Howmet Aerospace Inc. quarterly report, Q3 FY2022

Howmet Aerospace Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Howmet manufactures engineered metal products for commercial and defense aerospace, commercial transportation, and industrial markets across four segments: Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. Dollar amounts are in millions unless otherwise noted.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Sales	$1,433	$1,283	$4,150	$3,687
Operating income	$228	$205	$699	$601
Net income	$80	$27	$358	$181
Diluted EPS	$0.19	$0.06	$0.84	$0.41
Cash provided by operations	—	$278	$146

Q3 sales rose 12%; nine-month sales rose 13%. Growth was primarily driven by commercial aerospace volumes, material-cost pass-through, and favorable pricing. Commercial aerospace sales increased 23% in Q3 and 28% year to date.
Q3 cost of goods sold was 73.7% of sales, versus 72.3% a year earlier; the nine-month ratio was 72.1% in both periods. Q3 pressure reflected $25 of charges associated with plant fires and the Barberton cast-house incident, along with inflation and added staffing, partly offset by volume and pricing.
Operating margin was approximately 15.9% in Q3 versus 16.0% in Q3 2021. Net margin was approximately 5.6% versus 2.1%; the comparison reflects, among other items, the 2021 debt-redemption loss and the 2022 LBIE judgment charge.
Segment Adjusted EBITDA, a non-GAAP measure, was $342 in Q3 versus $308 and $997 for nine months versus $886. Engine Products improved strongly; Forged Wheels margins declined, and Fastening Systems’ nine-month EBITDA was lower.
Q3 net income included a $65 adverse judgment charge relating to Lehman Brothers International (Europe) swaps. Q3 2021 included a $118 debt-redemption loss; the comparable 2022 quarter had none. Nine-month debt-redemption losses were $2 in 2022 versus $141 in 2021.

Cash, debt, and liquidity

Cash and cash equivalents were $453 at September 30, 2022, down from $720 at December 31, 2021. Total debt was approximately $4,171, compared with $4,232 at year-end; long-term debt due after one year was $4,170.
Nine-month operating cash flow was $278. Capital expenditures were $148, implying operating cash flow less capital expenditures of approximately $130. Cash used in financing was $437, including $335 of share repurchases and $27 of dividends; investing activities used $106.
Working capital absorbed cash, particularly inventories, which increased $210 from year-end to $1,612. Receivables were $600 in total, compared with $420 at year-end.
The company had a $1,000 senior unsecured revolving credit facility with no borrowings outstanding. It reported compliance with covenants; the maximum net-debt-to-EBITDA ratio was 4.25x for Q3 2022 under temporary covenant relief. Dividends and repurchases during 2022 were subject to a $500 aggregate limit under the relief period.
Howmet repurchased 10 million shares for $335 during the first nine months; approximately $1,012 remained under the $1,500 authorization. The company declared common dividends of $0.10 per share year to date.

Material changes and management outlook

Commercial aerospace recovery supported growth, with narrow-body demand recovering faster than wide-body. Commercial aerospace was 47% of Q3 revenue, below the approximately 60% pre-pandemic 2019 annual share. Boeing 787 production declines continued to weigh on several segments.
Management anticipated an additional $25–$30 of charges in Q4 2022 related to the France and Barberton plant fires and cast-house incident, with further effects as operations recover. Insurance claims have been submitted; the filing does not provide a clear amount or timing for potential recoveries.
For full-year 2022 versus 2021, management expected higher demand in commercial aerospace and, for most regions, commercial transportation; defense aerospace demand in Engineered Structures was expected to decline. Material-cost pass-through was expected to increase sales. Forged Wheels sales could be affected by customers’ non-wheel component supply constraints. The filing gives no consolidated numerical revenue or earnings guidance.
Management expected approximately $60 of pension contributions and other postretirement benefit payments for 2022. It also noted inflation, supply-chain disruption, COVID-19-related uncertainty, aircraft build-rate changes, and foreign-currency movements as risks to results.

Contingencies and unusual items

In the LBIE proceeding, an October 2022 judgment found that amounts under the swaps could become payable following LBIE’s expected emergence from administration and other steps. Howmet recorded $65 as a current liability and expense, disputes the ruling, and intends to seek appeal and a stay. Interest was not reserved; any ultimate payment and timing remain uncertain.
The company participates in environmental assessments and cleanups at more than 30 locations and recorded a $15 remediation reserve. It also disclosed an estimated present-value guarantee of approximately $1,406 related to an Alcoa energy-supply agreement; management viewed the risk of Alcoa default as remote. Other guarantees, letters of credit, and surety bonds were also disclosed.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.

Investor facts to verify

Whether the LBIE judgment is appealed, stayed, or results in payment, including potential interest and timing.
Actual Q4 and subsequent fire-related costs, production recovery, and insurance recoveries.
Commercial aerospace and Boeing 787 build-rate trends, as well as defense-market demand and customer supply constraints.
Working-capital conversion, particularly inventory growth and receivables funding, alongside cash generation and capital spending.
Debt covenant headroom and liquidity under the temporary covenant-relief limits, including constraints on dividends and repurchases.