Howmet Aerospace Inc. — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2020. Unless stated otherwise, financial amounts are in millions. The filing was submitted under Howmet Aerospace’s former name, Arconic Inc.
Business context
On April 1, 2020, the company completed its separation into Howmet Aerospace and Arconic Corporation. Howmet retained Engineered Products and Forgings; Arconic Corporation received Global Rolled Products. The Q1 statements include both businesses, so they are not indicative of Howmet’s post-separation results or financial position. Future filings are expected to present Arconic Corporation’s historical businesses as discontinued operations.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $3,209 | $3,541 |
| Operating income | $399 | $374 |
| Operating margin | 12.4% | 10.6% |
| Net income | $215 | $187 |
| Net income attributable to common shareholders | $214 | $186 |
| Diluted earnings per share | $0.49 | $0.39 |
| Cash used for operations | $291 | $258 |
| Capital expenditures | $69 | $168 |
- Sales declined 9% year over year, mainly due to lower commercial transportation, automotive and aerospace volumes, the 737 MAX production decline, divestitures and lower aluminum prices.
- Operating income increased despite lower sales; operating margin rose to 12.4%. Net income increased 15%, with cost savings and lower other expense among the factors cited.
- At March 31, cash and cash equivalents were $2,591, versus $1,648 at year-end 2019. Cash, cash equivalents and restricted cash totaled $2,643 at quarter-end.
- Balance-sheet debt was $7,119, comprising $1,342 of short-term debt and $5,777 of long-term debt. The company reported no borrowings under its $1.5 billion revolving credit agreement and was in covenant compliance at March 31.
- Cash from financing was $1,145, primarily reflecting $1,200 of debt issued by Arconic Corporation in connection with the separation. The filing states Howmet had no obligations under that debt after the separation.
Segments and material changes
- Engineered Products and Forgings: Third-party sales were $1,631, down 7%; segment operating profit was $339, up 8%. Cost savings, lower raw-material costs and price increases more than offset lower volumes.
- Global Rolled Products: Third-party sales were $1,578, down 12%; segment operating profit was $169, up 25%. Savings and favorable industrial volumes supported profit, while end-market declines, lower aluminum prices and divestitures weighed on sales. This segment transferred to Arconic Corporation on April 1.
- Q1 restructuring and other charges were $21. The company recorded costs including severance and asset impairments, partly offset by a $27 gain on the sale of a South Korean extrusions business. Approximately 460 employees were associated with 2020 restructuring programs; none had been separated by March 31.
- Other comprehensive loss was $40, primarily reflecting foreign-currency translation losses of $65, partly offset by pension-related gains.
Outlook, risks and unusual items
- Management withdrew the 2020 guidance and assumptions issued in February, citing high uncertainty from COVID-19, and expected an adverse effect on 2020 performance. OEM production suspensions and temporary facility closures were affecting operations; the duration and financial impact were uncertain.
- Management announced headcount reductions, suspended common-stock dividends and reduced planned capital expenditures to preserve cash and liquidity. The filing also cited continuing negative effects from the 737 MAX production decline.
- Costs related to fires at two plants were $11 in Q1. Management anticipated approximately $10–$15 of additional charges in Q2, with further impacts as operations recovered; each plant had a $10 insurance deductible.
- Goodwill was $4,457. A quantitative test of the Engineered Structures reporting unit found no impairment, but its fair-value cushion over carrying value had narrowed from about 60% to about 15%. Management warned that further deterioration could require material impairment charges.
- Environmental remediation reserves were $229 at quarter-end. The filing also describes unresolved Grenfell Tower-related proceedings for which loss likelihood and range could not be reasonably estimated, and a Spanish tax assessment estimated at $170 including interest, under appeal.
- Subsequent to quarter-end, Howmet redeemed its $1,000 of 6.150% notes due 2020 and partially redeemed 2021 notes. It also issued $1,200 of 6.875% notes due 2025; related premiums and interest were to be recorded in Q2. Moody’s downgraded the company in April, triggering a receivables-program termination event that was subsequently cured by amendment.
- The separation introduced execution, indemnification and potential tax risks. The company noted that separation-related tax-free treatment could be challenged and that indemnity obligations between the companies may be significant.
Investor verification points
- Assess post-separation performance using filings that exclude Arconic Corporation, rather than treating Q1 combined results as representative of Howmet.
- Track COVID-19 and 737 MAX effects on aerospace demand, customer production, facility utilization and cash generation; confirm whether updated guidance is provided.
- Reconcile post-separation cash, debt maturities, refinancing costs, revolver availability and compliance with the amended net-debt-to-EBITDA covenant.
- Monitor the expected Q2 fire-related charges, restructuring execution and any goodwill or other asset impairment assessments.
- Follow developments in the Grenfell-related litigation, Spanish tax appeal, environmental remediation obligations and separation indemnities.