Howmet Aerospace Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Howmet retained Engine Products, Fastening Systems, Engineered Structures and Forged Wheels after its April 1, 2020 separation from Arconic Corporation. The 2020 income statement presents Arconic Corporation as discontinued operations; therefore, continuing-operations figures are the more relevant comparison. Amounts are in U.S. dollars in millions, except per-share data.
Financial performance and position
- Sales: $1,209, down 26% from $1,634. Commercial aerospace weakness, including COVID-19 effects and lower Boeing 737 MAX and 787 production, drove much of the decline; commercial transportation, defense aerospace and industrial gas turbine growth, plus $17 of favorable pricing, partly offset it.
- Profit: Operating income was $189 versus $258; operating margin was approximately 15.6% versus 15.8%. Continuing-operations income was $80 versus $153, and diluted EPS from continuing operations was $0.18 versus $0.35. Net income was $80 versus $215, with $62 of 2020 net income coming from discontinued operations.
- Costs and margins: Cost of goods sold was 72.2% of sales versus 72.4%. SG&A declined to $65 from $79; restructuring and other charges were $9 versus $39. Segment operating profit, a non-GAAP measure, was $226 versus $339.
- Segments: Engine Products sales/profit were $534/$101 (down 32%/39%); Fastening Systems $272/$45 (down 29%/53%); Engineered Structures $176/$10 (down 36%/64%); Forged Wheels $227/$70 (up 19%/40%). Aerospace represented 60% of revenue versus 73%.
- Cash flow: Operations used $6, compared with $208 used in Q1 2020. Capital expenditures were $55 versus $152; investing activities provided $3. Financing activities used $368, including $361 of debt repayments. Cash and cash equivalents were $1,238 at quarter-end, down from $1,610 at year-end 2020.
- Debt and liquidity: Debt was $4,713, including $489 due within one year; cash was $1,238. The company had no borrowings under its $1 billion revolving credit facility and reported covenant compliance. Current assets were $3,328 and current liabilities $1,680.
Changes, outlook and risks
- Q1 2021 continuing-operations income fell $73 year over year, primarily from lower commercial aerospace volumes and $28 of higher other expense, partly offset by lower interest expense and taxes. Interest expense declined to $72 from $84.
- Management expected commercial aerospace demand to remain down in 2021, while defense aerospace, industrial gas turbines and commercial transportation were expected to improve. Cost reductions and favorable pricing were expected to continue. No consolidated numerical earnings or revenue guidance is provided in the filing.
- Management expected to reinstate a $0.02-per-share quarterly common dividend beginning in Q3 2021, subject to board approval and contractual limits. During covenant relief through December 31, 2022, dividends and repurchases are restricted by facility terms.
- The company estimated $3–$7 of additional Q2 2021 charges related to fires at a Fastening Systems plant in France and a Forged Wheels plant in Ohio, with further effects possible. Q1 restructuring charges included a $4 impairment tied to a planned sale of a small French manufacturing business and $3 of pension settlement charges.
- Debt actions: Howmet redeemed $361 of 5.400% notes in January 2021; the filing says this is expected to reduce annual interest expense by about $19. On May 3, it redeemed $476 of 5.870% notes for $503 including accrued interest; a $22 termination premium was to be recorded in Q2. The two redemptions were expected to reduce annual interest expense by about $47 in total.
- Risks include continued COVID-19 and aerospace-market disruption, customer and supplier issues, manufacturing and quality problems, pension assumptions, goodwill impairment, and litigation or environmental liabilities. Goodwill was $4,086; no Q1 2021 impairment indicator was identified, but management warned future impairment could be material if results or market factors deteriorate.
- Contingencies include an LBIE claim seeking approximately $64 plus interest related to interest-rate swaps; Howmet said it has meritorious defenses. Arconic Corporation agreed to indemnify Howmet for potential Grenfell Tower-related liabilities, though proceedings involving Howmet remain pending. Other litigation outcomes and liabilities may be uncertain.
- The company disclosed a prior-period cash-flow classification correction: Q1 2020 capital expenditures were revised upward by $83, with corresponding cash-flow presentation adjustments; management said the misclassification was not material. Disclosure controls were reported effective, with no material Q1 changes to internal control over financial reporting.
Important facts for investors to verify
- Whether commercial aerospace recovery, 737 MAX/787 production and customer demand develop as management expected, and the resulting effect on segment sales and profit.
- Cash generation, working-capital movements, near-term debt maturities and compliance with the amended revolving-credit covenant thresholds.
- Whether the planned Q3 dividend reinstatement receives board approval and remains permissible under credit-facility terms.
- Actual costs and timing of the fire-related recovery, restructuring actions and planned French business sale.
- Developments in the LBIE and Grenfell-related proceedings, other contingencies, and the potential for goodwill impairment if forecasts weaken.