Arconic (NYSE:HWM), fresh from backing away from a sale to private equity and days removed from ousting the CEO spearheading its restructuring, on Feb. 8 announced plans to slash its dividend and split the company into two independent entities. It's the latest twist in the seemingly never-ending drama that has surrounded this company since it was spun out of Alcoa (NYSE:AA) in 2016.
The company said it would separate its engineered products and forgings business from its operations making aluminum sheet, adding that any unit that doesn't fit into those two categories could be marked for divestiture. It's also cutting its quarterly dividend to $0.02 per share from $0.06 per share to preserve cash.
Arconic made the announcements while reporting fourth-quarter results that suggest the business has stabilized. The company reported adjusted earnings of $0.33 per share, beating consensus by $0.03, on revenue of $3.5 billion that beat expectations by $100 million. Arconic also said it expects to earn between $1.55 and $1.65 per share in 2019 on sales of $14.3 billion to $14.6 billion, within what Wall Street had expected.
Undoing what was done
The separation marks a quick reversal for Arconic, which was assembled by former parent Alcoa via a series of acquisitions earlier in the decade. Alcoa's CEO at the time, Klaus Kleinfeld, saw investing in finished products as a way to break the aluminum giant's tight correlation with the commodity cycle.
The eventual spinoff of Arconic loaded the new company with much of Alcoa's debt, and was pitched as offering investors the choice between a slower-growing but steady metal-refining business and a faster-growing, but debt-burdened, supplier to aerospace and other red-hot industries.
Alas, Arconic has been a mess almost from the start. The company was plagued by performance issues and disappointing quarterly earnings reports, leading to a feud between Kleinfeld, who had stayed with Arconic post-split, and activist fund Elliott Management. Kleinfeld stepped down in April 2017 after the board determined he showed poor judgement in his interactions with Elliott, but it wasn't until January 2018 when a full-time replacement was found.
The new CEO, Chip Blankenship, upon arrival described a company in disarray, implying that previous management had done a poor job integrating the numerous acquisitions that created Arconic. Blankenship's first year was marked by heavy spending to better integrate the businesses and modernize operations, but also a slow but steady improvement in quarterly results.
Arconic last summer opened talks to be taken private at the urging of Elliott, holder of 10.75% of the company as of Sept. 30; Blankenship, according to reports, supported a buyout. But in mid-January Arconic's board rejected a proposal from buyout shop Apollo Global Management, and days before the earnings announcement, the board said Blankenship was out as CEO.
Restructuring the better bet
Arconic's earnings report and split announcement was new CEO John Plant's first opportunity to outline his vision for the company. Plant, an Elliott-backed appointee to the board who as chairman went against the fund in rejecting the Apollo deal, in a statement said he believes a breakup is a better option for investors than a sale.
"We did not receive a proposal for a full-company transaction that we believe was in the best interests of our shareholders," Plant said in the statement. "The board sees more shareholder value creation through a restructuring of the company."
I supported the board's decision at the time, noting that Apollo's reported $22.20-per-share offer is below Arconic's share price for much of its history as an independent. Recent quarterly results suggest Blankenship's turnaround plan was working, and shareholders would be better-served riding out the storm and reaping the improved valuation that will likely come from the restructuring, instead of handing those future gains to Apollo.
Blankenship's departure and the recent turmoil call that optimism into question, but I continue to believe the underlying logic is sound. Arconic is still very much in the early stages of a turnaround. While sales were up across the board, EBIT margins declined in both its engineered products and rolled aluminum segments, the result of commodity pricing pressure and a transitioning mix in its aerospace business.
A future both bright and cloudy
Arconic's product pipeline remains solid. The company in the last year signed a new long-term agreement with Boeing to supply aluminum sheet and plate for commercial jets, and is a key supplier to United Technologies' new Pratt & Whitney geared turbofan engines. It also has promising investments in next-generation production, including a collaboration with Lockheed Martin to develop 3D metal printing techniques and a new, high-temperature titanium alloy for aerospace.
If the company is able to continue to streamline, it should see solid margin improvements thanks to strong aerospace demand and a ramp-up in new engine products. The post-split businesses could also be attractive acquisition targets.
But if there's one clear lesson to be drawn from the company's short history, it's that nothing is ever easy when it comes to Arconic. Plant's plan to split makes sense, but with Elliott still lurking, it's far from certain the split is the last plot twist in this saga.
For shareholders, there's enough long-term promise in Arconic to hold tight and ride out the storm. But given the drama of the last few weeks, it would be understandable if investors would rather put new money to work elsewhere.