Second Quarter 2018 Highlights
- Revenue of $3.6 billion, up 10% year
over year; organic revenue1 up 5% year over year
- Net income of $120 million, or $0.24
per share, versus net income of $212 million, or $0.43 per share,
in the second quarter of 2017
- Net income excluding special items of
$185 million, or $0.37 per share, versus $165 million, or $0.32 per
share, in the second quarter of 2017
- Operating income of $324 million, up 1%
year over year
- Operating income excluding special
items of $381 million, down 2% year over year
- In the second quarters of 2018 and
2017: cash provided from operations of $176 million and $79
million, respectively; cash used for financing activities of $35
million and $912 million, respectively; and cash provided from
investing activities of $117 million and $69 million,
respectively.
- Adjusted Free Cash Flow in second
quarter 2018 was $289 million, which doubled year over year
2018 Guidance* Unchanged
- Previously announced 2018 Guidance is
unchanged: Revenue $13.7-$14.0 billion, Earnings Per Share
Excluding Special Items $1.17-$1.27, Adjusted Free Cash Flow ~$250
million
Key Announcements
- Strategy and portfolio review on track
and expected to conclude in the third quarter 2018; initiating sale
process of Building and Construction Systems (BCS) business
- Arconic Investor Day scheduled for
November 2018
- Expansions totaling more than $100
million at Arconic’s Whitehall and Morristown operations to meet
the growing demand from aerospace engine customers
- Signed Arconic’s largest multiyear
contract with Boeing to supply aluminum sheet and plate for all
models produced by Boeing Commercial Airplanes
- As previously reported, renewed $3
billion credit facility (now matures in June 2023) on improved
terms
______________________________________
* 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
Unchanged” below.
Arconic Inc. (NYSE: ARNC) today reported second quarter 2018
results, for which the Company reported revenues of $3.6 billion,
up 10% year over year. Organic revenue1 was up 5% year
over year, driven by higher volumes in the commercial
transportation, automotive, aerospace engines, defense, and
building and construction markets. This was partially offset by
unfavorable aerospace wide-body production mix, and the negative
impact of $38 million related to the settlements of certain
customer claims.
Net income in the second quarter was $120 million, or $0.24 per
share. These results include $65 million in special items,
including the impact of $38 million related to the settlements of
certain customer claims principally related to product
introductions, discrete tax items associated with U.S. tax reform,
and restructuring-related charges. Second quarter 2017 net income
was $212 million, or $0.43 per share. Net income excluding special
items was $185 million, or $0.37 per share, in the second quarter
of 2018, versus $165 million, or $0.32 per share, in the second
quarter of 2017.
Second quarter 2018 operating income was $324 million, up 1%
year over year. Operating income excluding special items was $381
million, down 2% year over year, reflecting the impact of a $23
million charge related to a physical inventory adjustment in one
facility, unfavorable aerospace wide-body production mix, and
continued challenges in the Rings and Disks operations, mostly
offset by higher volumes and net cost savings.
Arconic Chief Executive Officer Chip Blankenship said, “In the
second quarter, Arconic delivered strong organic revenue growth and
doubled adjusted free cash flow. We announced contract awards at
the Farnborough International Airshow, providing groundwork for
exciting growth with valued customers. We have initiated the sale
process of our Building and Construction Systems business as the
first outcome of our ongoing strategy review. Our team is
delivering operational improvements where we need it the most.
While there is plenty of work yet to be done, we are driving
progress and generating positive momentum.”
Arconic ended the second quarter 2018 with cash on hand of $1.5
billion. Cash provided from operations was $176 million; cash used
for financing activities totaled $35 million; and cash provided
from investing activities was $117 million. Adjusted Free Cash Flow
for the quarter was $289 million.
Second Quarter 2018 Segment Performance2
Engineered Products and Solutions
(EP&S)
EP&S reported revenue of $1.6 billion, an increase of 7%
year over year. Organic revenue1 was up 6% driven by volume growth
in aerospace engines and defense. Segment operating profit was $212
million, down $38 million year over year, as a negative physical
inventory adjustment of $23 million in one facility, unfavorable
product mix, and continued challenges in Rings and Disks more than
offset volume growth across all business units. Segment operating
margin was 13.3%, down 350 basis points year over year.
Global Rolled Products (GRP)
GRP reported revenue of $1.5 billion, an increase of 14% year
over year. Organic revenue1 was up 5%. Segment operating profit was
$123 million, down $10 million year over year, driven by
unfavorable aerospace wide-body production mix and higher aluminum
prices, partially offset by higher automotive and commercial
transportation volume and net cost savings. Segment operating
margin was 8.5%, down 200 basis points year over year, including a
120 basis point negative impact of higher aluminum prices.
Transportation and Construction Solutions
(TCS)
TCS delivered revenue of $562 million, an increase of 12% year
over year. Organic revenue1 was up 11%. Segment operating profit
was $97 million, up $26 million year over year, as higher volume in
commercial transportation and building and construction, and net
cost savings more than offset headwinds from higher aluminum
prices. Segment operating margin was 17.3%, up 320 basis points
year over year, including a 150 basis point negative impact of
higher aluminum prices.
Full Year 2018 Guidance* Unchanged
Arconic’s full year 2018 guidance, which was previously
announced on April 30, 2018, remains unchanged.
- Revenue of $13.7 billion to $14.0
billion
- Earnings Per Share Excluding Special
Items of $1.17 to $1.27
- Adjusted Free Cash Flow of
approximately $250 million
* Arconic has not provided a reconciliation of the
forward-looking financial measures of earnings per share excluding
special items and adjusted free cash flow to the most directly
comparable financial measures prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP) 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,
reconciliations of the forward-looking non-GAAP financial measures
to the most directly comparable GAAP measures 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.
Strategy and Portfolio Review
In January 2018, Arconic initiated a review of its strategy and
portfolio. As part of that ongoing review, the Company has
initiated the sale process of Arconic’s Building and Construction
Systems (BCS) business.
The Company continues to target completion of the strategic
review in the third quarter 2018. Arconic’s Investor Day, which
will include the output of the strategic review and associated
actions, is expected to be held in November 2018.
Expansion of Whitehall, MI and Morristown, TN
Operations
Arconic is expanding its operations in Whitehall, Michigan, and
Morristown, Tennessee, to provide additional capacity to meet
growing demand from aerospace engine customers. The expansions
total more than $100 million; about one-third of the total spend
will happen in 2018 and is already included in the Company’s 2018
capital expenditures plan. The expansions are expected to be
operational by the end of 2020.
Signed Largest Multiyear Supply Contract with Boeing
Arconic signed a new long-term contract with Boeing to supply
aluminum sheet and plate for all models produced by Boeing
Commercial Airplanes. The multiyear contract, which extends and
adds to the 2014 contract between the companies, is the largest to
date.
Renewal of Credit Facility
As previously reported, on June 29, 2018, Arconic entered into
Amendment No. 2 to its Five-Year Revolving Credit Agreement, which,
among other matters, provides that the Company’s $3 billion senior
unsecured revolving credit facility will now mature on June 29,
2023, and includes certain improved terms.
Arconic will hold its quarterly conference call at 10:00 AM
Eastern Time on July 31, 2018, to present second 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 July 31.
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; 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) 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 US 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) the
impact of cyber attacks and potential information technology or
data security breaches; (i) changes in discount rates or investment
returns on pension assets; (j) the impact of changes in aluminum
prices and foreign currency exchange rates on costs and results;
(k) the outcome of contingencies, including legal proceedings,
government or regulatory investigations, and environmental
remediation, which can expose Arconic to substantial costs and
liabilities; and (l) 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 June 30, 2018
March 31, 2018 June 30, 2017 Sales $
3,573 $ 3,445 $ 3,261 Cost of goods sold (exclusive of
expenses below) 2,903 2,768 2,549 Selling, general administrative,
and other expenses 158 172 200 Research and development expenses 29
23 29 Provision for depreciation and amortization 144 142 137
Restructuring and other charges 15 7 26
Operating income(1) 324 333 320 Interest expense(2) 89 114
183 Other expense (income), net(1),(3) 41 20 (132 )
Income before income taxes 194 199 269 Provision for income
taxes 74 56 57 Net income $ 120
$ 143 $ 212 EARNINGS PER SHARE ATTRIBUTABLE TO
ARCONIC COMMON SHAREHOLDERS: Basic(4)(5): Earnings per share $ 0.25
$ 0.30 $ 0.44 Average number of shares(5) 482,854,550 482,438,854
440,865,477 Diluted(4)(5): Earnings per share $ 0.24 $ 0.29
$ 0.43 Average number of shares(5) 501,960,573 502,924,068
461,826,510 (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 (income), net line item. Prior
periods in 2017 has 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 June 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 quarter ended
March 31, 2018 included $19 related to the early redemption of the
Company’s outstanding 5.720% Senior Notes due 2019. Interest
expense for the quarter ended June 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
quarter ended June 30, 2017 included a $167 gain on the exchange of
Arconic’s remaining investment in Alcoa Corporation common stock
for a portion of the Company’s 2018 Senior Notes.
(4)
In order to calculate both basic and
diluted earnings per share, preferred stock dividends declared of
$1, $1 and $18 for the quarters ended June 30, 2018, March 31, 2018
and June 30, 2017, respectively, need to be subtracted from Net
income.
(5)
For the quarters ended June 30, 2018,
March 31, 2018, and June 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, 20 million, and 21 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) Six months ended
June 30, 2018 June 30, 2017 Sales $ 7,018 $
6,453 Cost of goods sold (exclusive of expenses below) 5,671
5,007 Selling, general administrative, and other expenses 330 417
Research and development expenses 52 57 Provision for depreciation
and amortization 286 270 Restructuring and other charges 22
99 Operating income(1) 657 603 Interest expense(2)
203 298 Other expense (income), net(1),(3) 61 (448 )
Income before income taxes 393 753 Provision for income taxes 130
219 Net income $ 263 $ 534
EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC COMMON
SHAREHOLDERS: Basic(4)(5): Earnings per share $ 0.54 $ 1.13 Average
number of shares(5) 482,622,069 440,346,195 Diluted(4)(5):
Earnings per share $ 0.53 $ 1.07 Average number of shares(5)
502,452,369 500,141,305 Common stock outstanding at the end
of the period(4) 482,891,826 440,954,618 (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, $77 of non-service related net
periodic benefit cost was reclassified in the six-month period
ended June 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 six months ended
June 30, 2018 included $19 related to the early redemption of the
Company’s outstanding 5.720% Senior Notes due 2019. Interest
expense for the six months ended June 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 six
months ended June 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
$1 and $35 for the six months ended June 30, 2018 and June 30,
2017, respectively, need to be subtracted from Net income.
(5)
For the six months ended June 30, 2018,
the difference between the respective diluted average number of
shares and the respective basic average number of shares related to
share equivalents (20 million) associated with outstanding employee
stock options and awards and shares underlying outstanding
convertible debt (acquired through the acquisition of RTI). For the
six months ended June 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)
June 30, 2018 December 31, 2017 Assets
Current assets: Cash and cash equivalents $ 1,455 $ 2,150
Receivables from customers, less allowances of $5 in 2018 and $8 in
2017 1,159 1,035 Other receivables 478 339 Inventories 2,659 2,480
Prepaid expenses and other current assets 324 374
Total current assets 6,075 6,378 Properties,
plants, and equipment, net 5,582 5,594 Goodwill 4,518 4,535
Deferred income taxes 626 743 Intangibles, net 963 987 Other
noncurrent assets 455 481 Total assets $ 18,219
$ 18,718
Liabilities Current
liabilities: Accounts payable, trade $ 2,024 $ 1,839 Accrued
compensation and retirement costs 364 399 Taxes, including income
taxes 69 75 Accrued interest payable 113 124 Other current
liabilities 362 349 Short-term debt 45 38 Total
current liabilities 2,977 2,824 Long-term debt, less
amount due within one year 6,312 6,806 Accrued pension benefits
2,184 2,564 Accrued other postretirement benefits 815 841 Other
noncurrent liabilities and deferred credits 713 759
Total liabilities 13,001 13,794
Equity
Arconic shareholders’ equity: Preferred stock 55 55 Common stock
483 481 Additional capital 8,295 8,266 Accumulated deficit (1,073 )
(1,248 ) Accumulated other comprehensive loss (2,556 ) (2,644 )
Total Arconic shareholders’ equity 5,204 4,910 Noncontrolling
interests 14 14 Total equity 5,218 4,924
Total liabilities and equity $ 18,219 $ 18,718
Arconic and subsidiaries Statement of
Consolidated Cash Flows (unaudited) (in millions)
Six months ended June 30, 2018 2017
Operating activities Net income $ 263 $ 534 Adjustments to
reconcile net income to cash used for operations: Depreciation and
amortization 286 270 Deferred income taxes 47 27 Restructuring and
other charges 22 99 Net loss (gain) from investing activities—asset
sales 5 (515 ) Net periodic pension benefit cost 71 108 Stock-based
compensation 29 48 Other 50 115 Changes in assets and liabilities,
excluding effects of acquisitions, divestitures, and foreign
currency translation adjustments: (Increase) in receivables(1) (709
) (567 ) (Increase) in inventories (220 ) (150 ) Decrease in
prepaid expenses and other current assets 8 30 Increase (decrease)
in accounts payable, trade 218 (69 ) (Decrease) in accrued expenses
(84 ) (105 ) Increase in taxes, including income taxes 37 121
Pension contributions (237 ) (163 ) (Increase) in noncurrent assets
(4 ) (60 ) (Decrease) in noncurrent liabilities (42 ) (39 )
Cash
used for operations (260 ) (316 )
Financing
Activities Net change in short-term borrowings (original
maturities of three months or less) 5 9 Additions to debt (original
maturities greater than three months) 300 512 Premiums paid on
early redemption of debt (17 ) (52 ) Payments on debt (original
maturities greater than three months) (801 ) (1,333 ) Proceeds from
exercise of employee stock options 13 26 Dividends paid to
shareholders (60 ) (88 ) Distributions to noncontrolling interests
— (14 ) Other (17 ) (15 )
Cash used for financing activities
(577 ) (955 )
Investing Activities Capital
expenditures (288 ) (229 ) Proceeds from the sale of assets and
businesses 5 (9 ) Sales of investments(2) 9 888 Cash receipts from
sold receivables(1) 420 285 Other(3) — 244
Cash
provided from investing activities 146 1,179
Effect of exchange rate changes on cash, cash equivalents
and restricted cash (4) (2 ) 4 Net change in cash, cash
equivalents and restricted cash(4) (693 ) (88 ) 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) $ 1,460 $ 1,790 (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
$285 from operating activities to investing activities for the six
months ended June 30, 2017. In addition, Arconic reclassified $52
of cash paid for debt prepayments including extinguishment costs
from operating activities to financing activities for the six
months ended June 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 $10 from investing activities for the six
months ended June 30, 2017.
Arconic
and subsidiaries Segment Information (unaudited) (in
millions) 1Q17 2Q17 3Q17
4Q17 2017 1Q18 2Q18
Engineered
Products and Solutions:
Third-party sales $ 1,487 $ 1,485 $ 1,477 $ 1,494 $ 5,943 $ 1,541 $
1,596 Segment operating profit(1) $ 247 $ 250 $ 239 $ 228 $ 964 $
221 $ 212 Segment operating profit margin 16.6 % 16.8 % 16.2 % 15.3
% 16.2 % 14.3 % 13.3 % Provision for depreciation and amortization
$ 64 $ 66 $ 68 $ 70 $ 268 $ 71 $ 70 Impairment of goodwill $ — $ —
$ — $ 719 $ 719 $ — $ — Restructuring and other charges $ 6
$ 8 $ 10 $ 6
$ 30 $ 1 $ 9
Global Rolled
Products:
Third-party sales $ 1,248 $ 1,271 $ 1,234 $ 1,247 $ 5,000 $ 1,366 $
1,451 Intersegment sales $ 34 $ 37 $ 36 $ 41 $ 148 $ 42 $ 46
Segment operating profit $ 136 $ 133 $ 64 $ 91 $ 424 $ 112 $ 123
Segment operating profit margin 10.9 % 10.5 % 5.2 % 7.3 % 8.5 % 8.2
% 8.5 % Provision for depreciation and amortization $ 50 $ 51 $ 52
$ 52 $ 205 $ 51 $ 53 Restructuring and other charges $ 57 $ 17 $ 2
$ (4 ) $ 72 $ (1 ) $ 1 Third-party aluminum shipments (kmt)
310 307 297 283
1,197 308 315
Transportation
and Construction Solutions:
Third-party sales $ 456 $ 504 $ 523 $ 528 $ 2,011 $ 537 $ 562
Segment operating profit $ 68 $ 71 $ 74 $ 77 $ 290 $ 67 $ 97
Segment operating profit margin 14.9 % 14.1 % 14.1 % 14.6 % 14.4 %
12.5 % 17.3 % Provision for depreciation and amortization $ 12 $ 12
$ 13 $ 13 $ 50 $ 13 $ 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 Unallocated
amounts: Restructuring and other charges (73 ) (26 ) (19 ) (47 )
(165 ) (7 ) (15 ) Impairment of goodwill — — — (719 ) (719 ) — —
Corporate expense(2) (95 ) (108 ) (48 )
(63 ) (314 ) (60 ) (93 ) Consolidated
operating income (loss) 283 320 310 (433 ) 480 333 324 Interest
expense(3) (115 ) (183 ) (100 ) (98 ) (496 ) (114 ) (89 ) Other
income (expense), net(4) 316 132
(38 ) 76 486 (20 ) (41 )
Consolidated income (loss) before income taxes $ 484
$ 269 $ 172 $ (455 ) $
470 $ 199 $ 194
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)
Segment operating profit in the second
quarter of 2018 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
and $4 of legal and other advisory costs related to Grenfell
Tower.
(3)
For the quarter ended June 30, 2017,
Interest expense 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.
Interest expense for quarter ended March 31, 2018 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 Six months ended
June 30,2018
March 31,2018
June 30,2017
June 30,2018
June 30,2017
Net income $ 120 $ 143 $ 212 $ 263 $ 534 Diluted earnings per share
(EPS) $ 0.24 $ 0.29 $ 0.43 $ 0.53 $ 1.07 Special items:
Restructuring and other charges 15 7 26 22 99 Discrete tax items(1)
21 2 — 23 1 Other special items(2) 42 25 (23 ) 67 (348 ) Tax
impact(3) (13 ) (8 ) (50 ) (21 ) 48 Net income
excluding Special items $ 185 $ 169 $ 165 $
354 $ 334 Diluted EPS excluding Special items
$ 0.37 $ 0.34 $ 0.32 $ 0.71 $ 0.66
Average number of shares - diluted EPS excluding
Special items(4) 501,960,573 502,924,068 461,826,510 502,452,369
460,894,897
Net income excluding Special items and Diluted EPS excluding
Special items are non-GAAP financial measures. Management believes
that these measures are meaningful to investors because management
reviews the operating results of Arconic excluding the impacts of
Restructuring and other charges, Discrete tax items, and Other
special items (collectively, “Special items”). There can be no
assurances that additional special items will not occur in future
periods. To compensate for this limitation, management believes
that it is appropriate to consider both Net income determined under
GAAP as well as Net income excluding Special items.
(1) Discrete tax items for each period included the
following:
•
for the quarter ended June 30, 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 March 31, 2018, a
charge for a number of small items ($2);
•
for the six months ended June 30, 2018,
charges resulting from the Company’s ongoing analysis of the U.S.
Tax Cuts and Jobs Acts of 2017 related an increase in the
provisional estimate of the one-time transition tax ($18) and AMT
credits expected to be refunded upon filing the 2018 tax return
that will result in no benefit under government sequestration ($3),
and a charge for a number of small items ($2); and
•
for the six months ended June 30, 2017, a
net charge for a number of small items ($1).
(2) Other special items included the following:
•
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 March 31, 2018,
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 ($5), and a charge for a number of small
tax items ($1);
•
for the quarter ended June 30, 2017, 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 ($42), 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 ($30), and a favorable tax impact related to the interim
period treatment of operational losses in certain foreign
jurisdictions for which no tax benefit was recognized ($4);
•
for the six months ended June 30, 2018,
costs related to settlements of certain customer claims primarily
related to product introductions ($38), costs related to the early
redemption of the Company’s outstanding 5.720% Senior Notes due
2019 ($19), legal and other advisory costs related to Grenfell
Tower ($9), and a charge for a number of small tax items ($1);
and
•
for the six months ended June 30, 2017, a
gain on the sale of a portion of Arconic’s investment in Alcoa
Corporation common stock ($351), 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), 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 ($13), 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 six months ended June
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 June 30,
2018 Six months ended June 30, 2018 As
reported
Specialitems(1)
As adjusted As reported
Specialitems(1)
As adjusted Income before income taxes $ 194 $ 57 $
251 $ 393 $ 88 $ 481 Provision for income taxes 74 (8 ) 66 130 (3 )
127 Operational tax rate 38.1 % 26.3 % 33.1 % 26.4 %
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 Quarter ended Six months ended
June 30, June 30, March 31,
March 31, June 30, June 30, 2018
2017 2018 2017 2018 2017
Arconic
Sales – Arconic $ 3,573 $ 3,261 $ 3,445 $ 3,192 $ 7,018 $ 6,453
Less: Sales – Tennessee packaging 46 51 43 54 89 105 Sales – Fusina
rolling mill — 9 — 45 — 54 Sales – Latin America extrusions — 30 25
26 25 56 Aluminum price impact 149 n/a 109 n/a 258 n/a Foreign
currency impact 38 n/a 66 n/a 104
n/a Arconic Organic revenue $ 3,340 $ 3,171 $
3,202 $ 3,067 $ 6,542 $ 6,238
Engineered Products
and Solutions (EP&S)
Sales $ 1,596 $ 1,485 $ 1,541 $ 1,487 $ 3,137 $ 2,972 Less:
Aluminum price impact 2 n/a 1 n/a 3 n/a Foreign currency impact 15
n/a 25 n/a 40 n/a EP&S
Organic revenue $ 1,579 $ 1,485 $ 1,515 $
1,487 $ 3,094 $ 2,972
Global Rolled
Products (GRP)
Sales $ 1,451 $ 1,271 $ 1,366 $ 1,248 $ 2,817 $ 2,519 Less: Sales –
Tennessee packaging 46 51 43 54 89 105 Sales – Fusina rolling mill
— 9 — 45 — 54 Aluminum price impact 128 n/a 109 n/a 237 n/a Foreign
currency impact 8 n/a 16 n/a 24
n/a GRP Organic revenue $ 1,269 $ 1,211 $ 1,198
$ 1,149 $ 2,467 $ 2,360
Transportation and
Construction Solutions (TCS)
Sales $ 562 $ 504 $ 537 $ 456 $ 1,099 $ 960 Less: Sales – Latin
America extrusions — 30 25 26 25 56 Aluminum price impact 19 n/a (1
) n/a 18 n/a Foreign currency impact 15 n/a 25
n/a 40 n/a TCS Organic revenue $ 528 $ 474
$ 488 $ 430 $ 1,016 $ 904
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 Six months ended
June 30,2018
March 31,2018
June 30,2017
June 30,2018
June 30,2017
Cash provided from (used for) operations $ 176 $ (436 ) $ 79 $ (260
) $ (316 ) Capital expenditures (171 ) (117 ) (126 ) (288 ) (229 )
Cash receipts from sold receivables 284 136 190
420 285 Adjusted free cash flow $ 289 $
(417 ) $ 143 $ (128 ) $ (260 )
There has been no change in the net cash funding in the sale of
accounts receivable program in the second 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 June 30,
March 31, December 31, September 30, June
30, 2018 2018 2017 2017 2017
Short-term debt $ 45 $ 45 $ 38 $ 55 $ 48 Long-term debt, less
amount due within one year 6,312 6,309 6,806
6,802 6,796 Total debt $ 6,357 $ 6,354 $ 6,844 $ 6,857 $
6,844 Less: Cash and cash equivalents 1,455 1,205
2,150 1,815 1,785 Net debt $ 4,902 $ 5,149
$ 4,694 $ 5,042 $ 5,059
Net debt is a non-GAAP financial measure. Management believes
that this measure is meaningful to investors because management
assesses Arconic’s leverage position after factoring in available
cash that could be used to repay outstanding debt.
Arconic and subsidiaries Calculation of
Financial Measures (unaudited), continued (dollars in
millions) Operating income excluding Special
items Quarter ended Six months ended
June 30,2018
March 31,2018
June 30,2017
June 30,2018
June 30,2017
Operating income $ 324 $ 333 $ 320 $ 657 $ 603 Special
items: Restructuring and other charges 15 7 26 22 99 Separation
costs — — — — 18 Proxy, advisory and governance-related costs — —
42 — 58 Legal and other advisory costs related to Grenfell Tower 4
5 — 9 — Settlements of certain customer claims primarily related to
product introductions 38 — — 38 —
Operating income excluding Special items $ 381 $ 345
$ 388 $ 726 $ 778
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) Six months ended
June 30, 2018 Net income $ 263 Special items(1) 91
Net income excluding Special items $ 354 Annualized net
income excluding Special items $ 708 Net Assets:
June 30, 2018 Add: Receivables from customers,
less allowances $ 1,159 Add: Deferred purchase program(2) 313 Add:
Inventories 2,659 Less: Accounts payable, trade 2,024
Working capital 2,107 Properties, plants, and equipment, net
(PP&E) 5,582 Net assets - total $ 7,689 RONA 9.2
%
RONA is a non-GAAP financial measure. RONA is calculated as Net
income excluding Special items divided by working capital and net
PP&E. Management believes that this measure is meaningful to
investors as RONA helps management and investors determine the
percentage of net income the Company is generating from its assets.
This ratio tells how effectively and efficiently the Company is
using its assets to generate earnings.
(1) See Reconciliation of Net income
excluding Special items for a description of Special items.
(2)
The Deferred purchase program relates to
an arrangement to sell certain customer receivables to several
financial institutions on a recurring basis. Arconic is adding back
the receivable for the purposes of the Working capital
calculation.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180731005498/en/
Arconic Inc.Investor ContactPatricia Figueroa,
212-836-2758Patricia.Figueroa@arconic.comORMedia ContactLori
Lecker, 412-553-3186Lori.Lecker@arconic.com
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