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Arconic Reports Second Quarter 2019 Results

August 2, 2019

Second Quarter 2019 Highlights

  • Revenue of $3.7 billion, up 3% year over year; organic revenue1 up 10% year over year
  • Net loss of $121 million, or $0.27 per share, mainly driven by non-cash asset impairments of $357 million, versus net income of $120 million, or $0.24 per share, in the second quarter 2018
  • Net income excluding special items of $269 million, or $0.58 per share, versus $185 million, or $0.37 per share, in the second quarter 2018
  • Operating loss of $81 million, versus operating income of $324 million in the second quarter 2018
  • Operating income excluding special items of $484 million, up 27% year over year
  • Operating income margin excluding special items up 240 basis points year over year
  • Cash balance of $1.4 billion, improved $38 million sequentially

2019 Guidance* Updated

  • Revenue unchanged at $14.3-$14.6 billion
  • Increased the midpoint of Earnings Per Share Excluding Special Items by 10%; increased the range from $1.75-$1.90 to $1.95-$2.05
  • Increased Adjusted Free Cash Flow to $700-$800 million
  • Added guidance for EBITDA Excluding Special Items at $2.25-$2.35 billion

Key Announcements

  • Increased annual cost reduction commitment to approximately $260 million on a run-rate basis.
  • Increased 2019 cost reduction commitment to approximately $140 million in year.
  • Repurchased an additional $200 million of common stock following the $700 million of common stock repurchased earlier in the year; $600 million remains authorized for share repurchases.
  • Portfolio separation remains on track for completion in the second quarter 2020. The names of the two companies will be Howmet Aerospace Inc. and Arconic Corporation. Identities of Remain Co. and Spin Co. to be announced in third quarter 2019 earnings release.
  • Recorded a pre-tax $428 million non-cash impairment charge related to the disks business within Engineered Products and Solutions.

___________________________________

* Reconciliations of the forward-looking non-GAAP measures to the most directly comparable GAAP measures are not available without unreasonable efforts due to the variability and complexity of the charges and other components excluded from the non-GAAP measures – for further detail, see “Updated Full Year 2019 Guidance” below.

PITTSBURGH-- Arconic Inc. (NYSE: ARNC) today reported second quarter 2019 results, for which the Company reported revenues of $3.7 billion, up 3% year over year. Organic revenue1 was up 10% year over year on strong volumes across all segments and all key markets, as well as favorable pricing in Engineered Products and Solutions and Global Rolled Products.

Arconic reported a net loss of $121 million, or $0.27 per share, in the second quarter 2019 versus net income of $120 million, or $0.24 per share, in the second quarter 2018. Net income excluding special items was $269 million, or $0.58 per share, in the second quarter 2019, versus $185 million, or $0.37 per share, in the second quarter 2018. Special items in the second quarter 2019 were $390 million, principally related to charges associated with non-cash asset impairments of $357 million, cost reduction initiatives, environmental remediation related to Grasse River, and separation costs, partially offset by discrete and special tax items.

Second quarter 2019 operating loss was $81 million, versus operating income of $324 million in the second quarter 2018. Operating income excluding special items was $484 million, up 27% year over year, as higher volumes, favorable product pricing, favorable aluminum prices, and net cost reductions more than offset operational challenges in aluminum extrusions and the continued costs associated with the transition of Tennessee’s North American packaging business to more profitable industrial products.

Arconic Chairman and Chief Executive Officer John Plant said, “In the second quarter 2019, the Arconic team delivered improved quarterly revenue, adjusted operating income, adjusted operating income margin, and adjusted earnings per share on both a year-over-year and sequential basis. Arconic’s second quarter 2019 RONA improved by 450 basis points year over year and 340 basis points from the first quarter 2019. We expect this positive year-over-year trend to continue in the third quarter. Based on our first half performance and our outlook for the remainder of 2019, we are increasing our full-year adjusted earnings per share and adjusted free cash flow guidance for the second time in 2019.”

Arconic ended the second quarter 2019 with cash on hand of $1.4 billion. Cash provided from operations was $106 million; cash used for financing activities totaled $201 million, reflecting the impact of the accelerated share repurchase program of $200 million; and cash provided from investing activities was $129 million. Adjusted Free Cash Flow for the quarter was $227 million.

Second Quarter 2019 Segment Performance

Engineered Products and Solutions (EP&S)

EP&S reported revenue of $1.6 billion, an increase of 6% year over year. Organic revenue1 was up 8%, driven by aerospace engine and defense growth. Segment operating profit was $286 million, up $62 million or 28% year over year, driven by net cost reductions, favorable pricing, and volume increases, partially offset by mix. Segment operating margin was 18.3%, up 310 basis points year over year.

Global Rolled Products (GRP)

GRP reported revenue of $1.6 billion, relatively flat year over year. Organic revenue1 was up 11%. Segment operating profit was $145 million, up $34 million or 31% year over year, driven by favorable pricing in industrial and commercial transportation; volume growth in aerospace, automotive, and commercial transportation; favorable aluminum prices; and net cost reductions. These impacts were partially offset by operational challenges in aluminum extrusions and continued costs associated with the transition of Tennessee’s North American packaging business to more profitable industrial products. Segment operating margin was 9.2%, up 210 basis points year over year.

Transportation and Construction Solutions (TCS)

TCS reported revenue of $548 million, a decrease of 2% year over year. Organic revenue1 was up 3%. Segment operating profit was $107 million, up $10 million or 10% year over year, driven by net cost reductions and growth in commercial transportation and building and construction. Segment operating margin was 19.5%, up 220 basis points year over year.

Updated Full Year 2019 Guidance*

Arconic is adjusting its full year 2019 guidance:

 

Previous (1Q 2019)

Updated (2Q 2019)

Revenue

$14.3-$14.6 billion

$14.3-$14.6 billion

Earnings Per Share Excluding Special Items*

$1.75-$1.90

$1.95-$2.05

EBITDA Excluding Special Items*

n/a

$2.25-$2.35 billion

Adjusted Free Cash Flow*

$650-$750 million

$700-$800 million

Arconic expects third quarter 2019 Earnings Per Share Excluding Special Items to be in a range of $0.47 to $0.53.

* All guidance excludes Separation impacts. Arconic has not provided reconciliations of the forward-looking non-GAAP financial measures, such as earnings per share excluding special items, EBITDA excluding special items, and adjusted free cash flow, to the most directly comparable GAAP financial measures. Such reconciliations are not available without unreasonable efforts due to the variability and complexity with respect to the charges and other components excluded from the non-GAAP measures, such as the effects of foreign currency movements, equity income, gains or losses on sales of assets, taxes and any future restructuring or impairment charges. These reconciling items are in addition to the inherent variability already included in the GAAP measures, which includes, but is not limited to, price/mix and volume. Arconic believes such reconciliations would imply a degree of precision that would be confusing or misleading to investors.

Commitments to Cost Reduction

The Company has increased the annualized cost reduction commitment to save approximately $260 million on a run-rate basis, versus its $230 million commitment that was provided during its first quarter 2019 earnings announcement. The Company expects to capture approximately $140 million of savings in 2019, versus its $120 million commitment that was provided during its first quarter 2019 earnings announcement.

Share Buyback of $900 Million is Complete

The share buyback of $700 million of common stock announced on February 19, 2019 was completed on April 29, 2019. The share buyback of $200 million of common stock announced on May 2, 2019 was completed on June 12, 2019. In total, Arconic repurchased approximately 45.4 million shares at a weighted average price of approximately $19.80 per share. Six hundred million dollars remains authorized for share repurchases. Total shares outstanding as of July 30, 2019 were approximately 440 million.

Portfolio Separation Remains on Track

The Company continues to target the initial filing of a Form 10 in the fourth quarter 2019 and the completion of the Separation in the second quarter 2020. The entity that will comprise Global Rolled Products (rolled aluminum products and aluminum extrusions) and building and construction systems will be named Arconic Corporation. The entity that will comprise Engineered Products and Solutions (engine components, fastening systems, and engineered structures) and forged aluminum wheels will be named Howmet Aerospace Inc. The Company intends to announce the identities of Remain Co. and Spin Co. in its third quarter 2019 earnings release.

Non-Cash Asset Impairment

As part of Arconic’s five-year planning activity, the Company continues to review its asset base to assess future cash flows. This review resulted in Arconic recording a pre-tax $428 million non-cash impairment charge in the second quarter 2019 related to its disks business within Engineered Products and Solutions.

Arconic will hold its quarterly conference call at 10:00 AM Eastern Time on August 2, 2019, to present second quarter 2019 financial results. The call will be webcast via www.arconic.com. Call information and related details are available at www.arconic.com under “Investors”; presentation materials will be available at approximately 8:00 AM Eastern Time on August 2.

About Arconic

Arconic (NYSE: ARNC) creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. For more information: www.arconic.com. Follow @arconic: Twitter, Instagram, Facebook, LinkedIn and YouTube.

Dissemination of Company Information

Arconic intends to make future announcements regarding Company developments and financial performance through its website at www.arconic.com.

Forward-Looking Statements

This release contains statements that relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "goal," "guidance," "intends," "may," "outlook," "plans," "projects," "seeks," "sees," "should," "targets," "will," "would," or other words of similar meaning. All statements that reflect Arconic’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts and expectations relating to the growth of the aerospace, defense, automotive, industrials, commercial transportation and other end markets; statements and guidance regarding future financial results or operating performance; statements regarding future strategic actions, including share repurchases, which may be subject to market conditions, legal requirements and other considerations; and statements about Arconic's strategies, outlook, business and financial prospects. These statements reflect beliefs and assumptions that are based on Arconic’s perception of historical trends, current conditions and expected future developments, as well as other factors Arconic believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and changes in circumstances that are difficult to predict, which could cause actual results to differ materially from those indicated by these statements. Such risks and uncertainties include, but are not limited to: (a) uncertainties regarding the planned separation, including whether it will be completed pursuant to the targeted timing, asset perimeters, and other anticipated terms, if at all; (b) the impact of the separation on the businesses of Arconic; (c) the risk that the businesses will not be separated successfully or such separation may be more difficult, time-consuming or costly than expected, which could result in additional demands on Arconic’s resources, systems, procedures and controls, disruption of its ongoing business, and diversion of management’s attention from other business concerns; (d) deterioration in global economic and financial market conditions generally; (e) unfavorable changes in the markets served by Arconic; (f) the inability to achieve the level of revenue growth, cash generation, cost savings, improvement in profitability and margins, fiscal discipline, or strengthening of competitiveness and operations anticipated or targeted; (g) competition from new product offerings, disruptive technologies or other developments; (h) political, economic, and regulatory risks relating to Arconic’s global operations, including compliance with U.S. and foreign trade and tax laws, sanctions, embargoes and other regulations; (i) manufacturing difficulties or other issues that impact product performance, quality or safety; (j) Arconic’s inability to realize expected benefits, in each case as planned and by targeted completion dates, from acquisitions, divestitures, facility closures, curtailments, expansions, or joint ventures; (k) the impact of potential cyber attacks and information technology or data security breaches; (l) the loss of significant customers or adverse changes in customers’ business or financial conditions; (m) adverse changes in discount rates or investment returns on pension assets; (n) the impact of changes in aluminum prices and foreign currency exchange rates on costs and results; (o) the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation, which can expose Arconic to substantial costs and liabilities; and (p) the other risk factors summarized in Arconic’s Form 10-K for the year ended December 31, 2018 and other reports filed with the U.S. Securities and Exchange Commission (SEC). Market projections are subject to the risks discussed above and other risks in the market. The statements in this release are made as of the date of this release, even if subsequently made available by Arconic on its website or otherwise. Arconic disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

Non-GAAP Financial Measures

Some of the information included in this release is derived from Arconic’s consolidated financial information but is not presented in Arconic’s financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain of these data are considered “non-GAAP financial measures” under SEC rules. These non-GAAP financial measures supplement our GAAP disclosures and should not be considered an alternative to the GAAP measure. Reconciliations to the most directly comparable GAAP financial measures and management’s rationale for the use of the non-GAAP financial measures can be found in the schedules to this release.

___________________________________

1 Organic revenue is U.S. GAAP revenue adjusted for Tennessee Packaging (due to its completed phase-down as of year-end 2018), divestitures, and changes in aluminum prices and foreign currency exchange rates relative to prior year period.

Arconic and subsidiaries

Statement of Consolidated Operations (unaudited)

(in millions, except per-share and share amounts)

 

Quarter ended

 

June 30, 2019

 

March 31, 2019

 

June 30, 2018

Sales

$

3,691

 

 

$

3,541

 

 

$

3,573

 

 

 

 

 

 

 

Cost of goods sold (exclusive of expenses below)

2,939

 

 

2,818

 

 

2,903

 

Selling, general administrative, and other expenses

178

 

 

178

 

 

158

 

Research and development expenses

17

 

 

22

 

 

29

 

Provision for depreciation and amortization

139

 

 

137

 

 

144

 

Restructuring and other charges(1)

499

 

 

12

 

 

15

 

Operating (loss) income

(81

)

 

374

 

 

324

 

 

 

 

 

 

 

Interest expense

85

 

 

85

 

 

89

 

Other expense, net

29

 

 

32

 

 

41

 

 

 

 

 

 

 

(Loss) income before income taxes

(195

)

 

257

 

 

194

 

(Benefit) provision for income taxes

(74

)

 

70

 

 

74

 

 

 

 

 

 

 

Net (loss) income

$

(121

)

 

$

187

 

 

$

120

 

 

 

 

 

 

 

(LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC COMMON SHAREHOLDERS:

 

 

 

 

 

Basic(2)(3):

 

 

 

 

 

(Loss) earnings per share

$

(0.27

)

 

$

0.40

 

 

$

0.25

 

Average number of shares(3)(4)

445,298,284

 

 

470,798,121

 

 

482,854,550

 

 

 

 

 

 

 

Diluted(2)(3):

 

 

 

 

 

(Loss) earnings per share

$

(0.27

)

 

$

0.39

 

 

$

0.24

 

Average number of shares(3)(4)

445,298,284

 

 

489,059,798

 

 

501,960,573

 

(1)

Restructuring and other charges for the quarter ended June 30, 2019 primarily included an impairment of a long-lived asset group of $428, layoff costs of $30, and other exit costs of $41.

(2)

In order to calculate both basic and diluted earnings per share, preferred stock dividends declared of $1 for the quarter ended March 31, 2019 need to be subtracted from Net income.

(3)

For the quarter ended June 30, 2019, the diluted average number of shares does not include any share equivalents (19 million) related to outstanding employee stock options and awards and shares underlying outstanding convertible debt (acquired through the acquisition of RTI International Metals, Inc (“RTI”)) as their effect was anti-dilutive. For the quarters ended March 31, 2019 and June 30, 2018, the difference between the respective diluted average number of shares and the respective basic average number of shares related to share equivalents (18 million and 19 million, respectively) associated with outstanding employee stock options and awards and shares underlying outstanding convertible debt (acquired through the acquisition of RTI).

(4)

Basic and diluted average number of shares for the quarters ended June 30, 2019 and March 31, 2019 reflect the impact of the accelerated share repurchase programs of the Company’s common stock.

Arconic and subsidiaries

Statement of Consolidated Operations (unaudited)

(in millions, except per-share and share amounts)

 

Six months ended

 

June 30, 2019

 

June 30, 2018

Sales

$

7,232

 

 

$

7,018

 

 

 

 

 

Cost of goods sold (exclusive of expenses below)

5,757

 

 

5,671

 

Selling, general administrative, and other expenses

356

 

 

330

 

Research and development expenses

39

 

 

52

 

Provision for depreciation and amortization

276

 

 

286

 

Restructuring and other charges(1)

511

 

 

22

 

Operating income

293

 

 

657

 

 

 

 

 

Interest expense(2)

170

 

 

203

 

Other expense, net

61

 

 

61

 

 

 

 

 

Income before income taxes

62

 

 

393

 

(Benefit) provision for income taxes

(4

)

 

130

 

 

 

 

 

Net income

$

66

 

 

$

263

 

 

 

 

 

EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC COMMON SHAREHOLDERS:

 

 

 

Basic(3)(4):

 

 

 

Earnings per share

$

0.14

 

 

$

0.54

 

Average number of shares(4)(5)

458,005,369

 

 

482,622,069

 

 

 

 

 

Diluted(3)(4):

 

 

 

Earnings per share

$

0.14

 

 

$

0.53

 

Average number of shares(4)(5)

462,099,059

 

 

502,452,369

 

 

 

 

 

Common stock outstanding at the end of the period(5)

440,087,693

 

 

482,891,826

 

(1)

Restructuring and other charges for the six months ended June 30, 2019 primarily included an impairment of a long-lived asset group of $428, layoff costs of $95, and other exit costs of $46, partially offset by a credit of $58 related to the elimination of life insurance benefits for U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries.

(2)

Interest expense for the six months ended June 30, 2018 included $19 related to the early redemption of the Company’s then outstanding 5.720% Senior Notes due 2019.

(3)

In order to calculate both basic and diluted earnings per share, preferred stock dividends declared of $1 for the six months ended June 30, 2019 and June 30, 2018 need to be subtracted from Net income.

(4)

For the six months ended June 30, 2019, the difference between the respective diluted average number of shares and the respective basic average number of shares related to share equivalents (4 million) associated with outstanding employee stock options and awards. For the six months ended June 30, 2018, the difference between the respective diluted average number of shares and the respective basic average number of shares related to share equivalents (20 million) associated with outstanding employee stock options and awards and shares underlying outstanding convertible debt (acquired through the acquisition of RTI).

(5)

Basic and diluted average number of shares and Common stock outstanding at the end of the period for the six months ended June 30, 2019 reflect the impact of the accelerated share repurchase programs of the Company’s common stock.

Arconic and subsidiaries

Consolidated Balance Sheet (unaudited)

(in millions)

 

June 30, 2019

 

December 31, 2018

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

1,357

 

 

$

2,277

 

Receivables from customers, less allowances of $4 in 2019 and 2018

1,155

 

 

1,047

 

Other receivables

640

 

 

451

 

Inventories

2,606

 

 

2,492

 

Prepaid expenses and other current assets

260

 

 

314

 

Total current assets

6,018

 

 

6,581

 

 

 

 

 

Properties, plants, and equipment, net(1)(2)

5,517

 

 

5,704

 

Goodwill

4,500

 

 

4,500

 

Deferred income taxes

568

 

 

573

 

Intangibles, net(2)

686

 

 

919

 

Other noncurrent assets(1)(2)

624

 

 

416

 

Total assets

$

17,913

 

 

$

18,693

 

 

 

 

 

Liabilities

 

 

 

Current liabilities:

 

 

 

Accounts payable, trade

$

2,095

 

 

$

2,129

 

Accrued compensation and retirement costs

384

 

 

370

 

Taxes, including income taxes

116

 

 

118

 

Accrued interest payable

113

 

 

113

 

Other current liabilities(1)

479

 

 

356

 

Short-term debt

434

 

 

434

 

Total current liabilities

3,621

 

 

3,520

 

Long-term debt, less amount due within one year

5,901

 

 

5,896

 

Accrued pension benefits

2,079

 

 

2,230

 

Accrued other postretirement benefits

641

 

 

723

 

Other noncurrent liabilities and deferred credits(1)

805

 

 

739

 

Total liabilities

13,047

 

 

13,108

 

 

 

 

 

Equity

 

 

 

Arconic shareholders’ equity:

 

 

 

Preferred stock

55

 

 

55

 

Common stock(3)

440

 

 

483

 

Additional capital(3)

7,484

 

 

8,319

 

Accumulated deficit(1)

(256

)

 

(358

)

Accumulated other comprehensive loss

(2,869

)

 

(2,926

)

Total Arconic shareholders’ equity

4,854

 

 

5,573

 

Noncontrolling interests

12

 

 

12

 

Total equity

4,866

 

 

5,585

 

Total liabilities and equity

$

17,913

 

 

$

18,693

 

(1)

Effective January 1, 2019, Arconic adopted the new accounting standard for leases that resulted in the Company recording operating lease right-of-use assets and lease liabilities of approximately $320. Also, the Company reclassified cash proceeds of $119 from Other noncurrent liabilities and deferred credits, assets of $24 from Properties, plants, and equipment, net, and a deferred tax asset of $22 from Other noncurrent assets to Accumulated deficit reflecting the cumulative effect of an accounting change related to the deferred gain resulting from the sale-leaseback of the Texarkana, Texas cast house in October of 2018. The adoption of the standard had no impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows.

(2)

In the second quarter of 2019, the Company recorded an impairment charge of $428 related to a long-lived asset group. The impairment charge impacted properties, plant and equipment; intangible assets; and certain other noncurrent assets by $198, $197 and $33, respectively.

(3)

Reflects the impact of the accelerated share repurchase programs of the Company’s common stock.

Arconic and subsidiaries

Statement of Consolidated Cash Flows (unaudited)

(in millions)

 

Six months ended June 30,

 

2019

 

2018

Operating activities

 

 

 

Net income

$

66

 

 

$

263

 

Adjustments to reconcile net income to cash used for operations:

 

 

 

Depreciation and amortization

276

 

 

286

 

Deferred income taxes

(78

)

 

47

 

Restructuring and other charges

511

 

 

22

 

Net loss from investing activities—asset sales

4

 

 

5

 

Net periodic pension benefit cost

58

 

 

71

 

Stock-based compensation

27

 

 

29

 

Other

14

 

 

50

 

Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:

 

 

 

(Increase) in receivables

(743

)

 

(709

)

(Increase) in inventories

(117

)

 

(220

)

Decrease in prepaid expenses and other current assets

18

 

 

8

 

(Decrease) increase in accounts payable, trade

(29

)

 

218

 

(Decrease) in accrued expenses

(46

)

 

(84

)

Increase in taxes, including income taxes

41

 

 

37

 

Pension contributions

(140

)

 

(237

)

(Increase) in noncurrent assets

(5

)

 

(4

)

(Decrease) in noncurrent liabilities

(9

)

 

(42

)

Cash used for operations

(152

)

 

(260

)

 

 

 

 

Financing Activities

 

 

 

Net change in short-term borrowings (original maturities of three months or less)

 

 

5

 

Additions to debt (original maturities greater than three months)

226

 

 

300

 

Payments on debt (original maturities greater than three months)

(226

)

 

(801

)

Premiums paid on early redemption of debt

 

 

(17

)

Proceeds from exercise of employee stock options

11

 

 

13

 

Dividends paid to shareholders

(39

)

 

(60

)

Repurchases of common stock(1)

(900

)

 

 

Other

(14

)

 

(17

)

Cash used for financing activities

(942

)

 

(577

)

 

 

 

 

Investing Activities

 

 

 

Capital expenditures

(304

)

 

(288

)

Proceeds from the sale of assets and businesses

12

 

 

5

 

Sales of investments

47

 

 

9

 

Cash receipts from sold receivables

417

 

 

420

 

Other

(1

)

 

 

Cash provided from investing activities

171

 

 

146

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

1

 

 

(2

)

Net change in cash, cash equivalents and restricted cash

(922

)

 

(693

)

Cash, cash equivalents and restricted cash at beginning of period

2,282

 

 

2,153

 

Cash, cash equivalents and restricted cash at end of period

$

1,360

 

 

$

1,460

 

(1)

For the six months ended June 30, 2019, Arconic repurchased 45,451,404 shares of its common stock for $900 through multiple accelerated share repurchase agreements with JPMorgan Chase Bank pursuant to the share repurchase programs previously authorized by its Board of Directors.

Arconic and subsidiaries

Segment Information (unaudited)

(in millions)

 

1Q18

 

2Q18

 

3Q18

 

4Q18

 

2018

 

1Q19

 

2Q19

Engineered Products and Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party sales

$

1,426

 

 

$

1,474

 

 

$

1,445

 

 

$

1,487

 

 

$

5,832

 

 

$

1,502

 

 

$

1,565

 

Segment operating profit

$

209

 

 

$

224

 

 

$

235

 

 

$

216

 

 

$

884

 

 

$

253

 

 

$

286

 

Segment operating profit margin

14.7

%

 

15.2

%

 

16.3

%

 

14.5

%

 

15.2

%

 

16.8

%

 

18.3

%

Provision for depreciation and amortization

$

65

 

 

$

65

 

 

$

65

 

 

$

64

 

 

$

259

 

 

$

64

 

 

$

62

 

Restructuring and other charges

$

1

 

 

$

8

 

 

$

16

 

 

$

46

 

 

$

71

 

 

$

14

 

 

$

442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Rolled Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party sales

$

1,481

 

 

$

1,573

 

 

$

1,547

 

 

$

1,487

 

 

$

6,088

 

 

$

1,503

 

 

$

1,577

 

Intersegment sales

$

57

 

 

$

61

 

 

$

44

 

 

$

45

 

 

$

207

 

 

$

55

 

 

$

55

 

Segment operating profit(1)

$

124

 

 

$

111

 

 

$

77

 

 

$

81

 

 

$

393

 

 

$

107

 

 

$

145

 

Segment operating profit margin

8.4

%

 

7.1

%

 

5.0

%

 

5.4

%

 

6.5

%

 

7.1

%

 

9.2

%

Provision for depreciation and amortization

$

56

 

 

$

59

 

 

$

56

 

 

$

64

 

 

$

235

 

 

$

54

 

 

$

54

 

Restructuring and other charges

$

(1

)

 

$

2

 

 

$

2

 

 

$

(159

)

 

$

(156

)

 

$

6

 

 

$

2

 

Third-party aluminum shipments (kmt)

322

 

 

330

 

 

330

 

 

319

 

 

1,301

 

 

331

 

 

367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation and Construction Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party sales

$

537

 

 

$

562

 

 

$

530

 

 

$

497

 

 

$

2,126

 

 

$

535

 

 

$

548

 

Segment operating profit

$

67

 

 

$

97

 

 

$

77

 

 

$

63

 

 

$

304

 

 

$

87

 

 

$

107

 

Segment operating profit margin

12.5

%

 

17.3

%

 

14.5

%

 

12.7

%

 

14.3

%

 

16.3

%

 

19.5

%

Provision for depreciation and amortization

$

13

 

 

$

12

 

 

$

12

 

 

$

13

 

 

$

50

 

 

$

13

 

 

$

13

 

Restructuring and other charges

$

 

 

$

 

 

$

 

 

$

1

 

 

$

1

 

 

$

9

 

 

$

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Total segment operating profit to Consolidated income before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment operating profit

$

400

 

 

$

432

 

 

$

389

 

 

$

360

 

 

$

1,581

 

 

$

447

 

 

$

538

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and other charges

(7

)

 

(15

)

 

2

 

 

11

 

 

(9

)

 

(12

)

 

(499

)

Corporate expense(2)

(60

)

 

(93

)

 

(46

)

 

(48

)

 

(247

)

 

(61

)

 

(120

)

Consolidated operating income (loss)

333

 

 

324

 

 

345

 

 

323

 

 

1,325

 

 

374

 

 

(81

)

Interest expense(3)

(114

)

 

(89

)

 

(88

)

 

(87

)

 

(378

)

 

(85

)

 

(85

)

Other expense, net

(20

)

 

(41

)

 

(8

)

 

(10

)

 

(79

)

 

(32

)

 

(29

)

Consolidated income (loss) before income taxes

$

199

 

 

$

194

 

 

$

249

 

 

$

226

 

 

$

868

 

 

$

257

 

 

$

(195

)

In the first quarter of 2019, the Company transferred its aluminum extrusions operations from the Arconic Engineered Structures business unit within the Engineered Products and Solutions segment to the Global Rolled Products segment. Prior period financial information has been recast to conform to current year presentation. Segment performance under Arconic’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Segment operating profit. Arconic’s definition of Segment operating profit is Operating income excluding Special items. Special items include Restructuring and other charges. Segment operating profit includes the impact of LIFO inventory accounting, metal price lag, intersegment profit eliminations, and derivative activities. Differences between certain segment totals and consolidated Arconic are in Corporate.

(1)

For the quarter ended June 30, 2018, Segment operating profit for the Global Rolled Products segment included the impact of a $23 charge related to a physical inventory adjustment at one plant.

(2)

For the quarter ended June 30, 2018, Corporate expense included $38 of costs related to settlements of certain customer claims primarily related to product introductions. For the quarter ended June 30, 2019, Corporate expense included $25 of costs associated with ongoing environmental remediation, $16 of costs associated with the planned separation of Arconic, $9 of costs associated with negotiation of the collective bargaining agreement with the United Steelworkers (USW); $9 impairment of assets of the energy business; and $4 of costs related to a fire at a fasteners plant.

(3)

For the quarter ended March 31, 2018, Interest expense included $19 related to the early redemption of the Company’s then outstanding 5.720% Senior Notes due 2019.

Arconic and subsidiaries

Calculation of Financial Measures (unaudited)

(in millions, except per-share amounts)

 

Net income excluding Special items

Quarter ended

 

Six months ended

June 30,

2019

 

March 31,

2019

 

June 30,

2018

 

June 30,

2019

 

June 30,

2018

Net (loss) income

$

(121

)

 

$

187

 

 

$

120

 

 

$

66

 

 

$

263

 

Diluted (loss) earnings per share (EPS)

$

(0.27

)

 

$

0.39

 

 

$

0.24

 

 

$

0.14

 

 

$

0.53

 

 

 

 

 

 

 

 

 

 

 

Special items:

 

 

 

 

 

 

 

 

 

Restructuring and other charges

499

 

 

12

 

 

15

 

 

511

 

 

22

 

Discrete tax items(1)

(36

)

 

1

 

 

21

 

 

(35

)

 

23

 

Other special items(2)

41

 

 

12

 

 

42

 

 

53

 

 

67

 

Tax impact(3)

(114

)

 

(4

)

 

(13

)

 

(118

)

 

(21

)

 

 

 

 

 

 

 

 

 

 

Net income excluding Special items

$

269

 

 

$

208

 

 

$

185

 

 

$

477

 

 

$

354

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS excluding Special items

$

0.58

 

 

$

0.43

 

 

$

0.37

 

 

$

1.01

 

 

$

0.71

 

 

 

 

 

 

 

 

 

 

 

Average number of shares - diluted EPS excluding Special items(4)

463,970,027

 

 

489,059,798

 

 

501,960,573

 

 

476,600,574

 

 

502,452,369

 

Net income excluding Special items and Diluted EPS excluding Special items are non-GAAP financial measures. Management believes that these measures are meaningful to investors because management reviews the operating results of Arconic excluding the impacts of Restructuring and other charges, Discrete tax items, and Other special items (collectively, “Special items”). There can be no assurances that additional special items will not occur in future periods. To compensate for this limitation, management believes that it is appropriate to consider both Net income determined under GAAP as well as Net income excluding Special items.

(1)

Discrete tax items for each period included the following:

 

for the quarter ended June 30, 2019, a benefit associated with the deduction of foreign taxes that were previously claimed as a U.S. foreign tax credit ($25), a benefit to remeasure certain deferred tax assets as a result of a foreign tax rate change ($12), and a net charge for a number of small items ($1);

 

for the quarter ended March 31, 2019, a charge for a number of small items ($1);

 

for the quarter ended June 30, 2018, charges resulting from the Company’s then ongoing analysis of the U.S. Tax Cuts and Jobs Acts of 2017 related to an increase in the provisional estimate of the one-time transition tax ($18) and Alternative Minimum Tax (AMT) credits expected to be refunded upon filing the 2018 tax return that will result in no benefit under government sequestration ($3);

 

for the six months ended June 30, 2019, a benefit associated with the deduction of foreign taxes that were previously claimed as a U.S. foreign tax credit ($25), a benefit for foreign tax rate changes ($12), and a net charge for a number of small items ($2); and

 

for the six months ended June 30, 2018, charges resulting from the Company’s then ongoing analysis of the U.S. Tax Cuts and Jobs Acts of 2017 related an increase in the provisional estimate of the one-time transition tax ($18) and AMT credits expected to be refunded upon filing the 2018 tax return that will result in no benefit under government sequestration ($3), and a charge for a number of small items ($2).

(2)

Other special items for each period included the following:

 

for the quarter ended June 30, 2019, a favorable tax impact resulting from the difference between Arconic’s consolidated estimated annual effective tax rate and the statutory rate applicable to special items ($32), costs associated with ongoing environmental remediation ($25), costs associated with the planned separation of Arconic ($16), costs associated with negotiation of the collective bargaining agreement with the USW ($9), an impairment of assets of the energy business ($9), an unfavorable tax impact related to the interim period treatment of operational losses in certain foreign jurisdictions for which no tax benefit was recognized ($7), costs related to a fire at a fasteners plant ($4), and legal and other advisory costs related to Grenfell Tower ($3);

 

for the quarter ended March 31, 2019, strategy and portfolio review costs ($6), costs associated with the planned separation of Arconic ($3), legal and other advisory costs related to Grenfell Tower ($2), and a charge for a number of small tax items ($1);

 

for the quarter ended June 30, 2018, costs related to settlements of certain customer claims primarily related to product introductions ($38) and legal and other advisory costs related to Grenfell Tower ($4);

 

for the six months ended June 30, 2019, a favorable tax impact resulting from the difference between Arconic’s consolidated estimated annual effective tax rate and the statutory rate applicable to special items ($33), costs associated with ongoing environmental remediation ($25), costs associated with the planned separation of Arconic ($19), costs associated with negotiation of the collective bargaining agreement with the USW ($9), an unfavorable tax impact related to the interim period treatment of operational losses in certain foreign jurisdictions for which no tax benefit was recognized ($9), an impairment of assets of the energy business ($9), strategy and portfolio review costs ($6), legal and other advisory costs related to Grenfell Tower ($5), and costs related to a fire at a fasteners plant ($4); and

 

for the six months ended June 30, 2018, costs related to settlements of certain customer claims primarily related to product introductions ($38), costs related to the early redemption of the Company’s then outstanding 5.720% Senior Notes due 2019 ($19), legal and other advisory costs related to Grenfell Tower ($9), and a charge for a number of small tax items ($1).

(3)

The tax impact on Special items is based on the applicable statutory rates whereby the difference between such rates and Arconic’s consolidated estimated annual effective tax rate is itself a Special item.

(4)

The average number of shares applicable to diluted EPS excluding Special items, includes certain share equivalents as their effect was dilutive. For all periods presented, share equivalents associated with outstanding employee stock options and awards and shares underlying outstanding convertible debt (acquired through the acquisition of RTI) were dilutive based on Net income excluding Special items. The average number of shares applicable to diluted EPS excluding Special items for 2019 included the impact of the accelerated share repurchase programs of the Company’s common stock.

Operational Tax Rate

Quarter ended June 30, 2019

 

Six months ended June 30, 2019

As reported

 

Special

items(1)

 

As adjusted

 

As reported

 

Special

items(1)

 

As adjusted

(Loss) income before income taxes

$

(195

)

 

$

565

 

 

$

370

 

 

$

62

 

 

$

588

 

 

$

650

 

(Benefit) provision for income taxes

(74

)

 

175

 

 

101

 

 

(4

)

 

177

 

 

173

 

Operational tax rate

37.9

%

 

 

 

27.3

%

 

(6.5

)%

 

 

 

26.6

%

Operational tax rate is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management reviews the operating results of Arconic excluding the impacts of Special items. There can be no assurances that additional Special items will not occur in future periods. To compensate for this limitation, management believes that it is appropriate to consider both the Effective tax rate determined under GAAP as well as the Operational tax rate.

(1)

See Net income excluding Special items reconciliation above for a description of Special items.

Arconic and subsidiaries

Calculation of Financial Measures (unaudited), continued

(dollars in millions)

 
Organic Revenue

Quarter ended

June 30,

 

Quarter ended

March 31,

 

Six months ended

June 30,

 

2019

 

2018

 

2019

 

2018

 

2019

 

2018

Arconic

 

 

 

 

 

 

 

 

 

 

 

Sales – Arconic

$

3,691

 

 

$

3,573

 

 

$

3,541

 

 

$

3,445

 

 

$

7,232

 

 

$

7,018

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Sales – Tennessee packaging

 

 

46

 

 

 

 

43

 

 

 

 

89

 

Sales – Eger forgings

 

 

9

 

 

 

 

10

 

 

 

 

19

 

Sales – Latin America extrusions

 

 

 

 

 

 

25

 

 

 

 

25

 

Aluminum price impact

(136

)

 

 

n/a

 

 

(59

)

 

n/a

 

 

(195

)

 

n/a

 

Foreign currency impact

(35

)

 

n/a

 

 

(55

)

 

n/a

 

 

(90

)

 

n/a

 

Arconic Organic revenue

$

3,862

 

 

$

3,518

 

 

$

3,655

 

 

$

3,367

 

 

$

7,517

 

 

$

6,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Products and Solutions (EP&S)

 

 

 

 

 

 

 

 

 

 

 

Sales

$

1,565

 

 

$

1,474

 

 

$

1,502

 

 

$

1,426

 

 

$

3,067

 

 

$

2,900

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Sales – Eger forgings

 

 

9

 

 

 

 

10

 

 

 

 

19

 

Aluminum price impact

(4

)

 

n/a

 

 

(2

)

 

n/a

 

 

(6

)

 

n/a

 

Foreign currency impact

(11

)

 

n/a

 

 

(13

)

 

n/a

 

 

(24

)

 

n/a

 

EP&S Organic revenue

$

1,580

 

 

$

1,465

 

 

$

1,517

 

 

$

1,416

 

 

$

3,097

 

 

$

2,881

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Rolled Products (GRP)

 

 

 

 

 

 

 

 

 

 

 

Sales

$

1,577

 

 

$

1,573

 

 

$

1,503

 

 

$

1,481

 

 

$

3,080

 

 

$

3,054

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Sales – Tennessee packaging

 

 

46

 

 

 

 

43

 

 

 

 

89

 

Aluminum price impact

(112

)

 

n/a

 

 

(58

)

 

n/a

 

 

(170

)

 

n/a

 

Foreign currency impact

(11

)

 

n/a

 

 

(26

)

 

n/a

 

 

(37

)

 

n/a

 

GRP Organic revenue

$

1,700

 

 

$

1,527

 

 

$

1,587

 

 

$

1,438

 

 

$

3,287

 

 

$

2,965

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation and Construction Solutions (TCS)

 

 

 

 

 

 

 

 

 

 

 

Sales

$

548

 

 

$

562

 

 

$

535

 

 

$

537

 

 

$

1,083

 

 

$

1,099

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Sales – Latin America extrusions

 

 

 

 

 

 

25

 

 

 

 

25

 

Aluminum price impact

(20

)

 

n/a

 

 

1

 

 

n/a

 

 

(19

)

 

n/a

 

Foreign currency impact

(13

)

 

n/a

 

 

(16

)

 

n/a

 

 

(29

)

 

n/a

 

TCS Organic revenue

$

581

 

 

$

562

 

 

$

550

 

 

$

512

 

 

$

1,131

 

 

$

1,074

 

Organic revenue is a non-GAAP financial measure. Management believes this measure is meaningful to investors as it presents revenue on a comparable basis for all periods presented due to the impact of the ramp-down of Arconic's North American packaging business at its Tennessee operations (completed in December 2018), the sale of the forgings business in Eger, Hungary (divested in December 2018), the sale of Latin America extrusions (divested in April 2018), and the impact of changes in aluminum prices and foreign currency fluctuations relative to the prior year periods. The revenue from a small manufacturing facility that was divested in the second quarter of 2019 was not material and therefore is included in Organic revenue.

Arconic and subsidiaries

Calculation of Financial Measures (unaudited), continued

(dollars in millions)

 

Adjusted free cash flow

Quarter ended

 

Six months ended

June 30,

2019

 

March 31,

2019

 

June 30,

2018

 

June 30,

2019

 

June 30,

2018

Cash provided from (used for) operations

$

106

 

 

$

(258

)

 

$

176

 

 

$

(152

)

 

$

(260

)

Cash receipts from sold receivables

257

 

 

160

 

 

284

 

 

417

 

 

420

 

Capital expenditures

(136

)

 

(168

)

 

(171

)

 

(304

)

 

(288

)

Adjusted free cash flow

$

227

 

 

$

(266

)

 

$

289

 

 

$

(39

)

 

$

(128

)

There has been no change in the net cash funding in the sale of accounts receivable program in the second quarter of 2019. It remains at $350.

 

Adjusted free cash flow is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management reviews cash flows generated from operations after taking into consideration capital expenditures (due to the fact that these expenditures are considered necessary to maintain and expand Arconic’s asset base and are expected to generate future cash flows from operations), as well as cash receipts from net sales of beneficial interest in sold receivables. It is important to note that Adjusted free cash flow does not represent the residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure.

Net Debt

June 30,

2019

 

March 31,

2019

 

December 31,

2018

 

September 30,

2018

 

June 30,

2018

Short-term debt

$

434

 

 

$

435

 

 

$

434

 

 

$

42

 

 

$

45

 

Long-term debt, less amount due within one year

5,901

 

 

5,899

 

 

5,896

 

 

6,315

 

 

6,312

 

Total debt

$

6,335

 

 

$

6,334

 

 

$

6,330

 

 

$

6,357

 

 

$

6,357

 

Less: Cash and cash equivalents

1,357

 

 

1,319

 

 

2,277

 

 

1,535

 

 

1,455

 

Net debt

$

4,978

 

 

$

5,015

 

 

$

4,053

 

 

$

4,822

 

 

$

4,902

 

Net debt is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management assesses Arconic’s leverage position after factoring in available cash that could be used to repay outstanding debt.

Arconic and subsidiaries

Calculation of Financial Measures (unaudited), continued

(dollars in millions)

 

Operating income excluding Special items

 

Quarter ended

 

Six months ended

June 30,

2019

 

March 31,

2019

 

June 30,

2018

 

June 30,

2019

 

June 30,

2018

Operating (loss) income

$

(81

)

 

$

374

 

 

$

324

 

 

$

293

 

 

$

657

 

 

 

 

 

 

 

 

 

 

 

Special items:

 

 

 

 

 

 

 

 

 

Restructuring and other charges

499

 

 

12

 

 

15

 

 

511

 

 

22

 

Costs associated with planned separation

16

 

 

3

 

 

 

 

19

 

 

 

Environmental remediation

25

 

 

 

 

 

 

25

 

 

 

Collective bargaining agreement negotiation

9

 

 

 

 

 

 

9

 

 

 

Impairment of energy business assets

9

 

 

 

 

 

 

9

 

 

 

Legal and other advisory costs related to Grenfell Tower

3

 

 

2

 

 

4

 

 

5

 

 

9

 

Strategy and portfolio review costs

 

 

6

 

 

 

 

6

 

 

 

Fasteners plant fire costs

4

 

 

 

 

 

 

4

 

 

 

Settlements of certain customer claims primarily related to product introductions

 

 

 

 

38

 

 

 

 

38

 

 

 

 

 

 

 

 

 

 

 

Operating income excluding Special items

$

484

 

 

$

397

 

 

$

381

 

 

$

881

 

 

$

726

 

 

 

 

 

 

 

 

 

 

 

Sales

$

3,691

 

 

$

3,541

 

 

$

3,573

 

 

$

7,232

 

 

$

7,018

 

 

 

 

 

 

 

 

 

 

 

Operating income margin, excluding Special items

13.1

%

 

11.2

%

 

10.7

%

 

12.2

%

 

10.3

%

Operating income excluding Special items and Operating income margin, excluding Special items are non-GAAP financial measures. Management believes that these measures are meaningful to investors because management reviews the operating results of Arconic excluding the impacts of Special items. There can be no assurances that additional Special items will not occur in future periods. To compensate for this limitation, management believes that it is appropriate to consider both Operating (loss) income determined under GAAP as well as Operating income excluding Special items.

Arconic and subsidiaries

Calculation of Financial Measures (unaudited), continued

(dollars in millions)

 

Return on Net Assets (RONA)

Quarter ended

 

Quarter ended

 

Six months ended

June 30,

 

March 31,

 

June 30,

2019

 

2018

 

2019

 

2018

 

2019

 

2018

Net income

$

(121

)

 

$

120

 

 

$

187

 

 

$

143

 

 

$

66

 

 

$

263

 

Special items(1)

390

 

 

65

 

 

21

 

 

26

 

 

411

 

 

91

 

Net income excluding Special items

269

 

 

185

 

 

208

 

 

169

 

 

477

 

 

354

 

Annualized net income excluding Special items

1,076

 

 

740

 

 

832

 

 

676

 

 

954

 

 

708

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets:

June 30,

2019

 

June 30,

2018

 

March 31,

2019

 

March 31,

2018

 

June 30,

2019

 

June 30,

2018

Add: Receivables from customers, less allowances

$

1,155

 

 

$

1,159

 

 

$

1,170

 

 

$

1,179

 

 

$

1,155

 

 

$

1,159

 

Add: Deferred purchase program(2)

426

 

 

313

 

 

430

 

 

320

 

 

426

 

 

313

 

Add: Inventories

2,606

 

 

2,659

 

 

2,612

 

 

2,648

 

 

2,606

 

 

2,659

 

Less: Accounts payable, trade

2,095

 

 

2,024

 

 

2,193

 

 

1,874

 

 

2,095

 

 

2,024

 

Working capital

2,092

 

 

2,107

 

 

2,019

 

 

2,273

 

 

2,092

 

 

2,107

 

Properties, plants, and equipment, net (PP&E)

5,517

 

 

5,582

 

 

5,727

 

 

5,628

 

 

5,517

 

 

5,582

 

Net assets - total

$

7,609

 

 

$

7,689

 

 

$

7,746

 

 

$

7,901

 

 

$

7,609

 

 

$

7,689

 

 

 

 

 

 

 

 

 

 

 

 

 

RONA

14.1

%

 

9.6

%

 

10.7

%

 

8.6

%

 

12.5

%

 

9.2

%

RONA is a non-GAAP financial measure. RONA is calculated as Net income excluding Special items divided by working capital and net PP&E. Management believes that this measure is meaningful to investors as RONA helps management and investors determine the percentage of net income the company is generating from its assets. This ratio tells how effectively and efficiently the company is using its assets to generate earnings.

(1)

See Reconciliation of Net income excluding Special items for a description of Special items.

(2)

The Deferred purchase program relates to an arrangement to sell certain customer receivables to several financial institutions on a recurring basis. Arconic is adding back the receivable for the purposes of the Working capital calculation.

 

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