Howmet Aerospace Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with Q1 2022. Amounts are in U.S. dollars in millions, except per-share data. Howmet manufactures lightweight metal products for aerospace, commercial transportation, and industrial markets.
Financial results and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $1,603 | $1,324 | +21% |
| Operating income | $285 | $230 | +24% |
| Net income | $148 | $131 | +13% |
| Net income attributable to common shareholders | $147 | $130 | +13% |
| Diluted EPS | $0.35 | $0.31 | +13% |
| Cash provided by operations | $23 | $55 | Down $32 |
| Capital expenditures | $64 | $62 | + $2 |
- Operating margin was 17.8%, versus 17.4% in Q1 2022. Cost of goods sold was 72.6% of sales, up from 71.8%. Management attributed the increase mainly to inflation pass-through and higher headcount, partly offset by volume and pricing.
- Total Segment Adjusted EBITDA, a non-GAAP measure, was $379, up from $319. Segment margins were: Engine Products 26.7% (27.4%); Fastening Systems 18.6% (21.2%); Engineered Structures 14.5% (12.6%); Forged Wheels 27.3% (27.1%).
- Cash and cash equivalents were $537 at March 31, versus $791 at year-end. Long-term debt was $3,988, down from $4,162. The $1 billion revolving credit facility had no borrowings; the company reported covenant compliance. Current assets were $3,057 and current liabilities $1,403.
- Operating cash flow was pressured by working-capital needs, especially receivables and accounts payable. Operating cash flow less capital expenditures was negative $41 (calculated). Cash used for financing was $214, including $176 of debt repayments and $25 of share repurchases.
Material changes and drivers
- Sales rose $279, led by commercial aerospace growth of $168 and defense aerospace growth of $25, alongside approximately $35 more inflationary cost pass-through and $17 of favorable product pricing.
- Commercial aerospace and defense sales increased across several segments; Forged Wheels also benefited from higher commercial transportation volumes. Engine Products and Fastening Systems margins declined as inflation and hiring costs offset volume gains.
- The company repurchased approximately 0.6 million shares for $25 in Q1 2023, versus approximately 5 million shares for $175 in Q1 2022. The board authorization remaining was approximately $922.
- Howmet repurchased and redeemed portions of its 5.125% notes due 2024. Debt reduction is expected to lower annual interest expense by approximately $9.
Outlook, risks, and unusual items
- No consolidated full-year revenue or earnings guidance is provided in the filing. Management expects commercial aerospace demand to continue growing, with narrow-body demand recovering faster than wide-body demand. International air travel was approximately 80% of pre-pandemic levels; domestic travel had approximated pre-pandemic levels.
- For 2023 versus 2022, management expects higher demand in commercial aerospace for Engine Products, Fastening Systems, and Engineered Structures, while Engineered Structures defense demand is expected to decline. Forged Wheels expects lower commercial transportation demand in most regions.
- Management anticipates approximately $1–$5 of additional charges in Q2 2023 related to plant fire recovery, with further impacts in subsequent quarters. Q1 COGS included $4 of charges related to prior fires/incidents.
- Q1 income tax expense included a $20 reserve following an adverse French appellate tax decision concerning 2010–2012 and other open years. Howmet expects a payment to the French tax authority in 2023; a successful further appeal could result in a refund with interest.
- Other legal matters include an approximately $74 settlement in principle in the Howard securities case, expected to be covered by insurance and subject to court approval. A separate LBIE proceeding has a recorded $65 current liability; Howmet disputes the ruling and its appeal was scheduled for June 2023.
- Other risks include aircraft build-rate and product-mix uncertainty, inflation, supply-chain and workforce constraints, customer concentration, environmental remediation, and legal contingencies. Two customers represented approximately 13% and 10% of Q1 third-party sales. The Whitehall, Michigan labor agreement expired March 31; negotiations continued under an extension.
Important facts for investors to verify
- Whether aerospace demand, production capacity, and hiring convert into sustained revenue and margin improvement, particularly given the segment margin declines.
- Cash conversion and working-capital trends, including receivables, inventory, and supplier-payment balances; supplier-finance invoices included in accounts payable were $237.
- Outcome and cash timing of the French tax dispute, the LBIE appeal, and the insurance-covered Howard settlement.
- Progress and costs of recovery from the plant fires, and the expected reduction in interest expense after debt repayment.
- How market demand changes—especially wide-body aerospace and commercial transportation—affect product mix and segment performance.