Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in millions, except per-share amounts and per-metric ton amounts; shipments in thousands of metric tons (kmt))
References to (i) “ParentCo” refer to Arconic Inc., a Delaware corporation, and its consolidated subsidiaries (through March 31, 2020, at which time it was renamed Howmet Aerospace Inc.), and (ii) “2016 Separation Transaction” refer to the November 1, 2016 separation of Alcoa Inc., a Pennsylvania corporation, into two standalone, publicly-traded companies, Arconic Inc. and Alcoa Corporation.
Overview
Our Business
Arconic Corporation (or the “Company”) is a manufacturer of fabricated aluminum products, including sheet and plate, extrusions, and architectural products, with a primary focus on the ground transportation, aerospace, building and construction, industrial products, and packaging end markets. The Company has 22 primary operating locations in 8 countries around the world, situated in the United States, Canada, China, France, Germany, Hungary, Russia, and the United Kingdom.
The Separation
On February 8, 2019, ParentCo announced that its Board of Directors approved a plan to separate into two standalone, publicly-traded companies (the “Separation”). The spin-off company, later named Arconic Corporation, was to include the rolled aluminum products, aluminum extrusions, and architectural products operations of ParentCo, as well as the Latin America extrusions operations sold in April 2018, (collectively, the “Arconic Corporation Businesses”). The existing publicly traded company, ParentCo, 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 on March 31, 2020) regarding the qualification of the distribution, together with certain related transactions, as a “reorganization” within the meaning of Sections 335 and 368(a)(1)(D) of the U.S. Internal Revenue Code (i.e., a transaction that is generally tax-free for U.S. federal income tax purposes); and the U.S. Securities and Exchange Commission (the “SEC”) declaring effective a Registration Statement on Form 10, as amended, filed with the SEC on February 13, 2020 (effectiveness was declared by the SEC on February 13, 2020).
On February 5, 2020, ParentCo’s Board of Directors approved the completion of the Separation by means of a pro rata distribution by ParentCo of all of the outstanding shares of common stock of Arconic Corporation to ParentCo common stockholders of record as of the close of business on March 19, 2020 (the “Record Date”). At the time of the Separation, ParentCo common stockholders 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 stockholders were to receive cash in lieu of fractional shares).
In connection with the Separation, as of March 31, 2020, Arconic Corporation and Howmet Aerospace entered into several agreements to implement the legal and structural separation between the two companies; govern the relationship between Arconic Corporation and Howmet Aerospace after the completion of the Separation; and allocate between Arconic Corporation and Howmet Aerospace various assets, liabilities, and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities. These agreements included a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, and certain Patent, Know-How, Trade Secret License and Trademark License Agreements. The Separation and Distribution Agreement 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.
On April 1, 2020 (the “Separation Date”), the Separation was completed and became effective at 12:01 a.m. Eastern Daylight Time. To effect the Separation, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in a cash payment of $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 the New York Stock Exchange on April 1, 2020 under the ticker symbol “ARNC.” Arconic Corporation’s common stock has a par value of $0.01 per share.
ParentCo incurred costs to evaluate, plan, and execute the Separation, and Arconic Corporation was allocated a pro rata portion of these costs based on segment revenue (see Cost Allocations below). ParentCo recognized $38 from January 2020 through March 2020 and $78 in 2019 for such costs, of which $18 and $40, 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.
Basis of Presentation. The Consolidated Financial Statements of Arconic Corporation are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, including considerations related to the coronavirus (COVID-19) pandemic. 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 Arconic Corporation's 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 Arconic Corporation's 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 Arconic Corporation's 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 Arconic Corporation's Statement of Consolidated Operations within Interest expense.
The following table reflects the allocations described above:
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2020
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2019
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2018
|
Cost of goods sold(1)
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$
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—
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$
|
14
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|
|
$
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11
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|
Selling, general administrative, and other expenses(2)
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25
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115
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|
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56
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|
Research and development expenses
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—
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|
|
11
|
|
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24
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|
Provision for depreciation and amortization
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1
|
|
|
10
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|
|
10
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|
Restructuring and other charges(3)
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2
|
|
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7
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|
|
50
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|
Interest expense
|
28
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|
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115
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|
|
125
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|
Other (income), net
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(5)
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(6)
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(12)
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__________________
(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 2020 (January through March) and 2019, amount includes an allocation of $18 and $40, respectively, for costs incurred by ParentCo associated with the Separation (see above).
(3) In 2018, amount includes an allocation of settlement and curtailment charges and benefits related to several actions taken (lump sum payments and benefit reductions) by ParentCo associated with pension and other postretirement benefit plans.
Management believes the assumptions regarding the allocation of ParentCo’s general corporate expenses and financing costs were reasonable.
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 Arconic Corporation's Consolidated Financial Statements and were considered to be effectively settled for cash at the time the transaction was recorded. The total net effect of the settlement of these transactions was reflected on Arconic Corporation’s Statement of Consolidated Cash Flows as a financing activity and on the Company’s Consolidated Balance Sheet as Parent Company net investment.
Management Review of 2020 and Outlook for the Future
After the Separation from ParentCo on April 1, 2020, we immediately took actions to conserve cash, manage working capital more efficiently, and preserve operational flexibility as the COVID-19 pandemic continued to adversely impact the global economy. In the weeks that followed, we optimized our capital structure through new debt offerings and a new credit facility. The new debt structure created greater financial flexibility to operate in an uncertain economic environment and improved our liquidity. While 2020 was a challenging year, the Company demonstrated agility and solid performance in the face of pandemic driven lower demand and uncertainty. As we completed the Separation during a global pandemic that caused rapid shifts in the markets we serve, we have become a stronger and more dynamic organization.
In 2020, Sales of $5,675 declined 22% from 2019, reflecting lower volumes across the Company's three segments mainly caused by the economic impact of the COVID-19 pandemic and/or production declines due to delays associated with the Boeing 737 MAX. Lower aluminum prices also contributed to the decline, with a 5% drop in the average LME aluminum price and a 33% decrease in the average Midwest premium (United States). Revenue in the fourth quarter of 2020 was $1,462, down 14% year over year, but up 3% over the third quarter of 2020 reflecting a continued recovery from the COVID-19 pandemic impacts. The decline in revenue over the prior year quarter was primarily a result of continued softness in aerospace and was partially offset by strength in the industrial products and packaging end markets. In the segments, Total Segment Adjusted EBITDA decreased 14% in 2020 compared with 2019 due to the impact of the COVID-19 pandemic across all end markets, partially offset by cost actions implemented during the year and the absence of certain employee retirement benefit plan expenses (see Cost of Goods Sold under Results of Operations below).
In 2020, the Company recorded a net loss of $109, or $1.00 per share, compared to net income of $177, or $1.63 per share, in 2019. The 2020 results included a pre-tax charge of $198 ($156 after-tax) for the settlement of certain employee retirement benefits related to the annuitization of pension plan obligations in the U.S. and the U.K. Of this charge, $140 ($108 after-tax) was recorded in the fourth quarter of 2020. Additional items impacting the fourth quarter of 2020 included a pre-tax benefit of $25 ($19 after-tax) for contingent consideration received related to the 2018 sale of the Texarkana (Texas) rolling mill and a pre-tax benefit of $20 ($20 after-tax) for the reversal of a liability previously established at the Separation Date related to a potential indemnification to Howmet Aerospace by Arconic Corporation for an outstanding income tax matter in Spain. The results for 2020 compared to 2019 were also favorably impacted by a lower corporate cost structure as a standalone company compared to an allocation of ParentCo’s corporate overhead in 2019.
We ended the year with a cash balance of $787, and total liquidity of approximately $1,500. Subsequent to year-end, we accelerated our 2021 U.S. pension contributions into January 2021 and funded $200 to be opportunistic on capitalizing on investment arbitrage by using our balance sheet cash. The Company is planning to complete additional annuitizations of its pension obligations over the first half of 2021.
As we look forward to 2021 and beyond, we see multiple paths to growth on both the top and bottom line through driving asset utilization, debottlenecking operations, maintaining permanent cost reductions, and capturing productivity driven cost savings. We have identified several opportunities that are expected to drive future volume growth and increase market penetration for continued improvement of our results. We are continuing to ramp up incremental capacity for automotive and industrial products at our Tennessee facility and we expect to benefit from an increase in demand in the industrial products end
market due to favorable outcomes in the U.S. common alloy aluminum sheet trade case. We are also in the process of re-entering packaging in several markets following the expiration of the non-compete agreement from the 2016 Separation Transaction. We are bringing our Tennessee can sheet facility back online and are in discussions with customers about qualification runs. Bringing this capacity back online is timely, as surging aluminum packaging demand over recent years has driven multiple recently announced capacity additions by North American can makers resulting in increased demand for can sheet.
Based on current internal and external projections of build rates and leading indicators in the markets we serve, and assuming an average LME aluminum price of $2,030 per metric ton and an average Midwest premium of $320 per metric ton, our expectations for sales by major end market in 2021 follow. These expectations may change during the course of the year given the continued uncertainty in the global economy. For the ground transportation end market, we expect sales to increase approximately 25% to 35% in 2021 compared with 2020. This range is somewhat wider reflecting uncertainty on how quickly the supply chain recovers from the semiconductor chip shortage. Automotive sales are expected to increase due to strong consumer demand and a recovery from soft 2020 levels, along with continued improvement in heavy duty truck sales. For the industrial products end market, we anticipate sales to increase by approximately 15% to 20% in 2021 compared with 2020, driven by increased capabilities and capacity at our Tennessee facility and stronger domestic pricing and volume demand due to the impact of ongoing U.S. trade actions. For the building and construction end market, we anticipate sales to be flat in 2021 compared with 2020, as global macro uncertainty continues to pressure non-residential construction, which comprises the vast majority of our sales in this segment. For the packaging end market, we expect sales to be relatively flat in 2021 compared with 2020. In 2020, our facility in Russia was operating at near full capacity to satisfy strong global packaging demand. Although the non-compete agreement expired in the fourth quarter of 2020, the qualification and negotiation process to reenter the U.S. packaging market is expected to take several quarters. Therefore, we would expect U.S. packaging production to meaningfully contribute to results in 2022. For the aerospace end market, we expect sales to decline approximately 25% to 30% from 2020, which is approximately 50% below pre-pandemic 2019 levels as continued destocking is expected to impact the entire aerospace supply chain. This destocking impact is anticipated to continue through the first half of 2021 and we expect return to year over year growth in the second half of the year.
COVID-19 Pandemic
Our operations and financial results have been, and are expected to continue to be, adversely affected by the COVID-19 pandemic. Since Arconic Corporation’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 temporarily suspended operations. While many of our customers have resumed operations, we are unable to estimate with certainty at this time the status, frequency, or duration of any potential reoccurrences of customer shutdowns, or the duration or extent of resumed operations. In 2020, we derived approximately 33% of our revenue from the ground transportation end market—including approximately 11% of its revenue from Ford, our largest customer—and 14% from the aerospace end market. Due to the impacts of the COVID-19 pandemic 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. The impact on our business, results of operations, financial condition, liquidity, and/or cash flows will be magnified if the disruption from the COVID-19 pandemic continues for an extended period.
We believe that our 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 the COVID-19 pandemic in one location may have a disproportionate effect on our operations in the future.
The safety of our employees is our highest priority. We 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 implemented a series of proactive actions starting in April 2020 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%.
*Effective September 1, 2020, the Company restored both the salaries of all salaried employees and the 401K match of all salaried U.S. employees, including executive officers, to the levels in effect prior to the actions described above. Also effective September 1, 2020, the Company restored the annual cash retainers payable to the non-employee members of the Company’s Board of Directors to the levels in effect prior to the previous reduction described above.
The foregoing measures from our cash conservation program resulted in actual cost savings of approximately $160, comprised of $100 in temporary savings (i.e., 2020 only) and $60 in permanent savings, as well as an additional $50 for capital expenditure reductions, from April 2020 through December 2020. While we anticipate incremental cost savings in future periods related to the measures that resulted in permanent cost savings during 2020, we may not achieve such savings. In addition, we may determine that it is necessary to modify or rescind cost-saving actions, in which case certain of the realized permanent cost savings may not continue and/or any anticipated incremental 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 we have demonstrated a robust and agile cash management program in 2020, and together with potential future cash conservation actions, 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. We are continuing to evaluate the impact this global event may have on its future results of operations, financial condition, liquidity, and cash flows.
See Part I. Item 1A. “Risk Factors” for additional information regarding the continuing impact of the COVID-19 pandemic on our operations.
Results of Operations
Earnings Summary
Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented in the Company's Consolidated Financial Statements. See Note M to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Sales. Sales were $5,675 in 2020 compared with $7,277 in 2019, a decrease of $1,602, or 22%. The decrease was principally due to depressed volumes within each of the Company's three 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 in the Rolled Products segment, driven by a drop in both the average LME price and regional premiums; the absence of sales ($176) related to the divestitures of a rolling mill in Brazil (February 2020) and an extrusions plant in South Korea (March 2020); 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; and unfavorable product mix in the Rolled Products segment.
Sales in 2019 were $7,277 compared with $7,442 in 2018, a decrease of $165, or 2%. The decrease was largely attributable to lower aluminum prices, the absence of sales ($169 combined) as a result of both the ramp down of the Company’s North American packaging operations (completed in December 2018) and the divestiture of its Latin America Extrusions business (April 2018), and unfavorable foreign currency movements. These negative impacts were mostly offset by favorable product mix and pricing in the Rolled Products segment and volume growth related to the packaging (excluding North America), aerospace, and industrial end markets.
Cost of Goods Sold. COGS was $4,862 in 2020 compared with $6,332 in 2019, a decline of $1,470, or 23%. Also, COGS as a percentage of Sales was 85.7% in 2020 compared to 87.0% in 2019. This 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 ($69 – see below), mostly offset by lower volumes and unfavorable product mix.
COGS was $6,332 in 2019 compared with $6,527 in 2018, a decline of $195, or 3%. Also, COGS as a percentage of Sales was 87.0% in 2019 compared to 87.7% in 2018. This percentage was positively impacted by favorable product pricing and mix in the Rolled Products segment and the absence of a charge for a physical inventory adjustment at an Extrusions plant ($14). These positive impacts were partially offset by costs associated with the transition of the Company’s Tennessee plant to industrial products from packaging, a charge to increase an environmental reserve related to a U.S. Extrusions plant ($25), and a charge, primarily for a one-time employee signing bonus, related to a collective bargaining agreement negotiation ($9 - see below).
In June of 2019, Arconic Corporation and the United Steelworkers (USW) reached a tentative three-year labor agreement covering approximately 3,400 employees at four U.S. locations; the previous labor agreement expired on May 15, 2019. The tentative agreement was ratified on July 11, 2019.
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:
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|
2020
|
|
2019
|
|
2018
|
Cost of goods sold
|
|
$
|
25
|
|
|
$
|
94
|
|
|
$
|
101
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|
Selling, general administrative, and other expenses
|
|
—
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|
|
13
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|
|
13
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|
Research and development expenses
|
|
—
|
|
|
2
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|
|
2
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|
Other expenses (income), net
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|
78
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|
2
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|
|
2
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Total
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|
$
|
103
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|
|
$
|
111
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|
|
$
|
118
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|
Selling, General Administrative, and Other Expenses. SG&A expenses were $258, or 4.5% of Sales, in 2020 compared with $346, or 4.8% of Sales, in 2019. The decrease of $88, or 25%, was largely attributable to a combination of a lower corporate cost structure as a standalone company in 2020 compared to an allocation of ParentCo’s corporate overhead (excluding costs for the Separation) in 2019 and cost reduction actions in response to COVID-19 (see Outlook above), a lower allocation ($22) of costs incurred for the Separation (see Cost Allocations under The Separation above), and the absence of certain employee retirement benefit plan expenses ($13 – see Cost of goods sold above).
SG&A expenses were $346, or 4.8% of Sales, in 2019 compared with $288, or 3.9% of Sales, in 2018. The increase of $58, or 20%, was primarily the result of a higher allocation (increase of $59) of ParentCo’s corporate overhead, which was mostly driven by the following: costs incurred for the Separation ($78, of which $40 was allocated to Arconic Corporation) and higher
expenses for both executive compensation and estimated annual employee incentive compensation, all of which was somewhat offset by reductions in several other overhead costs.
Research and Development Expenses. R&D expenses were $36 in 2020 compared with $45 in 2019. The decrease was primarily driven by a lower amount of expenses associated with the Company's standalone R&D facility in 2020 compared to the expenses allocated to Arconic Corporation by ParentCo (see Cost Allocations under The Separation above) in 2019. The lower cost structure was the result of the consolidation of this R&D facility in connection with cost reduction efforts initiated by ParentCo in 2019.
R&D expenses were $45 in 2019 compared with $63 in 2018. The decrease was principally related to a lower allocation of ParentCo’s expenses, which was driven by decreased spending.
Provision for Depreciation and Amortization. The provision for D&A was $251 in 2020 compared with $252 in 2019. The decrease of $1 was primarily due to lower D&A due to restructuring actions related to impairment of assets in 2019, mostly offset by capital projects placed into service.
The provision for D&A was $252 in 2019 compared with $272 in 2018. The decrease of $20, or 7%, was primarily due to the divestiture of the Texarkana (Texas) rolling mill and cast house.
Restructuring and Other Charges. In 2020, 2019, and 2018, Restructuring and other charges were comprised of a net charge of $188, a net charge of $87, and a net benefit of $104, respectively. See Note E to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
Interest Expense. Interest expense was $118 in 2020 compared with $115 in 2019. The increase of $3, or 3%, was primarily due 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) in May 2020, partially offset by a lower amount of interest associated with the Company’s standalone outstanding debt (see Financing Activities under Liquidity and Capital Resources below) in 2020 compared to the interest allocated to Arconic Corporation by ParentCo (see Cost Allocations under The Separation above) in 2019.
Interest expense was $115 in 2019 compared with $129 in 2018. The decrease of $14, or 11%, was mostly the result of a lower allocation (decrease of $10) of ParentCo’s financing costs due to a lower average amount of ParentCo’s outstanding debt in 2019 compared to 2018 and an increase ($3) in the amount of interest capitalized due to expansion projects at the Company's Davenport (Iowa) and Tennessee facilities (see Investing Activities in Liquidity and Capital Resources below).
Other Expenses (Income), Net. Other expenses, net was $70 in 2020 compared with Other income, net of $15 in 2019. The unfavorable change of $85 was mainly the result of an increase ($76) in non-service cost related to the new standalone U.S. pension and other postretirement benefit plans that became effective January 1, 2020 (see Cost of goods sold above), as well as net unfavorable foreign currency movements ($28), somewhat offset by the reversal of a liability ($20) established at Separation for Arconic Corporation’s share of a Spanish tax matter of ParentCo that was favorably settled in the fourth quarter of 2020.
Other income, net was $15 in 2019 compared with Other expenses, net of $4 in 2018. The change of $19 was largely attributable to net favorable foreign currency movements.
Provision (Benefit) for Income Taxes. Arconic Corporation’s effective tax rate was (0.9)% (provision on a loss) in 2020, (53.9)% (benefit on income) in 2019, and 28.9% (provision on income) in 2018. See Note I to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for a reconciliation of the effective tax rate for each of these years to the U.S. federal statutory rate of 21%.
Segment Information
Arconic Corporation’s operations consist of three reportable segments: Rolled Products, Building and Construction Systems, and Extrusions. Segment performance under Arconic Corporation’s management reporting system is evaluated based on several factors; however, the primary measure of performance is Segment Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization).
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 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. Effective in the third quarter of 2020, management refined the Company’s Segment Adjusted EBITDA measure to remove the impact of metal price lag (see footnote 4 to the Reconciliation of Total Segment Adjusted
EBITDA below). This change was made to further enhance the transparency and visibility of the underlying operating performance of each segment by removing the volatility associated with metal prices.
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 and Metal price lag. Previously, the Company calculated Segment operating profit as Segment Adjusted EBITDA minus each of (i) the Provision for depreciation and amortization, (ii) Stock-based compensation expense, and (iii) Metal price lag. Arconic Corporation’s Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies’ reportable segments.
Also, effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented in the Company's Consolidated Financial Statements. See Note M to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Segment information for all prior periods presented was recast to reflect the new measure of segment profit or loss and the change in inventory cost method.
Segment Adjusted EBITDA for all reportable segments totaled $648 in 2020, $757 in 2019, and $702 in 2018. The following information provides Sales and Segment Adjusted EBITDA for each reportable segment for each of the three years in the period ended December 31, 2020. See Note D to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
Rolled Products
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2020
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2019
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2018
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Third-party sales*
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$
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4,335
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$
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5,609
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$
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5,731
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Intersegment sales
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19
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25
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15
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Total sales
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$
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4,354
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$
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5,634
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$
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5,746
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Segment Adjusted EBITDA
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$
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527
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$
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640
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$
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562
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Third-party aluminum shipments (kmt)
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1,179
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1,390
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1,309
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__________________
* Sales to the Howmet Aerospace Businesses were $75, $131, and $145, respectively, in 2020, 2019, and 2018, 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.
Overview. The Rolled Products segment produces aluminum sheet and plate for a variety of end markets. Sheet and plate are sold directly to customers and through distributors related to the aerospace, automotive, commercial transportation, packaging, building and construction, and industrial products (mainly used in the production of machinery and equipment and consumer durables) end markets. A small portion of this segment also produced aseptic foil for the packaging end market prior to February 1, 2020 (see below). While the customer base for flat-rolled products is large, a significant amount of sales of sheet and plate is to a relatively small number of customers. Prices for these products are generally based on the price of metal plus a premium for adding value to the aluminum to produce a semi-finished product, resulting in a business model in which the underlying price of metal is contractually passed-through to customers. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar and, to a lesser extent, each of the following: the Russian ruble, Chinese yuan, the euro, the British pound, and the Brazilian real.
On February 1, 2020, Arconic Corporation completed the sale of its aluminum rolling mill in Itapissuma, Brazil to Companhia Brasileira de Alumínio. This rolling mill produced aseptic foil and sheet products. The rolling mill generated third-party sales of $10, $143, and $179 in 2020, 2019, and 2018, respectively, and, at the time of divestiture, had approximately 500 employees. See Note S to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
On November 1, 2016, Arconic Corporation entered into a toll processing agreement with Alcoa Corporation for the tolling of metal for the Warrick, IN rolling mill which became a part of Alcoa Corporation upon the completion of the 2016 Separation Transaction. As part of this arrangement, Arconic Corporation provided a toll processing service to Alcoa Corporation to produce can sheet products at its facility in Tennessee through the end date of the contract, December 31, 2018. Alcoa Corporation supplied all required raw materials to Arconic Corporation, which processed the raw materials into finished can sheet coils ready for shipment to the end customer. Tolling revenue for 2018 was $144.
Sales. Third-party sales for the Rolled Products segment decreased $1,274, or 23%, in 2020 compared with 2019, primarily attributable to depressed volumes (see below), unfavorable product mix, lower aluminum prices (see below), and the absence of sales related to both the February 2020 divestiture of a rolling mill in Brazil ($133) and the December 2019 curtailment of operations in San Antonio (Texas).
The lower volumes were largely attributable to a decline in the ground transportation end market due to the economic impact of COVID-19. Additionally, volumes related to the aerospace end market were also unfavorably impacted due to the economic impact of COVID-19 and production declines due to delays associated with the Boeing 737 MAX.
In 2020, the lower aluminum prices were largely driven by a 5% drop in the average LME aluminum price and a 33% decrease in the average Midwest premium (United States).
Third-party sales for this segment decreased $122, or 2%, in 2019 compared with 2018, primarily attributable to lower aluminum prices (see below), the absence of sales ($144) as a result of the ramp down of the Company’s North American packaging operations (completed in December 2018), and unfavorable foreign currency movements. These negative impacts were partially offset by favorable product pricing and mix and higher volumes in the packaging (excluding North America), aerospace, and industrial products end markets.
In 2019, the lower aluminum prices were largely driven by a 15% drop in the average LME aluminum price and a 6% decrease in the average Midwest premium.
Segment Adjusted EBITDA. Segment adjusted EBITDA for the Rolled Products segment decreased $113, or 18%, in 2020 compared with 2019, primarily driven by lower volumes, unfavorable product mix, and unfavorable pricing on industrial and ground transportation products, 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).
Segment adjusted EBITDA for this segment increased $78, or 14%, in 2019 compared with 2018, principally driven by favorable pricing adjustments on industrial products and commercial transportation products, favorable aluminum price impacts, net cost savings, and favorable product mix. These positive impacts were somewhat offset by the Company’s Tennessee plant’s transition to industrial production from packaging production.
Building and Construction Systems
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2020
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2019
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2018
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Third-party sales
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$
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963
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|
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$
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1,118
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|
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$
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1,140
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Segment Adjusted EBITDA
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$
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137
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$
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126
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$
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117
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Overview. The Building and Construction Systems segment manufactures products that are used in the non-residential building and construction end market. These products include integrated aluminum architectural systems and architectural extrusions, which are sold directly to customers and through distributors. A limited amount of this segment’s product sales is directly impacted by metal pricing, which is a pass-through to the related customers. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar and, to a lesser extent, each of the following: the euro, the British pound, and Canadian dollar.
Sales. Third-party sales for the Building and Construction Systems segment decreased $155, or 14%, in 2020 compared with 2019, primarily 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.
Third-party sales for this segment decreased $22, or 2%, in 2019 compared with 2018, primarily driven by unfavorable foreign currency movements, principally driven by a weaker euro, and unfavorable aluminum pricing (see below). These negative impacts were somewhat offset by higher volume.
In 2019, the lower aluminum prices were largely driven by a 15% drop in the average LME aluminum price.
Segment Adjusted EBITDA. Segment adjusted EBITDA for the Building and Construction Systems segment increased $11, or 9%, in 2020 compared with 2019, principally driven by net cost savings and a decrease in employee retirement benefit plan expenses (see footnote 1 to the Reconciliation of Total Segment Adjusted EBITDA below), partially offset by lower volumes.
Segment adjusted EBITDA for this segment increased $9, or 8%, in 2019 compared with 2018, principally driven by net cost savings.
Extrusions
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2020
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2019
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2018
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Third-party sales*
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$
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381
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$
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550
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$
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546
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Segment Adjusted EBITDA
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$
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(16)
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$
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(9)
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$
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23
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Third-party aluminum shipments (kmt)
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40
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60
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|
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59
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__________________
* Sales to the Howmet Aerospace Businesses were $33, $52, and $61 in 2020, 2019, and 2018, 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.
Overview. The Extrusions segment produces a range of extruded and machined parts for the aerospace, automotive, commercial transportation, and industrial products end markets. These products are sold directly to customers and through distributors. Prices for these products are generally based on the price of metal plus a premium for adding value to the aluminum to produce a semi-finished product, resulting in a business model in which the underlying price of metal is contractually passed-through to customers. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar and, to a lesser extent, the euro.
On March 1, 2020, Arconic Corporation completed the sale of its hard alloy extrusions plant in South Korea. The extrusions plant generated third-party sales of $8, $51, and $53 in 2020, 2019, and 2018, respectively, and, at the time of divestiture, had approximately 160 employees. See Note S to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
Sales. Third-party sales for the Extrusions segment decreased $169, or 31%, in 2020 compared with 2019, primarily driven by lower volumes related to the aerospace, ground transportation, and industrial 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 ($43) related to the divestiture of an extrusions plant in South Korea (see above). These negative impacts were slightly offset by a favorable aerospace mix.
Third-party sales for this segment increased $4, or 1%, in 2019 compared with 2018, primarily driven by favorable product mix (mainly related to the automotive end market).
Segment Adjusted EBITDA. Segment Adjusted EBITDA for the Extrusions segment decreased $7 in 2020 compared with 2019, principally caused by lower volumes and costs ($9) 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).
Segment Adjusted EBITDA for this segment decreased $32 in 2019 compared with 2018, principally driven by higher operating costs, including labor, maintenance, and transportation. These negative impacts were partially offset by the absence of a charge for a physical inventory adjustment at one plant ($14).
Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net (Loss) Income Attributable to Arconic Corporation
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For the year ended December 31,
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2020
|
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2019
|
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2018
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Total Segment Adjusted EBITDA(1),(2)
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$
|
648
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|
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$
|
757
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|
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$
|
702
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|
Unallocated amounts:
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|
|
|
|
|
|
Corporate expenses(1),(3)
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(24)
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|
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(53)
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|
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(57)
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|
Stock-based compensation expense
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(23)
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|
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(40)
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|
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(22)
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Metal price lag(4)
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(27)
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|
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(39)
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3
|
|
Provision for depreciation and amortization
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(251)
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|
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(252)
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|
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(272)
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Restructuring and other charges(5)
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(188)
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|
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(87)
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|
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104
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|
Other(1),(6)
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(55)
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|
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(71)
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|
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(62)
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Operating income(2)
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80
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|
|
215
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|
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396
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|
Interest expense
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(118)
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|
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(115)
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|
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(129)
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Other (expenses) income, net(1)
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(70)
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|
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15
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|
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(4)
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(Provision) Benefit for income taxes(2)
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(1)
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|
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62
|
|
|
(76)
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|
Net income attributable to noncontrolling interest
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—
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|
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—
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|
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—
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Consolidated net (loss) income attributable to Arconic Corporation(2)
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|
$
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(109)
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|
|
$
|
177
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|
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$
|
187
|
|
_________________
(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:
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For the year ended December 31,
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2020
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2019
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2018
|
Segment Adjusted EBITDA:
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|
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Rolled Products
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$
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(17)
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|
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$
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(62)
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|
|
$
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(67)
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|
Building and Construction Systems
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(2)
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|
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(5)
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|
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(6)
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|
Extrusions
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(7)
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|
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(18)
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|
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(18)
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Segment total
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(26)
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|
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(85)
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|
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(91)
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|
Unallocated amounts:
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|
|
|
|
|
|
Corporate expenses
|
|
—
|
|
|
(15)
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|
|
(13)
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|
Other
|
|
1
|
|
|
(9)
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|
|
(11)
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|
Subtotal
|
|
1
|
|
|
(24)
|
|
|
(24)
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|
Other expenses, net
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(78)
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|
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(2)
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|
|
(2)
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|
Total
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$
|
(103)
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|
|
$
|
(111)
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|
|
$
|
(117)
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|
(2)Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented in the accompanying Consolidated Financial Statements. See Note M to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
(3)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 the Cost Allocations section of The Separation under Overview above).
(4)Metal price lag represents the financial impact of the timing difference between when aluminum prices included in Sales are recognized and when aluminum purchase prices included in Cost of goods sold are realized. This adjustment aims to remove the effect of the volatility in metal prices and the calculation of this impact considers applicable metal hedging transactions.
(5)In 2020, Restructuring and other charges includes a $199 charge for the settlement of certain employee retirement benefits virtually all within the United States and the United Kingdom. See Note H to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
(6)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 the Environmental Matters section of Note T to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Liquidity and Capital Resources
Arconic Corporation’s primary future cash needs are centered on operating activities, including working capital, as well as recurring and strategic capital expenditures. The Company’s ability to fund its cash needs depends on its ongoing ability to generate and raise cash in the future. Although management believes that Arconic Corporation's future cash from operations, together with the Company's access to capital markets, will provide adequate resources to fund Arconic Corporation's operating and investing needs, the Company's access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) Arconic Corporation’s credit rating; (ii) the liquidity of the overall capital markets; and (iii) the current state of the economy. There can be no assurances that the Company will continue to have access to capital markets on terms acceptable to Arconic Corporation.
For all periods prior to the Separation Date, ParentCo provided capital, cash management, and other treasury services to the Company. Only cash amounts specifically attributable to Arconic Corporation were reflected in the Company’s Consolidated Financial Statements. Transfers of cash, both to and from ParentCo’s centralized cash management system, were reflected as a component of Parent Company net investment in Arconic Corporation's Consolidated Financial Statements.
Cash provided from operations and financing activities is expected to be adequate to cover the Company’s operational and business needs over the next 12 months. For an analysis of long-term liquidity, see Contractual Obligations and Off-Balance Sheet Arrangements below.
At December 31, 2020, the Company’s cash and cash equivalents were $787, of which $256 was held outside the United States. Arconic Corporation has a number of commitments and obligations related to the Company’s operations in various foreign jurisdictions, resulting in the need for cash outside the United States. Management continuously evaluates the Company's local and global cash needs for future business operations, which may influence future repatriation decisions.
Operating Activities
Cash provided from operations was $6 in 2020 compared with $457 in 2019 and $503 in 2018.
In 2020, cash provided from operations was comprised of a positive add-back for non-cash transactions in earnings of $552 and a favorable change in noncurrent assets and liabilities of $56, mostly offset by pension contributions of $271, an unfavorable change in working capital of $222 (see below), and a net loss of $109.
In 2019, cash provided from operations was comprised primarily of a positive add-back for non-cash transactions in earnings of $313 and net income of $177, slightly offset by an unfavorable change in working capital of $57.
In 2020, working capital was significantly impacted by the fact that customer receivables related to the Arconic Corporation Businesses were no longer included in ParentCo’s accounts receivable securitization program effective January 2, 2020. In periods prior to 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 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 2019, the previously mentioned unfavorable change in working capital of $57 would have increased by $281. See Cash Management in Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
In 2018, cash provided from operations was comprised primarily of a positive add-back for non-cash transactions in earnings of $201, net income of $187, and a favorable change in working capital of $137.
Financing Activities
Cash provided from financing activities was $744 in 2020 compared with cash used for financing activities of $295 in 2019 and cash used for financing activities of $536 in 2018. The source of cash in 2020 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 under Overview above). The use of cash in both 2019 and 2018 was mostly due to net cash transfers to ParentCo.
Financing Arrangements. In connection with the capital structure to be established at the time of the Separation, Arconic Corporation secured $1,200 in third-party indebtedness. On February 7, 2020, Arconic Corporation completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for $600 of 6.125% Senior Secured Second-Lien Notes due 2028 (the “2028 Notes”). The Company received $593 in net proceeds from the debt offering reflecting a discount to the initial purchasers of the 2028 Notes. Also, on March 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 the Term Loan reflecting upfront fees and costs to enter into the financing arrangement.
The Company used a portion of the $1,168 in net proceeds from the aggregate indebtedness to make a $728 payment to ParentCo on April 1, 2020 to fund the transfer of certain net assets from ParentCo to Arconic Corporation in connection with the completion of the Separation (see The Separation under Overview 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, as provided for in the Separation and Distribution Agreement, and the amount of cash held by Arconic Corporation Businesses at March 31, 2020 ($60 – the sum of this amount and the aggregate indebtedness in (i) equals the sum of Cash and cash equivalents and Restricted cash on the Company’s Combined Balance Sheet as of March 31, 2020).
On April 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 under Results of Operations above).
On May 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 $678 during the 2020 fourth quarter and was determined to be $732 for the 2021 first quarter – see ABL Credit Agreement in Note Q to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K), 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 Q to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K 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 the Term Loan and the Credit Facility. The debt issuance costs were initially deferred and were being amortized to interest expense over the respective terms of the 2028 Notes, the Term Loan, and the Credit Facility. In connection with the issuance of the 2025 Notes and the execution of the ABL Credit Agreement, the Company paid $15 in discounts to the initial purchasers and/or upfront fees and costs (the “new debt issuance costs”). As a result of applying both debt modification and debt extinguishment accounting, as appropriate based on the lender mix for each debt instrument, to the debt refinancing, the Company was required to write off $16 of the $30 in debt issuance costs and immediately expense $3 of the $15 in new debt issuance costs. This $19 was reported within Interest expense on the Company’s Statement of Consolidated Operations. The remaining $14 in debt issuance costs continued to be deferred and the remaining $12 in new debt issuance costs were deferred; both are being amortized to interest expense over the respective terms of the 2025 Notes and the ABL Credit Agreement.
Ratings. Arconic Corporation’s cost of borrowing and ability to access the capital markets are affected not only by market conditions but also by the ratings assigned to Arconic Corporation and its debt by the major credit rating agencies. As of December 31, 2020, the following are the most recent ratings for Arconic Corporation and its outstanding debt.
Moody’s Investor Service (Moody’s) has assigned a Ba3 rating to both the Company and the 2028 Notes and a Ba1 rating to the 2025 Notes. Additionally, Moody's has given these ratings a stable outlook.
Standard and Poor’s Global Ratings (S&P) has assigned a BB rating to the Company, a B+ rating to the 2028 Notes, and a BB+ rating to the 2025 Notes. Additionally, S&P has given these ratings a stable outlook.
Fitch Ratings (Fitch) has assigned a BB+ rating to both the Company and the 2028 Notes and a BBB- rating to both the 2025 Notes and the ABL Credit Facility. Additionally, Fitch has given these ratings a negative outlook.
Investing Activities
Cash used for investing activities was $38 in 2020 compared with $170 in 2019 and $10 in 2018.
The use of cash in 2020 reflects capital expenditures of $163, mostly offset by $98 in net proceeds received from the sales of an extrusions plant in South Korea and a rolling mill in Brazil and additional proceeds of $25 (contingent consideration) received from the 2018 sale of the Texarkana (Texas) rolling mill.
The use of cash in 2019 reflects capital expenditures of $201, including for an approximately $140 project at the Davenport (Iowa) plant and an approximately $100 project at the Tennessee plant, slightly offset by additional proceeds of $27 (contingent consideration) received from the 2018 sale of the Texarkana (Texas) rolling mill. At Davenport, Arconic Corporation installed a new horizontal heat treat furnace to capture growth in the aerospace and industrial products markets. This project began near the end of 2017 and was completed in 2019 (furnace was in customer qualification stage as of December 31, 2019). At Tennessee, Arconic Corporation is expanding its hot mill capability and adding downstream equipment capabilities to capture growth in the automotive and industrial products markets. This project began in early 2019 and was essentially complete at the end of 2020.
The use of cash in 2018 reflects capital expenditures of $317, including for a horizontal heat treat furnace at the Davenport (Iowa) plant, mostly offset by proceeds of $302 from the sale of the Texarkana (Texas) rolling mill and cast house.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations. Arconic Corporation is required to make future payments under various contracts, including long-term purchase obligations, lease agreements, and financing arrangements. The Company also has commitments to make contributions to its funded pension plans, provide payments for pension (unfunded) and other postretirement benefit plans, and fund capital projects. As of December 31, 2020, a summary of Arconic Corporation’s outstanding contractual obligations is as follows (these contractual obligations are grouped in the same manner as they are classified in the Statement of Consolidated Cash Flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information):
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2021
|
|
2022-2023
|
|
2024-2025
|
|
Thereafter
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Raw material purchase obligations
|
$
|
1,545
|
|
|
$
|
957
|
|
|
$
|
588
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Energy-related purchase obligations
|
101
|
|
|
16
|
|
|
28
|
|
|
25
|
|
|
32
|
|
Other purchase obligations
|
11
|
|
|
9
|
|
|
1
|
|
|
1
|
|
|
—
|
|
Operating leases
|
180
|
|
|
43
|
|
|
60
|
|
|
36
|
|
|
41
|
|
Interest related to debt
|
465
|
|
|
79
|
|
|
158
|
|
|
137
|
|
|
91
|
|
Pension contributions - funded plans
|
786
|
|
|
209
|
|
|
308
|
|
|
269
|
|
|
—
|
|
Pension benefit payments - unfunded plans
|
74
|
|
|
8
|
|
|
16
|
|
|
14
|
|
|
36
|
|
Other postretirement benefit payments
|
319
|
|
|
37
|
|
|
70
|
|
|
65
|
|
|
147
|
|
Layoff and other restructuring payments
|
14
|
|
|
12
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Uncertain tax positions
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Debt
|
1,300
|
|
|
—
|
|
|
—
|
|
|
700
|
|
|
600
|
|
Dividends to stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Capital projects
|
76
|
|
|
56
|
|
|
20
|
|
|
—
|
|
|
—
|
|
Totals
|
$
|
4,894
|
|
|
$
|
1,426
|
|
|
$
|
1,251
|
|
|
$
|
1,247
|
|
|
$
|
970
|
|
Obligations for Operating Activities
Raw material purchase obligations consist mostly of aluminum with expiration dates ranging from less than one year to two years. Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from one year to eight years. Many of these purchase obligations contain variable pricing components, and, as a result, actual cash payments may differ from the estimates provided in the preceding table.
Operating leases represent multi-year obligations for certain land and buildings, plant equipment, vehicles, and computer equipment.
Interest related to debt is based on stated interest rates on debt with maturities that extend to 2028 (see the Financing Arrangements section of Financing Activities under Liquidity and Capital Resources above).
Pension contributions (funded plans) and pension (unfunded plans) and other postretirement benefit payments are based on actuarial estimates using current assumptions for, among others, discount rates, long-term rate of return on plan assets, rate of compensation increases, and/or health care cost trend rates. It is Arconic Corporation’s policy to contribute amounts to funded pension plans sufficient to meet the minimum requirements set forth in applicable country employee benefit and tax regulations. The minimum required contributions to funded pension plans are estimated to be $192 for 2021, $144 for 2022, $164 for 2023, $152 for 2024, and $117 for 2025. In January 2021, the Company contributed a combined $200 to its two U.S. funded pension plans, comprised of the estimated minimum required funding for 2021 of $183 and an additional $17. Accordingly, the amount for pension contributions – funded plans in the preceding table for 2021 includes the $17. Pension benefit payments for unfunded plans are expected to approximate $7 to $8 annually for years 2021 through 2030. Other postretirement benefit payments are expected to approximate $30 to $35 annually for years 2021 through 2025 and $30 annually for years 2026 through 2030. The other postretirement benefit payments will be slightly offset by subsidy receipts related to Medicare Part D, which are estimated to approximate $1 annually. Management has determined that it is not practicable to present pension contributions (funded plans) and both pension (unfunded plans) and other postretirement benefit payments beyond 2025 and 2030, respectively.
Layoff and other restructuring payments relate virtually all to severance costs.
Uncertain tax positions taken or expected to be taken on an income tax return may result in additional payments to tax authorities. As of December 31, 2020, no interest and penalties were accrued related to such positions. The total amount of uncertain tax positions is included in the “Thereafter” column as Arconic Corporation is not able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.
Obligations for Financing Activities
The debt amount in the preceding table represents the principal amounts of all outstanding long-term debt, which have maturities that extend to 2028 (see the Financing Arrangements section of Financing Activities under Liquidity and Capital Resources above).
As of December 31, 2020, Arconic Corporation had 109,205,226 issued and outstanding shares of common stock. Dividends on common stock are subject to authorization by the Company’s Board of Directors. Arconic Corporation did not declare or pay any dividends from April 1, 2020 through December 31, 2020.
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by management as of December 31, 2020. Funding levels may vary in future years based on anticipated construction schedules of the projects. It is expected that significant expansion projects will be funded through various sources, including cash provided from operations. Total capital expenditures are anticipated to be approximately $180 in 2021.
Off-Balance Sheet Arrangements. Arconic Corporation has outstanding bank guarantees related to, among others, tax matters and customs duties. The total amount committed under these guarantees, which expire at various dates between 2021 and 2026 was $2 at December 31, 2020. Additionally, Howmet Aerospace has outstanding bank guarantees related to the Company in the amount of $1 at December 31, 2020. In the event Howmet Aerospace would be required to perform under any of these instruments, Howmet Aerospace would be indemnified by Arconic Corporation in accordance with the Separation and Distribution Agreement. Furthermore, Alcoa Corporation has outstanding bank guarantees related to the Company in the amount of $14 at December 31, 2020. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified by Arconic Corporation in accordance with the 2016 Separation and Distribution Agreement.
Arconic Corporation has outstanding letters of credit primarily related to insurance, environmental, and lease obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2021, was $7 at December 31, 2020. Additionally, Howmet Aerospace has outstanding letters of credit related to the Company in the amount of $43 at December 31, 2020. In the event Howmet Aerospace would be required to perform under any of these instruments, Howmet Aerospace would be indemnified by Arconic Corporation in accordance with the Separation and Distribution Agreement.
Arconic Corporation has outstanding surety bonds primarily related to customs duties and environmental obligations. The total amount committed under these surety bonds, which expire at various dates, primarily in 2021, was $45 at December 31, 2020. Additionally, Howmet Aerospace has outstanding surety bonds related to the Company in the amount of $4 at December 31, 2020. In the event Howmet Aerospace would be required to perform under any of these instruments, Howmet Aerospace would be indemnified by Arconic Corporation in accordance with the Separation and Distribution Agreement. Furthermore, Alcoa Corporation has outstanding surety bonds related to the Company in the amount of $5 at December 31, 2020. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified by Arconic Corporation in accordance with the 2016 Separation and Distribution Agreement.
Critical Accounting Policies and Estimates
The preparation of Arconic Corporation’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates based on judgments and assumptions regarding uncertainties that may affect the amounts reported in the Consolidated Financial Statements and disclosed in the Notes to the Consolidated Financial Statements. Areas that require such estimates include the review of properties, plants, and equipment and goodwill for impairment, and accounting for each of the following: environmental and litigation matters; pension and other postretirement employee benefit obligations; stock-based compensation; and income taxes.
Management uses historical experience and all available information to make these estimates, and actual results may differ from those used to prepare Arconic Corporation’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, provide a meaningful and fair perspective of the Company.
A summary of Arconic Corporation’s significant accounting policies is included in Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K. Management believes that the application of these policies on a consistent basis enables Arconic Corporation to provide the users of the Consolidated Financial Statements with useful and reliable information about Arconic Corporation’s operating results and financial condition.
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 Company's Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if the Arconic Corporation Businesses had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise the Arconic Corporation Businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Arconic Corporation. The Critical Accounting Policies described below reflect any incremental judgments and assumptions made by management in the preparation of the Company’s Consolidated Financial Statements prior to the Separation Date (see The Separation in Overview above for additional information).
Properties, Plants, and Equipment. Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the related operations (asset group) to the carrying value of the associated assets. An impairment loss would be recognized when the carrying value of the assets exceeds the estimated undiscounted net cash flows of the asset group. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of the assets also require significant judgments.
Goodwill. Goodwill is not amortized; it is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell, exit, or realign a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods. The fair value that could be realized in an actual transaction may differ from that used to evaluate goodwill for impairment.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Arconic Corporation has three reporting units—the Rolled Products segment, the Building and Construction Systems segment, and the Extrusions segment—all of which contain goodwill. As of December 31, 2020, the carrying value of goodwill for Rolled Products, Building and Construction Systems, and Extrusions was $254, $71, and $65, respectively.
In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform a quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the quantitative impairment test.
Arconic Corporation determines annually, based on facts and circumstances, which of its reporting units will be subject to the qualitative assessment. For those reporting units where a qualitative assessment is either not performed or for which the conclusion is that an impairment is more likely than not, a quantitative impairment test will be performed. Arconic Corporation’s policy is that a quantitative impairment test be performed for each reporting unit at least once during every three-year period.
Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.
Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Arconic Corporation uses a DCF model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. Several significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including sales growth (volumes and pricing), production costs, capital spending, working capital levels, and discount rate. Certain of these assumptions may vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The WACC rate for the individual reporting units is estimated by management with the assistance of valuation experts. In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, Arconic Corporation would recognize an impairment charge equal to the excess of the reporting unit’s carrying value over its fair value without exceeding the total amount of goodwill applicable to that reporting unit.
During the 2020 annual review of goodwill, management proceeded directly to the quantitative impairment test for all three of the Company's reporting units. The estimated fair value for each of the three reporting units was substantially in excess of the respective carrying value, resulting in no impairment.
The annual review in 2019 and 2018 indicated that goodwill was not impaired for any of Arconic Corporation’s reporting units and there were no triggering events that necessitated a quantitative impairment test for any of the reporting units. That said, in light of the economic impact of the COVID-19 pandemic, the Company did perform periodic qualitative assessments throughout 2020 as described below.
During the first quarter of 2020, the equity value of Arconic Corporation’s peer group companies, and the overall U.S. stock market declined significantly amid market volatility. In addition, as a result of the COVID-19 pandemic and measures designed to contain the spread, sales globally to customers in the ground transportation and aerospace industries that are impacted by COVID-19 have been and are expected to be negatively impacted as a result of disruption in demand. As a result of these macroeconomic factors, the Company performed a qualitative assessment to evaluate whether it was more likely than not that the fair value of any of its reporting units was less than the respective carrying value. As a result of this assessment, the Company concluded that no further analysis was required and no impairment existed. The Company revisited this assessment in both the second and third quarters of 2020 amid the continued widespread impact of COVID-19 and arrived at the same conclusion. If Arconic Corporation’s actual results or external market factors further decline significantly, future goodwill impairment charges may be necessary and could be material.
Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery, which are recognized when probable and as agreements are reached with third parties. The estimates may also include costs related to other potentially responsible parties to the extent that Arconic Corporation has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as, among others, the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the
outcome of similar historical matters. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine the probability an assertion will be made is likely; then a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Pension and Other Postretirement Benefits. For all periods prior to January 1, 2020 (see below), certain employees attributable to the Arconic Corporation Businesses participated in defined benefit pension and other postretirement benefit plans sponsored by ParentCo (the “Shared Plans”), which also included participants attributable to non-Arconic Corporation Businesses. Arconic Corporation accounted for the portion of the Shared Plans related to its employees as multiemployer benefit plans. Accordingly, Arconic Corporation did not record an asset or liability to recognize any portion of the funded status of the Shared Plans. However, the related expense recorded by the Company was based primarily on pensionable compensation and estimated interest costs related to participants attributable to the Arconic Corporation Businesses.
Prior to the Separation Date, certain other ParentCo plans that were entirely attributable to employees of the Arconic Corporation Businesses (“Direct Plans”) were accounted for as defined benefit pension and other postretirement benefit plans. Accordingly, the funded and unfunded position of each Direct Plan was recorded in the Consolidated Balance Sheet. Actuarial gains and losses that have not yet been recognized in earnings were recorded in accumulated other comprehensive income, net of taxes, until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to the Direct Plans is dependent on various assumptions, including discount rates, long-term expected rates of return on plan assets, and future compensation increases. ParentCo’s management developed each assumption using relevant company experience in conjunction with market-related data for each individual location in which such plans exist.
In preparation for the Separation, effective January 1, 2020, certain of the Shared Plans were separated into standalone plans for both Arconic Corporation (“New Direct Plans”) and ParentCo (see Note H to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K). Additionally, effective April 1, 2020, certain of the other remaining Shared Plans were assumed by Arconic Corporation (“Additional New Direct Plans”) (see Note H to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K). Accordingly, beginning on the respective effective dates, the New Direct Plans and the Additional New Direct Plans are accounted for as defined benefit pension and other postretirement plans. Additionally, the Direct Plans continue to be accounted for as defined benefit pension and other postretirement plans.
The following table summarizes the total expenses (excluding settlements and curtailments) recognized by Arconic Corporation related to the pension and other postretirement benefits described above:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement benefits
|
|
|
|
|
December 31,
|
|
December 31,
|
Type of Plan
|
|
Type of Expense
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Cumulative Direct Plans
|
|
Net periodic benefit cost*
|
|
$
|
82
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Shared Plans
|
|
Multiemployer contribution expense
|
|
—
|
|
|
61
|
|
|
67
|
|
|
—
|
|
|
21
|
|
|
21
|
|
Shared Plans
|
|
Cost allocation
|
|
(1)
|
|
|
20
|
|
|
20
|
|
|
—
|
|
|
4
|
|
|
5
|
|
|
|
|
|
$
|
81
|
|
|
$
|
86
|
|
|
$
|
92
|
|
|
$
|
22
|
|
|
$
|
25
|
|
|
$
|
26
|
|
__________________
* In 2020, 2019, and 2018, net periodic benefit cost for pension benefits was comprised of service cost of $21, $3, and $3, respectively, and non-service cost of $61, $2, and $2, respectively. In 2020, net periodic benefit cost for other postretirement benefits was comprised of service cost of $5 and non-service cost of $17.
Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (compensation increases, health care cost trend rates, retirement age, and mortality).
The interest rate used to discount future estimated liabilities is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors. The yield curve model parallels the projected plan cash flows, which have a weighted average duration of 11 years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the plan obligations multiple times. If a deep market of high quality corporate bonds does not exist in a country, then the yield on government bonds is used. In 2020, the weighted average discount rate used to determine benefit obligations for pension plans was 2.45% and for other postretirement benefit plans was 2.61%. The impact on the combined pension and other postretirement liabilities of a change in the weighted average discount rate of 1/4 of 1% would be approximately $140 and either a charge or credit of approximately $1 to pretax earnings in the following year.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (the fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on forward-looking investment returns by asset class. Management incorporates expected future investment returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment. For 2020, management used 6.09% as its weighted-average expected long-term rate of return, which was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. For 2021, management anticipates that the weighted-average expected long-term rate of return will be in the range of 5.00% to 6.00%. A change in the assumption for the weighted average expected long-term rate of return on plan assets of 1/4 of 1% would impact pretax earnings by approximately $6 for 2021.
Stock-Based Compensation. For all periods prior to the Separation Date, eligible employees attributable to the Arconic Corporation Businesses participated in ParentCo’s stock-based compensation plan. The compensation expense recorded by Arconic Corporation included the expense associated with these employees, as well as the expense associated with an allocation of stock-based compensation expense for ParentCo's corporate employees (see Cost Allocations in The Separation under Overview above). From the Separation Date through December 31, 2020, Arconic Corporation recorded stock-based compensation expense for all of the Company's employees eligible to participate in Arconic Corporation's stock-based compensation plan. The following describes the manner in which stock-based compensation expense was initially determined for both Arconic Corporation and ParentCo.
Compensation expense for employee equity grants is recognized using the non-substantive vesting period approach, in which the expense is recognized ratably over the requisite service period based on the grant date fair value. The fair value of stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance stock units containing a market condition is valued using a Monte Carlo valuation model. Determining the fair value at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
In 2020, 2019, and 2018, Arconic Corporation recognized stock-based compensation expense of $23 ($18 after-tax), $38 ($30 after-tax), and $22 ($17 after-tax), respectively.
Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Arconic Corporation’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
For all periods prior to the Separation Date, the Arconic Corporation Businesses were included in the income tax filings of ParentCo. The provision for income taxes was determined in the same manner described above, but on a on a separate return methodology as if Arconic Corporation was a standalone taxpayer filing hypothetical income tax returns where applicable. Any additional accrued tax liability or refund arising as a result of this approach was assumed to be immediately settled with ParentCo as a component of Parent Company net investment. Deferred taxes were also determined in the same manner described above and were reflected in the Consolidated Balance Sheet for net operating losses, credits or other attributes to the extent that such attributes were expected to transfer to Arconic Corporation upon the Separation. Any difference from attributes generated in a hypothetical return on a separate return basis was adjusted as a component of Parent Company net investment.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections
of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic Corporation’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the grant and lapse of tax holidays.
Arconic Corporation applies a tax law ordering approach when considering the need for a valuation allowance on net operating losses expected to offset Global Intangible Low Taxed Income (GILTI) income inclusions. Under this approach, reductions in cash tax savings are not considered as part of the valuation allowance assessment. Instead, future GILTI inclusions are considered a source of taxable income that support the realizability of deferred tax assets.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired or the appropriate taxing authority has completed its examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.
Related Party Transactions
Transactions between the Arconic Corporation Businesses and the Howmet Aerospace Businesses have been presented as related party transactions on Arconic Corporation's Consolidated Financial Statements. In 2020, 2019, and 2018, sales to the Howmet Aerospace Businesses from the Arconic Corporation Businesses were $108, $183, and $206, respectively. As of December 31, 2020, outstanding receivables from the Howmet Aerospace Businesses were $12 and were included in Receivables from customers on Arconic Corporation's Consolidated Balance Sheet.
Recently Adopted Accounting Guidance
See the Recently Adopted Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Recently Issued Accounting Guidance
See the Recently Issued Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Management's Reports to Arconic Corporation Stockholders
Management's Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Arconic Corporation and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity, in accordance with accounting principles generally accepted in the United States of America (GAAP) and include amounts that are based on management’s best judgments and estimates. The other financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 is consistent with that in the Consolidated Financial Statements.
Management recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the U.S. Securities Exchange Act of 1934 (as amended), for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment to evaluate the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 using the criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020.
|
|
|
/s/ Timothy D. Myers
|
Timothy D. Myers
Chief Executive Officer
|
/s/ Erick R. Asmussen
|
Erick R. Asmussen
Executive Vice President and
Chief Financial Officer
|
February 23, 2021
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Arconic Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Arconic Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Changes in Accounting Principles
As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for inventory in 2020 and the manner in which it accounts for leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - Extrusions Reporting Unit
As described in Notes B and O to the consolidated financial statements, the Company’s consolidated goodwill balance was $390 million as of December 31, 2020, and the amount of the goodwill associated with the Extrusions reporting unit was $65 million. Goodwill is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell, exit, or realign a business. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. During the current year’s annual review of goodwill, management proceeded directly to the quantitative impairment test for all three of the Company's reporting units. Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Management uses a discounted cash flow model to estimate the current fair value of the reporting units when testing for impairment. Several significant assumptions and estimates are involved in the
application of the discounted cash flow model to forecast operating cash flows, including sales growth (volumes and pricing), production costs, capital spending, working capital levels, and discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Extrusions reporting unit is a critical audit matter are the significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s significant assumptions related to sales growth (volumes and pricing), production costs, capital spending, and discount rate. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others (i) testing management’s process for developing the fair value estimate for the Extrusions reporting unit; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness, accuracy, and relevance of underlying data used in the model; and (iv) evaluating the reasonableness of the significant assumptions used by management related to sales growth (volumes and pricing), production costs, capital spending, and discount rate. Evaluating management’s assumptions related to sales growth (volumes and pricing) production costs, and capital spending involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with available industry or market data, executed customer contracts, and approved capital spending budgets; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and the discount rate assumption.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 23, 2021
We have served as the Company’s auditor since 2019.
Arconic Corporation and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Sales to unrelated parties
|
|
$
|
5,567
|
|
|
$
|
7,094
|
|
|
$
|
7,236
|
|
Sales to related parties (A)
|
|
108
|
|
|
183
|
|
|
206
|
|
Total Sales (C and D)
|
|
5,675
|
|
|
7,277
|
|
|
7,442
|
|
Cost of goods sold (exclusive of expenses below) (M)
|
|
4,862
|
|
|
6,332
|
|
|
6,527
|
|
Selling, general administrative, and other expenses
|
|
258
|
|
|
346
|
|
|
288
|
|
Research and development expenses
|
|
36
|
|
|
45
|
|
|
63
|
|
Provision for depreciation and amortization
|
|
251
|
|
|
252
|
|
|
272
|
|
Restructuring and other charges (E)
|
|
188
|
|
|
87
|
|
|
(104)
|
|
Operating income
|
|
80
|
|
|
215
|
|
|
396
|
|
Interest expense (F)
|
|
118
|
|
|
115
|
|
|
129
|
|
Other expenses (income), net (G)
|
|
70
|
|
|
(15)
|
|
|
4
|
|
(Loss) Income before income taxes
|
|
(108)
|
|
|
115
|
|
|
263
|
|
Provision (Benefit) for income taxes (I)
|
|
1
|
|
|
(62)
|
|
|
76
|
|
Net (loss) income
|
|
(109)
|
|
|
177
|
|
|
187
|
|
Less: Net income attributable to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
Net (loss) income attributable to Arconic Corporation
|
|
$
|
(109)
|
|
|
$
|
177
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
Earnings Per Share Attributable to Arconic Corporation Common Stockholders (J):
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.00)
|
|
|
$
|
1.63
|
|
|
$
|
1.72
|
|
Diluted
|
|
$
|
(1.00)
|
|
|
$
|
1.63
|
|
|
$
|
1.72
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Statement of Consolidated Comprehensive Income
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arconic Corporation
|
|
Noncontrolling interest
|
|
Total
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Net (loss) income
|
|
$
|
(109)
|
|
|
$
|
177
|
|
|
$
|
187
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(109)
|
|
|
$
|
177
|
|
|
$
|
187
|
|
Other comprehensive income (loss), net of tax (L):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrecognized net actuarial loss and prior service benefit related to pension and other postretirement benefits
|
|
54
|
|
|
(11)
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54
|
|
|
(11)
|
|
|
4
|
|
Foreign currency translation adjustments
|
|
87
|
|
|
56
|
|
|
(164)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
87
|
|
|
56
|
|
|
(164)
|
|
Net change in unrecognized losses on cash flow hedges
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Total Other comprehensive income (loss), net of tax
|
|
146
|
|
|
45
|
|
|
(160)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
146
|
|
|
45
|
|
|
(160)
|
|
Comprehensive income
|
|
$
|
37
|
|
|
$
|
222
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
222
|
|
|
$
|
27
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Consolidated Balance Sheet
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
787
|
|
|
$
|
72
|
|
Receivables from customers, less allowances of $1 in 2020 and $2 in 2019 (A)
|
|
631
|
|
|
384
|
|
Other receivables
|
|
128
|
|
|
136
|
|
Inventories (M)
|
|
1,043
|
|
|
1,137
|
|
Prepaid expenses and other current assets
|
|
53
|
|
|
28
|
|
Total current assets
|
|
2,642
|
|
|
1,757
|
|
Properties, plants, and equipment, net (N)
|
|
2,712
|
|
|
2,744
|
|
Goodwill (O)
|
|
390
|
|
|
386
|
|
Operating lease right-of-use assets (P)
|
|
144
|
|
|
125
|
|
Deferred income taxes (I)
|
|
329
|
|
|
14
|
|
Other noncurrent assets
|
|
97
|
|
|
32
|
|
Total assets
|
|
$
|
6,314
|
|
|
$
|
5,058
|
|
Liabilities
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable, trade
|
|
$
|
1,106
|
|
|
$
|
1,061
|
|
Accrued compensation and retirement costs
|
|
118
|
|
|
80
|
|
Taxes, including income taxes
|
|
33
|
|
|
21
|
|
Environmental remediation (T)
|
|
90
|
|
|
83
|
|
Operating lease liabilities (P)
|
|
36
|
|
|
33
|
|
Other current liabilities
|
|
90
|
|
|
63
|
|
Total current liabilities
|
|
1,473
|
|
|
1,341
|
|
Long-term debt (Q)
|
|
1,278
|
|
|
250
|
|
Accrued pension benefits (H)
|
|
1,343
|
|
|
63
|
|
Accrued other postretirement benefits (H)
|
|
479
|
|
|
1
|
|
Environmental remediation (T)
|
|
66
|
|
|
125
|
|
Operating lease liabilities (P)
|
|
111
|
|
|
96
|
|
Deferred income taxes (I)
|
|
15
|
|
|
159
|
|
Other noncurrent liabilities and deferred credits
|
|
102
|
|
|
50
|
|
Total liabilities
|
|
4,867
|
|
|
2,085
|
|
Contingencies and commitments (T)
|
|
|
|
|
Equity
|
|
|
|
|
Arconic Corporation stockholders’ equity:
|
|
|
|
|
Parent Company net investment (A)
|
|
—
|
|
|
2,664
|
|
Common stock (K)
|
|
1
|
|
|
—
|
|
Additional capital
|
|
3,348
|
|
|
—
|
|
Accumulated deficit
|
|
(155)
|
|
|
—
|
|
Accumulated other comprehensive (loss) income (L)
|
|
(1,761)
|
|
|
295
|
|
Total Arconic Corporation stockholders’ equity
|
|
1,433
|
|
|
2,959
|
|
Noncontrolling interest
|
|
14
|
|
|
14
|
|
Total equity
|
|
1,447
|
|
|
2,973
|
|
Total liabilities and equity
|
|
$
|
6,314
|
|
|
$
|
5,058
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Operating Activities
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(109)
|
|
|
$
|
177
|
|
|
$
|
187
|
|
Adjustments to reconcile net (loss) income to cash provided from operations:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
251
|
|
|
252
|
|
|
272
|
|
Deferred income taxes (I)
|
|
(16)
|
|
|
(81)
|
|
|
1
|
|
Restructuring and other charges (E)
|
|
188
|
|
|
87
|
|
|
(104)
|
|
Net periodic pension benefit cost (H)
|
|
82
|
|
|
5
|
|
|
5
|
|
Stock-based compensation (K)
|
|
23
|
|
|
40
|
|
|
22
|
|
Amortization of debt issuance costs (Q)
|
|
25
|
|
|
—
|
|
|
—
|
|
Other
|
|
(1)
|
|
|
10
|
|
|
5
|
|
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
|
|
|
|
|
|
|
(Increase) Decrease in receivables
|
|
(235)
|
|
|
2
|
|
|
(24)
|
|
Decrease (Increase) in inventories
|
|
65
|
|
|
57
|
|
|
(73)
|
|
(Increase) Decrease in prepaid expenses and other current assets
|
|
(16)
|
|
|
10
|
|
|
24
|
|
Increase (Decrease) in accounts payable, trade
|
|
82
|
|
|
(100)
|
|
|
247
|
|
(Decrease) in accrued expenses
|
|
(217)
|
|
|
(67)
|
|
|
(38)
|
|
Increase in taxes, including income taxes
|
|
99
|
|
|
41
|
|
|
1
|
|
Pension contributions (H)
|
|
(271)
|
|
|
(3)
|
|
|
(4)
|
|
Decrease (Increase) in noncurrent assets
|
|
35
|
|
|
5
|
|
|
(2)
|
|
Increase (Decrease) in noncurrent liabilities
|
|
21
|
|
|
22
|
|
|
(16)
|
|
Cash provided from operations
|
|
6
|
|
|
457
|
|
|
503
|
|
Financing Activities
|
|
|
|
|
|
|
Net transfers from (to) former parent company
|
|
216
|
|
|
(296)
|
|
|
(531)
|
|
Separation payment to former parent company (A)
|
|
(728)
|
|
|
—
|
|
|
—
|
|
Additions to debt (original maturities greater than three months) (Q)
|
|
2,400
|
|
|
—
|
|
|
—
|
|
Debt issuance costs (Q)
|
|
(57)
|
|
|
—
|
|
|
—
|
|
Payments on debt (original maturities greater than three months) (Q)
|
|
(1,100)
|
|
|
—
|
|
|
—
|
|
Other
|
|
13
|
|
|
1
|
|
|
(5)
|
|
Cash provided from (used for) financing activities
|
|
744
|
|
|
(295)
|
|
|
(536)
|
|
Investing Activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(163)
|
|
|
(201)
|
|
|
(317)
|
|
Proceeds from the sale of assets and businesses (S)
|
|
125
|
|
|
31
|
|
|
307
|
|
Cash used for investing activities
|
|
(38)
|
|
|
(170)
|
|
|
(10)
|
|
Effect of exchange rate changes on cash and cash equivalents
and restricted cash
|
|
3
|
|
|
(1)
|
|
|
(2)
|
|
Net change in cash and cash equivalents and restricted cash
|
|
715
|
|
|
(9)
|
|
|
(45)
|
|
Cash and cash equivalents and restricted cash at beginning of year (R)
|
|
72
|
|
|
81
|
|
|
126
|
|
Cash and cash equivalents and restricted cash at end of year (R)
|
|
$
|
787
|
|
|
$
|
72
|
|
|
$
|
81
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Statement of Changes in Consolidated Equity
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company net
investment
|
|
Common stock
|
|
Additional capital
|
|
Accumulated deficit
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Noncontrolling
interest
|
|
Total
equity
|
Balance at December 31, 2017
|
|
$
|
2,862
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
410
|
|
|
$
|
13
|
|
|
$
|
3,285
|
|
Net income
|
|
187
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
187
|
|
Other comprehensive loss (L)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(160)
|
|
|
—
|
|
|
(160)
|
|
Change in ParentCo contribution
|
|
(339)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(339)
|
|
Other
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(4)
|
|
Balance at December 31, 2018
|
|
$
|
2,707
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250
|
|
|
$
|
12
|
|
|
$
|
2,969
|
|
Adoption of accounting
standard (B)
|
|
73
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
73
|
|
Net income
|
|
177
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
177
|
|
Other comprehensive
income (L)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
45
|
|
Change in ParentCo contribution
|
|
(294)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(294)
|
|
Other
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
3
|
|
Balance at December 31, 2019
|
|
$
|
2,664
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
$
|
14
|
|
|
$
|
2,973
|
|
Net income (loss)
|
|
46
|
|
|
—
|
|
|
—
|
|
|
(155)
|
|
|
—
|
|
|
—
|
|
|
(109)
|
|
Other comprehensive
income (L)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
146
|
|
|
—
|
|
|
146
|
|
Establishment of additional defined benefit plans (H)
|
|
349
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,752)
|
|
|
—
|
|
|
(1,403)
|
|
Change in ParentCo contribution
|
|
217
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
217
|
|
Separation payment to former parent company (A)
|
|
(728)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(728)
|
|
Separation-related adjustments
|
|
(2,548)
|
|
|
—
|
|
|
3,334
|
|
|
—
|
|
|
(450)
|
|
|
—
|
|
|
336
|
|
Issuance of common stock (K)
|
|
—
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation (K)
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
3,348
|
|
|
$
|
(155)
|
|
|
$
|
(1,761)
|
|
|
$
|
14
|
|
|
$
|
1,447
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Arconic Corporation and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except per-share amounts)
A. The Separation and Basis of Presentation
Arconic Corporation (or the “Company”) is a manufacturer of fabricated aluminum products, including sheet and plate, extrusions, and architectural products, with a primary focus on the ground transportation, aerospace, building and construction, industrial products, and packaging end markets. The Company has 22 primary operating locations in 8 countries around the world, situated in the United States, Canada, China, France, Germany, Hungary, Russia, and the United Kingdom.
References in these Notes to (i) “ParentCo” refer to Arconic Inc., a Delaware corporation, and its consolidated subsidiaries (through March 31, 2020, at which time it was renamed Howmet Aerospace Inc.), and (ii) “2016 Separation Transaction” refer to the November 1, 2016 separation of Alcoa Inc., a Pennsylvania corporation, into two standalone, publicly-traded companies, Arconic Inc. and Alcoa Corporation.
Coronavirus. Our operations and financial results have been, and are expected to continue to be, adversely affected by the current coronavirus (COVID-19) pandemic. Since Arconic Corporation’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 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, or the duration or extent of resumed operations. In 2020, Arconic Corporation derived approximately 33% of its revenue from the ground transportation end market—including approximately 11% of its revenue from Ford, our largest customer—and 14% from the aerospace end market. 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. The impact on our business, results of operations, financial condition, liquidity, and/or cash flows will be magnified if the disruption from COVID-19 continues for an extended period.
As a result of these developments, Arconic Corporation implemented several measures starting in April 2020 to mitigate the impacts of COVID-19 on the Company’s business, results of operations, financial condition, liquidity, and cash flows:
•deferred initiating a dividend on common stock;
•reduced the CEO’s salary and the Board of Directors’ cash compensation by 30% (see below);
•reduced salaries for senior-level management by 20% and for all other salaried employees by 10% (see below);
•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 (see below); and
•reducing capital expenditures by approximately $50, or approximately 30%.
Effective September 1, 2020, the Company restored both the salaries of all salaried employees and the 401K match of all salaried U.S. employees, including executive officers, to the levels in effect prior to the actions described above. Also effective September 1, 2020, the Company restored the annual cash retainers payable to the non-employee members of the Company’s Board of Directors to the levels in effect prior to the previous reduction described above.
The Separation. On February 8, 2019, ParentCo announced that its Board of Directors approved a plan to separate into two standalone, publicly-traded companies (the “Separation”). The spin-off company, later named Arconic Corporation, was to include the rolled aluminum products, aluminum extrusions, and architectural products operations of ParentCo, as well as the Latin America extrusions operations sold in April 2018, (collectively, the “Arconic Corporation Businesses”). The existing publicly traded company, ParentCo, 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 on March 31, 2020) regarding the qualification of the distribution, together with certain related transactions, as a “reorganization” within the meaning of Sections 335 and 368(a)(1)(D) of the U.S. Internal Revenue Code (i.e., a transaction that is generally tax-free for U.S. federal income tax
purposes); and the U.S. Securities and Exchange Commission (the “SEC”) declaring effective a Registration Statement on Form 10, as amended, filed with the SEC on February 13, 2020 (effectiveness was declared by the SEC on February 13, 2020).
On February 5, 2020, ParentCo’s Board of Directors approved the completion of the Separation by means of a pro rata distribution by ParentCo of all of the outstanding shares of common stock of Arconic Corporation to ParentCo common stockholders of record as of the close of business on March 19, 2020 (the “Record Date”). At the time of the Separation, ParentCo common stockholders 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 stockholders were to receive cash in lieu of fractional shares).
In connection with the Separation, as of March 31, 2020, Arconic Corporation and Howmet Aerospace entered into several agreements to implement the legal and structural separation between the two companies; govern the relationship between Arconic Corporation and Howmet Aerospace after the completion of the Separation; and allocate between Arconic Corporation and Howmet Aerospace various assets, liabilities, and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities. These agreements included a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, and certain Patent, Know-How, Trade Secret License and Trademark License Agreements. The Separation and Distribution Agreement 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.
On April 1, 2020 (the “Separation Date”), the Separation was completed and became effective at 12:01 a.m. Eastern Daylight Time. To effect the Separation, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in a cash payment of $728 to ParentCo by Arconic Corporation from a portion of the aggregate net proceeds of previously executed financing arrangements (see Note Q). In connection with the Separation, 109,021,376 shares of Arconic 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 the New York Stock Exchange on April 1, 2020 under the ticker symbol “ARNC.” Arconic Corporation’s common stock has a par value of $0.01 per share.
ParentCo incurred costs to evaluate, plan, and execute the Separation, and Arconic Corporation was allocated a pro rata portion of these costs based on segment revenue (see Cost Allocations below). ParentCo recognized $38 from January 2020 through March 2020 and $78 in 2019 for such costs, of which $18 and $40, respectively, was allocated to Arconic Corporation. The allocated amounts were included in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations.
Basis of Presentation. The Consolidated Financial Statements of Arconic Corporation are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, 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.
Principles of Consolidation. The Consolidated Financial Statements of Arconic Corporation include the accounts of Arconic Corporation and companies in which Arconic Corporation has a controlling interest. Intercompany transactions have been eliminated.
Management evaluates whether an Arconic Corporation entity or interest is a variable interest entity and whether Arconic Corporation is the primary beneficiary. Consolidation is required if both of these criteria are met. Arconic Corporation does not have any variable interest entities requiring consolidation.
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 accompanying Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if the Arconic Corporation Businesses had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise the Arconic Corporation Businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were
specifically identifiable or otherwise attributable to Arconic Corporation. ParentCo’s net investment in these operations was reflected as Parent Company net investment on the accompanying Consolidated Financial Statements. All significant transactions and accounts within Arconic Corporation were eliminated. All significant intercompany transactions between ParentCo and Arconic Corporation were included within Parent Company net investment on the accompanying Consolidated Financial Statements.
Cost Allocations. The description and information on cost allocations is applicable for all periods 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cost of goods sold(1)
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
11
|
|
Selling, general administrative, and other expenses(2)
|
25
|
|
|
115
|
|
|
56
|
|
Research and development expenses
|
—
|
|
|
11
|
|
|
24
|
|
Provision for depreciation and amortization
|
1
|
|
|
10
|
|
|
10
|
|
Restructuring and other charges(3) (E)
|
2
|
|
|
7
|
|
|
50
|
|
Interest expense (F)
|
28
|
|
|
115
|
|
|
125
|
|
Other (income), net (G)
|
(5)
|
|
|
(6)
|
|
|
(12)
|
|
_________________
(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 2020 (January through March) and 2019, amount includes an allocation of $18 and $40, respectively, for costs incurred by ParentCo associated with the Separation (see above).
(3)In 2018, amount includes an allocation of settlement and curtailment charges and benefits related to several actions taken (lump sum payments and benefit reductions) by ParentCo associated with pension and other postretirement benefit plans.
Management believes the assumptions regarding the allocation of ParentCo’s general corporate expenses and financing costs were reasonable.
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. The total net effect of the settlement of these transactions was reflected on the accompanying Statement of Consolidated Cash Flows as a financing activity and on the accompanying Consolidated Balance Sheet as Parent Company net investment.
Cash Management. The description and information on cash management is applicable for all periods included in the Consolidated Financial Statements prior to the Separation Date.
Cash was managed centrally with certain net earnings reinvested locally and working capital requirements met from existing liquid funds. Accordingly, the cash and cash equivalents held by ParentCo at the corporate level were not attributed to Arconic Corporation for any of the periods presented prior to the Separation Date. Only cash amounts specifically attributable to Arconic Corporation were reflected in the accompanying Consolidated Balance Sheet. Transfers of cash, both to and from ParentCo’s centralized cash management system, were reflected as a component of Parent Company net investment on the accompanying Consolidated Balance Sheet and as a financing activity on the accompanying Statement of Consolidated Cash Flows.
ParentCo had an arrangement with several financial institutions to sell certain customer receivables without recourse on a revolving basis. The sale of such receivables was completed through the use of a bankruptcy-remote special-purpose entity, which was a consolidated subsidiary of ParentCo. In connection with this arrangement, in all periods prior to January 1, 2020, certain of Arconic Corporation’s customer receivables were sold on a revolving basis to this bankruptcy-remote subsidiary of ParentCo; these sales were reflected as a component of Parent Company net investment on the accompanying Consolidated Balance Sheet. As of December 31, 2019, the amount of Arconic Corporation’s outstanding customer receivables sold to ParentCo’s subsidiary was $281. Effective January 2, 2020, in preparation for the Separation, ParentCo’s arrangement was amended to no longer include customer receivables associated with the Arconic Corporation Businesses, as well as to remove previously included customer receivables related to the Arconic Corporation Businesses not yet collected as of January 2, 2020. Accordingly, uncollected customer receivables of $281 related to the Arconic Corporation Businesses were removed from the program and the right to collect and receive the cash from the customer was returned to Arconic Corporation.
ParentCo participated in several accounts payable settlement arrangements with certain vendors and third-party intermediaries. These arrangements provided that, at the vendor’s request, the third-party intermediary advance the amount of the scheduled payment to the vendor, less an appropriate discount, before the scheduled payment date and ParentCo make payment to the third-party intermediary on the date stipulated in accordance with the commercial terms negotiated with its vendors. In connection with these arrangements, certain of Arconic Corporation’s accounts payable were settled, at the vendor’s request, before the scheduled payment date; these settlements were reflected as a component of Parent Company net investment on the accompanying Consolidated Balance Sheet. As of December 31, 2019, the amount of Arconic Corporation’s accounts payables settled under such arrangements that had yet to be extinguished between ParentCo and third-party intermediaries was $1.
Related Party Transactions. Transactions between the Arconic Corporation Businesses and the Howmet Aerospace Businesses have been presented as related party transactions on the accompanying Consolidated Financial Statements. In 2020, 2019, and 2018, sales to the Howmet Aerospace Businesses from the Arconic Corporation Businesses were $108, $183, and $206, respectively. As of December 31, 2020, outstanding receivables from the Howmet Aerospace Businesses were $12 and were included in Receivables from customers on the accompanying Consolidated Balance Sheet.
B. Summary of Significant Accounting Policies
Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. For all periods prior to the Separation Date, the cash and cash equivalents held by ParentCo at the corporate level were not attributed to Arconic Corporation. Only cash amounts specifically attributable to Arconic Corporation were reflected on the Company's Consolidated Financial Statements.
Inventory Valuation. Inventories are carried at the lower of cost and net realizable value, with cost for most inventories determined under the average cost method. The cost of certain non-U.S. inventories is determined under the first-in, first-out (FIFO) method.
Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at last-in, first-out (LIFO) cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented in the accompanying Consolidated Financial Statements. See Note M for additional information.
Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Also, interest related to the construction of qualifying assets is capitalized as part of the construction costs. Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets. The following table details the weighted-average useful lives of structures and machinery and equipment by reporting segment (numbers in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
Structures
|
|
Machinery
and
equipment
|
Rolled Products
|
32
|
|
22
|
Building and Construction Systems
|
25
|
|
18
|
Extrusions
|
33
|
|
19
|
Repairs and maintenance are charged to expense as incurred. Generally, gains or losses from the sale of asset groups are recorded in Restructuring and other charges while gains and losses from the sale of individual assets are recorded in Other expenses (income), net.
Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the related operations (asset group) to the carrying value of the associated assets. An impairment loss would be recognized when the carrying value of the assets exceeds the estimated undiscounted net cash flows of the asset group. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of the assets also require significant judgments.
Goodwill. Goodwill is not amortized; it is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell, exit, or realign a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods. The fair value that could be realized in an actual transaction may differ from that used to evaluate goodwill for impairment.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Arconic Corporation has three reporting units—the Rolled Products segment, the Building and Construction Systems segment, and the Extrusions segment—all of which contain goodwill. As of December 31, 2020, the carrying value of goodwill for Rolled Products, Building and Construction Systems, and Extrusions was $254, $71, and $65, respectively.
In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform a quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The ultimate outcome of the goodwill impairment review for a
reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the quantitative impairment test.
Arconic Corporation determines annually, based on facts and circumstances, which of its reporting units will be subject to the qualitative assessment. For those reporting units where a qualitative assessment is either not performed or for which the conclusion is that an impairment is more likely than not, a quantitative impairment test will be performed. Arconic Corporation’s policy is that a quantitative impairment test be performed for each reporting unit at least once during every three-year period.
Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.
Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Arconic Corporation uses a DCF model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. Several significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including sales growth (volumes and pricing), production costs, capital spending, working capital levels, and discount rate. Certain of these assumptions may vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The WACC rate for the individual reporting units is estimated by management with the assistance of valuation experts. In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, Arconic Corporation would recognize an impairment charge equal to the excess of the reporting unit’s carrying value over its fair value without exceeding the total amount of goodwill applicable to that reporting unit.
During the 2020 annual review of goodwill, management proceeded directly to the quantitative impairment test for all three of the Company's reporting units. The estimated fair value for each of the three reporting units was substantially in excess of the respective carrying value, resulting in no impairment.
The annual review in 2019 and 2018 indicated that goodwill was not impaired for any of Arconic Corporation’s reporting units and there were no triggering events that necessitated a quantitative impairment test for any of the reporting units. That said, in light of the economic impact of the COVID-19 pandemic, the Company did perform periodic qualitative assessments throughout 2020 as described below.
During the first quarter of 2020, the equity value of Arconic Corporation’s peer group companies, and the overall U.S. stock market declined significantly amid market volatility. In addition, as a result of the COVID-19 pandemic and measures designed to contain the spread, sales globally to customers in the ground transportation and aerospace industries that are impacted by COVID-19 have been and are expected to be negatively impacted as a result of disruption in demand. As a result of these macroeconomic factors, the Company performed a qualitative assessment to evaluate whether it was more likely than not that the fair value of any of its reporting units was less than the respective carrying value. As a result of this assessment, the Company concluded that no further analysis was required and no impairment existed. The Company revisited this assessment in both the second and third quarters of 2020 amid the continued widespread impact of COVID-19 and arrived at the same conclusion. If Arconic Corporation’s actual results or external market factors further decline significantly, future goodwill impairment charges may be necessary and could be material.
Other Intangible Assets. Intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited. The following table details the weighted-average useful lives of software and other intangible assets by reporting segment (numbers in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
Other
intangible
assets
|
Rolled Products
|
6
|
|
12
|
Building and Construction Systems
|
4
|
|
20
|
Extrusions
|
3
|
|
10
|
Leases. Arconic Corporation determines whether a contract contains a lease at inception. The Company leases certain land and buildings, plant equipment, vehicles, and computer equipment, which have been classified as operating leases. Certain real estate leases include one or more options to renew; the exercise of lease renewal options is at the Company’s discretion. Arconic Corporation includes renewal option periods in the lease term when it is determined that the options are reasonably certain to be exercised. Certain of the Company’s real estate lease agreements include rental payments that either have fixed contractual increases over time or adjust periodically for inflation. Also, certain of the Company’s lease agreements include variable lease payments. The variable portion of payments is not included in the initial measurement of the right-of-use asset or lease liability due to the uncertainty of the payment amount and is recorded as lease cost in the period incurred.
Operating lease right-of-use assets and lease liabilities with an initial term greater than 12 months are recorded on the balance sheet at the present value of the future minimum lease payments over the lease term calculated at the lease commencement date and are recognized as lease expense on a straight-line basis over the lease term. Arconic Corporation uses an incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, as most of the Company’s leases do not provide an implicit rate. The operating lease right-of-use assets also include any lease prepayments made and are reduced by lease incentives and accrued exit costs.
Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery, which are recognized when probable and as agreements are reached with third parties. The estimates may also include costs related to other potentially responsible parties to the extent that Arconic Corporation has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as, among others, the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine the probability an assertion will be made is likely; then a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Revenue Recognition. Arconic Corporation’s contracts with customers are comprised of acknowledged purchase orders incorporating the Company’s standard terms and conditions, or for larger customers, may also generally include terms under negotiated multi-year agreements. These customer contracts typically consist of the manufacture of products, which represent single performance obligations that are satisfied upon transfer of control of the product to the customer. Arconic Corporation produces aluminum sheet and plate; extruded, machined, and formed shapes; integrated aluminum structural systems; and architectural extrusions. Transfer of control is assessed based on alternative use of the products produced and Arconic Corporation’s enforceable right to payment for performance to date under the contract terms. Transfer of control and revenue recognition generally occur upon shipment or delivery of the product, which is when title, ownership, and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck, train, or vessel).
In certain circumstances, Arconic Corporation receives advanced payments from its customers for product to be delivered in future periods. These advanced payments are recorded as deferred revenue until the product is delivered and title and risk of loss have passed to the customer in accordance with the terms of the contract. Deferred revenue is included in Other current liabilities and Other noncurrent liabilities and deferred credits on the Consolidated Balance Sheet.
Pension and Other Postretirement Benefits. For all periods prior to January 1, 2020 (see below), certain employees attributable to the Arconic Corporation Businesses participated in defined benefit pension and other postretirement benefit plans sponsored by ParentCo (the “Shared Plans”), which also included participants attributable to non-Arconic Corporation Businesses. Arconic Corporation accounted for the portion of the Shared Plans related to its employees as multiemployer benefit plans. Accordingly, Arconic Corporation did not record an asset or liability to recognize any portion of the funded status
of the Shared Plans. However, the related expense recorded by the Company was based primarily on pensionable compensation and estimated interest costs related to participants attributable to the Arconic Corporation Businesses.
Prior to the Separation Date, certain other ParentCo plans that were entirely attributable to employees of the Arconic Corporation Businesses (“Direct Plans”) were accounted for as defined benefit pension and other postretirement benefit plans. Accordingly, the funded and unfunded position of each Direct Plan was recorded in the Consolidated Balance Sheet. Actuarial gains and losses that have not yet been recognized in earnings were recorded in accumulated other comprehensive income, net of taxes, until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to the Direct Plans is dependent on various assumptions, including discount rates, long-term expected rates of return on plan assets, and future compensation increases. ParentCo’s management developed each assumption using relevant company experience in conjunction with market-related data for each individual location in which such plans exist.
In preparation for the Separation, effective January 1, 2020, certain of the Shared Plans were separated into standalone plans for both Arconic Corporation (“New Direct Plans”) and ParentCo (see Note H). Additionally, effective April 1, 2020, certain of the other remaining Shared Plans were assumed by Arconic Corporation (“Additional New Direct Plans”) (See Note H). Accordingly, beginning on the respective effective dates, the New Direct Plans and the Additional New Direct Plans are accounted for as defined benefit pension and other postretirement plans. Additionally, the Direct Plans continue to be accounted for as defined benefit pension and other postretirement plans.
Stock-Based Compensation. For all periods prior to the Separation Date, eligible employees attributable to the Arconic Corporation Businesses participated in ParentCo’s stock-based compensation plan. The compensation expense recorded by Arconic Corporation included the expense associated with these employees, as well as the expense associated with an allocation of stock-based compensation expense for ParentCo's corporate employees (see Cost Allocations in Note A). From the Separation Date through December 31, 2020, Arconic Corporation recorded stock-based compensation expense for all of the Company's employees eligible to participate in Arconic Corporation's stock-based compensation plan. The following describes the manner in which stock-based compensation expense was initially determined for both Arconic Corporation and ParentCo.
Compensation expense for employee equity grants is recognized using the non-substantive vesting period approach, in which the expense is recognized ratably over the requisite service period based on the grant date fair value. The fair value of stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance stock units containing a market condition is valued using a Monte Carlo valuation model. Determining the fair value at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Arconic Corporation’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
For all periods prior to the Separation Date, the Arconic Corporation Businesses were included in the income tax filings of ParentCo. The provision for income taxes was determined in the same manner described above, but on a on a separate return methodology as if Arconic Corporation was a standalone taxpayer filing hypothetical income tax returns where applicable. Any additional accrued tax liability or refund arising as a result of this approach was assumed to be immediately settled with ParentCo as a component of Parent Company net investment. Deferred taxes were also determined in the same manner described above and were reflected in the Consolidated Balance Sheet for net operating losses, credits or other attributes to the extent that such attributes were expected to transfer to Arconic Corporation upon the Separation. Any difference from attributes generated in a hypothetical return on a separate return basis was adjusted as a component of Parent Company net investment.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic Corporation’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow
for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the grant and lapse of tax holidays.
Arconic Corporation applies a tax law ordering approach when considering the need for a valuation allowance on net operating losses expected to offset Global Intangible Low Taxed Income (GILTI) income inclusions. Under this approach, reductions in cash tax savings are not considered as part of the valuation allowance assessment. Instead, future GILTI inclusions are considered a source of taxable income that support the realizability of deferred tax assets.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired or the appropriate taxing authority has completed its examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.
Foreign Currency. The local currency is the functional currency for Arconic Corporation’s significant operations outside the United States, except for operations in Russia, where the U.S. dollar is used as the functional currency. The determination of the functional currency for Arconic Corporation’s operations is made based on the appropriate economic and management indicators.
Recently Adopted Accounting Guidance. On January 1, 2020, Arconic Corporation adopted changes issued by the Financial Accounting Standards Board (FASB) to credit losses. This guidance added a new impairment model (known as the current expected credit loss (CECL) model), which is based on expected losses rather than incurred losses. Under this model, an entity is required to recognize an allowance equivalent to its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. This model does not have a minimum threshold for recognition of impairment losses and requires the measurement of expected credit losses on assets that have a low risk of loss. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements. This guidance will need to be considered in future assessments of credit losses.
Effective December 31, 2020, Arconic Corporation adopted changes issued by the FASB that modify disclosures for defined benefit pension plans and other postretirement benefit plans. These modifications consist of the elimination, addition, and clarification of several disclosures aimed at improving the effectiveness of such disclosure. Changes that impact Arconic Corporation’s disclosure include the following: (i) elimination of presenting the amounts in accumulated other comprehensive income expected to be recognized (i.e., amortization of net actuarial losses and prior service costs) as non-service components of net periodic benefit cost over the next fiscal year; (ii) for postretirement health care benefits, elimination of the effects of a one-percentage point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit cost and (b) benefit obligation; and (iii) addition of an explanation of the reasons for significant gains and losses related to the changes in benefit obligations for the reporting period. The remaining changes under this guidance either do not represent a change to the Company’s previous disclosures or are not applicable. Other than applying the disclosure changes (see Note H), the adoption of this guidance did not have an impact on the Consolidated Financial Statements.
On January 1, 2019, Arconic Corporation adopted changes issued by the FASB to the accounting and presentation of leases. These changes require lessees to recognize a right-of-use asset and lease liability on the balance sheet, initially measured at the present value of the future lease payments for all operating leases with a term greater than 12 months. These changes were applied using the modified retrospective approach as of the date of adoption, under which leases existing at, or entered into after, January 1, 2019 were required to be measured and recognized on the Consolidated Balance Sheet. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed, among other things, the Company to carry forward the historical lease classification. The Company also elected to separate lease components from non-lease components for all classes of assets. The adoption of this new guidance resulted in the Company recording operating lease right-of-use assets and lease liabilities of $150 on the Consolidated Balance Sheet as of January 1, 2019. Also, the Company reclassified a net $73 to Parent Company net investment comprised of $119 from Other noncurrent liabilities and deferred credits, $24 from Properties, plants, and equipment, net, and $22 from Deferred income tax assets reflecting the cumulative effect of an accounting change related to the sale-leaseback of Arconic Corporation’s
Texarkana (Texas) cast house (see Note S). The adoption of the standard had no impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows. See Note P for disclosures related to the Company’s operating leases.
Recently Issued Accounting Guidance. In March 2020, the FASB issued guidance that provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. These expedients and exceptions may be used when applying GAAP, if certain criteria are met, to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of such reform. The purpose of this guidance is to provide relief to entities from experiencing unintended accounting and/or financial reporting outcomes or consequences due to reference rate reform. This guidance became effective immediately on March 12, 2020 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022, after which time the expedients and exceptions expire. As of December 31, 2020, the Company has not experienced any unintended outcomes or consequences of reference rate reform that would necessitate the adoption of this guidance. Additionally, the Company will not need to consider the application of this guidance related to its credit agreement, which is scheduled to mature on May 13, 2025 and provides a credit facility that is referenced to LIBOR in certain borrowing situations (see Note Q), as the terms of such agreement currently provide for a replacement rate if LIBOR is discontinued by the end of 2021 as expected. That said, management will continue to closely monitor all potential instances of reference rate reform to determine if adoption of this guidance becomes necessary in the future.
In December 2019, the FASB issued guidance that is intended to simplify various aspects related to the accounting for income taxes as part of the overall initiative to reduce complexity in accounting standards. These changes include the removal of certain exceptions and the simplification of several provisions, including: requiring an entity to recognize tax that is partially based on income, such as franchise tax, as income-based tax and account for additional amounts incurred as non-income based tax; requiring an entity to evaluate when a step up in tax basis of goodwill should be considered part of the original business combination or a separate transaction; and requiring an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. These changes become effective on January 1, 2021, with early adoption permitted. Management has determined that the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
C. Revenue from Contracts with Customers
The following table disaggregates revenue by major end market served. Differences between segment totals and consolidated Arconic Corporation are in Corporate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
Rolled
Products
|
|
Building and
Construction
Systems
|
|
Extrusions
|
|
Total
|
2020
|
|
|
|
|
|
|
|
|
Ground Transportation
|
|
$
|
1,761
|
|
|
$
|
—
|
|
|
$
|
88
|
|
|
$
|
1,849
|
|
Building and Construction
|
|
154
|
|
|
963
|
|
|
—
|
|
|
1,117
|
|
Aerospace
|
|
598
|
|
|
—
|
|
|
222
|
|
|
820
|
|
Industrial Products and Other
|
|
1,049
|
|
|
—
|
|
|
71
|
|
|
1,120
|
|
Packaging
|
|
773
|
|
|
—
|
|
|
—
|
|
|
773
|
|
Total end-market revenue
|
|
$
|
4,335
|
|
|
$
|
963
|
|
|
$
|
381
|
|
|
$
|
5,679
|
|
2019
|
|
|
|
|
|
|
|
|
Ground Transportation
|
|
$
|
2,428
|
|
|
$
|
—
|
|
|
$
|
117
|
|
|
$
|
2,545
|
|
Building and Construction
|
|
182
|
|
|
1,118
|
|
|
—
|
|
|
1,300
|
|
Aerospace
|
|
1,016
|
|
|
—
|
|
|
291
|
|
|
1,307
|
|
Industrial Products and Other
|
|
1,098
|
|
|
—
|
|
|
142
|
|
|
1,240
|
|
Packaging
|
|
885
|
|
|
—
|
|
|
—
|
|
|
885
|
|
Total end-market revenue
|
|
$
|
5,609
|
|
|
$
|
1,118
|
|
|
$
|
550
|
|
|
$
|
7,277
|
|
2018
|
|
|
|
|
|
|
|
|
Ground Transportation
|
|
$
|
2,585
|
|
|
$
|
—
|
|
|
$
|
107
|
|
|
$
|
2,692
|
|
Building and Construction
|
|
217
|
|
|
1,140
|
|
|
—
|
|
|
1,357
|
|
Aerospace
|
|
895
|
|
|
—
|
|
|
285
|
|
|
1,180
|
|
Industrial Products and Other
|
|
1,029
|
|
|
—
|
|
|
154
|
|
|
1,183
|
|
Packaging
|
|
1,005
|
|
|
—
|
|
|
—
|
|
|
1,005
|
|
Total end-market revenue
|
|
$
|
5,731
|
|
|
$
|
1,140
|
|
|
$
|
546
|
|
|
$
|
7,417
|
|
D. Segment and Related Information
Segment Information
Arconic Corporation has three operating and reportable segments, which are organized by product on a global basis: Rolled Products, Building and Construction Systems, and Extrusions (see segment descriptions below). The Company determined the chief operating decision maker to be the CEO, who regularly reviews the financial information of these three segments to assess performance and allocate resources.
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. Effective in the third quarter of 2020, management refined the Company’s Segment Adjusted EBITDA measure to remove the impact of metal price lag (see footnote 4 to the Segment Adjusted EBITDA reconciliation below). This change was made to further enhance the transparency and visibility of the underlying operating performance of each segment by removing the volatility associated with metal prices.
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 and Metal price lag. Previously, the Company calculated Segment operating profit as Segment Adjusted EBITDA minus each of (i) the Provision for depreciation and amortization, (ii) Stock-based compensation expense, and (iii) Metal price lag. Arconic Corporation’s Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies’ reportable segments.
Also, effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented in the accompanying Consolidated Financial Statements. See Note M for additional information.
Segment information for all prior periods presented was recast to reflect the new measure of segment profit or loss and the change in inventory cost method.
Segment assets are comprised of customer receivables; inventories; properties, plants, and equipment, net; and goodwill.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note B). Transactions among segments are established based on negotiation among the parties.
The following are detailed descriptions of Arconic Corporation’s reportable segments:
Rolled Products. This segment produces aluminum sheet and plate for a variety of end markets. Sheet and plate are sold directly to customers and through distributors related to the aerospace, automotive, commercial transportation, packaging, building and construction, and industrial products (mainly used in the production of machinery and equipment and consumer durables) end markets. A small portion of this segment also produced aseptic foil for the packaging end market prior to February 1, 2020 (see Note S). While the customer base for flat-rolled products is large, a significant amount of sales of sheet and plate is to a relatively small number of customers. Prices for these products are generally based on the price of metal plus a premium for adding value to the aluminum to produce a semi-finished product, resulting in a business model in which the underlying price of metal is contractually passed-through to customers.
Building and Construction Systems. This segment manufactures products that are used in the non-residential building and construction end market. These products include integrated aluminum architectural systems and architectural extrusions, which are sold directly to customers and through distributors.
Extrusions. This segment produces a range of extruded and machined parts for the aerospace, automotive, commercial transportation, and industrial products end markets. These products are sold directly to customers and through distributors. Prices for these products are generally based on the price of metal plus a premium for adding value to the aluminum to produce a semi-finished product, resulting in a business model in which the underlying price of metal is contractually passed-through to customers.
The operating results and assets of Arconic Corporation’s reportable segments were as follows (differences between segment totals and Arconic Corporation’s consolidated totals for line items not reconciled are in Corporate):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled
Products
|
|
Building and
Construction
Systems
|
|
Extrusions
|
|
Total
|
2020
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
Third-party sales–unrelated party
|
$
|
4,260
|
|
|
$
|
963
|
|
|
$
|
348
|
|
|
$
|
5,571
|
|
Third-party sales–related party
|
75
|
|
|
—
|
|
|
33
|
|
|
108
|
|
Intersegment sales
|
19
|
|
|
—
|
|
|
2
|
|
|
21
|
|
Total sales
|
$
|
4,354
|
|
|
$
|
963
|
|
|
$
|
383
|
|
|
$
|
5,700
|
|
Segment Adjusted EBITDA(1)
|
$
|
527
|
|
|
$
|
137
|
|
|
$
|
(16)
|
|
|
$
|
648
|
|
Provision for depreciation and amortization
|
$
|
192
|
|
|
$
|
18
|
|
|
$
|
25
|
|
|
$
|
235
|
|
2019
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
Third-party sales–unrelated party
|
$
|
5,478
|
|
|
$
|
1,118
|
|
|
$
|
498
|
|
|
$
|
7,094
|
|
Third-party sales–related party
|
131
|
|
|
—
|
|
|
52
|
|
|
183
|
|
Intersegment sales
|
25
|
|
|
—
|
|
|
3
|
|
|
28
|
|
Total sales
|
$
|
5,634
|
|
|
$
|
1,118
|
|
|
$
|
553
|
|
|
$
|
7,305
|
|
Segment Adjusted EBITDA(1),(2)
|
$
|
640
|
|
|
$
|
126
|
|
|
$
|
(9)
|
|
|
$
|
757
|
|
Provision for depreciation and amortization
|
$
|
185
|
|
|
$
|
18
|
|
|
$
|
29
|
|
|
$
|
232
|
|
2018
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
Third-party sales–unrelated party
|
$
|
5,586
|
|
|
$
|
1,140
|
|
|
$
|
485
|
|
|
$
|
7,211
|
|
Third-party sales–related party
|
145
|
|
|
—
|
|
|
61
|
|
|
206
|
|
Intersegment sales
|
15
|
|
|
—
|
|
|
3
|
|
|
18
|
|
Total sales
|
$
|
5,746
|
|
|
$
|
1,140
|
|
|
$
|
549
|
|
|
$
|
7,435
|
|
Segment Adjusted EBITDA(1),(2)
|
$
|
562
|
|
|
$
|
117
|
|
|
$
|
23
|
|
|
$
|
702
|
|
Provision for depreciation and amortization
|
$
|
212
|
|
|
$
|
18
|
|
|
$
|
23
|
|
|
$
|
253
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Segment assets
|
$
|
3,895
|
|
|
$
|
381
|
|
|
$
|
420
|
|
|
$
|
4,696
|
|
Supplemental information:
|
|
|
|
|
|
|
|
Capital expenditures
|
134
|
|
|
7
|
|
|
11
|
|
|
152
|
|
Goodwill (O)
|
254
|
|
|
71
|
|
|
65
|
|
|
390
|
|
2019
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Segment assets
|
$
|
3,758
|
|
|
$
|
415
|
|
|
$
|
500
|
|
|
$
|
4,673
|
|
Supplemental information:
|
|
|
|
|
|
|
|
Capital expenditures
|
162
|
|
|
9
|
|
|
18
|
|
|
189
|
|
Goodwill (O)
|
246
|
|
|
69
|
|
|
71
|
|
|
386
|
|
The following tables reconcile certain segment information to consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Sales:
|
|
|
|
|
|
|
Total segment sales
|
|
$
|
5,700
|
|
|
$
|
7,305
|
|
|
$
|
7,435
|
|
Elimination of intersegment sales
|
|
(21)
|
|
|
(28)
|
|
|
(18)
|
|
Other*
|
|
(4)
|
|
|
—
|
|
|
25
|
|
Consolidated sales
|
|
$
|
5,675
|
|
|
$
|
7,277
|
|
|
$
|
7,442
|
|
_____________________
*In 2018, the Other amount represents third-party sales generated by the Latin America extrusions business, which was sold in April 2018 (see Note S).
The following table reconciles total Segment Adjusted EBITDA to consolidated net income (loss) attributable to Arconic Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Total Segment Adjusted EBITDA(1),(2)
|
|
$
|
648
|
|
|
$
|
757
|
|
|
$
|
702
|
|
Unallocated amounts:
|
|
|
|
|
|
|
Corporate expenses(1),(3)
|
|
(24)
|
|
|
(53)
|
|
|
(57)
|
|
Stock-based compensation expense (K)
|
|
(23)
|
|
|
(40)
|
|
|
(22)
|
|
Metal price lag(4)
|
|
(27)
|
|
|
(39)
|
|
|
3
|
|
Provision for depreciation and amortization
|
|
(251)
|
|
|
(252)
|
|
|
(272)
|
|
Restructuring and other charges(5) (E)
|
|
(188)
|
|
|
(87)
|
|
|
104
|
|
Other(1),(6)
|
|
(55)
|
|
|
(71)
|
|
|
(62)
|
|
Operating income(2)
|
|
80
|
|
|
215
|
|
|
396
|
|
Interest expense (F)
|
|
(118)
|
|
|
(115)
|
|
|
(129)
|
|
Other (expenses) income, net(1) (G)
|
|
(70)
|
|
|
15
|
|
|
(4)
|
|
(Provision) Benefit for income taxes(2) (I)
|
|
(1)
|
|
|
62
|
|
|
(76)
|
|
Net income attributable to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
Consolidated net (loss) income attributable to Arconic Corporation(2)
|
|
$
|
(109)
|
|
|
$
|
177
|
|
|
$
|
187
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Segment Adjusted EBITDA:
|
|
|
|
|
|
|
Rolled Products
|
|
$
|
(17)
|
|
|
$
|
(62)
|
|
|
$
|
(67)
|
|
Building and Construction Systems
|
|
(2)
|
|
|
(5)
|
|
|
(6)
|
|
Extrusions
|
|
(7)
|
|
|
(18)
|
|
|
(18)
|
|
Segment total
|
|
(26)
|
|
|
(85)
|
|
|
(91)
|
|
Unallocated amounts:
|
|
|
|
|
|
|
Corporate expenses
|
|
—
|
|
|
(15)
|
|
|
(13)
|
|
Other
|
|
1
|
|
|
(9)
|
|
|
(11)
|
|
Subtotal
|
|
1
|
|
|
(24)
|
|
|
(24)
|
|
Other expenses, net
|
|
(78)
|
|
|
(2)
|
|
|
(2)
|
|
Total
|
|
$
|
(103)
|
|
|
$
|
(111)
|
|
|
$
|
(117)
|
|
(2)Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented in the accompanying Consolidated Financial Statements. See Note M for additional information.
(3)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).
(4)Metal price lag represents the financial impact of the timing difference between when aluminum prices included in Sales are recognized and when aluminum purchase prices included in Cost of goods sold are realized. This adjustment aims to remove the effect of the volatility in metal prices and the calculation of this impact considers applicable metal hedging transactions.
(5)In 2020, Restructuring and other charges includes a $199 charge for the settlement of certain employee retirement benefits virtually all within in the United States and the United Kingdom (see Note H).
(6)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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Assets:
|
|
|
|
|
Total segment assets
|
|
$
|
4,696
|
|
|
$
|
4,673
|
|
Unallocated amounts:
|
|
|
|
|
Cash and cash equivalents
|
|
787
|
|
|
72
|
|
Prepaid expenses and other current assets
|
|
53
|
|
|
28
|
|
Corporate fixed assets, net
|
|
187
|
|
|
103
|
|
Operating lease right-of-use assets
|
|
144
|
|
|
125
|
|
Deferred income taxes (I)
|
|
329
|
|
|
14
|
|
Other noncurrent assets
|
|
97
|
|
|
32
|
|
Other
|
|
21
|
|
|
11
|
|
Consolidated assets
|
|
$
|
6,314
|
|
|
$
|
5,058
|
|
Customer Information
In 2020, 2019, and 2018 Arconic Corporation generated more than 10% of its consolidated sales from one customer, Ford Motor Company. These sales amounted to $647, $942, and $983 in 2020, 2019, and 2018 respectively, and were included in the Rolled Products segment.
Geographic Area Information
Geographic information for sales was as follows (based upon the country where the point of sale occurred):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Sales:
|
|
|
|
|
|
|
United States
|
|
$
|
3,697
|
|
|
$
|
4,760
|
|
|
$
|
4,713
|
|
Russia*
|
|
535
|
|
|
512
|
|
|
553
|
|
Hungary*
|
|
462
|
|
|
614
|
|
|
675
|
|
China
|
|
429
|
|
|
486
|
|
|
487
|
|
France
|
|
207
|
|
|
277
|
|
|
328
|
|
United Kingdom
|
|
144
|
|
|
230
|
|
|
218
|
|
Other
|
|
201
|
|
|
398
|
|
|
468
|
|
|
|
$
|
5,675
|
|
|
$
|
7,277
|
|
|
$
|
7,442
|
|
_____________________
*In all periods presented, sales of a portion of aluminum products from Arconic Corporation’s plant in Russia were completed through the Company’s international selling company located in Hungary.
Geographic information for long-lived assets was as follows (based upon the physical location of the assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Long-lived assets:
|
|
|
|
|
United States
|
|
$
|
2,019
|
|
|
$
|
2,018
|
|
China
|
|
252
|
|
|
255
|
|
Russia
|
|
213
|
|
|
231
|
|
Hungary
|
|
108
|
|
|
100
|
|
United Kingdom
|
|
82
|
|
|
84
|
|
France
|
|
18
|
|
|
18
|
|
Other
|
|
20
|
|
|
38
|
|
|
|
$
|
2,712
|
|
|
$
|
2,744
|
|
E. Restructuring and Other Charges
Restructuring and other charges for each year in the three-year period ended December 31, 2020 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Settlements related to employee retirement benefit plans (H)
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net gain on divestitures of assets and businesses (S)
|
(49)
|
|
|
(20)
|
|
|
(152)
|
|
Layoff costs
|
23
|
|
|
30
|
|
|
1
|
|
Asset impairments
|
15
|
|
|
68
|
|
|
4
|
|
Other*
|
14
|
|
|
9
|
|
|
53
|
|
Reversals of previously recorded layoff and other costs
|
(14)
|
|
|
—
|
|
|
(10)
|
|
Restructuring and other charges
|
$
|
188
|
|
|
$
|
87
|
|
|
$
|
(104)
|
|
__________________
*In 2020, 2019, and 2018, Other includes $2, $7, and $50, respectively, related to the allocation of ParentCo’s corporate restructuring activity to Arconic Corporation (see Cost Allocations in Note A).
Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans.
2020 Actions. In 2020, Arconic Corporation recorded a net charge of $188 in Restructuring and other charges, which were comprised of the following components: a $199 charge for the settlement of certain employee retirement benefits virtually all within the United States and the United Kingdom (see Note H); a $25 benefit for contingent consideration received related to the 2018 sale of the Texarkana (Texas) rolling mill (see Note S); a $25 net gain related to the sales of an extrusions plant in South Korea and an aluminum rolling mill in Brazil (see Note S); a $21 charge for costs, of which $5 is for layoff costs associated with approximately 90 employees, related to the planned closure and related reorganizations of several small facilities in the Building and Construction Systems and Extrusions segments; an $18 charge for layoff costs associated with the separation of approximately 460 employees across the Company in response to the impact of COVID 19 (see Note A); a $14 credit for the reversal of reserves established in prior periods, including $5 related to an environmental matter (see Note T); a $4 charge for legacy non-income tax matters in Brazil; a $2 charge for an allocation of ParentCo’s corporate restructuring activity (see Cost Allocations in Note A); and an $8 charge for other items.
As of December 31, 2020, approximately 450 of the 550 employees associated with 2020 restructuring programs were separated. The remaining separations are expected to be completed in 2021. In 2020, cash payments of $15 were made against layoff reserves related to 2020 restructuring programs.
2019 Actions. In 2019, Arconic Corporation recorded Restructuring and other charges of $87, which were comprised of the following components: a $53 impairment charge for the assets associated with an aluminum rolling mill in Brazil as a result of signing a definitive sale agreement (see Note S); a $30 charge for layoff costs, including the separation of approximately 480 employees (240 in the Rolled Products segment, 190 in the Building and Construction Systems segment, and 50 in the Extrusions segment); a $20 benefit for contingent consideration received related to the sale of the Texarkana (Texas) rolling mill (see Note S); a $10 charge for the impairment of the carrying value of a trade name intangible asset; a $7 charge for an allocation of ParentCo’s corporate restructuring activity (see Cost Allocations in Note A); and a $7 net charge for other items.
As of December 31, 2020, approximately 350 of the 370 (previously 480) employees associated with 2019 restructuring programs were separated. The total number of employees was updated to reflect the reversal of a program initiated by ParentCo in 2019, natural attrition, and employees initially identified for separation accepting other positions within the Company. The remaining separations are expected to be completed between 2021 and 2022 due to retirement and long-term disability considerations. In 2020 and 2019, cash payments of $9 and $11, respectively, were made against layoff reserves related to 2019 restructuring programs.
2018 Actions. In 2018, Arconic Corporation recorded a net benefit of $104 in Restructuring and other charges, which were comprised of the following components: a $154 gain on the sale of the Texarkana (Texas) rolling mill and cast house (see Note S); a $50 charge for an allocation of ParentCo’s corporate restructuring activity (see Cost Allocations in Note A); a $2 charge for a post-closing adjustment related to the divestiture of the Latin America extrusions business (see Note S); an $8 net charge for other items; and a $10 benefit for the reversal of several layoff reserves related to prior periods.
Arconic Corporation does not include Restructuring and other charges in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Rolled Products
|
|
$
|
(15)
|
|
|
$
|
47
|
|
|
$
|
(156)
|
|
Building and Construction Systems
|
|
5
|
|
|
33
|
|
|
(3)
|
|
Extrusions
|
|
(14)
|
|
|
1
|
|
|
—
|
|
Segment total
|
|
(24)
|
|
|
81
|
|
|
(159)
|
|
Corporate
|
|
212
|
|
|
6
|
|
|
55
|
|
|
|
$
|
188
|
|
|
$
|
87
|
|
|
$
|
(104)
|
|
Activity and reserve balances for restructuring charges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Layoff costs
|
|
Other costs
|
|
Total
|
Reserve balances at December 31, 2017
|
$
|
22
|
|
|
$
|
2
|
|
|
$
|
24
|
|
Cash payments
|
(12)
|
|
|
(1)
|
|
|
(13)
|
|
Restructuring charges
|
1
|
|
|
1
|
|
|
2
|
|
Other(1)
|
(10)
|
|
|
1
|
|
|
(9)
|
|
Reserve balances at December 31, 2018
|
1
|
|
|
3
|
|
|
4
|
|
Cash payments
|
(12)
|
|
|
(3)
|
|
|
(15)
|
|
Restructuring charges
|
30
|
|
|
2
|
|
|
32
|
|
Other(1)
|
1
|
|
|
(1)
|
|
|
—
|
|
Reserve balances at December 31, 2019
|
20
|
|
|
1
|
|
|
21
|
|
Separation-related adjustments(2)
|
2
|
|
|
—
|
|
|
2
|
|
Cash payments
|
(24)
|
|
|
(3)
|
|
|
(27)
|
|
Restructuring charges
|
23
|
|
|
4
|
|
|
27
|
|
Other(1)
|
(8)
|
|
|
(1)
|
|
|
(9)
|
|
Reserve balances at December 31, 2020(3)
|
$
|
13
|
|
|
$
|
1
|
|
|
$
|
14
|
|
_____________________
(1)Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation.
(2)Represents liabilities transferred from ParentCo on April 1, 2020 in connection with the Separation (see Note A).
(3)The remaining reserves are expected to be paid in cash during 2021, with the exception of $2 that is expected to be paid in 2022 related to special termination benefits.
F. Interest Cost Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Amount charged to expense
|
|
$
|
118
|
|
|
$
|
115
|
|
|
$
|
129
|
|
Amount capitalized
|
|
6
|
|
|
12
|
|
|
9
|
|
|
|
$
|
124
|
|
|
$
|
127
|
|
|
$
|
138
|
|
In 2020 (January through March), 2019, and 2018, total interest costs include an allocation of ParentCo’s financing costs of $28, $115, and $125, respectively (see Cost Allocations in Note A). Also, in 2020, total interest costs include $19 for the write-off and immediate expensing of certain debt issuance costs related to a debt refinancing (see Note Q). Typically, such costs are deferred and amortized to interest expense over the term of the related financing arrangement.
G. Other Expenses (Income), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Non-service costs — Pension and OPEB (H)
|
|
$
|
78
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Foreign currency losses (gains), net
|
|
11
|
|
|
(17)
|
|
|
17
|
|
Net loss from asset sales
|
|
—
|
|
|
2
|
|
|
4
|
|
Interest income
|
|
(4)
|
|
|
(13)
|
|
|
(13)
|
|
Other, net
|
|
(15)
|
|
|
11
|
|
|
(6)
|
|
|
|
$
|
70
|
|
|
$
|
(15)
|
|
|
$
|
4
|
|
In 2020, Other, net includes a $20 benefit for the reversal of a liability previously established at the Separation Date related to a potential indemnification to Howmet Aerospace by Arconic Corporation for an outstanding income tax matter in Spain. Under the terms of the Tax Matters Agreement (see Note A) related to the Separation, Arconic Corporation was responsible for 34% of the potential loss related to this matter should Howmet Aerospace receive an unfavorable ruling from Spain’s Supreme Court. At the time of Separation, Arconic Corporation management believed that the likelihood of the Company performing under the indemnification was probable resulting in a liability being established on Arconic Corporation’s opening balance sheet at the Separation Date. In November 2020, a favorable ruling was received from Spain’s Supreme Court bringing a final conclusion to this matter as this decision may not be appealed any further. As no further income tax payment was required of Howmet Aerospace likewise Arconic Corporation no longer has a requirement to perform under the indemnification.
H. Pension and Other Postretirement Benefits
Defined Benefit Plans
Arconic Corporation sponsors several defined benefit pension and other postretirement plans covering eligible employees and retirees in U.S. and foreign locations, as well as certain legacy plans previously sponsored by ParentCo. Prior to January 1, 2020 for U.S. plans and prior to April 1, 2020 for certain non-U.S. plans, eligible employees and retirees related to the Arconic Corporation Businesses participated in ParentCo-sponsored defined benefit pension and other postretirement plans (the “Shared Plans”), which included participants related to the Howmet Aerospace Businesses and ParentCo corporate participants, as well as eligible retirees from previously closed or sold operations. Also, prior to the Separation Date, other eligible employees and retirees related to the Arconic Corporation Businesses participated in certain non-U.S. defined benefit pension and other postretirement plans (the “Direct Plans”).
The Company accounted for the portion of the Shared Plans related to its employees as multiemployer benefit plans. Accordingly, Arconic Corporation did not record an asset or liability to recognize the funded status of the Shared Plans. However, the related pension and other postretirement benefit expenses attributable to Arconic Corporation were based primarily on pensionable compensation of active Arconic Corporation participants and estimated interest costs, respectively. The Company also recorded an allocation of pension and other postretirement benefit expenses for the Shared Plans attributable to ParentCo corporate participants, as well as to participants related to closed and sold operations (see Cost Allocations in Note A).
The Direct Plans were accounted for as defined benefit pension and other postretirement plans. Accordingly, the funded status of each Direct Plan was recorded in the Company’s Consolidated Balance Sheet. Actuarial gains and losses that had not yet been recognized in earnings were recorded in Accumulated other comprehensive loss until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to Direct Plans were dependent on various assumptions, including discount rates, long-term expected rates of return on plan assets, and future compensation increases. Management developed each assumption using relevant company experience in conjunction with market-related data for each of the plans.
In preparation for the Separation, effective January 1, 2020, certain U.S. pension and other postretirement benefit plans previously sponsored by ParentCo (the “U.S. Shared Plans” – see above) were separated into standalone plans for both Arconic Corporation (the “New Direct Plans”) and Howmet Aerospace. Accordingly, on January 1, 2020, Arconic Corporation recognized an aggregate liability of $1,920, of which $60 was current, reflecting the combined net unfunded status of the New Direct Plans, comprised of a benefit obligation of $4,255 and plan assets of $2,335, as well as $1,752 (net of tax impact) in Accumulated other comprehensive loss representing a net actuarial loss.
Additionally, effective on the Separation Date, certain other Shared Plans (the “Additional New Direct Plans,” and, collectively with the Direct Plans and New Direct Plans, the “Cumulative Direct Plans”) were assumed by Arconic Corporation. Accordingly, on April 1, 2020, Arconic Corporation recognized a noncurrent asset of $65 and a noncurrent liability of $15, reflecting the combined net funded status of the Additional New Direct Plans, as well as $50 (net of tax impact) in Accumulated other comprehensive loss representing a net actuarial loss.
U.K. Pension Plan Annuitization—In June 2020, Arconic Corporation and Howmet Aerospace, together, executed several liability management actions related to approximately 1,800 participants in a U.K. defined benefit pension plan. The primary action was the purchase of a group annuity contract to transfer the obligation to pay the remaining retirement benefits of certain plan participants to an insurance company. On a combined basis, these actions resulted in the settlement of approximately $400 in plan obligations and the transfer of approximately $460 in plan assets. In the 2020 second quarter, the Company contributed $10 to the plan to facilitate these actions and maintain the funding level of the remaining plan obligations. Prior to these actions, this plan had approximately 3,350 participants combined.
Accordingly, this plan was required to be remeasured, and through this process, the discount rate was updated to 1.55% at June 30, 2020 from 2.05% at December 31, 2019. The settlement events, together with the remeasurement of the plan, resulted in an approximately $250 net reduction to the Company’s remaining plan obligation and both a decrease to the Company’s pension benefit asset and a settlement charge of $58 ($48 after-tax) in 2020. The settlement charge represents the accelerated amortization of a portion of the existing net actuarial loss associated with this plan. This amount was reclassified to earnings through Restructuring and other charges (see Note E) from Accumulated other comprehensive loss. Subsequent to this remeasurement, the remaining respective plan obligations and plan assets attributable to Arconic Corporation and Howmet Aerospace were transferred into separate plans and the existing U.K. plan was terminated. Immediately following the completion of the transfer, the Company’s remaining plan obligation was approximately $240 and the plan assets were approximately $260 related to 1,050 plan participants.
U.S. OPEB Plan Amendment—In July 2020, Arconic Corporation and the United Steelworkers agreed to modify the medical benefit coverage offered to certain Medicare-eligible participants under the Company's U.S. other postretirement
benefit plan, as provided for in the current master collective bargaining agreement between the parties. Effective January 1, 2021, this modification results in lower premiums and increased benefits to the participants. This change qualifies as a significant plan amendment to the Company's U.S. other postretirement benefit plan. Accordingly, this plan was required to be remeasured, and through this process, the discount rate was updated to 2.54% at July 31, 2020 from 3.17% at December 31, 2019. The amendment, together with the remeasurement of this plan, resulted in a net decrease to both the Company's other postretirement benefits liability of $7 and Accumulated other comprehensive loss of $5 (after-tax). The impact of this change on the Company's annual net periodic benefit cost is not material. The Company's estimated annual benefit payments will decrease by approximately $20 beginning in 2021.
U.S. Pension Plan Annuitization—In December 2020, Arconic Corporation purchased a group annuity contract to transfer the obligation to pay the remaining retirement benefits of approximately 7,000 participants from two U.S. defined benefit pension plans to an insurance company. On a combined basis, this transaction resulted in the settlement of approximately $240 in plan obligations and the transfer of approximately $245 in plan assets. Prior to this action, these two plans had approximately 30,000 participants combined. The Company recognized a $140 ($108 after-tax) settlement charge, which represents the accelerated amortization of a portion of the existing net actuarial loss associated with these plans. This amount was reclassified to earnings through Restructuring and other charges (see Note E) from Accumulated other comprehensive loss (see Note L).
The following table summarizes the total expenses (excluding settlements and curtailments) recognized by Arconic Corporation related to the pension and other postretirement benefits described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement benefits
|
|
|
|
|
For the year ended December 31,
|
|
For the year ended December 31,
|
Type of Plan
|
|
Type of Expense
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Cumulative Direct Plans
|
|
Net periodic benefit cost
|
|
$
|
82
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Shared Plans
|
|
Multiemployer contribution expense
|
|
—
|
|
|
61
|
|
|
67
|
|
|
—
|
|
|
21
|
|
|
21
|
|
Shared Plans
|
|
Cost allocation
|
|
(1)
|
|
|
20
|
|
|
20
|
|
|
—
|
|
|
4
|
|
|
5
|
|
|
|
|
|
$
|
81
|
|
|
$
|
86
|
|
|
$
|
92
|
|
|
$
|
22
|
|
|
$
|
25
|
|
|
$
|
26
|
|
The funded status of Arconic Corporation’s Cumulative Direct Plans is measured as of December 31 each calendar year. All the information that follows for pension and other postretirement benefit plans is only applicable to the Cumulative Direct Plans, as appropriate. As of and for the year ended December 31, 2019, the Company’s other postretirement benefit plans were not material.
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement benefits
|
|
December 31,
|
|
2020
|
|
2019
|
|
2020
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
142
|
|
|
$
|
122
|
|
|
$
|
1
|
|
|
Establishment of additional defined benefit plans - New Direct Plans
|
|
3,688
|
|
|
—
|
|
|
567
|
|
|
Separation-related adjustments - Additional New Direct Plans
|
|
550
|
|
|
—
|
|
|
—
|
|
|
Service cost
|
|
21
|
|
|
3
|
|
|
5
|
|
|
Interest cost
|
|
108
|
|
|
4
|
|
|
13
|
|
|
Amendments
|
|
—
|
|
|
—
|
|
|
(52)
|
|
|
Actuarial losses*
|
|
382
|
|
|
17
|
|
|
33
|
|
|
Benefits paid
|
|
(273)
|
|
|
(5)
|
|
|
(55)
|
|
|
Settlements
|
|
(542)
|
|
|
—
|
|
|
—
|
|
|
Foreign currency translation impact
|
|
10
|
|
|
1
|
|
|
—
|
|
|
Divestitures
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
Medicare part D subsidy receipts
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Benefit obligation at end of year
|
|
$
|
4,081
|
|
|
$
|
142
|
|
|
$
|
514
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
79
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
Establishment of additional defined benefit plans - New Direct Plans
|
|
2,335
|
|
|
—
|
|
|
—
|
|
|
Separation-related adjustments - Additional New Direct Plans
|
|
600
|
|
|
—
|
|
|
—
|
|
|
Actual return on plan assets
|
|
350
|
|
|
7
|
|
|
—
|
|
|
Employer contributions
|
|
271
|
|
|
3
|
|
|
—
|
|
|
Benefits paid
|
|
(266)
|
|
|
(4)
|
|
|
—
|
|
|
Settlements
|
|
(595)
|
|
|
—
|
|
|
—
|
|
|
Foreign currency translation impact
|
|
3
|
|
|
3
|
|
|
—
|
|
|
Divestitures
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
Administrative expenses
|
|
(19)
|
|
|
—
|
|
|
—
|
|
|
Fair value of plan assets at end of year
|
|
$
|
2,754
|
|
|
$
|
79
|
|
|
$
|
—
|
|
|
Funded status
|
|
$
|
(1,327)
|
|
|
$
|
(63)
|
|
|
$
|
(514)
|
|
|
Amounts recognized in the Consolidated Balance Sheet consist of:
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
24
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
Current liabilities
|
|
(8)
|
|
|
(2)
|
|
|
(35)
|
|
|
Noncurrent liabilities
|
|
(1,343)
|
|
|
(63)
|
|
|
(479)
|
|
|
Net amount recognized
|
|
$
|
(1,327)
|
|
|
$
|
(63)
|
|
|
$
|
(514)
|
|
|
Amounts recognized in Accumulated Other Comprehensive Income consist of:
|
|
|
|
|
|
|
|
Net actuarial loss, before tax effect
|
|
$
|
2,203
|
|
|
$
|
58
|
|
|
$
|
197
|
|
|
Prior service cost (benefit)
|
|
1
|
|
|
—
|
|
|
(61)
|
|
|
Net amount recognized
|
|
$
|
2,204
|
|
|
$
|
58
|
|
|
$
|
136
|
|
|
Other changes in plan assets and benefit obligations recognized in Other
Comprehensive Income consist of:
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
275
|
|
|
$
|
16
|
|
|
$
|
35
|
|
|
Prior service cost (benefit)
|
|
1
|
|
|
—
|
|
|
(52)
|
|
|
Amortization of prior service benefit
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Amortization of accumulated net actuarial loss
|
|
(322)
|
|
|
(3)
|
|
|
(8)
|
|
|
Total, before tax effect
|
|
$
|
(46)
|
|
|
$
|
13
|
|
|
$
|
(21)
|
|
|
*At December 31, 2020, actuarial losses for pension benefits includes approximately $370 attributable to the change in the discount rate used to determine the benefit obligation (see “Assumptions” below).
Pension Plan Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
2020
|
|
2019
|
The projected benefit obligation and accumulated benefit obligation for all defined benefit
pension plans was as follows:
|
|
|
|
|
Projected benefit obligation
|
|
$
|
4,081
|
|
|
$
|
142
|
|
Accumulated benefit obligation
|
|
4,068
|
|
|
133
|
|
The aggregate projected benefit obligation and fair value of plan assets for pension plans
with projected benefit obligations in excess of plan assets was as follows:
|
|
|
|
|
Projected benefit obligation
|
|
3,795
|
|
|
123
|
|
Fair value of plan assets
|
|
2,444
|
|
|
57
|
|
The aggregate accumulated benefit obligation and fair value of plan assets for pension
plans with accumulated benefit obligations in excess of plan assets was as follows:
|
|
|
|
|
Accumulated benefit obligation
|
|
3,784
|
|
|
113
|
|
Fair value of plan assets
|
|
2,444
|
|
|
57
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement benefits
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
|
|
|
Service cost
|
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
|
|
|
Interest cost
|
|
108
|
|
|
4
|
|
|
4
|
|
|
13
|
|
|
|
|
|
Expected return on plan assets
|
|
(170)
|
|
|
(5)
|
|
|
(5)
|
|
|
—
|
|
|
|
|
|
Recognized net actuarial loss
|
|
123
|
|
|
3
|
|
|
3
|
|
|
8
|
|
|
|
|
|
Amortization of prior service benefit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
|
|
|
Settlements
|
|
199
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Net periodic benefit cost*
|
|
$
|
281
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
22
|
|
|
|
|
|
_____________________
*Service cost was included within Cost of goods sold, Settlement was included within Restructuring and other charges, and all other components were included in Other expenses (income), net on the accompanying Statement of Consolidated Operations.
Assumptions
Weighted average assumptions used to determine benefit obligations and net periodic benefit cost for pension and other postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations
|
|
Net periodic benefit cost
|
|
December 31,
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2018
|
Discount rate—pension plans
|
2.45
|
%
|
|
2.29
|
%
|
|
2.86
|
%
|
|
3.12
|
%
|
|
2.94
|
%
|
Discount rate—other postretirement benefit plans
|
2.61
|
|
|
*
|
|
2.30
|
|
|
*
|
|
*
|
Rate of compensation increase—pension plans
|
2.55
|
|
|
3.20
|
|
|
3.20
|
|
|
3.42
|
|
|
3.33
|
|
Expected long-term rate of return on plan assets—pension plans
|
—
|
|
|
—
|
|
|
6.09
|
|
|
6.73
|
|
|
6.72
|
|
______________________
*In 2019 and 2018, the Company's other postretirement benefit plans were not material.
The discount rate is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors. The yield curve model parallels the projected plan cash flows, which have a weighted average duration of 11 years, and the underlying
cash flows of the bonds included in the model exceed the cash flows needed to satisfy the plan obligations multiple times. If a deep market of high quality corporate bonds does not exist in a country, then the yield on government bonds is used.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (the fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on forward-looking investment returns by asset class. Management incorporates expected future investment returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment. For 2020, the expected long-term rate of return used by management was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. For 2021, management anticipates that the weighted-average expected long-term rate of return will be in the range of 5.00% to 6.00%.
Weighted-average assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (non-U.S. plans are not material):
|
|
|
|
|
|
|
|
|
|
|
2020
|
Health care cost trend rate assumed for next year
|
|
7.7
|
%
|
Rate to which the cost trend rate gradually declines
|
|
4.6
|
%
|
Year that the rate reaches the rate at which it is assumed to remain
|
|
2026
|
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by the Company’s other postretirement benefit plans. For 2021, a 7.7% trend rate will be used, reflecting management’s best estimate of the change in future health care costs covered by the plans.
Plan Assets
Arconic Corporation’s pension plan investment policy and weighted average asset allocations at December 31, 2020 and 2019, by asset class, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at December 31,
|
Asset class
|
|
Policy maximum*
|
|
2020
|
|
2019
|
Equities
|
|
40%
|
|
20
|
%
|
|
42
|
%
|
Fixed income
|
|
100%
|
|
51
|
|
|
38
|
|
Other investments
|
|
30%
|
|
29
|
|
|
20
|
|
Total
|
|
|
|
100
|
%
|
|
100
|
%
|
______________________
*Reflects new investment policy established for the Company after the Separation Date.
The principal objectives underlying the investment of the pension plan assets are to ensure that Arconic Corporation can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify investments across and within various asset classes to protect asset values against adverse movements. The use of derivative instruments is permitted where appropriate and necessary for achieving diversification across the balance of the asset portfolio. Investment practices comply with the requirements of applicable country laws and regulations.
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension plan assets. For plan assets measured at net asset value, this refers to the net asset value of the investment on a per share basis (or its equivalent) as a practical expedient. Otherwise, an indication of the level in the fair value hierarchy in which each type of asset is generally classified is provided (see Note Q for the definition of fair value and a description of the fair value hierarchy).
Equities—These securities consist of: (i) direct investments in the stock of publicly traded U.S. and non-U.S. companies and are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (ii) the plans’ share of commingled funds that are invested in the stock of publicly traded companies and are valued at net asset value; and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) and are valued at net asset value.
Fixed income—These securities consist of: (i) U.S. government debt and are generally valued using quoted prices (included in Level 1); and (ii) publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds and
debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data (included in Level 2).
Other investments—These investments include, among others: (i) real estate investment trusts valued based on the closing price reported in an active market on which the investments are traded (included in Level 1); (ii) the plans’ share of commingled funds that are invested in real estate partnerships and are valued at net asset value; (iii) direct investments in discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued at net asset value; and (iv) absolute return strategy funds and are valued at net asset value.
The fair value methods described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Arconic Corporation believes the valuation methods used by the plans’ trustees are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table presents the fair value of pension plan assets classified under either the appropriate level of the fair value hierarchy or net asset value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Net Asset Value
|
|
Total
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
276
|
|
|
$
|
277
|
|
Long/short equity hedge funds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
107
|
|
|
107
|
|
Private equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
143
|
|
|
143
|
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
526
|
|
|
$
|
527
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
Intermediate and long duration government/credit
|
|
$
|
117
|
|
|
$
|
602
|
|
|
$
|
—
|
|
|
$
|
606
|
|
|
$
|
1,325
|
|
Other
|
|
1
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
45
|
|
|
|
$
|
118
|
|
|
$
|
602
|
|
|
$
|
—
|
|
|
$
|
650
|
|
|
$
|
1,370
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93
|
|
|
$
|
132
|
|
Discretionary and systematic macro hedge funds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
531
|
|
|
531
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
94
|
|
|
94
|
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
718
|
|
|
$
|
757
|
|
Total*
|
|
$
|
158
|
|
|
$
|
602
|
|
|
$
|
—
|
|
|
$
|
1,894
|
|
|
$
|
2,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Net Asset Value
|
|
Total
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
33
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
33
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
Intermediate and long duration government/credit
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
26
|
|
Other
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
30
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Total
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
75
|
|
|
$
|
79
|
|
______________________
*As of December 31, 2020, the total fair value of pension plan assets excludes a net receivable of $100, which represents securities not yet settled plus interest and dividends earned on various investments.
Funding and Cash Flows
It is Arconic Corporation’s policy to contribute amounts to funded defined benefit pension plans sufficient to meet the minimum requirements set forth in applicable country employee benefit and tax regulations, including ERISA for U.S. plans. From time to time, Arconic Corporation may contribute additional amounts as deemed appropriate. In 2020 and 2019, cash contributions to Arconic Corporation’s funded defined benefit pension plans were $271 and $3, respectively. The minimum required contributions to Arconic Corporation’s funded defined benefit pension plans in 2021 is estimated to be $192, of which $183 is for U.S. plans. In January 2021, the Company contributed a combined $200 to its two U.S. funded defined benefit pension plans, comprised of the estimated minimum required funding for 2021 of $183 and an additional $17. Benefit payments expected to be paid to pension (funded and unfunded) and other postretirement benefit plan participants and expected Medicare Part D subsidy receipts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
Pension benefits
|
|
Gross other postretirement benefits
|
|
Medicare part D subsidy receipts
|
|
Net other postretirement benefits
|
2021
|
|
$
|
256
|
|
|
$
|
37
|
|
|
$
|
1
|
|
|
$
|
36
|
|
2022
|
|
252
|
|
36
|
|
1
|
|
35
|
2023
|
|
247
|
|
34
|
|
1
|
|
33
|
2024
|
|
242
|
|
33
|
|
1
|
|
32
|
2025
|
|
237
|
|
32
|
|
1
|
|
31
|
2026 through 2029
|
|
1,112
|
|
147
|
|
4
|
|
143
|
|
|
$
|
2,346
|
|
|
$
|
319
|
|
|
$
|
9
|
|
|
$
|
310
|
|
Defined Contribution Plans
Arconic Corporation sponsors savings and investment plans in the United States and certain other countries. Prior to the Separation Date, employees attributable to the Arconic Corporation Businesses participated in ParentCo-sponsored plans. In the United States, employees may contribute a portion of their compensation to the plans, and Arconic Corporation (ParentCo prior to the Separation Date) matches a specified percentage of these contributions in equivalent form of the investments elected by the employee. Also, Arconic Corporation (ParentCo prior to the Separation Date) makes contributions to a retirement savings account based on a percentage of eligible compensation for certain U.S. employees. Arconic Corporation’s expenses (contributions) related to all defined contribution plans were $35 in 2020, $38 in 2019, and $37 in 2018.
I. Income Taxes
Provision (Benefit) for income taxes. The components of (loss) income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Domestic - United States
|
|
$
|
(126)
|
|
|
$
|
64
|
|
|
$
|
193
|
|
Foreign
|
|
18
|
|
|
51
|
|
|
70
|
|
|
|
$
|
(108)
|
|
|
$
|
115
|
|
|
$
|
263
|
|
Provision (Benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
U.S. federal*
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47
|
|
Foreign
|
|
13
|
|
|
16
|
|
|
20
|
|
U.S. state and local
|
|
4
|
|
|
3
|
|
|
8
|
|
|
|
17
|
|
|
19
|
|
|
75
|
|
Deferred:
|
|
|
|
|
|
|
U.S. federal*
|
|
(12)
|
|
|
(83)
|
|
|
(8)
|
|
Foreign
|
|
4
|
|
|
11
|
|
|
9
|
|
U.S. state and local
|
|
(8)
|
|
|
(9)
|
|
|
—
|
|
|
|
(16)
|
|
|
(81)
|
|
|
1
|
|
Total
|
|
$
|
1
|
|
|
$
|
(62)
|
|
|
$
|
76
|
|
__________________
* Includes U.S. income taxes related to foreign income. Also, in 2020, the Deferred amount includes a $21 charge related to income generated by the Company prior to the Separation Date that will be included in ParentCo's 2021 tax return.
A reconciliation of the U.S. federal statutory rate to Arconic Corporation’s effective tax rate was as follows (the effective tax rate was a provision on loss in 2020, a benefit on income in 2019, and a provision on income in 2018):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
U.S. federal statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Taxes on foreign operations - rate differential
|
|
(4.8)
|
|
|
(6.0)
|
|
|
0.8
|
|
Other taxes related to foreign operations(1)
|
|
(9.4)
|
|
|
23.5
|
|
|
0.4
|
|
U.S. state and local taxes, including federal benefit
|
|
3.3
|
|
|
(2.6)
|
|
|
1.9
|
|
Statutory tax rate and law changes
|
|
(2.1)
|
|
|
—
|
|
|
—
|
|
Changes in valuation allowances
|
|
(7.3)
|
|
|
30.4
|
|
|
5.7
|
|
Non-taxable income - indemnification liability(2)
|
|
3.8
|
|
|
—
|
|
|
—
|
|
Subsidiary recapitalizations and reorganizations(3)
|
|
(3.9)
|
|
|
(121.8)
|
|
|
—
|
|
Non-deductible costs related to the Separation (A)
|
|
(2.2)
|
|
|
3.5
|
|
|
—
|
|
Other
|
|
0.7
|
|
|
(1.9)
|
|
|
(0.9)
|
|
Effective tax rate
|
|
(0.9)
|
%
|
|
(53.9)
|
%
|
|
28.9
|
%
|
_____________________
(1) In 2019, this line item includes the impact of incremental income tax expense of $35 related to foreign operations that generated income subject to the global intangible low-taxed income inclusion under the U.S. Internal Revenue Code.
(2) In 2020, this line item reflects the impact of the absence of income tax expense for non-taxable income generated by the reversal of a liability previously established at the Separation Date related to a potential indemnification to Howmet Aerospace by Arconic Corporation for an outstanding income tax matter in Spain (see Note G).
(3) In 2019, this line item represents the impact of a $140 net tax benefit related to a U.S. tax election that resulted in the deemed liquidation of a foreign subsidiary's assets into its U.S. tax parent.
Deferred income taxes. The components of deferred tax assets and liabilities based on the underlying attributes without regard to jurisdiction were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
December 31,
|
|
Deferred
tax
assets
|
|
Deferred
tax
liabilities
|
|
Deferred
tax
assets
|
|
Deferred
tax
liabilities
|
Employee benefits
|
|
$
|
503
|
|
|
$
|
3
|
|
|
$
|
43
|
|
|
$
|
—
|
|
Tax loss carryforwards
|
|
167
|
|
|
—
|
|
|
115
|
|
|
—
|
|
Loss provisions
|
|
42
|
|
|
—
|
|
|
53
|
|
|
—
|
|
Operating lease right-of-use asset and liabilities
|
|
37
|
|
|
37
|
|
|
33
|
|
|
33
|
|
Depreciation
|
|
13
|
|
|
256
|
|
|
15
|
|
|
213
|
|
Deferred income/expense
|
|
6
|
|
|
80
|
|
|
8
|
|
|
75
|
|
Other
|
|
17
|
|
|
4
|
|
|
32
|
|
|
10
|
|
|
|
$
|
785
|
|
|
$
|
380
|
|
|
$
|
299
|
|
|
$
|
331
|
|
Valuation allowance
|
|
(91)
|
|
|
—
|
|
|
(113)
|
|
|
—
|
|
|
|
$
|
694
|
|
|
$
|
380
|
|
|
$
|
186
|
|
|
$
|
331
|
|
The following table details the expiration periods of the deferred tax assets presented above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Expires
within
10 years
|
|
Expires
within
11-20 years
|
|
No
expiration(1)
|
|
Other(2)
|
|
Total
|
Tax loss carryforwards
|
|
$
|
37
|
|
|
$
|
25
|
|
|
$
|
105
|
|
|
$
|
—
|
|
|
$
|
167
|
|
Employee benefits
|
|
—
|
|
|
—
|
|
|
—
|
|
|
503
|
|
|
503
|
|
Other
|
|
—
|
|
|
2
|
|
|
15
|
|
|
98
|
|
|
115
|
|
Valuation allowance
|
|
(35)
|
|
|
(11)
|
|
|
(8)
|
|
|
(37)
|
|
|
(91)
|
|
|
|
$
|
2
|
|
|
$
|
16
|
|
|
$
|
112
|
|
|
$
|
564
|
|
|
$
|
694
|
|
____________________
(1)Deferred tax assets with no expiration may still have annual limitations on utilization.
(2)Employee benefits will become deductible for tax purposes over an extended period of time as contributions are made to employee benefit plans and payments are made to participants. Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference.
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (55%) and taxable temporary differences that reverse within the carryforward period (45%).
The following table details the changes in the valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
2018
|
Balance at beginning of year
|
|
$
|
113
|
|
|
$
|
107
|
|
|
$
|
103
|
|
Separation-related adjustments (A)
|
|
22
|
|
|
—
|
|
|
—
|
|
Net change to existing allowances*
|
|
(16)
|
|
|
18
|
|
|
7
|
|
Release of allowances
|
|
—
|
|
|
(11)
|
|
|
—
|
|
Acquisitions and divestitures
|
|
(31)
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
|
3
|
|
|
(1)
|
|
|
(3)
|
|
Balance at end of year
|
|
$
|
91
|
|
|
$
|
113
|
|
|
$
|
107
|
|
____________________
* This line item reflects movements in previously established valuation allowances, which increase or decrease as the related deferred tax assets increase or decrease. Such movements occur as a result of remeasurement due to a tax rate change and changes in the underlying attributes of the deferred tax assets, including expiration of the attribute and reversal of the temporary difference that gave rise to the deferred tax assets. In 2020, 2019, and 2018, no new valuation allowances were established.
Undistributed net earnings. Foreign undistributed net earnings that have not otherwise previously been subject to U.S. tax are generally exempt from U.S. tax if repatriated in the future. Such future distributions, as well as distributions of previously taxed foreign earnings, may be subject to U.S. state and/or foreign withholding taxes in certain jurisdictions. Also, foreign currency gains/losses related to the translation of previously taxed foreign earnings from the functional currency to the U.S. dollar may be subject to U.S. tax if such earnings were to be distributed in the future. At this time, management has no plans to repatriate such earnings in the foreseeable future, as the Company has several commitments and obligations related to its operations in various foreign jurisdictions. Management continuously evaluates the Company’s local and global cash needs for future business operations and anticipated debt facilities, which may influence future repatriation decisions. If such earnings were to be distributed in the future, management does not expect the potential U.S. state and/or foreign withholding taxes to be material to the Company’s Consolidated Financial Statements.
Uncertain tax positions. Arconic Corporation and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various foreign and U.S. state jurisdictions. For U.S. federal income tax purposes, Arconic Corporation’s U.S. operations were included in the income tax filings of ParentCo’s U.S. consolidated tax group through 2019, and will continue to be through March 31, 2020. The U.S. federal income tax filings of ParentCo’s U.S. consolidated tax group have been examined for all periods through 2019. In 2021, the Company’s U.S. consolidated tax group will file a nine-month (April 1, 2020 through December 31, 2020) U.S. federal income tax return. For U.S. state and foreign income tax purposes, Arconic Corporation and its subsidiaries remain subject to income tax examinations for the 2012 tax year and forward.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
2018
|
Balance at beginning of year
|
|
$
|
21
|
|
|
$
|
18
|
|
|
$
|
23
|
|
Additions for tax positions of prior years
|
|
—
|
|
|
4
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
—
|
|
|
—
|
|
|
(4)
|
|
Foreign currency translation
|
|
2
|
|
|
(1)
|
|
|
(1)
|
|
Balance at end of year
|
|
$
|
23
|
|
|
$
|
21
|
|
|
$
|
18
|
|
For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The amount of unrecognized tax benefits, if recorded, would not impact the annual effective tax rate for 2020, 2019, and 2018. Management does not anticipate that changes in the Company's unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2021.
It is Arconic Corporation’s policy to recognize interest and penalties related to income taxes as a component of the Provision (benefit) for income taxes on the accompanying Statement of Consolidated Operations. In 2020, 2019, and 2018, Arconic Corporation did not recognize any interest or penalties. As of December 31, 2020 and 2019, no interest and penalties were accrued.
J. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing Net (loss) income attributable to Arconic Corporation by the weighted-average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The share information used to compute basic and diluted EPS attributable to Arconic Corporation common stockholders was as follows (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Weighted-average shares outstanding – basic
|
|
109
|
|
109
|
|
109
|
Effect of dilutive share equivalents:
|
|
|
|
|
|
|
Stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average shares outstanding – diluted
|
|
109
|
|
109
|
|
109
|
In 2020, basic weighted-average shares outstanding and diluted weighted-average shares outstanding were the same because the effect of common share equivalents was anti-dilutive since Arconic Corporation generated a net loss. Had Arconic Corporation generated net income in 2020, 2.6 million common share equivalents related to outstanding stock units and stock options would have been included in diluted weighted-average shares outstanding. These common share equivalents do not consider 0.5 million stock options outstanding as of December 31, 2020 with a weighted average exercise price of $33.32 as the respective exercise price of these options was greater than the average market price of Arconic Corporation’s common stock.
Prior to the Separation Date, Arconic Corporation did not have any publicly-traded issued and outstanding common stock or any common share equivalents. Accordingly, in 2019 and 2018, the EPS included on the accompanying Statement of Consolidated Operations was calculated based on the 109,021,376 shares of Arconic Corporation common stock distributed on the Separation Date in connection with the completion of the Separation (see Note A).
K. Preferred and Common Stock
Preferred Stock. Arconic Corporation is authorized to issue 10,000,000 shares of preferred stock at a par value of $0.01 per share. At December 31, 2020, the Company had no issued preferred stock.
Common Stock. Arconic Corporation is authorized to issue 150,000,000 shares of common stock at a par value of $0.01 per share. On April 1, 2020, in connection with the Separation, the Company distributed 109,021,376 shares of its common stock to ParentCo’s stockholders (see Note A). Additionally, from April 1, 2020 through December 31, 2020, the Company issued 183,850 shares of common stock under its employee stock-based compensation plan (see below). As of December 31, 2020, Arconic Corporation had 109,205,226 issued and outstanding shares of common stock.
The Company issues new shares to satisfy the exercise of stock options and the conversion of stock units granted under its employee stock-based compensation plan, which provides authorization for the issuance of up to 8,500,000 shares. From April 1, 2020 through December 31, 2020, there were 84,959 stock options exercised and 157,230 stock units converted (see table below). Additionally, as of December 31, 2020, there were 1,026,808 stock options and 4,544,063 stock units outstanding (i.e., unexercised and/or unvested) under this plan (see table below). In accordance with the provisions of this plan, each stock option counts as one share and each stock unit counts as one and one-half share for purposes of determining the number of shares remaining for authorization. Accordingly, as of December 31, 2020, there were 336,293 shares of common stock available for issuance under the plan.
Dividends on common stock are subject to authorization by the Company’s Board of Directors. Arconic Corporation did not declare any dividends from April 1, 2020 through December 31, 2020.
Stock-based Compensation
For all periods prior to the Separation Date, eligible employees attributable to the Arconic Corporation Businesses participated in ParentCo’s stock-based compensation plan. From the Separation Date through December 31, 2020, eligible Arconic Corporation employees participated in the Company’s stock-based compensation plan.
Effective April 1, 2020, all outstanding stock options (vested and non-vested) and non-vested stock units originally granted under ParentCo’s stock-based compensation plan related to employees of the Arconic Corporation Businesses, as well as the ParentCo corporate employees that became Arconic Corporation employees at Separation, were replaced with similar stock options and stock units under Arconic Corporation’s stock-based compensation plan. In order to preserve the intrinsic value of these awards, the referenced employees received replacement stock options and stock units under Arconic Corporation’s stock-based compensation plan at a ratio of 1.07 and 2.18, respectively, compared to the number of stock options and stock units originally granted under ParentCo’s stock-based compensation plan. The ratio for stock options was developed by dividing the March 31, 2020 closing market price ($16.06) of ParentCo’s common stock by the April 1, 2020 opening market price ($15.00) of Arconic Corporation’s common stock (the Company’s common stock did not trade on a “when issued” basis prior to April 1, 2020). Additionally, the exercise price of stock options was decreased by a ratio of 0.93 developed by dividing $15.00 by $16.06. The ratio for stock units was developed by dividing the March 31, 2020 closing market price of ParentCo’s common stock by the volume weighted average trading price ($7.37) of Arconic Corporation’s common stock during the first five trading days subsequent to March 31, 2020. This resulted in a beginning balance of outstanding stock options and stock units under Arconic Corporation’s stock-based compensation plan of 1,173,492 and 3,062,013, respectively, as of April 1, 2020. The respective fair values of these stock options and units were adjusted accordingly. Arconic Corporation did not recognize any immediate incremental stock-based compensation expense as a result of this adjustment.
The following description of Arconic Corporation’s stock-based compensation plan is not materially different from the description of ParentCo’s stock-based compensation plan prior to the Separation.
Stock awards are generally granted in the first quarter of each calendar year to eligible employees at the closing market price of Arconic Corporation’s common stock on the date of grant. Stock options typically grade-vest over a three-year service period (1/3 each year) with a ten-year contractual term; stock units typically cliff-vest on the third anniversary of the award grant date. As a condition of Arconic Corporation’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant.
In 2020, certain of the stock unit grants also contain both performance and market conditions (the “performance stock units”) and were granted to a limited number of eligible employees, including the Company's executive officers. The final number of performance stock units earned is dependent on Arconic Corporation’s achievement of certain targets (performance condition) modified by a total stockholder return (“TSR”) multiplier (market condition) over a three-year measurement period. Specifically, determination of the initial number of stock units earned is based on the Company’s achievement of an adjusted EBITDA target (25%), a controllable free cash flow target (25%), and a pretax return on net assets target (50%). For the 2020
performance stock units, the Compensation Committee of the Company's Board of Directors established three one-year financial targets to address the lack of visibility and challenge in setting long-term financial goals at the outset of the COVID-19 pandemic, while aligning executive compensation to long-term results. This result is then scaled by the TSR multiplier, which is based on the Company’s relative three-year (January 1 of the grant year through December 31 of the third year in the service period) performance against the TSRs of a group of peer companies. Similar grants were made by ParentCo in 2019 and 2018 but these awards were subsequently converted by ParentCo management prior to 2020 at 100% and 97.5%, respectively, of target to stock units with no such conditions for the remainder of the service period in consideration of the Separation.
In 2020, 2019, and 2018, Arconic Corporation recognized stock-based compensation expense of $23 ($18 after-tax), $38 ($30 after-tax), and $22 ($17 after-tax), respectively, of which a minimum of approximately 85% was related to stock units in each period. No stock-based compensation expense was capitalized in 2020, 2019, or 2018. For periods prior to the Separation, the stock-based compensation expense recorded by Arconic Corporation was comprised of two components: (i) the expense associated with employees attributable to the Arconic Corporation Businesses, and (ii) an allocation of expense related to ParentCo corporate employees (see Cost Allocations in Note A). In 2020 (January through March), 2019, and 2018, this allocation was $5, $30, and $12, respectively, of Arconic Corporation’s recognized stock-based compensation expense. Also, in 2019, Arconic Corporation’s recognized stock-based compensation expense includes a benefit of $2 (through allocation) for certain executive pre-vest stock award cancellations. This benefit was recorded in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations.
Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For stock units with no market condition, the fair value is equivalent to the closing market price of Arconic Corporation’s or ParentCo’s common stock on the date of grant in the respective periods. For stock units with a market condition, the fair value is estimated on the date of grant using a Monte Carlo simulation model, which generated a result of $10.02, $11.93, and $20.25 per unit in 2020, 2019, and 2018 respectively. For stock options, the fair value was estimated on the date of grant using a lattice-pricing model, which generated a result of $9.79 per option in 2018 (there were no stock options granted in 2020 or 2019). As previously mentioned, the estimated fair values for stock options and stock units granted in 2019 and 2018 and outstanding at March 31, 2020 were adjusted in order to maintain the intrinsic value of these awards in connection with the Separation.
To estimate the fair value of a stock unit with a market condition, the Monte Carlo simulation model uses certain assumptions, including a risk-free interest rate and volatility, to estimate the probability of satisfying market conditions. The risk-free interest rate (0.2% in 2020, 1.6% in 2019, and 2.7% in 2018) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. Volatility was estimated using implied and historical volatility (35.4% in 2020 and 33.4% in 2019). Because of limited historical information due to the 2016 Separation Transaction, 2018 volatility (32.0%) was estimated using implied volatility and the representative price return approach, which uses price returns of comparable companies to develop a correlation assumption.
To estimate the fair value of a stock option, the lattice-pricing model uses several assumptions, including a risk-free interest rate, dividend yield, volatility, annual forfeiture rate, exercise behavior, and contractual life. The following describes the assumptions ParentCo used to estimate the fair value of stock options granted in 2018. The risk-free interest rate (2.5%) was based on a yield curve of interest rates at the time of the grant over the contractual life of the option. The dividend yield (0.9%) was based on a one-year average. Volatility (34.0%) was based on comparable companies and implied volatilities over the term of the option. ParentCo utilized historical option forfeiture data to estimate annual pre- and post-vesting forfeitures (6%). Exercise behavior (61%) was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the life of an option (6.0 years) was an output of the lattice-pricing model.
The activity for stock options and stock units, including performance stock units granted to the Company's executive officers, from April 1, 2020 through December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
Stock units
|
|
|
Number of
options
|
|
Weighted
average
exercise price
|
|
Number of
units
|
|
Weighted
average FMV
per unit
|
Outstanding, April 1, 2020
|
|
1,173,492
|
|
|
$
|
26.01
|
|
|
3,062,013
|
|
|
$
|
10.94
|
|
Granted
|
|
—
|
|
|
—
|
|
|
1,987,748
|
|
|
9.57
|
|
Exercised
|
|
(84,959)
|
|
|
18.81
|
|
|
—
|
|
|
—
|
|
Converted*
|
|
—
|
|
|
—
|
|
|
(157,230)
|
|
|
11.54
|
|
Expired or forfeited
|
|
(61,725)
|
|
|
25.56
|
|
|
(343,526)
|
|
|
10.41
|
|
Performance share adjustment
|
|
—
|
|
|
—
|
|
|
(4,942)
|
|
|
9.29
|
|
Outstanding, December 31, 2020
|
|
1,026,808
|
|
|
26.64
|
|
|
4,544,063
|
|
|
10.36
|
|
*The number of converted units includes 58,339 shares “withheld” to meet the Company’s statutory tax withholding requirements related to the income earned by the employees as a result of vesting in the units.
As of December 31, 2020, the 1,026,808 outstanding stock options had a weighted average remaining contractual life of 2.8 years and a total intrinsic value of $5. Additionally, 979,111 of the total outstanding stock options were fully vested and exercisable and had a weighted average remaining contractual life of 2.6 years, a weighted average exercise price of $26.56, and a total intrinsic value of $5 as of December 31, 2020. From April 1, 2020 through December 31, 2020, cash received from stock option exercises was $1 and the total intrinsic value of stock options exercised was $1.
At December 31, 2020, there was $10 (pre-tax) of combined unrecognized compensation expense related to non-vested grants of both stock options and stock units. This expense is expected to be recognized over a weighted average period of 1.8 years.
L. Accumulated Other Comprehensive (Loss) Income
The following table details the activity of the three components that comprise Accumulated other comprehensive (loss) income for Arconic Corporation (such activity for Noncontrolling interest was immaterial for all periods presented):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Pension and other postretirement benefits (H)
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(43)
|
|
|
$
|
(32)
|
|
|
$
|
(36)
|
|
Establishment of additional defined benefit plans
|
|
(1,752)
|
|
|
—
|
|
|
—
|
|
Separation-related adjustments (A)
|
|
(50)
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service benefit
|
|
(259)
|
|
|
(16)
|
|
|
1
|
|
Tax benefit
|
|
62
|
|
|
3
|
|
|
1
|
|
Total Other comprehensive (loss) income before reclassifications, net of tax
|
|
(197)
|
|
|
(13)
|
|
|
2
|
|
Amortization of net actuarial loss and prior service benefit(1)
|
|
326
|
|
|
3
|
|
|
3
|
|
Tax expense(2)
|
|
(75)
|
|
|
(1)
|
|
|
(1)
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5)
|
|
251
|
|
|
2
|
|
|
2
|
|
Total Other comprehensive income (loss)
|
|
54
|
|
|
(11)
|
|
|
4
|
|
Balance at end of period
|
|
$
|
(1,791)
|
|
|
$
|
(43)
|
|
|
$
|
(32)
|
|
Foreign currency translation
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
338
|
|
|
$
|
282
|
|
|
$
|
446
|
|
Separation-related adjustments (A)
|
|
(396)
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation(3)
|
|
65
|
|
|
56
|
|
|
(164)
|
|
Net amount reclassified to earnings from Accumulated other comprehensive income(3),(5)
|
|
22
|
|
|
—
|
|
|
—
|
|
Total Other comprehensive income (loss)
|
|
87
|
|
|
56
|
|
|
(164)
|
|
Balance at end of period
|
|
$
|
29
|
|
|
$
|
338
|
|
|
$
|
282
|
|
Cash flow hedges
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Separation-related adjustments (A)
|
|
(4)
|
|
|
—
|
|
|
—
|
|
Other comprehensive income:
|
|
|
|
|
|
|
Net change from periodic revaluations
|
|
(2)
|
|
|
—
|
|
|
—
|
|
Tax benefit
|
|
1
|
|
|
—
|
|
|
—
|
|
Total Other comprehensive loss before reclassifications, net of tax
|
|
(1)
|
|
|
—
|
|
|
—
|
|
Net amount reclassified to earnings(4)
|
|
8
|
|
|
—
|
|
|
—
|
|
Tax expense(2)
|
|
(2)
|
|
|
—
|
|
|
—
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax(5)
|
|
6
|
|
|
—
|
|
|
—
|
|
Total Other comprehensive income
|
|
5
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accumulated other comprehensive (loss) income
|
|
$
|
(1,761)
|
|
|
$
|
295
|
|
|
$
|
250
|
|
_____________________
(1)These amounts were included in the non-service component of net periodic benefit cost for pension and other postretirement benefits (see Note H). In 2020, this amount includes $199 related to the settlement of certain employee retirement benefits (see Note H).
(2)These amounts were reported in Provision (Benefit) for income taxes on the accompanying Statement of Consolidated Operations.
(3)In all periods presented, there were no tax impacts related to rate changes. In 2020, the net amount reclassified to earnings was reported in Restructuring and other charges on the accompanying Statement of Consolidated Operations related to the sale of certain foreign subsidiaries.
(4)These amounts relate to aluminum contracts, a portion of which were reported in both Sales and Cost of goods sold on the accompanying Statement of Consolidated Operations.
(5)A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings. These amounts were reflected on the accompanying Statement of Consolidated Operations in the line items indicated in footnotes 1 through 4.
M. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Finished goods
|
|
$
|
282
|
|
|
$
|
237
|
|
Work-in-process
|
|
635
|
|
|
746
|
|
Purchased raw materials
|
|
59
|
|
|
85
|
|
Operating supplies
|
|
67
|
|
|
69
|
|
|
|
$
|
1,043
|
|
|
$
|
1,137
|
|
Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. Management determined that this change in accounting principle is preferable because the average cost method more closely reflects the physical flow of inventories, improves comparability of the Company’s operating results with its industry peers, and provides an increased level of consistency in the measurement of inventories in the Company’s consolidated financial statements. All non-U.S. inventories and a small portion of U.S. inventories were previously, and continue to be, measured using a combination of first in, first out (FIFO) and average cost methods.
The effects of the change in accounting principle from LIFO to average cost have been retrospectively applied to all prior periods presented. This change resulted in an increase to Parent Company net investment of $278 as of January 1, 2018. Additionally, certain financial statement line items in the accompanying Consolidated Balance Sheet as of December 31, 2019 and each of the Statement of Consolidated Operations, Statement of Consolidated Comprehensive Income, and Statement of Consolidated Cash Flows for the years ended December 31, 2019 and 2018 were recast as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
Effect of Change
|
|
As Recast
|
Statement of Consolidated Operations for the year ended December 31, 2019:
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
6,270
|
|
|
$
|
62
|
|
|
$
|
6,332
|
|
Operating income
|
|
277
|
|
|
(62)
|
|
|
215
|
|
Income before income taxes
|
|
177
|
|
|
(62)
|
|
|
115
|
|
Benefit for income taxes
|
|
(48)
|
|
|
(14)
|
|
|
(62)
|
|
Net income
|
|
225
|
|
|
(48)
|
|
|
177
|
|
Net income attributable to Arconic Corporation
|
|
225
|
|
|
(48)
|
|
|
177
|
|
Earnings per share attributable to Arconic Corporation common stockholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
2.07
|
|
|
$
|
(0.44)
|
|
|
$
|
1.63
|
|
Diluted
|
|
2.07
|
|
|
(0.44)
|
|
|
1.63
|
|
|
|
|
|
|
|
|
Statement of Consolidated Comprehensive Income for the year ended December 31, 2019:
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
270
|
|
|
$
|
(48)
|
|
|
$
|
222
|
|
Comprehensive income attributable to Arconic Corporation
|
|
270
|
|
|
(48)
|
|
|
222
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet as of December 31, 2019:
|
|
|
|
|
|
|
Inventories
|
|
$
|
820
|
|
|
$
|
317
|
|
|
$
|
1,137
|
|
Deferred income tax liabilities
|
|
87
|
|
|
72
|
|
|
159
|
|
Parent Company net investment
|
|
2,419
|
|
|
245
|
|
|
2,664
|
|
|
|
|
|
|
|
|
Statement of Consolidated Cash Flows for the year ended December 31, 2019:
|
|
|
|
|
|
|
Net income
|
|
$
|
225
|
|
|
$
|
(48)
|
|
|
$
|
177
|
|
Deferred income taxes
|
|
(67)
|
|
|
(14)
|
|
|
(81)
|
|
(Increase) Decrease in inventories
|
|
(5)
|
|
|
62
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
Effect of Change
|
|
As Recast
|
Statement of Consolidated Operations for the year ended December 31, 2018:
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
6,549
|
|
|
$
|
(22)
|
|
|
$
|
6,527
|
|
Operating income
|
|
374
|
|
|
22
|
|
|
396
|
|
Income before income taxes
|
|
241
|
|
|
22
|
|
|
263
|
|
Provision for income taxes
|
|
71
|
|
|
5
|
|
|
76
|
|
Net income
|
|
170
|
|
|
17
|
|
|
187
|
|
Net income attributable to Arconic Corporation
|
|
170
|
|
|
17
|
|
|
187
|
|
Earnings per share attributable to Arconic Corporation common stockholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
1.56
|
|
|
$
|
0.16
|
|
|
$
|
1.72
|
|
Diluted
|
|
1.56
|
|
|
0.16
|
|
|
1.72
|
|
|
|
|
|
|
|
|
Statement of Consolidated Comprehensive Income for the year ended December 31, 2018:
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
10
|
|
|
$
|
17
|
|
|
$
|
27
|
|
Comprehensive income attributable to Arconic Corporation
|
|
10
|
|
|
17
|
|
|
27
|
|
|
|
|
|
|
|
|
Statement of Consolidated Cash Flows for the year ended December 31, 2018:
|
|
|
|
|
|
|
Net income
|
|
$
|
170
|
|
|
$
|
17
|
|
|
$
|
187
|
|
Deferred income taxes
|
|
(4)
|
|
|
5
|
|
|
1
|
|
(Increase) in inventories
|
|
(51)
|
|
|
(22)
|
|
|
(73)
|
|
The following table compares the amounts that were reported under average cost in the Consolidated Financial Statements as of and for the year ended December 31, 2020 with the amounts had they continued to be reported under LIFO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported under
Average Cost
|
|
As Computed under LIFO
|
|
Effect of Change
|
Statement of Consolidated Operations for the year ended December 31, 2020:
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
4,862
|
|
|
$
|
4,889
|
|
|
$
|
(27)
|
|
Operating income
|
|
80
|
|
|
53
|
|
|
27
|
|
Loss before income taxes
|
|
(108)
|
|
|
(135)
|
|
|
27
|
|
Provision (Benefit) for income taxes
|
|
1
|
|
|
(5)
|
|
|
6
|
|
Net loss
|
|
(109)
|
|
|
(130)
|
|
|
21
|
|
Net loss attributable to Arconic Corporation
|
|
(109)
|
|
|
(130)
|
|
|
21
|
|
Earnings per share attributable to Arconic Corporation common stockholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.00)
|
|
|
$
|
(1.19)
|
|
|
$
|
0.19
|
|
Diluted
|
|
(1.00)
|
|
|
(1.19)
|
|
|
0.19
|
|
|
|
|
|
|
|
|
Statement of Consolidated Comprehensive Income for the year ended December 31, 2020:
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
37
|
|
|
$
|
16
|
|
|
$
|
21
|
|
Comprehensive income attributable to Arconic Corporation
|
|
37
|
|
|
16
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported under
Average Cost
|
|
As Computed under LIFO
|
|
Effect of Change
|
Consolidated Balance Sheet as of December 31, 2020:
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,043
|
|
|
$
|
696
|
|
|
$
|
347
|
|
Deferred income tax assets
|
|
329
|
|
|
408
|
|
|
(79)
|
|
Additional capital
|
|
3,348
|
|
|
3,115
|
|
|
233
|
|
Accumulated deficit
|
|
(155)
|
|
|
(190)
|
|
|
35
|
|
|
|
|
|
|
|
|
Statement of Consolidated Cash Flows for the year ended December 31, 2020:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109)
|
|
|
$
|
(130)
|
|
|
$
|
21
|
|
Deferred income taxes
|
|
(16)
|
|
|
(22)
|
|
|
6
|
|
Decrease in inventories
|
|
65
|
|
|
92
|
|
|
(27)
|
|
N. Properties, Plants, and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Land and land rights
|
|
$
|
23
|
|
|
$
|
27
|
|
Structures:
|
|
|
|
|
Rolled Products
|
|
1,095
|
|
|
1,057
|
|
Building and Construction Systems
|
|
95
|
|
|
95
|
|
Extrusions
|
|
150
|
|
|
153
|
|
Other*
|
|
153
|
|
|
15
|
|
|
|
1,493
|
|
|
1,320
|
|
Machinery and equipment:
|
|
|
|
|
Rolled Products
|
|
4,787
|
|
|
4,661
|
|
Building and Construction Systems
|
|
205
|
|
|
201
|
|
Extrusions
|
|
520
|
|
|
539
|
|
Other*
|
|
279
|
|
|
147
|
|
|
|
5,791
|
|
|
5,548
|
|
|
|
7,307
|
|
|
6,895
|
|
Less: accumulated depreciation and amortization
|
|
4,697
|
|
|
4,466
|
|
|
|
2,610
|
|
|
2,429
|
|
Construction work-in-progress
|
|
102
|
|
|
315
|
|
|
|
$
|
2,712
|
|
|
$
|
2,744
|
|
__________________
* On the Separation Date, several corporate-related assets were transferred to Arconic Corporation from ParentCo, including a research and development center and related technical equipment (see Note A).
O. Goodwill and Other Intangible Assets
The following table details the changes in the carrying amount of goodwill (see Note B for review of goodwill for impairment):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled
Products
|
|
Building and
Construction
Systems
|
|
Extrusions
|
|
Total
|
Balances at December 31, 2018
|
|
|
|
|
|
|
|
Goodwill
|
$
|
245
|
|
|
$
|
97
|
|
|
$
|
71
|
|
|
$
|
413
|
|
Accumulated impairment losses
|
—
|
|
|
(28)
|
|
|
—
|
|
|
(28)
|
|
Goodwill, net
|
245
|
|
|
69
|
|
|
71
|
|
|
385
|
|
Translation
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Balances at December 31, 2019
|
|
|
|
|
|
|
|
Goodwill
|
246
|
|
|
97
|
|
|
71
|
|
|
414
|
|
Accumulated impairment losses
|
—
|
|
|
(28)
|
|
|
—
|
|
|
(28)
|
|
Goodwill, net
|
246
|
|
|
69
|
|
|
71
|
|
|
386
|
|
Divestitures (S)
|
(1)
|
|
|
—
|
|
|
(6)
|
|
|
(7)
|
|
Translation
|
9
|
|
|
2
|
|
|
—
|
|
|
11
|
|
Balances at December 31, 2020
|
|
|
|
|
|
|
|
Goodwill
|
254
|
|
|
99
|
|
|
65
|
|
|
418
|
|
Accumulated impairment losses
|
—
|
|
|
(28)
|
|
|
—
|
|
|
(28)
|
|
Goodwill, net
|
$
|
254
|
|
|
$
|
71
|
|
|
$
|
65
|
|
|
$
|
390
|
|
Other intangible assets, which are included in Other noncurrent assets on the accompanying Consolidated Balance Sheet, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Computer software*
|
|
$
|
550
|
|
|
$
|
(510)
|
|
|
$
|
40
|
|
Patents and licenses
|
|
28
|
|
|
(28)
|
|
|
—
|
|
Other
|
|
21
|
|
|
(14)
|
|
|
7
|
|
Total other intangible assets
|
|
$
|
599
|
|
|
$
|
(552)
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Computer software
|
|
$
|
193
|
|
|
$
|
(177)
|
|
|
$
|
16
|
|
Patents and licenses
|
|
28
|
|
|
(28)
|
|
|
—
|
|
Other
|
|
21
|
|
|
(12)
|
|
|
9
|
|
Total other intangible assets
|
|
$
|
242
|
|
|
$
|
(217)
|
|
|
$
|
25
|
|
__________________
* On the Separation Date, several corporate-related information technology systems and applications were transferred to Arconic Corporation from ParentCo (see Note A).
Computer software consists primarily of software costs associated with an enterprise business solution within Arconic Corporation to drive common systems among all businesses.
Amortization expense related to the intangible assets in the tables above for the years ended December 31, 2020, 2019, and 2018 was $17, $10, and $18, respectively. During the next five years, amortization expense related to these intangible assets is expected to decrease from $18 in 2021 to $2 in 2025.
P. Leases
Arconic Corporation leases certain land and buildings, plant equipment, vehicles, and computer equipment, which have been classified as operating leases. Operating lease cost, which includes short-term leases and variable lease payments and approximates cash paid, was $62, $63, and $52 in 2020, 2019, and 2018, respectively.
Right-of-use assets obtained in exchange for operating lease obligations in 2020 and 2019 were $46 and $15, respectively.
Future minimum contractual operating lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
2020
|
$
|
—
|
|
|
$
|
38
|
|
2021
|
43
|
|
|
29
|
|
2022
|
34
|
|
|
22
|
|
2023
|
26
|
|
|
17
|
|
2024
|
20
|
|
|
14
|
|
2025
|
16
|
|
|
12
|
|
Thereafter
|
41
|
|
|
26
|
|
Total lease payments
|
$
|
180
|
|
|
$
|
158
|
|
Less: imputed interest
|
33
|
|
|
29
|
|
Present value of lease liabilities
|
$
|
147
|
|
|
$
|
129
|
|
The weighted-average remaining lease term and weighted-average discount rate for Arconic Corporation's operating leases at December 31, 2020 and 2019 was 6.6 years and 6.7 years, respectively, and 5.9% and 6.0%, respectively.
Q. Debt
In connection with the capital structure to be established at the time of the Separation, Arconic Corporation secured $1,200 in third-party indebtedness. On February 7, 2020, Arconic Corporation completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for $600 of 6.125% Senior Secured Second-Lien Notes due 2028 (the “2028 Notes”). The Company received $593 in net proceeds from the debt offering reflecting a discount to the initial purchasers of the 2028 Notes. Also, on March 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 the Term Loan reflecting upfront fees and costs to enter into the financing arrangement.
The Company used a portion of the $1,168 in net proceeds from the aggregate indebtedness to make a $728 payment to ParentCo on April 1, 2020 to fund the transfer of certain net assets from ParentCo to Arconic Corporation in connection with the completion of the Separation (see Note A). The payment to ParentCo was calculated as the difference between (i) the $1,168 of net proceeds from the aggregate indebtedness and (ii) the difference between a beginning cash balance at the Separation Date of $500, as provided for in the Separation and Distribution Agreement, and the amount of cash held by Arconic Corporation Businesses at March 31, 2020 ($60 – the sum of this amount and the aggregate indebtedness in (i) equals the sum of Cash and cash equivalents and Restricted cash on the Company’s Combined Balance Sheet as of March 31, 2020).
On April 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 Note A).
On May 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, 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.
Descriptions of the 2028 Notes, 2025 Notes, and ABL Credit Agreement are set forth below.
In connection with the issuance of the 2028 Notes and the execution of the Credit Agreement, the Company paid $42 in discounts to the initial purchasers and/or upfront fees and costs (the “debt issuance costs”), of which $30 was attributable to the Term Loan and the Credit Facility. The debt issuance costs were initially deferred and were being amortized to interest expense over the respective terms of the 2028 Notes, the Term Loan, and the Credit Facility. In connection with the issuance of the 2025 Notes and the execution of the ABL Credit Agreement, the Company paid $15 in discounts to the initial purchasers and/or upfront fees and costs (the “new debt issuance costs”). As a result of applying both debt modification and debt extinguishment accounting, as appropriate based on the lender mix for each debt instrument, to the debt refinancing, the Company was required to write off $16 of the $30 in debt issuance costs and immediately expense $3 of the $15 in new debt issuance costs. This $19 was reported within Interest expense on the Company’s Statement of Consolidated Operations. The remaining $14 in debt issuance costs continued to be deferred and the remaining $12 in new debt issuance costs were deferred; both are being amortized to interest expense over the respective terms of the 2025 Notes and the ABL Credit Agreement.
Separately, in August 2012, ParentCo and the Iowa Finance Authority entered into a loan agreement for the proceeds from the issuance of $250 in Midwestern Disaster Area Revenue Bonds Series 2012 due 2042 (the “Bonds”). The Bonds were issued by the Iowa Finance Authority pursuant to the Heartland Disaster Tax Relief Act of 2008 for the purpose of financing all or part of the cost of acquiring, constructing, reconstructing, and renovating certain facilities (the “Project”) at Arconic Corporation’s rolling mill plant in Davenport, IA. The loan proceeds could only be used for this purpose and, therefore, were included on the Company’s Combined Balance Sheet for all periods prior to the Separation Date. In accordance with the Separation and Distribution Agreement, as well as a Second Supplemental Tax and Project Certificate and Agreement, dated March 31, 2020,
to the Tax Exemption Certificate and Agreement, dated August 14, 2012, (collectively, the “Tax Agreement”), ParentCo remained the borrower associated with the Bonds and Arconic Corporation is the legal owner of the Davenport facility, including the Project. The Company has no financial obligations related to the future debt service of the Bonds but is required to continue to operate, and maintain the location of, the Project in accordance with the Tax Agreement. Accordingly, the $250 carrying value of the Bonds, as well as related accrued interest, was removed from Arconic Corporation’s Consolidated Balance Sheet in connection with the Separation.
2028 Notes—Interest on the 2028 Notes is paid semi-annually in February and August and commenced August 15, 2020.
Arconic Corporation has the option to redeem the 2028 Notes on at least 10 days, but not more than 60 days, prior notice to the holders of the 2028 Notes under multiple scenarios, including, in whole or in part, at any time or from time to time after February 14, 2023 at a redemption price specified in the indenture (up to 103.063% of the principal amount plus any accrued and unpaid interest in each case). At any time prior to February 15, 2023, the Company may redeem all or a part of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus a “make-whole” redemption price determined as the greater of (1) 1.0% of the principal amount of such notes and (2) the excess, if any, of (a) the present value at the date of redemption of (i) 103.063% of the principal amount of such notes plus (ii) all required interest payments due on such notes (excluding accrued but unpaid interest to the date of redemption) through February 15, 2023, computed using a discount rate equal to, generally, the yield to maturity of United States Treasury securities with a constant maturity as of the date of redemption plus 50 basis points, over (b) the principal amount of such notes, as of, and accrued and unpaid interest, if any, to, but excluding, the date of redemption. Also, at any time prior to February 15, 2023, Arconic Corporation may, on one or more occasions, redeem up to 40% of the aggregate principal amount of the notes at a redemption price equal to 106.125% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, with the net cash proceeds of certain equity offerings, if at least 60% of the original aggregate principal amount of the notes remains outstanding immediately after such redemption and the redemption occurs within 120 days of the date of such equity offering. Additionally, the 2028 Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the indenture) at a repurchase price in cash equal to 101% of the aggregate principal amount of the 2028 Notes repurchased, plus any accrued and unpaid interest on the 2028 Notes repurchased.
The 2028 Notes are senior secured obligations of Arconic Corporation and do not entitle the holders to any registration rights pursuant to a registration rights agreement. The Company does not intend to file a registration statement with respect to resales of or an exchange offer for the 2028 Notes. The 2028 Notes are guaranteed on a senior secured basis by Arconic Corporation and its subsidiaries that are guarantors (the “subsidiary guarantors” and, together with Arconic Corporation, the “guarantors”) under the ABL Credit Agreement (see below). Each of the subsidiary guarantors will be released from their 2028 Notes guarantees upon the occurrence of certain events, including the release of such guarantor from its obligations as a guarantor under the ABL Credit Agreement.
The 2028 Notes indenture includes several customary affirmative covenants. Additionally, the 2028 Notes indenture contains several negative covenants, that, subject to certain exceptions, limit the Company’s ability to, among other things, (i) make investments, loans, advances, guarantees, and acquisitions, (ii) pay dividends on or make other distributions in respect of capital stock and make other restricted payments and investments (as defined in the 2028 Notes), (iii) sell or transfer certain assets, and (iv) create liens on assets to secure debt.
The 2028 Notes rank equally in right of payment with all of Arconic Corporation’s existing and future senior indebtedness, including the facility under the ABL Credit Agreement (see below); rank senior in right of payment to any future subordinated obligations of Arconic Corporation; and are effectively subordinated to Arconic Corporation’s existing and future secured indebtedness that is secured on a first priority basis, including the 2025 Notes and the facility under the ABL Credit Agreement, to the extent of the value of property and assets securing such indebtedness.
2025 Notes—Interest on the 2025 Notes is paid semi-annually in May and November and commenced November 15, 2020.
Arconic Corporation has the option to redeem the 2025 Notes on at least 10 days, but not more than 60 days, prior notice to the holders of the 2025 Notes under multiple scenarios, including, in whole or in part, at any time or from time to time after May 14, 2022 at a redemption price specified in the indenture (up to 103.0% of the principal amount plus any accrued and unpaid interest in each case). At any time prior to May 15, 2022, the Company may redeem all or a part of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus a “make-whole” redemption price determined as the greater of (1) 1.0% of the principal amount of such notes and (2) the excess, if any, of (a) the present value at the date of redemption of (i) 103.0% of the principal amount of such notes plus (ii) all required interest payments due on such notes (excluding accrued but unpaid interest to the date of redemption) through May 15, 2022, computed using a discount rate equal to, generally, the yield to maturity of United States Treasury securities with a constant maturity as of the date of redemption plus 50 basis points, over (b) the principal amount of such notes, as of, and accrued and unpaid interest, if any, to,
but excluding, the date of redemption. Also, at any time prior to May 15, 2022, Arconic 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 106.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, with the net cash proceeds of certain equity offerings, if at least 60% of the original aggregate principal amount of the notes remains outstanding immediately after such redemption and the redemption occurs within 120 days of the date of such equity offering. Additionally, the 2025 Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the indenture) at a repurchase price in cash equal to 101% of the aggregate principal amount of the 2025 Notes repurchased, plus any accrued and unpaid interest on the 2025 Notes repurchased.
The 2025 Notes are senior secured obligations of Arconic Corporation and do not entitle the holders to any registration rights pursuant to a registration rights agreement. The Company does not intend to file a registration statement with respect to resales of or an exchange offer for the 2025 Notes. The 2025 Notes are guaranteed on a senior secured basis by Arconic Corporation and its subsidiaries that are guarantors (the “subsidiary guarantors” and, together with Arconic Corporation, the “guarantors”) under the ABL Credit Agreement (see below). Each of the subsidiary guarantors will be released from their 2025 Notes guarantees upon the occurrence of certain events, including the release of such guarantor from its obligations as a guarantor under the ABL Credit Agreement.
The 2025 Notes indenture includes several customary affirmative covenants. Additionally, the 2025 Notes indenture contains several negative covenants, that, subject to certain exceptions, limit the Company’s ability to, among other things, (i) pay dividends on or make other distributions in respect of capital stock and make other restricted payments and investments (as defined in the 2025 Notes), (ii) sell or transfer certain assets, (iii) incur indebtedness, and (iv) create liens on assets to secure debt.
The 2025 Notes are secured on a first priority basis by certain defined collateral (generally consisting of the Company’s and the Guarantors’ equipment, material owned U.S. real property, intellectual property, certain stock, and other tangible and intangible personal property, in each case, subject to certain exceptions) and on a second priority basis by certain other assets (generally consisting of substantially all of the accounts receivable, inventory, deposit accounts, securities accounts, commodities accounts, and cash assets of the Company and the Guarantors, and the proceeds thereof).
ABL Credit Agreement—Availability under the ABL Credit Facility is subject to a quarterly borrowing base calculation, generally based upon a set percentage of eligible accounts receivable and inventory, less customary reserves. During the 2020 fourth quarter, the calculated available balance was $678. On January 25, 2021, the calculated available balance for the 2021 first quarter was determined to be $732.
The ABL Credit Facility is scheduled to mature on May 13, 2025, unless extended or earlier terminated in accordance with the ABL Credit Agreement. Under the provision of the ABL Credit Agreement, Arconic Corporation will pay a quarterly commitment fee ranging from 0.250% to 0.375% (based on Arconic Corporation’s leverage ratio) per annum on the unused portion of the ABL Credit Facility, which will be determined based on the Company’s average daily utilization. The ABL Credit Facility was undrawn as of December 31, 2020 and no amounts were borrowed since inception.
The ABL Credit Facility is subject to an interest rate for U.S. dollar borrowings equal to an applicable margin plus, at the Company’s option, of either (a) base rate (“ABR”) determined by reference to the highest of (1) Deutsche Bank AG New York Branch’s “prime rate,” (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5%, and (3) the one month adjusted LIBO Rate, plus 1% per annum or (b) an adjusted LIBO Rate (which will not be less than 0.75% per annum) (“LIBOR”). The applicable margin for the ABL Credit Facility through June 30, 2021 is (a) 1.25% for ABR loans and (b) 2.25% for LIBOR loans. Thereafter, the applicable margin for the ABL Credit Facility will be (a) 0.75% to 1.25% per annum for ABR loans and (b) 1.75% per annum to 2.25% per annum for LIBOR loans based on the average daily excess availability (as defined under the ABL Credit Agreement). Accordingly, the interest rates for the ABL Credit Facility will fluctuate based on changes in the ABR, LIBOR, and/or future changes in the average daily excess availability.
All obligations under the ABL Credit Facility are unconditionally guaranteed, jointly and severally, by substantially all of the direct and indirect wholly-owned material subsidiaries of the Company that are organized under the laws of the United States, any state thereof or the District of Columbia, subject to certain exceptions (collectively, the “Guarantors”). The Company and the Guarantors entered into a guarantee under the ABL Credit Agreement concurrently with the effectiveness of the ABL Credit Agreement.
Subject to certain limitations, the ABL Credit Facility is secured on a first priority basis by certain defined collateral (generally consisting of substantially all of the accounts receivable, inventory, deposit accounts, securities accounts, commodities accounts, and cash assets of the Company and the Guarantors, and the proceeds thereof) and on a second-priority basis by certain defined collateral under the 2025 Notes (generally consisting of the Company and the Guarantors’ equipment, material owned U.S. real property, intellectual property, certain stock, and other tangible and intangible personal property, in
each case, subject to exceptions as defined in the 2025 Notes). The Company and the Guarantors entered into collateral agreements concurrently with the effectiveness of the ABL Credit Agreement.
The ABL Credit Facility contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit the Company’s and its subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends, to make other distributions or redemptions/repurchases, in respect of the Company’s and its subsidiaries’ equity interests, to engage in transactions with affiliates and to amend certain material documents.
In addition, the ABL Credit Facility contains a financial maintenance covenant applicable to any fiscal quarter in which the excess availability is less than the greater of (a) 10% of the lesser of (x) the aggregate amount of the commitments under the ABL Credit Facility and (y) the borrowing base and (b) $50. In such circumstances, until such time as excess availability shall have exceeded such threshold for at least 30 consecutive days, the Company would be required to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00. The ABL Credit Facility also requires the Company and its subsidiaries to maintain substantially all of the Company’s cash in accounts that are subject to the control of the agent, which control becomes applicable when (a) an event of default under the facility occurs and is continuing until the first day thereafter on which no event of default shall exist or (b) excess availability is less than the greater of (i) 12.5% of the lesser of (x) the aggregate amount of the commitments under the ABL Credit Facility and (y) the borrowing base or (ii) $62.5 for five consecutive business days until the first day thereafter on which excess availability shall have exceeded such threshold for at least 30 consecutive days.
The ABL Credit Facility contains customary events of default, including with respect to a failure to make payments thereunder, cross-default and cross-acceleration, certain bankruptcy and insolvency events, and customary change of control events.
Fair Value—Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3—Inputs that are both significant to the fair value measurement and unobservable.
As of December 31, 2020, the combined carrying value and fair value of the 2028 Notes and 2025 Notes were $1,278 and $1,399, respectively. The fair value amounts for the 2028 Notes and 2025 Notes were based on quoted market prices for public debt and were classified in Level 2 of the fair value hierarchy.
R. Cash Flow Information
Cash paid for interest and income taxes was as follows:
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2020
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2019
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2018
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Interest, net of amount capitalized*
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$
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48
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$
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107
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$
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120
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Income taxes, net of amount refunded
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27
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29
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24
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* In 2019 and 2018, amount includes cash paid by ParentCo related to interest expense allocated to Arconic Corporation (see Cost Allocations in Note A).
For all periods presented, both Cash and cash equivalents and restricted cash at beginning of year and Cash and cash equivalents and restricted cash at end of year includes Restricted cash of less than $0.04.
S. Acquisitions and Divestitures
Divestitures
Itapissuma. On February 1, 2020, Arconic Corporation completed the sale of its aluminum rolling mill (aseptic foil and sheet products) in Itapissuma, Brazil to Companhia Brasileira de Alumínio for a net $46 in cash (see below), resulting in a loss of $59 (pretax). In 2019, Arconic Corporation recognized a charge of $53 (pretax) for the non-cash impairment of the carrying value of the rolling mill’s net assets, primarily properties, plants, and equipment, as a result of entering into an agreement in August 2019 to sell this rolling mill. Additionally, in February 2020, Arconic Corporation recognized a charge of $6 (pretax) for further necessary adjustments upon completion of the divestiture. Each of these amounts were recorded in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations in the respective reporting periods. In December 2020, Arconic Corporation paid $4 in cash to Companhia Brasileira de Alumínio to settle working capital and other adjustments, which was previously contemplated in the aforementioned loss. This transaction remains subject to certain post-closing adjustments as defined in the agreement. Prior to the divestiture, this rolling mill’s operating results and assets and liabilities were reported in the Rolled Products segment. The rolling mill generated third-party sales of $143 and $179 in 2019 and 2018, respectively, and, at the time of divestiture, had approximately 500 employees.
Changwon. On March 1, 2020, Arconic Corporation completed the sale of its hard alloy extrusions plant in South Korea to SeAH Besteel Corporation for a net $55 in cash, resulting in a gain of $31 (pretax), which was recorded in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations. The gain is net of a $6 write-off of related goodwill. In May 2020, Arconic Corporation received an additional $1 in cash as a result of a post-closing adjustment, which was previously contemplated in the aforementioned gain. This transaction is no longer subject to post-closing adjustments. Prior to the divestiture, this plant’s operating results and assets and liabilities were reported in the Extrusions segment. The extrusions plant generated third-party sales of $51 and $53 in 2019 and 2018, respectively, and, at the time of divestiture, had approximately 160 employees.
Latin America Extrusions. In April 2018, Arconic Corporation completed the sale of its Latin America extrusions business to a subsidiary of Hydro Extruded Solutions AS for $2, following the settlement of post-closing and other adjustments in December 2018. As a result of entering into the agreement to sell the Latin America extrusions business in December 2017, a charge of $41 was recognized in Restructuring and other charges on the Company's Statement of Consolidated Operations related to the non-cash impairment of the net book value of the business. Additionally, in 2018, a charge of $2 related to a post-closing adjustment was recognized in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations. This transaction is no longer subject to any post-closing adjustments. The Latin America extrusions business generated third-party sales of $25 and $115 in 2018 (through the date of divestiture) and 2017, respectively, and had 612 employees at the time of the divestiture.
Texarkana. In October 2018, Arconic Corporation sold its Texarkana (Texas) rolling mill and cast house, which had a combined net book value of $63, to Ta Chen International, Inc. for $302 in cash, subject to post-closing adjustments, plus additional contingent consideration of up to $50. The contingent consideration related to the achievement of various milestones associated with operationalizing the rolling mill equipment within 36 months of the transaction closing date. The Texarkana rolling mill facility had previously been idle since late 2009. In early 2016, Arconic Corporation restarted the Texarkana cast house to meet demand for aluminum slab. While owned by Arconic Corporation, the operating results and assets and liabilities of the business were included in the Rolled Products segment. As part of the sale agreement, Arconic Corporation continued to produce aluminum slab at the facility for a period of 18 months through a lease back of the cast house building and equipment, after which time Ta Chen performed toll processing of metal for Arconic Corporation for a period of six months. Arconic Corporation supplied Ta Chen with cold-rolled aluminum coil during this 24-month period.
The sale of the rolling mill and cast house was accounted for separately. In 2018, a gain on the sale of the rolling mill of $154, including fair value of contingent consideration of $5, was recorded in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations. In 2020 and 2019, the Company received additional contingent consideration of $25 and $20, respectively, which was recorded as a gain in Restructuring and other charges (see Note E) on the accompanying Statement of Consolidated Operations in the respective reporting periods. As of December 31, 2020, there was no remaining contingent consideration associated with this transaction.
Arconic Corporation had continuing involvement related to the lease back of the cast house. As a result, the Company continued to recognize as assets, as well as depreciate, the cast house building and equipment that it sold to Ta Chen, and recorded the portion of the cash proceeds associated with the sale of the cast house assets as a noncurrent liability, including a deferred gain of $95. As of December 31, 2018, Arconic Corporation's Consolidated Balance Sheet included $24 in Properties, plants, and equipment, net, $22 in Deferred income taxes (noncurrent asset), and $119 in Other noncurrent liabilities and deferred credits. On January 1, 2019, Arconic Corporation adopted the lease accounting guidance (see Recently Adopted
Accounting Guidance in Note B), under which Arconic Corporation’s continuing involvement no longer required deferral of the recognition of the sale of the cast house. Accordingly, the carrying value of these assets and liabilities were reclassified to equity reflecting a net $73 cumulative effect of an accounting change on the date of adoption.
T. Contingencies and Commitments
Unless specifically described to the contrary, all matters within Note T are the full responsibility of Arconic Corporation pursuant to the Separation and Distribution Agreement (see Note A). Additionally, the Separation and Distribution Agreement provides for cross-indemnities between the Company and Howmet Aerospace for claims subject to indemnification.
Contingencies
Environmental Matters. Arconic Corporation participates in environmental assessments and cleanups at several locations. These include owned or operating facilities and adjoining properties, previously owned or operating facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as, among others, the nature and extent of contamination, changes in remedial requirements, and technological changes.
Arconic Corporation’s remediation reserve balance was $156 and $208 (of which $90 and $83, respectively, was classified as a current liability) at December 31, 2020 and 2019, respectively, and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. Additionally, Accounts payable, trade includes unpaid invoices of $22 related to environmental remediation projects as of December 31, 2019.
In 2020, the remediation reserve was reduced by $2 due to the reversal of a $5 liability (a credit was recorded in Restructuring and other charges – see Note E) previously established by ParentCo, as the underlying obligation no longer exists based on an assessment completed by Arconic Corporation management; a charge of $1 (recorded in Restructuring and other charges – see Note E) to establish a liability related to the divestiture of a rolling mill in Brazil (see Note S); and a charge of $2 (recorded in Cost of goods sold) for incremental estimated expenditures associated with active remediation systems and/or monitoring and inspection programs at several sites. In 2019, the remediation reserve was increased by $25 (recorded in Cost of goods sold) related to the Grasse River project (see Massena West, NY below).
Payments related to remediation expenses applied against the reserve were $82, $56, and $27 in 2020, 2019, and 2018, respectively, which include expenditures currently mandated, as well as those not required by any regulatory authority or third party. The change in the reserve in 2020 also reflects both an increase of $13 for obligations transferred from ParentCo on April 1, 2020 in connection with the Separation (see below) and a decrease of $3 for other items.
The Separation and Distribution Agreement includes provisions for the assignment or allocation of environmental liabilities between Arconic Corporation and Howmet Aerospace, including certain remediation obligations associated with environmental matters. In general, the respective parties are responsible for the environmental matters associated with their operations, and with the properties and other assets assigned to each. Additionally, the Separation and Distribution Agreement lists environmental matters with a shared responsibility between the two companies with an allocation of responsibility and the lead party responsible for management of each matter. For matters assigned to Arconic Corporation and Howmet Aerospace under the Separation and Distribution Agreement, the companies have agreed to indemnify each other in whole or in part for environmental liabilities arising from operations prior to the Separation Date.
The following description provides details regarding the current status of one reserve, which represents the majority of the Company’s total remediation reserve balance, related to a current Arconic Corporation site.
Massena West, NY — Arconic Corporation has an ongoing remediation project related to the Grasse River, which is adjacent to the Company’s Massena plant site. Many years ago, it was determined that sediments and fish in the river contain varying levels of polychlorinated biphenyls (PCBs). The project, which was selected by the U.S. Environmental Protection Agency (EPA) in a Record of Decision issued in April 2013, is aimed at capping PCB contaminated sediments with concentration in excess of one part per million in the main channel of the river and dredging PCB contaminated sediments in the near-shore areas where total PCBs exceed one part per million. Arconic Corporation completed the final design phase of the project, which was approved by the EPA in March 2019. Following the EPA’s approval, the actual remediation fieldwork commenced.
In June 2019, Arconic Corporation increased the reserve balance by $25 due to changes required in the EPA-approved remedial design and post-construction monitoring. These changes were necessary due to several items, the majority of which related to navigation issues identified by a local seaway development company. Accordingly, the EPA requested an addendum to the final remedial design be submitted to address these issues. The proposed remedy is to dredge certain of the sediments originally identified for capping in the affected areas of the Grasse River, resulting in incremental project costs. The EPA
approved the proposal in April 2020. As the project progresses, further changes to the reserve may be required due to factors such as, among others, additional changes in remedial requirements, increased site restoration costs, and incremental ongoing operation and maintenance costs.
At December 31, 2020 and 2019, the reserve balance associated with this matter was $115 and $171, respectively. Additionally, Accounts payable, trade includes unpaid invoices of $21 related to this project as of December 31, 2019. The majority of the remaining expenditures related to the project are expected to occur between 2021 and 2022.
Litigation.
All references to ParentCo in the matters described under this section Litigation refer to Arconic Inc. only and do not include its subsidiaries, except as otherwise stated.
Reynobond PE — On June 13, 2017, the Grenfell Tower in London, U.K. caught fire resulting in fatalities, injuries, and damage. A French subsidiary of Arconic Corporation (of ParentCo at that time), Arconic Architectural Products SAS (AAP SAS), supplied a product, Reynobond PE, to its customer, a cladding system fabricator, which used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supplied its portion of the cladding system to the facade installer, who then completed and installed the system under the direction of the general contractor. Neither ParentCo nor AAP SAS was involved in the design or installation of the system used at the Grenfell Tower, nor did it have a role in any other aspect of the building’s refurbishment or original design. Regulatory investigations into the overall Grenfell Tower matter are being conducted, including a criminal investigation by the London Metropolitan Police Service (the “Police”), a Public Inquiry by the British government, and a consumer protection inquiry by a French public authority. The Public Inquiry was announced by the U.K. Prime Minister on June 15, 2017 and subsequently was authorized to examine the circumstances leading up to and surrounding the Grenfell Tower fire in order to make findings of fact and recommendations to the U.K. Government on matters such as the design, construction, and modification of the building, the role of relevant public authorities and contractors, the implications of the fire for the adequacy and enforcement of relevant regulations, arrangements in place for handling emergencies, and the handling of concerns from residents, among other things. Hearings for Phase 1 of the Public Inquiry began on May 21, 2018 and concluded on December 12, 2018. Phase 2 hearings of the Public Inquiry began in early 2020, following which a final report will be written and subsequently published. As Phase 2 of the public inquiry resumed in July after a hiatus due to the COVID-19 pandemic, the testimony has supported AAP SAS’s position that the choice of materials and the responsibility of ensuring compliance of the cladding system with relevant U.K. building code and regulations was with those individuals or entities who designed and installed the cladding system such as the architects, fabricators, contractors and building owners. The ongoing hearings in the U.K. have revealed serious doubts about whether these third parties had the necessary qualifications or expertise to carry out the refurbishment work at Grenfell Tower, adequately oversaw the process, conducted the required fire safety testing or analysis, or otherwise complied with their obligations under U.K. regulations. AAP SAS is participating as a Core Participant in the Public Inquiry and is also cooperating with the ongoing parallel investigation by the Police. Arconic Corporation does not sell and ParentCo previously stopped selling the PE product for architectural use on buildings. Given the preliminary nature of these investigations and the uncertainty of potential future litigation, Arconic Corporation cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
United Kingdom Litigation. Multiple claimant groups comprised of survivors and estates of decedents of the Grenfell Tower fire have filed claims in the U.K. arising from that fire, including as follows:
•On June 12, 2020, four claimants represented by Birnberg Peirce Ltd filed suit against AAP SAS.
•On June 12, 2020, two claimants represented by Howe & Co Solicitors filed suit against AAP SAS.
•On June 26, 2020, three claimants represented by Russell-Cooke LLP filed suit against AAP SAS.
•On December 23, 2020, several additional claims were filed by claimant groups comprised of survivors and estates of decedents. These claims were all filed against the same group of 23 defendants: AAP SAS, Arconic Corporation, Howmet Aerospace Inc., the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, the London Fire Commissioner, the UK Home Office, The Ministry of Housing, Communities and Local Government, Rydon Maintenance Ltd, Celotex Ltd, Saint-Gobain Construction Products UK Limited, Kingspan Insulation Limited, Kingspan Group PLC, Studio E Architects Ltd (In liquidation), Harley Facades Ltd, Harley Curtain Wall Limited (In liquidation), CEP Architectural Facades Ltd, Exova (U.K.) Ltd, CS Stokes & Associates Ltd, Artelia Projects UK Limited, Whirlpool UK Appliances Limited, Whirlpool Company Polska Sp.z.o.o. and Whirlpool Corporation. These claims include as follows (represent preliminary best estimates of claimants in each suit):
◦Seven claimants represented by Deighton Pierce Glynn;
◦Five claimants represented by SMQ Legal Services;
◦Four claimants represented by Scott Moncrieff;
◦Six claimants represented by Saunders Law;
◦Twenty-four claimants represented by Russell Cooke LLP;
◦Forty claimants represented by Imran Khan & Partners;
◦Sixty-seven claimants represented by Howe & Co.;
◦One hundred fourteen claimants represented by Hodge Jones and Allen Solicitor;
◦Nineteen claimants represented by Hickman & Rose;
◦Five claimants represented by Duncan Lewis Solicitors;
◦One hundred eighteen claimants represented by Birnberg Peirce;
◦Three hundred forty-one claimants represented by Bindmans LLP; and
◦Eighty-two claimants represented by Bhatt Murphy Ltd.
Multiple claimant groups comprised of emergency responders who attended the Grenfell Tower fire have also filed claims against AAP SAS arising from that fire, including as follows:
•On June 11, 2020, 80 firefighters represented by Thompsons Solicitors filed suit against AAP SAS, as well as the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, Celotex Ltd, Exova (U.K.) Ltd, Rydon Maintenance Ltd, Studio E Architects Ltd, Harley Facades Ltd, CEP Architectural Facades Ltd, CS Stokes & Associates Ltd, and the London Fire Commissioner. Since then, another 5 firefighters have sought to be added to the suit.
•On June 12, 2020, 27 police officers represented by Penningtons Manches Cooper LLP filed suit against AAP SAS, as well as the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, Celotex Ltd, Exova (U.K.) Ltd, Rydon Maintenance Ltd, Studio E Architects Ltd, Harley Facades Ltd, CEP Architectural Facades Ltd, CS Stokes & Associates Ltd, London Fire Commissioner, and the Commissioner of the Police of the Metropolis. Since then, some claimants have withdrawn and others have sought to be added to the suit.
•On June 12, 2020, two firefighters represented by Pattinson and Brewer filed suit against AAP SAS, as well as the Royal Borough of Kensington and Chelsea, the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd, Celotex Ltd, Exova (U.K.) Ltd, Rydon Maintenance Ltd, Studio E Architects Ltd, Harley Facades Ltd, CEP Architectural Facades Ltd, CS Stokes & Associates Ltd, and the London Fire Commissioner. A third firefighter, also represented by Pattinson and Brewer, brought a claim against the same defendants on June 15, 2020. One of the original firefighter claimants has now withdrawn from the suit.
All of these claims have been filed in the High Court in London. On October 2, 2020, the High Court ordered that (a) the suits of the survivors and estates of decedents that were issued in June 2020 be stayed until a hearing scheduled by the High Court for June 9-10, 2021; and (b) that the suits of emergency responders be stayed until a hearing scheduled by the High Court for July 7-8, 2021.
On December 17, 2020, a claim was issued by the Royal Borough of Kensington and Chelsea and the Royal Borough of Kensington and Chelsea Tenant Management Organisation Ltd against: (1) Whirlpool Company Polska Spolka z Organiczona; and (2) AAP SAS. The Claimants seek damages in respect of their own losses and/or a contribution to the extent that they are found to be liable by the London High Court for any losses arising out of the Grenfell Tower fire on June 14, 2017. This suit is to be stayed until July 8, 2021.
Given the preliminary nature of these matters and the uncertainty of litigation, Arconic Corporation cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome in any of the above-referenced disputes.
Behrens et al. v. Arconic Inc. et al. On June 6, 2019, 247 plaintiffs comprised of survivors and estates of decedents of the Grenfell Tower fire filed a complaint against “Arconic Inc., Alcoa Inc., and Arconic Architectural Products, LLC” (collectively, for purposes of the description of such proceeding, the “ParentCo Defendants”), as well as Saint-Gobain Corporation, d/b/a Celotex and Whirlpool Corporation, in the Court of Common Pleas of Philadelphia County. The complaint alleges claims under Pennsylvania state law for products liability and wrongful death related to the fire. In particular, the plaintiffs allege that the ParentCo Defendants knowingly supplied a dangerous product (Reynobond PE) for installation on the Grenfell Tower despite knowing that Reynobond PE was unfit for use above a certain height. The ParentCo Defendants removed the case to the United States District Court for the Eastern District of Pennsylvania on June 19, 2019. On August 29, 2019, the ParentCo Defendants moved to dismiss the complaint on the bases, among other things, that: (i) the case should be heard in the United Kingdom, not the United States; (ii) there is no jurisdiction over necessary parties; and (iii) Pennsylvania product liability law does not apply to manufacture and sale of product overseas. On December 23, 2019, the Court issued an order denying the motion to dismiss the complaint on bases (ii) and (iii) suggesting a procedure for limited discovery followed by further briefing on those subjects. On September 16, 2020, the Court issued an order granting Defendants’ motion to dismiss on forum non conveniens grounds, subject to certain conditions, determining that the United Kingdom, and not the United States, is the appropriate place for plaintiffs to bring their case. Plaintiffs subsequently filed a motion for reconsideration, which the Court denied on November 23, 2020. Plaintiffs are appealing this judgment; ParentCo Defendants are cross-appealing one of the conditions. Given the preliminary nature of this matter and the uncertainty of litigation, Arconic Corporation cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
Howard v. Arconic Inc. et al. A purported class action complaint related to the Grenfell Tower fire was filed on August 11, 2017 in the United States District Court for the Western District of Pennsylvania against ParentCo and Klaus Kleinfeld. A related purported class action complaint was filed in the United States District Court for the Western District of Pennsylvania on September 15, 2017, under the caption Sullivan v. Arconic Inc. et al., against ParentCo, three former ParentCo executives, several current and former ParentCo directors, and banks that acted as underwriters for ParentCo’s September 18, 2014 preferred stock offering (the “Preferred Offering”). The plaintiff in Sullivan had previously filed a purported class action against the same defendants on July 18, 2017 in the Southern District of New York and, on August 25, 2017, voluntarily dismissed that action without prejudice. On February 7, 2018, on motion from certain putative class members, the court consolidated Howard and Sullivan, closed Sullivan, and appointed lead plaintiffs in the consolidated case. On April 9, 2018, the lead plaintiffs in the consolidated purported class action filed a consolidated amended complaint. The consolidated amended complaint alleged that the registration statement for the Preferred Offering contained false and misleading statements and omitted to state material information, including by allegedly failing to disclose material uncertainties and trends resulting from sales of Reynobond PE for unsafe uses and by allegedly expressing a belief that appropriate risk management and compliance programs had been adopted while concealing the risks posed by Reynobond PE sales. The consolidated amended complaint also alleged that between November 4, 2013 and June 23, 2017 ParentCo and Kleinfeld made false and misleading statements and failed to disclose material information about ParentCo’s commitment to safety, business and financial prospects, and the risks of the Reynobond PE product, including in ParentCo’s Form 10-Ks for the fiscal years ended December 31, 2013, 2014, 2015, and 2016, its Form 10-Qs and quarterly financial press releases from the fourth quarter of 2013 through the first quarter of 2017, its 2013, 2014, 2015, and 2016 Annual Reports, its 2016 Annual Highlights Report, and on its official website. The consolidated amended complaint sought, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On June 8, 2018, all defendants moved to dismiss the consolidated amended complaint for failure to state a claim. On June 21, 2019, the Court granted the defendants’ motion to dismiss in full, dismissing the consolidated amended complaint in its entirety without prejudice. On July 23, 2019, the lead plaintiffs filed a second amended complaint. The second amended complaint alleges generally the same claims as the consolidated amended complaint with certain additional allegations, as well as claims that the risk factors set forth in the registration statement for the Preferred Offering were inadequate and that certain additional statements in the sources identified above were misleading. The second amended complaint seeks, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On September 11, 2019, all defendants moved to dismiss the second amended complaint. Plaintiffs' opposition to that motion was filed on November 1, 2019 and all defendants filed a reply brief on November 26, 2019. On June 22, 2020, counsel for Arconic and the individual defendants filed a letter apprising the Court of a recent decision by the Third Circuit and discussing its relevance to the pending motion to dismiss. Pursuant to an Order by the Court directing the plaintiffs to respond to this letter, the plaintiffs filed a letter response on July 9, 2020. The motion to dismiss remains pending. Given the preliminary nature of this matter and the uncertainty of litigation, Arconic Corporation cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
Raul v. Albaugh, et al. On June 22, 2018, a derivative complaint was filed nominally on behalf of ParentCo by a purported ParentCo stockholder against the then members of ParentCo’s Board of Directors and Klaus Kleinfeld and Ken Giacobbe, naming ParentCo as a nominal defendant, in the United States District Court for the District of Delaware. The complaint raises similar allegations as the consolidated amended complaint and second amended complaint in Howard, as well as allegations that the defendants improperly authorized the sale of Reynobond PE for unsafe uses, and asserts claims under
Section 14(a) of the Securities Exchange Act of 1934, as amended, and Delaware state law. On July 13, 2018, the parties filed a stipulation agreeing to stay this case until the final resolution of the Howard case, the Grenfell Tower Public Inquiry in London, and the investigation by the Police and on July 23, 2018, the Court approved the stay. Given the preliminary nature of this matter and the uncertainty of litigation, Arconic Corporation cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
General. While Arconic Corporation believes that all the above referenced Reynobond PE cases are without merit and intends to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters.
Airbus Matters—In 2017, Airbus and various of its affiliates (“Airbus”) filed three separate confidential requests for arbitration against ParentCo and various of its then affiliates, one of which is Arconic Manufacturing (GB) Limited, an Arconic Corporation subsidiary, with the International Chamber of Commerce. Airbus specifically alleges that a defect exists in certain of our products sold to Airbus under various separate contracts. Airbus’s claims include claims of breach of certain alleged express and implied warranties and negligence. On June 12, 2020, Airbus filed its Second Memorial in the arbitration in which it claims damages attributed specifically to our products. Airbus is seeking damages in excess of $200 million and an order of indemnification with respect to conditional future losses. A private and confidential arbitration hearing occurred in late October 2020 on two of the three requests for arbitration with the second hearing on the final request for arbitration originally scheduled for February 2021 but now stayed. A decision has not been issued yet on the October arbitration hearing. While the amounts claimed in this matter may be substantial, the ultimate liability is not determinable because of the considerable uncertainties that exist in this matter. Accordingly, it is possible that our liquidity or results of operations in a reporting period could be materially adversely affected by the Airbus arbitration. However, based on facts currently available, management believes that the disposition of the Airbus arbitration will not have a material adverse effect on our results of operations, financial position or cash flows.
Federal Antimonopoly Service Of The Russian Federation Litigation—The Federal Antimonopoly Service of the Russian Federation (“FAS”) filed a lawsuit on March 17, 2020 with the Arbitrazh (State Commercial) Court of Samara Region against two of the Company’s subsidiaries, Arconic Rus Investment Holdings LLC (“LLC ARIH”) and AlTi Forge Holding Sarl (the “Arconic Russian Holding Companies”), naming Elliott Associates L.P., Elliott International L.P., and Elliot International Capital Advisors Inc. (“Elliott”) as third parties. Also named as interested parties are: Parent Co. and certain of its foreign subsidiaries; and Arconic Netherland B.V., the Company’s subsidiary that directly and indirectly owns LLC ARIH, Arconic SMZ JSC and JSC AlTi Forge (the “Arconic Russian Subsidiaries”). FAS alleges that Elliott indirectly acquired control over the Arconic Russian Subsidiaries when, in May 2019, directors who had previously been nominated by Elliott and appointed or elected to Parent Co.’s board of directors pursuant to certain settlement agreements among Parent Co. and Elliott constituted a majority of that board as a result of a reduction in the size of the board. FAS claims alleged non-compliance with Russian Federal Law No. 57-FZ, which governs foreign ownership of certain Russian companies and requires certain governmental approvals for a foreign investor to acquire control over strategically important Russian companies. As a consequence of the alleged violation, FAS is seeking removal and exclusion of the Arconic Russian Holding Companies from the affairs of the Arconic Russian Subsidiaries, resulting in the deprivation of the right to vote at the general stockholders’ meetings of the Arconic Russian Subsidiaries. On April 6, 2020, the Samara Court granted injunctions against the Arconic Russian Holding Companies prohibiting the taking of certain corporate governance actions, including with respect to: (i) the disposal of shares in the Arconic Russian Subsidiaries; and (ii) the making of certain decisions with respect to the Arconic Russian Subsidiaries, including decisions regarding the payment of dividends, placement of bonds, amendment of bylaws and internal documents, the appointment, change and compensation of the Arconic Russian Subsidiaries’ CEO, and the election of the Arconic Russian Subsidiaries’ board of directors. On April 29, 2020, the Arconic Russian Holding Companies simultaneously filed an appeal and motion to revoke the previously issued injunctions. Both the appeal and motion to revoke were denied. On September 7, 2020, the Court postponed a hearing on the merits of the claim until March 2021. Given the preliminary nature of this matter and the uncertainty of litigation, we cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
General. In addition to the matters described above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Arconic Corporation, including those pertaining to environmental, product liability, safety and health, employment, tax, and antitrust matters. While the amounts claimed in these other matters may be substantial, the ultimate liability is not readily determinable because of the considerable uncertainties that exist. Accordingly, it is possible that the Company's liquidity or results of operations in a reporting period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the results of operations, financial position or cash flows of Arconic Corporation.
Commitments
Purchase Obligations. Arconic Corporation has entered into purchase commitments for raw materials, energy, and other goods and services, which total $982 in 2021, $542 in 2022, $75 in 2023, $14 in 2024, $12 in 2025, and $32 thereafter as of December 31, 2020.
Operating Leases. See Note P for future minimum contractual obligations under long-term operating leases.
Guarantees. Arconic Corporation has outstanding bank guarantees related to, among others, tax matters and customs duties. The total amount committed under these guarantees, which expire at various dates between 2021 and 2026 was $2 at December 31, 2020. Additionally, Howmet Aerospace has outstanding bank guarantees related to the Company in the amount of $1 at December 31, 2020. In the event Howmet Aerospace would be required to perform under any of these instruments, Howmet Aerospace would be indemnified by Arconic Corporation in accordance with the Separation and Distribution Agreement. Furthermore, Alcoa Corporation has outstanding bank guarantees related to the Company in the amount of $14 at December 31, 2020. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified by Arconic Corporation in accordance with the 2016 Separation and Distribution Agreement.
Letters of Credit. Arconic Corporation has outstanding letters of credit primarily related to insurance, environmental, and lease obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2021, was $7 at December 31, 2020. Additionally, Howmet Aerospace has outstanding letters of credit related to the Company in the amount of $43 at December 31, 2020. In the event Howmet Aerospace would be required to perform under any of these instruments, Howmet Aerospace would be indemnified by Arconic Corporation in accordance with the Separation and Distribution Agreement.
Surety Bonds. Arconic Corporation has outstanding surety bonds primarily related to customs duties and environmental obligations. The total amount committed under these surety bonds, which expire at various dates, primarily in 2021, was $45 at December 31, 2020. Additionally, Howmet Aerospace has outstanding surety bonds related to the Company in the amount of $4 at December 31, 2020. In the event Howmet Aerospace would be required to perform under any of these instruments, Howmet Aerospace would be indemnified by Arconic Corporation in accordance with the Separation and Distribution Agreement. Furthermore, Alcoa Corporation has outstanding surety bonds related to the Company in the amount of $5 at December 31, 2020. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified by Arconic Corporation in accordance with the 2016 Separation and Distribution Agreement.
U. Subsequent Events
Management evaluated all activity of Arconic Corporation and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements, except as described below.
In January 2021, the Company contributed a combined $200 to its two U.S. funded defined benefit pension plans (see Funding and Cash Flows within Note H).
Supplemental Financial Information (unaudited)
Quarterly Data
(in millions, except per-share amounts)
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First
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Second
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Third
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Fourth(1)
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Year
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2020
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|
|
|
|
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Sales
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$
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1,611
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|
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$
|
1,187
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|
|
$
|
1,415
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|
|
$
|
1,462
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|
|
$
|
5,675
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|
Net income (loss)(2)
|
$
|
46
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|
|
$
|
(96)
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|
|
$
|
5
|
|
|
$
|
(64)
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|
|
$
|
(109)
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|
Net income (loss) attributable to Arconic Corporation(2)
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$
|
46
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|
|
$
|
(96)
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|
|
$
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5
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|
|
$
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(64)
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|
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$
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(109)
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Earnings per share attributable to Arconic Corporation common stockholders(2),(3):
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Basic
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$
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0.42
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$
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(0.88)
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|
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$
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0.05
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$
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(0.59)
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$
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(1.00)
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Diluted
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$
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0.42
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|
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$
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(0.88)
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$
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0.05
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|
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$
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(0.59)
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|
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$
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(1.00)
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2019
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|
|
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Sales
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$
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1,841
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|
|
$
|
1,923
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|
|
$
|
1,805
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|
|
$
|
1,708
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|
|
$
|
7,277
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Net income (loss)(2)
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$
|
37
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|
|
$
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(4)
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|
|
$
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(24)
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|
|
$
|
168
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|
|
$
|
177
|
|
Net income (loss) attributable to Arconic Corporation(2)
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$
|
37
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|
|
$
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(4)
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|
|
$
|
(24)
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|
|
$
|
168
|
|
|
$
|
177
|
|
Earnings per share attributable to Arconic Corporation common stockholders(2),(3):
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|
|
|
|
|
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|
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Basic
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$
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0.34
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|
|
$
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(0.04)
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|
|
$
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(0.22)
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|
|
$
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1.54
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|
|
$
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1.63
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Diluted
|
$
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0.34
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|
|
$
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(0.04)
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|
|
$
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(0.22)
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|
|
$
|
1.54
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|
|
$
|
1.63
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(1) In the fourth quarter of 2020, Arconic Corporation recorded the following items in pretax income: a $140 settlement charge related to the annuitization of a portion of the Company’s U.S. defined benefit pension plan obligation (see Notes E and H); a $25 benefit for contingent consideration received related to the 2018 sale of the Texarkana (Texas) rolling mill (see Notes E and S); and a $20 benefit for the reversal of a liability previously established at the Separation Date related to a potential indemnification to Howmet Aerospace by Arconic Corporation for an outstanding income tax matter in Spain (see Note G).
In the fourth quarter of 2019, Arconic Corporation recorded the following items in pretax income: a $20 benefit for contingent consideration received related to the 2018 sale of the Texarkana (Texas) rolling mill (see Notes E and S); and $17 for costs to evaluate, plan, and execute the Separation (see Note A).
(2) Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented. See Note M for additional information.
(3) Per share amounts are calculated independently for each period presented; therefore, the sum of the quarterly per-share amounts may not equal the per-share amounts for the year.
Prior to the Separation Date, Arconic Corporation did not have any publicly-traded issued and outstanding common stock or any common share equivalents. Accordingly, for all periods presented prior to April 1, 2020, earnings per share was calculated based on the 109,021,376 shares of Arconic Corporation common stock distributed on the Separation Date in connection with the completion of the Separation (see Note A).