Howmet Aerospace Inc. — 2017 First-Quarter Filing Summary
Filing identity: The supplied Form 10-Q is for Arconic Inc., the registrant’s name in 2017, for the quarter ended March 31, 2017. It is not filed under the Howmet Aerospace name. Arconic’s separation from Alcoa Corporation was completed November 1, 2016.
Business context and reporting period
Arconic manufactured engineered lightweight-metal products serving aerospace, automotive, transportation, packaging, building and construction, and other markets. The quarter’s comparative operating results exclude Alcoa Corporation, which is presented as discontinued operations for first-quarter 2016; 2016 cash flows were not segregated and are therefore not fully comparable.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $3.192 billion | $3.055 billion |
| Income from continuing operations | $322 million | $110 million |
| Net income attributable to Arconic | $322 million | $16 million |
| Diluted EPS from continuing operations | $0.65 | $0.21 |
| Cash used for operations | $300 million | $430 million |
- Sales increased 4% year over year. Management attributed growth to higher volumes across segments and higher aluminum pricing, partly offset by packaging ramp-down and unfavorable pricing and mix.
- Cost of goods sold was 78.1% of sales, versus 78.6% a year earlier. Segment adjusted EBITDA, the company’s primary segment-performance measure, was $549 million versus $524 million. Consolidated adjusted EBITDA was $451 million versus $419 million; these are non-GAAP measures and the latter includes the effect of items such as the investment-sale gain.
- First-quarter net income included a $351 million gain on the sale of part of Arconic’s Alcoa Corporation stake. Restructuring and other charges were $73 million, including a $60 million loss on the Fusina mill sale.
- Cash used for operations improved by $130 million year over year, but remained negative. Investing activities provided $1.029 billion, including $888 million from the Alcoa Corporation share sale and $238 million from the Yadkin Hydroelectric Project proceeds.
- Cash and cash equivalents were $2.553 billion at March 31, up from $1.863 billion at year-end 2016. Current assets were $6.710 billion and current liabilities $2.587 billion. Total debt was approximately $8.093 billion, comprising $8.046 billion long-term debt and $47 million short-term borrowings.
- Capital expenditures were $103 million. The company paid $0.06 per common share in dividends, compared with $0.09 in Q1 2016.
Material changes versus the prior comparable period
- Continuing-operations income and diluted EPS rose substantially, but the $351 million Alcoa share-sale gain was a major driver; it should not be treated as recurring operating performance.
- Segment adjusted EBITDA increased to $549 million from $524 million. Engineered Products and Solutions was broadly flat at $306 million; Global Rolled Products rose to $171 million from $155 million; Transportation and Construction Solutions rose to $72 million from $64 million.
- Restructuring and other charges rose to $73 million from $16 million, primarily due to the Fusina sale loss. Interest expense declined to $115 million from $121 million.
- Cash used for operations narrowed, while investing cash flow swung from a $1 million use to a $1.029 billion source, largely reflecting asset and investment proceeds. The prior-year cash-flow comparison includes Alcoa Corporation.
Outlook, management commentary, risks and unusual items
- No consolidated full-year financial guidance is provided in the supplied filing text. Management expected strong commercial aerospace demand, with customer destocking and engine-ramp challenges as offsets; automotive growth; weaker packaging demand; and continued cost savings. Pricing pressure and lower commercial-transportation build rates were also noted.
- On April 13, 2017, CEO and Chairman Klaus Kleinfeld stepped down. The board appointed David P. Hess interim CEO and Patricia F. Russo interim chair while it searched for a permanent CEO.
- After quarter-end, Arconic pursued purchases of senior notes. It reported a $295 million principal purchase for $320 million cash and an agreement to acquire another $500 million principal amount through an Alcoa Corporation share exchange and cash, subject to closing conditions. The company anticipated a second-quarter pretax gain of about $167 million and related interest expense of approximately $50–$60 million.
- Environmental remediation reserves were $308 million at quarter-end, including $227 million for the Massena, New York, Grasse River project. The project’s fieldwork was expected to take about four years, with most spending anticipated from 2017 to 2021.
- A Spanish tax dispute involved combined assessments of $265 million, including interest. A court ruled for the company on one assessment, but further proceedings remained; the company said the outcome could not be reasonably predicted.
- The filing describes guarantees, letters of credit and surety bonds, as well as other legal and environmental matters. Management said other pending matters were not expected to have a material adverse effect based on information then available, while acknowledging uncertainty and possible period impacts.
- Two shareholder lawsuits were filed after quarter-end concerning a company disclosure about a potential change in control. Arconic said it considered the suits without merit and intended to defend them.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring segment operations versus the $351 million Alcoa share-sale gain and other unusual items.
- Whether operating cash flow improves sustainably, given the $300 million quarterly cash use and working-capital movements.
- The outcome and timing of the Spanish tax assessments, environmental remediation spending, and other contingencies.
- Final terms, completed transactions, cash costs and accounting effects of the post-quarter senior-note purchases and exchange.
- Leadership succession, the shareholder litigation, and the company’s subsequent operating outlook by end market.