Arconic Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The filing is by Arconic Inc.; it is not filed under the name Howmet Aerospace. Financial figures are in millions of dollars unless stated otherwise.
Business context and results
Arconic manufactures engineered products and lightweight-metal components serving aerospace, automotive, commercial transportation, packaging, construction, and other markets. Its three reported segments are Engineered Products and Solutions (EPS), Global Rolled Products (GRP), and Transportation and Construction Solutions (TCS). Alcoa Corporation’s results are presented as discontinued operations in the 2016 income-statement comparisons following the November 2016 separation; 2016 cash flows were not similarly separated.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $3,236 | $3,138 | $9,689 | $9,427 |
| Operating income | $271 | $237 | $797 | $790 |
| Continuing-operations income after tax | $119 | $66 | $653 | $229 |
| Net income attributable to Arconic | $119 | $166 | $653 | $317 |
| Diluted EPS from continuing operations | $0.22 | $0.11 | $1.31 | $0.40 |
| Combined segment Adjusted EBITDA | $535 | $515 | $1,640 | $1,607 |
Q3 sales rose 3% year over year, while operating income increased $34. Cost of goods sold was 81.1% of sales, versus 79.8% a year earlier. For the nine months, sales rose 3%; operating income was nearly flat. The large increase in nine-month continuing income reflects, in significant part, gains on the Alcoa Corporation share sale ($351) and debt-for-equity exchange ($167), not solely operating performance. Q3 2016 attributable net income included $100 from discontinued operations; nine-month 2016 attributable net income included $88.
Segments and operating trends
- EPS: Q3 sales were $1,476 and Adjusted EBITDA $312, versus $1,406 and $296. Nine-month sales were $4,445 and EBITDA $928, versus $4,320 and $930. Higher volumes and cost savings were partly offset by aerospace pricing and new-engine ramp-up costs.
- GRP: Q3 third-party sales were $1,234 and EBITDA $140, versus $1,285 and $143. Nine-month third-party sales were $3,751 and EBITDA $475, versus $3,785 and $461. Tennessee packaging-business ramp-down, the Fusina mill sale, and lower aerospace volumes affected sales; automotive volumes and cost savings supported results.
- TCS: Q3 sales were $517 and EBITDA $83, versus $450 and $76. Nine-month sales were $1,467 and EBITDA $237, versus $1,346 and $216. Higher volumes and savings were partly offset by lower pricing, mix, and aluminum-cost pressures.
Cash flow, balance sheet, and capital
- Cash provided by operations was $89 for the first nine months, down from $208 in 2016; capital expenditures were $360. Cash and equivalents were $1,815 at September 30, compared with $1,863 at year-end 2016.
- Investing activities provided $776, including $888 from selling Alcoa Corporation shares and $243 of Yadkin Hydroelectric Project proceeds. Financing activities used $918, including debt repayments.
- Total debt was $6,803, down from $8,048 at year-end; long-term debt was $6,802. Interest expense was $100 in Q3 and $398 for nine months. Early debt redemptions reduced debt but contributed $76 of nine-month redemption premiums.
- Current assets were $6,148 and current liabilities $2,677. The company reported a $3,000 revolving credit facility maturing in 2020 and $715 of additional credit capacity, some of which expires in 2017 and 2018.
- Common dividends paid were $0.06 per share in Q3 and $0.18 per share for nine months, compared with $0.09 and $0.27, respectively, in 2016.
Outlook, unusual items, and risks
- Management expected Q4 commercial aerospace demand to grow year over year, with ongoing EPS ramp-up costs and pricing pressure. GRP expected automotive growth but weaker commercial-airframe and packaging demand; TCS expected continued volume growth alongside pricing headwinds and cost savings. No consolidated numerical earnings or revenue guidance is provided in the supplied filing text.
- Arconic recorded $118 of restructuring and other charges for nine months, including a $60 loss on the Fusina sale and $59 in layoff costs. Approximately 800 employee separations were associated with 2017 programs. A further $30–$50 noncash impairment charge was anticipated in Q4 for the Brazil extrusions business.
- Grenfell Tower-related investigations and securities litigation concerning Reynobond PE were ongoing. The company said it could not estimate the likelihood or range of potential losses. The filing states that Arconic did not design or install the Grenfell cladding system.
- Environmental remediation reserves were $292, including $221 for the Grasse River project. Most Grasse River project spending was expected between 2018 and 2022; design timing had been delayed by a state request for revisions.
- A Spanish tax assessment of $152 for tax years 2006–2009 remained under appeal; the company said the outcome could not be reasonably predicted. Other guarantees for Alcoa Corporation include up to approximately $1,660 of estimated present-value energy-supply guarantees and $270 of maximum potential guarantees related to Saudi project financing; Arconic’s exposure generally depends on an Alcoa Corporation payment default.
- After quarter-end, mandatory convertible preferred shares converted into approximately 39.2 million common shares. Alcoa Corporation’s termination of an electricity contract was expected to produce approximately $25 of noncash, non-operating income for Arconic in Q4.
- Adoption of the new revenue-recognition standard was planned for January 2018; the effect was not yet determinable, including because certain customized contracts may qualify for revenue recognition over time. Management cited market, aluminum-price, currency, pension, operational, legal, environmental, and cybersecurity risks.
Important facts for investors to verify
- How much of the reported earnings increase reflects recurring segment performance versus the $518 of Alcoa-related sale and exchange gains and other unusual items.
- Whether operating cash generation improves, given $89 of operating cash flow against $360 of capital expenditures for the nine-month period.
- Progress and realized savings from restructuring, and the expected Brazil impairment charge.
- Potential financial exposure and developments in Grenfell-related litigation, the Spanish tax appeal, environmental remediation, and guarantees for Alcoa Corporation.
- The final effect of revenue-standard adoption and the post-quarter preferred-stock conversion on revenue comparability and common-share dilution.
The interim financial statements were reviewed by the independent auditor, not audited; the auditor reported no material modifications needed for GAAP conformity.