ARCONIC CORPORATION

ARNC
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ARCONIC : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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05/18/2020 | 09:14 am


(dollars in millions; shipments in thousands of metric tons [kmt])
References 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.), 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 February 8, 2019, ParentCo announced that its Board of Directors approved a
plan to separate into two standalone, publicly-traded companies (the
"Separation"). The spin-off company, Arconic Corporation, will include 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, ParentCo, will continue to own the engine
products, engineered structures, fastening systems, and forged wheels operations
(collectively, the "Howmet Aerospace Businesses").
The Separation was subject to a number of conditions, including, but not limited
to: final approval by ParentCo's Board of Directors (see below); receipt of an
opinion of legal counsel (received on March 31, 2020) regarding the
qualification of the distribution, together with certain related transactions,
as a "reorganization" within the meaning of Sections 335 and 368(a)(1)(D) of the
U.S. Internal Revenue Code (i.e., a transaction that is generally tax-free for
U.S. federal income tax purposes); and the U.S. Securities and Exchange
Commission
(the "SEC") declaring effective a Registration Statement on Form 10,
as amended, filed with the SEC on February 13, 2020 (effectiveness was declared
by the SEC on February 13, 2020).
On February 5, 2020, ParentCo's Board of Directors approved the completion of
the Separation by means of a pro rata distribution by ParentCo of all of the
outstanding shares of common stock of Arconic Corporation to ParentCo common
shareholders of record as of the close of business on March 19, 2020 (the
"Record Date"). At the time of the Separation, ParentCo common shareholders will
receive one share of Arconic Corporation common stock for every four shares of
ParentCo common stock (the "Separation Ratio") held as of the Record Date
(ParentCo common shareholders will receive cash in lieu of fractional shares).
In connection with the Separation, as of March 31, 2020, Arconic Corporation and
Howmet Aerospace entered into several agreements to implement the legal and
structural separation between the two companies; govern the relationship between
Arconic Corporation and Howmet Aerospace after the completion of the Separation;
and allocate between Arconic Corporation and Howmet Aerospace 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 identifies the assets to be transferred, the liabilities
to be assumed, and the contracts to be transferred to each of Arconic
Corporation and Howmet Aerospace as part of the Separation, and provides for
when and how these transfers and assumptions will occur.
On April 1, 2020 (the "Separation Date"), the Separation was completed and
became effective at 12:01 a.m. Eastern Daylight Time. 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 approximately
$730 to ParentCo by Arconic Corporation from a portion of the aggregate net
proceeds of previously executed financing arrangements (see Financing Activities
in Liquidity and Capital Resources below). In connection with the Separation,
109,021,376 shares of Arconic Corporation common stock were distributed to
ParentCo stockholders. "Regular-way" trading of Arconic Corporation's common
stock began with the opening of the New York Stock Exchange on April 1, 2020
under the ticker symbol "ARNC." Arconic Corporation's common stock has a par
value of $0.01 per share.
ParentCo incurred costs to evaluate, plan, and execute the Separation, and
Arconic Corporation was allocated a pro rata portion of these costs based on
segment revenue (see Cost Allocations below). ParentCo recognized $38 in the
2020 first quarter and $3 in the 2019 first quarter for such costs, of which $18
and $1, respectively, was allocated to Arconic Corporation. The allocated
amounts were included in Selling, general administrative, and other expenses on
Arconic Corporation's Statement of Combined Operations.
Basis of Presentation. The Combined Financial Statements of Arconic Corporation
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


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and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements. These estimates are based on historical
experience and, in some cases, assumptions based on current and future market
experience, including considerations related to COVID-19. We have made our best
estimates using all relevant information available at the time, but it is
possible that our estimates will differ from our actual results and affect the
Combined Financial Statements in future periods and potentially require adverse
adjustments to the recoverability of goodwill and long-lived assets, the
realizability of deferred tax assets and other judgments and estimations and
assumptions that may be impacted by COVID-19.
The Combined Financial Statements of Arconic Corporation are prepared from
ParentCo's historical accounting records and are presented on a standalone basis
as if the Arconic Corporation Businesses have been conducted independently from
ParentCo. Such Combined Financial Statements include the historical operations
that are considered to comprise the Arconic Corporation Businesses, as well as
certain assets and liabilities that have been historically held at ParentCo's
corporate level but are specifically identifiable or otherwise attributable to
Arconic Corporation.
Cost Allocations. The Combined Financial Statements of Arconic Corporation
include general corporate expenses of ParentCo that were not historically
charged to the Arconic Corporation Businesses for certain support functions that
are 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 are included on the accompanying
Statement of Combined Operations within Cost of goods sold, Selling, general
administrative and other expenses, and Research and development expenses. These
expenses have been allocated to Arconic Corporation 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 Arconic Corporation has been
excluded from the accompanying Combined Balance Sheet. Financing costs related
to these debt obligations have been allocated to Arconic Corporation 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 are included on the
accompanying Statement of Combined Operations within Interest expense.
The following table reflects the allocations described above:
First quarter ended March 31, 2020 2019
Cost of goods sold(1) $ - $ 3


Selling, general administrative, and other expenses(2) 25 24
Research and development expenses


- 5
Provision for depreciation and amortization 1 2
Restructuring and other charges 2 (9 )
Interest expense 28 28
Other (income), net (5 ) (8 )



_____________________



(1) For all periods presented, amount principally relates to an allocation of



expenses for ParentCo's retained pension and other postretirement benefit
obligations associated with closed and sold operations.




(2) In the first quarter of 2020, amount includes an allocation of $18 for costs



incurred by ParentCo associated with the Separation (see above).



Management believes the assumptions regarding the allocation of ParentCo's
general corporate expenses and financing costs are reasonable.
Nevertheless, the Combined Financial Statements of Arconic Corporation may not
include all of the actual expenses that would have been incurred and may not
reflect Arconic Corporation's combined results of operations, financial
position, and cash flows had it been a standalone company during the periods
presented. Actual costs that would have been incurred if Arconic Corporation 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 Arconic Corporation and ParentCo, including sales to the Howmet
Aerospace Businesses, have been presented as related party transactions in these
Combined Financial Statements and are considered to be effectively settled for
cash at the time the transaction is recorded.





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Results of Operations
Outlook
Our operations and financial results have been, and are expected to continue to
be, adversely affected by the current coronavirus (COVID-19) pandemic. As a
result of, among other things, uncertainty regarding the COVID-19 pandemic's
duration and its impact on the Company's customers, suppliers and operations,
Arconic Corporation is not currently able to estimate with certainty the
specific future impact on its operations or financial results. Since Arconic's
launch as a standalone company on April 1, 2020, market conditions have been
changing rapidly and unpredictably. As a result of the COVID-19 pandemic,
several of our automotive and aerospace customers have temporarily suspended
operations. Arconic derives approximately 35% of its revenue from ground
transportation end markets and 18% from aerospace end markets, including
approximately 13% of its revenue from Ford, our largest customer. We cannot
predict with certainty the duration of these shutdowns. Due to the impacts of
COVID-19 on our customers, we are experiencing, and expect to continue
experiencing, lower demand and volume for our products. These trends may lead to
charges, impairments and other adverse financial impacts over time. The duration
of the current disruptions to our customers and related financial impact to us
has been estimated, but remains highly uncertain at this time. Should such
disruption continue for an extended period of time, the impact will have a
material adverse effect on our business, results of operations, financial
condition and/or cash flows.
We believe that Arconic's diverse end markets and geographic composition
mitigate a portion of the impact on the Company from any singular area of
decline. Furthermore, despite the challenges that we currently face in North
America
and Europe, we are seeing positive momentum at our Chinese facilities
that felt the full brunt of the COVID-19 pandemic in early 2020 and are now back
to essentially normal production. Our Russian packaging facility is running at
full operations due to strong end market demand. Moreover, our operating
footprint benefits from a highly variable cost structure and we are actively
managing operations to effectively flex activity to respond to changing
automotive and aerospace market conditions.
The safety of Arconic's employees is our highest priority. We are heightening
measures at all of our locations to maintain strict hygiene, increase social
distancing, and enable employees to work remotely where possible. In response to
market conditions we are taking a series of proactive actions to mitigate the
impacts of the COVID-19 pandemic on our business, including the following:
• deferred initiating a dividend on common stock;



• reduced the CEO's salary and the Board of Directors' cash compensation by 30%;





• reduced salaries for senior-level management by 20% and for all other
salaried employees by 10%;



• restructuring of the salaried workforce, targeting a 10% reduction;





• idling of various production facilities based on market conditions within
the regions where the Company operates;


• decreased production and operating with a reduced labor force through
shortened work weeks, shift reductions, layoffs, and the elimination of
temporary workers and contractors at U.S.-based rolling and extrusion
facilities;


• modified schedules, adjusted work hours, lower costs, and delayed raises
at all rolling mill facilities in Europe, China and Russia;



• suspended the 401K match program for U.S. salaried employees; and



• reducing capital expenditures by approximately $50, or approximately 30%.





While the foregoing measures are anticipated to result in cost savings of
approximately $150 on an annualized run-rate basis, plus the additional $50 for
capital expenditure reductions, there can be no assurance that we will achieve
the targeted levels of cost savings in connection with the measures described
above or any other measures taken to date, or that these measures will be
sufficient to offset revenue declines. Further disruptions and uncertainties
related to the COVID-19 pandemic could require us to take additional cost-saving
actions, make additional modifications to our strategic plans and/or implement
other cost-savings initiatives. The cost-savings measures taken to date, and any
cost-cutting measures we may need to take in the future, could have a material
and adverse effect on our business, results of operations and financial
condition.
While we are continuing to evaluate the impact of this global event, our
liquidity and financial position remains strong despite the COVID-19 pandemic's
impact to our business. Our business is flexible and our cash requirements are
countercyclical. We expect working capital will be a source of cash in the near
term, and together with the benefit of the recent management actions to reduce
costs, we believe we have adequate liquidity to operate the Company over the
next twelve months.
The timing for the Company and/or our customers resuming operations and the
levels of operations experienced before the COVID-19 pandemic depend on numerous
factors beyond the Company's control, including, among other things: the
revision of governmental quarantine, shelter in place or similar social
distancing orders or guidelines; the occurrence and magnitude of future
outbreaks; the availability of vaccines or other medical remedies and preventive
measures; the location of facilities; and


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determinations regarding, among other things, health and safety, demand for
specific products, and broader economic conditions. Arconic Corporation is
continuing to evaluate the impact this global event may have on its future
results of operations, cash flows, financial position.
Earnings Summary:
Net income. Net income was $60 in the first quarter of 2020 compared to $41 in
the first quarter of 2019. The increase in results of $19 was mainly driven by
net cost savings, favorable aluminum prices, and a gain on the sale of an
extrusions plant. These favorable impacts were partially offset by lower volumes
driven by COVID-19 and 737 MAX production declines and an allocation of costs
related to the Separation Transaction.
Sales. Sales decreased $230, or 12%, in the first quarter of 2020 compared to
the first quarter of 2019. The decline was principally due to disruptions in the
automotive, commercial transportation and aerospace end markets driven by
COVID-19 and 737 MAX aircraft production declines; lower aluminum prices; and
the absence of sales ($34 combined) as a result of the divestitures of an
aluminum rolling mill in Itapissuma, Brazil (February 2020) and an extrusions
plant in South Korea (March 2020). These negative impacts were somewhat offset
by volume growth in the industrial end market.
Cost of goods sold (COGS). COGS was $1,327, or 82.4% of Sales, in the first
quarter of 2020 compared with $1,596, or 86.7% of Sales, in the first quarter of
2019. The percentage was positively impacted by net cost savings and a favorable
change in LIFO inventory accounting ($16-see below), partially offset by lower
volumes.
The positive change in LIFO inventory accounting was mostly related to a greater
decrease in the price of aluminum at first quarter of 2020 indexed to December
31, 2019
compared to a decrease in the price of aluminum at first quarter of
2019 indexed to December 31, 2018.
In preparation for the Separation Transaction, effective January 1, 2020,
certain U.S. pension and other postretirement defined benefit plans previously
sponsored by ParentCo were separated into standalone plans for both Arconic
Corporation (the "U.S. Shared Plans") and Howmet Aerospace. Accordingly, in
2020, the Company will recognize the related expense of the U.S. Shared Plans in
accordance with defined benefit plan accounting, under which expense is split
between operating income (service cost) and nonoperating income (nonservice
cost). Total combined net periodic benefit cost of the U.S. Shared Plans in 2020
is estimated to be approximately $100, of which approximately $25 is service
cost. The nonservice cost will be recognized in Other expenses (income), net and
the service cost will be recognized in COGS.
In the Company's historical Combined Financial Statements prior to January 1,
2020
, Arconic Corporation recognized its portion of the expense of these
ParentCo-sponsored U.S. benefit plans in accordance with multiemployer plan
accounting, under which expense is recorded entirely in operating income. In the
first quarter of 2019, the Company recognized $20 in COGS for these
ParentCo-sponsored U.S. benefit plans.
Selling, general administrative, and other expenses (SG&A). SG&A expenses
decreased $6, or 7%, in the first quarter of 2020 compared with the first
quarter of 2019. The decrease was attributable to a lower allocation (decrease
of $16) of ParentCo's corporate overhead (excluding costs for the Separation)
and the absence of certain employee retirement benefit expenses ($7) in
conjunction with the new standalone U.S. pension and other postretirement
benefit plans that became effective January 1, 2020 (see COGS above). These
positive impacts were partially offset by a higher allocation (increase of $17)
of costs incurred for the Separation (see Cost Allocations under The Separation
above). SG&A as a percentage of Sales increased from 4.7% in the first quarter
of 2019 to 5.0% in the first quarter of 2020.
In 2020, the Company recognized no expense in SG&A related to U.S. pension and
other postretirement employee defined benefit plans compared to $7 recognized in
the first quarter of 2019 (see COGS above).
Research and development expenses (R&D). R&D expenses decreased $3 in the first
quarter of 2020 compared to the first quarter of 2019 primarily driven by a
lower allocation (decrease of $5) of ParentCo's expenses, which was caused by
the consolidation of ParentCo's primary R&D facility in conjunction with cost
reduction efforts in 2019.
Restructuring and other charges. Restructuring and other charges in the first
quarter of 2020 was a net benefit of $19, comprised of the following components:
a $31 gain on the sale of an extrusions plant in South Korea, a $6 loss on sale
of an aluminum rolling mill in Brazil; and a $6 net charge for other items.
Restructuring and other charges in the first quarter of 2019 was a net charge of
$2, comprised of the following components: an $11 charge for layoff costs,
including the separation of approximately 155 employees (all within the Rolled


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Products and Building and Construction Systems segments); and a $9 net benefit
for an allocation of ParentCo's corporate restructuring activity (see Cost
Allocations under The Separation above).
See Note E to the Combined Financial Statements in Part I Item 1 of this Form
10-Q for additional information.
Interest expense. Interest expense increased $7, or 25%, in the first quarter
of 2020 compared with the first quarter of 2019. The increase was principally
related to the $1,200 in third-party indebtedness incurred in the first quarter
of 2020 associated with the Separation.
Other expenses (income), net. Other expenses, net was $26 in the first quarter
of 2020 compared to Other income, net of $14 in the first quarter of 2019. The
unfavorable change of $40 was mainly the result of net unfavorable foreign
currency movements ($27), as well as the non-service cost of combined net
periodic benefit cost ($21) recognized in the first quarter of 2020 in
conjunction with the new standalone U.S. pension and other postretirement
benefit plans that became effective January 1, 2020 (see Cost of goods sold
above).
Provision for income taxes. The effective tax rate, including discrete items,
was 34.1% in the first quarter of 2020 and 37.9% in the first quarter of 2019.
See Note H to the Combined Financial Statements in Part I Item 1 of this Form
10-Q for additional information.
Segment Information
Rolled Products
First quarter ended March 31,
2020 2019
Third-party sales* $ 1,222 $ 1,411
Intersegment sales 7 7
Total sales $ 1,229 $ 1,418
Segment operating profit $ 125 $ 91
Third-party aluminum shipments (kmt)* 319 333




__________________



* In the first quarter of 2020 and 2019, third-party sales included $21 and
$35, respectively, and third-party aluminum shipments included 19 kmt and 16
kmt, respectively, related to sales to ParentCo's Howmet Aerospace
Businesses. These sales are deemed to be related-party sales and are
presented as such on Arconic Corporation's Statement of Combined Operations.



Third-party sales for the Rolled Products segment decreased $189, or 13%, in the
first quarter of 2020 compared to the first quarter of 2019. The decline was
primarily due to lower volumes in the automotive, commercial transportation, and
aerospace end markets driven by COVID-19 and 737 MAX production declines, lower
aluminum prices (see below), and a decrease in sales of $29 from the divestiture
of an aluminum rolling mill in Itapissuma, Brazil (February 2020). These
negative impacts were partially offset by higher volumes in the industrial
products end market.
Segment operating profit for this segment increased $34 in the first quarter of
2020 compared with the first quarter of 2019. The improvement was largely
attributable to net cost savings and favorable aluminum price impacts (see
below), partially offset by the previously mentioned lower volumes.
Changes in aluminum prices in the first quarter of 2020 compared to the first
quarter of 2019 negatively impacted Third-party sales by approximately $43 and
positively impacted Segment operating profit by approximately $24. Metal price
is a pass-through to this segment's customers with limited exception (e.g.,
fixed-priced contracts, certain regional premiums). On average, the price of
aluminum on the London Metal Exchange declined approximately 9% in the first
quarter of 2020 compared with the first quarter of 2019.










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Extrusions
First quarter ended March 31,
2020 2019
Third-party sales* $ 133 $ 149
Segment operating profit $ 6 $ (4 )
Third-party aluminum shipments (kmt)* 14 16




__________________



* In the first quarter of 2020 and 2019, third-party sales included $14 and
$17, respectively, and third-party aluminum shipments included 2 kmt (both
periods) related to sales to ParentCo's Howmet Aerospace Businesses. These
sales are deemed to be related-party sales and are presented as such on
Arconic Corporation's Statement of Combined Operations.



Third-party sales for the Extrusions segment decreased $16, or 11%, in the first
quarter of 2020 compared to the first quarter of 2019. The decline was
principally the result of lower volumes in the automotive and aerospace end
markets driven by COVID-19 and 737 MAX production declines and a decrease in
sales of $5 from the divestiture of an extrusions plant in South Korea (March
2020
), partially offset by favorable product pricing and mix.
Segment operating profit for this segment increased $10 in the first quarter of
2020 compared to the first quarter of 2019. The increase was largely driven by
net cost savings and favorable product pricing, partly offset by the previously
mentioned lower volumes.
Building and Construction Systems



First quarter ended March 31,
2020 2019
Third-party sales $ 256 $ 281
Segment operating profit $ 28 $ 22


Third-party sales for the Building and Construction Systems segment decreased
$25, or 9%, in the first quarter of 2020 compared to first quarter of 2019. The
decline was mainly due to the rationalization of a product line, the shutdown of
a small service center, lower volumes due to COVID-19 production declines,
unfavorable foreign currency movements, and unfavorable aluminum pricing (see
below).
Segment operating profit for this segment increased $6 in the first quarter of
2020 compared with the first quarter of 2019, due to net cost savings, partly
offset by lower volumes.
Changes in aluminum prices in the first quarter of 2020 compared to the first
quarter of 2019 negatively impacted Third-party sales by approximately $2 with
no impact on Segment operating profit. A limited amount of this segment's
product sales is directly impacted by metal pricing, which is a pass-through to
the related customers. On average, the price of aluminum on the London Metal
Exchange
declined approximately 9% in the first quarter of 2020 compared with
the first quarter of 2019.
Reconciliation of Total Segment Operating Profit to Combined Income before
Income Taxes
First quarter ended March 31, 2020 2019
Total segment operating profit 159 109
Unallocated amounts:
Cost allocations(1) (26 ) (34 )
Restructuring and other charges(2) 19 (2 )
Other - 7
Combined operating income 152 80
Interest expense(2) (35 ) (28 )
Other (expenses) income, net(2) (26 ) 14
Combined income before income taxes 91 66





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__________________



(1) Cost allocations are composed of an allocation of ParentCo's general



administrative and other expenses related to operating its corporate
headquarters and other global administrative facilities, as well as an
allocation of ParentCo's research and development expenses associated with
its corporate technical center (see Cost Allocations under The Separation
above).



(2) See same titled sections under Earnings Summary in Results of Operations



above for a description of notable changes.



Environmental Matters



See Environmental Matters in Note N to the Combined Financial Statements in Part
I Item 1 of this Form 10-Q.



Liquidity and Capital Resources




Operating Activities
Cash used for operations was $295 in the first quarter of 2020 compared with $11
in the first quarter of 2019. In the first quarter of 2020, cash used for
operations was comprised of an unfavorable change in working capital of $429
(see below) and pension contributions of $32, somewhat offset by a positive
add-back for non-cash transactions in earnings of $95 and net income of $60. In
the first quarter of 2019, cash used for operations was comprised of an
unfavorable change in working capital of $133 (see below), mostly offset by a
positive add-back for non-cash transactions in earnings of $79 and net income of
$41.
In the first quarter of 2020, working capital was significantly impacted by the
fact that customer receivables related to the Arconic Corporation Businesses
were no longer included in ParentCo's accounts receivable securitization program
effective January 2, 2020. In periods prior to the first quarter of 2020,
certain identified customer receivables related to the Arconic Corporation
Businesses were sold on a revolving basis to a ParentCo subsidiary under this
program. Accordingly, sales of such receivables were reflected as a component of
Parent Company net investment on Arconic Corporation's Combined Balance Sheet as
Arconic Corporation no longer had the right to collect and receive cash from the
related customers. In the first quarter of 2020, Arconic Corporation retains the
right to collect and receive cash from its customers since none of the Company's
receivables were sold to ParentCo. As a result, sales transactions for which
cash had not yet been collected from the customers were appropriately reflected
as customer receivables on Arconic Corporation's Combined Balance Sheet as of
March 31, 2020. Had customer receivables related to the Arconic Corporation
Businesses not been included in ParentCo's program in the first quarter of 2019,
the previously mentioned unfavorable change in working capital of $133 would
have increased by $377. See Cash Management in Note A to the Combined Financial
Statements in Part I Item 1 of this Form 10-Q.
Financing Activities
Cash provided from financing activities was $1,374 in the first quarter of 2020
compared with $14 in the first quarter of 2019. The source of cash in the first
quarter of 2020 was due to $1,158 in net proceeds (reflects additional debt
issuance costs paid from cash on hand) from the issuance of new indebtedness
(see below) and $216 in net cash funding provided by ParentCo. The source of
cash in the first quarter of 2019 was due to net cash funding provided by
ParentCo.
In connection with the capital structure to be established at the time of the
Separation, Arconic Corporation secured $1,200 in third-party indebtedness. The
Company used a portion of the net proceeds from the aggregate indebtedness to
make a payment to ParentCo on April 1, 2020 to fund the transfer of certain net
assets from ParentCo to Arconic Corporation in connection with the completion of
the Separation (see The Separation above). 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 and the amount of cash held by Arconic
Corporation 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).
Descriptions of this aggregate indebtedness are set forth below.
144A Debt-On February 7, 2020, Arconic Corporation 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. The discount to the initial purchasers, as well as
costs to complete the financing, was deferred and is being amortized to interest
expense over the term of the 2028 Notes. Interest on the 2028 Notes will be paid
semi-annually in February and August, commencing August 15, 2020. The net
proceeds from the 2028 Notes were held in escrow until the satisfaction of the
escrow release conditions, including the substantially concurrent completion of
the Separation. Accordingly, the $593 of escrowed cash was included in
Restricted cash on the Company's Combined Balance Sheet at March 31, 2020.


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Arconic Corporation 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 Corporation 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 Corporation 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 Corporation and its
subsidiaries that are guarantors (the "subsidiary guarantors" and, together with
Arconic Corporation, the "guarantors") under the 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 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
Corporation's existing and future senior indebtedness, including the facilities
under the Credit Agreement (see below); rank senior in right of payment to any
future subordinated obligations of Arconic Corporation; and are effectively
subordinated to Arconic Corporation's existing and future secured indebtedness
that is secured on a first priority basis, including the facilities under the
Credit Agreement, to the extent of the value of property and assets securing
such indebtedness.
Credit Agreement-On March 25, 2020, Arconic Corporation entered into a credit
agreement, which provides 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") (see Refinancing below). The Company received $575 in
net proceeds from Term Loan B reflecting upfront fees and costs to enter into
the financing arrangement. These upfront fees and costs, as well as other costs
to complete the financing, were deferred and are being amortized to interest
expense over the term of Term Loan B.
The variable interest rate with respect to the Term Loan is currently based on
LIBOR for the relevant interest period plus an applicable margin of 2.75% and
the variable commitment fee for undrawn capacity related to the Credit Facility
is 0.35%. The provisions of the Term Loan require a mandatory 1% repayment of
the initial $600 borrowing each annual period during the seven-year term. The
Term Loan and the Credit Facility are guaranteed by certain of Arconic
Corporation's wholly-owned domestic subsidiaries. Each of the Term Loan, the
Credit Facility, and the related guarantees are secured on a first-priority
basis by liens on certain assets of Arconic Corporation and the guarantors, as
defined therein.
The Credit Agreement includes financial covenants requiring the maintenance of a
Consolidated Total Leverage Ratio and a Consolidated Interest Coverage Ratio, as
defined in the Credit Agreement. The Consolidated Total Leverage Ratio is the
ratio of Consolidated Debt to Consolidated EBITDA for the trailing four fiscal
quarters, as defined in the Credit Agreement, and may not exceed a ratio of 2.50
to 1.00 for each fiscal quarter commencing with the fiscal quarter ending on
June 30, 2020 through and including the fiscal quarter ending on March 31, 2021,
and 2.25 to 1.00 for each fiscal quarter thereafter. The Consolidated


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Interest Coverage Ratio is the ratio of Consolidated EBITDA to Consolidated
Interest Expense for the trailing four fiscal quarters, as defined in the Credit
Agreement, and may not fall below a ratio of 3.00 to 1.00 for any fiscal quarter
during the term of the Credit Agreement, commencing with the fiscal quarter
ending on June 30, 2020. In addition, the Credit Agreement requires pro forma
compliance with these financial covenants at each instance of borrowing under
the Credit Facility, which may limit the Company's ability to draw the full
amount of the Credit Facility.
On April 2, 2020, Arconic Corporation borrowed $500 under the Credit Facility
(see Refinancing below). 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 outbreak (see Outlook above).
Refinancing
In order to provide improved financial flexibility, Arconic Corporation executed
a refinancing of its existing Credit Agreement. Arconic Corporation 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 new aggregate indebtedness are set forth below.
144A Debt-On May 13, 2020, Arconic Corporation completed a Rule 144A (U.S.
Securities Act of 1933, as amended) debt offering for $700 of 6.000% 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. The discount to the initial purchasers, as well as
costs to complete the financing, was deferred and is being amortized to interest
expense over the term of the 2025 Notes. Interest on the 2025 Notes will be paid
semi-annually in May and November, commencing November 15, 2020.
Arconic Corporation 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
103.000% 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) 103.000% 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 Corporation
may, on one or more occasions, redeem up to 40% of the aggregate principal
amount of the notes at a redemption price equal to 106.000% 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 Corporation 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 Corporation and its
subsidiaries that are guarantors (the "subsidiary guarantors" and, together with
Arconic Corporation, 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


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(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-Also on May 13, Arconic Corporation entered into a credit
agreement with a syndicate of lenders named therein and Deutsche Bank AG New
York Branch, as administrative agent (the "ABL Credit Agreement"). The ABL
Credit Agreement provides for a senior secured asset-based revolving credit
facility in an aggregate principal amount of $800, including a letter of credit
sub-facility and a swingline loan sub-facility (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. Availability under the ABL Credit
Facility is subject to a borrowing base calculation, generally based upon a set
percentage of eligible accounts receivable and inventory, less customary
reserves (provided that for a period ending on the earlier of (a) the date of
receipt by the administrative agent of the initial inventory appraisal and field
examination and (b) 90 days following the date of entry into the ABL Credit
Facility, the borrowing base will be deemed to be equal to $500).
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 Corporation will pay a quarterly
commitment fee ranging from 0.250% to 0.375% (based on Arconic Corporation'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 May 15, 2020.
The ABL Credit Facility is 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
(which will not be less than 0.75% per annum) ("LIBOR"). The applicable margin
for the ABL Credit Facility through June 30, 2021 is (a) 1.25% for ABR loans and
(b) 2.25% for LIBOR loans. Thereafter, the applicable margin for the ABL Credit
Facility will be (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). Accordingly, the
interest rates for the ABL Credit Facility will fluctuate based on changes in
the ABR, LIBOR, and/or future changes in the average daily excess availability.
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, we 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


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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.
Investing Activities
Cash provided from investing activities was $78 in the first quarter of 2020
compared with cash used for investing activities of $38 in the first quarter of
2019. The source of cash in the first quarter of 2020 was due to $101 in net
proceeds received from the sales of an extrusions plant in South Korea and a
rolling mill in Brazil, slightly offset by $23 in capital expenditures. The use
of cash in the first quarter of 2019 was due to capital expenditures of $42,
slightly offset by $4 in proceeds received from an asset sale.
Recently Adopted and Recently Issued Accounting Guidance
See Note B to the Combined Financial Statements in Part I Item 1 of this Form
10-Q.



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