HOWMET AEROSPACE INC. (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, was to 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, was to 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 were to 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 were to 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 identified 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 provided for when and how these transfers and assumptions were to 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$728 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. This was determined by applying the Separation Ratio to the 436,085,504 shares of ParentCo's outstanding common stock as of the Record Date. "Regular-way" trading of Arconic 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 sixth-month period and$16 and$19 in the 2019 second quarter and six-month period, respectively, for such costs, of which$18 in the 2020 six-month period and$9 and$10 in the 2019 second quarter and six-month period, respectively, was allocated to Arconic Corporation. The allocated amounts were included in Selling, general administrative, and other expenses on Arconic Corporation's Statement of Consolidated Operations. 36 -------------------------------------------------------------------------------- Basis of Presentation. The Consolidated 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 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. Management has made its best estimates using all relevant information available at the time, but it is possible that these estimates will differ from actual results and affect the Consolidated 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. Prior to the Separation Date, Arconic Corporation did not operate as a separate, standalone entity. Arconic Corporation's operations were included in ParentCo's financial results. Accordingly, for all periods prior to the Separation Date, the Consolidated Financial Statements of Arconic Corporation were prepared from ParentCo's historical accounting records and were presented on a standalone basis as if the Arconic Corporation Businesses had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise the Arconic Corporation Businesses, as well as certain assets and liabilities that were historically held at ParentCo's corporate level but were specifically identifiable or otherwise attributable to Arconic Corporation. Cost Allocations. The description and information on cost allocations is applicable for all periods included in the Consolidated Financial Statements prior to the Separation Date. The Consolidated 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 were provided on a centralized basis, such as expenses related to finance, audit, legal, information technology, human resources, communications, compliance, facilities, employee benefits and compensation, and research and development activities. These general corporate expenses were included on the accompanying Statement of Consolidated Operations within Cost of goods sold, Selling, general administrative and other expenses, and Research and development expenses. These expenses were allocated to 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 was excluded from the accompanying Consolidated Balance Sheet. Financing costs related to these debt obligations were 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 were included on the accompanying Statement of Consolidated Operations within Interest expense. The following table reflects the allocations described above: Six months ended June Second quarter ended June 30, 30, 2020 2019 2020 2019 Cost of goods sold(1) $ -$ 4 $ - $ 7 Selling, general administrative, and other expenses(2) - 29 25 53 Research and development expenses - 2 - 7 Provision for depreciation and amortization - 3 1 5 Restructuring and other charges - 12 2 3 Interest expense - 29 28 57 Other expenses (income), net - 11 (5) 3 _____________________
(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 2020 six-month period and the 2019 second quarter and six-month
period, amount includes an allocation of
Management believes the assumptions regarding the allocation of ParentCo's general corporate expenses and financing costs were reasonable.
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Nevertheless, the Consolidated 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 consolidated results of operations, financial
position, and cash flows had it been a standalone company during the periods
prior to the Separation Date. Actual costs that would have been incurred if
Arconic 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, were presented as related party
transactions in these Consolidated Financial Statements and were considered to
be effectively settled for cash at the time the transaction was recorded.
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. While many of our customers have resumed operations, the Company is
unable to estimate with certainty at this time the status, frequency, or
duration of any potential reoccurrences of customer shutdowns. We have provided
concessions and contract modifications to certain customers, and may do so with
additional customers, which may adversely affect our results of operations and
cash flows. In 2019, Arconic derived 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 or any future shutdowns, or the
duration or extent of resumed operations. 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 the potential disruption to our supply
chain, and related financial impact to us has been estimated, but remains highly
uncertain at this time. The impact on our business, results of operations,
financial condition, liquidity and cash flows will be magnified if the
disruption from COVID-19 continues for an extended period.
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. However, the geographic locations in
which our products are manufactured, distributed or sold are in varying stages
of continued restrictions or lifting of restrictions, and the status of
restrictions in certain areas may change on short notice. Because we rely on
supply chain continuity, restrictions in one location may materially impact
operations in multiple locations, and the impact of COVID-19 in one location may
have a disproportionate effect on our operations in the future.
The safety of Arconic's employees is our highest priority. We have heightened
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;
•decreasing 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;
•implementing a combination of modified schedules, adjusted work hours, lower
costs, and/or 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%.
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While the foregoing measures are anticipated to result in cost savings of
approximately $200 on an annualized run-rate basis, plus the additional $50 for
capital expenditure reductions, we may not achieve the targeted levels of cost
savings in connection with the measures described above or any other measures
taken to date, and these measures may not be sufficient to offset the negative
impact of the COVID-19 pandemic on our business. In addition, we may determine
that it is necessary to modify or rescind cost-saving actions, such as salary
reductions, in which case the planned cost savings would not be fully realized.
Further disruptions and uncertainties related to the COVID-19 pandemic could
require us to take additional cost-saving actions or to modify or rescind
current cost-saving actions, make additional modifications to our strategic
plans and/or incur additional expenses as part of our continued response to the
COVID-19 pandemic. 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, financial condition, liquidity
and/or cash flows.
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 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, financial condition,
liquidity and cash flows.
See Part II Item 1A "Risk Factors" for additional information regarding the
continuing impact of the COVID-19 pandemic on our operations.
Earnings Summary:
Sales. Sales were $1,187 in the 2020 second quarter compared to $1,923 in the
2019 second quarter and $2,798 in the 2020 six-month period compared with $3,764
in the 2019 six-month period. The decrease of $736 , or 38%, in the 2020 second
quarter and $966 , or 26%, in the 2020 six-month period was principally due to
depressed volumes within each of the Rolled Products, Building and Construction
Systems, and Extrusions segments, mainly caused by the economic impact of
COVID-19 and/or production declines due to delays associated with the Boeing 737
MAX; lower aluminum prices driven by a drop in both the average LME price and
regional premiums; the absence of sales ($55 -second quarter and $89-six months)
related to the divestitures of a rolling mill in Brazil (February 2020 ) and an
extrusions plant in South Korea (March 2020 ); and an unfavorable impact related
to the curtailment of a rolling mill and both the exit and rationalization of
two separate product lines in the Building and Construction Systems segment.
Cost of goods sold (COGS). COGS was $1,046 , or 88.1% of Sales, in the 2020
second quarter compared to $1,671 , or 86.9% of Sales, in the 2019 second quarter
and $2,373 , or 84.8% of Sales, in the 2020 six-month period compared with
$3,267 , or 86.8% of Sales, in the 2019 six-month period.
The percentage was negatively impacted in the 2020 second quarter by lower
volumes and unfavorable product mix, partially offset by net cost savings,
including lower labor costs (see Outlook above), and the absence of certain
employee retirement benefit plan expenses ($18 - see below).
In the 2020 six-month period, the percentage was positively impacted by net cost
savings, including lower labor costs (see Outlook above), and the absence of
certain employee retirement benefit plan expenses ($36 - see below), partially
offset by lower volumes and unfavorable product mix.
In preparation for the Separation, effective January 1, 2020 , certain U.S.
defined benefit pension and other postretirement plans previously sponsored by
ParentCo were separated into standalone plans for both Arconic Corporation and
Howmet Aerospace. Additionally, effective April 1, 2020 , Arconic Corporation
assumed a portion of the obligations associated with certain non-U.S. defined
benefit pension plans that included participants related to both the Arconic
Corporation Businesses and the Howmet Aerospace Businesses, as well as legacy
defined benefit pension plans assigned to the Company as a result of the
Separation. As a result, beginning in the first quarter of 2020 for these U.S.
plans and in the second quarter of 2020 for these non-U.S. plans, Arconic
Corporation applied defined benefit plan accounting resulting in benefit plan
expense being recorded in operating income (service cost) and nonoperating
income (nonservice cost). In all historical periods prior to these respective
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timeframes, Arconic Corporation was considered a participating employer in
ParentCo's defined benefit plans and, therefore, applied multiemployer plan
accounting resulting in the Company's share of benefit plan expense being
recorded entirely in operating income. Also, Arconic Corporation is the plan
sponsor of certain other non-U.S. defined benefit plans that contain
participants related only to the Arconic Corporation Businesses and, therefore,
the related benefit plan expense was recorded in accordance with defined benefit
plan accounting in all periods presented. The following table presents the total
benefit plan expense (excluding settlements and curtailments) recorded by
Arconic Corporation based on the foregoing in each period presented:
Second quarter ended June 30, Six months ended June 30,
2020 2019 2020 2019
Cost of goods sold $ 6 $ 24 $ 11 $ 47
Selling, general administrative, and other
expenses - 3 - 7
Research and development expenses - 1 - 1
Other expenses (income), net 18 - 39 1
Total $ 24 $ 28 $ 50 $ 56
Selling, general administrative, and other expenses (SG&A). SG&A expenses were
$55 in the 2020 second quarter compared to $87 in the 2019 second quarter and
$135 in the 2020 six-month period compared to $173 in the 2019 six-month period.
The decrease of $32 , or 37%, in the 2020 second quarter was largely attributable
to a lower corporate cost structure as a standalone company compared to an
allocation of ParentCo's corporate overhead (excluding costs for the
Separation), the absence of an allocation ($9 ) of costs incurred for the
Separation (see Cost Allocations under The Separation above), cost reduction
actions (see Outlook above), and the absence of certain employee retirement
benefit plan expenses ($3 - see Cost of goods sold above).
In the 2020 six-month period, the decrease of $38 , or 22%, was largely
attributable to a lower corporate cost structure as a standalone company
compared to an allocation of ParentCo's corporate overhead (excluding costs for
the Separation), the absence of certain employee retirement benefit plan
expenses ($7 - see Cost of goods sold above), and to cost reduction actions (see
Outlook above). These positive impacts were slightly offset by a higher
allocation (increase of $8 ) of costs incurred for the Separation (see Cost
Allocations under The Separation above).
SG&A as a percentage of Sales increased from 4.5% in the 2019 second quarter to
4.6% in the 2020 second quarter and 4.6% in the 2019 six-month period to 4.8% in
the 2020 six-month period.
Research and development expenses (R&D). R&D expenses decreased $3 in the 2020
second quarter compared to the 2019 second quarter and $6 in the 2020 six-month
period compared to the 2019 six-month period primarily driven by a lower
allocation (decrease of $2 and $7 , respectively) 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 was a net
charge of $77 in the 2020 second quarter compared to a net charge of $38 in the
2019 second quarter and a net charge of $58 in the 2020 six-month period
compared to a net charge of $40 in the 2019 six-month period. See Note E to the
Consolidated Financial Statements in Part I Item 1 of this Form 10-Q for
additional information.
Interest expense. Interest expense increased $11 , or 38%, in the 2020 second
quarter compared with the 2019 second quarter and $18 , or 32%, in the 2020
six-month period compared to the 2019 six-month period. The increase was
principally related to the write-off and immediate expensing of $19 in debt
issuance costs as a result of a debt refinancing (see Financing Activities under
Liquidity and Capital Resources below). This amount was somewhat offset in the
2020 second quarter due to a lower amount of interest associated with the
Company's outstanding debt in the 2020 second quarter compared to the interest
allocated to the Company by ParentCo in the 2019 second quarter.
Other expenses (income), net. Other expenses, net was $16 in the 2020 second
quarter compared to $10 in the 2019 second quarter and $42 in the 2020 six-month
period compared to Other income, net of $4 in the 2019 six-month period. The
unfavorable change of $6 in the 2020 second quarter and $46 in the 2020
six-month period was mainly the result of non-service cost of combined net
periodic benefit cost ($18 and $38 , respectively) in conjunction with the new
standalone U.S. pension and
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other postretirement benefit plans that became effective January 1, 2020 (see
Cost of goods sold above). The amount in the 2020 second quarter was partially
offset by net favorable foreign currency movements ($14 ).
(Benefit) Provision for income taxes. The effective tax rate, including
discrete items, was 25.2% (benefit on a loss) in the 2020 second quarter
compared to 61.5% (provision on income) in the 2019 second quarter and was 0.0%
in the 2020 six-month period compared to 41.8% (provision on income) in the 2019
six-month period. See Note H to the Consolidated Financial Statements in Part I
Item 1 of this Form 10-Q for additional information.
Segment Information
Effective in the second quarter of 2020, management elected to change the profit
or loss measure of the Company's reportable segments from Segment operating
profit to Segment Adjusted EBITDA (Earnings before interest, taxes,
depreciation, and amortization) for internal reporting and performance
measurement purposes. This change was made to enhance the transparency and
visibility of the underlying operating performance of each segment. Arconic
Corporation calculates Segment Adjusted EBITDA as Total sales (third-party and
intersegment) minus each of (i) Cost of goods sold, (ii) Selling, general
administrative, and other expenses, and (iii) and Research and development
expenses, plus Stock-based compensation expense. Previously, the Company
calculated Segment operating profit as Segment Adjusted EBITDA minus both
Stock-based compensation expense and the Provision for depreciation and
amortization. Arconic Corporation's Segment Adjusted EBITDA may not be
comparable to similarly titled measures of other companies' reportable segments.
Segment information for all prior periods presented was recast to reflect the
new measure of segment profit or loss.
Rolled Products
Second quarter ended June 30,
Six months ended
2020 2019 2020 2019
Third-party sales* $ 880 $ 1,486 $ 2,102 $ 2,897
Intersegment sales 4 9 11 16
Total sales $ 884 $ 1,495 $ 2,113 $ 2,913Segment Adjusted EBITDA $ 78$ 185 $ 251 $ 325 Third-party aluminum shipments (kmt) 246 371 565 704 __________________ *Sales to the Howmet Aerospace Businesses were$10 and$31 in the 2020 second quarter and six-month period, respectively, and$35 and$70 in the 2019 second quarter and six-month period, respectively. These sales are deemed to be related-party sales and are presented as such on Arconic Corporation's Statement of Consolidated Operations. The product sold to the Howmet Aerospace Businesses consists of aluminum billet. Third-party sales for the Rolled Products segment decreased$606 , or 41%, in the 2020 second quarter and$795 , or 27%, in the 2020 six-month period compared to the same periods in 2019. In both periods, the decline was primarily due to depressed volumes (see below), lower aluminum prices (see below), the absence of sales ($42 -second quarter and$71-six months) related to the divestiture of a rolling mill inBrazil (February 2020 ), unfavorable product mix, and the absence of sales due to the curtailment of operations inSan Antonio (December 2019 ). The lower volumes in both periods were largely attributable to declines related to the ground transportation, industrial products, and aerospace end markets due to the economic impact of COVID-19. Additionally, volumes related to the industrial products end market were negatively impacted by oversupply inNorth America andEurope and the aerospace end market were unfavorably impacted by production declines due to delays associated with the Boeing 737 MAX. Decreased volumes in the packaging end market also contributed to the decline in the 2020 six-month period. In the 2020 second quarter and six-month period, the lower aluminum prices were largely driven by a 17% and 13%, respectively, drop in the average LME aluminum price and a 53% and 41%, respectively, decrease in the average Midwest premium (United States ). Segment adjusted EBITDA for this segment decreased$107 , or 58%, and$74 , or 23%, in the 2020 second quarter and six-month period, respectively, compared with the corresponding periods in 2019. The decline in both periods was largely attributable to lower volumes and unfavorable product mix, partially offset by net cost savings, including lower labor costs (see Outlook under Results of Operations above), and the absence of certain employee retirement benefit plan expenses (see footnote 1 to the Reconciliation of Total Segment Adjusted EBITDA below). 41 --------------------------------------------------------------------------------
Building and Construction Systems
Second quarter ended June 30 ,
Six months ended
2020 2019 2020 2019
Third-party sales $ 230 $ 292 $ 486 $ 573
Segment Adjusted EBITDA $ 38 $ 38 $ 70 $ 65
Third-party sales for the Building and Construction Systems segment decreased
$62 , or 21%, in the 2020 second quarter and $87 , or 15%, in the 2020 six-month
period compared to the same periods in 2019. In both periods, the decline was
mainly due to lower volumes driven by the economic impact of COVID-19, the exit
of the Reynobond product line in Europe , and the rationalization of the windows
product line.
Segment Adjusted EBITDA for this segment was flat and increased $5 , or 8%, in
the 2020 second quarter and six-month period, respectively, compared with the
corresponding periods in 2019. In the 2020 second quarter, net costs savings,
including lower labor costs (see Outlook under Results of Operations above), and
a decrease in employee benefit plan expenses (see footnote 1 to the
Reconciliation of Total Segment Adjusted EBITDA below) were offset by lower
volumes. The increase in the 2020 six-month period principally related to net
costs savings, including lower labor costs (see Outlook under Results of
Operations above), and the absence of certain employee retirement benefit plan
expenses (see footnote 1 to the Reconciliation of Total Segment Adjusted EBITDA
below), mostly offset by lower volumes.
Extrusions
Second quarter ended June 30,
Six months ended
2020 2019 2020 2019
Third-party sales* $ 81 $ 145 $ 214 $ 294
Segment Adjusted EBITDA $ (13) $ - $ (1) $ 3
Third-party aluminum
shipments (kmt)* 8 15 22 31
__________________
*Sales to the Howmet Aerospace Businesses were $12 and $26 in the 2020 second
quarter and six-month period, respectively, and $14 and $31 in the 2019 second
quarter and six-month period, respectively. These sales are deemed to be
related-party sales and are presented as such on Arconic Corporation's Statement
of Consolidated Operations. The product sold to the Howmet Aerospace Businesses
consists of aluminum billet and forged aluminum stock.
Third-party sales for the Extrusions segment decreased $64 , or 44%, in the 2020
second quarter and $80 , or 27%, in the 2020 six-month period compared to the
same periods in 2019. In both periods, the decline was principally the result of
lower volumes related to the aerospace and ground transportation end markets,
driven by the economic impact of COVID-19 and/or production declines due to
delays associated with the Boeing 737 MAX, and the absence of sales ($13 -second
quarter and $18-six months) related to the divestiture of an extrusions plant in
South Korea (March 2020 ).
Segment adjusted EBITDA for this segment decreased $13 and $4 in the 2020 second
quarter and six-month period, respectively, compared with the corresponding
periods in 2019. The decrease in both periods was largely driven by lower
volumes and costs ($12 ) related to both inventory write-downs and customer
settlements, partially offset by net cost savings, including lower labor costs
(see Outlook under Results of Operations above), and the absence of certain
employee retirement benefit plan expenses (see footnote 1 to the Reconciliation
of Total Segment Adjusted EBITDA below).
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Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net (Loss)
Income Attributable to Arconic Corporation
Second quarter ended June 30, Six months ended June 30,
2020 2019 2020 2019
Total Segment Adjusted EBITDA(1) $ 103 $ 223 $ 320 $ 393
Unallocated amounts:
Corporate expenses(1),(2) (7) (12) (9) (33)
Stock-based compensation expense (5) (12) (12) (18)
Provision for depreciation and
amortization (68) (64) (128) (127)
Restructuring and other charges (77) (38) (58) (40)
Other(1),(3) (13) (45) (28) (43)
Operating (loss) income (67) 52 85 132
Interest expense (40) (29) (75) (57)
Other (expenses) income, net(1) (16) (10) (42) 4
Benefit (Provision) for income
taxes 31 (8) - (33)
Net income attributable to
noncontrolling interest - - - -
Consolidated net (loss) income
attributable to Arconic
Corporation $ (92) $ 5 $ (32) $ 46
__________________
(1)In preparation for the Separation, effective January 1, 2020 , certain U.S.
defined benefit pension and other postretirement plans previously sponsored by
ParentCo were separated into standalone plans for both Arconic Corporation and
Howmet Aerospace. Additionally, effective April 1, 2020 , Arconic Corporation
assumed a portion of the obligations associated with certain non-U.S. defined
benefit pension plans that included participants related to both the Arconic
Corporation Businesses and the Howmet Aerospace Businesses, as well as legacy
defined benefit pension plans assigned to the Company as a result of the
Separation. As a result, beginning in the first quarter of 2020 for these U.S.
plans and in the second quarter of 2020 for these non-U.S. plans, Arconic
Corporation applied defined benefit plan accounting resulting in benefit plan
expense being recorded in operating income (service cost) and nonoperating
income (nonservice cost). In all historical periods prior to these respective
timeframes, Arconic Corporation was considered a participating employer in
ParentCo's defined benefit plans and, therefore, applied multiemployer plan
accounting resulting in the Company's share of benefit plan expense being
recorded entirely in operating income. Also, Arconic Corporation is the plan
sponsor of certain other non-U.S. defined benefit plans that contain
participants related only to the Arconic Corporation Businesses and, therefore,
the related benefit plan expense was recorded in accordance with defined benefit
plan accounting in all periods presented. The following table presents the total
benefit plan expense (excluding settlements and curtailments) recorded by
Arconic Corporation based on the foregoing in each period presented:
Second quarter ended June 30, Six months ended June 30,
2020 2019 2020 2019
Segment Adjusted EBITDA:
Rolled Products $ (4) $ (15) $ (8) $ (31)
Building and Construction Systems - (2) (1) (3)
Extrusions (2) (5) (3) (9)
Segment total (6) (22) (12) (43)
Unallocated amounts:
Corporate expenses - (4) - (8)
Other - (2) 1 (4)
Subtotal - (6) 1 (12)
Other income (expenses), net (18) - (39) (1)
Total $ (24) $ (28) $ (50) $ (56)
43-------------------------------------------------------------------------------- (2)Corporate expenses are composed of general administrative and other expenses of operating the corporate headquarters and other global administrative facilities, as well as research and development expenses of the corporate technical center. Amounts presented for all periods prior to second quarter 2020 represent an allocation of ParentCo's corporate expenses (see Cost Allocations in Note A). (3)Other includes certain items that impact Cost of goods sold and Selling, general administrative, and other expenses on the Company's Statement of Consolidated Operations that are not included in Segment Adjusted EBITDA.
Environmental Matters
See Environmental Matters in Note O to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
Liquidity and Capital Resources
Operating Activities Cash used for operations was$265 in the 2020 six-month period compared with cash provided from operations of$27 in the 2019 six-month period. In the 2020 six-month period, cash used for operations was comprised of an unfavorable change in working capital of$536 (see below), pension contributions of$44 , and a net loss of$32 , partially offset by a positive add-back for non-cash transactions in earnings of$315 and a favorable change in noncurrent assets and liabilities of$32 . In the 2019 six-month period, cash provided from operations was comprised of a positive add-back for non-cash transactions in earnings of$193 , net income of$46 , and a favorable change in noncurrent assets and liabilities of$24 , mostly offset by an unfavorable change in working capital of$235 (see below). In the 2020 six-month period, 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 2020 six-month period, 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 Consolidated Balance Sheet as Arconic Corporation no longer had the right to collect and receive cash from the related customers. Had customer receivables related to the Arconic Corporation Businesses not been included in ParentCo's program in the 2019 six-month period, the previously mentioned unfavorable change in working capital of$235 would have increased by$354 . See Cash Management in Note A to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q. Financing Activities Cash provided from financing activities was$731 in the 2020 six-month period compared with$10 in the 2019 six-month period. The source of cash in the 2020 six-month period was due to$2,343 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 prior to the Separation Date, partially offset by$1,100 for the repayment of debt (see below) and a$728 payment to ParentCo in connection with the Separation (see The Separation above). The source of cash in the 2019 six-month period 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. 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. Also, onMarch 25, 2020 , Arconic Corporation entered into a credit agreement, which provided a$600 Senior Secured First-Lien Term Loan B Facility (variable rate and seven-year term) (the "Term Loan") and a$1,000 Senior Secured First-Lien Revolving Credit Facility (variable rate and five-year term) (the "Credit Facility"), with a syndicate of lenders and issuers named therein (the "Credit Agreement"). The Company received$575 in net proceeds from Term Loan B reflecting upfront fees and costs to enter into the financing arrangement. The Company used a portion of the$1,168 in net proceeds from the aggregate indebtedness to make a$728 payment to ParentCo 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 44 -------------------------------------------------------------------------------- balance at the Separation Date of$500 , as provided for in the Separation and Distribution Agreement, 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 Consolidated Balance Sheet as ofMarch 31, 2020 ). OnApril 2, 2020 , Arconic Corporation borrowed$500 , which was subject to an interest rate equal to the sum of the three-month LIBOR plus a 2.0% applicable margin, under the Credit Facility. This borrowing was a proactive measure taken by the Company to bolster its liquidity and preserve financial flexibility in light of uncertainties resulting from the COVID-19 outbreak (see Outlook above). OnMay 13, 2020 , Arconic Corporation executed a refinancing of its existing Credit Agreement in order to provide improved financial flexibility. Arconic Corporation completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for$700 of 6.0% Senior Secured First-Lien Notes due 2025 (the "2025 Notes"). The Company received$691 in net proceeds from the debt offering reflecting a discount to the initial purchasers of the 2025 Notes. Additionally, Arconic 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 (availability was$681 as ofJune 30, 2020 - see ABL Credit Agreement in Note M to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q), 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 . 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. See Note M to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q for descriptions of the 2028 Notes, 2025 Notes, and ABL Credit Agreement. In connection with the issuance of the 2028 Notes and the execution of the Credit Agreement, the Company paid$42 in discounts to the initial purchasers and/or upfront fees and costs (the "debt issuance costs"), of which$30 was attributable to Term Loan B and the Credit Facility. The debt issuance costs were initially deferred and were being amortized to interest expense over the respective terms of the 2028 Notes, Term Loan B, and the Credit Facility. In connection with the issuance of the 2025 Notes and the execution of the ABL Credit Agreement, the Company paid$15 in discounts to the initial purchasers and/or upfront fees and costs (the "new debt issuance costs"). As a result of applying both debt modification and debt extinguishment accounting, as appropriate based on the lender mix for each debt instrument, to the debt refinancing, the Company was required to write off$16 of the$30 in debt issuance costs and immediately expense$3 of the$15 in new debt issuance costs. This$19 was reported within Interest expense on the Company's Statement of Consolidated Operations. The remaining$14 in debt issuance costs continued to be deferred and the remaining$12 in new debt issuance costs were deferred; both are being amortized to interest expense over the respective terms of the 2025 Notes and the ABL Credit Agreement. Investing Activities Cash provided from investing activities was$58 in the 2020 six-month period compared with cash used for investing activities of$71 in the 2019 six-month period. The source of cash in the 2020 six-month period was due to$102 in net proceeds received from the sales of an extrusions plant inSouth Korea and a rolling mill inBrazil , somewhat offset by$44 in capital expenditures. The use of cash in the 2019 six-month period was due to capital expenditures of$82 , slightly offset by$11 in proceeds received from two asset sales. The reduction in capital expenditures between the 2020 and 2019 six-month periods was mainly driven by one of several actions initiated by the Company in response to the COVID-19 pandemic (see Outlook under Results of Operations above). Recently Adopted and Recently Issued Accounting Guidance See Note B to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q. 45
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