Arconic Reports First Quarter 2022 Results and Raises Outlook

Sales

Cost of goods sold (exclusive of expenses below)

Selling, general administrative, and other expenses

Research and development expenses

Provision for depreciation and amortization

Impairment of goodwill⁽¹⁾

Restructuring and other charges⁽²⁾

Operating income

Interest expense

Other expenses, net

Income (Loss) before income taxes

Provision for income taxes

Net income (loss)

Less: Net income attributable to noncontrolling interest

NET INCOME (LOSS) ATTRIBUTABLE TO ARCONIC

CORPORATION

EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC

CORPORATION COMMON STOCKHOLDERS:

Basic:

Net income (loss)

Weighted-average number of shares

Diluted:

Net income (loss)

Weighted-average number of shares⁽³⁾

COMMON STOCK OUTSTANDING AT THE END OF THE

PERIOD

In the quarter ended December 31, 2021, Arconic completed its annual review of goodwill for impairment for each of its three reporting units: Rolled Products, Building and Construction Systems, and Extrusions. The results of this review indicated that the carrying value of the Extrusions reporting unit’s goodwill was fully impaired. Accordingly, in the quarter ended December 31, 2021, the Company recognized an impairment charge of $65. This impairment was primarily driven by a combination of market-based factors, including delays in aerospace market improvement and significant cost inflation, resulting in increasingly limited margin expansion. The Company had not previously identified any triggering events during 2021 prior to the annual review. See the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (filed on February 22, 2022) for additional information.

In the quarter ended December 31, 2021, Restructuring and other charges includes $11 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.

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

Prepaid expenses and other current assets

Total current assets

Properties, plants, and equipment

Less: accumulated depreciation and amortization

Properties, plants, and equipment, net

Operating lease right-of-use-assets

Deferred income taxes

Other noncurrent assets

Total assets

LIABILITIES

Current liabilities:

Short term debt⁽¹⁾

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

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 March 2022, the Company borrowed $100 under this facility.

OPERATING ACTIVITIES

Net income (loss)

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

Depreciation and amortization

Impairment of goodwill⁽¹⁾

Deferred income taxes

Restructuring and other charges⁽²⁾

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:

(Increase) in receivables⁽³⁾

(Increase) in inventories

(Increase) Decrease in prepaid expenses and other current assets

Increase in accounts payable, trade

(Decrease) in accrued expenses

Increase in taxes, including income taxes

Pension contributions⁽⁴⁾

Decrease (Increase) in noncurrent assets

Increase in noncurrent liabilities

CASH (USED FOR) PROVIDED FROM OPERATIONS

FINANCING ACTIVITIES

Net change in short term borrowings (original maturities of three months or less)⁽⁵⁾

Additions to debt (original maturities greater than three months)⁽⁶⁾

Debt issuance costs

Repurchases of common stock⁽⁷⁾

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⁽⁸⁾

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD⁽⁸⁾

For the quarter ended December 31, 2021, see footnote 1 to the Statement of Consolidated Operations included in this release.

For the quarter ended December 31, 2021 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 (Increase) in receivables line item within Operating Activities on the Statement of Consolidated Cash Flows. In the 2022 first quarter, the Company sold $221 in customer receivables and remitted $158 in cash collections to the financial institution.

In January 2021, the Company contributed a total of $200 to its two funded U.S. defined benefit pension plans, comprised of the estimated minimum required funding for 2021 of $183 and an additional $17. Arconic had no minimum required funding due in the 2022 first quarter for these two plans. The Company expects to contribute a total of $22 to these two plans in the remainder of 2022.

For the quarter ended March 31, 2022, see footnote 1 to the Consolidated Balance Sheet included in this release.

In March 2021, Arconic issued $300 aggregate principal amount of 6.125% Senior Secured Second-Lien Notes due 2028 at 106.25% of par. In April 2021, the Company used a portion of the net proceeds of this issuance to contribute a total of $250 to its two funded U.S. defined benefit plans to maintain the funding level of the remaining plan obligations not transferred under a group annuity contract.

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 March 31, 2022 and December 31, 2021, the Company repurchased 505,982 and 1,803,800 shares of its common stock, respectively, under this program.

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 gains on mark-to-market hedging instruments and derivatives

Provision for depreciation and amortization

Impairment of goodwill⁽⁴⁾

Restructuring and other charges⁽⁵⁾

Operating income

Interest expense

Other expenses, net

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, prior period information presented was 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 income (loss).

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 quarter ended December 31, 2021, see footnote 1 to the Statement of Consolidated Operations included in this release.

For the quarter ended December 31, 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).

Adjusted EBITDA

Net income (loss) attributable to Arconic Corporation

Add:

Net income attributable to noncontrolling interest

Provision for income taxes

Other expenses, net

Interest expense

Restructuring and other charges⁽¹⁾

Impairment of goodwill⁽²⁾

Provision for depreciation and amortization

Stock-based compensation

Metal price lag⁽³⁾

Unrealized gains on mark-to-market hedging instruments and derivatives

Other special items⁽⁴⁾

Adjusted EBITDA

Sales

Adjusted EBITDA Margin

For the quarter ended December 31, 2021, see footnote 2 to the Statement of Consolidated Operations included in this release.

For the quarter ended December 31, 2021, see footnote 1 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 March 31, 2022, costs related to several legal matters ($2), costs related to the packaging restart at the Tennessee rolling mill ($2), and other items ($1);

• for the quarter ended December 31, 2021, costs related to several legal matters, including Grenfell Tower ($4) and other ($2), costs related to both an equipment fire and packaging restart at the Tennessee rolling mill ($5), and other items ($2); and

• for the quarter ended March 31, 2021, costs related to several legal matters, including Grenfell Tower ($4) and other ($1).

Adjusted Free Cash Flow Bridge

Adjusted EBITDA⁽¹⁾

Change in working capital⁽²⁾

Cash payments for:

Environmental remediation

Pension contributions⁽³⁾

Other postretirement benefits

Restructuring actions

Interest

Income taxes

Capital expenditures

Other

Free Cash Flow⁽⁴⁾

Adjusted EBITDA is a non-GAAP financial measure. See the reconciliation of Adjusted EBITDA included in this release for (i) Arconic’s definition of Adjusted EBITDA, (ii) management’s rationale for the presentation of this non-GAAP measure, and (iii) a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.

Arconic’s definition of working capital is Receivables plus Inventories less Accounts payable, trade.

In January 2021, the Company contributed a total of $200 to its two funded U.S. defined benefit pension plans, comprised of the estimated minimum required funding for 2021 of $183 and an additional $17. In April 2021, the Company contributed a total of $250 to its two funded U.S. defined benefit pension plans to maintain the funding level of the remaining plan obligations not transferred under a group annuity contract.

Arconic’s definition of Free Cash Flow is Cash from operations less capital expenditures. Free Cash Flow is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management reviews cash flows generated from operations after taking into consideration capital expenditures, which are both necessary to maintain and expand the Company’s asset base and expected to generate future cash flows from operations. It is important to note that Free Cash Flow does not represent the residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure.

• 1Q 2022:  Cash used for operations of $(103) less capital expenditures of $95 = free cash flow of $(198)

• 4Q 2021:  Cash used for operations of $96 less capital expenditures of $61 = free cash flow of $35

• 3Q 2021:  Cash used for operations of $(42) less capital expenditures of $51 = free cash flow of $(93)

• 2Q 2021:  Cash used for operations of $(167) less capital expenditures of $44 = free cash flow of $(211)

• 1Q 2021:  Cash used for operations of $(294) less capital expenditures of $28 = free cash flow of $(322)