Preferred and Common Stock

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

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

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

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

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

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

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

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

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

See Note W for further information on common stock repurchases.

Share Activity (number of shares)



	Common stock
	Treasury		Outstanding
Balance at end of 2015	81,051,103		1,310,160,141
Issued for stock-based compensation plans	(5,219,660	)	5,302,128
Treasury stock retirement	(75,831,443	)	—
Reverse Stock Split	—		(876,942,489	)
Balance at end of 2016	—		438,519,780
Conversion of convertible notes	—		39,242,706
Issued for stock-based compensation plans	—		3,654,051
Balance at end of 2017	—		481,416,537
Issued for stock-based compensation plans	—		1,854,180
Balance at end of 2018	—		483,270,717

Stock-Based Compensation

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

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

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

The risk-free interest rate (2.5%) was based on a yield curve of interest rates at the time of the grant based on the contractual life of the option. The dividend yield (0.9%) was based on a one-year average. Volatility (34.0% for 2018, 38.1% for 2017, and 44.5% in 2016) was based on comparable companies in 2018 and 2017 (except 2016 historical volatilities were used) and implied volatilities over the term of the option. Arconic utilized historical option forfeiture data to estimate annual pre- and post-vesting forfeitures (6%). Exercise behavior (61%) was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the life of an option (6.0 years (7.3 years for four-year cliff options)) was an output of the lattice-pricing model. The activity for stock options and stock awards during 2018 was as follows (options and awards in millions):



	Stock options				Stock awards
	Number of options		Weighted average exercise price		Number of awards		Weighted average FMV per award
Outstanding, January 1, 2018	11		$	23.94	7		$	21.49
Granted	1		29.97		2		26.48
Exercised	(1	)	18.95		—		—
Converted	—		—		(1	)	32.75
Expired or forfeited	(1	)	26.96		(1	)	21.10
Performance share adjustment	—		—		—		18.47
Outstanding, December 31, 2018	10		$	24.95	7		$	21.13

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