10-QPeriod: Q2 FY2017

Howmet Aerospace Inc. Quarterly Report for Q2 Ended Jun 30, 2017

Filed August 2, 2017For Securities:HWM

Summary

Howmet Aerospace Inc. (HWM), previously operating as Arconic Inc., reported its financial results for the second quarter and the first six months ended June 30, 2017. The company demonstrated a significant improvement in profitability, with net income attributable to Arconic common shareholders increasing from $135 million in Q2 2016 to $212 million in Q2 2017, and from $151 million for the six-month period in 2016 to $534 million in 2017. This growth was driven by a combination of factors, including a substantial gain from the sale of a portion of its investment in Alcoa Corporation and a debt-for-equity exchange, alongside net cost savings and higher volumes across its operating segments. Sales saw a modest increase, reflecting volume growth and higher aluminum pricing, though partially offset by specific business divestitures and pricing pressures in certain segments. From a balance sheet perspective, total assets decreased from $20.04 billion at the end of 2016 to $19.11 billion as of June 30, 2017. This reduction was largely influenced by a decrease in long-term debt and the sale of investment in Alcoa Corporation. The company also managed its debt effectively, redeeming a significant portion of its outstanding bonds and notes in Q2 2017. The company faced some headwinds, including increased restructuring charges and ongoing legal matters, notably related to product safety and environmental concerns, which are being vigorously contested. Investors should note the significant positive impact of the Alcoa divestiture gains on current period earnings and monitor the resolution of ongoing legal proceedings.

Financial Highlights

47 data points
Beta

Revenue

$3.26B

Net Income

$212.00M

6.5% Net Margin

EPS (Diluted)

$0.43

Total Assets

$19.11B

Cash & Equivalents

$1.79B

Free Cash Flow

-$47.00M

Financial Statements
Beta
Revenue$3.26B
R&D Expenses$29.00M
SG&A Expenses$200.00M
Operating Income$320.00M
Interest Expense$24.00M
Net Income$212.00M
EPS (Basic)$0.44
EPS (Diluted)$0.43
Shares Outstanding (Basic)441.00M
Shares Outstanding (Diluted)462.00M

Key Highlights

  • 1Net income attributable to common shareholders increased significantly to $212 million in Q2 2017, up from $135 million in Q2 2016, and to $534 million for the six-month period, up from $151 million in the prior year.
  • 2Sales increased by 1% to $3.26 billion in Q2 2017 and by 3% to $6.45 billion for the six months ended June 30, 2017, compared to the respective periods in 2016.
  • 3The company recognized a substantial gain of $351 million from the sale of Alcoa Corporation shares and another $167 million gain from a debt-for-equity exchange, significantly boosting net income.
  • 4Total assets decreased to $19.11 billion as of June 30, 2017, from $20.04 billion at December 31, 2016, largely due to debt reduction and the sale of Alcoa investment.
  • 5Long-term debt decreased significantly from $8.04 billion at year-end 2016 to $6.80 billion by June 30, 2017, reflecting early redemption of bonds and notes.
  • 6Restructuring and other charges increased to $26 million in Q2 2017 and $99 million for the six-month period, primarily due to layoff costs and a loss on the sale of the Fusina, Italy rolling mill.
  • 7The company is facing multiple class-action lawsuits related to the Reynobond PE cladding product and the Grenfell Tower fire, as well as ongoing environmental and tax matters.

Frequently Asked Questions

The substantial increase in net income was primarily driven by significant one-time gains: a $351 million gain from the sale of a portion of Arconic's investment in Alcoa Corporation common stock and a $167 million gain from a debt-for-equity exchange. These financial events, combined with operational improvements such as cost savings and higher volumes, led to the improved profitability.

Arconic actively managed its debt during the period. It reduced its total long-term debt by approximately $1.24 billion, from $8.04 billion at the end of 2016 to $6.80 billion by June 30, 2017. This reduction was achieved through the early redemption of a significant portion of its outstanding 6.50% Bonds due 2018, 6.75% Notes due 2018, and a portion of its 5.72% Notes due 2019.

The company faces several significant risks. These include ongoing regulatory investigations and potential liabilities related to environmental matters, notably a reserve of $224 million for the Grasse River remediation. Additionally, Arconic is involved in multiple class-action lawsuits stemming from the Grenfell Tower fire in London, concerning its Reynobond PE cladding product, and is contesting significant tax assessments in Spain. While the company believes it has meritorious defenses, the outcomes of these legal and environmental matters are uncertain and could materially impact financial results.

In the first quarter of 2017, Arconic changed its primary measure of segment performance from After-tax operating income (ATOI) to Adjusted earnings before interest, tax, depreciation, and amortization (Adjusted EBITDA). The company also continues to present the results of Alcoa Corporation for periods prior to the November 1, 2016 separation as discontinued operations.