Arconic Reports Second Quarter 2018 Results
Jul. 31, 2018
NEW YORK--(BUSINESS WIRE)--Jul 31, 2018--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 revenue 1 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 Performance 2
Engineered Products and Solutions (EP&S)
EP&S reported revenue of $1.6 billion, an increase of 7% year over year. Organic revenue 1 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 revenue 1 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 revenue 1 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 . Call information and related details are available at under “Investors”; presentation materials will be available at approximately 8:00 AM Eastern Time on July 31.
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.
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.
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