Third Quarter 2018 Highlights
- Revenue of $3.5 billion, up 9% year
over year; organic revenue1 up 7% year over year
- Net income of $161 million, or $0.32
per share, versus net income of $119 million, or $0.22 per share,
in the third quarter of 2017
- Net income excluding special items of
$160 million, or $0.32 per share, versus $132 million, or $0.25 per
share, in the third quarter of 2017
- Operating income of $345 million, up
11% year over year
- Operating income excluding special
items of $348 million, up 4% year over year
- In the third quarter, cash provided
from operations of $51 million, cash used for financing activities
of $32 million, and cash provided from investing activities of $65
million
- Adjusted Free Cash Flow in the third
quarter was $115 million
- Net pension and OPEB liability
reduction of $519 million for January 1 through September 30
2018 Guidance* Updated
- Earnings Per Share Excluding Special
Items increased to $1.28-$1.34 from $1.17-$1.27
- Revenue of $13.7-$14.0 billion and
Adjusted Free Cash Flow of ~$250 million remain unchanged
Key Announcements
- Extending the scope and duration of the
Company’s strategy review, with anticipated completion in the
fourth quarter 2018. The Company will communicate the outcome once
the strategy review is complete.
- Reached an agreement to sell Arconic’s
idled Texarkana, Texas, rolling mill for approximately $300 million
in cash, plus additional contingent consideration of up to $50
million.
- Sale process for the Building and
Construction Systems business is underway and has drawn robust
interest.
___________________________________
* 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 “Full Year 2018 Guidance
Updated” below.
Arconic Inc. (NYSE: ARNC) today reported third quarter 2018
results, for which the Company reported revenues of $3.5 billion,
up 9% year over year. Organic revenue1 was up 7% year
over year, with higher volumes across all segments driven by
double-digit growth in the aerospace engines, aerospace defense,
and automotive end markets, along with solid increases from the
commercial transportation, industrial, and building and
construction markets.
Net income in the third quarter was $161 million, or $0.32 per
share. These results include $1 million of income from special
items, principally related to benefits associated with a tax
indemnification receivable and a post-retirement benefit
curtailment, mostly offset by charges related to net unfavorable
discrete tax items and other restructuring charges. Third quarter
2017 net income was $119 million, or $0.22 per share. Net income
excluding special items was $160 million, or $0.32 per share, in
the third quarter of 2018, versus $132 million, or $0.25 per share,
in the third quarter of 2017.
Third quarter 2018 operating income was $345 million, up 11%
year over year. Operating income excluding special items was $348
million, up 4% year over year, as higher volumes more than offset
aerospace product price and mix headwinds and unfavorable net cost
savings, driven by higher transportation costs.
Arconic Chief Executive Officer Chip Blankenship said, “In the
third quarter, Arconic delivered solid organic revenue growth while
increasing adjusted free cash flow. Our team remains focused on
operational improvements and portfolio refinements; this quarter we
made the strategic decision to sell our idled rolling mill in
Texarkana, Texas, which provides us with added financial
flexibility as we continue to explore opportunities to enhance our
portfolio. We have completed significant milestones as reported
last quarter; however, we are extending the scope and duration of
the strategy review to address additional scenarios. We now
anticipate completing the strategy review in the fourth
quarter.”
Arconic ended the third quarter 2018 with cash on hand of $1.5
billion. In the third quarters of 2018 and 2017: cash provided from
operations was $51 million and cash used for operations was $57
million, respectively; cash used for financing activities was $32
million and $15 million, respectively; and cash provided from
investing activities was $65 million and $100 million,
respectively. Adjusted Free Cash Flow for the quarter was $115
million, up from $41 million in the third quarter 2017.
Third Quarter 2018 Segment Performance2
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 6%, driven by volume growth
in aerospace engines and defense. Segment operating profit was $238
million, down $1 million year over year, as volume growth across
all business units was offset by unfavorable aerospace product
price/mix and manufacturing inefficiencies in the Engineered
Structures business. Segment operating margin was 15.2%, down 100
basis points year over year.
Global Rolled Products (GRP)
GRP reported revenue of $1.4 billion, an increase of 16% year
over year. Organic revenue1 was up 9%. Segment operating profit was
$74 million, up $10 million year over year, driven by higher
automotive and industrial volume, partially offset by higher
transportation costs and scrap spreads and volume. Segment
operating margin was 5.2%, consistent with the prior year,
including a 30 basis point positive impact of higher aluminum
prices.
Transportation and Construction Solutions
(TCS)
TCS delivered revenue of $530 million, an increase of 1% year
over year. Organic revenue1 was up 8%. Segment operating profit was
$77 million, up $3 million year over year, as higher volume in
commercial transportation and building and construction as well as
net cost savings more than offset headwinds from higher aluminum
prices. Segment operating margin was 14.5%, up 40 basis points year
over year, including a 280 basis point negative impact of higher
aluminum prices.
Full Year 2018 Guidance Updated
Arconic is adjusting its full year 2018 EPS guidance:
2Q 2018 Updated 3Q 2018
Earnings Per Share Excluding Special Items*
$1.17-$1.27 $1.28-$1.34
Revenue $13.7-$14.0
billion Unchanged
Adjusted Free Cash Flow*
Approximately $250 million Unchanged
* Arconic has not provided reconciliations of the
forward-looking non-GAAP financial measures to the most directly
comparable GAAP financial measures because Arconic is unable to
quantify certain amounts that would be required to be included in
the GAAP measures without unreasonable efforts, and Arconic
believes such reconciliations would imply a degree of precision
that would be confusing or misleading to investors. In particular,
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.
Key Announcements
Strategy and Portfolio Review
The Company is extending the scope and duration of this activity
to address additional scenarios. The Company now anticipates
completing the strategy review in the fourth quarter 2018. The
Company will communicate the outcome once the strategy review is
complete.
Announced Sale of Texarkana, TX Rolling
Mill
Arconic reached an agreement to sell its idled Texarkana, Texas,
rolling mill to Ta Chen International, Inc., a U.S. subsidiary of
aluminum and stainless steel distributor Ta Chen Stainless Pipe
Co., Ltd. Under the terms of the transaction, Arconic will sell the
Texarkana facility for approximately $300 million in cash, plus
additional contingent consideration of up to $50 million. The
transaction is expected to close in the fourth quarter 2018,
subject to receipt of certain regulatory approvals and other
customary closing conditions. The rolling mill and cast house have
a combined net book value of $62 million. The Company expects to
record a gain on the sale.
Sale Process of BCS Business
Underway
In July 2018, Arconic announced as part of the ongoing strategy
review that the Company initiated the sale process of the Building
and Construction Systems (BCS) business. The sale process is
currently underway and has drawn robust interest.
Arconic will hold its quarterly conference call at 10:00 AM
Eastern Time on October 30, 2018, to present third quarter 2018
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 October 30.
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, automotive, commercial transportation and other end
markets; statements and guidance regarding future financial results
or operating performance; statements about Arconic's strategies,
outlook, business and financial prospects; and statements regarding
the completion of the Texarkana sale and the expected financial
impact of the sale. 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) deterioration in global economic and financial
market conditions generally; (b) unfavorable changes in the markets
served by Arconic; (c) 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; (d)
competition from new product offerings, disruptive technologies or
other developments; (e) 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; (f) manufacturing difficulties or other issues that
impact product performance, quality or safety; (g) 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; (h)
failure or delays in the receipt or satisfaction of, or
unacceptable or burdensome conditions imposed in connection with,
all required regulatory approvals and the other closing conditions
to the Texarkana transaction; (i) the impact of cyber attacks and
potential information technology or data security breaches; (j)
changes in discount rates or investment returns on pension assets;
(k) the impact of changes in aluminum prices and foreign currency
exchange rates on costs and results; (l) the outcome of
contingencies, including legal proceedings, government or
regulatory investigations, and environmental remediation, which can
expose Arconic to substantial costs and liabilities; and (m) the
other risk factors summarized in Arconic’s Form 10-K for the year
ended December 31, 2017 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 and on our
website at www.arconic.com under the “Investors”
section.
___________________________________
1 Organic revenue is U.S. GAAP revenue adjusted for Tennessee
Packaging (due to its planned phase-down), divestitures, and
changes in aluminum prices and foreign currency exchange rates
relative to prior year period.
2 As of the first quarter of 2018, Arconic’s segment reporting
measure has changed from Adjusted EBITDA to Segment operating
profit.
Arconic and subsidiaries Statement of
Consolidated Operations (unaudited) (in millions, except
per-share and share amounts) Quarter ended
September 30, 2018 June 30, 2018 September
30, 2017 Sales $ 3,524 $ 3,573 $ 3,236 Cost of goods
sold (exclusive of expenses below) 2,881 2,903 2,591 Selling,
general administrative, and other expenses 134 158 152 Research and
development expenses 25 29 24 Provision for depreciation and
amortization 141 144 140 Restructuring and other charges (2 ) 15 19
Operating income(1) 345 324 310 Interest expense 88 89 100
Other expense, net(1) 8 41 38 Income before income
taxes 249 194 172 Provision for income taxes 88 74 53
Net income $ 161 $ 120 $ 119 EARNINGS PER SHARE
ATTRIBUTABLE TO ARCONIC COMMON SHAREHOLDERS:
Basic(2)(3):
Earnings per share $ 0.33 $ 0.25 $ 0.23
Average number of shares(3)
483,048,831 482,854,550
441,512,709
Diluted(2)(3):
Earnings per share $ 0.32 $ 0.24 $ 0.22
Average number of shares(3)
502,427,792 501,960,573 462,055,864 (1) In the first quarter
of 2018, Arconic adopted changes issued by the Financial Accounting
Standards Board ("FASB") to the presentation of net periodic
pension cost and net periodic postretirement benefit cost. Based on
the new guidance, Arconic has presented only the service cost
component of net periodic benefit cost within Operating income,
while the non-service related components of net periodic benefit
cost have been presented in the Other expense, net line item. Prior
periods in 2017 have been recast to conform to this presentation.
As a result, $39 of non-service related net periodic benefit cost
was reclassified in the quarter ended September 30, 2017 from
various line items within Operating income to the Other expense,
net line item. There was no impact to Net income. (2) In
order to calculate both basic and diluted earnings per share,
preferred stock dividends declared of $1, $1 and $18 for the
quarters ended September 30, 2018, June 30, 2018 and September 30,
2017, respectively, need to be subtracted from Net income.
(3) For the quarters ended September 30, 2018, June 30, 2018, and
September 30, 2017, the difference between the respective diluted
average number of shares and the respective basic average number of
shares related to share equivalents (19 million, 19 million, and 20
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”)).
Arconic and subsidiaries
Statement of Consolidated Operations (unaudited) (in
millions, except per-share and share amounts) Nine
months ended September 30, 2018 September 30,
2017 Sales $ 10,542 $ 9,689 Cost of goods sold
(exclusive of expenses below) 8,552 7,598 Selling, general
administrative, and other expenses 464 569 Research and development
expenses 77 81 Provision for depreciation and amortization 427 410
Restructuring and other charges 20 118 Operating
income(1) 1,002 913 Interest expense(2) 291 398 Other
expense (income), net(1),(3) 69 (410 ) Income before
income taxes 642 925 Provision for income taxes 218 272
Net income $ 424 $ 653 EARNINGS
PER SHARE ATTRIBUTABLE TO ARCONIC COMMON SHAREHOLDERS: Basic(4)(5):
Earnings per share $ 0.87 $ 1.36 Average number of shares(5)
482,765,798 440,751,958 Diluted(4)(5): Earnings per share $
0.86 $ 1.31 Average number of shares(5) 502,521,053 500,534,603
Common stock outstanding at the end of the period(4)
483,181,619 442,080,224 (1) In the first quarter of 2018,
Arconic adopted changes issued by the FASB to the presentation of
net periodic pension cost and net periodic postretirement benefit
cost. Based on the new guidance, Arconic has presented only the
service cost component of net periodic benefit cost within
Operating income, while the non-service related components of net
periodic benefit cost have been presented in the Other expense
(income), net line item. Prior periods in 2017 have been recast to
conform to this presentation. As a result, $116 of non-service
related net periodic benefit cost was reclassified in the
nine-month period ended September 30, 2017 from various line items
within Operating income to the Other expense (income), net line
item. There was no impact to Net income. (2) Interest
expense for the nine months ended September 30, 2018 included $19
related to the early redemption of the Company’s outstanding 5.720%
Senior Notes due 2019. Interest expense for the nine months ended
September 30, 2017 included $76 related to the early redemption of
the Company’s outstanding 6.500% Senior Notes due 2018 and 6.750%
Senior Notes due 2018 (collectively, the “2018 Senior Notes”) and a
portion of the Company’s outstanding 5.720% Senior Notes due 2019.
(3) Other expense (income), net for the nine months ended
September 30, 2017 included a $351 gain on the sale of a portion of
Arconic’s investment in Alcoa Corporation common stock and a $167
gain on the exchange of Arconic’s remaining investment in Alcoa
Corporation common stock for a portion of the Company’s outstanding
2018 Senior Notes. (4) In order to calculate both basic and
diluted earnings per share, preferred stock dividends declared of
$2 and $53 for the nine months ended September 30, 2018 and
September 30, 2017, respectively, need to be subtracted from Net
income. (5) 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). For the
nine months ended September 30, 2017, the difference between the
respective diluted average number of shares and the respective
basic average number of shares related to share equivalents (60
million) associated with outstanding employee stock options and
awards, shares underlying outstanding convertible debt (acquired
through the acquisition of RTI), and shares underlying mandatory
convertible preferred stock.
Arconic and
subsidiaries Consolidated Balance Sheet (unaudited)
(in millions) September 30, 2018 December
31, 2017 Assets Current assets: Cash and cash
equivalents $ 1,535 $ 2,150 Receivables from customers, less
allowances of $5 in 2018 and $8 in 2017 1,147 1,035 Other
receivables 511 339 Inventories 2,622 2,480 Prepaid expenses and
other current assets 317 374 Total current assets
6,132 6,378 Properties, plants, and equipment,
net 5,645 5,594 Goodwill 4,517 4,535 Deferred income taxes 605 743
Intangibles, net 954 987 Other noncurrent assets 474 481
Total assets $ 18,327 $ 18,718
Liabilities Current liabilities: Accounts payable, trade $
2,061 $ 1,839 Accrued compensation and retirement costs 359 399
Taxes, including income taxes 84 75 Accrued interest payable 97 124
Other current liabilities 371 349 Short-term debt 42 38
Total current liabilities 3,014 2,824
Long-term debt, less amount due within one year 6,315 6,806 Accrued
pension benefits 2,120 2,564 Accrued other postretirement benefits
773 841 Other noncurrent liabilities and deferred credits 730
759 Total liabilities 12,952 13,794
Equity Arconic shareholders’ equity: Preferred stock
55 55 Common stock 483 481 Additional capital 8,310 8,266
Accumulated deficit (943 ) (1,248 ) Accumulated other comprehensive
loss (2,544 ) (2,644 ) Total Arconic shareholders’ equity 5,361
4,910 Noncontrolling interests 14 14 Total equity
5,375 4,924 Total liabilities and equity $ 18,327
$ 18,718
Arconic and
subsidiaries Statement of Consolidated Cash Flows
(unaudited) (in millions) Nine months ended
September 30, 2018 2017 Operating
activities Net income $ 424 $ 653 Adjustments to reconcile net
income to cash used for operations: Depreciation and amortization
427 410 Deferred income taxes 95 24 Restructuring and other charges
20 118 Net loss (gain) from investing activities—asset sales 7 (514
) Net periodic pension benefit cost 100 163 Stock-based
compensation 43 59 Other 61 112 Changes in assets and liabilities,
excluding effects of acquisitions, divestitures, and foreign
currency translation adjustments: (Increase) in receivables(1)
(1,020 ) (792 ) (Increase) in inventories (184 ) (168 ) (Increase)
decrease in prepaid expenses and other current assets (3 ) 6
Increase (decrease) in accounts payable, trade 257 (94 ) (Decrease)
in accrued expenses (96 ) (138 ) Increase in taxes, including
income taxes 63 144 Pension contributions (288 ) (257 ) (Increase)
in noncurrent assets (33 ) (37 ) (Decrease) in noncurrent
liabilities (82 ) (62 )
Cash used for operations (209 ) (373
)
Financing Activities Net change in short-term
borrowings (original maturities of three months or less) 3 15
Additions to debt (original maturities greater than three months)
450 664 Premiums paid on early redemption of debt (17 ) (52 )
Payments on debt (original maturities greater than three months)
(952 ) (1,484 ) Proceeds from exercise of employee stock options 15
48 Dividends paid to shareholders (89 ) (132 ) Distributions to
noncontrolling interests — (14 ) Other (19 ) (15 )
Cash used for
financing activities (609 ) (970 )
Investing
Activities Capital expenditures (497 ) (360 ) Proceeds from the
sale of assets and businesses 7 (9 ) Sales of investments(2) 9 890
Cash receipts from sold receivables(1) 693 514 Other(3) (1 ) 244
Cash provided from investing activities 211
1,279
Effect of exchange rate changes on cash,
cash equivalents and restricted cash (4) (4 ) 6 Net
change in cash, cash equivalents and restricted cash(4) (611 ) (58
) Cash, cash equivalents and restricted cash at beginning of
year(4) 2,153 1,878
Cash, cash equivalents and
restricted cash at end of period(4) $ 1,542 $
1,820 (1) In the first quarter of 2018, Arconic
adopted changes issued by the FASB to the classification of certain
cash receipts and cash payments within the statement of cash flows.
Based on the new guidance, Arconic classified cash received related
to net sales of beneficial interest in previously transferred trade
accounts receivables within investing activities. This new
accounting standard does not reflect a change in our underlying
business or activities. The prior period in 2017 has been recast to
conform to this presentation, resulting in the reclassification of
$514 from operating activities to investing activities for the nine
months ended September 30, 2017. In addition, Arconic reclassified
$52 of cash paid for debt prepayments including extinguishment
costs from operating activities to financing activities for the
nine months ended September 30, 2017. (2) In the first
quarter of 2017, Arconic sold 23,353,000 of its shares of Alcoa
Corporation common stock at $38.03 per share which resulted in $888
in cash proceeds. (3) In the first quarter of 2017, Other
investing activities included proceeds received from Alcoa
Corporation’s sale of the Yadkin Hydroelectric Project. (4)
In the first quarter of 2018, Arconic adopted changes issued by the
FASB to the classification of cash and cash equivalents within the
statement of cash flows. Based on the new guidance, Arconic
classified restricted cash and the change in restricted cash within
the cash and cash equivalents and net change in cash and cash
equivalents line items. The prior period in 2017 has been recast to
conform to this presentation, resulting in the reclassification of
$11 from investing activities for the nine months ended September
30, 2017.
Arconic and subsidiaries Segment Information
(unaudited) (in millions) 1Q17 2Q17
3Q17 4Q17 2017 1Q18 2Q18
3Q18
Engineered
Products and Solutions:
Third-party sales $ 1,487 $ 1,485 $ 1,477 $ 1,494
$ 5,943 $ 1,541 $ 1,596 $ 1,566 Segment operating profit(1) $ 247 $
250 $ 239 $ 228 $ 964 $ 221 $ 212 $ 238 Segment operating profit
margin 16.6 % 16.8 % 16.2 % 15.3 % 16.2 % 14.3 % 13.3 % 15.2 %
Provision for depreciation and amortization $ 64 $ 66 $ 68 $ 70 $
268 $ 71 $ 70 $ 71 Impairment of goodwill $ — $ — $ — $ 719 $ 719 $
— $ — $ — Restructuring and other charges $ 6
$ 8 $ 10 $ 6 $ 30
$ 1 $ 9 $ 15
Global Rolled
Products:
Third-party sales $ 1,248 $ 1,271 $ 1,234 $ 1,247 $ 5,000 $ 1,366 $
1,451 $ 1,426 Intersegment sales $ 34 $ 37 $ 36 $ 41 $ 148 $ 42 $
46 $ 34 Segment operating profit $ 136 $ 133 $ 64 $ 91 $ 424 $ 112
$ 123 $ 74 Segment operating profit margin 10.9 % 10.5 % 5.2 % 7.3
% 8.5 % 8.2 % 8.5 % 5.2 % Provision for depreciation and
amortization $ 50 $ 51 $ 52 $ 52 $ 205 $ 51 $ 53 $ 50 Restructuring
and other charges $ 57 $ 17 $ 2 $ (4 ) $ 72 $ (1 ) $ 1 $ 2
Third-party aluminum shipments (kmt) 310 307
297 283 1,197
308 315 318
Transportation
and Construction Solutions:
Third-party sales $ 456 $ 504 $ 523 $ 528 $ 2,011 $ 537 $ 562 $ 530
Segment operating profit $ 68 $ 71 $ 74 $ 77 $ 290 $ 67 $ 97 $ 77
Segment operating profit margin 14.9 % 14.1 % 14.1 % 14.6 % 14.4 %
12.5 % 17.3 % 14.5 % Provision for depreciation and amortization $
12 $ 12 $ 13 $ 13 $ 50 $ 13 $ 12 $ 12 Restructuring and other
charges $ 3 $ 6 $ 2
$ 41 $ 52 $ — $ —
$ —
Reconciliation of Total segment
operating profit to Consolidated income (loss) before income
taxes: Total segment operating profit $ 451 $ 454 $ 377 $ 396 $
1,678 $ 400 $ 432 $ 389 Unallocated amounts: Restructuring and
other charges (73 ) (26 ) (19 ) (47 ) (165 ) (7 ) (15 ) 2
Impairment of goodwill — — — (719 ) (719 ) — — — Corporate
expense(2) (95 ) (108 ) (48 ) (63 )
(314 ) (60 ) (93 ) (46 ) Consolidated
operating income (loss) 283 320 310 (433 ) 480 333 324 345 Interest
expense(3) (115 ) (183 ) (100 ) (98 ) (496 ) (114 ) (89 ) (88 )
Other income (expense), net(4) 316 132
(38 ) 76 486 (20 )
(41 ) (8 ) Consolidated income (loss) before income taxes
$ 484 $ 269 $ 172
$ (455 ) $ 470 $ 199 $ 194
$ 249
In the first quarter of 2018, the Company changed its primary
measure of segment performance from Adjusted EBITDA to Segment
operating profit. Arconic’s definition of Segment operating profit
is Operating income (loss) excluding Special items. Special items
include Restructuring and other charges, and Impairment of
goodwill. Segment operating profit may not be comparable to
similarly titled measures of other companies. Prior period amounts
have been recast to conform to current period presentation.
Segment operating profit also includes certain items which under
the previous segment performance measure were recorded in
Corporate, such as the impact of LIFO inventory accounting, metal
price lag, intersegment profit eliminations, and derivative
activities.
The difference between certain segment totals and consolidated
amounts is Corporate.
(1) For the quarter ended June 30, 2018, Segment operating
profit for the Engineered Products and Solutions segment included
the impact of a $23 charge related to a physical inventory
adjustment at one plant. (2) For the quarter ended March 31,
2017, Corporate expense included $18 of costs associated with the
separation of Alcoa Inc. and $16 of proxy, advisory and
governance-related costs. For the quarter ended June 30, 2017,
Corporate expense included $42 of proxy, advisory and
governance-related costs. 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.
(3) For the quarter ended June 30, 2017, Interest expense
included $76 related to the early redemption of the Company’s 2018
Senior Notes and a portion of the Company’s outstanding 5.720%
Senior Notes due 2019. For quarter ended March 31, 2018, Interest
expense included $19 related to the early redemption of the
Company’s outstanding 5.720% Senior Notes due 2019. (4) For
the quarter ended March 31, 2017, Other income (expense), net
included a $351 gain on the sale of a portion of Arconic’s
investment in Alcoa Corporation common stock. For the quarter ended
June 30, 2017, Other income (expense), net included a $167 gain on
the exchange of Arconic’s remaining investment in Alcoa Corporation
common stock for a portion of the Company’s outstanding 2018 Senior
Notes. For the quarter ended December 31, 2017, Other income
(expense), net included favorable adjustments of $81 to the Firth
Rixson earn-out and $25 to a separation-related guarantee
liability.
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 30,2018
June 30,2018
September 30,2017
September 30,2018
September 30,2017
Net income $ 161 $ 120 $ 119 $ 424 $ 653 Diluted earnings per share
(EPS) $ 0.32 $ 0.24 $ 0.22 $ 0.86 $ 1.31 Special items:
Restructuring and other charges (2 ) 15 19 20 118 Discrete tax
items(1) 26 21 2 49 3 Other special items(2) (24 ) 42 — 43 (348 )
Tax impact(3) (1 ) (13 ) (8 ) (22 ) 40 Net income
excluding Special items $ 160 $ 185 $ 132 $
514 $ 466 Diluted EPS excluding Special items
$ 0.32 $ 0.37 $ 0.25 $ 1.04 $ 0.91
Average number of shares - diluted EPS excluding
Special items(4) 502,427,792 501,960,573 462,055,864 502,521,053
461,287,601
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, 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 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 quarter ended June 30, 2018, charges resulting from the
Company’s 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 quarter ended September 30, 2017, a net charge for a number
of small items ($2);
•
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 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); and
•
for the nine months ended September 30, 2017, a net charge for a
number of small items ($3). (2) Other special items included
the following:
•
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 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 quarter ended September 30, 2017, legal and other advisory
costs related to Grenfell Tower ($7) 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 ($7);
•
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 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); and
•
for the nine months ended September 30, 2017, a gain on the sale of
a portion of Arconic’s investment in Alcoa Corporation common stock
($351), and a gain on the exchange of the remaining portion of
Arconic’s investment in Alcoa Corporation common stock ($167),
costs associated with the Company’s early redemption of $1,250 of
outstanding senior notes ($76), proxy, advisory, and
governance-related costs ($58), costs associated with the
separation of Alcoa Inc. ($18), legal and other advisory costs
related to Grenfell Tower ($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) and an unfavorable tax impact related to the interim
period treatment of operational losses in certain foreign
jurisdictions for which no tax benefit was recognized ($5).
(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. For
the quarter and nine months ended September 30, 2017, share
equivalents associated with mandatory convertible preferred stock
were anti-dilutive based on Net income excluding Special items.
Operational Tax Rate Quarter ended
September 30, 2018 Nine months ended September 30, 2018
As reported
Specialitems(1)
As adjusted As reported
Specialitems(1)
As adjusted Income before income taxes $ 249 $ (26 )
$ 223 $ 642 $ 62 $ 704 Provision for income taxes 88 (25 ) 63 218
(28 ) 190 Operational tax rate 35.3 % 28.3 % 34.0 % 27.0 %
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 endedSeptember
30,
Quarter ended June 30,
Nine months endedSeptember
30,
2018 2017 2018 2017
2018 2017
Arconic
Sales – Arconic $ 3,524 $ 3,236 $ 3,573 $ 3,261 $ 10,542 $ 9,689
Less: Sales – Tennessee packaging 37 45 46 51 126 150 Sales –
Fusina rolling mill — — — 9 — 54 Sales – Latin America extrusions —
30 — 30 25 86 Aluminum price impact 108 n/a 149 n/a 366 n/a Foreign
currency impact (15 ) n/a 38 n/a 89 n/a
Arconic Organic revenue $ 3,394 $ 3,161 $ 3,340
$ 3,171 $ 9,936 $ 9,399
Engineered Products
and Solutions (EP&S)
Sales $ 1,566 $ 1,477 $ 1,596 $ 1,485 $ 4,703 $ 4,449 Less:
Aluminum price impact (1 ) n/a 2 n/a 2 n/a Foreign currency impact
(1 ) n/a 15 n/a 39 n/a EP&S Organic
revenue $ 1,568 $ 1,477 $ 1,579 $ 1,485
$ 4,662 $ 4,449
Global Rolled
Products (GRP)
Sales $ 1,426 $ 1,234 $ 1,451 $ 1,271 $ 4,243 $ 3,753 Less: Sales –
Tennessee packaging 37 45 46 51 126 150 Sales – Fusina rolling mill
— — — 9 — 54 Aluminum price impact 106 n/a 128 n/a 343 n/a Foreign
currency impact (10 ) n/a 8 n/a 14 n/a
GRP Organic revenue $ 1,293 $ 1,189 $ 1,269 $
1,211 $ 3,760 $ 3,549
Transportation and
Construction Solutions (TCS)
Sales $ 530 $ 523 $ 562 $ 504 $ 1,629 $ 1,483 Less: Sales – Latin
America extrusions — 30 — 30 25 86 Aluminum price impact 3 n/a 19
n/a 21 n/a Foreign currency impact (4 ) n/a 15 n/a
36 n/a TCS Organic revenue $ 531 $ 493
$ 528 $ 474 $ 1,547 $ 1,397
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 and Toll Processing and Services Agreement
with Alcoa Corporation at the North America packaging business at
its Tennessee operations, the sale of the Fusina, Italy rolling
mill, the sale of Latin America extrusions, and the impact of
changes in aluminum prices and foreign currency fluctuations
relative to the prior year periods.
Arconic and subsidiaries Calculation of
Financial Measures (unaudited), continued (dollars in
millions) Adjusted free cash flow Quarter
ended Nine months ended
September 30,2018
June 30,2018
September 30,2017
September 30,2018
September 30,2017
Cash provided from (used for) operations $ 51 $ 176 $ (57 ) $ (209
) $ (373 ) Capital expenditures (209 ) (171 ) (131 ) (497 ) (360 )
Cash receipts from sold receivables 273 284 229
693 514 Adjusted free cash flow $ 115 $
289 $ 41 $ (13 ) $ (219 )
There has been no change in the net cash funding in the sale of
accounts receivable program in the third quarter of 2018. 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. In conjunction
with the implementation of the new accounting guidance on changes
to the classification of certain cash receipts and cash payments
within the statement of cash flows, specifically as it relates to
the requirement to reclassify cash receipts from net sales of
beneficial interest in sold receivables from operating activities
to investing activities, the Company has changed the calculation of
its measure of Adjusted free cash flow to include cash receipts
from net sales of beneficial interest in sold receivables. This
change to our measure of Adjusted free cash flow is being
implemented to ensure consistent presentation of this measure
across all historical periods. The adoption of this accounting
guidance does not reflect a change in our underlying business or
activities. 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 30,2018
June 30,2018
March 31,2018
December 31,2017
September 30,2017
Short-term debt $ 42 $ 45 $ 45 $ 38 $ 55 Long-term debt, less
amount due within one year 6,315 6,312 6,309
6,806 6,802 Total debt $ 6,357 $ 6,357 $ 6,354 $ 6,844 $
6,857 Less: Cash and cash equivalents 1,535 1,455
1,205 2,150 1,815 Net debt $ 4,822 $ 4,902
$ 5,149 $ 4,694 $ 5,042
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 30,2018
June 30,2018
September 30,2017
September 30,2018
September 30,2017
Operating income $ 345 $ 324 $ 310 $ 1,002 $ 913 Special
items: Restructuring and other charges (2 ) 15 19 20 118 Separation
costs — — — — 18 Proxy, advisory and governance-related costs — — —
— 58 Legal and other advisory costs related to Grenfell Tower 5 4 7
14 7 Settlements of certain customer claims primarily related to
product introductions — 38 — 38 —
Operating income excluding Special items $ 348 $ 381
$ 336 $ 1,074 $ 1,114
Operating income excluding Special items 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 Operating 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) Nine
months ended September 30, 2018 Net income $ 424 Special
items(1) 90 Net income excluding Special items $ 514
Annualized net income excluding Special items $ 685 Net
Assets:
September 30, 2018 Add: Receivables
from customers, less allowances $ 1,147 Add: Deferred purchase
program(2) 362 Add: Inventories 2,622 Less: Accounts payable, trade
2,061 Working capital 2,070 Properties, plants, and
equipment, net (PP&E) 5,645 Net assets - total $ 7,715
RONA 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/20181030005569/en/
Arconic Inc.Investor ContactPaul T. Luther,
212-836-2758Paul.Luther@arconic.comorMedia ContactJustin
Falce, 412-553-2666Justin.Falce@arconic.com
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