Howmet Aerospace Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unless stated otherwise, amounts are U.S. dollars in millions. Howmet makes engineered metal products for aerospace, commercial transportation, and industrial markets. The company’s 2020 separation from Arconic Corporation means the comparative income statement and segment results exclude Arconic Corporation’s discontinued operations.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $1,283 | $1,134 | $3,687 | $4,021 |
| Operating income | $205 | $73 | $601 | $405 |
| Income from continuing operations | $27 | $36 | $181 | $105 |
| diluted EPS from continuing operations | $0.06 | $0.08 | $0.41 | $0.23 |
| Cash from operations | Not separately stated for quarter | $146 | $(142) | |
| Capital expenditures | $47 | $36 | $138 | $220 |
Q3 gross margin was approximately 27.7% versus 20.6% a year earlier; operating margin was approximately 16.0% versus 6.4%. Nine-month gross margin was approximately 27.9% versus 25.2%, and operating margin was approximately 16.3% versus 10.1%. These ratios are calculated from reported sales and cost of goods sold or operating income.
At September 30, 2021, cash was $724, total debt was approximately $4,286, and the company had no borrowings under its $1,000 revolving credit facility. Current assets were $2,820 and current liabilities $1,208. The company reported total equity of $3,579. Cash and cash equivalents fell from $1,610 at year-end 2020. Cash used in financing was $1,174; cash provided by investing was $144.
Changes versus comparable periods
- Q3 sales increased 13%, reflecting higher commercial transportation, commercial aerospace, and industrial gas turbine volumes and $28 of favorable pricing; defense aerospace was weaker. Nine-month sales decreased 8%, chiefly because of lower commercial aerospace volumes, COVID-19 effects, and Boeing 787 production declines.
- Operating income rose in both comparisons, supported by cost reductions, pricing, and improved Q3 volumes. Nine-month restructuring charges fell to $22 from $166.
- Q3 continuing-operations income declined to $27 from $36, mainly because of $118 in debt-redemption losses and a smaller tax benefit, partly offset by higher operating income and lower interest expense. Nine-month continuing-operations income rose to $181 from $105.
- Segment performance was mixed year to date: Forged Wheels sales rose 44% and operating profit rose 112%; Engine Products sales fell 9%; Fastening Systems sales fell 20%; and Engineered Structures sales fell 25%. In Q3, Engine Products and Forged Wheels sales increased, while Fastening Systems and Engineered Structures sales declined.
- Operating cash flow improved by $288 year over year to $146, principally from working-capital changes, including accounts payable and inventory, and lower pension contributions. Receivables were a significant offset.
Outlook, risks, and unusual items
- Management provided qualitative, segment-level 2021 expectations rather than consolidated numerical guidance: commercial aerospace demand was expected to remain down, while industrial gas turbine, commercial transportation, and certain industrial markets were expected to improve. Cost reductions were expected to continue. Forged Wheels noted potential customer supply-chain constraints.
- Howmet expected about $3–$7 of additional Q4 2021 charges related to fires at facilities in France and Barberton, Ohio, with further impacts as recovery continues. In October, pension annuity actions were expected to result in an approximately $30 Q4 settlement charge. Debt activity in 2021 was expected to reduce annual net interest expense by about $70.
- The company issued $700 of 3.000% notes due 2029 and used proceeds in part to fund debt repurchases. Q3 debt-redemption loss was $118, primarily from premiums on tendered 6.875% notes due 2025. Total nine-month debt-redemption loss was $141.
- The amended revolving credit agreement matures in 2026 and provides covenant relief through 2022, with leverage limits that tighten over time. The company reported covenant compliance at quarter-end. During the relief period, dividends and buybacks are subject to conditions and limits.
- COVID-19 duration and aerospace recovery, Boeing 787 production reductions, supply-chain disruptions, customer concentration, pension assumptions, and execution of cost reductions remain risks. GE represented approximately 13% of nine-month 2021 third-party sales.
- Contingencies include environmental remediation reserves of $12 and legal matters, including securities litigation and a dispute involving interest-rate swaps for which LBIE claims approximately $64 plus interest. Management said the outcome of other claims cannot be determined; the filing describes an Alcoa-related guarantee with an estimated present value of approximately $1,406, while stating the risk of Alcoa default is viewed as remote.
- John C. Plant became sole CEO on October 14, 2021, following the departure of co-CEO Tolga Oal. The filing reported no material changes to previously disclosed risk factors and no material changes in internal controls.
Important facts for investors to verify
- Whether commercial aerospace demand and Boeing 787 production recover as assumed, and how that affects sales and segment profitability.
- Whether working-capital movements, including receivables and customer receivable sales, support sustainable operating cash flow.
- Debt-repurchase costs and the resulting interest savings, leverage, and compliance with revolving-credit covenants.
- Actual costs and timing of the Q4 pension settlement, fire-related charges, and remaining restructuring payments.
- Developments in the disclosed litigation, environmental matters, and guarantees, including the potential exposure and indemnification arrangements.