Howmet Aerospace Inc. (then Arconic Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018. The filing was issued under Arconic Inc., before its later name change to Howmet Aerospace. Arconic described itself as a global lightweight-metals engineering and manufacturing company serving aerospace, transportation, construction, industrial, defense, and packaging markets.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $3.541 billion | $3.445 billion |
| Operating income | $374 million | $333 million |
| Net income | $187 million | $143 million |
| Net income attributable to common shareholders | $186 million | $142 million |
| Diluted EPS | $0.39 | $0.29 |
| Cash used for operations | $258 million | $436 million |
| Capital expenditures | $168 million | $117 million |
Sales rose 3%; operating income increased 12% and net income rose 31%. Gross margin was approximately 20.4%, versus 19.7%; operating margin was approximately 10.6%, versus 9.7%. Management attributed higher earnings mainly to volume growth, favorable pricing, cost savings, and lower interest expense, partly offset by product mix, higher taxes, and other expense.
Cash and cash equivalents were $1.319 billion at March 31, down from $2.277 billion at year-end. Current assets were $6.053 billion and current liabilities $3.659 billion. Short-term debt was $435 million and long-term debt, net of current maturities, was $5.899 billion; total reported debt was approximately $6.334 billion. The company had no borrowings under its $3.0 billion revolving credit facility. Cash used in financing was $741 million, including a $700 million common-stock repurchase. Investing activities provided $42 million.
Segments and changes versus prior period
- Engineered Products and Solutions: Third-party sales were $1.502 billion, up 5%; segment operating profit was $253 million, up 21%. Growth reflected aerospace volumes and pricing and cost savings.
- Global Rolled Products: Third-party sales were $1.503 billion, up 1%; segment operating profit was $107 million, down 14%. Management cited the Tennessee plant transition, operating headwinds in Aluminum Extrusions, and unfavorable mix.
- Transportation and Construction Solutions: Sales were $535 million, down slightly; segment operating profit was $87 million, up 30%, reflecting higher volumes and cost savings.
Interest expense fell to $85 million from $114 million, partly because a prior-year early-redemption premium did not recur. Other expense rose to $32 million from $20 million. The reported tax rate including discrete items was 27.2%, compared with 28.1%.
Outlook, material developments, and risks
- Management expected commercial aerospace demand to remain strong, supported by new engine-platform ramp-ups; it also anticipated growth in defense, selected commercial transportation, and building and construction markets, alongside continued pricing and productivity benefits. No consolidated numerical earnings or revenue guidance was provided in the supplied filing text.
- The company said Boeing’s announced temporary 737 MAX production-rate reduction was not expected to significantly affect Q2 revenue or segment operating profit; a prolonged reduction could negatively affect second-half 2019 results in the aerospace-related segments.
- Arconic announced a planned separation into two publicly traded companies, targeting completion in Q2 2020. Completion depended on approvals, tax and financing conditions, and SEC filings; the company could alter or abandon the plan. Q1 separation costs included $3 million in SG&A.
- The company repurchased $700 million of stock under an accelerated share repurchase agreement. By April 29, it had received and retired 36.4 million shares at an average price of $19.21; $300 million remained authorized for repurchases through 2020.
- Q1 restructuring and other charges were $12 million. The company reported restructuring programs involving approximately 800 employee separations, with most remaining 2019 separations expected by year-end. A small-facility sale agreed in April was expected to produce a $10–$15 million pretax restructuring-related charge.
- Environmental remediation reserves were $261 million. The Massena, New York river cleanup reserve was $195 million, with work expected to continue through 2022.
- In the Grenfell Tower-related matters, Arconic and a subsidiary faced investigations and litigation concerning Reynobond PE cladding. The company said it could not estimate the likelihood or range of loss for the principal shareholder lawsuits; it stated it would no longer sell the PE product for architectural use on buildings.
- A Spanish tax dispute involved an estimated revised assessment of $171 million, including interest. The company had recorded a $59 million reserve and a $28 million indemnification receivable from Alcoa Corporation; Spain’s Supreme Court accepted the company’s petition for review.
- Arconic guaranteed up to an estimated present value of approximately $1.143 billion for an Alcoa Corporation energy-supply obligation in the event of payment default; the guarantee runs to 2047. Management described default risk as remote.
Other financial and reporting notes
Operating cash outflow improved from the prior year, mainly due to lower pension contributions and working-capital changes, although receivables were a cash-use headwind. Adoption of the new lease standard added approximately $320 million of operating lease assets and liabilities at January 1, 2019; March 31 operating lease liabilities totaled $309 million. The interim financial statements were reviewed, not audited; the independent accountant reported no material modifications identified in its review.
Most important facts for investors to verify
- Whether the Q1 earnings improvement and segment trends continued, especially the decline in Global Rolled Products operating profit.
- Cash generation, working-capital movements, capital spending, and the company’s ability to fund operations while maintaining its debt burden and shareholder distributions.
- Progress, costs, financing, tax treatment, and final terms of the proposed separation, including whether the targeted Q2 2020 timing remained achievable.
- Any developments in the 737 MAX production outlook, Grenfell-related litigation and investigations, the Spanish tax appeal, and environmental remediation liabilities.
- The completed ASR’s effect on shares outstanding and per-share results, and any subsequent use of the remaining repurchase authorization.