Arconic Reports Second Quarter 2021 Results Demonstrating Profitability Growth and Near-Term Opportunities

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⁽¹⁾

Interest expense⁽³⁾

Other expenses, net

(Loss) Income before income taxes⁽¹⁾

(Benefit) Provision for income taxes⁽¹⁾

Net (loss) income⁽¹⁾

Less: Net income attributable to noncontrolling interest

NET (LOSS) INCOME ATTRIBUTABLE TO ARCONIC

CORPORATION⁽¹⁾

EARNINGS PER SHARE ATTRIBUTABLE TO ARCONIC

CORPORATION COMMON STOCKHOLDERS:

Basic:

Net (loss) income⁽¹⁾

Weighted-average number of shares

Diluted:

Net (loss) income⁽¹⁾

Weighted-average number of shares⁽⁴⁾

COMMON STOCK OUTSTANDING AT THE END OF THE

PERIOD

Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at last-in, first-out (LIFO) cost. Management believes the average cost method more closely reflects the physical flow of inventories, improves comparability of the Company’s operating results with its industry peers, and provides an increased level of consistency in the measurement of inventories in the Company’s consolidated financial statements. The effects of the change in accounting principle from LIFO to average cost have been retrospectively applied to the Company’s Statement of Consolidated Operations for the quarter ended June 30, 2020. Accordingly, Net loss attributable to Arconic Corporation increased $4 (comprised of a $5 increase to Cost of goods sold and a $1 increase to Benefit for income taxes), or $0.04 per share, from the amount previously reported in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 (filed on August 4, 2020). See the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (filed on February 23, 2021) for additional information.

In the quarter ended June 30, 2021, Restructuring and other charges includes $568 related to the settlement of a portion of the Company’s U.S. defined benefit pension plan obligations as a result of the purchase of a group annuity contract and elections by certain plan participants to receive lump-sum benefit payments (see footnote 4 to the Consolidated Balance Sheet included in this release). In the quarter ended June 30, 2020, Restructuring and other charges includes $55 related to the settlement of a portion of the Company’s U.K. defined benefit pension plan obligation as a result of the purchase of a group annuity contract.

In the quarter ended June 30, 2020, Interest expense includes $19 related to the write-off and immediate expensing of certain debt issuance costs associated with a debt refinancing executed in May 2020.

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 2021 and 2020

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:

Accounts payable, trade

Accrued compensation and retirement costs

Taxes, including income taxes

Environmental remediation

Operating lease liabilities

Other current liabilities

Total current liabilities

Long-term debt⁽¹⁾

Accrued pension benefits⁽²⁾

Accrued other postretirement benefits

Environmental remediation

Operating lease liabilities

Deferred income taxes

Other noncurrent liabilities and deferred credits

Total liabilities

EQUITY

Arconic Corporation stockholders’ equity:

Common stock

Additional capital

Accumulated deficit

Treasury stock⁽³⁾

Accumulated other comprehensive loss⁽⁴⁾

Total Arconic Corporation stockholders’ equity

Noncontrolling interest

Total equity

Total liabilities and equity

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 (see footnote 2).

The decrease of $606 in Accrued pension benefits was mostly due to cash contributions and the purchase of a group annuity contract associated with the Company’s two funded U.S. defined benefit pension plans. In January 2021, the Company contributed a total of $200 to these two plans, comprised of the estimated minimum required funding for 2021 of $183 and an additional $17. In April 2021, the Company purchased a group annuity contract to transfer the obligation to pay the remaining retirement benefits of approximately 8,400 participants to an insurance company. On a combined basis, this transaction resulted in the settlement of $995 in plan obligations and the transfer of $1,007 in plan assets. In connection with this transaction, the Company contributed a total of $250 to these two plans to maintain the funding level of the remaining plan obligations not transferred. This contribution was funded with the net proceeds from a recent debt offering (see footnote 1). This transaction represents a significant settlement event, and, as a result, the Company was required to complete a remeasurement of these two plans, including an interim actuarial valuation of the plan obligations. Accordingly, the weighted average discount rate used in calculating the plan obligations increased to 3.10% as of April 30, 2021 from 2.54% as of December 31, 2020. This increase drove a decrease in the Company’s liability of $152.

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 quarter ended June 30, 2021, the Company repurchased 246,011 shares of its common stock under this program.

The decrease of $562 in Accumulated other comprehensive loss was mostly due to a reduction in the existing combined net actuarial loss associated with the Company’s two funded U.S. defined benefit pension plans. In the quarter ended June 30, 2021, the Company accelerated the amortization of a portion of this net actuarial loss due to the settlement of a portion of the Company’s pension plan obligations as a result of the purchase of a group annuity contract (see footnote 2) and elections by certain plan participants to receive lump-sum benefit payments. The impact of this activity on Accumulated other comprehensive loss was $437 ($568 before tax impact). The Company recognized the $568 in Restructuring and other charges on its Statement of Consolidated Operations (see footnote 2 to the Statement of Consolidated Operations included in this release). Additionally, as a result of an increase in the discount rate used in calculating the Company’s obligations related to these two plans as of April 30, 2021 (see footnote 2), Accumulated other comprehensive loss was reduced by $117 ($152 before tax impact).

OPERATING ACTIVITIES

Net (loss) income⁽¹⁾

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

Depreciation and amortization

Deferred income taxes⁽¹⁾

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) Decrease in receivables

(Increase) Decrease in inventories⁽¹⁾

(Increase) Decrease in prepaid expenses and other current assets

Increase (Decrease) in accounts payable, trade⁽³⁾

(Decrease) in accrued expenses

Increase (Decrease) in taxes, including income taxes

Pension contributions⁽⁴⁾

(Increase) Decrease in noncurrent assets

Increase in noncurrent liabilities

CASH (USED FOR) PROVIDED FROM OPERATIONS

FINANCING ACTIVITIES

Separation payment to former parent company⁽⁵⁾

Additions to debt (original maturities greater than three months)⁽⁵⁾

Debt issuance costs

Payments on debt (original maturities greater than three months)⁽⁵⁾

Repurchases of common stock⁽⁶⁾

Other

CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES

INVESTING ACTIVITIES

Capital expenditures⁽³⁾

Proceeds from the sale of assets and businesses

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⁽⁷⁾

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD⁽⁷⁾

Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at last-in, first-out (LIFO) cost. Management believes the average cost method more closely reflects the physical flow of inventories, improves comparability of the Company’s operating results with its industry peers, and provides an increased level of consistency in the measurement of inventories in the Company’s consolidated financial results. The effects of the change in accounting principle from LIFO to average cost have been retrospectively applied to the Company’s Statement of Consolidated Cash Flows for the quarter ended June 30, 2020. Accordingly, Net loss increased $4, Deferred income taxes decreased $1, and Decrease in inventories positively changed by $5 from the amounts reported on August 4, 2020. See the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (filed on February 23, 2021) for additional information.

See footnote 2 to the Statement of Consolidated Operations included in this release.

In preparing the Statement of Consolidated Cash Flows for the nine months ended September 30, 2020, management identified a misclassification related to the non-cash portion of properties, plants, and equipment additions. This non-cash portion is the result of the timing difference that exists between when the Company records such additions as assets on its Consolidated Balance Sheet and when such additions have been paid in cash. As a result, the amount of (Decrease) in accounts payable, trade reported on August 4, 2020 for the quarter ended June 30, 2020 was overstated by $8 and the amount of Capital expenditures reported on August 4, 2020 for the quarter ended June 30, 2020 was understated by $8. Accordingly, for the quarter ended June 30, 2020, management has corrected both (Decrease) in accounts payable, trade and Capital expenditures from the amounts reported on August 4, 2020 to remove the respective effect of this $8.

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 (see footnote 2 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 (see footnote 4).

On April 1, 2020, Arconic Inc. separated into two standalone, publicly-traded companies, Arconic Corporation and Howmet Aerospace Inc. (the “Separation”). In connection with the capital structure to be established at the time of the Separation, Arconic secured $1,200 in third-party indebtedness in the quarter ended March 31, 2020. The net proceeds from a portion of this indebtedness was held in escrow until the satisfaction of the escrow release conditions, which included the substantially concurrent completion of the Separation. Accordingly, the escrowed cash was included in Restricted cash as of March 31, 2020 (see footnote 7). The Company used a portion of the net proceeds from the aggregate indebtedness to make a $728 payment to its former parent company on April 1, 2020 to fund the transfer of certain net assets from the former parent company to Arconic in connection with the completion of the Separation.

On April 2, 2020, Arconic incurred an additional $500 of indebtedness as a proactive measure taken by the Company to bolster its liquidity and preserve financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. On May 13, 2020, in order to provide improved financial flexibility, Arconic executed a refinancing of a portion of its outstanding indebtedness by securing $700 in new third-party indebtedness. The Company used the net proceeds from the new indebtedness, together with cash on hand, to repay $1,100 of outstanding indebtedness.

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 quarter ended June 30, 2021, the Company repurchased 246,011 shares of its common stock under this program.

Cash and cash equivalents and restricted cash at beginning of period for the quarters ended June 30, 2021 and March 31, 2021 and Cash and cash equivalents and restricted cash at end of period for all periods presented includes Restricted cash of less than $0.03. For the quarter ended June 30, 2020, Cash and cash equivalents and restricted cash at beginning of period includes Restricted cash of $593 (see footnote 5).

Total Segment Adjusted EBITDA^(1),(2)

Unallocated amounts:

Corporate expenses⁽³⁾

Stock-based compensation expense

Metal price lag⁽⁴⁾

Provision for depreciation and amortization

Restructuring and other charges⁽⁵⁾

Operating (loss) income⁽²⁾

Interest expense

Other expenses, net

Benefit (Provision) for income taxes⁽²⁾

Arconic’s profit or loss measure for its reportable segments is Segment Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization). Effective in the third quarter of 2020, management refined the Company’s Segment Adjusted EBITDA measure to remove the impact of metal price lag (see footnote 4). This change was made to further enhance the transparency and visibility of the underlying operating performance of each segment by removing the volatility associated with metal prices. 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 Stock-based compensation expense and Metal price lag. Arconic’s Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies’ reportable segments.

Also, effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at last-in, first-out (LIFO) cost. The effects of the change in accounting principle have been retrospectively applied to the Company’s Statement of Consolidated Operations for the quarter ended June 30, 2020. See footnote 2 for additional information.

Segment Adjusted EBITDA for the quarter ended June 30, 2020 was recast to reflect the updated measure of segment profit or loss and the change in inventory cost method.

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.

Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. Management believes the average cost method more closely reflects the physical flow of inventories, improves comparability of the Company’s operating results with its industry peers, and provides an increased level of consistency in the measurement of inventories in the Company’s consolidated financial statements. The effects of the change in accounting principle from LIFO to average cost have been retrospectively applied to the Company’s Statement of Consolidated Operations for the quarter ended June 30, 2020. Accordingly, Net loss attributable to Arconic Corporation increased $4 (comprised of a $5 increase to Cost of goods sold and a $1 increase to Benefit for income taxes) from the amount previously reported in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 (filed on August 4, 2020). See the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (filed on February 23, 2021) for additional information.

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.

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 (loss) income attributable to Arconic Corporation⁽¹⁾

Add:

Net income attributable to noncontrolling interest

(Benefit) Provision for income taxes⁽¹⁾

Other expenses, net

Interest expense

Restructuring and other charges⁽²⁾

Provision for depreciation and amortization

Stock-based compensation

Metal price lag⁽³⁾

Other special items⁽⁴⁾

Adjusted EBITDA⁽¹⁾

Sales

Adjusted EBITDA Margin

Arconic’s definition of Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) is net margin plus an add-back for the following items: Provision for depreciation and amortization; Stock-based compensation; Metal price lag (see below); and Other special items. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation and amortization. Special items are composed of restructuring and other charges, discrete income tax items, and other items as deemed appropriate by management. There can be no assurances that additional special items will not occur in future periods. Adjusted EBITDA is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because Adjusted EBITDA provides additional information with respect to Arconic’s operating performance and the Company’s ability to meet its financial obligations. The Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies.

Effective in the third quarter of 2020, management refined the Company’s Adjusted EBITDA measure to remove the impact of metal price lag (see footnote 3). This change was made to further enhance the transparency and visibility of the underlying operating performance of the Company by removing the volatility associated with metal prices. Also, effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at last-in, first-out (LIFO) cost. The effects of the change in accounting principle have been retrospectively applied to the Company’s Statement of Consolidated Operations for the quarter ended June 30, 2020. See footnote 1 for additional information. Adjusted EBITDA for the quarter ended June 30, 2020 was recast to reflect both these changes.

Effective July 1, 2020, the Company changed its inventory cost method to average cost for all U.S. inventories previously carried at LIFO cost. Management believes the average cost method more closely reflects the physical flow of inventories, improves comparability of the Company’s operating results with its industry peers, and provides an increased level of consistency in the measurement of inventories in the Company’s consolidated financial statements. The effects of the change in accounting principle from LIFO to average cost have been retrospectively applied to the Company’s Statement of Consolidated Operations for the quarter ended June 30, 2020. Accordingly, Net loss attributable to Arconic Corporation increased $4 (comprised of a $5 increase to Cost of goods sold and a $1 increase to Benefit for income taxes) from the amount previously reported in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 (filed on August 4, 2020). See the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (filed on February 23, 2021) for additional information.

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 June 30, 2021, a write-down of inventory related to the idling of both the remaining operations at the Chandler (Arizona) extrusions facility and the casthouse operations at the Lafayette (Indiana) extrusions facility ($4) and costs related to several legal matters ($3);

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

• for the quarter ended June 30, 2020, costs related to several legal matters, including a customer settlement ($5), Grenfell Tower ($3), and other ($3).

Long-term debt

Short-term borrowings

Total debt

Less: Cash and cash equivalents

Net debt

Net debt is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management assesses Arconic’s leverage position after considering available cash that could be used to repay outstanding debt. Long-term debt equals $1,600 principal of outstanding indebtedness plus $18 of unamortized debt premium less $25 of unamortized debt issuance costs.

Adjusted EBITDA to

Free Cash Flow Bridge

Other

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.

In preparing the Statement of Consolidated Cash Flows for the nine months ended September 30, 2020, management identified a misclassification related to the non-cash portion of properties, plants, and equipment additions. This non-cash portion is the result of the timing difference that exists between when the Company records such additions as assets on its Consolidated Balance Sheet and when such additions have been paid in cash. As a result, the amount of (Decrease) in accounts payable, trade (included in Change in working capital) reported on August 4, 2020 for the quarter ended June 30, 2020 was overstated by $8 and the amount of Capital expenditures reported on August 4, 2020 for the quarter ended June 30, 2020 was understated by $8. Accordingly, for the quarter ended June 30, 2020, management has corrected both (Decrease) in accounts payable, trade and Capital expenditures from the amounts reported on August 4, 2020 to remove the respective effect of this $8.

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.

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)

4Q 2020: Cash used for operations of $(12) less capital expenditures of $37 = free cash flow of $(49)

3Q 2020: Cash provided from operations of $240 less capital expenditures of $39 = free cash flow of $201

2Q 2020: Cash provided from operations of $38 less capital expenditures of $29 = free cash flow of $9

Pension benefits are comprised of contributions to funded defined benefit plans and benefit payments to participants in unfunded defined benefit plans.

Adjusted Free Cash Flow is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because Adjusted Free Cash Flow provides an incremental view of the Company’s cash performance by excluding payments related to legacy liabilities.