filings.toolsItem 1. Financial Statements and Supplementary Data.
106K characters. Original on sec.gov · Markdown
Item 1. Financial Statements and Supplementary Data.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Operations (unaudited)
(in millions, except per-share amounts)
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Sales (C) | $ | 1,648 | $ | 1,393 | $ | 3,251 | $ | 2,717 | |||||||||||||||
| Cost of goods sold (exclusive of expenses below) | 1,196 | 987 | 2,360 | 1,937 | |||||||||||||||||||
| Selling, general administrative, and other expenses | 88 | 83 | 163 | 152 | |||||||||||||||||||
| Research and development expenses | 9 | 9 | 18 | 16 | |||||||||||||||||||
| Provision for depreciation and amortization | 67 | 67 | 136 | 133 | |||||||||||||||||||
| Restructuring and other charges (D) | 3 | 6 | 4 | 8 | |||||||||||||||||||
| Operating income | 285 | 241 | 570 | 471 | |||||||||||||||||||
| Loss on debt redemption (N) | — | 2 | 1 | 2 | |||||||||||||||||||
| Interest expense, net | 55 | 57 | 112 | 115 | |||||||||||||||||||
| Other income, net (F)(P) | (13) | (1) | (6) | — | |||||||||||||||||||
| Income before income taxes | 243 | 183 | 463 | 354 | |||||||||||||||||||
| Provision for income taxes (G) | 50 | 36 | 122 | 76 | |||||||||||||||||||
| Net income | $ | 193 | $ | 147 | $ | 341 | $ | 278 | |||||||||||||||
| Amounts Attributable to Howmet Aerospace Common Shareholders (H): | |||||||||||||||||||||||
| Net income | $ | 193 | $ | 147 | $ | 340 | $ | 277 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.47 | $ | 0.35 | $ | 0.82 | $ | 0.66 | |||||||||||||||
| Diluted | $ | 0.46 | $ | 0.35 | $ | 0.81 | $ | 0.66 | |||||||||||||||
| Average Shares Outstanding (H): | |||||||||||||||||||||||
| Basic | 413 | 417 | 413 | 418 | |||||||||||||||||||
| Diluted | 417 | 422 | 417 | 423 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Comprehensive Income (unaudited)
(in millions)
| Second quarter ended | Six months ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 193 | $ | 147 | $ | 341 | $ | 278 | ||||||||||||||||||||||||||||||||||||
| 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 | 4 | 22 | 9 | 32 | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 4 | (114) | 38 | (145) | ||||||||||||||||||||||||||||||||||||||||
| Net change in unrecognized losses on cash flow hedges | (10) | (36) | (14) | (16) | ||||||||||||||||||||||||||||||||||||||||
| Total Other comprehensive (loss) income, net of tax | (2) | (128) | 33 | (129) | ||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | $ | 191 | $ | 19 | $ | 374 | $ | 149 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Consolidated Balance Sheet (unaudited)
(in millions)
| June 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 535 | $ | 791 | |||||||
| Receivables from customers, less allowances of $1 in both 2023 and 2022 (J) | 657 | 506 | |||||||||
| Other receivables | 14 | 31 | |||||||||
| Inventories (K) | 1,715 | 1,609 | |||||||||
| Prepaid expenses and other current assets | 207 | 206 | |||||||||
| Total current assets | 3,128 | 3,143 | |||||||||
| Properties, plants, and equipment, net (L) | 2,319 | 2,332 | |||||||||
| Goodwill | 4,026 | 4,013 | |||||||||
| Deferred income taxes | 52 | 54 | |||||||||
| Intangibles, net | 513 | 521 | |||||||||
| Other noncurrent assets (M) | 195 | 192 | |||||||||
| Total assets | $ | 10,233 | $ | 10,255 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable, trade (B) | $ | 881 | $ | 962 | |||||||
| Accrued compensation and retirement costs | 209 | 195 | |||||||||
| Taxes, including income taxes (G) | 78 | 48 | |||||||||
| Accrued interest payable | 73 | 75 | |||||||||
| Other current liabilities (M)(P) | 169 | 202 | |||||||||
| Total current liabilities | 1,410 | 1,482 | |||||||||
| Long-term debt, less amounts due within one year (N)(O) | 3,989 | 4,162 | |||||||||
| Accrued pension benefits (E) | 626 | 633 | |||||||||
| Accrued other postretirement benefits (E) | 106 | 109 | |||||||||
| Other noncurrent liabilities and deferred credits (M) | 327 | 268 | |||||||||
| Total liabilities | 6,458 | 6,654 | |||||||||
| Contingencies and commitments (P) | |||||||||||
| Equity | |||||||||||
| Howmet Aerospace shareholders’ equity: | |||||||||||
| Preferred stock | 55 | 55 | |||||||||
| Common stock | 412 | 412 | |||||||||
| Additional capital | 3,782 | 3,947 | |||||||||
| Retained earnings | 1,334 | 1,028 | |||||||||
| Accumulated other comprehensive loss (I) | (1,808) | (1,841) | |||||||||
| Total equity | 3,775 | 3,601 | |||||||||
| Total liabilities and equity | $ | 10,233 | $ | 10,255 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Cash Flows (unaudited)
(in millions)
| Six months ended | |||||||||||
| June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ | 341 | $ | 278 | |||||||
| Adjustments to reconcile net income to cash provided from operations: | |||||||||||
| Depreciation and amortization | 136 | 133 | |||||||||
| Deferred income taxes | 57 | 52 | |||||||||
| Restructuring and other charges | 4 | 8 | |||||||||
| Net realized and unrealized losses | 11 | 7 | |||||||||
| Net periodic pension cost (E) | 19 | 11 | |||||||||
| Stock-based compensation | 26 | 29 | |||||||||
| Loss on debt redemption (N) | 1 | 2 | |||||||||
| Other | — | 27 | |||||||||
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||||||
| Increase in receivables (J) | (141) | (169) | |||||||||
| Increase in inventories | (99) | (191) | |||||||||
| (Increase) decrease in prepaid expenses and other current assets | (9) | 1 | |||||||||
| (Decrease) increase in accounts payable, trade | (80) | 118 | |||||||||
| Decrease in accrued expenses | (15) | (40) | |||||||||
| Increase in taxes, including income taxes | 31 | 1 | |||||||||
| Pension contributions | (12) | (20) | |||||||||
| Decrease (increase) in noncurrent assets | 1 | (1) | |||||||||
| Decrease in noncurrent liabilities | (19) | (33) | |||||||||
| Cash provided from operations | 252 | 213 | |||||||||
| Financing Activities | |||||||||||
| Net change in short-term borrowings | — | (4) | |||||||||
| Repurchases and payments on debt (N) | (176) | (60) | |||||||||
| Premiums paid on early redemption of debt (N) | (1) | (2) | |||||||||
| Repurchase of common stock | (125) | (235) | |||||||||
| Proceeds from exercise of employee stock options | 9 | 10 | |||||||||
| Dividends paid to shareholders | (35) | (18) | |||||||||
| Taxes paid for net share settlement of equity awards | (75) | (22) | |||||||||
| Cash used for financing activities | (403) | (331) | |||||||||
| Investing Activities | |||||||||||
| Capital expenditures (C) | (105) | (106) | |||||||||
| Proceeds from the sale of assets and businesses (L) | — | 42 | |||||||||
| Other | — | (1) | |||||||||
| Cash used for investing activities | (105) | (65) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | (1) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (256) | (184) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 792 | 722 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 536 | $ | 538 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Changes in Consolidated Equity (unaudited)
(in millions, except per-share amounts)
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 55 | $ | 418 | $ | 4,123 | $ | 725 | $ | (1,864) | $ | 3,457 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 147 | — | 147 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss (I) | — | — | — | — | (128) | (128) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common @ $0.02 per share | — | — | — | (9) | — | (9) | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock (H) | — | (2) | (58) | — | — | (60) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 18 | — | — | 18 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | — | (4) | — | — | (4) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 55 | $ | 416 | $ | 4,079 | $ | 863 | $ | (1,992) | $ | 3,421 |
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | 55 | $ | 412 | $ | 3,941 | $ | 1,159 | $ | (1,806) | $ | 3,761 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 193 | — | 193 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss (I) | — | — | — | — | (2) | (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common @ $0.04 per share | — | — | — | (18) | — | (18) | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock (H) | — | (3) | (97) | — | — | (100) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 12 | — | — | 12 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 3 | (74) | — | — | (71) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | 55 | $ | 412 | $ | 3,782 | $ | 1,334 | $ | (1,808) | $ | 3,775 |
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, 2021 | $ | 55 | $ | 422 | $ | 4,291 | $ | 603 | $ | (1,863) | $ | 3,508 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 278 | — | 278 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss (I) | — | — | — | — | (129) | (129) | |||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $1.8750 per share | — | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||
| Common @ $0.04 per share | — | — | — | (17) | — | (17) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock (H) | — | (7) | (228) | — | — | (235) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 29 | — | — | 29 | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 1 | (13) | — | — | (12) | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 55 | $ | 416 | $ | 4,079 | $ | 863 | $ | (1,992) | $ | 3,421 |
| Preferred stock | Common stock | Additional capital | Retained earnings | Accumulated other comprehensive loss | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 55 | $ | 412 | $ | 3,947 | $ | 1,028 | $ | (1,841) | $ | 3,601 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 341 | — | 341 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (I) | — | — | — | — | 33 | 33 | |||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred-Class A @ $1.8750 per share | — | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||
| Common @ $0.08 per share | — | — | — | (34) | — | (34) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock (H) | — | (3) | (122) | — | — | (125) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 26 | — | — | 26 | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued: compensation plans | — | 3 | (69) | — | — | (66) | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | 55 | $ | 412 | $ | 3,782 | $ | 1,334 | $ | (1,808) | $ | 3,775 |
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 share and 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 2022 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, 2022 (the “Form 10-K”), 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 six months ended June 30, 2023, the Company derived approximately 47% of its revenue from products sold to the commercial aerospace market which is substantially less than the 2019 annual rate of approximately 60%. During the global COVID-19 pandemic and its impact on the commercial aerospace industry to date, there was a decrease in domestic and international air travel, which in turn adversely affected demand for narrow body and wide body aircraft. Domestic air travel has rebounded and approximates 2019 levels. International air travel continues to recover and is approximately 90% of 2019 levels. We expect commercial aerospace growth to continue with narrow body demand returning faster than wide body demand. The commercial wide body aircraft market is taking longer to recover, which is creating a shift in our product mix compared to 2019 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, 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 related to COVID-19 and changes in the aerospace industry. The impact of these changes, including the macroeconomic considerations, remains 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.
B. Recently Adopted and Recently Issued Accounting Guidance
Adopted
In September 2022, the Financial Accounting Standards Board (“FASB”) issued guidance to enhance the transparency of disclosures regarding supplier finance programs. These changes became 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.
On January 1, 2023, the Company adopted the changes issued by the FASB related to disclosure requirements of supplier finance program obligations. We offer voluntary supplier finance programs to suppliers who may elect to sell their receivables to third parties at the sole discretion of both the suppliers and the third parties. The program is at no cost to the Company and provides additional liquidity to our suppliers, if they desire, at their cost. Under these programs, the Company pays the third party bank rather than the supplier, the stated amount of the confirmed invoices on the original maturity date of the invoices. The Company or the third party bank may terminate a program upon at least 30 days’ notice. Supplier invoices under the program require payment in full no more than 120 days of the invoice date. As of June 30, 2023 and December 31, 2022, supplier invoices that are subject to future payment under these programs were $259 and $240, respectively, and are included in Accounts payable, trade in the Consolidated Balance Sheet.
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. In December 2022, the FASB deferred the sunset date to December 31, 2024. The Company has amended its agreements in accordance with the new guidance (See Note J and Note N). Management has concluded that the impact of these changes is not expected to have a material impact 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. 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 | |||||||||||||||||||||||||
| Second quarter ended June 30, 2023 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 821 | $ | 329 | $ | 200 | $ | 298 | $ | 1,648 | |||||||||||||||||||
| Inter-segment sales | 5 | — | 1 | — | 6 | ||||||||||||||||||||||||
| Total sales | $ | 826 | $ | 329 | $ | 201 | $ | 298 | $ | 1,654 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 32 | $ | 12 | $ | 12 | $ | 10 | $ | 66 | |||||||||||||||||||
| Segment Adjusted EBITDA | 223 | 64 | 20 | 81 | 388 | ||||||||||||||||||||||||
| Restructuring and other (credits) charges | (1) | — | 5 | — | 4 | ||||||||||||||||||||||||
| Capital expenditures | 21 | 5 | 5 | 7 | 38 | ||||||||||||||||||||||||
| Second quarter ended June 30, 2022 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 652 | $ | 277 | $ | 185 | $ | 279 | $ | 1,393 | |||||||||||||||||||
| Inter-segment sales | 1 | — | 1 | — | 2 | ||||||||||||||||||||||||
| Total sales | $ | 653 | $ | 277 | $ | 186 | $ | 279 | $ | 1,395 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 31 | $ | 11 | $ | 12 | $ | 10 | $ | 64 | |||||||||||||||||||
| Segment Adjusted EBITDA | 179 | 56 | 26 | 75 | 336 | ||||||||||||||||||||||||
| Restructuring and other charges | 4 | — | 1 | — | 5 | ||||||||||||||||||||||||
| Capital expenditures | 24 | 8 | 2 | 5 | 39 | ||||||||||||||||||||||||
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| Six months ended June 30, 2023 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 1,616 | $ | 641 | $ | 407 | $ | 587 | $ | 3,251 | |||||||||||||||||||
| Inter-segment sales | 7 | — | 1 | — | 8 | ||||||||||||||||||||||||
| Total sales | $ | 1,623 | $ | 641 | $ | 408 | $ | 587 | $ | 3,259 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 64 | $ | 23 | $ | 24 | $ | 19 | $ | 130 | |||||||||||||||||||
| Segment Adjusted EBITDA | 435 | 122 | 50 | 160 | 767 | ||||||||||||||||||||||||
| Restructuring and other (credits) charges | (1) | — | 6 | — | 5 | ||||||||||||||||||||||||
| Capital expenditures | 54 | 14 | 15 | 16 | 99 | ||||||||||||||||||||||||
| Six months ended June 30, 2022 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 1,283 | $ | 541 | $ | 367 | $ | 526 | $ | 2,717 | |||||||||||||||||||
| Inter-segment sales | 2 | — | 2 | — | 4 | ||||||||||||||||||||||||
| Total sales | $ | 1,285 | $ | 541 | $ | 369 | $ | 526 | $ | 2,721 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | $ | 62 | $ | 23 | $ | 24 | $ | 20 | $ | 129 | |||||||||||||||||||
| Segment Adjusted EBITDA | 352 | 112 | 49 | 142 | 655 | ||||||||||||||||||||||||
| Restructuring and other charges (credits) | 7 | (3) | 3 | — | 7 | ||||||||||||||||||||||||
| Capital expenditures | 51 | 23 | 9 | 14 | 97 |
The following table reconciles Total Segment Adjusted EBITDA to Income before income taxes. Differences between the total segment and consolidated totals are in Corporate.
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Total Segment Adjusted EBITDA | $ | 388 | $ | 336 | $ | 767 | $ | 655 | |||||||||||||||
| Segment provision for depreciation and amortization | (66) | (64) | (130) | (129) | |||||||||||||||||||
| Unallocated amounts: | |||||||||||||||||||||||
| Restructuring and other charges | (3) | (6) | (4) | (8) | |||||||||||||||||||
| Corporate expense | (34) | (25) | (63) | (47) | |||||||||||||||||||
| Operating income | $ | 285 | $ | 241 | $ | 570 | $ | 471 | |||||||||||||||
| Loss on debt redemption | — | (2) | (1) | (2) | |||||||||||||||||||
| Interest expense, net | (55) | (57) | (112) | (115) | |||||||||||||||||||
| Other income, net | 13 | 1 | 6 | — | |||||||||||||||||||
| Income before income taxes | $ | 243 | $ | 183 | $ | 463 | $ | 354 |
The following table reconciles total segment capital expenditures with Capital expenditures as presented in the Statement of Consolidated Cash Flows.
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Total segment capital expenditures | $ | 38 | $ | 39 | $ | 99 | $ | 97 | |||||||||||||||
| Corporate | 3 | 5 | 6 | 9 | |||||||||||||||||||
| Capital expenditures | $ | 41 | $ | 44 | $ | 105 | $ | 106 |
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 | |||||||||||||||||||||||||
| Second quarter ended June 30, 2023 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 446 | $ | 184 | $ | 141 | $ | — | $ | 771 | |||||||||||||||||||
| Aerospace - Defense | 174 | 46 | 42 | — | 262 | ||||||||||||||||||||||||
| Commercial Transportation | — | 62 | — | 298 | 360 | ||||||||||||||||||||||||
| Industrial and Other | 201 | 37 | 17 | — | 255 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 821 | $ | 329 | $ | 200 | $ | 298 | $ | 1,648 | |||||||||||||||||||
| Second quarter ended June 30, 2022 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 362 | $ | 155 | $ | 108 | $ | — | $ | 625 | |||||||||||||||||||
| Aerospace - Defense | 123 | 37 | 63 | — | 223 | ||||||||||||||||||||||||
| Commercial Transportation | — | 53 | — | 279 | 332 | ||||||||||||||||||||||||
| Industrial and Other | 167 | 32 | 14 | — | 213 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 652 | $ | 277 | $ | 185 | $ | 279 | $ | 1,393 | |||||||||||||||||||
| Six months ended June 30, 2023 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 878 | $ | 354 | $ | 293 | $ | — | $ | 1,525 | |||||||||||||||||||
| Aerospace - Defense | 337 | 90 | 86 | — | 513 | ||||||||||||||||||||||||
| Commercial Transportation | — | 125 | — | 587 | 712 | ||||||||||||||||||||||||
| Industrial and Other | 401 | 72 | 28 | — | 501 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 1,616 | $ | 641 | $ | 407 | $ | 587 | $ | 3,251 | |||||||||||||||||||
| Six months ended June 30, 2022 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 691 | $ | 303 | $ | 217 | $ | — | $ | 1,211 | |||||||||||||||||||
| Aerospace - Defense | 260 | 69 | 120 | — | 449 | ||||||||||||||||||||||||
| Commercial Transportation | — | 106 | — | 526 | 632 | ||||||||||||||||||||||||
| Industrial and Other | 332 | 63 | 30 | — | 425 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 1,283 | $ | 541 | $ | 367 | $ | 526 | $ | 2,717 |
The Company derived 63% and 61% of its revenue from the aerospace (commercial and defense) market for the six months ended June 30, 2023 and 2022, respectively.
General Electric Company and RTX Corporation represented approximately 13% and 10%, respectively, of the Company’s third-party sales for the six months ended June 30, 2023. General Electric Company and RTX Corporation represented approximately 13% and 9%, respectively, of the Company’s third-party sales for the six months ended June 30, 2022. These sales were primarily from the Engine Products segment.
D. Restructuring and Other Charges
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Reversals of previously recorded layoff reserves | $ | — | $ | — | $ | (1) | $ | (1) | |||||||||||||||
| Pension and Other post-retirement benefits - net settlements (E) | 3 | 3 | 3 | 4 | |||||||||||||||||||
| Other | — | 3 | 2 | 5 | |||||||||||||||||||
| Restructuring and other charges | $ | 3 | $ | 6 | $ | 4 | $ | 8 |
In the second quarter of 2023, the Company recorded Restructuring and other charges of $3, which were primarily due to charges for a U.S. pension plan settlement of $3.
In the six months ended June 30, 2023, the Company recorded Restructuring and other charges of $4, which were primarily due to charges for a U.S. pension plan settlement of $3 and exit related costs, including accelerated depreciation, of $2, partially offset by a reversal of $1 for a layoff reserve related to a prior period.
In the second quarter of 2022, the Company recorded Restructuring and other charges of $6, which were primarily due to charges for U.S. pension plan settlements of $3 and exit related costs, including accelerated depreciation, of $3.
In the six months ended June 30, 2022, the Company recorded Restructuring and other charges of $8, which were primarily due to exit related costs, including accelerated depreciation, of $5 and charges for U.S. pension plan settlements of $4, partially offset by a reversal of $1 for a layoff reserve related to a prior period.
| Layoff costs | Other exit costs | Total | |||||||||||||||
| Reserve balances at December 31, 2022 | $ | 6 | $ | 2 | $ | 8 | |||||||||||
| Cash payments | (1) | (2) | (3) | ||||||||||||||
| Restructuring charges | 2 | 2 | 4 | ||||||||||||||
| Other(1) | (3) | (1) | (4) | ||||||||||||||
| Reserve balances at June 30, 2023 | $ | 4 | $ | 1 | $ | 5 |
(1)In the six months ended June 30, 2023, other for layoff costs included $3 of charges for a U.S. pension plan settlement and for other exit costs included a $1 charge for accelerated depreciation.
The remaining reserves as of June 30, 2023 are expected to be paid in cash during the remainder of 2023 and 2024.
E. Pension and Other Postretirement Benefits
The components of net periodic cost (benefit) were as follows:
| Second quarter ended | Six months ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Pension benefits | ||||||||||||||||||||||||||
| Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | ||||||||||||||||||
| Interest cost | 20 | 13 | 40 | 25 | ||||||||||||||||||||||
| Expected return on plan assets | (18) | (21) | (37) | (41) | ||||||||||||||||||||||
| Recognized net actuarial loss | 7 | 12 | 14 | 25 | ||||||||||||||||||||||
| Settlements | 3 | 3 | 3 | 4 | ||||||||||||||||||||||
| Net periodic cost(1) | $ | 13 | $ | 8 | $ | 22 | $ | 15 | ||||||||||||||||||
| Other postretirement benefits | ||||||||||||||||||||||||||
| Service cost | $ | — | $ | 1 | $ | — | $ | 1 | ||||||||||||||||||
| Interest cost | 1 | 1 | 3 | 2 | ||||||||||||||||||||||
| Recognized net actuarial gain | — | 1 | (1) | 1 | ||||||||||||||||||||||
| Amortization of prior service benefit | (2) | (3) | (4) | (5) | ||||||||||||||||||||||
| Net periodic benefit(1) | $ | (1) | $ | — | $ | (2) | $ | (1) | ||||||||||||||||||
(1)Service cost was included within Cost of goods sold, and Selling, general administrative, and other expenses; settlements were included in Restructuring and other charges; and all other cost components were recorded in Other income, net in the Statement of Consolidated Operations.
Pension benefits
In the second quarter and six months ended June 30, 2023, the Company undertook additional actions to reduce gross pension obligations by $19 by purchasing group annuity contracts from a third-party carrier to pay and administer future annuity payments. These actions resulted in settlement charges of $3. In the second quarter and six months ended June 30, 2022, the Company applied settlement accounting to certain U.S. pension plans due to lump sum payments made to participants, which resulted in settlement charges of $3 and $4, respectively, that were recorded in Restructuring and other charges in the Statement of Consolidated Operations.
For the second quarter and six months ended June 30, 2023, Howmet’s combined pension contributions and other postretirement benefit payments were approximately $7 and $19, respectively. For the second quarter and six months ended June 30, 2022, Howmet’s combined pension contributions and other postretirement benefit payments were approximately $12 and $25, respectively.
F. Other Income, Net
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Non-service costs - pension and other postretirement benefits (E) | $ | 8 | $ | 3 | $ | 15 | $ | 7 | |||||||||||||||
| Interest income | (5) | (1) | (10) | (1) | |||||||||||||||||||
| Foreign currency gains, net | — | (1) | (2) | (4) | |||||||||||||||||||
| Net realized and unrealized losses | 7 | 4 | 11 | 7 | |||||||||||||||||||
| Deferred compensation | 3 | (6) | 6 | (9) | |||||||||||||||||||
| Other, net | (26) | — | (26) | — | |||||||||||||||||||
| Other income, net | $ | (13) | $ | (1) | $ | (6) | $ | — |
In the second quarter and six months ended June 30, 2023, Other, net primarily includes the reversal of $25, net of legal fees of $1, of the $65 pre-tax charge taken in the third quarter of 2022 related to the Lehman Brothers International (Europe) legal proceeding (See Note P) due to the final settlement of such proceeding in June 2023.
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 23.0% in both the second quarter and six months ended June 30, 2023 and 23.9% in both the second quarter and six months ended June 30, 2022. The 2023 and 2022 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, foreign earnings subject to tax in higher rate jurisdictions, and nondeductible expenses.
For the second quarter of 2023 and 2022, the tax rate including discrete items was 20.6% and 19.7%, respectively. For the second quarter of 2023, the Company recorded a discrete net tax benefit of $7 related to an $8 excess tax benefit for stock compensation and a net charge of $1 for other small items. For the second quarter of 2022, the Company recorded a discrete tax benefit of $7 attributable to a $6 benefit to release a valuation allowance related to an interest carryforward tax attribute in the U.K. and a net benefit of $1 for other small items.
For the six months ended June 30, 2023 and 2022, the tax rate including discrete items was 26.3% and 21.5%, respectively. For the six months ended June 30, 2023, the company recorded a discrete net tax charge of $14 attributable to a $20 charge for a tax reserve established in France (See Note P) and a net tax charge of $2 for other small items, reduced by an $8 excess tax benefit for stock compensation. For the six months ended June 30, 2022, the Company recorded a discrete net tax benefit of $9 attributable to a $6 benefit to release a valuation allowance related to an interest carryforward tax attribute in the U.K., a $5 excess benefit for stock compensation, and a net charge of $2 for other small items.
The tax provision was comprised of the following:
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Pre-tax income at estimated annual effective income tax rate before discrete items | $ | 56 | $ | 44 | $ | 107 | $ | 85 | |||||||||||||||
| Impact of change in estimated annual effective tax rate on previous quarter’s pre-tax income | — | (1) | — | — | |||||||||||||||||||
| Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized | 1 | — | 1 | — | |||||||||||||||||||
| Tax reserve (P) | — | — | 20 | — | |||||||||||||||||||
| Other discrete items | (7) | (7) | (6) | (9) | |||||||||||||||||||
| Provision for income taxes | $ | 50 | $ | 36 | $ | 122 | $ | 76 |
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 in table below):
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income attributable to common shareholders | $ | 193 | $ | 147 | $ | 341 | $ | 278 | |||||||||||||||
| Less: preferred stock dividends declared | — | — | 1 | 1 | |||||||||||||||||||
| Net income available to Howmet Aerospace common shareholders - basic and diluted | $ | 193 | $ | 147 | $ | 340 | $ | 277 | |||||||||||||||
| Average shares outstanding - basic | 413 | 417 | 413 | 418 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Stock and performance awards | 4 | 5 | 4 | 5 | |||||||||||||||||||
| Average shares outstanding - diluted | 417 | 422 | 417 | 423 |
Common stock outstanding as of June 30, 2023 and 2022 was approximately 412 million and 416 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. After giving effect to the share repurchases made through June 30, 2023, approximately $822 Board authorization remains available.
The following table provides details for share repurchases made for the periods presented:
| Number of shares | Average price per share**(1)** | Total | |||||||||||||||
| Q1 2023 open market repurchase | 576,629 | $ | 43.36 | $ | 25 | ||||||||||||
| Q2 2023 open market repurchase | 2,246,294 | $ | 44.52 | $ | 100 | ||||||||||||
| 2023 Share repurchases as of June 30, 2023 | 2,822,923 | $ | 44.28 | $ | 125 | ||||||||||||
| Q1 2022 open market repurchase | 5,147,307 | $ | 34.00 | $ | 175 | ||||||||||||
| Q2 2022 open market repurchase | 1,770,271 | $ | 33.89 | $ | 60 | ||||||||||||
| 2022 Share repurchases as of June 30, 2022 | 6,917,578 | $ | 33.97 | $ | 235 |
(1)Excludes commissions cost.
Under the Company’s share repurchase program (the “Share Repurchase Program”), 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 Program. Under its Share Repurchase Program, 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. The Company is not obligated to repurchase any specific number of shares or to do so at any particular time, and the Share Repurchase Program may be suspended, modified or terminated at any time without prior notice.
The approximately 5 million decrease in average shares outstanding (basic) for the second quarter of 2023 compared to the second quarter of 2022 was primarily due to the approximately 7 million shares repurchased between July 1, 2022 and June 30, 2023. As average shares outstanding are used in the calculation for both basic and diluted EPS, the full impact of share repurchases was not fully realized in EPS in the period of repurchase since share repurchases may occur at varying points during a period.
There were no shares relating to outstanding stock options excluded from the calculation of average shares outstanding – diluted for the second quarter and six months ended June 30, 2023 and 2022.
I. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss:
| Second quarter ended | Six months ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Pension and other postretirement benefits (E) | |||||||||||||||||||||||
| Balance at beginning of period | $ | (648) | $ | (789) | $ | (653) | $ | (799) | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Unrecognized net actuarial (loss) gain and prior service cost/benefit | (3) | 15 | — | 16 | |||||||||||||||||||
| Tax benefit (expense) | 1 | (3) | — | (3) | |||||||||||||||||||
| Total Other comprehensive (loss) income before reclassifications, net of tax | (2) | 12 | — | 13 | |||||||||||||||||||
| Amortization of net actuarial loss and prior service cost(1) | 8 | 13 | 12 | 25 | |||||||||||||||||||
| Tax expense(2) | (2) | (3) | (3) | (6) | |||||||||||||||||||
| Total amount reclassified from Accumulated other comprehensive income, net of tax(3) | 6 | 10 | 9 | 19 | |||||||||||||||||||
| Total Other comprehensive income | 4 | 22 | 9 | 32 | |||||||||||||||||||
| Balance at end of period | $ | (644) | $ | (767) | $ | (644) | $ | (767) | |||||||||||||||
| Foreign currency translation | |||||||||||||||||||||||
| Balance at beginning of period | $ | (1,159) | $ | (1,093) | $ | (1,193) | $ | (1,062) | |||||||||||||||
| Other comprehensive income (loss) | 4 | (114) | 38 | (145) | |||||||||||||||||||
| Balance at end of period | $ | (1,155) | $ | (1,207) | $ | (1,155) | $ | (1,207) | |||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||
| Balance at beginning of period | $ | 1 | $ | 18 | $ | 5 | $ | (2) | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Net change from periodic revaluations | (10) | (36) | (14) | (11) | |||||||||||||||||||
| Tax income | 2 | 8 | 3 | 2 | |||||||||||||||||||
| Total Other comprehensive loss before reclassifications, net of tax | (8) | (28) | (11) | (9) | |||||||||||||||||||
| Net amount reclassified to earnings | (3) | (11) | (4) | (10) | |||||||||||||||||||
| Tax benefit(2) | 1 | 3 | 1 | 3 | |||||||||||||||||||
| Total amount reclassified from Accumulated other comprehensive loss, net of tax(3) | (2) | (8) | (3) | (7) | |||||||||||||||||||
| Total Other comprehensive loss | (10) | (36) | (14) | (16) | |||||||||||||||||||
| Balance at end of period | $ | (9) | $ | (18) | $ | (9) | $ | (18) | |||||||||||||||
| Accumulated other comprehensive loss | $ | (1,808) | $ | (1,992) | $ | (1,808) | $ | (1,992) |
(1)These amounts were recorded in Restructuring and other charges (See Note D) and Other income, net (See Note F) in the Statement of Consolidated Operations.
(2)These amounts were included in Provision 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 net cash funding from the sale of accounts receivable through the SPE was neither a use of cash nor a source of cash for the second quarter of 2023 or 2022.
The accounts receivables securitization arrangement is one in which the Company, through an SPE, has a receivables purchase agreement (the “Receivables Purchase Agreement”) pursuant to which the SPE may sell certain receivables to financial
institutions until the earlier of August 30, 2024 or a termination event. The Receivables Purchase Agreement 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. The Receivables Purchase Agreement was amended on February 17, 2023 to update the reference rate and reduce the facility limit to $250 from $325, with a provision to increase the limit to $325.
The facility limit under the Receivables Purchase Agreement was $250 and $325 as of June 30, 2023 and December 31, 2022, respectively. A total of $250 was drawn as of both June 30, 2023 and December 31, 2022. As collateral against the sold receivables, the SPE maintains a certain level of unsold receivables, which were $151 and $190 as of June 30, 2023 and December 31, 2022, respectively.
The Company sold $382 and $719 of its receivables without recourse and received cash funding under this program during the second quarter and six months ended June 30, 2023, respectively, resulting in derecognition of the receivables from the Company’s Consolidated Balance Sheet. The Company sold $437 and $901 of its receivables without recourse and received cash funding under the program during the second quarter and six months ended June 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 second quarter and six months ended June 30, 2023, the Company sold $151 and $289, respectively, of certain customers’ receivables in exchange for cash ($155 was outstanding from customers as of June 30, 2023), the proceeds from which are presented in changes in receivables within operating activities in the Statement of Consolidated Cash Flows. In the second quarter and six months ended June 30, 2022, the Company sold $117 and $223 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
| June 30, 2023 | December 31, 2022 | ||||||||||
| Finished goods | $ | 488 | $ | 490 | |||||||
| Work-in-process | 800 | 748 | |||||||||
| Purchased raw materials | 364 | 317 | |||||||||
| Operating supplies | 63 | 54 | |||||||||
| Total inventories | $ | 1,715 | $ | 1,609 |
As of June 30, 2023 and December 31, 2022, the portion of inventories valued on a last-in, first-out (“LIFO”) basis was $423 and $441, respectively. If valued on an average-cost basis, total inventories would have been $228 and $220 higher as of June 30, 2023 and December 31, 2022, respectively.
L. Properties, Plants, and Equipment, net
| June 30, 2023 | December 31, 2022 | ||||||||||
| Land and land rights | $ | 85 | $ | 84 | |||||||
| Structures | 1,001 | 986 | |||||||||
| Machinery and equipment | 4,005 | 3,941 | |||||||||
| 5,091 | 5,011 | ||||||||||
| Less: accumulated depreciation and amortization | 2,962 | 2,858 | |||||||||
| 2,129 | 2,153 | ||||||||||
| Construction work-in-progress | 190 | 179 | |||||||||
| Properties, plants, and equipment, net | $ | 2,319 | $ | 2,332 |
The proceeds from the sale of the corporate headquarters in Pittsburgh, PA 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 as of June 30, 2023 and June 30, 2022 of $48 and $30, 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 includes short-term leases and variable lease payments and approximates cash paid. Operating lease cost was $16 and $14 in the second quarter of 2023 and 2022, respectively, and $32 and $30 in the six months ended June 30, 2023 and 2022, respectively. Operating lease cost in the second quarter and six months ended June 30, 2023 includes the lease for the portion of the property in Pittsburgh, PA used as the corporate headquarters.
Operating lease right-of-use assets and lease liabilities in the Consolidated Balance Sheet were as follows:
| June 30, 2023 | December 31, 2022 | ||||||||||||||||
| Right-of-use assets classified in Other noncurrent assets | $ | 107 | $ | 111 | |||||||||||||
| Current portion of lease liabilities classified in Other current liabilities | $ | 34 | $ | 32 | |||||||||||||
| Long-term portion of lease liabilities classified in Other noncurrent liabilities and deferred credits | 77 | 83 | |||||||||||||||
| Total lease liabilities | $ | 111 | $ | 115 |
N. Debt
| June 30, 2023 | December 31, 2022 | ||||||||||
| 5.125% Notes, due 2024 | $ | 905 | $ | 1,081 | |||||||
| 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) | (16) | (19) | |||||||||
| Total long-term debt | $ | 3,989 | $ | 4,162 |
(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
In January 2023, the Company repurchased approximately $26 aggregate principal amount of its 5.125% Notes due October 2024 (the “5.125% Notes”) through an open market repurchase (“OMR”). The OMR was settled at slightly less than par.
In March 2023, the Company completed the early partial redemption of an additional $150 aggregate principal amount of its 5.125% Notes in accordance with the terms of the notes, and paid an aggregate of $155, including accrued interest and an early termination premium of approximately $4 and $1, respectively, which were recorded in Interest expense, net, and Loss on debt redemption, respectively, in the Statement of Consolidated Operations.
On July 31, 2023, the Company issued a notice of partial redemption to redeem on September 28, 2023 (the “Redemption Date”) $200 aggregate principal amount of its 5.125% Notes in accordance with the terms of the notes. The redemption price (the “Redemption Price”) for the 5.125% Notes to be redeemed shall be equal to the greater of (i) 100% of the principal amount of the 5.125% Notes to be redeemed, plus accrued interest, if any, to the Redemption Date or (ii) the sum of the present values of the Remaining Scheduled Payments, discounted on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the Treasury Rate plus 40 basis points, plus accrued interest to the Redemption Date that has not been paid. The Company expects the aggregate Redemption Price for the 5.125% Notes to be redeemed to be approximately $205, which the Company intends to pay with cash on hand.
Credit Facility
On July 27, 2023, the Company entered into the Second Amended and Restated Five-Year Revolving Credit Agreement (the “Credit Agreement”) by and among the Company, a syndicate of lenders and issuers named therein, Citibank, N.A., as administrative agent for the lenders and issuers, and JPMorgan Chase Bank, N.A., as syndication agent. The Credit Agreement
amended and restated the Company’s Amended and Restated Five-Year Revolving Credit Agreement, dated as of September 28, 2021, as amended by Amendment No. 1 to Credit Agreement, dated as of February 13, 2023.
The Credit Agreement provides a $1,000 senior unsecured revolving credit facility (the “Credit Facility”) that matures on July 27, 2028, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. The Company may make two one-year extension requests during the term of the Credit Facility, with any extension being subject to the lender consent requirements set forth in the Credit Agreement. Subject to the terms and conditions of the Credit Agreement, the Company may from time to time request increases in commitments under the Credit Facility, not to exceed $500 in aggregate principal amount, and may also request the issuance of letters of credit, subject to a letter of credit sublimit of $500 of the Credit Facility. Under the provisions of the Credit Agreement, based on Howmet’s current long-term debt ratings, Howmet pays an annual fee of 0.175% of the total commitment to maintain the Credit Facility.
The Credit Facility is unsecured and amounts payable under it will rank pari passu with all other unsecured, unsubordinated indebtedness of the Company. Borrowings under the Credit Facility may be denominated in U.S. dollars or Euros. Loans will bear interest at a base rate or, in the case of U.S. dollar-denominated loans, a rate equal to the Term Secured Overnight Financing Rate (“SOFR”) plus adjustment or, in the case of euro-denominated loans, the Euro inter-bank offered rate (“EURIBOR”), plus, in each case, an applicable margin based on the credit ratings of the Company’s outstanding senior unsecured long-term debt. Based on the Company’s current long-term debt ratings, the applicable margin on base rate loans would be 0.325% per annum and the applicable margin on Term SOFR loans and EURIBOR loans would be 1.325% per annum. The applicable margin is subject to change based on the Company’s long-term debt ratings. Loans may be prepaid without premium or penalty, subject to customary breakage costs.
The obligation of the Company to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an “Event of Default” as defined in the Credit Agreement. Such Events of Default include, among others, (a) non-payment of obligations; (b) breach of any representation or warranty in any material respect; (c) non-performance of covenants and obligations; (d) with respect to other indebtedness in a principal amount in excess of $100, a default thereunder that causes such indebtedness to become due prior to its stated maturity or a default in the payment at maturity of any principal of such indebtedness; (e) the bankruptcy or insolvency of the Company; and (f) a change in control of the Company.
The Credit Agreement contains covenants, including, among others, (a) limitations on the Company’s ability to incur liens securing indebtedness for borrowed money; (b) limitations on the Company’s ability to consummate a consolidation, merger or sale of all or substantially all of its assets; (c) limitations on the Company’s ability to change the nature of its business; and (d) a limitation requiring the ratio of Consolidated Net Debt to Consolidated EBITDA (each as defined in the Credit Agreement) as of the end of each fiscal quarter for the period of the four fiscal quarters most recently ended, to be less than or equal to 3.75 to 1.00.
There were no amounts outstanding under the Credit Agreement as of June 30, 2023 or December 31, 2022, and no amounts were borrowed during 2023 or 2022 under the Credit Agreement. As of June 30, 2023, 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 ratio 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 and are carried at fair value based on quoted market prices. The aforementioned securities are classified in Level 1 of the fair value hierarchy and are included in Other noncurrent assets in the Consolidated Balance Sheet. The fair value of Long-term debt, less amounts 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.
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Carrying value | Fair value | Carrying value | Fair value | ||||||||||||||||||||
| Long-term debt, less amounts due within one year | $ | 3,989 | $ | 3,945 | $ | 4,162 | $ | 4,059 |
Restricted cash, which is included in Prepaid expenses and other current assets in the Consolidated Balance Sheet, was $1 as of both June 30, 2023 and December 31, 2022.
P. 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 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 $17 and $16 as of June 30, 2023 and December 31, 2022, respectively, and was recorded in Other noncurrent liabilities and deferred credits in the Consolidated Balance Sheet (of which $6 was classified as a current liability for both periods), 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 $2 in the second quarter and six months ended June 30, 2023 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.
Tax. In December 2013 and 2014, the Company received audit assessment notices from the French Tax Authority (“FTA”) for the 2010 through 2012 tax years. In 2016, the Company appealed to the Committee of the Abuse of Tax Law, where it received a favorable nonbinding decision. The FTA disagreed with the Committee of the Abuse of Tax Law’s opinion, and the Company appealed to the Montreuil Administrative Court, where in 2020 the Company prevailed on the merits. The FTA appealed this decision to the Paris Administrative Court of Appeal in 2021. On March 31, 2023, the Company received an adverse decision from the Paris Administrative Court of Appeal. The Company estimates the assessment amount to be $19 (€18), including interest and penalties. In the second quarter of 2023, the Company filed an appeal to the French Administrative Supreme Court.
As a result of the adverse decision from the Paris Administrative Court of Appeal, the Company has concluded that it is no longer more likely than not to sustain its position. In the first quarter of 2023, the Company recorded an income tax reserve in Provision for income taxes in the Statement of Consolidated Operations of $20 (€19), which includes estimated interest and penalties, for the 2010 through 2012 tax years, as well as the remaining tax years open for reassessment. In accordance with FTA dispute resolution practices, the Company is expecting that a payment to the FTA will be necessary in 2023. If an appeal to the French Administrative Supreme Court is successful, any payment would be refunded with interest.
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 substantial majority of these suits were settled pursuant to the terms of a confidential settlement agreement and are now discontinued and closed. Those suits that have not been settled are stayed until the next case management conference, which will be heard on November 15, 2023.
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, and, on October 7, 2022, the Third Circuit Court denied a petition for a rehearing. On January 5, 2023, the plaintiffs filed a petition for a writ of certiorari in the U.S. Supreme Court, which the Supreme Court denied on February 21, 2023. This case is fully dismissed and closed.
Howard v. Arconic Inc. et al. (securities law related claims). On February 3, 2023, the court issued an order referring the case to mediation. In March 2023, following successive mediation sessions, the parties reached a settlement in principle that remains subject to court approval and, among other things, is in the amount of $74 and is to be covered by insurance proceeds, in
exchange for the dismissal of the action and a release of all claims against the defendants. The settlement is without admission of fault or wrongdoing by the defendants. Plaintiffs filed the Stipulation of Settlement, a motion to preliminarily approve the settlement, and related papers with the court on April 21, 2023. On May 2, 2023, the court issued an order granting plaintiffs’ motion to preliminarily approve the settlement and set August 9, 2023 as the date of the final settlement approval hearing.
With respect to Raul v. Albaugh, et al. (derivative related claim), 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 concerned two interest rate swap transactions that the Firth Rixson Entities entered into with LBIE in 2007 and 2008. As a result of the ruling issued by the Court in October 2022, the Company recorded $65 in Other current liabilities in the Consolidated Balance Sheet and took a pre-tax charge of this amount in Other income, net in the Statement of Consolidated Operations in the third quarter of 2022. The Firth Rixson Entities appealed the Court’s ruling, and the appeal was to be addressed at a hearing before the English Court of Appeal in June 2023 (the “Litigation”). On June 15, 2023, the Company, the Firth Rixson Entities, and LBIE reached a full and final settlement of all claims arising out of the Litigation (the “Settlement”). The Settlement provides for a payment of $40 to be paid to LBIE in two installments: $15 paid in July 2023 and $25 payable in July 2024. As a result of the Settlement, $25 of the amount previously recorded for the Litigation as a pre-tax charge in Other income, net was reversed as a credit to Other income, net in the Company’s second quarter 2023 results. The hearing before the English Court of Appeal has accordingly been vacated.
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
As of June 30, 2023, Howmet had outstanding bank guarantees related to tax matters, outstanding debt, workers’ compensation, environmental obligations, and customs duties, among others. The total amount committed under these guarantees, which expire at various dates between 2023 and 2040, was $5 as of June 30, 2023.
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 as of both June 30, 2023 and December 31, 2022, 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 $1,040 as of both June 30, 2023 and December 31, 2022 in the event of an Alcoa Corporation default. In December 2022, 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 insurance obligations, among others. The total amount committed under these letters of credit, which automatically renew or expire at various dates, primarily in 2023 and 2024, was $117 as of June 30, 2023.
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 $52 (which are included in the $117 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 $117 in the above paragraph).
Surety Bonds
The Company has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, energy contracts, and customs duties. The total amount committed under these annual surety bonds, which automatically renew or expire at various dates, primarily in 2023 and 2024, was $43 as of June 30, 2023.
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.
Q. 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 N for the issuance of the debt redemption notice and the amendment of the Company’s Credit Agreement in the third quarter of 2023.
See Note P for the $15 installment payment made in July 2023 related to the LBIE Settlement.
On July 10, 2023, Howmet and the United Steel Workers at our Niles, Ohio location entered into a new four-year collective bargaining agreement, covering approximately 370 employees, effective July 1, 2023. The previous agreement was to expire on April 20, 2024.
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