Third Quarter 2019 Highlights
- Revenue of $3.6 billion, up 1% year over year; organic revenue1
up 6% year over year
- Net income of $95 million, or $0.21 per share, which included
non-cash asset impairments of $108 million, versus net income of
$161 million, or $0.32 per share, in the third quarter 2018
- Net income excluding special items of $260 million, or $0.58
per share, versus $160 million, or $0.32 per share, in the third
quarter 2018
- Operating income of $326 million versus $345 million in the
third quarter 2018
- Operating income excluding special items of $475 million, up
36% year over year
- Operating income margin excluding special items up 340 basis
points year over year
- Cash balance of $1.3 billion
2019 Guidance* Updated
- Revenue seen at $14.15-$14.35 billion versus prior $14.3- $14.6
billion, driven by lower aluminum price and divestitures
- Increased Earnings Per Share Excluding Special Items to
$2.07-$2.11 versus prior $1.95-$2.05
- Adjusted Free Cash Flow unchanged at $700-$800 million
- EBITDA Excluding Special Items narrowed to high end of range at
$2.30-$2.35 billion versus prior $2.25-$2.35 billion
Key Announcements
- Increased annual cost reduction commitment to approximately
$280 million on a run-rate basis; Increased 2019 cost reduction
commitment to approximately $180 million in year.
- Repurchased an additional $200 million of common stock
following the $900 million of common stock repurchased earlier in
the year; $400 million remains authorized for share
repurchases.
- Realigned its operations into two segments: the Engineered
Products and Forgings (EP&F) segment and Global Rolled Products
(GRP) segment.
- The EP&F businesses will remain in the existing company
(Remain Co.), which will be renamed Howmet Aerospace Inc. at
separation, and the GRP businesses will comprise Spin Co. and will
be named Arconic Corporation at separation.
- Continued progress on divestitures, with transactions signed or
closed year-to-date expected to generate approximately $180 million
of net proceeds.
- Repaid in cash the aggregate outstanding principal amount of
the 1.63% Convertible Senior Notes of approximately $403 million on
October 15, 2019. As a result, the diluted share count will cease
to include approximately 15 million of Common Stock previously
attributable to the Notes.
_____________________________________
* 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.
Arconic Inc. (NYSE: ARNC) today reported third quarter 2019
results, for which the Company reported revenues of $3.6 billion,
up 1% year over year. Organic revenue1 was up 6% year over year on
strong volumes across all key markets and favorable pricing in the
Engineered Products and Forgings segment, and volume growth in
packaging, industrial, and aerospace markets as well as favorable
pricing in the Global Rolled Products segment.
Arconic reported net income of $95 million, or $0.21 per share,
in the third quarter 2019 versus net income of $161 million, or
$0.32 per share, in the third quarter 2018. Net income excluding
special items was $260 million, or $0.58 per share, in the third
quarter 2019, versus $160 million, or $0.32 per share, in the third
quarter 2018. Special items in the third quarter 2019 were $165
million, principally related to charges associated with non-cash
asset impairments of $108 million and separation costs.
Third quarter 2019 operating income was $326 million, versus
operating income of $345 million in the third quarter 2018.
Operating income excluding special items was $475 million, up 36%
year over year, as favorable product pricing, higher volume,
favorable aluminum prices, and net cost reductions more than offset
operational challenges in the aluminum extrusions business and
unfavorable product mix.
Arconic Chairman and Chief Executive Officer John Plant said,
“In the third quarter 2019, the Arconic team delivered improved
quarterly revenue, adjusted operating income, adjusted operating
income margin, adjusted free cash flow and adjusted earnings per
share on a year-over-year basis. Arconic’s third quarter 2019
return on net assets improved by 550 basis points year over year.
We expect this positive year-over-year trend to continue in the
fourth quarter. Based on our performance through the first nine
months of 2019 and our outlook for the remainder of 2019, we are
increasing our full-year adjusted earnings per share guidance for
the third time in 2019.”
Arconic ended the third quarter 2019 with cash on hand of $1.3
billion. Cash provided from operations was $52 million; cash used
for financing activities totaled $202 million, reflecting the
impact of the accelerated share repurchase program of $200 million;
and cash provided from investing activities was $117 million.
Adjusted Free Cash Flow for the quarter was $154 million.
Third Quarter 2019 Segment Performance
Engineered Products and Forgings
(EP&F)
EP&F reported revenue of $1.8 billion, an increase of 7%
year over year. Organic revenue1 was up 8%, driven by aerospace
engine, defense and commercial transportation growth. Segment
operating profit was $363 million, up $79 million or 28% year over
year, driven by volume increases, favorable pricing, lower raw
material costs and net cost reductions, partially offset by mix.
Segment operating profit margin was 20.2%, up 330 basis points year
over year.
Global Rolled Products (GRP)
GRP reported revenue of $1.8 billion, down 4% year over year.
Organic revenue1 was up 5%. Segment operating profit was $161
million, up $54 million or 50% year over year, driven by favorable
pricing in industrial and commercial transportation; volume growth
in packaging, industrial and aerospace; favorable aluminum prices;
and net cost reductions. These impacts were partially offset by
operational challenges at one plant in the aluminum extrusions
business and continued costs associated with the transition of
Tennessee’s North American packaging business to more profitable
industrial products. Segment operating profit margin was 9.1%, up
330 basis points year over year.
Updated Full Year 2019 Guidance*
Arconic is adjusting its full year 2019 guidance:
Previous (2Q 2019)
Updated (3Q 2019)
Revenue
$14.3-$14.6 billion
$14.15-$14.35 billion
Earnings Per Share Excluding Special
Items*
$1.95-$2.05
$2.07-$2.11
EBITDA Excluding Special Items*
$2.25-$2.35 billion
$2.30-$2.35 billion
Adjusted Free Cash Flow*
$700-$800 million
$700-$800 million
Arconic expects fourth quarter 2019 Earnings Per Share Excluding
Special Items to be in a range of $0.49 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.
Cost Reduction Commitment Increased
The Company has increased the annualized cost reduction
commitment to save approximately $280 million on a run-rate basis,
versus its $260 million commitment that was provided during its
second quarter 2019 earnings announcement. The Company expects to
capture approximately $180 million of savings in 2019, versus its
$140 million commitment that was provided during its second quarter
2019 earnings announcement.
Executed Cumulative Share Buybacks Totaling $1.1 Billion;
$400 Million Authorization Remains
The share buyback of $200 million of common stock announced on
August 6, 2019 was completed on October 3, 2019. In total, Arconic
has repurchased approximately 53.2 million shares year-to-date in
2019 at a weighted average price of approximately $20.67 per share.
Four hundred million dollars remains authorized for share
repurchases. Total shares outstanding as of November 1, 2019 were
approximately 433 million.
Realignment of Operations
In the third quarter 2019, the Company realigned its operations
by eliminating its Transportation and Construction Solutions
segment and transferring the Forged Wheels business to the
Engineered Products and Forgings segment (formerly named the
Engineered Products and Solutions segment) and the Building and
Construction Systems business to the Global Rolled Products
segment.
Arconic Corporation to be Spin Co.; Separation Remains on
Track
The Company continues to target the completion of the separation
in the second quarter 2020. We expect the Form 10 filing to be
available in the fourth quarter 2019. The Engineered Products and
Forgings businesses (engine products, fastening systems, engineered
structures and forged wheels) will remain in the existing company
(Remain Co.), which will be renamed Howmet Aerospace Inc. at
separation. The Global Rolled Products businesses (global rolled
products, aluminum extrusions and building and construction
systems) will comprise Spin Co. and will be named Arconic
Corporation at separation.
Progress on Divestitures
In the third quarter 2019, the Company reached an agreement to
sell its aluminum rolling mill in Itapissuma, Brazil for
approximately $50 million in cash. The transaction is expected to
close in the first quarter 2020. Also in the third quarter 2019,
the Company reached an agreement to sell its forgings business in
the U.K. for approximately $62 million in cash. The transaction is
expected to close in the fourth quarter 2019. The Company recorded
a pre-tax $102 million charge in the third quarter 2019
representing the non-cash impairment of the net book value of these
businesses. In the fourth quarter 2019, the Company reached an
agreement to sell its hard alloy extrusions plant in South Korea
for approximately $61 million in cash. The transaction is expected
to close in the first quarter 2020. Arconic expects to recognize a
$20 to $25 million pre-tax gain upon the sale. On a year-to-date
basis, the Company has signed or closed divestitures expected to
generate approximately $180 million in net proceeds.
Convertible Notes Matured on October 15, 2019
The Company repaid in cash the aggregate outstanding principal
amount of the 1.63% Convertible Senior Notes of approximately $403
million, together with accrued and unpaid interest, on the maturity
date, October 15, 2019. No shares of the Company’s common stock
were issued in connection with the maturity or the final conversion
of the Notes. As of October 15, 2019, the calculation of average
diluted shares outstanding will cease to include the approximately
15 million shares of common stock previously attributable to the
Notes.
Arconic will hold its quarterly conference call at 10:00 AM
Eastern Time on November 5, 2019, to present third 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 November
5.
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, industrial, commercial
transportation and other end markets; statements and guidance
regarding future financial results or operating performance;
statements regarding future strategic actions; 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
September 30, 2019
June 30, 2019
September 30, 2018
Sales
$
3,559
$
3,691
$
3,524
Cost of goods sold (exclusive of expenses
below)
2,800
2,939
2,881
Selling, general administrative, and other
expenses
167
178
134
Research and development expenses
16
17
25
Provision for depreciation and
amortization
131
139
141
Restructuring and other charges(1)
119
499
(2
)
Operating income (loss)
326
(81
)
345
Interest expense
86
85
88
Other expense, net
31
29
8
Income (loss) before income taxes
209
(195
)
249
Provision (benefit) for income taxes
114
(74
)
88
Net income (loss)
$
95
$
(121
)
$
161
EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO
ARCONIC COMMON SHAREHOLDERS:
Basic(2)(3):
Earnings (loss) per share
$
0.22
$
(0.27
)
$
0.33
Average number of shares(3)(4)
436,364,035
445,298,284
483,048,831
Diluted(2)(3):
Earnings (loss) per share
$
0.21
$
(0.27
)
$
0.32
Average number of shares(3)(4)
456,679,981
445,298,284
502,427,792
(1)
Restructuring and other charges for the
quarter ended September 30, 2019 included charges of $59 and $43
primarily related to non-cash impairments of the net book value of
the Company’s aluminum rolling mill in Brazil and its forgings
business in the U.K., respectively, associated with agreements
reached during the quarter to sell these businesses. Other charges
of $17 in the third quarter included asset impairments, accelerated
depreciation, and pension plan settlements. 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 quarters ended September 30, 2019 and 2018 need to be
subtracted from Net income.
(3)
For the quarters ended September 30, 2019
and 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 and 19 million,
respectively) associated with outstanding employee stock options
and awards and shares underlying outstanding convertible debt
(acquired through the acquisition of RTI International Metals, Inc
(RTI)). 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) as their effect was
anti-dilutive.
(4)
Basic and diluted average number of shares
for the quarters ended September 30, 2019 and June 30, 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)
Nine months ended
September 30, 2019
September 30, 2018
Sales
$
10,791
$
10,542
Cost of goods sold (exclusive of expenses
below)
8,557
8,552
Selling, general administrative, and other
expenses
523
464
Research and development expenses
55
77
Provision for depreciation and
amortization
407
427
Restructuring and other charges(1)
630
20
Operating income
619
1,002
Interest expense(2)
256
291
Other expense, net
92
69
Income before income taxes
271
642
Provision for income taxes
110
218
Net income
$
161
$
424
EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC
COMMON SHAREHOLDERS:
Basic(3)(4):
Earnings per share
$
0.35
$
0.87
Average number of shares(4)(5)
450,725,346
482,765,798
Diluted(3)(4):
Earnings per share
$
0.35
$
0.86
Average number of shares(4)(5)
455,387,336
502,521,053
Common stock outstanding at the end of the
period(5)
433,819,520
483,181,619
(1)
Restructuring and other charges for the
nine months ended September 30, 2019 included charges of $59 and
$43 primarily related to non-cash impairments of the net book value
of the Company’s aluminum rolling mill in Brazil and its forgings
business in the U.K., respectively, associated with agreements
reached during the quarter to sell these businesses; an impairment
of a long-lived asset group of $428; layoff costs of $97, and other
exit costs of $61, 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 nine months ended
September 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
$2 for the nine months ended September 30, 2019 and 2018 need to be
subtracted from Net income.
(4)
For the nine months ended September 30,
2019, the difference between the respective diluted average number
of shares and the respective basic average number of shares related
to share equivalents (5 million) associated with outstanding
employee stock options and awards. For the nine months ended
September 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 nine
months ended September 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)
September 30, 2019
December 31, 2018
Assets
Current assets:
Cash and cash equivalents
$
1,321
$
2,277
Receivables from customers, less
allowances of $4 in 2019 and 2018
1,116
1,047
Other receivables
657
451
Inventories
2,555
2,492
Prepaid expenses and other current
assets
259
314
Total current assets
5,908
6,581
Properties, plants, and equipment,
net(1)(2)
5,377
5,704
Goodwill
4,460
4,500
Deferred income taxes
466
573
Intangibles, net(2)
668
919
Other noncurrent assets(1)(2)
605
416
Total assets
$
17,484
$
18,693
Liabilities
Current liabilities:
Accounts payable, trade
$
1,988
$
2,129
Accrued compensation and retirement
costs
392
370
Taxes, including income taxes
115
118
Accrued interest payable
97
113
Other current liabilities(1)
434
356
Short-term debt
1,434
434
Total current liabilities
4,460
3,520
Long-term debt, less amount due within one
year
4,905
5,896
Accrued pension benefits
2,001
2,230
Accrued other postretirement benefits
629
723
Other noncurrent liabilities and deferred
credits(1)
779
739
Total liabilities
12,774
13,108
Equity
Arconic shareholders’ equity:
Preferred stock
55
55
Common stock(3)
434
483
Additional capital(3)
7,314
8,319
Accumulated deficit(1)
(179
)
(358
)
Accumulated other comprehensive loss
(2,928
)
(2,926
)
Total Arconic shareholders’ equity
4,696
5,573
Noncontrolling interests
14
12
Total equity
4,710
5,585
Total liabilities and equity
$
17,484
$
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, except as
noted)
Nine months ended September
30,
2019
2018
Operating activities
Net income
$
161
$
424
Adjustments to reconcile net income to
cash used for operations:
Depreciation and amortization
407
427
Deferred income taxes
(36
)
95
Restructuring and other charges
630
20
Net loss from investing activities—asset
sales
6
7
Net periodic pension benefit cost
87
100
Stock-based compensation
44
43
Other
15
61
Changes in assets and liabilities,
excluding effects of acquisitions, divestitures, and foreign
currency translation adjustments:
(Increase) in receivables
(957
)
(1,020
)
(Increase) in inventories
(92
)
(184
)
Decrease (increase) in prepaid expenses
and other current assets
17
(3
)
(Decrease) increase in accounts payable,
trade
(119
)
257
(Decrease) in accrued expenses
(90
)
(96
)
Increase in taxes, including income
taxes
92
63
Pension contributions
(217
)
(288
)
(Increase) in noncurrent assets
(12
)
(33
)
(Decrease) in noncurrent liabilities
(36
)
(82
)
Cash used for operations
(100
)
(209
)
Financing Activities
Net change in short-term borrowings
(original maturities of three months or less)
—
3
Additions to debt (original maturities
greater than three months)
300
450
Payments on debt (original maturities
greater than three months)
(303
)
(952
)
Premiums paid on early redemption of
debt
—
(17
)
Proceeds from exercise of employee stock
options
19
15
Dividends paid to shareholders
(48
)
(89
)
Repurchases of common stock(1)
(1,100
)
—
Other
(12
)
(19
)
Cash used for financing
activities
(1,144
)
(609
)
Investing Activities
Capital expenditures
(415
)
(497
)
Proceeds from the sale of assets and
businesses
27
7
Sales of investments
47
9
Cash receipts from sold receivables
630
693
Other
(1
)
(1
)
Cash provided from investing
activities
288
211
Effect of exchange rate changes on
cash, cash equivalents and restricted cash
(2
)
(4
)
Net change in cash, cash equivalents and
restricted cash
(958
)
(611
)
Cash, cash equivalents and restricted cash
at beginning of year
2,282
2,153
Cash, cash equivalents and restricted
cash at end of period
$
1,324
$
1,542
(1)
For the nine months ended September 30,
2019, Arconic repurchased and retired 52,242,576 shares of its
common stock for $1,100 through multiple accelerated share
repurchase agreements with JPMorgan Chase Bank and Goldman Sachs
& Co. LLC 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
3Q19
Engineered
Products and Forgings
Third-party sales
$
1,666
$
1,734
$
1,683
$
1,715
$
6,798
$
1,756
$
1,822
$
1,794
Segment operating profit
$
261
$
292
$
284
$
268
$
1,105
$
313
$
360
$
363
Segment operating profit margin
15.7
%
16.8
%
16.9
%
15.6
%
16.3
%
17.8
%
19.8
%
20.2
%
Provision for depreciation and
amortization
$
72
$
72
$
73
$
72
$
289
$
71
$
70
$
65
Restructuring and other charges
$
—
$
9
$
15
$
46
$
70
$
18
$
443
$
45
Capital expenditures
$
66
$
91
$
115
$
135
$
407
$
117
$
88
$
62
Global Rolled
Products
Third-party sales
$
1,754
$
1,875
$
1,839
$
1,755
$
7,223
$
1,784
$
1,868
$
1,763
Intersegment sales
$
57
$
60
$
44
$
44
$
205
$
52
$
49
$
41
Segment operating profit(1)
$
140
$
141
$
107
$
93
$
481
$
135
$
179
$
161
Segment operating profit margin
8.0
%
7.5
%
5.8
%
5.3
%
6.7
%
7.6
%
9.6
%
9.1
%
Provision for depreciation and
amortization
$
61
$
63
$
61
$
68
$
253
$
59
$
59
$
57
Restructuring and other charges
$
(1
)
$
2
$
2
$
(160
)
$
(157
)
$
11
$
26
$
62
Third-party aluminum shipments (kmt)
322
330
330
319
1,301
331
367
351
Capital expenditures
$
43
$
68
$
77
$
120
$
308
$
39
$
37
$
35
Reconciliation of Total segment
operating profit to Consolidated income before income
taxes:
Total segment operating profit
$
401
$
433
$
391
$
361
$
1,586
$
448
$
539
$
524
Unallocated amounts:
Restructuring and other charges
(7
)
(15
)
2
11
(9
)
(12
)
(499
)
(119
)
Corporate expense(2)
(61
)
(94
)
(48
)
(49
)
(252
)
(62
)
(121
)
(79
)
Consolidated operating income (loss)
333
324
345
323
1,325
374
(81
)
326
Interest expense(3)
(114
)
(89
)
(88
)
(87
)
(378
)
(85
)
(85
)
(86
)
Other expense, net
(20
)
(41
)
(8
)
(10
)
(79
)
(32
)
(29
)
(31
)
Consolidated income (loss) before income
taxes
$
199
$
194
$
249
$
226
$
868
$
257
$
(195
)
$
209
In the third quarter of 2019, the Company realigned its
operations by eliminating its Transportation and Construction
Solutions (TCS) segment and transferring the Forged Wheels business
to its Engineered Products and Forgings segment (formerly named the
Engineered Products and Solutions segment) and the Building and
Construction Systems business to its Global Rolled Products
segment. The Latin American extrusions business, which was formerly
part of the Company's TCS segment until its sale in April of 2018,
was moved to Corporate. In the first quarter of 2019, the Company
transferred its Aluminum Extrusions operations from the Engineered
Products and Forgings 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 Product 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. For the quarter ended September 30, 2019,
Corporate expense included $25 of costs associated with the planned
separation of Arconic 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
Nine months ended
September 30, 2019
June 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Net income (loss)
$
95
$
(121
)
$
161
$
161
$
424
Diluted earnings (loss) per share
(EPS)
$
0.21
$
(0.27
)
$
0.32
$
0.35
$
0.86
Special items:
Restructuring and other charges
119
499
(2
)
630
20
Discrete tax items(1)
10
(36
)
26
(25
)
49
Other special items(2)
43
41
(24
)
96
43
Tax impact(3)
(7
)
(114
)
(1
)
(125
)
(22
)
Net income excluding Special items
$
260
$
269
$
160
$
737
$
514
Diluted EPS excluding Special items
$
0.58
$
0.58
$
0.32
$
1.58
$
1.04
Average number of shares - diluted EPS
excluding Special items(4)
456,679,981
463,970,027
502,427,792
469,898,301
502,521,053
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 September 30, 2019, a charge related to
the adjustment of prior year taxes ($9), a charge for interest
accruals for the potential underpayment of taxes ($2), and a
benefit to remeasure certain deferred tax assets as a result of a
foreign tax rate change ($1);
- 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 September 30, 2018, a charge to establish
a tax reserve in Spain ($59), a net charge related to prior year
adjustments in various jurisdictions ($13), a benefit to reverse a
foreign tax reserve that is effectively settled ($38), and benefits
resulting from the Company’s then ongoing analysis of the U.S. Tax
Cuts and Jobs Act of 2017 related to the one-time transition tax
($2) and U.S. rate change impacts ($6);
- for the nine months ended September 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 ($13), a charge related to the adjustment of prior
year taxes ($9), a charge for interest accruals for potential
underpayment of taxes ($3), and a net charge for a number of small
items ($1); and
- for the nine months ended September 30, 2018, a charge to
establish a tax reserve in Spain ($59); a net charge related to
prior year adjustments in various jurisdictions ($13); a net charge
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 one-time
transition tax ($16) and a charge for AMT credits expected to be
refunded upon filing the 2018 tax return that will result in no
benefit under government sequestration ($3), partially offset by
beneficial U.S. rate change impacts ($6); a benefit to reverse a
foreign tax reserve that is effectively settled ($38), and a charge
for a number of small items ($2).
(2)
Other special items for each period included the following:
- for the quarter ended September 30, 2019, costs associated with
the planned separation of Arconic ($25), 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), an unfavorable tax impact resulting from the
difference between Arconic’s consolidated estimated annual
effective tax rate and the statutory rate applicable to special
items ($6), costs related to a fire at a fasteners plant ($4), and
legal and other advisory costs related to Grenfell Tower ($1);
- 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 September 30, 2018, a benefit from
establishing a tax indemnification receivable ($29) reflecting
Alcoa Corporation’s 49% share of the Spanish tax reserve and legal
and other advisory costs related to Grenfell Tower ($5);
- for the nine months ended September 30, 2019, costs associated
with the planned separation of Arconic ($44), costs associated with
ongoing environmental remediation ($25), an unfavorable tax impact
related to the interim period treatment of operational losses in
certain foreign jurisdictions for which no tax benefit was
recognized ($16), costs associated with negotiation of the
collective bargaining agreement with the USW ($9), an impairment of
assets of the energy business ($9), costs related to a fire at a
fasteners plant ($8), legal and other advisory costs related to
Grenfell Tower ($6), strategy and portfolio review costs ($6), and
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 ($27); and
- for the nine months ended September 30, 2018, costs related to
settlements of certain customer claims primarily related to product
introductions ($38), a benefit from establishing a tax
indemnification receivable ($29) reflecting Alcoa Corporation’s 49%
share of the Spanish tax reserve, 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 ($14), 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 September 30,
2019
Nine months ended September
30, 2019
As reported
Special items(1)
As adjusted
As reported
Special items(1)
As adjusted
Income before income taxes
$
209
$
149
$
358
$
271
$
737
$
1,008
Provision for income taxes
114
(16
)
98
110
161
271
Operational tax rate
54.5
%
27.4
%
40.6
%
26.9
%
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 September
30,
Quarter ended June 30,
Nine months ended September
30,
2019
2018
2019
2018
2019
2018
Arconic
Sales
$
3,559
$
3,524
$
3,691
$
3,573
$
10,791
$
10,542
Less:
Sales – Eger forgings
—
7
—
9
—
26
Sales – Latin America extrusions
—
—
—
—
—
25
Sales – Tennessee packaging
—
37
—
46
—
126
Aluminum price impact
(115
)
n/a
(136
)
n/a
(310
)
n/a
Foreign currency impact
(26
)
n/a
(35
)
n/a
(116
)
n/a
Arconic Organic revenue
$
3,700
$
3,480
$
3,862
$
3,518
$
11,217
$
10,365
Engineered Products
and Forgings
Sales
$
1,794
$
1,683
$
1,822
$
1,734
$
5,372
$
5,083
Less:
Sales – Eger forgings
—
7
—
9
—
26
Aluminum price impact
(6
)
n/a
(13
)
n/a
(19
)
n/a
Foreign currency impact
(12
)
n/a
(18
)
n/a
(51
)
n/a
Engineered Products and Forgings Organic
revenue
$
1,812
$
1,676
$
1,853
$
1,725
$
5,442
$
5,057
Global Rolled
Products
Sales
$
1,763
$
1,839
$
1,868
$
1,875
$
5,415
$
5,468
Less:
Sales – Tennessee packaging
—
37
—
46
—
126
Aluminum price impact
(109
)
n/a
(123
)
n/a
(291
)
n/a
Foreign currency impact
(14
)
n/a
(17
)
n/a
(65
)
n/a
Global Rolled Products Organic revenue
$
1,886
$
1,802
$
2,008
$
1,829
$
5,771
$
5,342
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 sale of the forgings business in Eger, Hungary
(divested in December 2018), the sale of Latin America extrusions
(divested in April 2018), the ramp-down of Arconic's North American
packaging business at its Tennessee operations (completed in
December 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 and the small energy business that
was divested in the third 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
Nine months ended
September 30, 2019
June 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Cash provided from (used for)
operations
$
52
$
106
$
51
$
(100
)
$
(209
)
Cash receipts from sold receivables
213
257
273
630
693
Capital expenditures
(111
)
(136
)
(209
)
(415
)
(497
)
Adjusted free cash flow
$
154
$
227
$
115
$
115
$
(13
)
There has been no change in the net cash funding in the sale of
accounts receivable program in the third 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
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Short-term debt
$
1,434
$
434
$
435
$
434
$
42
Long-term debt, less amount due within one
year
4,905
5,901
5,899
5,896
6,315
Total debt
$
6,339
$
6,335
$
6,334
$
6,330
$
6,357
Less: Cash and cash equivalents
1,321
1,357
1,319
2,277
1,535
Net debt
$
5,018
$
4,978
$
5,015
$
4,053
$
4,822
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
Nine months ended
September 30, 2019
June 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Operating income (loss)
$
326
$
(81
)
$
345
$
619
$
1,002
Special items:
Restructuring and other charges
119
499
(2
)
630
20
Costs associated with planned
separation
25
16
—
44
—
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
1
3
5
6
14
Strategy and portfolio review costs
—
—
—
6
—
Fasteners plant fire costs
4
4
—
8
—
Settlements of certain customer claims
primarily related to product introductions
—
—
—
—
38
Operating income excluding Special
items
$
475
$
484
$
348
$
1,356
$
1,074
Sales
$
3,559
$
3,691
$
3,524
$
10,791
$
10,542
Operating income margin, excluding Special
items
13.3
%
13.1
%
9.9
%
12.6
%
10.2
%
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
Nine months ended
September 30,
June 30,
September 30,
2019
2018
2019
2018
2019
2018
Net income (loss)
$
95
$
161
$
(121
)
$
120
$
161
$
424
Special items(1)
165
(1
)
390
65
576
90
Net income excluding Special items
260
160
269
185
737
514
Annualized net income excluding Special
items
1,040
640
1,076
740
983
685
Net Assets:
September 30, 2019
September 30, 2018
June 30, 2019
June 30, 2018
September 30, 2019
September 30, 2018
Add: Receivables from customers, less
allowances
$
1,116
$
1,147
$
1,155
$
1,159
$
1,116
$
1,147
Add: Deferred purchase program(2)
461
362
426
313
461
362
Add: Inventories
2,555
2,622
2,606
2,659
2,555
2,622
Less: Accounts payable, trade
1,988
2,061
2,095
2,024
1,988
2,061
Working capital
2,144
2,070
2,092
2,107
2,144
2,070
Properties, plants, and equipment, net
(PP&E)
5,377
5,645
5,517
5,582
5,377
5,645
Net assets - total
$
7,521
$
7,715
$
7,609
$
7,689
$
7,521
$
7,715
RONA
13.8
%
8.3
%
14.1
%
9.6
%
13.1
%
8.9
%
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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191105005575/en/
Investor Contact Paul T. Luther (412) 553-1950
Paul.Luther@arconic.com
Media Contact Esra Ozer (412) 553-2666
Esra.Ozer@arconic.com
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