Howmet Aerospace Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Howmet manufactures engineered lightweight-metal products for aerospace, commercial transportation, and industrial markets. Aerospace represented 61% of revenue, versus 60% a year earlier.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Sales | $1.324 billion | $1.209 billion |
| Operating income | $230 million | $189 million |
| Net income | $131 million | $80 million |
| Diluted EPS | $0.31 | $0.18 |
| Cash from (used for) operations | $55 million | $(6) million |
| Capital expenditures | $62 million | $55 million |
- Sales increased 10%, primarily on stronger commercial aerospace sales, approximately $40 million of higher material-cost pass-through, and $14 million of favorable pricing. Defense aerospace sales were lower.
- Operating margin was approximately 17.4%, versus 15.6%; net margin was approximately 9.9%, versus 6.6%. Cost of goods sold was 71.8% of sales, compared with 72.2%.
- Segment Adjusted EBITDA, a non-GAAP measure, was $319 million, up from $291 million. Engine Products rose to $173 million from $132 million; Fastening Systems was $56 million versus $57 million; Engineered Structures was $23 million versus $22 million; Forged Wheels fell to $67 million from $80 million.
- Cash and cash equivalents were $520 million at quarter-end, down from $720 million at December 31, 2021. Total debt was approximately $4.231 billion, including $3 million due within one year; long-term debt carrying value was $4.228 billion. The $1 billion revolving facility had no borrowings, and the company reported compliance with its covenants.
- Current assets were $2.782 billion and current liabilities $1.255 billion. Cash used in financing was $194 million, including $175 million of share repurchases; cash used in investing was $61 million.
Material changes and notable items
- Net income increased $51 million, reflecting higher commercial aerospace sales, pricing and productivity, lower interest expense, and fewer restructuring charges, partly offset by inflation and lower defense aerospace sales. Net interest expense declined to $58 million from $72 million, primarily due to lower average debt.
- Cash from operations improved by $61 million year over year, but working capital was a $30 million headwind, including an inventory increase. Inventory rose to $1.483 billion from $1.402 billion.
- Howmet repurchased approximately 5.15 million shares for $175 million at an average $34 per share. About $1.172 billion remained under its $1.5 billion authorization. The company declared a $0.02-per-share common dividend.
- Q1 restructuring and other charges were $2 million, versus $9 million. Fire-related costs at two facilities were $5 million in cost of goods sold, compared with $9 million in Q1 2021.
- The company agreed to sell its corporate center, carried at $40 million, and expects no material gain or loss; it plans to lease back part of the property.
Outlook, risks, and contingencies
- The filing provides no quantified consolidated full-year earnings or revenue guidance. Management expects 2022 demand to increase in commercial aerospace and, in most regions, commercial transportation; defense aerospace demand is expected to decline. Material-cost pass-through is expected to contribute to sales.
- Management expects Boeing 787 production-rate reductions to continue to weigh on sales and Segment Adjusted EBITDA in 2022. Forged Wheels may be affected by customer supply-chain constraints. The company cited inflation, supplier disruption, and the uncertain duration and effects of COVID-19 as risks.
- Howmet anticipates an additional $3 million to $7 million of fire-related charges in Q2 2022, with further impacts possible in subsequent quarters. Estimated 2022 pension contributions and other postretirement benefit payments are approximately $60 million.
- The revolving-credit covenant relief period runs through 2022, with maximum net-debt-to-EBITDA thresholds stepping down from 4.50x for Q1 and Q2 to 3.75x for Q4; the regular threshold is 3.50x. During relief, common dividends and repurchases are subject to conditions and a $500 million aggregate 2022 limit. Q1 dividends and repurchases totaled $183 million.
- Contingencies include environmental remediation reserves of $15 million and various legal matters. A claim by Lehman Brothers International seeks approximately $64 million plus interest over swap agreements; Howmet disputes liability and expects potential appeals. The company also disclosed an approximately $1.406 billion potential guarantee exposure tied to an Alcoa energy contract in the event of Alcoa default; it views default risk as remote, and a surety bond was obtained to protect its obligation.
- Moody’s upgraded Howmet’s long-term debt rating to Ba1 with a stable outlook on April 27, 2022. S&P rated it BB+ stable and Fitch BBB- stable. Management reported effective disclosure controls and no material change in internal controls.
Important facts for investors to verify
- Whether commercial aerospace recovery and Boeing 787 production constraints develop as management expects, and the resulting segment mix and margins.
- Whether inflation, customer and supplier constraints, and the two facility fires cause additional costs beyond the stated Q2 estimate.
- Whether inventory and receivables convert to cash and operating cash flow remains adequate alongside capital spending, pension payments, dividends, and repurchases.
- Compliance with leverage covenants as relief thresholds tighten, and the effect of restricted repurchase and dividend capacity.
- Developments in the Lehman Brothers proceeding, environmental matters, indemnified claims, and the Alcoa-related guarantee exposure.