Arconic posts increase in revenue for 2018

Arconic Inc., headquartered in New York City, has reported its financial results for the fourth quarter and full year of 2018 and announced a restructuring of the company into two separate firms.

“After a rigorous and comprehensive process, we did not receive a proposal for a full-company transaction that we believe was in the best interests of our shareholders,” Arconic Chairman and Chief Executive Officer John Plant says. “The board sees more shareholder value creation through a restructuring of the company. As part of the strategy and portfolio review, we have determined to separate the portfolio into Engineered Products & Forgings and Global Rolled Products. In addition, we will also explore the potential sale of businesses that do not best fit into Engineered Products & Forgings and Global Rolled Products.”

Despite the decision, Plant says, “In 2018, Arconic delivered solid revenue growth and improved operational performance. With Elmer Doty as president and chief operating officer, I am focused on further enhancing our operations and charting a new strategic direction to deliver value for shareholders.”

Feb. 6, Plant, then chairman of the board, was appointed by the board to serve as chairman and chief executive officer of the company. The board also appointed Elmer L. Doty, then a director on the board, to serve as president and chief operating officer of Arconic. These appointments were effective immediately.

In the fourth quarter of 2018, Arconic’s revenue was $3.5 billion, up 6 percent year over year. Fourth quarter 2018 organic revenue increased 10 percent year over year, driven by higher volumes across all segments with double-digit growth in most major end markets, according to the company. For the full year, revenue was $14 billion, an increase of 8 percent year over year, while organic revenue for the year increased 7 percent year over year.

Net income in the fourth quarter was $218 million, or 44 cents per share. These results include $56 million of income from special items, primarily related to a gain on the sale of the Texarkana, Texas, rolling mill and discrete tax items, partially offset by pension plan settlement charges and a loss on the sale of the Eger, Hungary, forgings business, Arconic reports. The company’s fourth-quarter 2017 net loss was $727 million, or $1.51 per share, and included the impairment of goodwill. For full year 2018, Arconic reports net income of $642 million, or $1.30 per share, versus a net loss of $74 million, or 28 cents per share, in 2017.

Net income excluding special items was $162 million, or 33 cents per share, in the fourth quarter of 2018 versus $152 million, or 31 cents per share, in the fourth quarter of 2017. The increase was driven by higher volumes and lower expenses for pension, interest and taxes, largely offset by higher aluminum prices and unfavorable product mix, the company says. Full year 2018 net income excluding special items was $676 million, or $1.36 per share, versus $618 million, or $1.22 per share, in 2017.

Fourth quarter 2018 operating income was $323 million versus an operating loss of $433 million in the fourth quarter of 2017. Operating income excluding special items was $323 million versus $343 million in the fourth quarter of 2017, down 6 percent year over year as volume growth was more than offset by aluminum price impacts and unfavorable product mix, Arconic says. 2018 operating income was $1.3 billion versus $480 million in 2017. Operating income excluding special items for 2018 was $1.4 billion versus $1.5 billion in 2017.

“Our team improved quality and delivery to customers in the face of increasing demand and record level shipment volumes in some segments,” Plant says. “Our continuous improvement efforts are gaining traction. Furthermore, we have commenced plans to reduce operating costs by approximately $200 million on an annual run-rate basis.”

Arconic ended the year with $2.3 billion in cash on hand. For 2018 and 2017, cash provided from operations was $217 million and cash used for operations was $39 million, respectively; cash used for financing activities was $649 million and $1 billion, respectively; and cash provided from investing activities was $565 million and $1.3 billion, respectively. Adjusted free cash flow for 2018 was $465 million, nearly tripling year over year.

The company’s Engineered Products and Solutions (EP&S) business reports revenue of $1.6 billion, an increase of 8 percent year over year. Organic revenue increased 9 percent, driven by volume growth in aerospace engines and defense. Segment operating profit was $220 million, down $8 million year over year, as unfavorable product mix and manufacturing challenges in the Engineered Structures business, including the now resolved forging press outage in the Cleveland facility, were partially offset by volume growth across all business units, the company says. Segment operating margin was 13.6 percent, down 170 basis points year over year.

Arconic’s Global Rolled Products (GRP) division reports revenue of $1.4 billion, an increase of 9 percent year over year. Organic revenue grew 13 percent. Segment operating profit was $77 million, down $14 million year over year, driven by aluminum price headwinds, higher transportation costs and scrap spreads, which were partially offset by pricing actions and higher volume in automotive, commercial transportation and aerospace, the company says. Segment operating margin was 5.7 percent, down 160 basis points year over year, including a 150 basis point negative impact from aluminum prices.

Its Transportation and Construction Solutions (TCS) business reports revenue of $497 million, a decrease of 6 percent year over year. Organic revenue increased 4 percent, but segment operating profit was $63 million, a decrease of $14 million year over year, driven by aluminum price headwinds, which were partially offset by growth in commercial transportation and building and construction, Arconic reports. Segment operating margin was 12.7 percent, a decrease of 190 basis points year over year, including a 330 basis point negative impact from aluminum prices.

For the full year, EP&S posted revenue of $6.3 billion, up 6 percent year over year, while segment operating profit was $891 million, down $73 million year over year. The segment’s operating margin was 14.1 percent, down 210 basis points year over year.

GRP revenue was $5.6 billion for the year, an increase of 12 percent year over year. Organic revenue grew 8 percent year over year, and segment operating profit was $386 million, $38 million less than in 2017. Segment operating margin was 6.9 percent, a decrease of 160 basis points year over year, including a 100 basis point negative impact of higher aluminum prices, Arconic says.

TCS revenue was $2.1 billion, a 6 percent increase over 2017, while organic revenue increased 9 percent year over year. Segment operating profit was $304 million, up $14 million year over year, while the segment’s operating margin was 14.3 percent, down 10 basis points year over year, including a 270 basis point negative impact of higher aluminum prices.

For the full year of 2019, Arconic says it expects revenue to range from $14.3 billion to $14.6 billion, with adjusted earnings per share ranging from $1.55 to $1.65. The company forecasts adjusted free cash flow of $400 million to $500 million.

The company says it started plans to reduce operating costs by approximately $200 million on an annual run-rate basis. The program is designed to maximize the impact in 2019.

Arconic also announced as part of its strategy and portfolio review that it will separate into Engineered Products & Forgings and Global Rolled Products, with a spin-off of one of the businesses. In addition, it also will explore the potential sale of businesses that do not best fit into Engineered Products & Forgings or Global Rolled Products.

The company says it also intends to execute its previously authorized $500 million share repurchase program in the first half of 2019. The board has also authorized an additional $500 million of share repurchases, effective through the end of 2020.

Arconic says it expects to reduce its quarterly common stock dividend from 6 cents to 2 cents per share.

In the fourth quarter of 2018, Arconic closed on the sale of its idled Texarkana, Texas, rolling mill to Ta Chen International Inc., a U.S. subsidiary of aluminum and stainless steel distributor Ta Chen Stainless Pipe Co. Ltd. Under the terms of the transaction, Arconic sold the Texarkana facility for approximately $300 million in cash, plus additional contingent consideration of up to $50 million.

In the fourth quarter of 2018, Arconic also closed on the sale of its Eger, Hungary, forgings business to Angstrom Automotive Group LLC. The company recorded a restructuring-related charge representing a pretax loss on the sale of $43 million. The charge primarily relates to the noncash impairment of the net book value of the business, Arconic says.