Howmet Aerospace 10-Q 2022-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended March 31, 2022

OR

Commission File Number 1-3610

HOWMET AEROSPACE INC.

(Exact name of registrant as specified in its charter)

201 Isabella Street, Suite 200, Pittsburgh, Pennsylvania 15212-5872

(Address of principal executive offices) (Zip code)

Investor Relations 412-553-1950

Office of the Secretary 412-553-1940

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ✓ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ✓ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of April 29, 2022, there were 417,914,089 shares of common stock, par value $1.00 per share, of the registrant outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Howmet Aerospace Inc. and subsidiaries

Statement of Consolidated Operations (unaudited)

(U.S. dollars in millions, except per-share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

Howmet Aerospace Inc. and subsidiaries

Statement of Consolidated Comprehensive Income (unaudited)

(U.S. dollars in millions)

The accompanying notes are an integral part of the consolidated financial statements.

Howmet Aerospace Inc. and subsidiaries

Consolidated Balance Sheet (unaudited)

(U.S. dollars in millions)

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(U.S. dollars in millions, except per share amounts)

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and notes thereto included in Part I, Item 1 (Financial Statements and Supplementary Data) of this Form 10-Q.

Overview

Howmet is a global leader in lightweight metals engineering and manufacturing. Howmet’s innovative, multi-material products, which include nickel, titanium, aluminum, and cobalt, are used worldwide in the aerospace (commercial and defense), commercial transportation, and industrial and other markets.

COVID-19

Year-to-date 2022, the Company derived approximately 61% of its revenue from products sold to the aerospace market. Due to the global COVID-19 pandemic and its impact on the aerospace industry to date, there has been a decrease in domestic and international air travel. As a result, the demand for narrow body and wide body aircraft has been adversely affected. Narrow body demand is returning faster than wide body demand, creating a shift in product mix compared to pre-pandemic conditions. Since the duration of the pandemic is uncertain, management has taken a series of actions to address the financial impact, including fixed and variable cost reductions, such as headcount reductions in certain segments, and reducing the level of capital expenditures to preserve cash and maintain liquidity.

For additional information regarding the risks of COVID-19 on our business, see section Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, “Risk Factors — Our business, results of operations, financial condition and/or cash flows have been and could continue to be adversely impacted materially by the continued effects of the COVID-19 pandemic.”

Results of Operations

Earnings Summary:

Sales. Sales were $1,324 in the first quarter of 2022 compared to $1,209 in the first quarter of 2021. The increase of $115, or 10%, in the first quarter of 2022 was primarily due to higher sales in the commercial aerospace market, an increase in material cost pass through of approximately $40, and favorable product pricing of $14, partially offset by lower sales in the defense aerospace market.

Cost of goods sold (COGS). COGS as a percentage of Sales was 71.8% in the first quarter of 2022 compared to 72.2% in the first quarter of 2021. The decrease in the first quarter of 2022 was primarily due to higher sales volumes and favorable productivity, partially offset by material cost pass through and increased headcount, primarily in the Engine Products and Fastening Systems segments, in anticipation of revenue increases in 2022. Additionally, the Company recorded total COGS charges of $9 in the first quarter of 2021 related to fires that occurred at a Fastening Systems plant in France in 2019 (the “France Plant Fire”) and at a Forged Wheels plant in Barberton, Ohio in 2020 (the “Barberton Plant Fire”). The Company recorded total COGS charges of $5 in the first quarter of 2022 related to the France Plant Fire and Barberton Plant Fire. The Company anticipates additional charges of approximately $3 to $7 in the second quarter of 2022, with further impacts in subsequent quarters as the businesses continue to recover from the fires.

Selling, general administrative, and other expenses (SG&A). SG&A expenses were $69 in the first quarter of 2022 compared to $65 in the first quarter of 2021. The increase of $4, or 6%, in the first quarter of 2022 was primarily due to previous legal reimbursements and higher Corporate costs, partially offset by net legal and other advisory reimbursements for an Arconic Corporation indemnified claim of $3.

Research and development expenses (R&D). R&D expenses were $7 in the first quarter of 2022 and $5 in the first quarter of 2021, an increase of $2, or 40%.

Restructuring and other charges. Restructuring and other charges were $2 in the first quarter of 2022 compared to $9 in the first quarter of 2021 or a decrease of $7.

Restructuring and other charges for the first quarter of 2022 were primarily due to a U.S. pension plan settlement and exit related costs of $2.

Restructuring and other charges for the first quarter of 2021 were primarily comprised of a $4 charge for impairment of assets associated with an agreement to sell a small manufacturing business in France and a $3 charge for U.S. pension plans' settlement accounting.

See Note D to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for additional detail.

Interest expense, net. Interest expense, net was $58 in the first quarter of 2022 compared to $72 in the first quarter of 2021. The decrease of $14, or 19%, in the first quarter of 2022 was primarily due to a reduced average level of debt.

See Note N to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for additional detail related to the Company’s debt.

Other expense, net. Other expense, net was $1 in the first quarter of 2022 compared to Other expense, net of $4 in the first quarter of 2021. The decrease of $3, or 75%, in the first quarter of 2022 was primarily due to an increase in foreign currency gains of $5 and the impacts of deferred compensation arrangements of $5, partially offset by mark-to-market adjustments of $6.

Provision for income taxes. The estimated annual effective tax rate, before discrete items, applied to ordinary income was 24.3% in the first quarter of 2022 compared to 30.4% in the first quarter of 2021. The tax rate including discrete items was 23.4% in the first quarter of 2022 compared to 29.2% in the first quarter of 2021. A discrete tax benefit of $2 was recorded in the first quarter of 2022 compared to a discrete tax benefit of $1 in the first quarter of 2021. The estimated annual effective tax rate is a reflection of global income across numerous jurisdictions. As a result of the recovery in domestic profitability, the annual effective tax rate has improved.

See Note G to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for additional detail.

Net income. Net income was $131, or $0.31 per diluted share, in the first quarter of 2022 compared to $80, or $0.18 per diluted share, in the first quarter of 2021. The increase of $51 in the first quarter of 2022 was primarily due to higher sales in the commercial aerospace market, price increases, productivity gains, a decrease in Interest expense, net, due to lower long-term debt levels, and a decrease in Restructuring and other charges, partially offset by lower sales in the defense aerospace market, an increase in material costs and other inflationary costs, and an increase in provision for income taxes primarily driven by an increase in income before income taxes.

Segment Information

The Company’s operations consist of four worldwide reportable segments: Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. Segment performance under Howmet’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Segment Adjusted EBITDA. Prior to the first quarter of 2022, the Company used Segment operating profit as its primary measure of performance. However, the Company’s Chief Executive Officer (“CEO”) believes that Segment adjusted EBITDA is now a better representation of its business because it provides additional information with respect to the Company’s operating performance and the Company’s ability to meet its financial obligations. Howmet’s definition of Segment Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) is net margin plus an add-back for depreciation and amortization. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation and amortization. Special items, including Restructuring and other charges, are also excluded from Net margin and Segment Adjusted EBITDA. Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Differences between the total segment and consolidated totals are in Corporate (See Note C to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a description of each segment).

The Company has aligned its operations consistent with how the CEO assesses operating performance and allocates capital.

The Company produces aerospace engine parts and components and aerospace fastening systems for Boeing 737 MAX (“737 MAX”) airplanes. In late December 2019, Boeing announced a temporary suspension of the production of 737 MAX airplanes. This decline in production had a negative impact on sales and Segment Adjusted EBITDA in the Engine Products, Fastening Systems, and Engineered Structures segments in 2020 and the first half of 2021. While regulatory authorities in the United States and certain other jurisdictions lifted grounding orders beginning in late 2020, our sales remained at lower levels through the first half of 2021 due to the residual impacts of the 737 MAX grounding.

The Company also produces aerospace engine parts and components and aerospace fastening systems for Boeing 787 airplanes. In 2020 and 2021, Boeing reduced production rates of the 787 airplanes. Boeing paused deliveries of its 787 aircraft in May 2021. The significant decline in Boeing 787 production rates had a negative impact on sales and Segment Adjusted EBITDA in the Engine Products, Fastening Systems, and Engineered Structures segments in 2021 and the first quarter of 2022. We expect reduced production rates to continue to have a negative impact on our sales and Segment Adjusted EBITDA in 2022.

Engine Products

Third-party sales for the Engine Products segment increased $97, or 18%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to higher sales volumes in the commercial aerospace and industrial gas turbine markets and an increase in material cost pass through, partially offset by lower sales volumes in the defense aerospace market.

Segment Adjusted EBITDA for the Engine Products segment increased $41, or 31%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to higher sales volumes in the commercial aerospace and industrial gas turbine markets as well as strong productivity gains, partially offset by lower sales volumes in the defense aerospace market. The segment added approximately 325 headcount in the first quarter of 2022 in anticipation of further revenue increases in 2022.

In 2022, as compared to 2021, demand in the commercial aerospace and industrial gas turbine markets is expected to increase. An increase in material costs is expected to contribute to an increase in sales as the Company generally passes through these costs.

Fastening Systems

Third-party sales for the Fastening Systems segment decreased $8, or 3%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to lower sales volumes in the defense aerospace market, partially offset by higher sales volumes in the commercial transportation market and an increase in material cost pass through. Commercial aerospace revenue in this segment was flat year over year, with narrow body recovery offset by Boeing 787 production declines.

Segment Adjusted EBITDA for the Fastening Systems segment decreased $1, or 2%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to lower sales volumes in the defense aerospace market, Boeing 787 production declines, and inflationary costs, partially offset by favorable sales volumes in the narrow body commercial aerospace and commercial transportation markets. The segment added approximately 135 headcount in the first quarter of 2022 in anticipation of further revenue increases in 2022.

In 2022, as compared to 2021, demand in the commercial aerospace and commercial transportation markets is expected to increase. An increase in material costs is expected to contribute to an increase in sales as the Company generally passes through these costs.

Engineered Structures

Third-party sales for the Engineered Structures segment increased $6, or 3%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to higher sales volumes in the commercial aerospace market and an increase in material cost pass through, partially offset by lower sales volumes in the defense aerospace market, including lower F-35 program volumes.

Segment Adjusted EBITDA for the Engineered Structures segment increased $1, or 5%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to higher sales volumes in the commercial aerospace market, partially offset by lower sales volumes in the defense aerospace market, including lower F-35 program volumes, as well as inflationary costs.

In 2022, as compared to 2021, demand in the commercial aerospace market is expected to increase. However, demand in the defense aerospace market is expected to be down. An increase in material costs is expected to contribute to an increase in sales as the Company generally passes through these costs.

Forged Wheels

Third-party sales for the Forged Wheels segment increased $20, or 9%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to an increase in material cost pass through, partially offset by a 7% decline in volumes in the commercial transportation market driven by customer supply chain constraints.

Segment Adjusted EBITDA for the Forged Wheels segment decreased $13, or 16%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to lower sales volumes in the commercial transportation market driven by customer supply chain constraints and unfavorable foreign currency.

In 2022, as compared to 2021, demand in the commercial transportation markets served by Forged Wheels is expected to increase in most regions. An increase in material costs is expected to contribute to an increase in sales as the Company generally passes through these costs. However, sales in the Forged Wheels segment could be negatively impacted by customer supply chain constraints.

Reconciliation of Total Segment Adjusted EBITDA to Income before income taxes

Total Segment Adjusted EBITDA is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because it provides additional information with respect to the Company’s operating performance and the Company’s ability to meet its financial obligations. Differences between the total segment and consolidated totals are in Corporate.

See Restructuring and other charges, Interest expense, net, and Other expense, net discussions above, under Results of Operations for reference.

Corporate expense decreased $6, or 21%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to lower costs related to the Barberton Plant Fire and the France Plant Fire of $5 and legal and other advisory reimbursements received in the first quarter of 2022 that did not occur in the first quarter of 2021 of $3, partially offset by higher costs.

Environmental Matters

See the Environmental Matters section of Note Q to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Subsequent Events

See Note R to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for subsequent events.

Liquidity and Capital Resources

Operating Activities

Cash provided from operations was $55 in the three months ended March 31, 2022 compared to cash used for operations of $6 in the three months ended March 31, 2021. The change of $61, or 1,017%, was primarily due to higher operating results of $75 and lower pension contributions of $18, partially offset by an increase in working capital of $30. The components of the change in working capital primarily included inventories of $107, prepaid expenses and other current assets of $18, and taxes, including income taxes, of $6, partially offset by a change in accounts payable of $42, accrued expenses of $38, and favorable changes in receivables of $21 including employee retention credit receivables.

Management expects Howmet’s estimated pension contributions and other postretirement benefit payments in 2022 to be approximately $60.

Financing Activities

Cash used for financing activities was $194 in the three months ended March 31, 2022 compared to $368 in the three months ended March 31, 2021. The decrease of $174, or 47%, was primarily due to payments made in 2021 in connection with the redemption of long-term debt of $361 (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference), partially offset by incremental common stock repurchases of $175 and dividends paid to common stock shareholders of $8.

The Company maintains a credit facility pursuant to its Five-Year Revolving Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and issuers named therein (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference).

The Company has an effective shelf registration statement on Form S-3, filed with the SEC, which allows for offerings of debt securities from time to time. The Company may opportunistically issue new debt securities under such registration statement or otherwise in accordance with securities laws, including but not limited to in order to refinance existing indebtedness.

The Company may in the future repurchase additional portions of its debt or equity securities from time to time, in either the open market or through privately negotiated transactions, in accordance with applicable SEC and other legal requirements. The timing, prices, and sizes of purchases depend upon prevailing trading prices, general economic and market conditions, and other factors, including applicable securities laws. Such purchases may be completed by means of trading plans established from time to time in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, block trades, private transactions, open market repurchases, tender offers, and/or accelerated share repurchase agreements or other derivative transactions.

The Company’s costs of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short and long-term debt ratings assigned to the Company by the major credit rating agencies.

The Company’s credit ratings from the three major credit rating agencies are as follows:

On April 27, 2022, Moody’s upgraded Howmet’s long-term debt rating from Ba2 to Ba1 citing the Company’s ability to improve its financial leverage, strong cash generation, and well-balanced financial policies and affirmed the current outlook as stable.

On March 22, 2022, Fitch affirmed the following ratings for Howmet: long-term debt at BBB- and the current outlook as stable.

Investing Activities

Cash used for investing activities was $61 in the three months ended March 31, 2022 compared to cash provided from investing activities of $3 in the three months ended March 31, 2021. The change of $64, or 2,133%, was primarily due to cash receipts from sold receivables of $57 in 2021, which did not have activity in the current year as a result of the accounts receivables securitization program changes in August 2021. This change was partially offset by an increase in capital expenditures of $7. The net cash funding from the sale of accounts receivable was neither a use of cash nor a source of cash during 2022 and 2021.

In March 2022, the Company reached an agreement to sell the corporate center. The carrying value of the building was $40 at March 31, 2022, and no material gain or loss is expected upon finalization of the sale. The Company intends to lease a portion of the property back from the purchaser which will not have a material adverse impact on the results of operations.

Recently Adopted and Recently Issued Accounting Guidance

See Note B to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Forward-Looking Statements

This report contains (and oral communications made by Howmet Aerospace may contain) statements that relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect Howmet Aerospace’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, statements, forecasts and outlook relating to the condition of end markets; future financial results or operating performance; future strategic actions; Howmet Aerospace’s strategies, outlook, and business and financial prospects; and any future repurchases of its debt or equity securities. These statements reflect beliefs and assumptions that are based on Howmet Aerospace’s perception of historical trends, current conditions and expected future developments, as well as other factors Howmet Aerospace believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict, which could cause actual results to differ materially from those indicated by these statements. Such risks and uncertainties include, but are not limited to: (a) uncertainty of the duration, extent and impact of the COVID-19 pandemic on Howmet Aerospace’s business, results of operations, and financial condition; (b) deterioration in global economic and financial market conditions generally (including as a result of COVID-19 and its effects, among other things, on global supply, demand, and distribution disruptions); (c) unfavorable changes in the markets served by Howmet Aerospace; (d) the impact of potential cyber attacks and information technology or data security breaches; (e) the loss of significant customers or adverse changes in customers’ business or financial conditions; (f) manufacturing difficulties or other issues that impact product performance, quality or safety; (g) inability of suppliers to meet obligations due to supply chain disruptions or otherwise; (h) the inability to achieve revenue growth, cash generation, cost savings, restructuring plans, cost reductions, improvement in profitability, or strengthening of competitiveness and operations anticipated or targeted; (i) inability to meet increased demand, production targets or commitments; (j) competition from new product offerings, disruptive technologies or other developments; (k) geopolitical, economic, and regulatory risks relating to Howmet Aerospace’s global operations, including geopolitical and diplomatic tensions, instabilities and conflicts, as well as compliance with U.S. and foreign trade and tax laws, sanctions, embargoes and other regulations; (l) the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation, which can expose Howmet Aerospace to substantial costs and liabilities; (m) failure to comply with government contracting regulations; (n) adverse changes in discount rates or investment returns on pension assets; and (o) the other risk factors summarized in Howmet Aerospace’s Form 10-K for the year ended December 31, 2021 and other reports filed with the U.S. Securities and Exchange Commission. Market projections are subject to the risks discussed above and other risks in the market. The statements in a presentation or document are made as of the date of such presentation or document. Howmet Aerospace disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

Not material.

(a) Evaluation of Disclosure Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the first quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

See Note Q to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents information with respect to the Company’s repurchases of its common stock during the quarter ended March 31, 2022:

(1)Excludes commissions cost.

(2)On August 18, 2021, the Company announced that its Board of Directors authorized a share repurchase program of up to $1,500 million of the Company's outstanding common stock. After giving effect to the share repurchases made through March 31, 2022, approximately $1,172 million Board authorization remains available. Under the Company’s share repurchase programs (the “Share Repurchase Programs”), the Company may repurchase shares by means of trading plans established from time to time in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, block trades, private transactions, open market repurchases and/or accelerated share repurchase agreements or other derivative transactions. There is no stated expiration for the Share Repurchase Programs. Under its Share Repurchase Programs, the Company may repurchase shares from time to time, in amounts, at prices, and at such times as the Company deems appropriate, subject to market conditions, legal requirements and other considerations, including limits under the Company’s Five-Year Revolving Credit Agreement (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference). The Company is not obligated to repurchase any specific number of shares or to do so at any particular time, and the Share Repurchase Programs may be suspended, modified or terminated at any time without prior notice.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.