Arconic Reports Third Quarter 2022 Results

Sales

Cost of goods sold (exclusive of expenses below)⁽¹⁾

Selling, general administrative, and other expenses

Research and development expenses

Provision for depreciation and amortization

Restructuring and other charges⁽²⁾

Operating (loss) income

Interest expense

Other expenses (income), net⁽³⁾

(Loss) Income before income taxes

(Benefit) Provision for income taxes

Net (loss) income

Less: Net income attributable to noncontrolling interest

NET (LOSS) INCOME ATTRIBUTABLE TO ARCONIC CORPORATION

EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC CORPORATION COMMON STOCKHOLDERS:

Basic:

Net (loss) income

Weighted-average number of shares

Diluted:

Net (loss) income

Weighted-average number of shares⁽⁴⁾

COMMON STOCK OUTSTANDING AT THE END OF THE PERIOD

On May 14, 2022, the Company and the United Steelworkers reached a tentative four-year labor agreement covering approximately 3,300 employees at four U.S. locations; the previous labor agreement expired on May 15, 2022. The tentative agreement was ratified by the union employees on June 1, 2022. In the quarter ended June 30, 2022, Arconic recognized $19 in Cost of goods sold primarily for a one-time signing bonus for the covered employees.

In the quarter ended September 30, 2022, the Company updated its five-year strategic plan, the results of which indicated that there was a decline in the forecasted financial performance for the Extrusions segment (and asset group). As such, management evaluated the recoverability of the long-lived assets of the Extrusions asset group and, ultimately, determined that such assets were impaired. Accordingly, in the quarter ended September 30, 2022, the Company recorded an impairment charge of $92, composed of $90 for Properties, plants, and equipment and $2 for intangible assets.

In the quarters ended September 30, 2022 and 2021, Restructuring and other charges includes $15 and $5, respectively, related to the settlement of a portion of the Company's U.S. defined benefit pension plan obligations as a result of elections by certain plan participants to receive lump-sum benefit payments.

In the quarters ended September 30, 2022 and June 30, 2022, Other expenses (income), net includes an $11 loss and a $54 gain, respectively, for the remeasurement of monetary balances, primarily cash, related to the Company's operations in Russia from rubles to the U.S. dollar. This loss and gain were the result of a significant weakening and strengthening, respectively, of the ruble against the U.S. dollar in the respective periods.

For periods in which the Company generates net income, the diluted weighted-average number of shares include common share equivalents associated with outstanding employee stock awards. For periods in which the Company generates a net loss, the diluted weighted-average number of shares does not include any common share equivalents as their effect is anti-dilutive.

ASSETS

Current assets:

Cash and cash equivalents

Receivables from customers, less allowances of $1 in both 2022 and 2021

Other receivables

Inventories

Fair value of hedging instruments and derivatives

Prepaid expenses and other current assets

Total current assets

Properties, plants, and equipment

Less: accumulated depreciation and amortization

Properties, plants, and equipment, net⁽¹⁾

Operating lease right-of-use-assets

Deferred income taxes

Other noncurrent assets

Total assets

LIABILITIES

Current liabilities:

Short term debt⁽²⁾

Accounts payable, trade

Accrued compensation and retirement costs

Taxes, including income taxes

Environmental remediation

Operating lease liabilities

Fair value of hedging instruments and derivatives

Other current liabilities

Total current liabilities

Long-term debt

Accrued pension benefits

Accrued other postretirement benefits

Environmental remediation

Operating lease liabilities

Deferred income taxes

Other noncurrent liabilities

Total liabilities

EQUITY

Arconic Corporation stockholders' equity:

Common stock

Additional capital

Accumulated deficit

Treasury stock

Accumulated other comprehensive loss

Total Arconic Corporation stockholders' equity

Noncontrolling interest

Total equity

Total liabilities and equity

In the 2022 third quarter, the Company recorded an impairment charge of $92, including $90 for Properties, plants, and equipment. See footnote 2 to the Statement of Consolidated Operations included in this release.

Arconic maintains a five-year credit agreement, dated May 13, 2020, with a syndicate of lenders named therein and Deutsche Bank AG New York Branch as administrative agent (the "ABL Credit Agreement"). The ABL Credit Agreement provides for a senior secured asset-based revolving credit facility (the "ABL Credit Facility") to be used, generally, for working capital or other general corporate purposes. On February 16, 2022, the Company's ABL Credit Agreement was amended to increase the revolving commitments under the ABL Credit Facility to $1,200 from $800. In the 2022 nine-month period, the Company borrowed $250 and repaid $100 under the ABL Credit Facility.

OPERATING ACTIVITIES

Net (loss) income

Adjustments to reconcile net (loss) income to cash provided from (used for) operations:

Depreciation and amortization

Deferred income taxes

Restructuring and other charges⁽¹⁾

Net periodic pension benefit cost

Stock-based compensation

Amortization of debt issuance costs

Other

Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:

Decrease (Increase) in receivables⁽²⁾

Decrease (Increase) in inventories

(Increase) Decrease in prepaid expenses and other current assets

(Decrease) Increase in accounts payable, trade

(Decrease) Increase in accrued expenses

Increase in taxes, including income taxes

Pension contributions

Decrease (Increase) in noncurrent assets

Increase (Decrease) in noncurrent liabilities

CASH PROVIDED FROM (USED FOR) OPERATIONS

FINANCING ACTIVITIES

Net change in short term borrowings (original maturities of three months or less)⁽³⁾

Repurchases of common stock⁽⁴⁾

Other

CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES

INVESTING ACTIVITIES

Capital expenditures

Other

CASH USED FOR INVESTING ACTIVITIES

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

Net change in cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash at beginning of period⁽⁵⁾

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD⁽⁵⁾

For the quarter ended September 30, 2022, see footnote 2 to the Statement of Consolidated Operations included in this release.

In January 2022, the Company entered into a one-year arrangement with a financial institution to sell certain customer receivables outright without recourse on a continuous basis. All such sales are at Arconic's discretion. Under this arrangement, the Company serves in an administrative capacity, including collection of the receivables from the respective customers and remittance of these cash collections to the financial institution. Accordingly, upon the sale of customer receivables to the financial institution, Arconic removes the underlying trade receivables from the Consolidated Balance Sheet and includes the reduction as a positive amount in the Decrease (Increase) in receivables line item within Operating Activities on the Statement of Consolidated Cash Flows. In the quarters ended September 30, 2022 and June 30, 2022, the Company sold customer receivables of $413 and $329, respectively, and remitted cash collections of $380 and $267, respectively, to the financial institution.

Under the ABL Credit Facility, the Company borrowed $150 in the quarter ended September 30, 2022 and repaid $50 in each of the quarters ended September 30, 2022 and June 30, 2022. See footnote 2 to the Consolidated Balance Sheet included in this release.

In May 2021, Arconic announced that its Board of Directors approved a share repurchase program authorizing the Company to repurchase shares of its outstanding common stock up to an aggregate transactional value of $300 over a two-year period expiring April 28, 2023. In the quarters ended September 30, 2022, June 30, 2022, and September 30, 2021, the Company repurchased 3,033,663, 1,324,027, and 2,862,694, respectively, shares of its common stock under this program. Cumulatively, the Company has repurchased 9,776,177 shares of its common stock for $300 since the program's inception.

Cash and cash equivalents and restricted cash at beginning of period for all periods presented and Cash and cash equivalents and restricted cash at end of period for all periods presented includes Restricted cash of less than $0.03.

Total Segment Adjusted EBITDA⁽¹⁾

Unallocated amounts:

Corporate expenses⁽²⁾

Stock-based compensation expense

Metal price lag⁽³⁾

Unrealized (losses) gains on mark-to-market hedging instruments and derivatives

Provision for depreciation and amortization

Restructuring and other charges⁽⁴⁾

Operating (loss) income

Interest expense

Other (expenses) income, net⁽⁶⁾

Benefit (Provision) for income taxes

Arconic's profit or loss measure for its reportable segments is Segment Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization). The Company calculates Segment Adjusted EBITDA as Total sales (third-party and intersegment) minus each of (i) Cost of goods sold, (ii) Selling, general administrative, and other expenses, and (iii) Research and development expenses, plus each of (i) Stock-based compensation expense, (ii) Metal price lag (see footnote 3), and (iii) Unrealized (gains) losses on mark-to-market hedging instruments and derivatives (see below). Arconic's Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies' reportable segments.

Effective in the first quarter of 2022, management modified the Company's definition of Segment Adjusted EBITDA to exclude the impact of unrealized gains and losses on mark-to-market hedging instruments and derivatives. This modification was deemed appropriate as Arconic is considering entering into additional hedging instruments in future reporting periods if favorable conditions exist to mitigate cost inflation. Certain of these instruments may not qualify for hedge accounting resulting in unrealized gains and losses being recorded directly to Sales or Cost of goods sold, as appropriate (i.e., mark-to-market). Additionally, this change was also applied to derivatives that do not qualify for hedge accounting for consistency purposes. The Company does not have a regular practice of entering into contracts that are treated as derivatives for accounting purposes. Ultimately, this change was made to maintain the transparency and visibility of the underlying operating performance of Arconic's reportable segments. Prior to this change, the Company had a limited number of hedging instruments and derivatives that did not qualify for hedge accounting, the unrealized impact of which was not material to Arconic's Segment Adjusted EBITDA performance measure. Accordingly, periods prior to the effective date of this change were not recast to reflect this change.

Total Segment Adjusted EBITDA is the sum of the respective Segment Adjusted EBITDA for each of the Company's three reportable segments: Rolled Products, Building and Construction Systems, and Extrusions. This amount is being presented for the sole purpose of reconciling Segment Adjusted EBITDA to the Company's Consolidated net (loss) income.

Corporate expenses are composed of general administrative and other expenses of operating the corporate headquarters and other global administrative facilities.

Metal price lag represents the financial impact of the timing difference between when aluminum prices included in Sales are recognized and when aluminum purchase prices included in Cost of goods sold are realized. This adjustment aims to remove the effect of the volatility in metal prices and the calculation of this impact considers applicable metal hedging transactions.

For the quarters ended September 30, 2022 and 2021, see footnote 2 to the Statement of Consolidated Operations included in this release.

Other includes certain items that impact Cost of goods sold and Selling, general administrative, and other expenses on the Company's Statement of Consolidated Operations that are not included in Segment Adjusted EBITDA, including those described as "Other special items" (see footnote 4 to the reconciliation of Adjusted EBITDA within Calculation of Non-GAAP Financial Measures included in this release).

For the quarters ended September 30, 2022 and June 30, 2022, see footnote 3 to the Statement of Consolidated Operations included in this release.

Adjusted EBITDA

Net (loss) income attributable to Arconic Corporation

Add:

Net income attributable to noncontrolling interest

(Benefit) Provision for income taxes

Other expenses (income), net⁽¹⁾

Interest expense

Restructuring and other charges⁽²⁾

Provision for depreciation and amortization

Stock-based compensation

Metal price lag⁽³⁾

Unrealized losses (gains) on mark-to-market hedging instruments and derivatives

Other special items⁽⁴⁾

Adjusted EBITDA

Sales

Adjusted EBITDA Margin

For the quarters ended September 30, 2022 and June 30, 2022, see footnote 3 to the Statement of Consolidated Operations included in this release.

For the quarters ended September 30, 2022 and 2021, see footnote 2 to the Statement of Consolidated Operations included in this release.

Metal price lag represents the financial impact of the timing difference between when aluminum prices included in Sales are recognized and when aluminum purchase prices included in Cost of goods sold are realized. This adjustment aims to remove the effect of the volatility in metal prices and the calculation of this impact considers applicable metal hedging transactions.

Other special items include the following:

• for the quarter ended September 30, 2022, a charge related to the Grasse River environmental remediation matter ($9), costs related to the Grenfell Tower legal matter ($3), and other items ($(2));
• for the quarter ended June 30, 2022, costs related to a new labor agreement with the United Steelworkers ($19), a charge for two environmental remediation matters ($9), costs related to several legal matters, including Grenfell Tower ($3) and other ($4), and other items ($4); and
• for the quarter ended September 30, 2021, a partial reversal of a previously established reserve related to the Grasse River environmental remediation matter ($11), costs related to several legal matters ($7), and other items ($3).

Adjusted EBITDA⁽¹⁾

Change in working capital⁽²⁾

Cash payments for:

Environmental remediation

Pension contributions

Other postretirement benefits

Restructuring actions

Interest

Income taxes

Capital expenditures

Other⁽³⁾

Free Cash Flow⁽⁴⁾