Howmet Aerospace Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are U.S. dollars in millions, except per-share data. Howmet manufactures engineered lightweight-metal products for aerospace, commercial transportation, and industrial markets across four reportable segments.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $1,658 | $1,433 | $4,909 | $4,150 |
| Operating income | $307 | $228 | $877 | $699 |
| Net income | $188 | $80 | $529 | $358 |
| Diluted EPS | $0.45 | $0.19 | $1.27 | $0.84 |
| Segment Adjusted EBITDA | $402 | $342 | $1,169 | $997 |
- Sales grew 16% in Q3 and 18% year to date. Operating margin was approximately 18.5% in Q3 versus 15.9%; year-to-date margin was 17.9% versus 16.8%. COGS was 71.4% of sales in Q3 versus 73.7%, and 72.2% year to date versus 72.1%.
- Q3 segment sales and Adjusted EBITDA: Engine Products $798 and $219; Fastening Systems $348 and $76; Engineered Structures $227 and $30; Forged Wheels $285 and $77. Year-to-date segment EBITDA margins were 27.1%, 20.0%, 12.6%, and 27.2%, respectively.
- Operating cash flow was $443 for nine months, versus $278. Capital expenditures were $164, versus $148; operating cash flow less capital expenditures was $279 (calculated). Cash and equivalents were $424 at September 30, 2023, down from $791 at year-end 2022. Cash flow statement ending cash including restricted cash was $425.
- Long-term debt was $3,794, down from $4,162 at year-end. The company repurchased or redeemed $376 principal of its 5.125% notes due 2024; it expects annual interest expense to decline by $19. A $1 billion revolving facility, maturing in 2028, was undrawn; Howmet reported covenant compliance. Current liabilities were $1,454 and current assets $3,111.
- Common dividends declared were $0.09 per share in Q3. The company repurchased $150 of common stock in the first nine months; approximately $797 remained under its authorization.
Material changes and drivers
- Growth reflected higher volumes across commercial and defense aerospace, commercial transportation, and industrial markets, plus favorable pricing. Pricing increases exceeded inflationary cost pass-through; pricing contributed $28 in Q3 and $65 year to date, while incremental inflation pass-through was approximately $15 and $75, respectively.
- Net income benefited from stronger volumes and pricing and from the absence of the $65 LBIE legal charge recorded in Q3 2022. Year-to-date results also included a $25 reversal of that prior charge following settlement.
- Segment EBITDA increased year over year in all four segments. Engineered Structures and Fastening Systems margins declined year to date amid inflation, staffing costs, and other operating pressures; Forged Wheels margin improved.
- Year-to-date working-capital movements constrained cash generation, including increases in receivables and inventories. Inventory rose to $1,748 from $1,609 at year-end.
Outlook, risks, and unusual items
- Management expects commercial aerospace growth to continue. Domestic air travel had exceeded 2019 levels; international travel was about 90% of 2019 levels. Commercial aerospace represented approximately 49% of Q3 revenue; aerospace markets represented 63% of nine-month revenue. Management expected 2023 demand to increase in commercial aerospace, defense aerospace, commercial transportation, and industrial markets overall, but expected defense aerospace demand in Engineered Structures to decrease. No numerical consolidated earnings or revenue guidance is provided in the filing.
- Aircraft build timing, aircraft mix, production bottlenecks, supply-chain disruption, staffing and training, inflation, and customer demand could affect results. Management cited additional operating costs from hiring ahead of expected growth and production constraints at an Engineered Structures plant. It anticipated up to $2 of additional Q4 charges related to prior plant fires.
- A $20 income-tax reserve was recorded following an adverse French court decision concerning tax years 2010–2012 and other open years; Howmet appealed and expected a payment in 2023, potentially refundable with interest if the appeal succeeds.
- The LBIE proceeding was settled for $40, payable in two installments: $15 paid in July 2023 and $25 due in July 2024. Environmental remediation reserves were $17. Other legal, environmental, tax, product-liability, and regulatory matters may have uncertain outcomes.
- Howmet remains secondarily liable, with Arconic Corporation, for an estimated present-value guarantee of approximately $1,040 related to an Alcoa energy contract if Alcoa defaults; management considers default risk remote. The filing also reports $116 of letters of credit and $42 of surety bonds outstanding.
- Management said cash on hand, operating cash flow, the revolving facility, and receivables program should be sufficient for operations and capital allocation, including debt repayment. It believed cash and/or revolver availability could repay the 2024 notes if refinancing is not completed beforehand.
Investor verification points
- Track refinancing or repayment plans for the remaining 5.125% notes due October 2024, and liquidity after debt reduction and shareholder returns.
- Assess whether aerospace demand recovery translates into production growth without persistent bottlenecks, workforce costs, or margin pressure—especially in Engineered Structures and Fastening Systems.
- Monitor the French tax appeal, expected payment and potential refund, and the remaining LBIE installment due in 2024.
- Review working-capital conversion, inventory growth, and reliance on receivables sales and supplier finance; supplier invoices in the finance programs were $254 at quarter-end.
- Consider customer concentration: GE and RTX represented approximately 13% and 10% of nine-month third-party sales, respectively.