Howmet Aerospace Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unless stated otherwise, amounts are U.S. dollars in millions. Howmet makes lightweight metal components serving commercial and defense aerospace, commercial transportation, and industrial markets.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $1,393 | $1,195 | $2,717 | $2,404 |
| Operating income | $241 | $207 | $471 | $396 |
| Net income | $147 | $74 | $278 | $154 |
| Diluted EPS | $0.35 | $0.17 | $0.66 | $0.35 |
| Segment Adjusted EBITDA | $336 | $287 | $655 | $578 |
- Q2 sales rose 17%; first-half sales rose 13%. Management attributed growth principally to commercial aerospace recovery, material-cost pass-through, and pricing. Commercial aerospace sales increased 34% in Q2 and 31% in the first half.
- Operating margin was approximately 17.3% in Q2 2022 and 17.3% in Q2 2021; first-half margin was approximately 17.3% versus 16.5%. Cost of goods sold declined to 70.9% of sales in Q2 and 71.3% for the first half, from 71.7% and 72.0%, respectively.
- Q2 earnings growth also reflected lower interest expense and debt-redemption losses. SG&A, R&D, material and inflationary costs increased. The first-half effective tax rate including discrete items was 21.5%, compared with 30.9% in 2021; the 2022 period included a $9 net discrete tax benefit.
- Segment results were mixed: first-half Segment Adjusted EBITDA increased at Engine Products ($352 versus $262) and Engineered Structures ($49 versus $46), but declined at Fastening Systems ($112 versus $120) and Forged Wheels ($142 versus $150).
Cash flow, liquidity and debt
- First-half cash from operations was $213, versus $79 in 2021. Capital expenditures were $106, compared with $91; operating cash flow was affected by higher inventory and receivables needs.
- Cash and cash equivalents were $537 at June 30, down from $720 at December 31, 2021. Cash used in financing was $331, including $235 of common-stock repurchases and $18 of dividends; cash used in investing was $65.
- Total debt was approximately $4,170, down from $4,232 at year-end. The $1 billion revolving credit facility had no borrowings outstanding. The company reported compliance with its covenants; the maximum net-debt-to-EBITDA covenant was 4.50x for Q2 during the temporary relief period.
- Common-stock repurchases and dividends totaled $252 in the first half. The credit agreement caps those payments at $500 for 2022 during the relief period, subject to conditions. Approximately $1,112 of repurchase authorization remained at June 30.
Material changes, outlook and risks
- Commercial aerospace recovery, particularly narrow-body demand, supported growth, while wide-body recovery remained slower. Boeing 787 production declines were expected to weigh on sales and segment EBITDA in the second half of 2022. Defense aerospace sales were lower in the first half, including lower F-35 volumes.
- Management expected 2022 demand to increase in commercial aerospace and, generally, commercial transportation and industrial gas turbine markets; defense demand was expected to decline. Material-cost pass-through may raise reported sales. Forged Wheels sales could be affected by customer supply-chain constraints.
- Howmet anticipated approximately $2–$6 of additional Q3 2022 charges related to prior plant fires, with further effects possible in later quarters. On July 30, 2022, a mechanical failure caused substantial heat and fire damage at the Barberton, Ohio cast house, temporarily closing the facility; the financial impact was still being assessed.
- Other significant exposures include ongoing COVID-19 and aircraft-production uncertainty, inflation, supply-chain disruption, customer concentration (GE represented approximately 13% of first-half third-party sales), environmental remediation, and legal proceedings. The filing describes a disputed Lehman-related swap claim of approximately $64 plus interest; outcome and timing remained uncertain. Management said other pending matters were not expected to have a material adverse effect based on information then available.
- The filing provided market and segment expectations, but no consolidated numeric revenue, earnings, or cash-flow guidance. Management estimated 2022 pension contributions and other postretirement benefit payments at approximately $60.
Key facts investors should verify
- Whether commercial and wide-body aerospace recovery, Boeing production rates, and defense demand track the company’s expectations.
- The operating and financial impact, recovery timeline, and insurance or other recovery for the July 2022 Barberton cast-house incident and prior plant fires.
- Whether inventory and receivables growth converts to cash, and whether debt, covenant headroom, and the $500 2022 capital-return limit remain manageable.
- Developments in the Lehman-related proceeding, environmental matters, and other contingencies, including any change to estimated liabilities or potential cash exposure.
- The effects of inflation, supply constraints, customer concentration, and material-cost pass-through on margins and segment profitability.