Howmet Aerospace Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars in millions, except per-share data. Howmet retained its Engine Products, Fastening Systems, Engineered Structures and Forged Wheels businesses following the April 2020 separation of Arconic Corporation; 2020 income-statement results exclude that company as discontinued operations. Cash-flow comparisons for 2020 include pre-separation cash flows.
Financial performance
- Q2 revenue: $1,195, down 5% from $1,253. Commercial aerospace weakness, including COVID-19 impacts and Boeing 787 production declines, outweighed growth in commercial transportation and industrial markets and $21 of favorable pricing.
- Six-month revenue: $2,404, down 17% from $2,887, primarily reflecting lower commercial aerospace volumes and Boeing 737 MAX and 787 production declines.
- Profit: Q2 operating income was $207 versus $74; continuing-operations net income was $74 versus a loss of $84, and diluted EPS was $0.17 versus a loss of $0.19. For six months, operating income was $396 versus $332; continuing-operations net income was $154 versus $69, and diluted EPS was $0.35 versus $0.15.
- Margins: COGS was 71.7% of sales in Q2 versus 73.7%, and 72.0% for six months versus 72.9%. Operating margin, calculated from reported figures, was 17.3% in Q2 versus 5.9%, and 16.5% for six months versus 11.5%.
- Segment operating profit: Q2 totals were $222 versus $200. Forged Wheels rose to $61 from $6; Engine Products was $100 versus $105, Fastening Systems $50 versus $70, and Engineered Structures $11 versus $19. For six months, total segment profit was $448 versus $539, with declines in the three aerospace-focused segments partly offset by Forged Wheels growth.
- Cash flow: Six-month operating cash flow was $79 versus cash used of $177. Capital expenditures were $91 versus $184; operating cash flow less capital expenditures was negative $12, a derived measure. Financing used $1,068; investing provided $94. Cash and cash equivalents fell to $715 from $1,610 at year-end.
- Debt and liquidity: Debt was $4,240 at June 30, down from $5,075 at year-end; long-term debt was $4,227. The company redeemed its remaining 5.400% and 5.870% notes in 2021, anticipating approximately $47 of annual interest savings. The $1 billion revolving credit facility had no borrowings, and the company reported covenant compliance. The filing does not state a current ratio or a clear consolidated net-debt figure.
- Shareholder returns: Howmet repurchased approximately 5.9 million shares for $200 in Q2 at an average $34.02 per share. A $0.02-per-share dividend was declared for payment in August 2021.
Changes, outlook and risks
- Year-over-year earnings improved substantially, helped by lower restructuring charges ($5 in Q2 versus $105) and lower interest expense ($89 versus $144). For the first half, restructuring charges were $14 versus $144, and interest expense was $161 versus $228. These items helped offset reduced aerospace sales.
- Management expected 2021 commercial aerospace demand to remain weak, citing COVID-19 and Boeing 787 production declines. It expected growth in industrial gas turbines, commercial transportation and industrial markets, with continued cost reductions. Forged Wheels growth could be constrained by customer supply-chain issues. The filing provides no consolidated numerical earnings or revenue guidance.
- Management anticipated $3–$7 of additional Q3 charges related to fires at two facilities, with further impacts as recovery continues. Estimated 2021 pension contributions and other postretirement payments were approximately $120.
- COVID-19 duration and effects, aerospace demand, Boeing production levels, supply-chain disruptions, customer concentration, cost-saving execution, pension assumptions and legal or environmental matters are identified risks. All manufacturing facilities were operating at quarter-end; management noted that future estimates, including asset and deferred-tax-asset recoverability, remain uncertain.
- Credit-agreement covenant relief runs through December 2022, subject to specified leverage limits. During the relief period, dividends and repurchases are restricted if facility loans are outstanding and are subject to aggregate caps.
- Contingencies include environmental remediation reserves of $10 and an approximately $64 claim by Lehman Brothers International relating to historic swaps, which Howmet disputes. Certain Grenfell Tower-related exposures are indemnified by Arconic Corporation. The filing also reports that some securities-law claims may proceed; management did not expect other pending matters, based on available facts, to have a material adverse effect.
Important facts for investors to verify
- Whether commercial aerospace demand and Boeing 787/737 MAX production recover as expected, and how much of sales growth comes from non-aerospace markets.
- Whether cost savings, segment margins and operating cash flow improve despite lower aerospace volumes and working-capital movements.
- Debt reduction, covenant headroom and the effect of restricted repurchases and dividends during covenant relief.
- The timing and cash impact of facility-fire recovery costs, pension payments, and any material legal or environmental developments.
- Comparability of 2020 cash-flow figures, given the separation and the filing’s disclosed prior-period cash-flow reclassification.