Howmet Aerospace Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; it does not provide a standalone fourth-quarter income statement or cash-flow summary. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
Howmet manufactures engineered metal products for aerospace, commercial transportation, and industrial markets through Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. Aerospace accounted for 62% of 2022 revenue; commercial transportation, 23%; and industrial and other markets, 15%. Commercial aerospace alone represented 46% of revenue, still below its approximately 60% pre-pandemic 2019 share.
Financial results and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Sales | $5,663 | $4,972 |
| Operating income | $919 | $748 |
| Income from continuing operations before tax | $606 | $324 |
| Net income from continuing operations | $469 | $258 |
| Diluted continuing-operations EPS | $1.11 | $0.59 |
| Total Segment Adjusted EBITDA | $1,352 | $1,200 |
| Cash provided from operations | $733 | $449 |
| Capital expenditures | $193 | $199 |
| Cash and cash equivalents at year-end | $791 | $720 |
| Long-term debt, net on balance sheet | $4,162 | $4,227 |
COGS was 72.5% of sales, implying a gross margin of approximately 27.5%, versus 27.7% in 2021. Segment Adjusted EBITDA margin was 23.9% of sales in 2022, compared with 24.1% in 2021. The effective tax rate was 22.6%. Cash used in financing was $526, including $400 of common-stock repurchases and $44 of dividends. Cash used in investing was $135.
At year-end, current assets were $3,143 and current liabilities were $1,482. The company also had an undrawn $1,000 revolving credit facility maturing in 2026 and reported compliance with its credit-facility covenants. Separately, the contractual-obligations table reports total debt of $4,181; this differs from balance-sheet debt, in part because the figures use different presentations.
Material changes versus FY 2021
- Sales rose 14%, mainly on commercial aerospace recovery, $225 higher material-cost pass-through, and $67 favorable product pricing. Defense aerospace sales declined.
- Continuing-operations net income increased 82%; the comparison also benefited from a $144 year-over-year reduction in debt-redemption losses and lower interest and restructuring costs.
- Operating cash flow increased $284, reflecting working-capital improvement, higher operating results, and lower pension contributions. Inventory increased $234 on the cash-flow statement, partially offsetting other working-capital benefits.
- Segment performance was mixed: Engine Products sales rose 18% and EBITDA rose 29%; Fastening Systems sales rose 7% but EBITDA fell 2%; Engineered Structures sales rose 9% and EBITDA rose 8%; Forged Wheels sales rose 15% but EBITDA fell 5%, with margin down about 560 basis points.
- Total debt declined $70. Howmet repurchased approximately 11.4 million shares for $400 during 2022.
Outlook, commentary, risks, and unusual items
- Outlook: Management expected 2023 sales and EPS to increase, citing commercial aerospace growth and continued operational improvement. Operating cash flow was expected to rise year over year, with capital expenditures below depreciation and amortization; total capital expenditures were also anticipated at approximately 4% of sales. No specific sales or EPS guidance ranges are provided in the filing text.
- Markets and execution: Management expected narrow-body aerospace demand to recover faster than wide-body demand and anticipated higher 787-related sales in 2023. Forged Wheels demand was expected to decrease in most regions because of lower OEM builds and potential customer supply constraints.
- Costs and operations: Inflation in materials, labor, and energy, supply-chain constraints, skilled-labor availability, manufacturing interruptions, and the ability to pass costs through to customers remain risks. Three plant-fire-related events contributed to 2022 costs; $59 of COGS charges were partly offset by $23 of insurance reimbursements. The company anticipated another $5–$10 of charges in 2023.
- Legal contingency: A UK court ruling in the LBIE swap proceeding led Howmet to record a $65 charge and liability in 2022. Howmet disagreed with the ruling and obtained permission to appeal; the court’s decision contemplated payment after a future event whose timing was unknown. Related interest was not reserved.
- Other special items: Restructuring and other charges were $56, including $58 of pension settlement accounting charges, partly offset by asset-sale gains. Pension and other postretirement benefit obligations totaled $1,719, with a funded status deficit of $749. The 2022 increase in discount rates materially reduced the reported benefit obligation.
- Principal risks: Cyclical aerospace and transportation markets, Boeing 787 production levels, customer concentration (GE and Raytheon represented about 12% and 9% of third-party sales), supplier constraints, geopolitics and energy prices, cyber incidents, labor negotiations, environmental obligations, and pension assumptions. The Whitehall UAW agreement covering approximately 1,300 employees was due to expire March 31, 2023.
- Other commitments: Howmet remained secondarily liable for a long-term energy-supply guarantee tied to Alcoa Corporation, with an estimated present-value exposure of approximately $1,040 if Alcoa defaulted; management viewed default risk as remote. Environmental remediation reserves were $16.
Important facts for investors to verify
- Whether commercial aerospace and Boeing 787 production recover as expected, and how the company’s commercial/defense and narrow-/wide-body mix affects margins.
- Whether 2023 sales, EPS, operating-cash-flow, and capital-spending expectations are achieved; the filing supplies qualitative guidance rather than ranges.
- The outcome and potential payment timing of the LBIE appeal, including any interest exposure not reserved.
- Whether inflation, energy costs, plant-fire expenses, customer supply constraints, and labor costs are offset by pricing and productivity gains.
- Debt maturities and covenant headroom, share repurchases and dividends, and the distinction between balance-sheet debt and contractual-obligation debt figures.