Howmet Aerospace Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; it does not provide a standalone fourth-quarter income statement or cash flow.
Business context
Howmet manufactures engineered aerospace and transportation products through four segments: Engine Products, Fastening Systems, Engineered Structures and Forged Wheels. Aerospace represented 64% of 2023 revenue, commercial transportation 21%, and industrial and other markets 15%. North America and Europe accounted for 70% and 23% of sales, respectively, based on shipment origin.
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Sales | $6.640 billion | $5.663 billion |
| Operating income | $1.203 billion | $919 million |
| Income before taxes | $975 million | $606 million |
| Net income | $765 million | $469 million |
| Diluted EPS | $1.83 | $1.11 |
| Cash provided by operations | $901 million | $733 million |
| Capital expenditures | $219 million | $193 million |
| Cash and cash equivalents, year-end | $610 million | $791 million |
| Total debt, year-end | $3.706 billion | $4.162 billion |
Operating margin was approximately 18.1% and net margin approximately 11.5% in 2023, calculated from reported sales and income. Operating cash flow less capital expenditures was approximately $682 million. Current assets were $3.316 billion versus current liabilities of $1.784 billion. Total debt less cash was approximately $3.096 billion.
Total Segment Adjusted EBITDA, a non-GAAP measure, rose 17% to $1.587 billion. Segment results:
| Segment | Sales | Adjusted EBITDA | EBITDA margin |
|---|---|---|---|
| Engine Products | $3.266 billion | $887 million | 27.2% |
| Fastening Systems | $1.349 billion | $278 million | 20.6% |
| Engineered Structures | $878 million | $113 million | 12.9% |
| Forged Wheels | $1.147 billion | $309 million | 26.9% |
Material changes versus 2022
- Sales increased 17%, led by commercial aerospace, where sales rose 24%; sales also grew in defense aerospace, commercial transportation, and industrial and other markets.
- Income before taxes increased 61%, while net income rose 63%. Management attributed the improvement mainly to higher volume and favorable pricing, alongside lower restructuring charges and interest expense and a partial reversal of the 2022 Lehman Brothers legal charge.
- Cost of goods sold fell to 71.9% of sales from 72.5%, supported by higher volume, pricing and lower fire-related costs, partly offset by inflation, pass-through costs and added staffing.
- Segment EBITDA margins improved in Engine Products and Forged Wheels but declined in Fastening Systems and Engineered Structures. Engineered Structures faced production bottlenecks and lower defense volumes.
- Operating cash flow increased to $901 million, although working capital was a $163 million year-over-year headwind. Debt fell by $456 million after debt repayments and redemptions, partly offset by $400 million of term-loan borrowings.
Outlook, risks and unusual items
- 2024 outlook: Management expects sales to increase, supported by commercial aerospace growth; EPS to grow; and operating cash flow to exceed 2023. Capital spending is expected to rise for capacity expansion. No specific sales or EPS guidance figures are provided. Capital expenditures are anticipated at approximately 4% of sales.
- Management expects demand to increase in commercial aerospace, defense aerospace, oil and gas, and industrial gas turbines for Engine Products; commercial aerospace for Engineered Structures; and commercial aerospace and industrial markets for Fastening Systems. Forged Wheels demand is expected to decline in most regions as OEM builds fall; lower aluminum pass-through is also expected to reduce sales.
- Commercial aerospace recovery, OEM build timing and product mix, inflation and energy costs, raw-material availability and pricing, supplier constraints, production bottlenecks, labor availability, customer concentration, geopolitical developments and cybersecurity are key risks. GE and RTX represented approximately 12% and 9% of third-party sales, respectively.
- Howmet repurchased approximately 5.2 million shares for $250 million in 2023 and paid $73 million in dividends. The board’s repurchase authorization had approximately $697 million remaining at January 1, 2024.
- The $65 million 2022 charge for the Lehman Brothers International (Europe) proceeding was partly reversed in 2023; the final settlement requires a $25 million payment in July 2024 after $15 million was paid in 2023.
- Howmet recorded a $21 million French tax reserve in 2023 and paid the assessment and estimated tax during the year; additional interest was expected to be paid in 2024. The company has appealed the underlying decision.
- Lockheed Martin sued Howmet and subsidiary RTI over titanium supply and pricing for the F-35 program. The court denied Lockheed Martin’s preliminary injunction request; Howmet recorded no liability, saying a loss was not probable or reasonably estimable. Trial was scheduled for July 2024.
- Year-end debt included $205 million of 5.125% notes due October 2024 and $600 million of 6.875% notes due May 2025. The company said cash and available credit were expected to support repayment if refinancing did not occur. Its $1 billion revolving credit facility was undrawn at year-end, and the company reported covenant compliance.
- The auditor identified the Engineered Structures goodwill impairment assessment as a critical audit matter because of judgment in forecasting sales, costs and discount rates. No goodwill impairment was recorded in 2023.
Important facts for investors to verify
- Whether commercial aerospace production growth and Howmet’s capacity ramp-up meet management’s expectations, particularly given reported hiring costs and Engineered Structures bottlenecks.
- 2024 performance against the directional outlook, including EPS, operating cash flow, capital spending and Forged Wheels demand.
- How Howmet will refinance or repay the 2024 and 2025 note maturities, and the effect of debt reduction and term loans on future interest expense.
- Developments in the Lockheed Martin/RTI F-35 litigation, the French tax appeal, and remaining LBIE settlement payment.
- Whether segment margins, working-capital requirements and material-cost pass-through sustain the improvement in earnings and cash generation.