Howmet Aerospace Reports Second Quarter 2023 Results

Howmet Aerospace (NYSE:HWM):

Second Quarter 2023 Highlights

• Revenue of $1.65 billion, up 18% year over year, driven by commercial aerospace, up 23% year over year
• Net income of $193 million, or $0.46 per share, versus $147 million, or $0.35 per share, in the second quarter 2022
• Net income excluding special items of $181 million, or $0.44 per share, versus $149 million, or $0.35 per share, in the second quarter 2022
• Adjusted EBITDA excluding special items of $368 million, up 16% year over year
• Generated $229 million cash from operations and $188 million of free cash flow; $189 million of cash used for financing activities; and $41 million of cash used for investing activities
• Cash balance at end of quarter of $536 million including impacts of $100M of common stock repurchases and $0.04 per share dividend on common stock

Key Announcements

• In the second quarter 2023, Howmet Aerospace repurchased $100 million of common stock at an average price of $44.52 per share, retiring approximately 2.2 million shares. As of July 31, 2023, total share repurchase authorization available was $822 million.
• On July 31, 2023, the Company issued a notice to redeem $200 million of the aggregate principal amount of its 5.125% Notes due 2024 (“2024 Notes”). The redemption is expected to be completed on September 28, 2023 and will reduce the outstanding 2024 Notes to $705 million. This action will reduce annualized interest expense by approximately $10 million.
• On July 27, 2023, the Company amended its credit agreement for its $1 billion revolving credit facility, including changes relating to a maturity date extension to July 27, 2028, a more favorable Debt-to-EBITDA financial covenant, and certain lower fees. Revolver capacity remains at $1 billion and is undrawn.
• The Company expects to increase the quarterly dividend on its common stock from $0.04 per share to $0.05 per share beginning in the fourth quarter 2023, subject to the discretion and final approval of the Board of Directors. On May 25, 2023, the Company paid a quarterly dividend of $0.04 per share on outstanding common stock.
• In the second quarter 2023, the Company reached a full and final settlement of all claims arising out of the Lehman Brothers International (Europe) (“LBIE”) litigation for $40 million. The litigation concerned interest rate swap transactions that were entered into in 2007 and 2008, which were assumed as part of the Firth Rixson acquisition in 2014.

Howmet Aerospace (NYSE: HWM) today reported second quarter 2023 results. The Company reported second quarter revenues of $1.65 billion, up 18% year over year, primarily driven by growth in the commercial aerospace market of 23%.

Howmet Aerospace reported net income of $193 million, or $0.46 per share, in the second quarter 2023 versus $147 million, or $0.35 per share, in the second quarter 2022. Net income excluding special items was $181 million, or $0.44 per share, in the second quarter 2023, versus $149 million, or $0.35 per share, in the second quarter 2022. Net income included approximately $12 million in net favorable impacts from special items, primarily due to the reversal of a pre-tax charge taken in the third quarter 2022 related to the LBIE legal proceeding as a result of the final settlement of such proceeding in June 2023. Operating income margin was flat year over year at 17.3% in the second quarter 2023.

Second quarter 2023 Adjusted EBITDA excluding special items was $368 million, up 16% year over year. The year-over-year increase was driven by growth in the commercial aerospace market. Adjusted EBITDA margin excluding special items was down approximately 50 basis points year over year at 22.3%, including approximately $25 million of inflationary cost pass through year over year. Excluding year over year inflationary cost pass through, adjusted EBITDA margin excluding special items was 22.7%.

Howmet Aerospace Executive Chairman and Chief Executive Officer John Plant said, “In the second quarter 2023, Howmet Aerospace delivered another strong set of results. Revenue grew year over year in every major end market, led by commercial aerospace up 23%, and exceeded the high end of our guidance range. Adjusted EBITDA^* and Adjusted Earnings Per Share^* also exceeded the high end of guidance and grew 16% and 26%, respectively, with Adjusted EBITDA Margin^* a healthy 22.3%.”

Mr. Plant continued, “The outlook for Howmet Aerospace continues to be strong and supported by the extraordinary backlog of commercial aircraft orders at Airbus and Boeing. Our key defense aerospace and industrial end markets continue to be solid, while the commercial transportation end market remains healthy, albeit the third quarter tends to be seasonally weaker. With the robust demand backdrop and continued strong operational execution, we are increasing full year 2023 guidance for revenue, Adjusted EBITDA^*, and Adjusted Earnings Per Share^*.”

“Howmet Aerospace’s balance sheet remains solid and cash generation was strong, supporting $100 million in common stock repurchases in the second quarter 2023. In July 2023, the Company launched a redemption of $200 million of its 2024 Notes, which will reduce annualized interest expense by approximately $10 million. We also expect to increase the quarterly dividend on common stock from $0.04 to $0.05 per share in the fourth quarter 2023, demonstrating confidence in Howmet’s free cash flow profile.”

Second Quarter 2023 Segment Performance

Engine Products

Engine Products reported revenue of $821 million, an increase of 26% year over year, due to growth in the commercial aerospace, defense aerospace, industrial gas turbine, and oil and gas markets. Segment Adjusted EBITDA was $223 million, up 25% year over year, driven by commercial aerospace, defense aerospace, industrial gas turbine, and oil and gas volumes. The segment added approximately 90 net headcount in the quarter and approximately 350 net headcount in the first half 2023 in anticipation of future revenue increases, resulting in unfavorable near-term costs. Segment Adjusted EBITDA margin decreased approximately 30 basis points year over year to 27.2%.

Fastening Systems

Fastening Systems reported revenue of $329 million, an increase of 19% year over year due to growth in the commercial aerospace, defense aerospace, industrial, and commercial transportation markets. Segment Adjusted EBITDA was $64 million, up 14% year over year, driven by commercial aerospace, defense aerospace, industrial, and commercial transportation volumes. The segment added approximately 215 net headcount in the quarter and approximately 430 net headcount in the first half 2023 in anticipation of future revenue increases, resulting in unfavorable near-term costs. Segment Adjusted EBITDA margin decreased approximately 70 basis points year over year to 19.5%.

Engineered Structures

Engineered Structures reported revenue of $200 million, an increase of 8% year over year due to growth in the commercial aerospace market driven by Russian titanium share gains, partially offset by declines in the defense aerospace market. Segment Adjusted EBITDA was $20 million, down 23% year over year, driven by unfavorable volume in the defense aerospace market and production rate increases not realized, partially offset by favorable volume in the commercial aerospace market. Operational costs such as additional headcount to support the planned production rate increases were unrecovered due to production bottlenecks at one plant. The Company expects to achieve targeted production levels in the second half 2023. The segment added approximately 50 net headcount in the quarter in anticipation of future revenue increases, resulting in unfavorable near-term costs. Segment Adjusted EBITDA margin decreased approximately 410 basis points year over year to 10.0%.

Forged Wheels

Forged Wheels reported revenue of $298 million, an increase of 7% year over year due to a 6% increase in volume. Segment Adjusted EBITDA was $81 million, up 8% year over year, driven by favorable volume partially offset by supply chain disruptions. Segment Adjusted EBITDA margin increased approximately 30 basis points year over year to 27.2% as the impact of lower aluminum prices was partially offset by inflationary cost pass through.

Repurchased $100 Million of Common Stock in Second Quarter 2023

In the second quarter 2023, Howmet Aerospace repurchased $100 million of common stock at an average price of $44.52 per share, retiring approximately 2.2 million shares. In the first half 2023, the Company repurchased $125 million of common stock at an average price of $44.28 per share, retiring approximately 2.8 million shares. As of July 31, 2023, total share repurchase authorization available was $822 million.

Redeeming $200 Million of 2024 Notes in Third Quarter 2023

On July 31, 2023, Howmet Aerospace issued a notice to redeem $200 million of the aggregate principal amount of its 5.125% Notes due 2024 (“2024 Notes”). The redemption is expected to be completed on September 28, 2023 and will reduce the outstanding 2024 Notes to $705 million. This redemption will reduce annualized interest expense by approximately $10 million. In the first quarter 2023, the Company redeemed $150 million and additionally repurchased approximately $26 million of the aggregate principal amount of the 2024 Notes. These combined actions will reduce annualized interest expense by approximately $19 million. All of the Company’s outstanding debt is unsecured and at fixed interest rates.

Revolver Amended Through 2028 with More Favorable Terms

On July 27, 2023, the Company amended its credit agreement for its $1 billion revolving credit facility, including changes relating to a maturity date extension to July 27, 2028, a more favorable Debt-to-EBITDA financial covenant, and certain lower fees. Revolver capacity remains at $1 billion and is undrawn.

Howmet Aerospace Expecting to Increase Common Stock Dividend in Fourth Quarter 2023

The Company expects to increase the quarterly dividend of its common stock from $0.04 per share to $0.05 per share, a 25% increase, beginning in the fourth quarter 2023, subject to the discretion and final approval of the Board of Directors each quarter after the Board’s consideration of all factors it deems relevant and subject to applicable law. On May 25, 2023, the Company paid a quarterly dividend of $0.04 per share on outstanding common stock.

Lehman Brothers International (Europe) (“LBIE”) Legal Proceeding Settled

In the second quarter 2023, the Company reached a full and final settlement of all claims arising out of the LBIE litigation. The litigation concerned interest rate swap transactions that were entered into in 2007 and 2008, which were assumed as part of the Firth Rixson acquisition in 2014. The settlement provides for a payment of $40 million to be paid to LBIE in two installments: $15 million paid in July 2023 and $25 million payable in July 2024. As a result of the settlement, $25 million of the amount previously recorded for the litigation as a pre-tax charge in Other income, net was reversed in the Company’s second quarter 2023 results.

Howmet Aerospace will hold its quarterly conference call at 10:00 AM Eastern Time on Tuesday, August 1, 2023. The call will be webcast via www.howmet.com. The press release and presentation materials will be available at approximately 7:00 AM ET on August 1, via the “Investors” section of the Howmet Aerospace website.

About Howmet Aerospace

Howmet Aerospace Inc., headquartered in Pittsburgh, Pennsylvania, is a leading global provider of advanced engineered solutions for the aerospace and transportation industries. The Company’s primary businesses focus on jet engine components, aerospace fastening systems, and airframe structural components necessary for mission-critical performance and efficiency in aerospace and defense applications, as well as forged aluminum wheels for commercial transportation. With nearly 1,150 granted and pending patents, the Company’s differentiated technologies enable lighter, more fuel-efficient aircraft and commercial trucks to operate with a lower carbon footprint. For more information, visit www.howmet.com.

Dissemination of Company Information

Howmet Aerospace intends to make future announcements regarding Company developments and financial performance through its website at www.howmet.com.

Forward-Looking Statements

This release contains 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 dividends and 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 and conflicts, 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 release are made as of the date of this release, even if subsequently made available by Howmet Aerospace on its website or otherwise. 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.

Non-GAAP Financial Measures

Some of the information included in this release is derived from Howmet Aerospace’s consolidated financial information but is not presented in Howmet Aerospace’s financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain of these data are considered “non-GAAP financial measures” under SEC rules. These non-GAAP financial measures supplement our GAAP disclosures and should not be considered an alternative to the GAAP measure. Reconciliations to the most directly comparable GAAP financial measures and management’s rationale for the use of the non-GAAP financial measures can be found in the schedules to this release.

Total Segment Adjusted EBITDA is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because Total Segment Adjusted EBITDA provides additional information with respect to the Company's operating performance and the Company’s ability to meet its financial obligations. The Total Segment Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. Howmet’s definition of Total 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. Differences between the total segment and consolidated totals are in Corporate.

The Accounts Receivable Securitization program remains unchanged at $250 outstanding.

Free cash flow is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management reviews cash flows generated from operations after taking into consideration capital expenditures (due to the fact that these expenditures are considered necessary to maintain and expand the Company's asset base and are expected to generate future cash flows from operations). It is important to note that Free cash flow does not represent the residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure.

Net income excluding Special items and Diluted EPS excluding Special items are non-GAAP financial measures. Management believes that these measures are meaningful to investors because management reviews the operating results of the Company excluding the impacts of Restructuring and other charges, Discrete tax items, and Other special items (collectively, “Special items”). There can be no assurances that additional Special items will not occur in future periods. To compensate for this limitation, management believes that it is appropriate to consider both Net income determined under GAAP as well as Net income excluding Special items and Diluted EPS excluding Special items.

Operational tax rate is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management reviews the operating results of the Company excluding the impacts of Special items. There can be no assurances that additional Special items will not occur in future periods. To compensate for this limitation, management believes that it is appropriate to consider both the Effective tax rate determined under GAAP as well as the Operational tax rate.

Adjusted EBITDA, Adjusted EBITDA excluding Special items, Adjusted EBITDA margin excluding Special items, Third-party sales excluding Material and other inflationary cost pass through, and Incremental margin are non-GAAP financial measures. Management believes that these measures are meaningful to investors because they provide additional information with respect to the Company's operating performance and the Company’s ability to meet its financial obligations. The Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. The Company's definition of 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.

Adjusted EBITDA, Adjusted EBITDA excluding Special items, Third-party sales excluding Year-over-Year Material and other inflationary cost pass through, Adjusted EBITDA margin excluding Special items, and Adjusted EBITDA margin excluding Special items and Year-over-Year Material and other inflationary cost pass through are non-GAAP financial measures. Management believes that these measures are meaningful to investors because they provide additional information with respect to the Company's operating performance and the Company’s ability to meet its financial obligations. The Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. The Company's definition of 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.

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