Arconic Reports First Quarter 2019 Results

First Quarter 2019 Highlights

  • Revenue of $3.5 billion, up 3% year over year; organic revenue1
    up 9% year over year
  • Net income of $187 million, or $0.39 per share, versus net income of
    $143 million, or $0.29 per share, in the first quarter 2018
  • Net income excluding special items of $208 million, or $0.43 per
    share, versus $169 million, or $0.34 per share, in the first quarter
    2018
  • Operating income of $374 million, up 12% year over year
  • Operating income excluding special items of $397 million, up 15% year
    over year
  • Operating income margin excluding special items up 120 basis points
    year over year

2019 Guidance* Updated

  • Updated Full Year 2019 Guidance: Revenue $14.3-$14.6 billion, Earnings
    Per Share Excluding Special Items $1.75-$1.90, Adjusted Free Cash Flow
    $650-$750 million

Key Announcements

  • Actions underway to reduce operating costs by approximately $230
    million on a run-rate basis – a $30 million increase from initial $200
    million target. Approximately $120 million of the savings are expected
    to be captured in 2019.
  • Repurchased $700 million of common stock; $300 million remains
    authorized for share repurchases through the end of 2020.
  • Portfolio of each post-separation company defined: Global Rolled
    Products will comprise rolled aluminum products and aluminum
    extrusions. The Engineered Products & Forgings business will include
    engine components, fastening systems and engineered structures. The
    businesses of the current Transportation and Construction Solutions
    segment will be divided – the Building and Construction Systems
    business will be retained and included in Global Rolled Products, and
    forged aluminum wheels will become part of Engineered Products &
    Forgings.
  • Reduced quarterly common stock dividend from $0.06 to $0.02 per share.

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

NEW YORK–(BUSINESS WIRE)–Arconic Inc. (NYSE: ARNC) today reported first quarter 2019 results, for
which the Company reported revenues of $3.5 billion, up 3% year over
year. Organic revenue1 was up 9% year over year on
strong volumes across all segments and all key markets, primarily in the
aerospace, defense, commercial transportation, automotive, packaging,
and building and construction end markets, as well as favorable
aerospace pricing.

Net income in the first quarter 2019 was $187 million, or $0.39 per
share, versus $143 million, or $0.29 per share, in the first quarter
2018. Net income excluding special items was $208 million, or $0.43 per
share, in the first quarter 2019, versus $169 million, or $0.34 per
share, in the first quarter 2018. Special items in the first quarter
2019 were $21 million, principally related to charges associated with
cost reduction initiatives, partially offset by a credit associated with
the elimination of certain postretirement benefits.

First quarter 2019 operating income was $374 million, up 12% year over
year. Operating income excluding special items was $397 million, up 15%
year over year, as higher volumes and favorable product pricing more
than offset the impact of transitioning Tennessee Packaging to
industrial products.

Arconic Chairman and Chief Executive Officer John Plant said, “In the
first quarter 2019, the Arconic team improved revenue, expanded margins,
improved adjusted free cash flow year over year, and delivered the
highest quarterly adjusted operating income, adjusted earnings per share
and RONA since 2016 separation. We expect this positive trend to
continue in the second quarter. As plans for separation move forward, we
are also acting swiftly to reduce costs to be in line with industry
leading peers and are targeting the sale of certain businesses that are
non-core to either of the future entities. These actions will help drive
the margin performance of the company.”

Arconic ended the first quarter 2019 with cash on hand of $1.3 billion.
Cash used for operations was $258 million, driven by typical seasonal
first-quarter build in working capital and semi-annual interest
payments; cash used for financing activities totaled $741 million,
reflecting the impact of the accelerated share repurchase program of
$700 million; and cash provided from investing activities was $42
million. Adjusted Free Cash Flow for the quarter was negative $266
million, up $151 million year over year principally due to lower pension
contributions. In the first quarter 2018, cash used for operations was
$436 million; cash used for financing activities totaled $542 million;
and cash provided from investing activities was $29 million.

First Quarter 2019 Segment Performance

In the first quarter 2019, the Company transferred its aluminum
extrusions operations from the Engineered Products and Solutions (EP&S)
segment to the Global Rolled Products (GRP) segment, based on synergies
with GRP including similar customer base, technologies and manufacturing
capabilities. Prior period information has been recast to conform to
current year presentation.

Engineered Products and Solutions (EP&S)

EP&S reported revenue of $1.5 billion, an increase of 5% year over year.
Organic revenue1 was up 7%, driven by aero engine and defense
growth. Segment operating profit was $253 million, up $44 million or 21%
year over year, driven by volume increases in high growth aerospace and
defense markets, favorable aerospace pricing and cost reductions,
partially offset by aero engines new product introductions. Segment
operating margin was 16.8%, up 210 basis points year over year.

Global Rolled Products (GRP)

GRP reported revenue of $1.5 billion, an increase of 1% year over year.
Organic revenue1 was up 10%. Segment operating profit was
$107 million, down $17 million or 14% year over year, driven by the
Tennessee plant transition from packaging to industrial products and
operational headwinds in aluminum extrusions. These impacts were
partially offset by higher volumes in packaging, commercial
transportation, and aerospace, as well as favorable price increases in
industrial and commercial transportation. Segment operating margin was
7.1%, down 130 basis points year over year.

Transportation and Construction Solutions (TCS)

TCS reported revenue of $535 million, relatively flat year over year.
Organic revenue1 was up 7%. Segment operating profit was $87
million, up $20 million or 30% year over year, driven by higher volume
in commercial transportation and building and construction, as well as
net cost savings. Segment operating margin was 16.3%, up 380 basis
points year over year.

Updated Full Year 2019 Guidance*

Arconic is adjusting its full year 2019 guidance:

           
       

4Q 2018

     

Updated 1Q 2019

Revenue

      $14.3-$14.6 billion       $14.3-$14.6 billion

Earnings Per Share Excluding Special Items*

      $1.55-$1.65       $1.75-$1.90

Adjusted Free Cash Flow*

      $400-$500 million       $650-$750 million
 

Arconic expects second quarter 2019 earnings per share excluding special
items to be in a range of $0.46 to $0.51.

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

Arconic believes such reconciliations would imply a degree of
precision that would be confusing or misleading to investors.

Actions Underway to Reduce Operating Costs

Arconic has increased the annualized cost reduction target to save
approximately $230 million on a run-rate basis, versus its initial $200
million target that was announced in February 2019. As a result of
taking quick action in the first quarter, the Company expects to capture
approximately $120 million of savings in 2019.

Share Buyback of $700 Million is Complete

The share buyback of $700 million of common stock announced on February
19, 2019, is complete. Arconic received 31.9 million shares on February
21, 2019, and an additional 4.5 million shares on April 29, 2019. The
average share price was approximately $19.21. Three hundred million
dollars remains authorized for share repurchases through the end of
2020. Total shares outstanding as of April 29, 2019 are approximately
449 million.

Portfolio of Each Post-Separation Company Defined

The Arconic Separation Project Team has fixed the business perimeters of
the two public companies that will be headquartered in Pittsburgh, PA.
Global Rolled Products will comprise rolled aluminum products and
aluminum extrusions. The Engineered Products & Forgings business will
include engine components, fastening systems and engineered structures.
The businesses of the current Transportation and Construction Solutions
segment will be divided – the Building and Construction Systems business
will be retained and included in Global Rolled Products, and forged
aluminum wheels will become part of Engineered Products & Forgings. The
Company is targeting the initial filing of a Form 10 in the fourth
quarter 2019 and the completion of the Separation in the second quarter
2020.

Arconic Reduced Quarterly Common Stock Dividend

The Arconic Board of Directors approved the reduction of the quarterly
common stock dividend from $0.06 cents to $0.02 cents per share.

Arconic will hold its quarterly conference call at 10:00 AM Eastern
Time on April 30, 2019, to present first quarter 2019 financial results.
The call will be webcast via
www.arconic.com.
Call information and related details are available at
www.arconic.com
under “Investors”; presentation materials will be available at
approximately 8:00 AM Eastern Time on April 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, defense, automotive, industrials, commercial transportation
and other end markets; statements and guidance regarding future
financial results or operating performance; statements regarding future
strategic actions, including share repurchases, which may be subject to
market conditions, legal requirements and other considerations; and
statements about Arconic’s strategies, outlook, business and financial
prospects. These statements reflect beliefs and assumptions that are
based on Arconic’s perception of historical trends, current conditions
and expected future developments, as well as other factors Arconic
believes are appropriate in the circumstances. Forward-looking
statements are not guarantees of future performance and are subject to
risks, uncertainties and changes in circumstances that are difficult to
predict, which could cause actual results to differ materially from
those indicated by these statements. Such risks and uncertainties
include, but are not limited to: (a) uncertainties regarding the planned
separation, including whether it will be completed pursuant to the
targeted timing, asset perimeters, and other anticipated terms, if at
all; (b) the impact of the separation on the businesses of Arconic; (c)
the risk that the businesses will not be separated successfully or such
separation may be more difficult, time-consuming or costly than
expected, which could result in additional demands on Arconic’s
resources, systems, procedures and controls, disruption of its ongoing
business, and diversion of management’s attention from other business
concerns; (d) deterioration in global economic and financial market
conditions generally; (e) unfavorable changes in the markets served by
Arconic; (f) the inability to achieve the level of revenue growth, cash
generation, cost savings, improvement in profitability and margins,
fiscal discipline, or strengthening of competitiveness and operations
anticipated or targeted; (g) competition from new product offerings,
disruptive technologies or other developments; (h) political, economic,
and regulatory risks relating to Arconic’s global operations, including
compliance with U.S. and foreign trade and tax laws, sanctions,
embargoes and other regulations; (i) manufacturing difficulties or other
issues that impact product performance, quality or safety; (j) Arconic’s
inability to realize expected benefits, in each case as planned and by
targeted completion dates, from acquisitions, divestitures, facility
closures, curtailments, expansions, or joint ventures; (k) the impact of
potential cyber attacks and information technology or data security
breaches; (l) the loss of significant customers or adverse changes in
customers’ business or financial conditions; (m) adverse changes in
discount rates or investment returns on pension assets; (n) the impact
of changes in aluminum prices and foreign currency exchange rates on
costs and results; (o) the outcome of contingencies, including legal
proceedings, government or regulatory investigations, and environmental
remediation, which can expose Arconic to substantial costs and
liabilities; and (p) the other risk factors summarized in Arconic’s Form
10-K for the year ended December 31, 2018 and other reports filed with
the U.S. Securities and Exchange Commission (SEC). Market projections
are subject to the risks discussed above and other risks in the market.
The statements in this release are made as of the date of this release,
even if subsequently made available by Arconic on its website or
otherwise. Arconic disclaims any intention or obligation to update
publicly any forward-looking statements, whether in response to new
information, future events, or otherwise, except as required by
applicable law.

Non-GAAP Financial Measures

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

___________________________________

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

 
Arconic and subsidiaries
Statement of Consolidated Operations (unaudited)
(in millions, except per-share and share amounts)
 
  Quarter ended
March 31, 2019   December 31, 2018   March 31, 2018
Sales $ 3,541 $ 3,472 $ 3,445
 
Cost of goods sold (exclusive of expenses below) 2,818 2,845 2,768
Selling, general administrative, and other expenses 178 140 172
Research and development expenses 22 26 23
Provision for depreciation and amortization 137 149 142
Restructuring and other charges(1) 12   (11 ) 7
Operating income 374 323 333
 
Interest expense(2) 85 87 114
Other expense, net 32   10   20
 
Income before income taxes 257 226 199
Provision for income taxes 70   8   56
 
Net income $ 187   $ 218   $ 143
 
EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC COMMON SHAREHOLDERS:
Basic(3)(4):
Earnings per share $ 0.40 $ 0.45 $ 0.30
Average number of shares(4)(5) 470,798,121 483,239,287 482,438,854
 
Diluted(3)(4):
Earnings per share $ 0.39 $ 0.44 $ 0.29
Average number of shares(4)(5) 489,059,798 503,018,904 502,924,068
 
Common stock outstanding at the end of the period(5) 453,093,877 483,270,717 482,819,135
(1)   Restructuring and other charges for the quarter ended March 31, 2019
primarily included severance costs of $67, partially offset by a
credit of $58 related to the elimination of life insurance benefits
for U.S. salaried and non-bargained hourly retirees of the Company
and its subsidiaries. Restructuring and other charges for the
quarter ended December 31, 2018 primarily included a gain of $154 on
the sale of the Texarkana rolling mill, offset by pension plan
settlement charges of $92 associated with significant lump sum
payments made to participants and a loss of $43 on the sale of the
Eger, Hungary forgings business.
 
(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.
 
(3) In order to calculate both basic and diluted earnings per share,
preferred stock dividends declared of $1 for the quarters ended
March 31, 2019, December 31, 2018, and March 31, 2018 need to be
subtracted from Net income.
 
(4) For the quarters ended March 31, 2019, December 31, 2018, and March
31, 2018, the difference between the respective diluted average
number of shares and the respective basic average number of shares
related to share equivalents (18 million, 20 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”)).
 
(5) Basic and diluted average number of shares and Common stock
outstanding at the end of the period for the quarter ended March 31,
2019 included the impact of the accelerated share repurchase program
of the Company’s common stock.
 
 
Arconic and subsidiaries
Consolidated Balance Sheet (unaudited)
(in millions)
 
  March 31, 2019   December 31, 2018
Assets
Current assets:
Cash and cash equivalents $ 1,319 $ 2,277
Receivables from customers, less allowances of $4 in 2019 and 2018 1,170 1,047
Other receivables 646 451
Inventories 2,612 2,492
Prepaid expenses and other current assets 306   314  
Total current assets 6,053   6,581  
 
Properties, plants, and equipment, net(1) 5,727 5,704
Goodwill 4,509 4,500
Deferred income taxes 480 573
Intangibles, net 912 919
Other noncurrent assets(1) 680   416  
Total assets $ 18,361   $ 18,693  
 
Liabilities
Current liabilities:
Accounts payable, trade $ 2,193 $ 2,129
Accrued compensation and retirement costs 339 370
Taxes, including income taxes 114 118
Accrued interest payable 97 113
Other current liabilities(1) 481 356
Short-term debt 435   434  
Total current liabilities 3,659   3,520  
Long-term debt, less amount due within one year 5,899 5,896
Accrued pension benefits 2,172 2,230
Accrued other postretirement benefits 636 723
Other noncurrent liabilities and deferred credits(1) 817   739  
Total liabilities 13,183   13,108  
 
Equity
Arconic shareholders’ equity:
Preferred stock 55 55
Common stock(2) 453 483
Additional capital(2) 7,644 8,319
Accumulated deficit(1) (134 ) (358 )
Accumulated other comprehensive loss (2,852 ) (2,926 )
Total Arconic shareholders’ equity 5,166 5,573
Noncontrolling interests 12   12  
Total equity 5,178   5,585  
Total liabilities and equity $ 18,361   $ 18,693  
(1)   Effective January 1, 2019, Arconic adopted the new accounting
standard for leases that resulted in the Company recording operating
lease right-of-use assets and lease liabilities of approximately
$320. Also, the Company reclassified cash proceeds of $119 from
Other noncurrent liabilities and deferred credits, assets of $24
from Properties, plants, and equipment, net, and a deferred tax
asset of $22 from Other noncurrent assets to Accumulated deficit
reflecting the cumulative effect of an accounting change related to
the deferred gain resulting from the sale-leaseback of the
Texarkana, Texas cast house in October of 2018. The adoption of the
standard had no impact on the Statement of Consolidated Operations
or Statement of Consolidated Cash Flows.
 
(2) Reflects the impact of the accelerated share repurchase program of
the Company’s common stock.
 
 
Arconic and subsidiaries
Statement of Consolidated Cash Flows (unaudited)
(in millions)
 
Three months ended March 31,
2019   2018
Operating activities
Net income $ 187 $ 143
Adjustments to reconcile net income to cash used for operations:
Depreciation and amortization 137 142
Deferred income taxes 8 18
Restructuring and other charges 12 7
Net loss from investing activities—asset sales 2 3
Net periodic pension benefit cost 29 41
Stock-based compensation 10 15
Other 11 49
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures, and foreign currency translation
adjustments:
(Increase) in receivables (489 ) (403 )
(Increase) in inventories (118 ) (141 )
(Increase) in prepaid expenses and other current assets (14 ) (12 )
Increase in accounts payable, trade 65 14
(Decrease) in accrued expenses (69 ) (118 )
Increase in taxes, including income taxes 47 8
Pension contributions (55 ) (177 )
(Increase) decrease in noncurrent assets (1 ) 1
(Decrease) in noncurrent liabilities (20 ) (26 )
Cash used for operations (258 ) (436 )
 
Financing Activities
Net change in short-term borrowings (original maturities of three
months or less)
1 5
Additions to debt (original maturities greater than three months) 150 150
Payments on debt (original maturities greater than three months) (151 ) (651 )
Premiums paid on early redemption of debt (17 )
Proceeds from exercise of employee stock options 1 12
Dividends paid to shareholders (29 ) (30 )
Repurchases of common stock(1) (700 )
Other (13 ) (11 )
Cash used for financing activities (741 ) (542 )
 
Investing Activities
Capital expenditures (168 ) (117 )
Proceeds from the sale of assets and businesses 4
Sales of investments 47 9
Cash receipts from sold receivables 160 136
Other (1 ) 1  
Cash provided from investing activities 42   29  
 
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
1 4
Net change in cash, cash equivalents and restricted cash (956 ) (945 )
Cash, cash equivalents and restricted cash at beginning of year 2,282   2,153  
Cash, cash equivalents and restricted cash at end of period $ 1,326   $ 1,208  

Contacts

Investors
Paul T. Luther
(212) 836-2758
Paul.Luther@arconic.com

Media
Esra Ozer
(412) 553-2666
Esra.Ozer@arconic.com

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