Arconic’s sales decrease 38 percent year over year in Q2

Arconic Corp., headquartered in Pittsburgh, has announced second-quarter 2020 results, with reported revenue of $1.2 billion, down 38 percent year over year on weaker volumes across all segments and most end markets primarily because of the impact of the COVID-19 pandemic. Despite the loss, the company's CEO says he sees a path to return to growth.

Arconic reported a net loss of $92 million, or 84 cents per share for the quarter compared with net income of $5 million, or 4 cents per share, in the second quarter of 2019. Its net loss for the second quarter of this year included $76 million of after-tax special items primarily related to a noncash charge to annuitize its U.K. pension obligations, debt issuance costs, plant closure costs and the previously announced restructuring.

Arconic’s second-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $94 million compared with $211 million in second-quarter 2019. The difference is attributed primarily to lower volumes arising from the impact of the COVID-19 pandemic partly mitigated by cost reduction actions, the company says.

Pandemic affects end markets

In the conference call to discuss its Q2 earnings, Erick R. Asmussen, executive vice president and chief financial officer of Arconic, said, “Ground transportation, which historically is about 34 percent of our revenue, was the hardest hit of our end markets and represented only 22 percent of our second-quarter organic revenue. In this end market, we experienced a 57 percent decline in organic revenue year-on-year, primarily due to the shutdown of automotive production in the second quarter.”

In the aerospace market, he said Arconic’s sales were down nearly 26 percent compared with Q2 of 2018, “reflecting the challenges that face the large commercial aircraft manufacturers and the continued grounding of the 737 MAX,” referring to the fourth generation of the Boeing’s 737 airliner, which has had safety issues that have resulted in two fatal crashes.

Asmussen said the company’s sales in industrial end markets declined 16 percent year over year, “reflecting the volume impacts from the pandemic. Our building and construction and market was down about 20 percent due to construction project delays, resulting from the quarantines that went into place in Europe and North America. Lastly, our organic packaging revenue increased slightly year over year as we experienced resilience in this end market, which we currently service through our China and Russia operations. Our ability to future capitalized in the package opportunities is currently limited due to the noncompete, which expires at the end of October of this year.”

He added, “While the noncompete expiration is expected to provide opportunities for our Tennessee, China and Russia facilities, it will take some time to qualify customers and ramp up production.”

Asmussen said the automotive market rebounded “from the quick decline in Q2 with steady improvement from our auto customers. We expect the second half demand in automotive to reach levels near the second half of 2019. In the commercial transportation market, we expect the balance of the year to remain challenged.”

He said the aerospace supply chain is adjusting to reduced production, with an anticipated “year-on-year decline in aerospace sales of roughly 50 percent in the second half.”

Asmussen also said he expects the building and construction market “to remain somewhat challenged for the rest of the year,” with a flat to modestly down second half of 2020 anticipated. 

Responding to COVID-19-related downturns

Arconic began operating as a stand-alone company April 1, when sudden declines in critical end markets because of the pandemic shut down many of its customers’ production facilities around the world. In response, the company announced $200 million of cash conservation actions in early April to right-size what it describes as its “highly variable cost structure” for the changes in demand. This amount has since been increased to $250 million, Arconic notes in the news release on its Q2 earnings. Those actions include $200 million related to temporary salary reductions, 10 percent salaried headcount reduction, operational schedule optimization and a $50 million reduction in capital expenditures for the fiscal year. Of the $200 million in cost actions, $100 million are structural in nature, the company says. In the conference call, Arconic CEO Tim Myers said the company intends to maintain these cost reductions going forward.

In the news release about its Q2 earnings, he says, “As we launched a new company in the midst of a global pandemic, we quickly responded to keep our employees safe and continue supply to our customers. Additionally, we implemented strategic and financial actions to conserve cash and maintain our strong position in the markets we serve, which will enable us to benefit from strong secular growth trends.”

In addition to implementing cash conservation actions, Arconic says it restructured its balance sheet to be more flexible, increase liquidity and better mitigate impacts of the global pandemic. Arconic also addressed a legacy pension obligation, reducing its gross liability by approximately $250 million primarily through the annuitization of a portion of the U.K. pension obligation.

“I’m proud of the way the whole Arconic team has continued to take all the right actions to position this company for growth, and I’d like to thank our employees for their commitment in staying focused on these objectives," Myers said. "Going forward, we will continue to grow organic volumes in attractive end markets; drive cost savings, increase scrap utilization and capture network efficiencies across all our facilities; and actively manage our legacy obligations.”

In the conference call, Myers added that the company continues “to expand our margins through a range of productivity initiatives, including more casting capacity, increased scrap utilization, physical and digital automation and debottlenecking of critical assets. We expect these initiatives in combination to drive between $70 million and $80 million in annual benefit on a normalized basis when compared to 2019 levels as the market demand returns.”

In the news release, Myers says he expects the company’s actions to position Arconic “to benefit from the global megatrends driving growth: automotive lightweighting, demand for alternatives to plastic packaging and the focus on energy-efficiency in building and construction.”

The company reports ending the second quarter of 2020 with cash on hand of $595 million and total liquidity of approximately $1.3 billion.

May 13, Arconic says it closed on a new capital structure that better positions the company to weather the swings in cash needs as the end markets move through the cycle. The recapitalization transaction was comprised of a newly issued $700 million first lien note due 2025 with a 6 percent interest rate. The company says it used the proceeds to repay the outstanding $600 million of term loan B and added the remaining approximately $100 million in cash to the balance sheet. Arconic also replaced its cash flow revolver with an undrawn $800 million asset-backed lending facility.

Also in the second quarter, Arconic reduced its gross pension obligation by approximately $250 million primarily through the purchase of a group annuity contract for certain pensioners. This transaction mitigates future mortality, inflation and yield curve risk, according to the company, and required approximately $10 million in funding during the quarter and resulted in a $55 million noncash settlement charge primarily related to the use of surplus for the buyout premium and the acceleration of legacy pension actuarial losses.

Positioned for growth

In the conference call, Myers said, “Despite the challenges of the second quarter, secular tailwinds are positive for our industry. In the packaging, automotive and industrial markets, we see a clear path to return to growth. We're excited about our potential on what lies ahead of us ... .”

In the automotive market, Myers said, “Greater penetration for aluminum is anticipated and currently underrepresented portions of the vehicle, including door panels, Liftgate and center. CRU also projects higher aluminum adoption in electric vehicles versus gas- and diesel-powered vehicles. Anticipating an uplift of 15 percent to 27 percent of content in those vehicles as the transition to electric vehicles evolves.

“As the technology leader in the industry, Arconic is poised to gain share of additional auto body sheet growth. We currently anticipate participate on more Arconic Corp., headquartered in Pittsburgh, has announced second-quarter 2020 results, with reported revenue of $1.2 billion, down 38 percent year over year on weaker volumes across all segments and most end markets primarily because of the impact of the COVID-19 pandemic."