ARCONIC CORPORATION (dollars in millions; shipments in thousands of metric tons [kmt]) References to (i) "ParentCo" refer toArconic Inc. , aDelaware corporation, and its consolidated subsidiaries (throughMarch 31, 2020 , at which time it was renamed Howmet Aerospace Inc.), and (ii) "2016 Separation Transaction" refer to theNovember 1, 2016 separation ofAlcoa Inc. , aPennsylvania corporation, into two standalone, publicly-traded companies,Arconic Inc. and Alcoa Corporation. The Separation OnFebruary 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 theLatin America extrusions operations sold inApril 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 onMarch 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 theU.S. Internal Revenue Code (i.e., a transaction that is generally tax-free forU.S. federal income tax purposes); and theU.S. Securities and Exchange Commission (the "SEC") declaring effective a Registration Statement on Form 10, as amended, filed with theSEC onFebruary 13, 2020 (effectiveness was declared by theSEC onFebruary 13, 2020 ). OnFebruary 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 onMarch 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 ofMarch 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. OnApril 1, 2020 (the "Separation Date"), the Separation was completed and became effective at12:01 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 theNew York Stock Exchange onApril 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 inthe 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 30
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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
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 onApril 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 fromFord , 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 inNorth America andEurope , 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
• reducing capital expenditures by approximately
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 32
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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 inSouth 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 toDecember 31, 2019 compared to a decrease in the price of aluminum at first quarter of 2019 indexed toDecember 31, 2018 . In preparation for the Separation Transaction, effectiveJanuary 1, 2020 , certainU.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 theU.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 theU.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 toJanuary 1, 2020 , Arconic Corporation recognized its portion of the expense of these ParentCo-sponsoredU.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-sponsoredU.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 standaloneU.S. pension and other postretirement benefit plans that became effectiveJanuary 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 toU.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 inSouth Korea , a$6 loss on sale of an aluminum rolling mill inBrazil ; 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 33
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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 standaloneU.S. pension and other postretirement benefit plans that became effectiveJanuary 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
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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
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 effectiveJanuary 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 ofMarch 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 onApril 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 atMarch 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 ofMarch 31, 2020 ). Descriptions of this aggregate indebtedness are set forth below. 144A Debt-OnFebruary 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, commencingAugust 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 atMarch 31, 2020 . 36
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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 afterFebruary 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 toFebruary 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) throughFebruary 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 toFebruary 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-OnMarch 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 onJune 30, 2020 through and including the fiscal quarter ending onMarch 31, 2021 , and 2.25 to 1.00 for each fiscal quarter thereafter. The Consolidated 37
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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 onJune 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. OnApril 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-OnMay 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, commencingNovember 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 afterMay 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 toMay 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) throughMay 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 toMay 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 ownedU.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 38
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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 onMay 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 onMay 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 ofMay 15, 2020 . The ABL Credit Facility is subject to an interest rate forU.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 throughJune 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 ofthe United States , any state thereof or theDistrict 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 ownedU.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 39
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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 inSouth Korea and a rolling mill inBrazil , 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. 40
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