase shares of its outstanding common stock up to an aggregate transactional value of $300 over a two-year period expiring April 28, 2023. In 2022 and 2021, Arconic repurchased 4,863,672 and 4,912,505 shares, respectively, of the Company's common stock for $139 and $161, respectively, resulting in completion of the total authorization under this program in August 2022. In connection with the establishment of a new repurchase program (see below), this repurchase program was terminated. Repurchases under the program were made from time to time, as the Company deemed appropriate, based on a variety of factors such as price, capital position, liquidity, financial performance, alternative uses of capital, and overall market conditions. This program was intended to comply with Rule 10b5-1 and all purchases were made in compliance with Rule 10b-18, including without limitation the timing, price, and volume restrictions thereof.
On November 16, 2022, Arconic announced that its Board of Directors approved a share repurchase program authorizing the Company to repurchase shares of its outstanding common stock up to an aggregate transactional value of $200 over a two-year period expiring November 17, 2024. Repurchases under the program may be made from time to time, as the Company deems appropriate, solely through open market repurchases effected through a broker dealer, based on a variety of factors such as price, capital position, liquidity, financial performance, alternative uses of capital, and overall market conditions. There can be no assurance as to the number of shares the Company will purchase. The share repurchase program may be increased or otherwise modified, renewed, suspended or terminated by the Company at any time, without prior notice. This program is intended to comply with Rule 10b5-1 and all purchases shall be made in compliance with Rule 10b-18, including without limitation, the timing, price, and volume restrictions thereof. In 2022, Arconic repurchased 2,071,835 shares of the Company's common stock for $46 under this program.
The Company issues new shares of common stock to satisfy the exercise of stock options and the conversion of stock units granted under its employee stock-based compensation plan. On May 20, 2021, the Company’s shareholders approved an amendment to the plan to increase the shares of common stock authorized for issuance by 3,000,000 to 11,500,000 shares and to eliminate the plan’s fungible share accounting, with the result that shares issued pursuant to full value stock awards, on or after the date of amendment, will be counted against the share reserve as one share issued under each such award, rather than as one and one-half shares. Shares returned to the plan, on or after the date of amendment, will be counted as one share, regardless of whether such shares were counted as one and one-half shares upon grant based on the prior fungible share accounting convention. In 2022, 2021, and from the Separation Date through December 31, 2020, there were 147,418, 251,919 and 84,959, respectively, stock options exercised and 1,314,188, 1,125,983 and 157,230, respectively, stock units converted (see table below). Additionally, as of December 31, 2022 and 2021, there were 413,592 and 590,906, respectively, stock options and 3,325,170 and 3,913,337, respectively, stock units outstanding (i.e., unexercised and/or unvested) under this plan (see table below). Accordingly, as of December 31, 2022 and 2021, there were 4,051,334 and 4,749,255, respectively, shares of common stock available for issuance under the plan.
Dividends on common stock are subject to authorization by the Company’s Board of Directors. Arconic did not declare any dividends in 2022, 2021, and from Separation Date through December 31, 2020.
Stock-based Compensation
In 2022, 2021, and from the Separation Date through December 31, 2020, eligible Arconic employees participated in the Company’s stock-based compensation plan. In all periods prior to the Separation Date, eligible employees attributable to the Arconic Corporation Businesses participated in ParentCo’s stock-based compensation plan.
Effective on the Separation Date, all outstanding stock options (vested and non-vested) and non-vested stock units originally granted under ParentCo’s stock-based compensation plan related to employees of the Arconic Corporation
Businesses, as well as the ParentCo corporate employees that became Arconic employees at Separation, were replaced with similar stock options and stock units under Arconic’s stock-based compensation plan. In order to preserve the intrinsic value of these awards, the referenced employees received replacement stock options and stock units under Arconic’s stock-based compensation plan at a ratio of 1.07 and 2.18, respectively, compared to the number of stock options and stock units originally granted under ParentCo’s stock-based compensation plan. The ratio for stock options was developed by dividing the March 31, 2020 closing market price ($16.06) of ParentCo’s common stock by the April 1, 2020 opening market price ($15.00) of Arconic’s common stock (the Company’s common stock did not trade on a “when issued” basis prior to April 1, 2020). Additionally, the exercise price of stock options was decreased by a ratio of 0.93 developed by dividing $15.00 by $16.06. The ratio for stock units was developed by dividing the March 31, 2020 closing market price of ParentCo’s common stock by the volume weighted average trading price ($7.37) of Arconic’s common stock during the first five trading days subsequent to March 31, 2020. This resulted in a beginning balance of outstanding stock options and stock units under Arconic’s stock-based compensation plan of 1,173,492 and 3,062,013, respectively, as of the Separation Date. The respective fair values of these stock options and units were adjusted accordingly. Arconic did not recognize any immediate incremental stock-based compensation expense as a result of this adjustment.
The following description of Arconic’s stock-based compensation plan is not materially different from the description of ParentCo’s stock-based compensation plan prior to the Separation.
Stock awards are generally granted in the first quarter of each calendar year to eligible employees at the closing market price of Arconic’s common stock on the date of grant. Stock options typically grade-vest over a three-year service period (1/3 each year) with a ten-year contractual term; stock units typically cliff-vest on the third anniversary of the award grant date. Beginning in 2022, stock units either cliff-vest or grade-vest based on the award type and employee’s job level. As a condition 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. In 2022, 2021, and 2020, certain of the stock unit grants also contain both performance and market conditions (for each year, the “performance stock units”) and were granted to a limited number of eligible employees, including the Company’s executive officers.
For 2022 and 2021, the final number of performance stock units earned is dependent on Arconic’s achievement of certain targets (performance condition) and a total stockholder return (“TSR”) (market condition) over a three-year measurement period. Specifically, determination of the initial number of stock units earned is based on the Company’s achievement of adjusted EBITDA (50%), return on invested capital (25%), and TSR (25%) targets. Beginning in 2021, TSR was added as a stand-alone metric rather than a post-performance period multiplier (see below) to further align executive compensation with the creation of shareholder value as compared to Arconic’s peers. For the 2022 and 2021 performance stock units, cumulative three-year performance goals (including for the TSR) were established for the performance period.
In 2020, the final number of performance stock units earned is dependent on Arconic’s achievement of certain targets (performance condition) modified by a TSR multiplier (market condition) over a three-year measurement period. Specifically, determination of the initial number of stock units earned is based on the Company’s achievement of an adjusted EBITDA target (25%), a controllable free cash flow target (25%), and a pretax return on net assets target (50%). For the 2020 performance stock units, the Compensation Committee of the Company's Board of Directors established three one-year financial targets to address the lack of visibility and challenge in setting long-term financial goals at the outset of the COVID-19 pandemic, while aligning executive compensation to long-term results. This result is then scaled by the TSR multiplier, which is based on the Company’s relative three-year (January 1 of the grant year through December 31 of the third year in the service period) performance against the TSRs of a group of peer companies.
In 2022, 2021, and 2020, Arconic recognized stock-based compensation expense of $15 ($12 after-tax), $22 ($17 after-tax), and $23 ($18 after-tax), respectively, of which a minimum of approximately 85% was related to stock units in each period. The amount recognized in 2022 includes a reversal of $4 of expense previously recognized in 2021 related to the performance condition portion of the 2021 performance stock units (see footnote 2 to table below). No stock-based compensation expense was capitalized as an asset in 2022, 2021, or 2020. For periods prior to the Separation, the stock-based compensation expense recorded by Arconic was comprised of two components: (i) the expense associated with employees attributable to the Arconic Corporation Businesses, and (ii) an allocation of expense related to ParentCo corporate employees (see Cost Allocations in Note A). In the 2020 Pre-Separation Period, this allocation was $5 of Arconic’s recognized stock-based compensation expense. Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For stock units granted with no market condition, the fair value is equivalent to the closing market price of Arconic’s or ParentCo’s common stock on the date of grant in the respective periods. For stock units granted with a market condition, the fair value is estimated on the date of grant using a Monte Carlo simulation model, which generated a result of $37.40, $46.17, and $10.02 per unit in 2022, 2021, and 2020 respectively. There were no stock options granted in 2022, 2021, or 2020.
To estimate the fair value of a stock unit with a market condition, the Monte Carlo simulation model uses certain assumptions, including a risk-free interest rate and volatility, to estimate the probability of satisfying market conditions. The risk-free interest rate (1.4% in 2022, 0.3% in 2021, and 0.2% in 2020) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. Volatility was estimated using implied and historical volatility (60.4% in 2022, 50.1% in 2021, and 35.4% in 2020).
The activity in 2022 for stock options and stock units, including performance stock units granted to the Company's executive officers, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock options | | Stock units |
| | Number of
options | | Weighted
average
exercise price | | Number of
units | | Weighted
average FMV
per unit |
| Outstanding, January 1, 2022 | | 590,906 | | | $ | 25.56 | | | 3,913,337 | | | $ | 15.14 | |
| Granted | | — | | | — | | | 1,227,768 | | | 25.73 | |
| Exercised | | (147,418) | | | 20.61 | | | — | | | — | |
Converted(1) | | — | | | — | | | (1,314,188) | | | 9.67 | |
| Expired or forfeited | | (29,896) | | | 32.25 | | | (194,074) | | | 22.18 | |
Performance share adjustment(2) | | — | | | — | | | (307,673) | | | 30.84 | |
| Outstanding, December 31, 2022 | | 413,592 | | | 26.84 | | | 3,325,170 | | | 19.35 | |
_____________________
(1)The number of converted units includes 420,790 shares “withheld” to meet the Company’s statutory tax withholding requirements related to the income earned by the employees as a result of vesting in the units.
(2)In 2022, the Company adjusted the target payout of the performance stock units granted in 2022, 2021, and 2020. Since the respective grant date, the fair value related to the performance condition of the 2022 and 2021 performance stock units has been expensed based on a payout at 100% of target. Additionally, the fair value related to the 2020 performance stock units has been expensed based on a payout at 8.3% of target (previously adjusted in the second half of 2021). However, at December 31, 2022, the estimated future payout for the 2022, 2021, and 2020 performance stock units was determined to be at 15.9%, 27.2%, and 7.9% of target, respectively. Accordingly, the number of non-vested performance stock units outstanding were adjusted to reflect the probable payout percentage.
As of December 31, 2022, the 413,592 outstanding stock options had a weighted average remaining contractual life of 2.3 years and a total intrinsic value of $1. Additionally, as of December 31, 2022 all of the total outstanding stock options were fully vested and exercisable. In 2022, 2021, and from the Separation Date through December 31, 2020, cash received from stock option exercises was $3, $6, $1, respectively, and the total intrinsic value of stock options exercised was $1, $2, and $1, respectively.
At December 31, 2022, there was $18 (pretax) of unrecognized compensation expense related to non-vested grants of stock units. This expense is expected to be recognized over a weighted average period of 1.8 years.
L. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss for Arconic (such activity for Noncontrolling interest was immaterial for all periods presented):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Pension and other postretirement benefits (H) | | | | | | |
| Balance at beginning of period | | $ | (1,121) | | | $ | (1,791) | | | $ | (43) | |
| Establishment of additional defined benefit plans | | — | | | — | | | (1,752) | |
Separation-related adjustments (A) | | — | | | — | | | (50) | |
| Other comprehensive income: | | | | | | |
| Unrecognized net actuarial loss and prior service cost/benefit | | 176 | | | 190 | | | (259) | |
| Tax (expense) benefit | | (41) | | | (43) | | | 62 | |
| Total Other comprehensive income (loss) before reclassifications, net of tax | | 135 | | | 147 | | | (197) | |
Amortization of net actuarial loss and prior service cost/benefit(1) | | 124 | | | 680 | | | 326 | |
Tax expense(2) | | (30) | | | (157) | | | (75) | |
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5) | | 94 | | | 523 | | | 251 | |
| Total Other comprehensive income | | 229 | | | 670 | | | 54 | |
| Balance at end of period | | $ | (892) | | | $ | (1,121) | | | $ | (1,791) | |
| Foreign currency translation | | | | | | |
| Balance at beginning of period | | $ | 25 | | | $ | 29 | | | $ | 338 | |
Separation-related adjustments (A) | | — | | | — | | | (396) | |
| Other comprehensive (loss) income: | | | | | | |
Foreign currency translation(3) | | (76) | | | (4) | | | 65 | |
Net amount reclassified to earnings from Accumulated other comprehensive income(3),(5) | | — | | | — | | | 22 | |
| Total Other comprehensive (loss) income | | (76) | | | (4) | | | 87 | |
| Balance at end of period | | $ | (51) | | | $ | 25 | | | $ | 29 | |
| | | | | | |
| Balance at beginning of period | | $ | (15) | | | $ | 1 | | | $ | — | |
Separation-related adjustments (A) | | — | | | — | | | (4) | |
| Other comprehensive income (loss): | | | | | | |
| Net change from periodic revaluations | | 95 | | | (161) | | | (2) | |
| Tax (expense) benefit | | (22) | | | 37 | | | 1 | |
| Total Other comprehensive income (loss) before reclassifications, net of tax | | 73 | | | (124) | | | (1) | |
Net amount reclassified to earnings: | | | | | | |
Aluminum(4) | | (48) | | | 142 | | | 8 | |
Energy(4) | | (20) | | | — | | | — | |
Alloying materials(4) | | 1 | | | (2) | | | — | |
Sub-total | | (67) | | | 140 | | | 8 | |
Tax benefit (expense)(2) | | 15 | | | (32) | | | (2) | |
Total amount reclassified from Accumulated other comprehensive income, net of tax(5) | | (52) | | | 108 | | | 6 | |
| Total Other comprehensive income (loss) | | 21 | | | (16) | | | 5 | |
| Balance at end of period | | $ | 6 | | | $ | (15) | | | $ | 1 | |
| Accumulated other comprehensive loss | | $ | (937) | | | $ | (1,111) | | | $ | (1,761) | |
_____________________
(1)These amounts were included in the non-service component of net periodic benefit cost for pension and other postretirement benefits (see Note H). In 2022, 2021, and 2020, this amount includes $47, $584, and $199, respectively, related to the settlement of certain employee retirement benefits (see Note H). (2)These amounts were reported in (Benefit) 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. In 2020, the net amount reclassified to earnings was reported in Restructuring and other charges on the accompanying Statement of Consolidated Operations related to the sale of certain foreign subsidiaries.
(4)A portion of the amounts related to aluminum were reported in each of Sales and Cost of goods sold on the accompanying Statement of Consolidated Operations (see Note U). The amounts related to energy and alloying materials were reported in Cost of goods sold on the accompanying Statement of Consolidated Operations (see Note U). (5)A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings. These amounts were reflected on the accompanying Statement of Consolidated Operations in the line items indicated in footnotes 1 through 4.
M. Inventories
| | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 |
| Finished goods | | $ | 343 | | | $ | 350 | |
| Work-in-process | | 1,106 | | | 1,105 | |
| Purchased raw materials | | 118 | | | 109 | |
| Operating supplies | | 55 | | | 66 | |
| | $ | 1,622 | | | $ | 1,630 | |
In November 2022, Arconic completed the sale of all of its operations in Russia (see Note S). As of December 31, 2021, Inventories related to the Company’s operations in Russia were $102. N. Properties, Plants, and Equipment, Net
| | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 |
| Land and land rights | | $ | 19 | | | $ | 22 | |
| Structures: | | | | |
| Rolled Products* | | 1,022 | | | 1,107 | |
| Building and Construction Systems | | 96 | | | 96 | |
| Extrusions | | 152 | | | 150 | |
| Other | | 149 | | | 152 | |
| | 1,419 | | | 1,505 | |
| Machinery and equipment: | | | | |
| Rolled Products* | | 4,299 | | | 4,816 | |
| Building and Construction Systems | | 204 | | | 203 | |
| Extrusions | | 523 | | | 523 | |
| Other | | 274 | | | 291 | |
| | 5,300 | | | 5,833 | |
| | 6,738 | | | 7,360 | |
| Less: accumulated depreciation and amortization | | 4,613 | | | 4,878 | |
| | 2,125 | | | 2,482 | |
| Construction work-in-progress | | 236 | | | 169 | |
| | $ | 2,361 | | | $ | 2,651 | |
_____________________
*In November 2022, Arconic completed the sale of all of its operations in Russia (see Note S). In 2022, Arconic recognized an impairment charge of $90 for the Extrusions segment as the result of a business review (See 2022 Actions in Note E). O. Goodwill and Other Intangible Assets
The following table details the changes in the carrying value of Goodwill:
| | | | | | | | | | | | | | | | | | | | | | | |
| Rolled
Products | | Building and
Construction
Systems | | Extrusions | | Total |
| Balances at December 31, 2020: | | | | | | | |
| Goodwill | $ | 254 | | | $ | 99 | | | $ | 65 | | | $ | 418 | |
| Accumulated impairment losses | — | | | (28) | | | — | | | (28) | |
| Goodwill, net | 254 | | | 71 | | | 65 | | | 390 | |
| — | | | — | | | (65) | | | (65) | |
| Translation | (1) | | | (2) | | | — | | | (3) | |
| Balances at December 31, 2021: | | | | | | | |
| Goodwill | 253 | | | 97 | | | 65 | | | 415 | |
| Accumulated impairment losses | — | | | (28) | | | (65) | | | (93) | |
| Goodwill, net | 253 | | | 69 | | | — | | | 322 | |
| (14) | | | — | | | — | | | (14) | |
| Translation | (15) | | | (1) | | | — | | | (16) | |
| Balances at December 31, 2022: | | | | | | | |
| Goodwill | 224 | | | 96 | | | 65 | | | 385 | |
| Accumulated impairment losses | — | | | (28) | | | (65) | | | (93) | |
| Goodwill, net | $ | 224 | | | $ | 68 | | | $ | — | | | $ | 292 | |
In 2021, Arconic recognized an impairment charge of $65 for the Extrusions reporting unit based on the result of the annual review of goodwill for impairment (see Goodwill in Note B). Other intangible assets, which are included in Other noncurrent assets on the accompanying Consolidated Balance Sheet, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Gross
carrying
amount | | Accumulated
amortization | | Net carrying
amount |
| Computer software* | | $ | 545 | | | $ | (521) | | | $ | 24 | |
| Patents and licenses | | 27 | | | (27) | | | — | |
| Other | | 21 | | | (18) | | | 3 | |
| Total other intangible assets | | $ | 593 | | | $ | (566) | | | $ | 27 | |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Gross
carrying
amount | | Accumulated
amortization | | Net carrying
amount |
| Computer software | | $ | 555 | | | $ | (523) | | | $ | 32 | |
| Patents and licenses | | 27 | | | (27) | | | — | |
| Other | | 21 | | | (15) | | | 6 | |
| Total other intangible assets | | $ | 603 | | | $ | (565) | | | $ | 38 | |
_____________________
*In 2022, Arconic recognized an impairment charge of $2 for the Extrusions segment as the result of a business review (See 2022 Actions in Note E).
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, 2022, 2021, and 2020 was $13, $17, and $17, respectively. During the next five years, amortization expense related to these intangible assets is expected to decrease from $9 in 2023 to $2 in 2027.
P. Leases
Arconic leases certain land and buildings, plant equipment, vehicles, and computer equipment, which have been classified as operating leases. Operating lease cost, which includes short-term leases and variable lease payments and approximates cash paid, was $54, $59, and $62 in 2022, 2021, and 2020, respectively.
Right-of-use assets obtained in exchange for operating lease obligations in 2022 and 2021 were $34 and $17, respectively.
Future minimum contractual operating lease obligations were as follows:
| | | | | | | | |
| December 31, | | 2022 |
| 2023 | | $ | 40 | |
| 2024 | | 31 | |
| 2025 | | 24 | |
| 2026 | | 16 | |
| 2027 | | 7 | |
| Thereafter | | 19 | |
| Total lease payments | | $ | 137 | |
| Less: imputed interest | | 20 | |
| Present value of lease liabilities | | $ | 117 | |
The weighted-average remaining lease term and weighted-average discount rate for Arconic's operating leases at December 31, 2022 and 2021 was 5.2 and 6.1 years, respectively, and 6.3% and 5.8%, respectively.
Q. Debt
| | | | | | | | | | | | | | |
| December 31, | | 2022 | | 2021 |
| 6.00% Notes, due 2025 | | $ | 700 | | | $ | 700 | |
| 6.125% Notes, due 2028 | | 900 | | | 900 | |
| Unamortized discounts and deferred financing costs | | (3) | | | (6) | |
| | $ | 1,597 | | | $ | 1,594 | |
| | | | |
2022 Activity—On February 16, 2022, the Company amended its five-year credit agreement, dated May 13, 2020, with a syndicate of lenders named therein and Deutsche Bank AG New York Branch as administrative agent (the “ABL Credit Agreement”) which provides for a senior secured asset-based revolving credit facility (the “ABL Credit Facility”) to be used, generally, for working capital or other general corporate purposes. The ABL Credit Agreement was amended to increase the revolving commitments under the ABL Credit Facility to $1,200 from $800. Additionally, the accordion feature of the ABL Credit Facility was revised to provide for the Company to request a further increase to the revolving commitments in an aggregate principal amount equal to the greater of $350 and the excess of the borrowing base over the ABL Credit Facility commitments. Furthermore, the LIBOR-based floating interest rate was replaced with a term SOFR-based interest rate, plus a credit spread adjustment equal to 0.10%, 0.15%, or 0.25% per annum for SOFR-based borrowings with interest periods of one month, three months, or six months, respectively, under the ABL Credit Facility. Arconic paid $1 in upfront costs associated with these amendments.
In 2022, the Company borrowed $275 and repaid $275 under the ABL Credit Facility. These borrowings were designated as SOFR loans with either an initial one-month or three-month interest period. In 2022, the weighted-average interest rate and weighted-average days outstanding of the borrowings was 4.3% and 90 days, respectively.
2021 Activity—On March 3, 2021, the Company completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for an additional $300 aggregate principal amount of 6.125% Senior Secured Second-Lien Notes due 2028 (the “Additional 2028 Notes”). The Additional 2028 Notes were issued under the indenture governing Arconic’s existing 6.125% Senior Secured Second-Lien Notes due 2028 (see 2020 Activity below). Other than with respect to the date of issuance and issue price, the Additional 2028 Notes are treated as a single series with and have the same terms as the referenced existing notes. The Additional 2028 Notes were sold at 106.25% of par (i.e., a premium) and, after reflecting a discount to the initial purchasers of the Additional 2028 Notes, the Company received $315 in net proceeds from the debt offering. Arconic used the net proceeds of this issuance to fund an annuitization of certain U.S. defined benefit pension plan obligations (see Note H). The premium ($19) and costs to complete the financing ($5) were deferred and are being amortized to interest expense over the term of the Additional 2028 Notes. The amortization of the premium is reflected as a reduction to interest expense and the amortization of the costs to complete the financing is reflected as an addition to interest expense. Interest on the Additional 2028 Notes is paid semi-annually in February and August and commenced August 15, 2021. 2020 Activity—In connection with the capital structure to be established at the time of the Separation, Arconic secured $1,200 in third-party indebtedness. On February 7, 2020, Arconic completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for $600 of 6.125% Senior Secured Second-Lien Notes due 2028 (the “2028 Notes”). The Company received $593 in net proceeds from the debt offering reflecting a discount to the initial purchasers of the 2028 Notes. Also, on March 25, 2020, Arconic entered into a credit agreement, which provided a $600 Senior Secured First-Lien Term Loan B Facility (variable rate and seven-year term) (the “Term Loan”) and a $1,000 Senior Secured First-Lien Revolving Credit Facility (variable rate and five-year term) (the “Credit Facility”), with a syndicate of lenders and issuers named therein (the “Credit Agreement”). The Company received $575 in net proceeds from the Term Loan reflecting upfront fees and costs to enter into the financing arrangement.
The Company used a portion of the $1,168 in net proceeds from the aggregate indebtedness to make a $728 payment to ParentCo on April 1, 2020 to fund the transfer of certain net assets from ParentCo to Arconic in connection with the completion of the Separation (see Note A). The payment to ParentCo was calculated as the difference between (i) the $1,168 of net proceeds from the aggregate indebtedness and (ii) the difference between a beginning cash balance at the Separation Date of $500, as provided for in the Separation and Distribution Agreement, and the amount of cash held by Arconic Businesses at March 31, 2020 ($60 – the sum of this amount and the aggregate indebtedness in (i) equals the sum of Cash and cash equivalents and Restricted cash on the Company’s Combined Balance Sheet as of March 31, 2020). On April 2, 2020, Arconic borrowed $500, which was subject to an interest rate equal to the sum of the three-month LIBOR plus a 2.0% applicable margin, under the Credit Facility. This borrowing was a proactive measure taken by the Company to bolster its liquidity and preserve financial flexibility in light of uncertainties resulting from the COVID-19 pandemic (see Note A). On May 13, 2020, Arconic executed a refinancing of its existing Credit Agreement in order to provide improved financial flexibility. Arconic completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for $700 of 6.0% Senior Secured First-Lien Notes due 2025 (the “2025 Notes”). The Company received $691 in net proceeds from the debt offering reflecting a discount to the initial purchasers of the 2025 Notes. Additionally, Arconic entered into the ABL Credit Agreement. The ABL Credit Agreement provided for a senior secured asset-based revolving credit facility in an aggregate principal amount of $800 (see 2022 Activity above for amendments to the ABL Credit Agreement), including a letter of credit sub-facility and the ABL Credit Facility. In addition, the ABL Credit Facility includes an accordion feature allowing the Company to request one or more increases to the revolving commitments in an aggregate principal amount up to $350 (see 2022 Activity above for amendment to the ABL Credit Facility).
Arconic used the net proceeds from the new indebtedness, together with cash on hand, to prepay in full the obligations outstanding under both the Term Loan ($600) and Credit Facility ($500) and to terminate in full the commitments under the Credit Agreement.
Descriptions of the 2028 Notes, 2025 Notes, and ABL Credit Agreement are set forth below.
In connection with the issuance of the 2028 Notes and the execution of the Credit Agreement, the Company paid $42 in discounts to the initial purchasers and/or upfront fees and costs (the “debt issuance costs”), of which $30 was attributable to the Term Loan and the Credit Facility. The debt issuance costs were initially deferred and were being amortized to interest expense over the respective terms of the 2028 Notes, the Term Loan, and the Credit Facility. In connection with the issuance of the 2025 Notes and the execution of the ABL Credit Agreement, the Company paid $15 in discounts to the initial purchasers and/or upfront fees and costs (the “new debt issuance costs”). As a result of applying both debt modification and debt extinguishment accounting, as appropriate based on the lender mix for each debt instrument, to the debt refinancing, the Company was required to write off $16 of the $30 in debt issuance costs and immediately expense $3 of the $15 in new debt issuance costs. This $19
was reported within Interest expense on the Company’s Statement of Consolidated Operations. The remaining $14 in debt issuance costs continued to be deferred and the remaining $12 in new debt issuance costs were deferred; both are being amortized to interest expense over the respective terms of the 2025 Notes and the ABL Credit Agreement.
2028 Notes—Interest on the 2028 Notes is paid semi-annually in February and August and commenced August 15, 2020.
Arconic has the option to redeem the 2028 Notes on at least 10 days, but not more than 60 days, prior notice to the holders of the 2028 Notes under multiple scenarios, including, in whole or in part, at any time or from time to time after February 14, 2023 at a redemption price specified in the indenture (up to 103.063% of the principal amount plus any accrued and unpaid interest in each case). At any time prior to February 15, 2023, the Company may redeem all or a part of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus a “make-whole” redemption price determined as the greater of (1) 1.0% of the principal amount of such notes and (2) the excess, if any, of (a) the present value at the date of redemption of (i) 103.063% of the principal amount of such notes plus (ii) all required interest payments due on such notes (excluding accrued but unpaid interest to the date of redemption) through February 15, 2023, computed using a discount rate equal to, generally, the yield to maturity of United States Treasury securities with a constant maturity as of the date of redemption plus 50 basis points, over (b) the principal amount of such notes, as of, and accrued and unpaid interest, if any, to, but excluding, the date of redemption. Also, at any time prior to February 15, 2023, Arconic may, on one or more occasions, redeem up to 40% of the aggregate principal amount of the notes at a redemption price equal to 106.125% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, with the net cash proceeds of certain equity offerings, if at least 60% of the original aggregate principal amount of the notes remains outstanding immediately after such redemption and the redemption occurs within 120 days of the date of such equity offering. Additionally, the 2028 Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the indenture) at a repurchase price in cash equal to 101% of the aggregate principal amount of the 2028 Notes repurchased, plus any accrued and unpaid interest on the 2028 Notes repurchased.
The 2028 Notes are senior secured obligations of Arconic and do not entitle the holders to any registration rights pursuant to a registration rights agreement. The Company does not intend to file a registration statement with respect to resales of or an exchange offer for the 2028 Notes. The 2028 Notes are guaranteed on a senior secured basis by Arconic and its subsidiaries that are guarantors (the “subsidiary guarantors” and, together with Arconic, the “guarantors”) under the ABL Credit Agreement (see below). Each of the subsidiary guarantors will be released from their 2028 Notes guarantees upon the occurrence of certain events, including the release of such guarantor from its obligations as a guarantor under the ABL Credit Agreement.
The 2028 Notes indenture includes several customary affirmative covenants. Additionally, the 2028 Notes indenture contains several negative covenants, that, subject to certain exceptions, limit the Company’s ability to, among other things, (i) make investments, loans, advances, guarantees, and acquisitions, (ii) pay dividends on or make other distributions in respect of capital stock and make other restricted payments and investments (as defined in the 2028 Notes), (iii) sell or transfer certain assets, and (iv) create liens on assets to secure debt.
The 2028 Notes rank equally in right of payment with all of Arconic’s existing and future senior indebtedness, including the facility under the ABL Credit Agreement (see below); rank senior in right of payment to any future subordinated obligations of Arconic; and are effectively subordinated to Arconic’s existing and future secured indebtedness that is secured on a first priority basis, including the 2025 Notes and the facility under the ABL Credit Agreement, to the extent of the value of property and assets securing such indebtedness.
2025 Notes—Interest on the 2025 Notes is paid semi-annually in May and November and commenced November 15, 2020.
Arconic has the option to redeem the 2025 Notes on at least 10 days, but not more than 60 days, prior notice to the holders of the 2025 Notes under multiple scenarios, including, in whole or in part, at any time or from time to time after May 14, 2022 at a redemption price specified in the indenture (up to 103.0% of the principal amount plus any accrued and unpaid interest in each case). At any time prior to May 15, 2022, the Company may redeem all or a part of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus a “make-whole” redemption price determined as the greater of (1) 1.0% of the principal amount of such notes and (2) the excess, if any, of (a) the present value at the date of redemption of (i) 103.0% of the principal amount of such notes plus (ii) all required interest payments due on such notes (excluding accrued but unpaid interest to the date of redemption) through May 15, 2022, computed using a discount rate equal to, generally, the yield to maturity of United States Treasury securities with a constant maturity as of the date of redemption plus 50 basis points, over (b) the principal amount of such notes, as of, and accrued and unpaid interest, if any, to, but excluding, the date of redemption. Also, at any time prior to May 15, 2022, Arconic may, on one or more occasions, redeem up to 40% of the aggregate principal amount of the notes at a redemption price equal to 106.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, with the net cash proceeds of certain equity offerings, if at least 60% of the original aggregate principal amount of the notes remains outstanding immediately after such redemption and
the redemption occurs within 120 days of the date of such equity offering. Additionally, the 2025 Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the indenture) at a repurchase price in cash equal to 101% of the aggregate principal amount of the 2025 Notes repurchased, plus any accrued and unpaid interest on the 2025 Notes repurchased.
The 2025 Notes are senior secured obligations of Arconic and do not entitle the holders to any registration rights pursuant to a registration rights agreement. The Company does not intend to file a registration statement with respect to resales of or an exchange offer for the 2025 Notes. The 2025 Notes are guaranteed on a senior secured basis by Arconic and its subsidiaries that are guarantors (the “subsidiary guarantors” and, together with Arconic, the “guarantors”) under the ABL Credit Agreement (see below). Each of the subsidiary guarantors will be released from their 2025 Notes guarantees upon the occurrence of certain events, including the release of such guarantor from its obligations as a guarantor under the ABL Credit Agreement.
The 2025 Notes indenture includes several customary affirmative covenants. Additionally, the 2025 Notes indenture contains several negative covenants, that, subject to certain exceptions, limit the Company’s ability to, among other things, (i) pay dividends on or make other distributions in respect of capital stock and make other restricted payments and investments (as defined in the 2025 Notes), (ii) sell or transfer certain assets, (iii) incur indebtedness, and (iv) create liens on assets to secure debt.
The 2025 Notes are secured on a first priority basis by certain defined collateral (generally consisting of the Company’s and the Guarantors’ equipment, material owned U.S. real property, intellectual property, certain stock, and other tangible and intangible personal property, in each case, subject to certain exceptions) and on a second priority basis by certain other assets (generally consisting of substantially all of the accounts receivable, inventory, deposit accounts, securities accounts, commodities accounts, and cash assets of the Company and the Guarantors, and the proceeds thereof).
ABL Credit Agreement—Availability under the ABL Credit Facility is subject to a monthly borrowing base calculation, which, in general, is determined by applying a predetermined percentage to the amount of eligible accounts receivable and inventory, less customary reserves. As of December 31, 2022, the available balance was $1,189.
The ABL Credit Facility is scheduled to mature on May 13, 2025, unless extended or earlier terminated in accordance with the ABL Credit Agreement. Under the provision of the ABL Credit Agreement, Arconic will pay a quarterly commitment fee ranging from 0.250% to 0.375% (based on Arconic’s leverage ratio) per annum on the unused portion of the ABL Credit Facility, which will be determined based on the Company’s average daily utilization. The ABL Credit Facility was undrawn as of both December 31, 2022 and 2021.
As referenced above (See 2022 Actions), the ABL Credit Agreement was amended on February 16, 2022 to replace the LIBOR-based floating interest rate with a term SOFR-based interest rate. The ABL Credit facility is now subject to an interest rate for U.S. dollar borrowings equal to an applicable margin plus, at the Company's option, of either (a) base rate (“ABR”) determined by reference to the highest of (1) Deutsche Bank AG New York Branch's “prime rate,” (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5%, and (3) the term SOFR-based interest rate for a one month interest period, plus 1% per annum or (b) a term SOFR-based interest rate (which will not be less than 0.75% per annum), plus a credit spread adjustment equal to 0.10%, 0.15%, or 0.25% per annum for SOFR-based borrowings with interest periods of one month, three months, or six months, respectively. The applicable margin for the ABL Credit Facility is (a) 0.75% to 1.25% per annum for ABR loans and (b) 1.75% per annum to 2.25% per annum for SOFR loans based on the average daily excess availability (as defined under the ABL Credit Agreement). Accordingly, the interest rates for the ABL Credit Facility will fluctuate based on changes in the ABR, SOFR, and/or futures changes in the average daily excess availability.
Prior to February 16, 2022, the ABL Credit Facility was subject to an interest rate for U.S. dollar borrowings equal to an applicable margin plus, at the Company’s option, of either (a) base rate (“ABR”) determined by reference to the highest of (1) Deutsche Bank AG New York Branch’s “prime rate,” (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5%, and (3) the one month adjusted LIBO Rate, plus 1% per annum or (b) an adjusted LIBO Rate (not less than 0.75% per annum) (“LIBOR”). The applicable margin for the ABL Credit Facility through June 30, 2021 was (a) 1.25% for ABR loans and (b) 2.25% for LIBOR loans. Thereafter, the applicable margin for the ABL Credit Facility was (a) 0.75% to 1.25% per annum for ABR loans and (b) 1.75% per annum to 2.25% per annum for LIBOR loans based on the average daily excess availability (as defined under the ABL Credit Agreement).
All obligations under the ABL Credit Facility are unconditionally guaranteed, jointly and severally, by substantially all of the direct and indirect wholly-owned material subsidiaries of the Company that are organized under the laws of the United States, any state thereof or the District of Columbia, subject to certain exceptions (collectively, the “Guarantors”). The Company and the Guarantors entered into a guarantee under the ABL Credit Agreement concurrently with the effectiveness of the ABL Credit Agreement.
Subject to certain limitations, the ABL Credit Facility is secured on a first priority basis by certain defined collateral (generally consisting of substantially all of the accounts receivable, inventory, deposit accounts, securities accounts, commodities accounts, and cash assets of the Company and the Guarantors, and the proceeds thereof) and on a second-priority basis by certain defined collateral under the 2025 Notes (generally consisting of the Company and the Guarantors’ equipment, material owned U.S. real property, intellectual property, certain stock, and other tangible and intangible personal property, in each case, subject to exceptions as defined in the 2025 Notes). The Company and the Guarantors entered into collateral agreements concurrently with the effectiveness of the ABL Credit Agreement.
The ABL Credit Facility contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit the Company’s and its subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends, to make other distributions or redemptions/repurchases, in respect of the Company’s and its subsidiaries’ equity interests, to engage in transactions with affiliates and to amend certain material documents.
In addition, the ABL Credit Facility contains a financial maintenance covenant applicable to any fiscal quarter in which the excess availability is less than the greater of (a) 10% of the lesser of (x) the aggregate amount of the commitments under the ABL Credit Facility and (y) the borrowing base and (b) $50. In such circumstances, until such time as excess availability shall have exceeded such threshold for at least 30 consecutive days, the Company would be required to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00. The ABL Credit Facility also requires the Company and its subsidiaries to maintain substantially all of the Company’s cash in accounts that are subject to the control of the agent, which control becomes applicable when (a) an event of default under the facility occurs and is continuing until the first day thereafter on which no event of default shall exist or (b) excess availability is less than the greater of (i) 12.5% of the lesser of (x) the aggregate amount of the commitments under the ABL Credit Facility and (y) the borrowing base or (ii) $62.5 for five consecutive business days until the first day thereafter on which excess availability shall have exceeded such threshold for at least 30 consecutive days.
The ABL Credit Facility contains customary events of default, including with respect to a failure to make payments thereunder, cross-default and cross-acceleration, certain bankruptcy and insolvency events, and customary change of control events.
R. Cash Flow Information
Cash paid for interest and income taxes was as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Interest, net of amount capitalized | $ | 99 | | | $ | 87 | | | $ | 48 | |
| Income taxes, net of amount refunded | 29 | | | 26 | | | 27 | |
For all periods presented, both Cash and cash equivalents and restricted cash at beginning of year and Cash and cash equivalents and restricted cash at end of year includes Restricted cash of less than $0.03.
S. Acquisitions and Divestitures
Divestitures
Russia. On November 15, 2022, Arconic completed the sale of all of its operations in Russia to Promishlennie Investitsii LLC, the majority owner of VSMPO-AVISMA Corporation, for cash proceeds of $230. The transaction closed after the Company received all required approvals, resulting in the receipt of the cash consideration in exchange for all of Arconic’s net assets in Russia. These net assets included $203 of cash held in Russia that was not available for distribution to the parent company because of injunctions imposed as a result of litigation initiated in March 2020 by the Federal Antimonopoly Service of the Russian Federation (see Litigation in Note T). The legal form of the transaction was a stock sale of all of the Company’s Russian subsidiaries. VSMPO-AVISMA Corporation owns a limited portion of one of these legal entities, which was reported as Noncontrolling interest in the accompanying Consolidated Financial Statements prior to consummation of the sale transaction. The decision to pursue a sale was the result of a strategic review of alternatives completed in May 2022 by management with respect to Arconic’s Russian operations in consideration of the sanctions and other trade restrictions levied against Russia beginning in February 2022 and preliminary injunctions imposed on the Company’s operations in Russia by the Federal Antimonopoly Service of the Russian Federation, which included a prohibition on the ability of Arconic’s Russian subsidiaries to pay dividends to the parent company. In connection with this transaction, the Company recognized a loss of $306 ($304 after-tax), which was recorded in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations. The loss includes the write-off of goodwill of $14 (see Note O).
The following table presents selected financial information related to Arconic’s former operations in Russia:
| | | | | | | | | | | | | | |
| | November 14, 2022 | | December 31, 2021 |
| Cash and cash equivalents | | $ | 203 | | | $ | 79 | |
| Receivables from customers | | 100 | | 120 |
| Inventories | | 129 | | 102 |
| Properties, plants, and equipment, net | | 184 | | 200 |
| Accounts payable, trade | | 55 | | 47 |
| | | | |
| | January 1, 2022 through November 14, 2022 | | For the year ended December 31, 2021 |
Third-party sales* | | $ | 903 | | | $ | 968 | |
| Segment Adjusted EBITDA | | 71 | | 87 |
_____________________
*In both periods presented, Third-party sales includes aluminum products manufactured at the Company’s plant in Russia and sold through Arconic’s international selling company located in Hungary.
Prior to the sale transaction, the Company continued to conduct business in Russia to fulfill existing obligations in accordance with applicable laws, regulations, and international rules. Arconic’s former operations in Russia were comprised of one principal location in Samara, which manufactured sheet, plate, extrusions, and forgings across all of the Company’s end markets. The Samara facility continued to operate at relatively normal levels despite the imposition of sanctions and trade restrictions that limit a Russian entity’s ability to export goods, as Samara’s operations primarily served customer demand within Russia. The Samara facility had approximately 2,900 employees at the time of divestiture.
Arconic’s former local Russian management team continued to operate the Samara facility through November 14, 2022 without undue influence imposed by any third-party, including the Russian government. Additionally, other than the prohibition on dividend payments to the parent company, the Company did not encounter any other significant constraints related to its control over the now former Russian subsidiaries. As a result, Arconic reported the financial results of its former Russian operations through November 14, 2022 in the Company’s Consolidated Financial Statements and within Arconic’s Rolled Products segment. Additionally, the Company did not record an impairment of long-lived or other assets in any prior financial reporting period given the relatively normal operating levels at Samara and lack of any triggering events in such periods.
Building and Construction Systems. On June 6, 2022, the Company announced that it is evaluating strategic options for the businesses that comprise the Building and Construction Systems segment, including exploring a sale of its architectural systems business (Kawneer® brand). Subsequent to this announcement, Arconic initiated a sale process with respect to its architectural systems business, which has six principal locations in the United States, Canada, and Europe. Products manufactured under the Kawneer brand include windows, doors, and curtain walls. This business generated third-party sales of approximately $970 in 2022 and had approximately 2,900 employees as of December 31, 2022.
On August 2, 2022, the Company announced a pause in the sale process of this business due to current economic conditions, particularly uncertainty in the debt markets. This business will remain classified as held and in-use in Arconic's Consolidated Financial Statements and will continue to be reported within the Building and Construction Systems segment.
Itapissuma. On February 1, 2020, Arconic completed the sale of its aluminum rolling mill (aseptic foil and sheet products) in Itapissuma, Brazil to Companhia Brasileira de Alumínio for a net $46 in cash. In December 2020, the Company paid $4 in cash to Companhia Brasileira de Alumínio to settle certain working capital and other post-closing adjustments. Additionally, in June 2021, the Company paid $2 in cash to Companhia Brasileira de Alumínio to settle the remaining working capital and other post-closing adjustments. Arconic has recognized a cumulative loss of $60 (pretax) on this transaction, composed of the following: a charge of $53 in 2019 for the non-cash impairment of the carrying value (i.e., write-down to fair value) of the rolling mill’s net assets, primarily properties, plants, and equipment, as a result of entering into an agreement in August 2019 to sell this rolling mill; a charge of $6 in February 2020 for further necessary adjustments upon completion of the divestiture; and a charge of $1 in March 2021 for a then-proposed final settlement of the remaining post-closing adjustments and other items. Each of these amounts were recorded in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations in the respective reporting periods. This transaction is no longer subject to post-closing adjustments. Prior to the divestiture, this rolling mill’s operating results and assets and liabilities were reported in Arconic’s Rolled Products segment. The rolling mill generated third-party sales of $143 in 2019 and, at the time of divestiture, had approximately 500 employees.
Changwon. On March 1, 2020, Arconic completed the sale of its hard alloy extrusions plant in South Korea to SeAH Besteel Corporation for a net $55 in cash, resulting in a gain of $31 (pretax), which was recorded in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations. The gain is net of a $6 write-off of related goodwill. In May 2020, the Company received an additional $1 in cash as a result of a post-closing adjustment, which was previously contemplated in the aforementioned gain. This transaction is no longer subject to post-closing adjustments. Prior to the divestiture, this plant’s operating results and assets and liabilities were reported in Arconic’s Extrusions segment. The extrusions plant generated third-party sales of $51 in 2019 and, at the time of divestiture, had approximately 160 employees. Texarkana. In October 2018, Arconic 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 plus additional contingent consideration of up to $50, of which $25 was received prior to 2020. The contingent consideration related to the achievement of various milestones associated with operationalizing the rolling mill equipment within 36 months of the transaction closing date. In 2020, Arconic received the remaining contingent consideration of $25, which was recorded as a gain in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations. As of December 31, 2020, there was no remaining contingent consideration associated with this transaction. T. Contingencies and Commitments
Unless specifically described to the contrary, all matters within Note T are the full responsibility of Arconic pursuant to the Separation and Distribution Agreement (see Note A). Additionally, the Separation and Distribution Agreement provides for cross-indemnities between the Company and Howmet for claims subject to indemnification. Contingencies
Environmental Matters. Arconic participates in environmental assessments and cleanups at several 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, among others, the nature and extent of contamination, changes in remedial requirements, and technological changes.
The Company’s remediation reserve balance was $85 and $64 (of which $40 and $15, respectively, was classified as a current liability) at December 31, 2022 and 2021, respectively, and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated.
In 2022, the remediation reserve was increased by $33 due to a charge of $13 (recorded in Cost of goods sold) for the Massena location (see below); a charge of $14 (recorded in Cost of goods sold) related to the estimated costs of future operations, maintenance, and monitoring activities at several sites, including $9 for a correction of an accrual (see Note A); a charge of $5 (recorded in Cost of goods sold) for the planned removal of polychlorinated biphenyls- (PCBs) contaminated soil from certain portions of a ditch that is adjacent to the Company’s facility in Lafayette, Indiana under a previously issued corrective action order with the Indiana Department of Environmental Management (remediation to be completed over a two-year period beginning in 2023); and a charge of $1 (recorded in Restructuring and other charges – see Note E) to reflect an estimate of Arconic's share of newly-identified costs for additional remediation work, which is subject to review by Italy’s Ministry of the Environment, related to a recently completed project at a former site where the Company is one of several responsible parties. In 2021, the remediation reserve was reduced by $5 due to a reversal of an $11 liability (a credit was recorded in Cost of goods sold) previously established for the Massena location (see below) and a charge of $2 (recorded in Restructuring and other charges – see Note E) for the assumption of a remediation obligation related to a legal settlement associated with a former operating site. Additionally, the change to the remediation reserve includes a charge of $4 (recorded in Cost of goods sold) for other items including incremental estimated expenditures associated with active remediation systems and/or monitoring and inspection programs at several sites. In 2020, the remediation reserve was reduced by $2 due to the reversal of a $5 liability (a credit was recorded in Restructuring and other charges – see Note E) previously established by ParentCo, as the underlying obligation no longer exists based on an assessment completed by Arconic management; a charge of $1 (recorded in Restructuring and other charges – see Note E) to establish a liability related to the divestiture of a rolling mill in Brazil (see Note S); and a charge of $2 (recorded in
Cost of goods sold) for incremental estimated expenditures associated with active remediation systems and/or monitoring and inspection programs at several sites.
Payments related to remediation expenses applied against the reserve were $11, $84, and $82 in 2022, 2021, and 2020, respectively, which include expenditures currently mandated, as well as those not required by any regulatory authority or third party. The change in the reserve in 2022 and 2021 reflects a decrease of $1 and $3 for other items, respectively, and the change in the reserve in 2020 reflects both an increase of $13 for obligations transferred from ParentCo on the Separation Date (see below) and a decrease of $3 for other items.
The Separation and Distribution Agreement includes provisions for the assignment or allocation of environmental liabilities between Arconic and Howmet, including certain remediation obligations associated with environmental matters. In general, the respective parties are responsible for the environmental matters associated with their operations, and with the properties and other assets assigned to each. Additionally, the Separation and Distribution Agreement lists environmental matters with a shared responsibility between the two companies with an allocation of responsibility and the lead party responsible for management of each matter. For matters assigned to Arconic and Howmet under the Separation and Distribution Agreement, the companies have agreed to indemnify each other in whole or in part for environmental liabilities arising from operations prior to the Separation Date.
The following description provides details regarding the Company’s largest reserve (next largest is $6), which relates to one of Arconic’s current operating locations.
Massena, NY — Arconic has an ongoing remediation project related to the Grasse River, which is adjacent to the Company’s Massena plant site. Many years ago, it was determined that sediments and fish in the river contain varying levels of PCBs. The project, which was selected by the U.S. Environmental Protection Agency (EPA) in a Record of Decision issued in April 2013, was 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. The EPA approved the final design phase of the project in March 2019. Following the EPA’s approval, the actual remediation fieldwork commenced. In April 2020, the EPA approved an addendum to the final remedial design to address newly-identified matters, including river navigation issues, which resulted in changing the original remedy for a specific segment of the river to dredging from capping. The Company attained substantial completion of remedial construction activities on the Grasse River in September 2021. As a result, along with an assessment of anticipated remaining future costs, primarily for post-construction monitoring, the reserve was reduced by $11.
In March 2022, an ice jam event occurred in a section of the river where the cap was installed. The ice accumulation caused a blockage in the river that restricted flow, which resulted in high forces being placed on the bottom sediments as the river worked its way through the obstruction. Once the ice cleared and it was safe to enter the river, Arconic investigated and analyzed the cap for any damage. It was determined that portions of the cap were damaged and there was disturbance to the underlying sediments. As a result, over the next several months, the Company performed extensive environmental, geotechnical, and ice modeling investigations to support the preparation of a proposed plan to repair the damaged cap and contain the exposed sediment. These activities were completed in September 2022 and led to a completed design and estimated cost of $22 for the proposed repair remedy, which included consideration of a temporary work stoppage due to the winter season extending the repair work into 2023 and the impact of cost inflation for labor and materials. Arconic’s existing reserve included consideration of potential future cap repairs given the magnitude and nature of the previously completed remediation project. As a result, in 2022, the Company increased the reserve balance for this matter by $13 for the incremental amount needed to cover the estimated cost of the proposed plan. On October 3, 2022, Arconic submitted an Analysis of Alternatives report to the EPA setting forth four potential remedies, including the Company’s proposed plan. On December 22, 2022, at the EPA’s request, Arconic submitted a revised Analysis of Alternatives report to address two additional repair remedies for a total of six potential alternatives. Arconic is now waiting on the EPA’s response, but continues to maintain an active dialogue with the EPA, as well as other stakeholders, all in support of the EPA making a final decision, which the Company expects over the next several months. Arconic’s proposed remedy is consistent with the Record of Decision issued for the original remediation project (see above). In advance of the EPA’s decision, the Company performed a portion of the work associated with its proposed remedy in order to reduce the environmental risk associated with the exposed sediments. This work was completed by the end of November 2022.
As the project progresses, further changes to the reserve may be required due to factors such as, among others, the EPA’s selection of a remedy that differs from Arconic’s proposed plan, additional changes in other remedial requirements, increased site restoration costs, and incremental ongoing operation and maintenance costs.
At December 31, 2022 and 2021, the reserve balance associated with this matter was $38 and $30, respectively. Timing of expenditures is contingent on the EPA’s decision with respect to the repair remedy and the subsequent mobilization of third-party contractors.
Litigation.
All references to ParentCo in the matters described under this section Litigation refer to Arconic Inc. only and do not include its subsidiaries, except as otherwise stated.
Federal Antimonopoly Service Of The Russian Federation Litigation—The Federal Antimonopoly Service of the Russian Federation (“FAS”) filed a lawsuit on March 17, 2020 with the Arbitrazh (State Commercial) Court of Samara Region against two of the Company’s now former subsidiaries, Arconic Rus Investment Holdings LLC (“LLC ARIH”) and AlTi Forge Holding Sarl (the “Arconic Russian Holding Companies”), naming Elliott Associates L.P., Elliott International L.P., and Elliot International Capital Advisors Inc. (“Elliott”) as third parties. Also named as interested parties are: Parent Co. and certain of its foreign subsidiaries; and Arconic Netherland B.V., the Company’s subsidiary that previously directly and indirectly owned LLC ARIH, Arconic SMZ JSC and JSC AlTi Forge (the “Arconic Russian Subsidiaries”). References in this disclosure to the Arconic Russian Holding Companies and/or the Arconic Russian Subsidiaries are applicable only through November 14, 2022. FAS alleges that Elliott indirectly acquired control over the former Arconic Russian Subsidiaries when, in May 2019, directors who had previously been nominated by Elliott and appointed or elected to Parent Co.’s board of directors pursuant to certain settlement agreements among Parent Co. and Elliott constituted a majority of that board as a result of a reduction in the size of the board. FAS claims alleged non-compliance with Russian Federal Law No. 57-FZ, which governs foreign ownership of certain Russian companies and requires certain governmental approvals for a foreign investor to acquire control over strategically important Russian companies. On April 6, 2020, the Samara Court granted preliminary injunctions against the Arconic Russian Holding Companies prohibiting the taking of certain corporate governance actions, including with respect to: (i) the disposal of shares in the Arconic Russian Subsidiaries; and (ii) the making of certain decisions with respect to the Arconic Russian Subsidiaries, including decisions regarding the payment of dividends, placement of bonds, amendment of bylaws and internal documents, the appointment, change and compensation of the Arconic Russian Subsidiaries’ CEO, and the election of the Arconic Russian Subsidiaries’ board of directors. On April 29, 2020, the Arconic Russian Holding Companies simultaneously filed an appeal and motion to revoke the previously issued injunctions. Both the appeal and motion to revoke were denied. A hearing on the merits of the claim had been postponed several times, most recently until December 22, 2022. As a consequence of the alleged violation, FAS was seeking removal and exclusion of the Arconic Russian Holding Companies from the affairs of the Arconic Russian Subsidiaries, resulting in the deprivation of the benefits of their ownership interests in the Arconic Russian Subsidiaries, including the rights currently restricted in the preliminary injunctions granted on April 6, 2020. On November 15, 2022, the Company completed the sale of all of its operations in Russia to Promishlennie Investitsii LLC, the majority owner of VSMPO-AVISMA Corporation, (see Russia in Note S). At a hearing on December 22, 2022, the Samara Court dismissed the litigation. Reynobond PE—On June 13, 2017, the Grenfell Tower in London, U.K. caught fire resulting in fatalities, injuries, and damage. A French subsidiary of Arconic Corporation (of ParentCo at that time), 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 facade installer, who then completed and installed the system under the direction of the general contractor. Neither ParentCo 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 and concluded in 2022, following which a final report will be written and subsequently published. As Phase 2 of the public inquiry concluded, the testimony supported AAP SAS’s position that the choice of materials and the responsibility of ensuring compliance of the cladding system with relevant U.K. building code and regulations was with those individuals or entities who designed and installed the cladding system such as the architects, fabricators, contractors and building owners. The ongoing hearings in the U.K. have revealed serious doubts about whether these third parties had the necessary qualifications or expertise to carry out the refurbishment work at Grenfell Tower, adequately oversaw the process, conducted the required fire safety testing or analysis, or otherwise complied with their obligations under U.K. regulations. AAP SAS is participating as a Core Participant in the Public Inquiry and is also cooperating with the ongoing parallel investigation by the Police. Arconic
Corporation does not sell and ParentCo previously stopped selling the PE product for architectural use on buildings. Given the preliminary nature of these investigations and the uncertainty of potential future litigation, Arconic Corporation 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.
United Kingdom Litigation. Multiple claimant groups comprised of survivors and estates of decedents of the Grenfell Tower fire have filed claims in the U.K. arising from that fire, including as follows:
•On June 12, 2020, four claimants represented by Birnberg Peirce Ltd filed suit against AAP SAS.
•On June 12, 2020, two claimants represented by Howe & Co Solicitors filed suit against AAP SAS.
•On June 26, 2020, three claimants represented by Russell-Cooke LLP filed suit against AAP SAS.
•On December 23, 2020, several additional suits were filed by claimant groups comprised of survivors and estates of decedents. These suits were all filed against the same group of 23 defendants: AAP SAS, Arconic Corporation, Howmet Aerospace Inc., the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, the London Fire Commissioner, the UK Home Office, The Ministry of Housing, Communities and Local Government, Rydon Maintenance Ltd, Celotex Ltd, Saint-Gobain Construction Products UK Limited, Kingspan Insulation Limited, Kingspan Group PLC (suits have since been discontinued), Studio E Architects Ltd (In liquidation), Harley Facades Ltd, Harley Curtain Wall Limited (In liquidation), CEP Architectural Facades Ltd, Exova (U.K.) Ltd, CS Stokes & Associates Ltd, Artelia Projects UK Limited (suits have since been discontinued), Whirlpool UK Appliances Limited, Whirlpool Company Polska Sp.z.o.o. and Whirlpool Corporation. These suits include as follows (represent preliminary best estimates of claimants in each suit):
◦Seven claimants represented by Deighton Pierce Glynn;
◦Seven (previously six) claimants represented by SMQ Legal Services;
◦Four (previously three) claimants represented by Scott Moncrieff;
◦Thirty-one (previously twenty-seven) claimants represented by Saunders Law;
◦Thirty-four (previously thirty-three) claimants represented by Russell Cooke LLP. On March 29, 2022, Russell Cooke issued a further suit against the above-mentioned 21 Defendants on behalf of one Claimant. The suits issued by Russell Cooke were consolidated;
◦Forty-seven (previously forty) claimants represented by Imran Khan & Partners;
◦Fifty-seven (previously sixty-one) claimants represented by Howe & Co.;
◦One hundred nineteen (previously one hundred fourteen) claimants represented by Hodge Jones and Allen Solicitor. On March 29, 2022, Hodge Jones and Allen issued a further suit against the above-mentioned 21 Defendants on behalf of four (previously five) Claimants. The suits issued by Hodge Jones and Allen were consolidated;
◦Twenty-three (previously nineteen) claimants represented by Hickman & Rose;
◦Twelve (previously ten) claimants represented by Duncan Lewis Solicitors;
◦One hundred six (previously one hundred thirteen) claimants represented by Birnberg Peirce;
◦Three hundred forty-six (previously three hundred forty-one) claimants represented by Bindmans LLP. On March 31, 2022, Bindmans issued a further suit against the above-mentioned 21 Defendants on behalf of five Claimants. The suits issued by Bindmans were consolidated;
◦Eighty (previously seventy-six) claimants represented by Bhatt Murphy Ltd; and
◦Twenty-seven (previously twenty-six) claimants represented by Slater & Gordon.
Multiple claimant groups comprised of emergency responders who attended the Grenfell Tower fire have also filed claims against AAP SAS arising from that fire, including as follows:
•On June 11, 2020, 98 (previously 80) firefighters represented by Thompsons Solicitors filed suit against AAP SAS, as well as the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, Celotex Ltd, Exova (U.K.) Ltd, Rydon Maintenance Ltd, Studio E Architects Ltd, Harley Facades Ltd, CEP Architectural Facades Ltd, CS Stokes & Associates Ltd, and the London Fire Commissioner. Since then, another 10 (previously 7) firefighters have sought to be added to the suit.
•On June 12, 2020, 36 (previously 27) police officers represented by Penningtons Manches Cooper LLP filed suit against AAP SAS, as well as the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, Celotex Ltd, Exova (U.K.) Ltd, Rydon Maintenance Ltd, Studio E Architects Ltd, Harley Facades Ltd, CEP Architectural Facades Ltd, CS Stokes & Associates Ltd, London Fire Commissioner, and the Commissioner of the Police of the Metropolis. Since then, some claimants have withdrawn and others have sought to be added to the suit (currently 33 claimants).
•On June 12, 2020, two firefighters represented by Pattinson and Brewer filed suit against AAP SAS, as well as the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, Celotex Ltd, Exova (U.K.) Ltd, Rydon Maintenance Ltd, Studio E Architects Ltd, Harley Facades Ltd, CEP Architectural Facades Ltd, CS Stokes & Associates Ltd, and the London Fire Commissioner. A third firefighter, also represented by Pattinson and Brewer, brought a claim against the same defendants on June 15, 2020. One of the original firefighter claimants has now withdrawn from the suit.
On December 17, 2020, a claim was issued by the Royal Borough of Kensington and Chelsea and the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd against: (1) Whirlpool Company Polska Spolka z Organiczona; and (2) AAP SAS. The Claimants seek damages in respect of their own losses and/or a contribution to the extent that they are found to be liable by the London High Court for any losses arising out of the Grenfell Tower fire on June 13, 2017. On March 29,2022, the Royal Borough of Kensington and Chelsea and the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd sought permission to join two further Defendants to these proceedings, namely: (i) Whirlpool EMEA S.p.A.; and (ii) Whirlpool UK Appliances Limited.
All of these claims were filed in the High Court in London. On October 2, 2020, the High Court ordered that: (a) the suits of the survivors and estates of decedents that were issued in June 2020 be stayed until a hearing scheduled by the High Court for June 9-10, 2021; and (b) that the suits of emergency responders be stayed until a hearing scheduled by the High Court for July 7-8, 2021. The hearing scheduled for June 9-10, 2021 was subsequently vacated by the Court.
The above-mentioned suits brought by: (1) the survivors and estates of decedents; (2) the emergency responders; and (3) the Royal Borough of Kensington and Chelsea for contributions, were heard together at a procedural hearing on July 7-8, 2021, before Senior Master Fontaine. At the hearing, the Senior Master made several directions for the future management of the Grenfell Tower litigation, including staying all suits against Arconic Corporation and its affiliates until the next directions hearing, which was held on April 26, 2022. On July 28, 2022, the Senior Master stayed the cases for another 12 months until the next case management conference, which will be scheduled on a date after April 27, 2023.
The stay is intended to allow Arconic Corporation, along with several other co-defendants to the above-mentioned litigations, to engage in discussions with the claimants' legal representatives in an attempt to reach a mutually agreeable settlement. The parties have agreed to overarching terms as to the form of Alternative Dispute Resolution that they are willing to participate in and discussions are ongoing.
These discussions have resulted in progress toward a settlement to resolve a substantial majority of the claims brought by the survivors and estates of decedents though it is not certain that such a settlement will be concluded. In preparation for a potential settlement, and based on anticipated contribution to a settlement offer, Arconic recorded a liability of $61 for its share and a related receivable of $53 for costs expected to be covered by insurance proceeds if settlement is concluded. Discussions with certain other claimant groups in the above-mentioned litigations are also ongoing though there is no certainty that such discussions will result in any settlement.
Other than the recorded liability related to the claims brought by the survivors and estates of decedents noted above, and given the preliminary nature of these matters and the uncertainty of litigation, Arconic 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 in the above-referenced disputes.
Behrens et al. v. Arconic Inc. et al. 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 “ParentCo 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 ParentCo 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 ParentCo 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 ParentCo 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 product 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) suggesting a procedure for limited discovery followed by further briefing on those subjects. On September 16, 2020, the Court issued an order granting Defendants’ motion to dismiss on forum non conveniens grounds, subject to certain conditions, determining that the United Kingdom, and not the United States, is the appropriate place for plaintiffs to bring their case. Plaintiffs subsequently filed a motion for reconsideration, which the Court denied on November 23, 2020. Plaintiffs are appealing this judgment; ParentCo Defendants are cross-appealing one of the conditions. The briefing was completed and oral argument was held on Plaintiffs’ appeal in the Third Circuit on June 7, 2022. On July 8, 2022, the Third Circuit decided the appeal in the Behrens matter in the defendants favor. The Third Circuit affirmed the district court’s dismissal of plaintiffs’ case on forum non conveniens grounds. The Court also granted ParentCo Defendants’ cross-appeal, invalidating one of the trial court’s dismissal conditions that would have left open the possibility for Plaintiffs to return to the United States for a trial on damages if defendants were found liable in English courts and if the English court made certain other legal and factual findings. On July 22, 2022, the Plaintiffs filed a petition seeking a panel rehearing, or en banc rehearing, of the Third Circuit’s July 8, 2022 decision, which the Third Circuit denied on October 7, 2022. On January 5, 2023, the plaintiffs filed a petition seeking review in the U.S. Supreme Court. The Supreme Court has not yet ruled on that petition. Because Plaintiffs have not exhausted all appellate options and the uncertainty of litigation, Arconic Corporation 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. 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 ParentCo 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 ParentCo, three former ParentCo executives, several current and former ParentCo directors, and banks that acted as underwriters for ParentCo’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 ParentCo and Kleinfeld made false and misleading statements and failed to disclose material information about ParentCo’s commitment to safety, business and financial prospects, and the risks of the Reynobond PE product, including in ParentCo’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 on November 1, 2019 and all defendants filed a reply brief on November 26, 2019. On June 22, 2020, counsel for Arconic Corporation and the individual defendants filed a letter apprising the Court of a recent decision by the Third Circuit and discussing its relevance to the pending motion to dismiss. Pursuant to an Order by the Court directing the plaintiffs to respond to this letter, the plaintiffs filed a letter response on July 9, 2020. On June 23, 2021, the Court granted in part and denied in part the defendants’ motion to dismiss the second amended complaint. The Court dismissed with prejudice plaintiffs’ claim against ParentCo, certain officers and directors and the underwriters based on the registration statement for the Preferred Offering, with the exception of one statement and only as to purchases made before October 23, 2015. In addition, plaintiffs’
claim based on ParentCo’s statements in other SEC filings, in product brochures, and on websites was dismissed in its entirety as to Kleinfeld and dismissed in part and allowed in part as to ParentCo. The Court also dismissed the control-person liability claims in their entirety. On August 11, 2021, ParentCo filed a motion with the district court for certification of an interlocutory appeal and a stay pending appeal. The motion seeks to appeal the aspect of the court’s June 23, 2021 opinion concerning the complaint’s pleading of ParentCo’s alleged scienter. Plaintiffs filed an opposition to the motion on August 17, 2021, and ParentCo filed a reply brief on August 24, 2021. On August 12, 2021, defendants filed an answer to the second amended complaint. A status conference was held before the Court on January 11, 2022 during which the Court heard argument from both parties on the pending motion for certification of an interlocutory appeal. On July 29, 2022, the Court denied the motion for certification of an interlocutory appeal and ordered the parties to submit a proposed scheduling order, which the parties jointly filed on August 29, 2022. The Court held a status conference on September 14, 2022, and on December 2, 2022, the Court issued an Initial Case Management Order (“CMO”) setting forth dates for class certification briefing and discovery. Discovery began and is ongoing. Given the preliminary nature of this matter and the uncertainty of litigation, Arconic Corporation 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. On June 22, 2018, a derivative complaint was filed nominally on behalf of ParentCo by a purported ParentCo stockholder against the then members of ParentCo’s Board of Directors and Klaus Kleinfeld and Ken Giacobbe, naming ParentCo 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 Securities Exchange Act of 1934, as amended, 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, Arconic Corporation 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.
General. While Arconic believes that all the above referenced Reynobond PE cases are without merit and intends to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters.
Tax. Under the terms of the agreements that govern the 2016 Separation Transaction, Arconic may be entitled to future economic benefits resulting from Alcoa Corporation’s utilization of certain value-added tax credits that were generated, in part, by the Company’s former operations in Brazil in years prior to 2015. Because Arconic is not party to the regulatory filings with the Brazilian government and, therefore, does not have a basis to conclude on the realizability of these value-added tax credits by Alcoa Corporation, the Company will recognize income when amounts are realized, if any.
Other. In 2018, Arconic entered into a consent order with the Iowa Department of Natural Resources (IDNR) to address overflows of stormwater combined with untreated process water from the Company’s Davenport plant which the IDNR alleged were unlawful bypasses prohibited by the facility’s wastewater discharge permit. These overflows occurred during periodic storm events which Arconic timely reported to the IDNR. The consent order required the Company to submit a feasibility study by November 1, 2022 evaluating the reasonableness, estimated cost, impact, and overall feasibility of all actions that could be implemented to avoid unlawful bypasses from occurring in the future. After conducting extensive monitoring, analysis, and investigative work, the Company submitted the feasibility study to the IDNR in October 2022. Arconic’s recommended approach, as documented in the feasibility study, consists of amending its wastewater discharge permit and constructing certain improvements to stormwater and process water systems expecting to result in estimated future capital expenditures of approximately $25 to $30, assuming Arconic’s approach is approved. In 2022, the Company established a reserve of $0.5 to cover future operating expenses associated with this proposed approach. Arconic is now in discussions with the IDNR concerning the feasibility study and the Company’s proposed approach, following which Arconic is then required to submit a final report for approval. The consent order requires the Company to implement the approved remedy by November 1, 2028. Approval of a final remedy by the IDNR may result in additional expenditure and/or liability.
General. In addition to the matters described 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 is not readily determinable because of the considerable uncertainties that exist. Accordingly, it is possible that the Company's liquidity or results of operations in a reporting 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 Arconic.
Commitments
Purchase Obligations. Arconic has entered into purchase commitments for raw materials, energy, and other goods and services, which total $909 in 2023, $106 in 2024, $19 in 2025, $15 in 2026, $13 in 2027, and $24 thereafter as of December 31, 2022. Subsequent to December 31, 2022, the Company entered into additional aluminum supply contracts totaling approximately $765, of which approximately $375, $195, and $195 is expected to be purchased in 2023, 2024, and 2025, respectively. Additionally, through February 20, 2023, Arconic is currently negotiating terms for further aluminum supply contracts totaling approximately $2,580.
Operating Leases. See Note P for future minimum contractual obligations under long-term operating leases. Guarantees, Letters of Credit, and Surety Bonds.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Guarantees(1) | | Letters of Credit(2) | | Surety Bonds(3) |
| Issuer | Beneficiary | | Amount | Expiration Date | | Amount | Expiration Date | | Amount | Expiration Date |
| Arconic | Third-parties | | $ | 2 | | 2023-2029 | | $ | 11 | | 2023 | | $ | 48 | | 2023-2024 |
| Howmet | Arconic | | — | | — | | 27 | | 2023 | | 4 | | 2023 |
| Alcoa Corporation | Arconic | | 8 | | Open term | | — | | — | | 2 | | 2024 |
_____________________
(1)Arconic has outstanding bank guarantees related to, among others, tax matters and customs duties. Furthermore, Alcoa Corporation has outstanding bank guarantees related to the Company. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified by Arconic in accordance with the 2016 Separation and Distribution Agreement.
(2)Arconic has outstanding letters of credit primarily related to insurance, environmental, and lease obligations. Additionally, Howmet has outstanding letters of credit related to the Company. In the event Howmet would be required to perform under any of these instruments, Howmet would be indemnified by Arconic in accordance with the Separation and Distribution Agreement.
(3)Arconic has outstanding surety bonds primarily related to customs duties and environmental obligations. Additionally, Howmet has outstanding surety bonds related to the Company. In the event Howmet would be required to perform under any of these instruments, Howmet would be indemnified by Arconic in accordance with the Separation and Distribution Agreement. Furthermore, Alcoa Corporation has outstanding surety bonds related to the Company. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified by Arconic in accordance with the 2016 Separation and Distribution Agreement.
In August 2012, ParentCo and the Iowa Finance Authority entered into a loan agreement for the proceeds from the issuance of $250 in Midwestern Disaster Area Revenue Bonds Series 2012 due 2042 (the “Bonds”). The Bonds were issued by the Iowa Finance Authority pursuant to the Heartland Disaster Tax Relief Act of 2008 for the purpose of financing all or part of the cost of acquiring, constructing, reconstructing, and renovating certain facilities (the “Project”) at Arconic’s rolling mill plant in Davenport, IA. In accordance with the Separation and Distribution Agreement, as well as a Second Supplemental Tax and Project Certificate and Agreement, dated March 31, 2020, to the Tax Exemption Certificate and Agreement, dated August 14, 2012, (collectively, the “Tax Agreement”), ParentCo remained the borrower associated with the Bonds and Arconic is the legal owner of the Davenport facility, including the Project. The Company has no financial obligations related to the future debt service of the Bonds but is required to continue to operate, and maintain the location of, the Project in accordance with the Tax Agreement.
U. Financial Instruments
Amounts designated below as kmt are thousand metric tons and MMBtu are million British thermal units.
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 respective carrying value and fair value of Arconic’s financial instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| December 31, | | Carrying value | | Fair value | | Carrying value | | Fair value |
| Cash and cash equivalents | | $ | 261 | | | $ | 261 | | | $ | 335 | | | $ | 335 | |
| Hedging instruments and derivatives - assets | | 21 | | | 21 | | | 1 | | | 1 | |
| Hedging instruments and derivatives - liabilities | | 8 | | | 8 | | | 23 | | | 23 | |
| Long-term debt | | 1,597 | | | 1,539 | | | 1,594 | | | 1,692 | |
The following methods were used to estimate the fair value of financial instruments:
Cash and cash equivalents and Short-term debt. The carrying amounts approximate fair value because of the short maturity of the instruments. The fair value amounts for Cash and cash equivalents were classified in Level 1 of the fair value hierarchy and Short-term debt was classified in Level 2 of the fair value hierarchy.
Hedging instruments and derivatives. Arconic is exposed to certain risks relating to its ongoing business operations, including financial, market, political, and economic risks. Information regarding the Company's exposure to risks of changing commodity prices is described below.
Arconic's commodity and hedging activities are subject to the management, direction, and control of the Strategic Risk Management Committee (SRMC), which consists of at least three members, including the Company's chief executive officer and chief financial officer. The remaining member(s) are other Arconic officers and/or employees as the chief executive officer may designate from time to time. Currently, the only other member of the SRMC is the Company's treasurer. The SRMC meets on a periodic basis to review hedging positions and strategy and reports to the Audit and Finance Committee of Arconic's Board of Directors on the scope of its activities.
The Company's hedging instruments are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility, and to cover underlying exposures. Specifically, these instruments hedge forward sale commitments for aluminum and forward purchase commitments for aluminum, natural gas, and certain alloying materials. Arconic is not involved in trading activities for energy, weather derivatives, or other nonexchange commodity trading activities.
The fair value of the Company's hedging instruments was based on quoted market prices (e.g., aluminum prices on the 10-year London Metal Exchange forward curve) and were classified in Level 1 of the fair value hierarchy. Most of these instruments are comprised of those that were designated as cash flow hedges while the remainder are marked-to-market as they do not qualify for hedge accounting.
The following table presents the fair value and amount of underlying by type for all hedging instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Assets | | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | | |
| Aluminum | | $ | — | | | 17 | | | kmt | | $ | — | | — | | | |
| Alloying materials* | | (1) | | | 1 | | | kmt | | — | | — | | | |
| Marked-to-market | | | | | | | | | | | |
| Aluminum | | 6 | | | 60 | | | kmt | | 1 | | 14 | | | kmt |
| | $ | 5 | | | | | | | $ | 1 | | | | |
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | | |
| Aluminum* | | $ | (14) | | | 368 | | | kmt | | $ | 18 | | 251 | | | kmt |
| Energy | | 5 | | | 6.3 | | | MMBtu | | 2 | | 3.3 | | | MMBtu |
| Alloying materials | | 1 | | | 3 | | | kmt | | — | | — | | | kmt |
| Marked-to-market | | | | | | | | | | | |
| Aluminum | | 12 | | | 53 | | | kmt | | 3 | | 19 | | | kmt |
| Energy | | 4 | | | 0.6 | | | MMBtu | | — | | — | | | |
| | $ | 8 | | | | | | | $ | 23 | | | | |
_____________________
*The hedging instruments are classified as assets or liabilities based on the overall position of all instruments held with respective counterparties.
The following table presents the unrealized and realized gains and losses associated with those hedging instruments designated as cash flow hedges:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Unrealized | | | | | | |
| Other comprehensive loss | | | | | | |
| Aluminum | | $ | 81 | | | $ | (160) | | | $ | (7) | |
| Energy | | 16 | | | (2) | | | — | |
| Alloying materials | | (2) | | | 1 | | | 5 | |
| | $ | 95 | | | $ | (161) | | | $ | (2) | |
Realized* | | | | | | |
| Sales | | | | | | |
| Aluminum | | $ | 43 | | | $ | (150) | | | $ | 2 | |
| Cost of goods sold | | | | | | |
| Aluminum | | (5) | | | (8) | | | 10 | |
| Energy | | (20) | | | — | | | — | |
| Alloying materials | | 1 | | | (2) | | | — | |
| | $ | 67 | | | $ | (140) | | | $ | (8) | |
_____________________*In all periods presented, these amounts were reclassified from Accumulated other comprehensive loss (see Note L). For hedging instruments that do not qualify for hedge accounting, in 2022, the Company recognized an unrealized loss of $4 and a realized gain of $6 in Sales for aluminum, and an unrealized loss of $4 and a realized gain of $3 in Cost of goods sold for energy. Unrealized and realized impacts were not material in 2021 and 2020.
The disclosures with respect to commodity price risk do not consider the underlying commitments or anticipated transactions. If the underlying items were included, the gains or losses on the hedging instruments may be offset. Actual results will be determined by several factors that are not under Arconic's control and could vary significantly from those factors disclosed.
The Company is exposed to credit loss in the event of nonperformance by counterparties on the above instruments, as well as credit or performance risk with respect to its hedged customers' commitments. Arconic does not anticipate nonperformance by any of these parties. Contracts are with creditworthy counterparties and are further supported by cash or irrevocable letters of credit issued by carefully chosen banks. In addition, master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts.
Separately, Arconic has three natural gas supply contracts that are treated as derivatives for accounting purposes as they failed to qualify for the normal purchase normal sale exception due to net settlement provisions. These derivatives also do not qualify for hedge accounting. The Company does not have a regular practice of entering into contracts that are treated as derivatives for accounting purposes. As of December 31, 2022, Arconic's derivatives classified as assets consisted of $16 (12.1 MMBtu). Additionally, in 2022, the Company recognized an unrealized gain of $16, in Cost of goods sold for these derivatives (see Note A). Long-term debt. The fair value was based on quoted market prices for public debt and were classified in Level 2 of the fair value hierarchy.
V. Receivables
On January 5, 2022, the Company entered into a one-year arrangement with a financial institution to sell certain customer receivables outright without recourse on a continuous basis. All such sales are at Arconic's discretion. Under this arrangement, the Company will serve in an administrative capacity, including collection of the receivables from the respective customers and remittance of these cash collections to the financial institution. Accordingly, upon the sale of customer receivables to the financial institution, Arconic removes the underlying trade receivables from the Consolidated Balance Sheet and includes the reduction as a positive amount in the Decrease (Increase) in receivables line item within Operating Activities on the Statement of Consolidated Cash Flows. At no time can the outstanding balance due to the financial institution exceed $225 (increased in February from original amount of $100). In 2022, the Company sold customer receivables and remitted cash to the financial institution both in the amount of $1,119. Of the total amount of customer receivables sold in 2022, $77 were included in Receivables from customers on the accompanying Consolidated Balance Sheet as of December 31, 2021. In December 2022, this arrangement was amended to provide for an automatic renewal each year unless terminated in accordance with the provisions of the underlying purchase agreement.
W. Subsequent Events
Management evaluated all activity of Arconic and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements.