Howmet Aerospace 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2023

OR

Commission File Number 1-3610

HOWMET AEROSPACE INC.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices) (Zip code)

Investor Relations 412-553-1950

Office of the Secretary 412-553-1940

(Registrant’s telephone number including area code)

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

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

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

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

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

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

As of October 31, 2023, there were 411,744,354 shares of common stock, par value $1.00 per share, of the registrant outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Howmet Aerospace Inc. and subsidiaries

Statement of Consolidated Operations (unaudited)

(in millions, except per-share amounts)

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

Howmet Aerospace Inc. and subsidiaries

Statement of Consolidated Comprehensive Income (unaudited)

(in millions)

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

Howmet Aerospace Inc. and subsidiaries

Consolidated Balance Sheet (unaudited)

(in millions)

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

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

Overview

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

In the third quarter of 2023, the Company derived approximately 49% 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 exceeds 2019 levels. International air travel continues to recover and is approximately 90% of 2019 levels. We expect commercial aerospace growth to continue. The commercial wide body aircraft market is emerging but the mix of wide body to narrow body aircraft remains below 2019 levels, 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.

For additional information regarding the ongoing risks related to our business, see section Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Results of Operations

Earnings Summary:

Sales. Sales were $1,658 in the third quarter of 2023 compared to $1,433 in the third quarter of 2022 and $4,909 in the nine months ended September 30, 2023 compared to $4,150 in the nine months ended September 30, 2022. The increase of $225, or 16%, in the third quarter of 2023 was primarily due to higher sales from the commercial aerospace, defense aerospace, commercial transportation, and industrial and other markets, an increase in inflationary cost pass through of approximately $15, and favorable product pricing of $28. The increase of $759, or 18%, in the nine months ended September 30, 2023 was primarily due to higher sales from the commercial aerospace, defense aerospace, commercial transportation, and industrial and other markets, an increase in inflationary cost pass through of approximately $75, and favorable product pricing of $65. Product price increases are in excess of inflationary cost pass through to our customers.

Cost of goods sold (“COGS”). COGS as a percentage of Sales was 71.4% in the third quarter of 2023 compared to 73.7% in the third quarter of 2022 and 72.2% in the nine months ended September 30, 2023 compared to 72.1% in the nine months ended September 30, 2022. The decrease in the third quarter of 2023 was primarily due to total COGS charges of $1 in the third quarter of 2023 related to fires that occurred at a Fastening Systems plant in France in 2019 (the “France Plant Fire”) and a mechanical failure resulting in substantial heat and fire-related damage to equipment at the Forged Wheel’s cast house in Barberton, Ohio in the third quarter of 2022 (the “Barberton Cast House Incident”), compared to total COGS charges of $25 in the third quarter of 2022, related to the France Plant Fire, Barberton Cast House Incident, and a fire that occurred at a Forged Wheels plant in Barberton, Ohio in mid-February 2020 (the “Barberton Plant Fire”), as well as higher volumes and favorable product pricing, partially offset by increased net headcount in the Engine Products and Engineered Structures segments, in support of expected revenue increases. The increase in COGS in the nine months ended September 30, 2023 was attributable to inflationary costs and increased net headcount, primarily in the Engine Products, Fastening Systems, and Engineered Structures segments, in support of expected revenue increases, resulting in unfavorable near-term recruiting, training and operational costs, as well as an increase of $9 of inventory impairment costs related to facilities closures, a supply chain disruption, and other items, costs primarily related to new collective bargaining agreements at two of our Engine Products and one of our Engineered Structures locations, and additional operating costs from production rate increases not realized due to production bottlenecks at a plant in the Engineered Structures segment. The increase in the nine months ended September 30, 2023 was partially offset by higher volumes and favorable product pricing, as well as total COGS net charges of $1 in the nine months ended September 30, 2023 related to the France Plant Fire and Barberton Cast House Incident compared to total COGS charges of $32 in the nine months ended September 30, 2022 related to the France Plant Fire, Barberton Cast House Incident, and the Barberton Plant Fire. The Company has submitted insurance claims related to these plant fires. During the fourth quarter of 2022, the Company settled the insurance claim related to the Barberton Plant Fire. The Company anticipates additional charges of up to $2 in the fourth quarter of 2023 for the France Plant Fire and Barberton Cast House Incident.

Selling, general administrative, and other expenses (“SG&A”). SG&A expenses were $87 in the third quarter of 2023 compared to $73 in the third quarter of 2022 and $250 in the nine months ended September 30, 2023 compared to $225 in the nine months ended September 30, 2022. The increase of $14, or 19%, in the third quarter of 2023 was primarily due to higher employment costs. The increase of $25, or 11%, in the nine months ended September 30, 2023 was primarily due to higher employment costs and legal fees related to the Lehman Brothers International (Europe) (“LBIE”) legal proceeding (See Note P to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for reference).

Research and development expenses (“R&D”). R&D expenses were $9 in the third quarter of 2023 compared to $7 in the third quarter of 2022, an increase of $2, or 29%. R&D expenses were $27 in the nine months ended September 30, 2023 compared to $23 in the nine months ended September 30, 2022, an increase of $4, or 17%. The increase in the third quarter and nine months ended September 30, 2023 was primarily due to higher spending on technology projects intended to support the aerospace business.

Restructuring and other charges. Restructuring and other charges were $4 in both the third quarter of 2023 and 2022. Restructuring and other charges were $8 in the nine months ended September 30, 2023 compared to $12 in the nine months ended September 30, 2022 or a decrease of $4. Restructuring and other charges for the third quarter of 2023 were primarily due to charges for a Canadian pension plan settlement of $2. Restructuring and other charges for the nine months ended September 30, 2023 were primarily due to charges for U.S. and Canadian pension plan settlements of $5 and exit related costs, including accelerated depreciation, of $3. Restructuring and other charges for the third quarter of 2022 were primarily due to charges for U.S. and Canadian pension plan settlements of $3. Restructuring and other charges for the nine months ended September 30, 2022 were primarily due to charges for U.S. pension plan settlements of $7 and exit related costs, including accelerated depreciation, of $6.

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

Interest expense, net. Interest expense, net was $54 in the third quarter of 2023 compared to $57 in the third quarter of 2022 and $166 in the nine months ended September 30, 2023 compared to $172 in the nine months ended September 30, 2022. The decrease of $3, or 5%, in the third quarter of 2023 and $6, or 3%, in the nine months ended September 30, 2023 was primarily due to a reduced average level of long-term debt. As a result of the January 2023, March 2023, and September 2023 debt actions that collectively reduced the outstanding aggregate principal amount of the 5.125% Notes due October 2024 (the “5.125% Notes”) by $376 during the nine months ended September 30, 2023, Interest expense, net is expected to be reduced annually by $19.

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

Loss on debt redemption. Debt redemption or tender premiums include the cost to redeem or repurchase certain of the Company’s notes at a price which may be equal to the greater of the principal amount or the sum of the present values of the remaining scheduled payments, discounted using a defined treasury rate plus a spread, or a price based on the market price of its notes. Loss on debt redemption was less than $1 in both the third quarter of 2023 and 2022 and $1 in the nine months ended September 30, 2023 compared to $2 in the nine months ended September 30, 2022. The decrease of $1 in the nine months ended September 30, 2023 was due to the higher debt premiums paid on the early partial redemption of the 5.125% Notes in the second quarter of 2022.

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

Other expense, net. Other expense, net was $11 in the third quarter of 2023 compared to Other expense, net of $67 in the third quarter of 2022 and Other expense, net was $5 in the nine months ended September 30, 2023 compared to Other expense, net of $67 in the nine months ended September 30, 2022. The decrease of $56 in the third quarter of 2023 was primarily due to the $65 pre-tax charge taken in the third quarter of 2022 related to the LBIE legal proceeding (See Note P to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for reference), and higher interest income of $3, partially offset by an increase in foreign currency losses of $8 and higher non-service related net periodic benefit costs related to pension and other postretirement benefit plans of $3. The decrease of $62 in the nine months ended September 30, 2023 was primarily due to the LBIE legal proceeding settled in the second quarter of 2023 (See Note P to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for reference), and higher interest income of $12, partially offset by the impacts of deferred compensation arrangements of $16, higher non-service related net periodic benefit costs related to pension and other postretirement benefit plans of $11, an increase in foreign currency losses of $10, and an increase from net realized and unrealized losses of $5, primarily due to losses on sales of receivables. Non-service related net periodic benefit costs related to defined benefit plans is expected to increase by approximately $15 for the full year 2023 versus 2022.

Provision for income taxes. The estimated annual effective tax rate, before discrete items, applied to ordinary income was 23.0% in both the third quarter and nine months ended September 30, 2023 compared to 24.3% in both the third quarter and nine months ended September 30, 2022. The tax rate including discrete items was 22.3% in the third quarter of 2023 compared to 23.1% in the third quarter of 2022. A discrete net tax benefit of $1 was recorded in the third quarter of 2023 compared to a discrete tax benefit of $2 in the third quarter of 2022. The tax rate including discrete items was 25.0% in the nine months ended September 30, 2023 compared to 21.8% in the nine months ended September 30, 2022. A discrete net tax charge of $13, which included the income tax reserve recorded as a result of the French tax litigation (See Note P to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for reference), was recorded in the nine months ended September 30, 2023 compared to a discrete tax benefit of $11 in the nine months ended September 30, 2022. The estimated annual effective tax rate has decreased primarily due to increased domestic deductions, lower non-deductible expenses, and a decrease in apportioned state tax rates, partially offset by increased earnings in high tax rate jurisdictions.

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

Net income. Net income was $188, or $0.45 per diluted share, in the third quarter of 2023 compared to $80, or $0.19 per diluted share, in the third quarter of 2022 and $529, or $1.27 per diluted share, in the nine months ended September 30, 2023 compared to $358, or $0.84 per diluted share, in the nine months ended September 30, 2022. The increase of $108 in the third quarter of 2023 was primarily due to higher volumes in the commercial aerospace, defense aerospace, commercial transportation, and industrial and other markets, as well as the $65 pre-tax charge taken in the third quarter of 2022 related to the LBIE legal proceeding (See Note P to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for reference) that did not recur in 2023, and favorable product pricing, partially offset by an increase in Provision for income taxes. The increase of $171 in the nine months ended September 30, 2023 was primarily due to higher volumes in the commercial aerospace, defense aerospace, commercial transportation, and industrial and other markets, as well as favorable product pricing, and the settlement of the LBIE legal proceeding (See Note P to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for reference), partially offset by an increase in Provision for income taxes.

Segment Information

The Company’s operations consist of four worldwide reportable segments: Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. Segment performance under Howmet’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Segment Adjusted EBITDA. 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 (See Note C to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a description of each segment).

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

Engine Products

Third-party sales for the Engine Products segment increased $115, or 17%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial aerospace, defense aerospace, oil and gas, and industrial gas turbine markets.

Third-party sales for the Engine Products segment increased $448, or 23%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial aerospace, defense aerospace, oil and gas, and industrial gas turbine markets.

Segment Adjusted EBITDA for the Engine Products segment increased $33, or 18%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial aerospace, defense aerospace, oil and gas, and industrial gas turbine markets. The segment absorbed approximately 500 net headcount in the third quarter of 2023, in support

of expected revenue increases, resulting in unfavorable near-term recruiting, training and operational costs.

Segment Adjusted EBITDA for the Engine Products segment increased $116, or 22%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial aerospace, defense aerospace, oil and gas, and industrial gas turbine markets. The segment absorbed approximately 850 net headcount in the nine months ended September 30, 2023, in support of expected revenue increases, resulting in unfavorable near-term recruiting, training and operational costs.

Segment Adjusted EBITDA Margin for the Engine Products segment increased approximately 20 basis points in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial aerospace, defense aerospace, oil and gas, and industrial gas turbine markets, partially offset by an increase in headcount and inflationary costs.

Segment Adjusted EBITDA Margin for the Engine Products segment decreased approximately 30 basis points in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to an increase in headcount and inflationary costs, partially offset by higher volumes in the commercial aerospace, defense aerospace, oil and gas, and industrial gas turbine markets.

On May 15, 2023, Howmet and the United Autoworkers at our Whitehall, Michigan location approved a new five-year collective bargaining agreement, covering approximately 1,300 employees, effective April 1, 2023. The previous agreement expired on March 31, 2023. The agreement positions our Whitehall location to offer market competitive wages and benefits and provide additional operational flexibility in support of expected revenue increases.

For the full year 2023 compared to 2022, demand in the commercial aerospace, defense aerospace, oil and gas, and industrial gas turbine markets is expected to increase.

Fastening Systems

Third-party sales for the Fastening Systems segment increased $57, or 20%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial aerospace market, including the emerging wide body recovery, and commercial transportation market.

Third-party sales for the Fastening Systems segment increased $157, or 19%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial aerospace, including the emerging wide body recovery, defense aerospace, commercial transportation, and industrial markets.

Segment Adjusted EBITDA for the Fastening Systems segment increased $12, or 19%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial aerospace and commercial transportation markets.

Segment Adjusted EBITDA for the Fastening Systems segment increased $22, or 13%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial aerospace, defense aerospace, commercial transportation, and industrial markets. The segment absorbed approximately 385 net headcount in the nine months ended September 30, 2023, in support of expected revenue increases, resulting in unfavorable near-term recruiting, training and operational costs.

Segment Adjusted EBITDA Margin for the Fastening Systems segment decreased approximately 20 basis points in the third quarter of 2023 compared to the third quarter of 2022, primarily due to an increase in headcount and inflationary costs as well as unfavorable foreign currency movements, partially offset by higher volumes in the commercial aerospace and commercial transportation markets.

Segment Adjusted EBITDA Margin for the Fastening Systems segment decreased approximately 120 basis points in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to an increase in headcount and inflationary costs, partially offset by higher volumes in the commercial aerospace, defense aerospace, commercial transportation, and industrial markets.

For the full year 2023 compared to 2022, demand in the commercial aerospace, defense aerospace, commercial transportation, and industrial markets is expected to increase.

Engineered Structures

Third-party sales for the Engineered Structures segment increased $34, or 18%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial aerospace market, including Russian titanium share gains and the emerging wide body recovery, partially offset by lower volumes in the defense aerospace market associated with legacy fighter programs.

Third-party sales for the Engineered Structures segment increased $74, or 13%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial aerospace market, including Russian titanium share gains and the emerging wide body recovery, partially offset by lower volumes in the defense aerospace market associated with legacy fighter programs.

Segment Adjusted EBITDA for the Engineered Structures segment increased $2, or 7%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial aerospace market, partially offset by lower volumes in the defense aerospace market. The segment absorbed approximately 145 net headcount in the third quarter of 2023, in support of expected revenue increases, resulting in unfavorable near-term recruiting, training and operational costs.

Segment Adjusted EBITDA for the Engineered Structures segment increased $3, or 4%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial aerospace market, partially offset by lower volumes in the defense aerospace market. The segment absorbed approximately 195 net headcount in the nine months ended September 30, 2023, in support of expected revenue increases, resulting in unfavorable near-term recruiting, training and operational costs.

Segment Adjusted EBITDA Margin for the Engineered Structures segment decreased approximately 130 basis points in the third quarter of 2023 compared to the third quarter of 2022, primarily due to lower volumes in the defense aerospace market, material and inflationary cost pass through, and an increase in headcount, partially offset by higher volumes in the commercial aerospace market.

Segment Adjusted EBITDA Margin for the Engineered Structures segment decreased approximately 120 basis points in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to lower volumes in the defense aerospace market, material and inflationary cost pass through, and an increase in headcount, partially offset by higher volumes in the commercial aerospace market.

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. The agreement positions our Niles location to offer market competitive wages and benefits, promote cost competitiveness, and provide additional operational flexibility in support of expected revenue increases.

For the full year 2023 compared to 2022, demand in the commercial aerospace market is expected to increase. However, demand in the defense aerospace market is expected to decrease.

Forged Wheels

Third-party sales for the Forged Wheels segment increased $19, or 7%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial transportation market, partially offset by a decrease in aluminum price pass through.

Third-party sales for the Forged Wheels segment increased $80, or 10%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial transportation market.

Segment Adjusted EBITDA for the Forged Wheels segment increased $13, or 20%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes in the commercial transportation market.

Segment Adjusted EBITDA for the Forged Wheels segment increased $31, or 15%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes in the commercial transportation market, partially offset by a supply chain disruption and unfavorable foreign currency movements.

Segment Adjusted EBITDA Margin for the Forged Wheels segment increased approximately 290 basis points in the third quarter of 2023 compared to the third quarter of 2022, primarily due to higher volumes. The favorable impact of lower aluminum prices was partially offset by other inflationary cost pass through.

Segment Adjusted EBITDA Margin for the Forged Wheels segment increased approximately 120 basis points in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher volumes, partially offset by a supply chain disruption and unfavorable foreign currency movements. The favorable impact of lower aluminum prices was partially offset by other inflationary cost pass through.

For the full year 2023 compared to 2022, demand in the commercial transportation markets served by Forged Wheels is expected to increase.

Reconciliation of Total Segment Adjusted EBITDA to Income before income taxes

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

See Restructuring and other charges, Interest expense, net, Loss on debt redemption, and Other expense, net discussions above, under “Results of Operations” for reference.

Corporate expense decreased $22, or 48%, in the third quarter of 2023 compared to the third quarter of 2022, primarily due to lower net costs related to the France Plant Fire, the Barberton Plant Fire, and the Barberton Cast House Incident of $24, partially offset by higher employment costs in 2023.

Corporate expense decreased $6, or 6%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to lower net costs related to the France Plant Fire, the Barberton Plant Fire, and the Barberton Cast House Incident of $31, partially offset by higher inventory impairment costs related to facilities closures, a supply chain disruption, and other items of $10, costs related to collective bargaining agreement negotiations in 2023 of $8, higher nonrecurring legal and other advisory reimbursements received in 2022 compared to 2023 of $3, and higher employment costs in 2023.

Environmental Matters

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

Subsequent Events

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

Liquidity and Capital Resources

Operating Activities

Cash provided from operations was $443 in the nine months ended September 30, 2023 compared to $278 in the nine months ended September 30, 2022. The increase of $165, or 59%, was primarily due to higher operating results of $194, lower payments on noncurrent liabilities of $17, and lower pension contributions of $15, partially offset by higher working capital of $64. The components of the change in working capital primarily included unfavorable changes in accounts payable of $187, accrued expenses of $36, and prepaid expenses and other current assets of $17, partially offset by inventories of $123, receivables of $35, and taxes, including income taxes, of $18.

Management expects Howmet’s estimated pension contributions and other postretirement benefit payments in 2023 to be approximately $56.

Financing Activities

Cash used for financing activities was $646 in the nine months ended September 30, 2023 compared to $437 in the nine months ended September 30, 2022. The increase of $209, or 48%, was primarily due to higher payments made in connection with the reduction of long-term debt of $316 (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference), higher taxes of $54 paid for the net share settlement of equity awards due to a significant amount of equity awards that vested and the impact of the Company’s stock price on the vesting date, and increased dividends paid to common stock shareholders of $25, partially offset by a reduction in common stock repurchases of $185. As a result of the January 2023, March 2023, and September 2023 debt actions that collectively reduced the outstanding aggregate principal amount of the 5.125% Notes by $376 during the nine months ended September 30, 2023, Interest expense, net is expected to be reduced annually by $19.

The Company maintains a credit facility pursuant to its Five-Year Revolving Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and issuers named therein (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference). There were no amounts outstanding under the Credit Agreement as of September 30, 2023 or December 31, 2022, and no amounts were borrowed during 2023 or 2022 under the Credit Agreement. On July 27, 2023, the Company entered into the Second Amended and Restated Five-Year Revolving Credit Agreement (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference).

The Company may opportunistically issue new debt securities in accordance with securities laws, in order to, but not limited to, refinance existing indebtedness. The Company continues to evaluate whether, when and to what extent it may access capital markets, including any plans to refinance, the 5.125% Notes due October 2024. Our ability to refinance our indebtedness or enter into alternative financings in adequate amounts on commercially reasonable terms, or terms acceptable to us, may be affected by circumstances and economic events outside of our control. In the event that a refinancing does not occur before the October 2024 maturity date of the Company’s 5.125% Notes, the Company believes that its projected cash on hand and/or availability under its Credit Facility will enable the Company to repay the 5.125% Notes.

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

The Company’s costs of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short-term and long-term debt ratings assigned to the Company by the major credit rating agencies. The Company believes that its cash on hand, cash provided from operations and availability of its Credit Facility and its accounts receivables securitization program will continue to be sufficient to fund our operating and capital allocation activities, including repayments of indebtedness.

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

On September 18, 2023, Moody’s affirmed Howmet’s long-term debt rating at Ba1 and upgraded the current outlook from stable to positive, citing the Company’s revenue and strong market position.

On August 23, 2023, Fitch upgraded Howmet’s long-term debt rating from BBB- to BBB, citing the Company’s improved financial leverage, and affirmed the current outlook at stable.

On April 25, 2023, S&P affirmed Howmet’s long-term debt rating at BB+ and upgraded the current outlook from stable to positive, citing strong demand in the commercial aerospace market and the Company’s improved financial leverage.

Investing Activities

Cash used for investing activities was $163 in the nine months ended September 30, 2023 compared to $106 in the nine months ended September 30, 2022. The increase of $57, or 54%, was primarily due to the net proceeds from the sale of the corporate center in the second quarter of 2022 of $41 that did not recur in 2023 and an increase in capital expenditures of $16 primarily related to sustaining capital projects across all segments.

Recently Adopted and Recently Issued Accounting Guidance

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

Forward-Looking Statements

This report contains (and oral communications made by Howmet Aerospace may contain) statements that relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect Howmet Aerospace’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, statements, forecasts and outlook relating to the condition of end markets; future financial results or operating performance; future strategic actions; Howmet Aerospace’s strategies, outlook, and business and financial prospects; and any future debt redemptions or repurchases of its debt or equity securities. These statements reflect beliefs and assumptions that are based on Howmet Aerospace’s perception of historical trends, current conditions and expected future developments, as well as other factors Howmet Aerospace believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict, which could cause actual results to differ materially from those indicated by these statements. Such risks and uncertainties include, but are not limited to: (a) deterioration in global economic and financial market conditions generally; (b) unfavorable changes in the markets served by Howmet Aerospace; (c) the impact of potential cyber attacks and information technology or data security breaches; (d) the loss of significant customers or adverse changes in customers’ business or financial conditions; (e) manufacturing difficulties or other issues that impact product performance, quality or safety; (f) inability of suppliers to meet obligations due to supply chain disruptions or otherwise; (g) failure to attract and retain a qualified workforce and key personnel; (h) uncertainty of the residual impact of the COVID-19 pandemic on Howmet Aerospace’s business, results of operations, and financial condition; (i) the inability to achieve revenue growth, cash generation, restructuring plans, cost reductions, improvement in profitability, or strengthening of competitiveness and operations anticipated or targeted; (j) inability to meet increased demand, production targets or commitments; (k) competition from new product offerings, disruptive technologies or other developments; (l) geopolitical, economic, and regulatory risks relating to Howmet Aerospace’s global operations, including geopolitical and diplomatic tensions, instabilities, conflicts and wars, as well as compliance with U.S. and foreign trade and tax laws, sanctions, embargoes and other regulations; (m) the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation, which can expose Howmet Aerospace to substantial costs and liabilities; (n) failure to comply with government contracting regulations; (o) adverse changes in discount rates or investment returns on pension assets; and (p) the other risk factors summarized in Howmet Aerospace’s Form 10-K for the year ended December 31, 2022 and other reports filed with the U.S. Securities and Exchange Commission. Market projections are subject to the risks discussed above and other risks in the market. The statements in this report are made as of the date of the filing of this report. Howmet Aerospace disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

Not material.

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

The following table presents information with respect to the Company’s repurchases of its common stock during the quarter ended September 30, 2023:

(1)Excludes commissions cost.

(2)On August 18, 2021, the Company announced that its Board of Directors authorized a share repurchase program of up to $1,500 million of the Company's outstanding common stock. After giving effect to the share repurchases made through September 30, 2023, approximately $797 million Board authorization remains available. 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.

SIGNATURES

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