filings.toolsItem 1. Financial Statements and Supplementary Data.
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Item 1. Financial Statements and Supplementary Data.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Operations (unaudited)
(U.S. dollars in millions, except per-share amounts)
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Sales (C) | $ | 1,433 | $ | 1,283 | $ | 4,150 | $ | 3,687 | |||||||||||||||
| Cost of goods sold (exclusive of expenses below) | 1,056 | 928 | 2,993 | 2,658 | |||||||||||||||||||
| Selling, general administrative, and other expenses | 73 | 70 | 225 | 190 | |||||||||||||||||||
| Research and development expenses | 7 | 4 | 23 | 13 | |||||||||||||||||||
| Provision for depreciation and amortization | 65 | 68 | 198 | 203 | |||||||||||||||||||
| Restructuring and other charges (D) | 4 | 8 | 12 | 22 | |||||||||||||||||||
| Operating income | 228 | 205 | 699 | 601 | |||||||||||||||||||
| Loss on debt redemption (N) | — | 118 | 2 | 141 | |||||||||||||||||||
| Interest expense, net | 57 | 63 | 172 | 201 | |||||||||||||||||||
| Other expense, net (F)(Q) | 67 | 1 | 67 | 13 | |||||||||||||||||||
| Income before income taxes | 104 | 23 | 458 | 246 | |||||||||||||||||||
| Provision (benefit) for income taxes (G) | 24 | (4) | 100 | 65 | |||||||||||||||||||
| Net income | $ | 80 | $ | 27 | $ | 358 | $ | 181 | |||||||||||||||
| Amounts Attributable to Howmet Aerospace Common Shareholders (H): | |||||||||||||||||||||||
| Net income | $ | 79 | $ | 26 | $ | 356 | $ | 179 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.19 | $ | 0.06 | $ | 0.86 | $ | 0.42 | |||||||||||||||
| Diluted | $ | 0.19 | $ | 0.06 | $ | 0.84 | $ | 0.41 | |||||||||||||||
| Average Shares Outstanding (in millions) (H): | |||||||||||||||||||||||
| Basic | 415 | 429 | 417 | 431 | |||||||||||||||||||
| Diluted | 420 | 434 | 422 | 437 |
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)
| Third quarter ended | Nine months ended | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 80 | $ | 27 | $ | 358 | $ | 181 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax (I): | ||||||||||||||||||||||||||||||||||||||||||||
| Change in unrecognized net actuarial loss and prior service cost related to pension and other postretirement benefits | 7 | 13 | 39 | 90 | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (128) | (36) | (273) | (62) | ||||||||||||||||||||||||||||||||||||||||
| Net change in unrecognized gains (losses) on cash flow hedges | 2 | (4) | (14) | 4 | ||||||||||||||||||||||||||||||||||||||||
| Total Other comprehensive (loss) income, net of tax | (119) | (27) | (248) | 32 | ||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | $ | (39) | $ | — | $ | 110 | $ | 213 |
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)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 453 | $ | 720 | |||||||
| Receivables from customers, less allowances of $— in both 2022 and 2021 (J) | 550 | 367 | |||||||||
| Other receivables (J) | 50 | 53 | |||||||||
| Inventories (K) | 1,612 | 1,402 | |||||||||
| Prepaid expenses and other current assets | 181 | 195 | |||||||||
| Total current assets | 2,846 | 2,737 | |||||||||
| Properties, plants, and equipment, net (L) | 2,288 | 2,467 | |||||||||
| Goodwill | 3,965 | 4,067 | |||||||||
| Deferred income taxes | 106 | 184 | |||||||||
| Intangibles, net | 523 | 549 | |||||||||
| Other noncurrent assets (M) | 201 | 215 | |||||||||
| Total assets | $ | 9,929 | $ | 10,219 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable, trade | $ | 812 | $ | 732 | |||||||
| Accrued compensation and retirement costs | 204 | 198 | |||||||||
| Taxes, including income taxes | 56 | 61 | |||||||||
| Accrued interest payable | 68 | 74 | |||||||||
| Other current liabilities (M)(Q) | 240 | 183 | |||||||||
| Short-term debt (N) | 1 | 5 | |||||||||
| Total current liabilities | 1,381 | 1,253 | |||||||||
| Long-term debt, less amount due within one year (N)(O) | 4,170 | 4,227 | |||||||||
| Accrued pension benefits (E) | 689 | 771 | |||||||||
| Accrued other postretirement benefits (E) | 147 | 153 | |||||||||
| Other noncurrent liabilities and deferred credits (M) | 269 | 307 | |||||||||
| Total liabilities | 6,656 | 6,711 | |||||||||
| Contingencies and commitments (Q) | |||||||||||
| Equity | |||||||||||
| Howmet Aerospace shareholders’ equity: | |||||||||||
| Preferred stock | 55 | 55 | |||||||||
| Common stock | 414 | 422 | |||||||||
| Additional capital | 3,998 | 4,291 | |||||||||
| Retained earnings | 917 | 603 | |||||||||
| Accumulated other comprehensive loss (I) | (2,111) | (1,863) | |||||||||
| Total equity | 3,273 | 3,508 | |||||||||
| Total liabilities and equity | $ | 9,929 | $ | 10,219 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Cash Flows (unaudited)
(U.S. dollars in millions)
| Nine months ended | |||||||||||
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ | 358 | $ | 181 | |||||||
| Adjustments to reconcile net income to cash provided from operations: | |||||||||||
| Depreciation and amortization | 198 | 203 | |||||||||
| Deferred income taxes | 58 | 24 | |||||||||
| Restructuring and other charges | 12 | 22 | |||||||||
| Net realized and unrealized losses | 12 | 7 | |||||||||
| Net periodic pension cost (E) | 17 | 13 | |||||||||
| Stock-based compensation | 43 | 28 | |||||||||
| Loss on debt redemption (N) | 2 | 141 | |||||||||
| Other | 26 | 28 | |||||||||
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||||||
| Increase in receivables (J) | (246) | (382) | |||||||||
| (Increase) decrease in inventories | (271) | 49 | |||||||||
| Decrease in prepaid expenses and other current assets | 5 | 6 | |||||||||
| Increase in accounts payable, trade | 130 | 63 | |||||||||
| Increase (decrease) in accrued expenses | 18 | (121) | |||||||||
| Decrease in taxes, including income taxes | (1) | (15) | |||||||||
| Pension contributions | (34) | (68) | |||||||||
| Increase in noncurrent assets | (5) | (1) | |||||||||
| Decrease in noncurrent liabilities | (44) | (32) | |||||||||
| Cash provided from operations | 278 | 146 | |||||||||
| Financing Activities | |||||||||||
| Net change in short-term borrowings (original maturities of three months or less) | (4) | — | |||||||||
| Additions to debt (original maturities greater than three months) (N) | — | 700 | |||||||||
| Payments on debt (original maturities greater than three months) (N) | (60) | (1,491) | |||||||||
| Debt issuance costs (N) | — | (11) | |||||||||
| Premiums paid on early redemption of debt (N) | (2) | (133) | |||||||||
| Repurchase of common stock | (335) | (225) | |||||||||
| Proceeds from exercise of employee stock options | 14 | 17 | |||||||||
| Dividends paid to shareholders | (27) | (11) | |||||||||
| Other | (23) | (20) | |||||||||
| Cash used for financing activities | (437) | (1,174) | |||||||||
| Investing Activities | |||||||||||
| Capital expenditures (C) | (148) | (138) | |||||||||
| Proceeds from the sale of assets and businesses | 42 | 8 | |||||||||
| Sale of debt securities | — | 5 | |||||||||
| Cash receipts from sold receivables (J) | — | 267 | |||||||||
| Other | — | 2 | |||||||||
| Cash (used for) provided from investing activities | (106) | 144 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (3) | (1) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (268) | (885) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 722 | 1,611 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 454 | $ | 726 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Changes in Consolidated Equity (unaudited)
(U.S. dollars in millions, except per-share amounts)
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 55 | $ | 429 | $ | 4,481 | $ | 517 | $ | (1,884) | $ | 3,598 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 27 | — | 27 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss (I) | — | — | — | — | (27) | (27) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $0.9375 per share | — | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common @ $0.02 per share | — | — | — | (9) | — | (9) | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | — | (1) | (24) | — | — | (25) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 14 | — | — | 14 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 55 | $ | 428 | $ | 4,473 | $ | 534 | $ | (1,911) | $ | 3,579 |
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 55 | $ | 416 | $ | 4,079 | $ | 863 | $ | (1,992) | $ | 3,421 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 80 | — | 80 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss (I) | — | — | — | — | (119) | (119) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $0.9375 per share | — | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common @ $0.06 per share | — | — | — | (25) | — | (25) | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | — | (3) | (97) | — | — | (100) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 14 | — | — | 14 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 1 | 2 | — | — | 3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 55 | $ | 414 | $ | 3,998 | $ | 917 | $ | (2,111) | $ | 3,273 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Changes in Consolidated Equity (unaudited)
(U.S. dollars in millions, except per-share amounts)
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 55 | $ | 433 | $ | 4,668 | $ | 364 | $ | (1,943) | $ | 3,577 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 181 | — | 181 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (I) | — | — | — | — | 32 | 32 | |||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $2.8125 per share | — | — | — | (2) | — | (2) | |||||||||||||||||||||||||||||||||||||||||
| Common @ $0.02 per share | — | — | — | (9) | — | (9) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | — | (7) | (218) | — | — | (225) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 28 | — | — | 28 | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 2 | (5) | — | — | (3) | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 55 | $ | 428 | $ | 4,473 | $ | 534 | $ | (1,911) | $ | 3,579 |
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 55 | $ | 422 | $ | 4,291 | $ | 603 | $ | (1,863) | $ | 3,508 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 358 | — | 358 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss (I) | — | — | — | — | (248) | (248) | |||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $2.8125 per share | — | — | — | (2) | — | (2) | |||||||||||||||||||||||||||||||||||||||||
| Common @ $0.10 per share | — | — | — | (42) | — | (42) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | — | (10) | (325) | — | — | (335) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 43 | — | — | 43 | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 2 | (11) | — | — | (9) | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 55 | $ | 414 | $ | 3,998 | $ | 917 | $ | (2,111) | $ | 3,273 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Notes to the Consolidated Financial Statements (unaudited)
(U.S. dollars in millions, except per-share amounts)
A. Basis of Presentation
The interim Consolidated Financial Statements of Howmet Aerospace Inc. and subsidiaries (“Howmet” or the “Company” or “we” or “our”) are unaudited. These Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position, and cash flows. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The 2021 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). This Form 10-Q report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2021, which includes all disclosures required by GAAP. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation.
In the third quarter of 2022, the Company derived approximately 47% of its revenue from products sold to the commercial aerospace market which is substantially less than the pre-pandemic 2019 annual rate of approximately 60%. Due to the global COVID-19 pandemic and its impact on the commercial aerospace industry to date, there has been a decrease in domestic and international air travel, which in turn has adversely affected demand for narrow-body and wide-body aircraft. Although domestic air travel is increasing, it is still below pre-pandemic 2019 levels on an average monthly basis. Year-to-date international travel also continues to be lower than pre-pandemic 2019 levels. Narrow-body demand is returning faster than wide-body demand and the commercial wide-body aircraft market is taking longer to recover, which is creating a shift in our product mix compared to pre-pandemic conditions. In addition to the impact from the pandemic, the timing and level of future aircraft builds by original equipment manufacturers are subject to changes and uncertainties, such as declines in Boeing 787 production rates due to delays in its recertification, which may cause our future results to differ from prior periods due to changes in product mix in certain segments.
The preparation of the Consolidated Financial Statements of the Company in conformity with GAAP requires management to make certain judgments, estimates, and assumptions. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, including considerations relating to the impact of COVID-19 and changes in the aerospace industry as a result of the pandemic. The impact of these changes is rapidly changing and of unknown duration and macroeconomic impact and, as a result, these considerations remain highly uncertain. Management has made its best estimates using all relevant information available at the time, but it is possible that our estimates will differ from our actual results and affect the Consolidated Financial Statements in future periods and potentially require adverse adjustments to the recoverability of goodwill, intangible and long-lived assets, the realizability of deferred tax assets and other judgments and estimations and assumptions that may be impacted by COVID-19 and changes in the aerospace industry.
B. Recently Adopted and Recently Issued Accounting Guidance
Adopted
On January 1, 2021, the Company adopted changes issued by the Financial Accounting Standards Board (“FASB”) that were intended to simplify various aspects of accounting for income taxes by eliminating certain exceptions contained in existing guidance and amending other guidance to simplify several other income tax accounting matters. The adoption of this new guidance did not have a material impact on the Consolidated Financial Statements.
Issued
In March 2020, the FASB issued amendments that provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The FASB is currently working on a project to extend the date to December 31, 2024. Management does not believe that the impact of these changes will have a material impact on the Consolidated Financial Statements.
In September 2022, the FASB issued guidance to enhance the transparency of disclosures regarding supplier finance programs. These changes become effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
C. Segment Information
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. 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 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 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.
Howmet’s operations consist of four worldwide reportable segments as follows:
Engine Products
Engine Products produces investment castings, including airfoils, and seamless rolled rings primarily for aircraft engines and industrial gas turbines. Engine Products produces rotating parts as well as structural parts.
Fastening Systems
Fastening Systems produces aerospace fastening systems, as well as commercial transportation, industrial and other fasteners. The business’s high-tech, multi-material fastening systems are found nose to tail on aircraft and aero engines. Fastening Systems’ products are also critical components of commercial transportation vehicles, automobiles, construction and industrial equipment, and renewable energy sectors.
Engineered Structures
Engineered Structures produces titanium ingots and mill products for aerospace and defense applications and is vertically integrated to produce titanium forgings, extrusions, forming and machining services for airframe, wing, aero-engine, and landing gear components. Engineered Structures also produces aluminum forgings, nickel forgings, and aluminum machined components and assemblies for aerospace and defense applications.
Forged Wheels
Forged Wheels provides forged aluminum wheels and related products for heavy-duty trucks and the commercial transportation market.
The operating results of the Company’s reportable segments were as follows:
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| Third quarter ended September 30, 2022 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 683 | $ | 291 | $ | 193 | $ | 266 | $ | 1,433 | |||||||||||||||||||
| Inter-segment sales | 1 | — | 3 | — | 4 | ||||||||||||||||||||||||
| Total sales | $ | 684 | $ | 291 | $ | 196 | $ | 266 | $ | 1,437 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 31 | $ | 11 | $ | 12 | $ | 10 | $ | 64 | |||||||||||||||||||
| Segment Adjusted EBITDA | 186 | 64 | 28 | 64 | 342 | ||||||||||||||||||||||||
| Restructuring and other charges | 2 | — | 1 | — | 3 | ||||||||||||||||||||||||
| Capital expenditures | 23 | 7 | 3 | 6 | 39 | ||||||||||||||||||||||||
| Third quarter ended September 30, 2021 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 599 | $ | 254 | $ | 199 | $ | 231 | $ | 1,283 | |||||||||||||||||||
| Inter-segment sales | 1 | — | 1 | — | 2 | ||||||||||||||||||||||||
| Total sales | $ | 600 | $ | 254 | $ | 200 | $ | 231 | $ | 1,285 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 31 | $ | 12 | $ | 12 | $ | 10 | $ | 65 | |||||||||||||||||||
| Segment Adjusted EBITDA | 151 | 59 | 26 | 72 | 308 | ||||||||||||||||||||||||
| Restructuring and other charges | 5 | 3 | — | — | 8 | ||||||||||||||||||||||||
| Capital expenditures | 21 | 8 | 3 | 15 | 47 | ||||||||||||||||||||||||
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| Nine months ended September 30, 2022 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 1,966 | $ | 832 | $ | 560 | $ | 792 | $ | 4,150 | |||||||||||||||||||
| Inter-segment sales | 3 | — | 5 | — | 8 | ||||||||||||||||||||||||
| Total sales | $ | 1,969 | $ | 832 | $ | 565 | $ | 792 | $ | 4,158 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 93 | $ | 34 | $ | 36 | $ | 30 | $ | 193 | |||||||||||||||||||
| Segment Adjusted EBITDA | 538 | 176 | 77 | 206 | 997 | ||||||||||||||||||||||||
| Restructuring and other charges (credits) | 9 | (3) | 4 | — | 10 | ||||||||||||||||||||||||
| Capital expenditures | 74 | 30 | 12 | 20 | 136 | ||||||||||||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 1,677 | $ | 788 | $ | 535 | $ | 687 | $ | 3,687 | |||||||||||||||||||
| Inter-segment sales | 3 | — | 4 | — | 7 | ||||||||||||||||||||||||
| Total sales | $ | 1,680 | $ | 788 | $ | 539 | $ | 687 | $ | 3,694 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 92 | $ | 37 | $ | 37 | $ | 29 | $ | 195 | |||||||||||||||||||
| Segment Adjusted EBITDA | 413 | 179 | 72 | 222 | 886 | ||||||||||||||||||||||||
| Restructuring and other charges | 15 | 8 | 1 | — | 24 | ||||||||||||||||||||||||
| Capital expenditures | 48 | 22 | 13 | 37 | 120 |
The following table reconciles Total Segment Adjusted EBITDA to Income before income taxes. Differences between the total segment and consolidated totals are in Corporate.
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Total Segment Adjusted EBITDA | $ | 342 | $ | 308 | $ | 997 | $ | 886 | |||||||||||||||
| Segment provision for depreciation and amortization | (64) | (65) | (193) | (195) | |||||||||||||||||||
| Unallocated amounts: | |||||||||||||||||||||||
| Restructuring and other charges | (4) | (8) | (12) | (22) | |||||||||||||||||||
| Corporate expense | (46) | (30) | (93) | (68) | |||||||||||||||||||
| Operating income | $ | 228 | $ | 205 | $ | 699 | $ | 601 | |||||||||||||||
| Loss on debt redemption | — | (118) | (2) | (141) | |||||||||||||||||||
| Interest expense, net | (57) | (63) | (172) | (201) | |||||||||||||||||||
| Other expense, net (Q) | (67) | (1) | (67) | (13) | |||||||||||||||||||
| Income before income taxes | $ | 104 | $ | 23 | $ | 458 | $ | 246 |
The following table reconciles total segment capital expenditures with Capital expenditures as presented in the Statement of Consolidated Cash Flows.
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Total segment capital expenditures | $ | 39 | $ | 47 | $ | 136 | $ | 120 | |||||||||||||||
| Corporate | 3 | — | 12 | 18 | |||||||||||||||||||
| Capital expenditures | $ | 42 | $ | 47 | $ | 148 | $ | 138 |
The following table disaggregates segment revenue by major market served. Differences between the total segment and consolidated totals are in Corporate.
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| Third quarter ended September 30, 2022 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 388 | $ | 156 | $ | 124 | $ | — | $ | 668 | |||||||||||||||||||
| Aerospace - Defense | 124 | 43 | 56 | — | 223 | ||||||||||||||||||||||||
| Commercial Transportation | — | 63 | — | 266 | 329 | ||||||||||||||||||||||||
| Industrial and Other | 171 | 29 | 13 | — | 213 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 683 | $ | 291 | $ | 193 | $ | 266 | $ | 1,433 | |||||||||||||||||||
| Third quarter ended September 30, 2021 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 299 | $ | 126 | $ | 118 | $ | — | $ | 543 | |||||||||||||||||||
| Aerospace - Defense | 130 | 37 | 65 | — | 232 | ||||||||||||||||||||||||
| Commercial Transportation | — | 59 | — | 231 | 290 | ||||||||||||||||||||||||
| Industrial and Other | 170 | 32 | 16 | — | 218 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 599 | $ | 254 | $ | 199 | $ | 231 | $ | 1,283 | |||||||||||||||||||
| Nine months ended September 30, 2022 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 1,079 | $ | 459 | $ | 341 | $ | — | $ | 1,879 | |||||||||||||||||||
| Aerospace - Defense | 384 | 112 | 176 | — | 672 | ||||||||||||||||||||||||
| Commercial Transportation | — | 169 | — | 792 | 961 | ||||||||||||||||||||||||
| Industrial and Other | 503 | 92 | 43 | — | 638 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 1,966 | $ | 832 | $ | 560 | $ | 792 | $ | 4,150 | |||||||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 786 | $ | 403 | $ | 277 | $ | — | $ | 1,466 | |||||||||||||||||||
| Aerospace - Defense | 402 | 120 | 206 | — | 728 | ||||||||||||||||||||||||
| Commercial Transportation | — | 154 | — | 687 | 841 | ||||||||||||||||||||||||
| Industrial and Other | 489 | 111 | 52 | — | 652 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 1,677 | $ | 788 | $ | 535 | $ | 687 | $ | 3,687 |
The Company derived 61% and 60% of its revenue from the aerospace market for the nine months ended September 30, 2022 and 2021, respectively.
General Electric Company represented approximately 13% of the Company’s third-party sales for both the nine months ended September 30, 2022 and 2021, primarily from Engine Products.
D. Restructuring and Other Charges
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Layoff costs | $ | — | $ | — | $ | — | $ | 2 | |||||||||||||||
| Reversals of previously recorded layoff reserves | — | — | (1) | (1) | |||||||||||||||||||
| Pension and Other post-retirement benefits - net settlements (E) | 3 | 3 | 7 | 9 | |||||||||||||||||||
| Non-cash asset impairments | — | 4 | — | 8 | |||||||||||||||||||
| Net loss related to divestitures of assets and businesses (P) | — | — | — | 4 | |||||||||||||||||||
| Other | 1 | 1 | 6 | — | |||||||||||||||||||
| Restructuring and other charges | $ | 4 | $ | 8 | $ | 12 | $ | 22 |
In the third quarter of 2022, the Company recorded Restructuring and other charges of $4, which were primarily due to charges
for U.S. and Canadian pension plan settlements of $3 and exit related costs, including accelerated depreciation, of $1.
In the nine months ended September 30, 2022, the Company recorded Restructuring and other charges of $12, which were primarily due to charges for U.S. pension plan settlements of $7 and exit related costs, including accelerated depreciation, of $6, partially offset by a reversal of $1 for a layoff reserve related to a prior period.
In the third quarter and nine months ended September 30, 2021, the Company recorded Restructuring and other charges of $8 and $22, respectively, which were primarily due to charges for pension plan settlements and exit related costs.
| Layoff costs | Other exit costs | Total | |||||||||||||||
| Reserve balances at December 31, 2021 | $ | 17 | $ | 2 | $ | 19 | |||||||||||
| Cash payments | (9) | (5) | (14) | ||||||||||||||
| Restructuring charges | 6 | 6 | 12 | ||||||||||||||
| Other(1) | (7) | (1) | (8) | ||||||||||||||
| Reserve balances at September 30, 2022 | $ | 7 | $ | 2 | $ | 9 |
(1)In the nine months ended September 30, 2022, other for layoff costs included a $7 charge for U.S. pension plan settlements and for other exit costs included a $1 charge for accelerated depreciation.
The majority of the layoff cost and other exit cost reserves is expected to be paid in cash during the remainder of 2022 and 2023, with small amounts to be paid in 2024.
E. Pension and Other Postretirement Benefits
The components of net periodic cost (benefit) were as follows:
| Third quarter ended | Nine months ended | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Pension benefits | ||||||||||||||||||||||||||
| Service cost | $ | 1 | $ | 1 | $ | 3 | $ | 3 | ||||||||||||||||||
| Interest cost | 13 | 12 | 38 | 36 | ||||||||||||||||||||||
| Expected return on plan assets | (20) | (23) | (61) | (69) | ||||||||||||||||||||||
| Recognized net actuarial loss | 12 | 14 | 37 | 43 | ||||||||||||||||||||||
| Settlements | 3 | 3 | 7 | 9 | ||||||||||||||||||||||
| Net periodic cost(1) | $ | 9 | $ | 7 | $ | 24 | $ | 22 | ||||||||||||||||||
| Other postretirement benefits | ||||||||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | 1 | $ | 1 | ||||||||||||||||||
| Interest cost | 1 | 1 | 3 | 4 | ||||||||||||||||||||||
| Recognized net actuarial loss | — | 1 | 1 | 1 | ||||||||||||||||||||||
| Amortization of prior service benefit | (2) | (3) | (7) | (7) | ||||||||||||||||||||||
| Net periodic benefit(1) | $ | (1) | $ | (1) | $ | (2) | $ | (1) | ||||||||||||||||||
(1)Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses, and Research and development expenses; settlements were included in Restructuring and other charges; and all other cost components were recorded in Other expense, net in the Statement of Consolidated Operations.
Pension benefits
The Company applied settlement accounting to certain small U.S. and Canadian pension plans due to lump sum payments made to participants, which resulted in settlement charges of $3 and $7 in the third quarter and nine months ended September 30, 2022, respectively, and $3 and $9 in the third quarter and nine months ended September 30, 2021, respectively, that were recorded in Restructuring and other charges in the Statement of Consolidated Operations.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARPA 2021”) was signed into law in the United States. ARPA 2021, in part, provides temporary relief for employers who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974. For the third quarter and nine months ended
September 30, 2022, Howmet’s combined pension contributions and other postretirement benefit payments were approximately $18 and $43, respectively. For the third quarter and nine months ended September 30, 2021, Howmet’s combined pension contributions and other postretirement benefit payments were approximately $10 and $79, respectively.
Other postretirement benefits
In the first quarter of 2021, the Company announced a plan administration change of certain of its Medicare-eligible prescription drug benefits to an Employer Group Waiver Plan with a wrap-around secondary plan effective July 1, 2021. The administration change is expected to reduce costs to the Company through the usage of Medicare Part D and drug manufacturer subsidies. Due to this amendment, along with the associated plan remeasurements, the Company recorded a decrease to its Accrued other postretirement benefits liability of $39, which was offset in Accumulated other comprehensive loss in the Consolidated Balance Sheet.
F. Other Expense, Net
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Non-service related net periodic benefit cost | $ | 4 | $ | 2 | $ | 11 | $ | 8 | |||||||||||||||
| Interest income | (2) | (1) | (3) | (2) | |||||||||||||||||||
| Foreign currency (gains) losses, net | (3) | (2) | (7) | 1 | |||||||||||||||||||
| Net realized and unrealized losses | 5 | 3 | 12 | 7 | |||||||||||||||||||
| Deferred compensation | (2) | (1) | (11) | 5 | |||||||||||||||||||
| Other, net | 65 | — | 65 | (6) | |||||||||||||||||||
| Other expense, net | $ | 67 | $ | 1 | $ | 67 | $ | 13 |
In the third quarter and nine months ended September 30, 2022, Other, net primarily includes the $65 adverse judgment related to Lehman Brothers International (Europe) swaps that were entered into in 2007 and 2008, which were assumed as part of the Firth Rixson acquisition in 2014 (see Note Q).
G. Income Taxes
The Company’s year-to-date tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date pre-tax ordinary income. The tax impacts of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur. In addition, the tax provision is adjusted for the interim period impact of non-benefited pre-tax losses.
The estimated annual effective tax rate, before discrete items, applied to ordinary income was 24.3% in both the third quarter and nine months ended September 30, 2022 and 29.7% in both the third quarter and nine months ended September 30, 2021. The 2022 and 2021 rates were higher than the U.S. federal statutory rate of 21% primarily due to additional estimated U.S. tax on Global Intangible Low-Taxed Income (“GILTI”) and other foreign earnings, incremental state tax and foreign taxes on earnings also subject to U.S. federal income tax, and nondeductible expenses.
For the third quarter of 2022 and 2021, the tax rate including discrete items was 23.1% (provision on income) and 17.4% (benefit on income), respectively. For the third quarter of 2022, the Company recorded a discrete tax benefit of $2 for other small items. For the third quarter of 2021, the Company recorded a discrete tax benefit of $12 related to a net $13 benefit from prior year amended returns and audit settlements and a net $1 charge for other small items.
For the nine months ended September 30, 2022 and 2021, the tax rate including discrete items was 21.8% and 26.4%, respectively. For the nine months ended September 30, 2022, the Company recorded a discrete tax benefit of $11 attributable to a $6 benefit to release a valuation allowance related to an interest carryforward tax attribute in the U.K. and a $5 excess benefit for stock compensation. For the nine months ended September 30, 2021, the Company recorded a discrete tax benefit of $9 attributable to a net $13 benefit related to prior year amended returns and audit settlements, a $2 charge for a U.K. tax rate change, and a net $2 charge for other small items.
The tax provision (benefit) was comprised of the following:
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Pre-tax income at estimated annual effective income tax rate before discrete items | $ | 24 | $ | 7 | $ | 111 | $ | 73 | |||||||||||||||
| Impact of change in estimated annual effective tax rate on previous quarter’s pre-tax income | 2 | 1 | — | — | |||||||||||||||||||
| Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized | — | — | — | 1 | |||||||||||||||||||
| Other discrete items | (2) | (12) | (11) | (9) | |||||||||||||||||||
| Provision (benefit) for income taxes | $ | 24 | $ | (4) | $ | 100 | $ | 65 |
H. Earnings Per Share and Common Stock
Basic earnings per share (“EPS”) amounts are computed by dividing earnings, after the deduction of preferred stock dividends declared, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The information used to compute basic and diluted EPS attributable to Howmet common shareholders was as follows (shares in millions):
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income attributable to common shareholders | $ | 80 | $ | 27 | $ | 358 | $ | 181 | |||||||||||||||
| Less: preferred stock dividends declared | 1 | 1 | 2 | 2 | |||||||||||||||||||
| Net income available to Howmet Aerospace common shareholders - basic and diluted | $ | 79 | $ | 26 | $ | 356 | $ | 179 | |||||||||||||||
| Average shares outstanding - basic | 415 | 429 | 417 | 431 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Stock and performance awards | 5 | 4 | 5 | 5 | |||||||||||||||||||
| Stock options | — | 1 | — | 1 | |||||||||||||||||||
| Average shares outstanding - diluted | 420 | 434 | 422 | 437 |
Common stock outstanding at September 30, 2022 and 2021 was approximately 414 million and 428 million, respectively.
On August 18, 2021, the Company announced that its Board of Directors authorized a share repurchase program of up to $1,500 of the Company's outstanding common stock. In the quarter ended September 30, 2022, the Company repurchased approximately 3 million shares of its common stock at an average price of $36.17 per share (excluding commissions cost) for $100 in cash. For the nine months ended September 30, 2022, the Company repurchased approximately 10 million shares for $335 in cash. All of the shares repurchased have been retired. After giving effect to the share repurchases made through September 30, 2022, approximately $1,012 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 its Five-Year Revolving Credit Agreement (the “Credit Agreement”) (see Note N). 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.
The approximately 14 million decrease in average shares outstanding (basic) for the third quarter of 2022 compared to the third quarter of 2021 was primarily due to the approximately 16 million shares repurchased between October 1, 2021 and September 30, 2022. As average shares outstanding are used in the calculation for both basic and diluted EPS, the full impact of share repurchases was not realized in EPS in the third quarter and nine months ended September 30, 2022 as share repurchases occurred at varying points during the quarter.
There were no stock options shares excluded from the calculation of average shares outstanding – diluted for the third quarter and nine months ended September 30, 2022 and 2021.
Common stock dividends declared were $0.06 per share in the third quarter of 2022 (of which $0.02 per share was paid) and $0.10 per share in the nine months ended September 30, 2022 (of which $0.06 per share was paid). Common stock dividends declared and paid were $0.02 per share for both the third quarter and nine months ended September 30, 2021.
I. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss:
| Third quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Pension and other postretirement benefits (E) | |||||||||||||||||||||||
| Balance at beginning of period | $ | (767) | $ | (903) | $ | (799) | $ | (980) | |||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Unrecognized net actuarial gain and prior service cost/benefit | (3) | 1 | 13 | 68 | |||||||||||||||||||
| Tax expense | — | — | (3) | (15) | |||||||||||||||||||
| Total Other comprehensive (loss) income before reclassifications, net of tax | (3) | 1 | 10 | 53 | |||||||||||||||||||
| Amortization of net actuarial loss and prior service cost(1) | 13 | 15 | 38 | 46 | |||||||||||||||||||
| Tax expense(2) | (3) | (3) | (9) | (9) | |||||||||||||||||||
| Total amount reclassified from Accumulated other comprehensive loss, net of tax(3) | 10 | 12 | 29 | 37 | |||||||||||||||||||
| Total Other comprehensive income | 7 | 13 | 39 | 90 | |||||||||||||||||||
| Balance at end of period | $ | (760) | $ | (890) | $ | (760) | $ | (890) | |||||||||||||||
| Foreign currency translation | |||||||||||||||||||||||
| Balance at beginning of period | $ | (1,207) | $ | (992) | $ | (1,062) | $ | (966) | |||||||||||||||
| Other comprehensive loss | (128) | (36) | (273) | (62) | |||||||||||||||||||
| Balance at end of period | $ | (1,335) | $ | (1,028) | $ | (1,335) | $ | (1,028) | |||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||
| Balance at beginning of period | $ | (18) | $ | 11 | $ | (2) | $ | 3 | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Net change from periodic revaluations | (6) | 1 | (17) | 20 | |||||||||||||||||||
| Tax income (expense) | 2 | — | 4 | (4) | |||||||||||||||||||
| Total Other comprehensive (loss) income before reclassifications, net of tax | (4) | 1 | (13) | 16 | |||||||||||||||||||
| Net amount reclassified to earnings | 9 | (7) | (1) | (15) | |||||||||||||||||||
| Tax (expense) benefit(2) | (3) | 2 | — | 3 | |||||||||||||||||||
| Total amount reclassified from Accumulated other comprehensive income (loss), net of tax(3) | 6 | (5) | (1) | (12) | |||||||||||||||||||
| Total Other comprehensive income (loss) | 2 | (4) | (14) | 4 | |||||||||||||||||||
| Balance at end of period | $ | (16) | $ | 7 | $ | (16) | $ | 7 | |||||||||||||||
| Accumulated other comprehensive loss | $ | (2,111) | $ | (1,911) | $ | (2,111) | $ | (1,911) |
(1)These amounts were recorded in Other expense, net (see Note F) and Restructuring and other charges (see Note D) in the Statement of Consolidated Operations.
(2)These amounts were included in Provision (benefit) for income taxes (see Note G) in the Statement of Consolidated Operations.
(3)A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.
J. Receivables
Sale of Receivables Programs
The Company maintains an accounts receivables securitization arrangement through a wholly-owned special purpose entity (“SPE”). The Company previously had a second arrangement which terminated on August 30, 2021. The net cash funding from the sale of accounts receivable was neither a use of cash nor a source of cash for any quarter of 2022 or 2021.
The terminated arrangement was with financial institutions to sell certain customer receivables without recourse on a revolving basis. The Company had $44 net cash repayments ($41 in draws and $85 in repayments) for the nine months ended September 30, 2021 in connection with this arrangement. The total cash receipts from both customer payments on sold receivables (which were cash receipts on the underlying trade receivables that had been previously sold) and net cash repayments under the program were presented as cash receipts from sold receivables within investing activities in the Statement of Consolidated Cash Flows for the nine months ended September 30, 2021.
The current accounts receivables securitization arrangement is one in which the Company, through an SPE, has a receivables purchase agreement (the “Receivables Purchase Agreement”) such that the SPE may sell certain receivables to financial institutions until the earlier of August 30, 2024 or a termination event. The Receivables Purchase Agreement also contains customary representations and warranties, as well as affirmative and negative covenants. Pursuant to the Receivables Purchase Agreement, the Company does not maintain effective control over the transferred receivables, and therefore accounts for these transfers as sales of receivables. This accounts receivable securitization arrangement totaled $325 at both September 30, 2022 and December 31, 2021 of which $250 was drawn as of both September 30, 2022 and December 31, 2021. As collateral against the sold receivables, the SPE maintains a certain level of unsold receivables, which were $161 and $79 at September 30, 2022 and December 31, 2021, respectively.
The Company sold $453 and $1,354 of its receivables without recourse and received cash funding under this program during the third quarter and nine months ended September 30, 2022, respectively, resulting in derecognition of the receivables from the Company’s Consolidated Balance Sheet. Costs associated with the sales of receivables are reflected in the Company’s Statement of Consolidated Operations for the periods in which the sales occur. Cash receipts from sold receivables under the Receivables Purchase Agreement are presented within operating activities in the Statement of Consolidated Cash Flows.
Other Customer Receivable Sales
In the third quarter and nine months ended September 30, 2022, the Company sold $127 and $350, respectively, of certain customers’ receivables in exchange for cash ($123 was outstanding from customers at September 30, 2022), the proceeds from which are presented in changes in receivables within operating activities in the Statement of Consolidated Cash Flows. In the third quarter and nine months ended September 30, 2021, the Company sold $103 and $267, respectively, of certain customers’ receivables in exchange for cash, the proceeds from which are presented in changes in receivables within operating activities in the Statement of Consolidated Cash Flows.
K. Inventories
| September 30, 2022 | December 31, 2021 | ||||||||||
| Finished goods | $ | 493 | $ | 478 | |||||||
| Work-in-process | 758 | 631 | |||||||||
| Purchased raw materials | 314 | 256 | |||||||||
| Operating supplies | 47 | 37 | |||||||||
| Total inventories | $ | 1,612 | $ | 1,402 |
At September 30, 2022 and December 31, 2021, the portion of inventories valued on a last-in, first-out (“LIFO”) basis was $668 and $523, respectively. These amounts exclude the effects of LIFO valuation reductions, which were $206 and $192 at September 30, 2022 and December 31, 2021, respectively.
L. Properties, Plants, and Equipment, net
| September 30, 2022 | December 31, 2021 | ||||||||||
| Land and land rights(1) | $ | 84 | $ | 91 | |||||||
| Structures(1) | 960 | 1,034 | |||||||||
| Machinery and equipment | 3,851 | 3,932 | |||||||||
| 4,895 | 5,057 | ||||||||||
| Less: accumulated depreciation and amortization(1) | 2,765 | 2,772 | |||||||||
| 2,130 | 2,285 | ||||||||||
| Construction work-in-progress | 158 | 182 | |||||||||
| Properties, plants, and equipment, net | $ | 2,288 | $ | 2,467 |
(1)In the first quarter of 2022, the Company entered into an agreement to sell the corporate headquarters in Pittsburgh, PA. The proceeds from the sale of the corporate headquarters, which closed in June 2022, were $44, excluding $3 of transaction costs, and the carrying value at the time of sale was $41. A loss of less than $1 was recorded in Restructuring and other charges in the Statement of Consolidated Operations upon finalization of the sale in the second quarter of 2022. The Company entered into a 12-year lease with the purchaser for a portion of the property.
The Company incurred capital expenditures which remained unpaid at September 30, 2022 and September 30, 2021 of $30 and $42, respectively, and will result in cash outflows within investing activities in the Statement of Consolidated Cash Flows in subsequent periods.
M. Leases
Operating lease cost, which includes short-term leases and variable lease payments and approximates cash paid, was $16 and $15 in the third quarter of 2022 and 2021, respectively. Operating lease cost, which includes short-term leases and variable lease payments and approximates cash paid, was $46 and $48 in the nine months ended September 30, 2022 and 2021, respectively.
Operating lease right-of-use assets and lease liabilities in the Consolidated Balance Sheet were as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||
| Right-of-use assets classified in Other noncurrent assets | $ | 106 | $ | 108 | |||||||||||||
| Current portion of lease liabilities classified in Other current liabilities | $ | 31 | $ | 33 | |||||||||||||
| Long-term portion of lease liabilities classified in Other noncurrent liabilities and deferred credits | 80 | 81 | |||||||||||||||
| Total lease liabilities | $ | 111 | $ | 114 |
N. Debt
| September 30, 2022 | December 31, 2021 | ||||||||||
| 5.125% Notes, due 2024 | $ | 1,090 | $ | 1,150 | |||||||
| 6.875% Notes, due 2025 | 600 | 600 | |||||||||
| 5.900% Notes, due 2027 | 625 | 625 | |||||||||
| 6.750% Bonds, due 2028 | 300 | 300 | |||||||||
| 3.000% Notes, due 2029 | 700 | 700 | |||||||||
| 5.950% Notes, due 2037 | 625 | 625 | |||||||||
| 4.750% Iowa Finance Authority Loan, due 2042 | 250 | 250 | |||||||||
| Other(1) | (19) | (18) | |||||||||
| 4,171 | 4,232 | ||||||||||
| Less: amount due within one year | 1 | 5 | |||||||||
| Total long-term debt | $ | 4,170 | $ | 4,227 |
(1)Includes various financing arrangements related to subsidiaries, unamortized debt discounts, and unamortized debt issuance costs related to outstanding notes and bonds listed in the table above.
Public Debt
On January 15, 2021, the Company completed the early redemption of all the remaining $361 of its 5.400% Notes due 2021 at par and paid $5 in accrued interest.
On May 3, 2021, the Company completed the early redemption of all the remaining $476 aggregate principal amount of its 5.870% Notes due 2022 and paid an aggregate of $503, including $5 of accrued interest. The Company also incurred an early termination premium and other costs of $23, which was recorded in Loss on debt redemption in the Statement of Consolidated Operations.
On September 1, 2021, the Company completed an offering of $700 aggregate principal amount of 3.000% Notes due 2029, the proceeds of which have been used to fund the cash tender offer noted below and to pay related transaction fees, including applicable premiums and expenses.
On September 2, 2021, the Company completed a cash tender offer and repurchased approximately $600 aggregate principal amount of its 6.875% Notes due 2025. The amount of tender premium and accrued interest associated with the notes accepted for settlement were $105 and $14, respectively, which were recorded in Loss on debt redemption and Interest expense, net, respectively, in the Statement of Consolidated Operations.
In the third quarter of 2021, the Company repurchased in the open market approximately $53 aggregate principal amount of its 5.125% Notes due 2024 (the “5.125% Notes”) and paid approximately $59, including an early termination premium and accrued interest of approximately $5 and $1, respectively, which were recorded in Loss on debt redemption and Interest expense, net, respectively.
In the second quarter of 2022, the Company repurchased in the open market approximately $60 aggregate principal amount of its 5.125% Notes and paid approximately $62, including an early termination premium of approximately $2, which was recorded in Loss on debt redemption in the Statement of Consolidated Operations.
Credit Facility
On September 28, 2021, the Company amended and restated its Credit Agreement. The Credit Agreement provides a $1,000 senior unsecured revolving credit facility that matures on September 28, 2026, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. Capitalized terms used in this “Credit Facility” section but not otherwise defined shall have the meanings given to such terms in the Credit Agreement.
Under the Credit Agreement, the Company’s ratio of Consolidated Net Debt to Consolidated EBITDA as of the end of each fiscal quarter for the period of the four fiscal quarters of the Company most recently ended, is required to be no greater than 3.50 to 1.00; provided, however, that during the Covenant Relief Period through December 31, 2022 (unless the Company elects to terminate the Covenant Relief Period earlier in accordance with the Credit Agreement), the Company’s Consolidated Net Debt to Consolidated EBITDA ratio cannot exceed the levels set forth below:
| No greater than | |||||
| (i) for the quarter ending September 30, 2022 | 4.25 to 1.00 | ||||
| (ii) for the quarter ending December 31, 2022 | 3.75 to 1.00 | ||||
During the Covenant Relief Period, common stock dividends and share repurchases (see Note H) are permitted only if no loans under the Credit Agreement are outstanding at the time and are limited to an aggregate amount not to exceed $500 during the year ending December 31, 2022. Common stock dividends and share repurchases were $377 for the nine months ended September 30, 2022.
There were no amounts outstanding under the Credit Agreement at September 30, 2022 or December 31, 2021, and no amounts were borrowed during 2022 or 2021 under the Credit Agreement. At September 30, 2022, the Company was in compliance with all covenants under the Credit Agreement. Availability under the Credit Agreement could be reduced in future periods if the Company fails to maintain the required ratios referenced above.
O. Fair Value of Financial Instruments
The carrying values of Cash and cash equivalents, restricted cash, derivatives, noncurrent receivables, and Short-term debt included in the Consolidated Balance Sheet approximate their fair value. The Company holds exchange-traded fixed income securities which are considered available-for-sale securities that are carried at fair value which is based on quoted market prices which are classified in Level 1 of the fair value hierarchy and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheet. The fair value of Long-term debt, less amount due within one year was based on quoted market prices for public debt and on interest rates that are currently available to Howmet for issuance of debt with similar terms and maturities for non-public debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying value | Fair value | Carrying value | Fair value | ||||||||||||||||||||
| Long-term debt, less amount due within one year | $ | 4,170 | $ | 3,905 | $ | 4,227 | $ | 4,707 |
Restricted cash, which is included in Prepaid expenses and other current assets in the Consolidated Balance Sheet, was $1 and $2 at September 30, 2022 and December 31, 2021, respectively.
P. Divestiture
2021 Divestiture
On March 15, 2021, the Company reached an agreement to sell a small manufacturing plant in France within the Fastening Systems segment, which resulted in a charge of $4 related to the non-cash impairment of the net book value of the business, primarily goodwill, in the first quarter of 2021 which was recorded in Restructuring and other charges in the Statement of Consolidated Operations. On June 1, 2021, the Company completed the sale for $10 (of which $8 of cash was received in the second quarter of 2021). In the third quarter of 2022, $1 was received, and the remaining $1 in escrow is expected to be received in the third quarter of 2023.
Q. Contingencies and Commitments
Contingencies
The following information supplements and, as applicable, updates the discussion of the contingencies and commitments in Note V to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”), and should be read in conjunction with the complete descriptions provided in the Form 10-K.
Environmental Matters. Howmet participates in environmental assessments and cleanups at more than 30 locations. These include owned or operating facilities and adjoining properties, previously owned or operated facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, and technological changes, among others.
The Company’s remediation reserve balance was $15 at both September 30, 2022 and December 31, 2021, and was recorded in Other noncurrent liabilities and deferred credits in the Consolidated Balance Sheet (of which $7 and $6, respectively, was classified as a current liability), and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. Payments related to remediation expenses applied against the reserve were less than $1 in the third quarter ended September 30, 2022 and included expenditures currently mandated, as well as those not required by any regulatory authority or third party.
Included in annual operating expenses are the recurring costs of managing hazardous substances and environmental programs. These costs are estimated to be less than 1% of Cost of goods sold.
Indemnified Matters. The Separation and Distribution Agreement, dated October 31, 2016, that the Company entered into with Alcoa Corporation in connection with its separation from Alcoa Corporation, provides for cross-indemnities between the Company and Alcoa Corporation for claims subject to indemnification. The Separation and Distribution Agreement, dated March 31, 2020, that the Company entered into with Arconic Corporation in connection with its separation from Arconic Corporation, provides for cross-indemnities between the Company and Arconic Corporation for claims subject to indemnification. Among other claims that are covered by these indemnities, Arconic Corporation indemnifies the Company (f/k/a Arconic Inc. and f/k/a Alcoa Inc.) for all potential liabilities associated with the fire that occurred at the Grenfell Tower in London, U.K. on June 14, 2017, including the following legal proceedings, as updated from the Form 10-K:
United Kingdom Litigation (various claims on behalf of survivors and estates of decedents). The suits are stayed. A case management conference was held during the week of April 26, 2022. On July 28, 2022, the stay was extended.
Behrens et al. v. Arconic Inc. et al. (various claims on behalf of survivors and estates of decedents). On September 16, 2020, the court dismissed the U.S. case, determining that the U.K. is the appropriate jurisdiction for the case. On July 8, 2022, the Third Circuit Court of Appeals affirmed the dismissal. A petition for a rehearing was filed before the Third Circuit Court, which the Third Circuit Court denied on October 7, 2022.
Howard v. Arconic Inc. et al. (securities law related claims). The court held a status conference on September 14, 2022, and the parties are currently awaiting an order from the court setting the schedule for class certification briefing and discovery.
With respect to the Raul v. Albaugh, et al. (derivative related claim) proceeding, the regulatory investigations and the stockholder demands specified in the Form 10-K, there are no updates.
Lehman Brothers International (Europe) (“LBIE”) Legal Proceeding. On June 26, 2020, Lehman Brothers International (Europe) (“LBIE”) filed proceedings in the High Court of Justice, Business and Property Courts of England and Wales (the “Court”) against two subsidiaries of the Company, FR Acquisitions Corporation (Europe) Ltd and JFB Firth Rixson Inc. (collectively, the “Firth Rixson Entities”). The proceedings concern two interest rate swap transactions with LBIE (collectively, the “ISDAs”). In 2007 and 2008, the Firth Rixson Entities, then owned by Oak Hill, entered into the ISDAs in order to meet their obligation to hedge interest rate exposure under a lending agreement with LBIE. When LBIE went into bankruptcy in 2008, the Firth Rixson Entities entered into alternative swap agreements with another counterparty in order to meet this hedging obligation. The Firth Rixson Entities were acquired by the Company as part of its acquisition of the Firth Rixson business from Oak Hill in 2014. In the LBIE legal proceeding, LBIE claims the amounts owing by the Firth Rixson Entities under the ISDAs to be approximately $64, plus applicable interest. The Court issued its ruling in these proceedings on October 11, 2022 (the “Judgment”). In its ruling, the Court determined that the event of default under the ISDAs caused by LBIE as a result of its insolvency in 2008 and other defaults will conclude upon LBIE’s expected emergence from administration under the Insolvency Act of 1986. The Court ruled that upon such future event and other relevant steps being completed, the timing of which is unknown, the Firth Rixson Entities will be obligated to pay amounts due under the ISDAs. The Company recorded $65 in Other current liabilities in the Consolidated Balance Sheet, and took a pre-tax charge of this amount in Other expense, net in the Statement of Consolidated Operations in the third quarter and nine months ended September 30, 2022. The matter of interest was not specifically addressed in the proceeding and no related amounts have been reserved. The Company vigorously disagrees with the ruling including as to any payment obligation in respect of the principal as well as any interest. The Company intends to apply to appeal the Judgment to the Court of Appeal and will request that payment of all amounts be stayed until the appeal is concluded. This application is expected to be addressed at a hearing before the Court by the end of this year, and any appeal proceedings would continue into 2023.
Other. In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against the Company, including those pertaining to environmental, product liability, safety and health, employment, tax and antitrust matters. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot currently be determined because of the considerable uncertainties that exist. Therefore, it is possible that the Company’s liquidity or results of operations in a period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the results of operations, financial position or cash flows of the Company.
Commitments
Guarantees
At September 30, 2022, Howmet had outstanding bank guarantees related to tax matters, outstanding debt, workers’ compensation, environmental obligations, energy contracts, and customs duties, among others. The total amount committed under these guarantees, which expire at various dates between 2022 and 2040, was $11 at September 30, 2022.
Pursuant to the Separation and Distribution Agreement, dated as of October 31, 2016, between Howmet and Alcoa Corporation, Howmet was required to provide certain guarantees for Alcoa Corporation, which had a fair value of $6 at both September 30, 2022 and December 31, 2021, and were included in Other noncurrent liabilities and deferred credits in the Consolidated Balance Sheet. The remaining guarantee, for which the Company and Arconic Corporation are secondarily liable in the event of a payment default by Alcoa Corporation, relates to a long-term energy supply agreement that expires in 2047 at an Alcoa Corporation facility. The Company currently views the risk of an Alcoa Corporation payment default on its obligations under the contract to be remote. The Company and Arconic Corporation are required to provide a guarantee up to an estimated present value amount of approximately $1,406 at both September 30, 2022 and December 31, 2021 in the event of an Alcoa Corporation default. In December 2021, a surety bond with a limit of $80 relating to this guarantee was obtained by Alcoa Corporation to protect Howmet’s obligation. This surety bond will be renewed on an annual basis by Alcoa Corporation.
Letters of Credit
The Company has outstanding letters of credit primarily related to workers’ compensation, environmental obligations, and leasing obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2022 and 2023, was $123 at September 30, 2022.
Pursuant to the Separation and Distribution Agreements between the Company and Arconic Corporation and between the Company and Alcoa Corporation, the Company is required to retain letters of credit of $53 (which are included in the $123 in the above paragraph) that had previously been provided related to the Company, Arconic Corporation, and Alcoa Corporation workers’ compensation claims that occurred prior to the respective separation transactions of April 1, 2020 and November 1, 2016. Arconic Corporation and Alcoa Corporation workers’ compensation and letters of credit fees paid by the Company are proportionally billed to, and are reimbursed by, Arconic Corporation and Alcoa Corporation, respectively. Also, the Company was required to provide letters of credit for certain Arconic Corporation environmental obligations and, as a result, the Company has $17 of outstanding letters of credit relating to such liabilities (which are also included in the $123 in the above paragraph).
Surety Bonds
The Company has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, and customs duties. The total amount committed under these annual surety bonds, which expire and automatically renew at various dates, primarily in 2022 and 2023, was $43 at September 30, 2022.
Pursuant to the Separation and Distribution Agreements between the Company and Arconic Corporation and between the Company and Alcoa Corporation, the Company is required to provide surety bonds of $22 (which are included in the $43 in the above paragraph) that had previously been provided related to the Company, Arconic Corporation, and Alcoa Corporation workers’ compensation claims that occurred prior to the respective separation transactions of April 1, 2020 and November 1, 2016. Arconic Corporation and Alcoa Corporation workers’ compensation claims and surety bond fees paid by the Company are proportionately billed to, and are reimbursed by, Arconic Corporation and Alcoa Corporation, respectively.
R. Subsequent Events
Management evaluated all activity of Howmet and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements, except as noted below:
See Note Q for the unfavorable judgment related to the LBIE legal proceeding.
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