Howmet Aerospace Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are U.S. dollars in millions, except per-share data. Howmet manufactures lightweight-metal products for aerospace, commercial transportation, and industrial markets across four segments: Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $1,648 | $1,393 | $3,251 | $2,717 |
| Operating income | $285 | $241 | $570 | $471 |
| Net income | $193 | $147 | $341 | $278 |
| Diluted EPS | $0.46 | $0.35 | $0.81 | $0.66 |
| Operating cash flow | — | $252 | $213 |
- Sales increased 18% in Q2 and 20% in the first half, driven by higher commercial and defense aerospace and commercial transportation sales, inflation cost pass-through, and favorable pricing.
- Cost of goods sold was 72.6% of sales in both Q2 and the first half, versus 70.9% and 71.3%, respectively, in 2022. Management cited inflation, added staffing and training costs, $9 of inventory impairments, labor-negotiation costs, and production bottlenecks; higher volumes and pricing partly offset these pressures.
- Segment Adjusted EBITDA, a non-GAAP measure, was $388 in Q2 versus $336; first-half total was $767 versus $655. Q2 segment margins: Engine Products 27.2% (down 0.3 percentage points year over year), Fastening Systems 19.5% (down 0.7 points), Engineered Structures 10.0% (down 4.1 points), and Forged Wheels 27.2% (up 0.3 points).
- Cash provided by operations rose $39 year over year, primarily on improved operating results, partly offset by working-capital use. Capital expenditures were $105 for the first half. Cash and cash equivalents were $535 at June 30, down from $791 at year-end 2022.
- Long-term debt was $3,989, down from $4,162 at year-end. The company reduced 5.125% notes due 2024 by $176 in the first half; the resulting annual interest reduction is expected to be about $9. A further $200 principal redemption, expected to cost about $205 and be funded with cash, was scheduled for September 2023.
- Current assets were $3,128 and current liabilities $1,410 at June 30. No borrowings were outstanding under the revolving credit facility. A new $1 billion unsecured revolver, maturing in July 2028, was entered into after quarter-end; the company reported covenant compliance at June 30.
Changes, outlook, and notable items
- Commercial aerospace represented approximately 47% of first-half revenue; aerospace overall represented 63%. Management said domestic air travel had returned to approximately 2019 levels and international travel was about 90% of 2019 levels. It expects commercial aerospace growth to continue, with narrow-body demand recovering faster than wide-body demand.
- For full-year 2023 versus 2022, management expected demand to increase in Engine Products’ commercial aerospace, defense aerospace, industrial gas turbine, and oil and gas markets; in Fastening Systems’ commercial aerospace, commercial transportation, and industrial markets; and in Engineered Structures’ commercial aerospace market. It expected Engineered Structures defense aerospace demand to decrease and Forged Wheels commercial transportation demand to remain relatively flat. The filing provides no consolidated numerical earnings or sales guidance.
- Management expects up to $5 of additional charges in the second half of 2023 related to the France plant fire and Barberton cast-house incident. It also expects 2023 pension and other postretirement benefit payments of approximately $56 and non-service pension and benefit costs about $20 higher than in 2022.
- Other income included a $25 pre-tax reversal, net of legal fees, of the prior LBIE legal charge following a June settlement. The settlement requires $40 in payments: $15 was paid in July 2023 and $25 is due in July 2024.
- The company recorded a $20 French tax reserve after an adverse appellate decision concerning 2010–2012 and other open tax years. It appealed to France’s Administrative Supreme Court and expected a payment in 2023; a successful appeal would result in a refund with interest.
- Other risks and uncertainties include production bottlenecks, supply-chain disruption, inflation and labor availability, aircraft-build timing and product mix, customer concentration, and legal, tax, and environmental matters. GE and RTX accounted for approximately 13% and 10% of first-half third-party sales, respectively. The company reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether aerospace demand and production-rate increases translate into sustained volume growth without continued bottlenecks, elevated staffing costs, or margin pressure.
- Progress and cash costs for the planned September debt redemption, and liquidity after the redemption and scheduled LBIE payment.
- Outcome and timing of the French tax appeal and the related reserve/payment.
- Actual recovery costs and insurance reimbursements for the France and Barberton fire-related matters.
- Working-capital trends, particularly receivables, inventory, and accounts payable, and the availability of the receivables-sale program and revolving facility.
- Resolution of the $74 Howard securities-law settlement, which remained subject to court approval in the filing, and developments in other legal and environmental contingencies.