Arconic Reports Second Quarter 2018 Results

July 31, 2018

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 Performance

2

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  

Special

items

(1)

  As adjusted As reported  

Special

items

(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.



Arconic Inc.
Investor Contact
Patricia Figueroa, 212-836-2758
Patricia.Figueroa@arconic.com
OR
Media Contact
Lori Lecker, 412-553-3186
Lori.Lecker@arconic.com