HOWMET AEROSPACE INC. (
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 2022, the Company derived approximately 47% of its revenue from products sold to the commercial aerospace market which is substantially less than the pre-pandemic 2019 annual rate of approximately 60%. Due to the global COVID-19 pandemic and its impact on the commercial aerospace industry to date, there has been a decrease in domestic and international air travel, which in turn has adversely affected demand for narrow-body and wide-body aircraft. Although domestic air travel is increasing, it is still below pre-pandemic 2019 levels on an average monthly basis. Year-to-date international travel also continues to be lower than pre-pandemic 2019 levels. Narrow-body demand is returning faster than wide-body demand and the commercial wide-body aircraft market is taking longer to recover, which is creating a shift in our product mix compared to pre-pandemic conditions. In addition to the impact from the pandemic, the timing and level of future aircraft builds by original equipment manufacturers are subject to changes and uncertainties, such as declines in Boeing 787 production rates due to delays in its recertification, which may cause our future results to differ from prior periods due to changes in product mix in certain segments. 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 endedDecember 31, 2021 .
Results of Operations
Earnings Summary:
Sales. Sales were$1,433 in the third quarter of 2022 compared to$1,283 in the third quarter of 2021 and$4,150 in the nine months endedSeptember 30, 2022 compared to$3,687 in the nine months endedSeptember 30, 2021 . The increase of$150 , or 12%, in the third quarter of 2022 was primarily due to higher sales of 23% from the commercial aerospace market, an increase in material cost pass through of approximately$70 , and favorable product pricing of$17 , partially offset by lower sales in the defense aerospace market. The increase of$463 , or 13%, in the nine months endedSeptember 30, 2022 was primarily due to higher sales of 28% from the commercial aerospace market, an increase in material cost pass through of approximately$170 , and favorable product pricing of$50 , partially offset by lower sales in the defense aerospace market. Cost of goods sold ("COGS"). COGS as a percentage of Sales was 73.7% in the third quarter of 2022 compared to 72.3% in the third quarter of 2021 and 72.1% in both the nine months endedSeptember 30, 2022 andSeptember 30, 2021 . The increase in the third quarter of 2022 was primarily due to total COGS charges of$25 in the third quarter of 2022 related to fires that occurred at a Fastening Systems plant inFrance in 2019 (the "France Plant Fire") and at a Forged Wheels plant inBarberton, Ohio in 2020 (the "Barberton Plant Fire"), and a mechanical failure resulting in substantial heat and fire-related damage to equipment at the Company's cast house inBarberton, Ohio in the third quarter of 2022 (the "Barberton Cast House Incident"), compared to total COGS charges of$1 related to the France Plant Fire and Barberton Plant Fire in the third quarter of 2021, as well as material cost pass through and increased headcount, primarily in the Engine Products segment, in anticipation of future revenue increases, partially offset by higher volumes and favorable product pricing. COGS was flat in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 primarily due to COGS charges of$32 in the nine months endedSeptember 30, 2022 related to the France Plant Fire, Barberton Plant Fire, and Barberton Cast House Incident, compared to net charges of$7 in the nine months endedSeptember 30, 2021 related to the France Plant Fire and theBarberton Plant Fire , as well as material cost pass through and increased headcount, primarily in the Engine Products and Fastening Systems segments, in anticipation of future revenue increases, offset by higher volumes and favorable product pricing. The Company has submitted insurance claims related to these plant fires. The Company anticipates additional charges of approximately$25 to$30 in the fourth quarter of 2022, with further impacts in subsequent quarters as the businesses continue to recover from the fires. 24 -------------------------------------------------------------------------------- Selling, general administrative, and other expenses ("SG&A"). SG&A expenses were$73 in the third quarter of 2022 compared to$70 in the third quarter of 2021 and$225 in the nine months endedSeptember 30, 2022 compared to$190 in the nine months endedSeptember 30, 2021 . The increase of$3 , or 4%, in the third quarter of 2022 was primarily due to higher employment costs. The increase of$35 , or 18%, in the nine months endedSeptember 30, 2022 was primarily due to higher employment and legacy costs, as well as legal and other advisory reimbursements received in 2021 that did not occur in 2022. Research and development expenses ("R&D"). R&D expenses were$7 in the third quarter of 2022 and$4 in the third quarter of 2021, an increase of$3 , or 75%. R&D expenses were$23 in the nine months endedSeptember 30, 2022 and$13 in the nine months endedSeptember 30, 2021 , an increase of$10 , or 77%. The increase in the third quarter and nine months endedSeptember 30, 2022 was primarily due to higher spending on technology projects. Restructuring and other charges. Restructuring and other charges were$4 in the third quarter of 2022 compared to$8 in the third quarter of 2021 or a decrease of$4 . Restructuring and other charges were$12 in the nine months endedSeptember 30, 2022 compared to$22 in the nine months endedSeptember 30, 2021 or a decrease of$10 . Restructuring and other charges for the third quarter of 2022 were primarily due to charges forU.S. and Canadian pension plan settlements of$3 and exit related costs, including accelerated depreciation, of$1 . Restructuring and other charges for the nine months endedSeptember 30, 2022 were primarily due to charges forU.S. pension plan settlements of$7 and exit related costs, including accelerated depreciation, of$6 , partially offset by a reversal of$1 for a layoff reserve related to a prior period. Restructuring and other charges for the third quarter and nine months endedSeptember 30, 2021 were primarily due to charges for pension plan settlements and exit related costs. Most of the Company's global pension plans currently offer lump-sum payment options.
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$57 in the third quarter of 2022 compared to$63 in the third quarter of 2021 and$172 in the nine months endedSeptember 30, 2022 compared to$201 in the nine months endedSeptember 30, 2021 . The decrease of$6 , or 10%, in the third quarter of 2022 and$29 , or 14%, in the nine months endedSeptember 30, 2022 was primarily due to a reduced average level of debt for the third quarter and nine months endedSeptember 30, 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.
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 zero in the third quarter of 2022 compared to$118 in the third quarter of 2021 and$2 in the nine months endedSeptember 30, 2022 compared to$141 in the nine months endedSeptember 30, 2021 . The decrease of$118 in the third quarter of 2022 and$139 in the nine months endedSeptember 30, 2022 was primarily due to the debt premiums paid on the 6.875% Notes due 2025 and the 5.125% Notes due 2024 in the third quarter of 2021, and the 5.870% Notes due 2022 in the second quarter of 2021.
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$67 in the third quarter of 2022 compared to$1 in the third quarter of 2021 and Other expense, net was$67 in the nine months endedSeptember 30, 2022 compared to$13 in the nine months endedSeptember 30, 2021 . The increase of$66 in the third quarter of 2022 was primarily due to the adverse judgment of$65 related toLehman Brothers International (Europe) ("LBIE") swaps that were entered into in 2007 and 2008, which were assumed as part of the Firth Rixson acquisition in 2014. The increase of$54 in the nine months endedSeptember 30, 2022 was primarily due to the adverse judgment related to the LBIE legal proceeding of$65 and an increase from net realized and unrealized losses of$5 , primarily due to unrecognized losses on debt securities investments, partially offset by impacts of deferred compensation arrangements of$16 and an increase in foreign currency gains of$8 . Provision (benefit) for income taxes. The estimated annual effective tax rate, before discrete items, applied to ordinary income was 24.3% in both the third quarter and nine months endedSeptember 30, 2022 compared to 29.7% in both the third quarter and nine months endedSeptember 30, 2021 . The tax rate including discrete items was 23.1% (provision on income) in the third quarter of 2022 compared to 17.4% (benefit on income) in the third quarter of 2021. A discrete tax benefit of$2 was recorded in the third quarter of 2022 compared to a discrete tax benefit of$12 in the third quarter of 2021. The tax rate including discrete items was 21.8% in the nine months endedSeptember 30, 2022 compared to 26.4% in the nine months endedSeptember 30, 2021 . A discrete tax benefit of$11 was recorded in the nine months endedSeptember 30, 2022 compared to a discrete tax benefit of$9 in the nine months endedSeptember 30, 2021 . The estimated annual effective tax rate is a reflection of global income across numerous jurisdictions. As a result of the recovery in domestic profitability, the annual effective tax rate has decreased. Furthermore, onAugust 16, 2022 , theU.S. enacted the Inflation Reduction Act ("IRA"), which is not expected to 25 --------------------------------------------------------------------------------
have a material impact on the income tax provision. Management is currently evaluating provisions of the IRA that may have an impact on the 2023 Consolidated Financial Statements.
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$80 , or$0.19 per diluted share, in the third quarter of 2022 compared to$27 , or$0.06 per diluted share, in the third quarter of 2021 and$358 , or$0.84 per diluted share, in the nine months endedSeptember 30, 2022 compared to$181 , or$0.41 per diluted share, in the nine months endedSeptember 30, 2021 . The increase of$53 in the third quarter of 2022 was primarily due to higher sales in the commercial aerospace market, favorable product pricing, a decrease in the Loss on debt redemption, a decrease in Interest expense, net, due to lower long-term debt levels, and a decrease in Restructuring and other charges, partially offset by lower sales in the defense aerospace market, the adverse judgment related to the LBIE legal proceeding, and an increase in Research and development expenses. The increase of$177 in the nine months endedSeptember 30, 2022 was primarily due to higher sales in the commercial aerospace market, favorable product pricing, a decrease in the Loss on debt redemption, a decrease in Interest expense, net, due to lower long-term debt levels, and a decrease in Restructuring and other charges, partially offset by lower sales in the defense aerospace market, an increase in material and other inflationary costs, the adverse judgment related to the LBIE legal proceeding, an increase in the provision for income taxes primarily driven by an increase in income before income taxes, and an increase in Research and development expenses.
Segment Information
The Company's operations consist of four worldwide reportable segments: Engine
Products, Fastening Systems, Engineered Structures, and Forged Wheels. Segment
performance under Howmet's management reporting system is evaluated based on a
number of factors; however, the primary measure of performance is Segment
Adjusted EBITDA. Prior to the first quarter of 2022, the Company used Segment
operating profit as its primary measure of performance. However, the Company's
Chief Executive Officer ("CEO") believes that Segment Adjusted EBITDA is now a
better representation of its business because it provides additional information
with respect to the Company's operating performance and the Company's ability to
meet its financial obligations. Howmet's definition of Segment Adjusted EBITDA
(Earnings before interest, taxes, depreciation, and amortization) is net margin
plus an add-back for depreciation and amortization. Net margin is equivalent to
Sales minus the following items: Cost of goods sold; Selling, general
administrative, and other expenses; Research and development expenses; and
Provision for depreciation and amortization. Special items, including
Restructuring and other charges, are excluded from Net margin and Segment
Adjusted EBITDA. Segment Adjusted EBITDA may not be comparable to similarly
titled measures of other companies. Differences between the total segment and
consolidated totals are in Corporate (See Note C to the Consolidated
Financial Statements in Part I, Item 1 of this Form 10-Q for a description
of each segment).
The Company has aligned its operations consistent with how the CEO assesses operating performance and allocates capital.
The Company produces aerospace engine parts and components and aerospace
fastening systems for Boeing 737 MAX ("737 MAX") airplanes. In late December
2019 , Boeing announced a temporary suspension of the production of 737 MAX
airplanes. This decline in production had a negative impact on sales and Segment
Adjusted EBITDA in the Engine Products, Fastening Systems, and Engineered
Structures segments in 2020 and the first half of 2021. While regulatory
authorities in the United States and certain other jurisdictions lifted
grounding orders beginning in late 2020, our sales remained at lower levels
through the first half of 2021 due to the residual impacts of the 737 MAX
grounding.
The Company also produces aerospace engine parts and components and aerospace
fastening systems for Boeing 787 airplanes. In 2020 and 2021, Boeing reduced
production rates of the 787 airplanes. Boeing paused deliveries of its 787
aircraft in May 2021 . The significant decline in Boeing 787 production rates had
a negative impact on sales and Segment Adjusted EBITDA in the Engine Products,
Fastening Systems, and Engineered Structures segments in 2021 and the first
three quarters of 2022. We expect reduced production rates to continue to have a
negative impact on our sales and Segment Adjusted EBITDA for 2022.
Engine Products
Third quarter ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Third-party sales $ 683 $ 599 $ 1,966 $ 1,677
Segment Adjusted EBITDA 186 151 538 413
Segment Adjusted EBITDA Margin 27.2 % 25.2 % 27.4 % 24.6 %
Third-party sales for the Engine Products segment increased$84 , or 14%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as an increase in material cost pass through.
Third-party sales for the Engine Products segment increased
26
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compared to the nine months ended
Segment Adjusted EBITDA for the Engine Products segment increased$35 , or 23%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as strong productivity gains. The segment added approximately 260 net headcount in the third quarter of 2022 in anticipation of future revenue increases. Segment Adjusted EBITDA for the Engine Products segment increased$125 , or 30%, in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as strong productivity gains. The segment added approximately 1,040 net headcount in the nine months endedSeptember 30, 2022 in anticipation of future revenue increases.
Segment Adjusted EBITDA Margin for the Engine Products segment increased approximately 200 basis points in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as strong productivity gains, partially offset by an increase in material cost pass through.
Segment Adjusted EBITDA Margin for the Engine Products segment increased approximately 280 basis points in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as strong productivity gains, partially offset by an increase in material cost pass through. For the full year 2022 compared to 2021, demand in the commercial aerospace, industrial gas turbine, and oil and gas markets is expected to increase. An increase in material costs is expected to contribute to an increase in sales as the Company generally passes through these costs. Fastening Systems Third quarter ended Nine months ended September 30, September 30, 2022 2021 2022 2021 Third-party sales$ 291 $ 254 $ 832 $ 788 Segment Adjusted EBITDA 64 59 176 179 Segment Adjusted EBITDA Margin 22.0 % 23.2 %
21.2 % 22.7 %
Third-party sales for the Fastening Systems segment increased$37 , or 15%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher volumes in the commercial aerospace market, with narrow body recovery more than offsetting Boeing 787 production declines, and an increase in material cost pass through. Third-party sales for the Fastening Systems segment increased$44 , or 6%, in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to higher volumes in the commercial aerospace market, with narrow body recovery more than offsetting Boeing 787 production declines, higher volumes in the commercial transportation market, and an increase in material cost pass through, partially offset by lower volumes in the defense aerospace and industrial markets. Segment Adjusted EBITDA for the Fastening Systems segment increased$5 , or 8%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to favorable volumes in the narrow body commercial aerospace market, partially offset by Boeing 787 production declines. Segment Adjusted EBITDA for the Fastening Systems segment decreased$3 , or 2%, in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to Boeing 787 production declines, lower volumes in the defense aerospace and industrial markets, and inflationary costs, partially offset by favorable volumes in the narrow body commercial aerospace and commercial transportation markets. The segment added approximately 410 net headcount in the nine months endedSeptember 30, 2022 in anticipation of future revenue increases.
Segment Adjusted EBITDA Margin for the Fastening Systems segment decreased approximately 120 basis points in the third quarter of 2022 compared to the third quarter of 2021, primarily due to Boeing 787 production declines, partially offset by favorable volumes in the narrow body commercial aerospace market.
Segment Adjusted EBITDA Margin for the Fastening Systems segment decreased approximately 150 basis points in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to Boeing 787 production declines, lower volumes in the defense aerospace and industrial markets, and inflationary costs, partially offset by favorable volumes in the narrow body commercial aerospace and commercial transportation markets. 27 -------------------------------------------------------------------------------- For the full year 2022 compared to 2021, demand in the commercial aerospace and commercial transportation markets is expected to increase. An increase in material costs is expected to contribute to an increase in sales as the Company generally passes through these costs. Engineered Structures Third quarter ended Nine months ended September 30, September 30, 2022 2021 2022 2021 Third-party sales$ 193 $ 199 $ 560 $ 535 Segment Adjusted EBITDA 28 26 77 72 Segment Adjusted EBITDA Margin 14.5 % 13.1 %
13.8 % 13.5 %
Third-party sales for the Engineered Structures segment decreased$6 , or 3%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to lower volumes in the defense aerospace market and Boeing 787 production declines, partially offset by higher volumes in the narrow body commercial aerospace market and an increase in material cost pass through. Third-party sales for the Engineered Structures segment increased$25 , or 5%, in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to higher volumes in the narrow body commercial aerospace market and an increase in material cost pass through, partially offset by lower volumes in the defense aerospace market and Boeing 787 production declines. Segment Adjusted EBITDA for the Engineered Structures segment increased$2 , or 8%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher volumes in the narrow body commercial aerospace market, partially offset by lower volumes in the defense aerospace market and Boeing 787 production declines. Segment Adjusted EBITDA for the Engineered Structures segment increased$5 , or 7%, in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , with higher volumes in the narrow body commercial aerospace market, partially offset by lower volumes in the defense aerospace market and Boeing 787 production declines as well as inflationary costs. Segment Adjusted EBITDA Margin for the Engineered Structures segment increased approximately 140 basis points in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher volumes in the narrow body commercial aerospace market, partially offset by lower volumes in the defense aerospace market and Boeing 787 production declines. Segment Adjusted EBITDA Margin for the Engineered Structures segment increased approximately 30 basis points in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to higher volumes in the narrow body commercial aerospace market, partially offset by lower volumes in the defense aerospace market and Boeing 787 production declines as well as continued inflationary cost pressures. For the full year 2022 compared to 2021, demand in the commercial aerospace market is expected to increase. However, demand in the defense aerospace market is expected to be down. An increase in material costs is expected to contribute to an increase in sales as the Company generally passes through these costs. Forged Wheels Third quarter ended Nine months ended September 30, September 30, 2022 2021 2022 2021 Third-party sales$ 266 $ 231 $ 792 $ 687 Segment Adjusted EBITDA 64 72 206 222 Segment Adjusted EBITDA Margin 24.1 % 31.2 %
26.0 % 32.3 %
28
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Third-party sales for the Forged Wheels segment increased $35 , or 15%, in the
third quarter of 2022 compared to the third quarter of 2021, primarily due to an
increase in aluminum material and other inflationary cost pass through and a 2%
increase in volumes, partially offset by unfavorable foreign currency movements.
Third-party sales for the Forged Wheels segment increased $105 , or 15%, in the
nine months ended September 30, 2022 compared to the nine months ended
September 30, 2021 , primarily due to an increase in aluminum material and other
inflationary cost pass through and higher volumes, partially offset by
unfavorable foreign currency movements.
Segment Adjusted EBITDA for the Forged Wheels segment decreased $8 , or 11%, in
the third quarter of 2022 compared to the third quarter of 2021, primarily due
to unfavorable foreign currency movements, partially offset by higher volumes.
Segment Adjusted EBITDA for the Forged Wheels segment decreased $16 , or 7%, in
the nine months ended September 30, 2022 compared to the nine months ended
September 30, 2021 , primarily due to unfavorable foreign currency movements,
partially offset by higher volumes.
Segment Adjusted EBITDA Margin for the Forged Wheels segment decreased
approximately 710 basis points in the third quarter of 2022 compared to the
third quarter of 2021, primarily due to aluminum material and European energy
cost pass through as well as unfavorable foreign currency movements, partially
offset by higher volumes.
Segment Adjusted EBITDA Margin for the Forged Wheels segment decreased
approximately 630 basis points in the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021 , primarily due to aluminum
material and European energy cost pass through as well as unfavorable foreign
currency movements, partially offset by higher volumes.
For the full year 2022 compared to 2021, demand in the commercial transportation
markets served by Forged Wheels is expected to increase in most regions. An
increase in aluminum material and other inflationary costs are expected to
contribute to an increase in sales as the Company generally passes through these
costs. However, sales in the Forged Wheels segment could be negatively impacted
by non-wheel component supply chain constraints at our customers.
Reconciliation of Total Segment Adjusted EBITDA to Income before income taxes
Third quarter ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Income before income taxes $ 104 $ 23 $ 458 $ 246
Loss on debt redemption - 118 2 141
Interest expense, net 57 63 172 201
Other expense, net(1) 67 1 67 13
Operating income $ 228 $ 205 $ 699 $ 601
Segment provision for depreciation and
amortization 64 65 193 195
Unallocated amounts:
Restructuring and other charges 4 8 12 22
Corporate expense 46 30 93 68
Total Segment Adjusted EBITDA $ 342 $ 308 $ 997 $ 886 (1)See the Contingencies section of Note Q to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
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 increased$16 , or 53%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher costs related to the France Plant Fire, the Barberton Plant Fire, and the Barberton Cast House Incident of$24 , partially offset by 2021 costs of$9 associated with closures, shutdowns, and other items which did not recur in 2022. 29 -------------------------------------------------------------------------------- Corporate expense increased$25 , or 37%, in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to higher costs related to the France Plant Fire, the Barberton Plant Fire, and the Barberton Cast House Incident of$24 , higher legal and other advisory reimbursements received in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2022 of$1 , and higher employment and legacy costs, partially offset by 2021 costs of$8 associated with closures, shutdowns, and other items which did not recur in 2022.
Environmental Matters
See the Environmental Matters section of Note Q to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Subsequent Events
See Note R to the Consolidated Financial Statements in Part I, Item 1
of
this Form 10-Q for subsequent events.
30
--------------------------------------------------------------------------------Liquidity and Capital Resources
Operating Activities
Cash provided from operations was$278 in the nine months endedSeptember 30, 2022 compared to$146 in the nine months endedSeptember 30, 2021 . The increase of$132 , or 90%, was primarily due to higher operating results of$79 , a decrease in working capital of$35 , and lower pension contributions of$34 . The components of the change in working capital primarily included accrued expenses of$139 , favorable changes in receivables of$136 , including employee retention credit receivables, a change in accounts payable of$67 , and taxes, including income taxes, of$14 , partially offset by inventories of$320 and prepaid expenses and other current assets of$1 .
Management expects Howmet's estimated pension contributions and other
postretirement benefit payments in 2022 to be approximately
Financing Activities
Cash used for financing activities was$437 in the nine months endedSeptember 30, 2022 compared to$1,174 in the nine months endedSeptember 30, 2021 . The decrease of$737 , or 63%, was primarily due to less payments made in connection with the redemption of long-term debt of$1,431 (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference), a reduction in the premiums paid on the early redemption of debt of$131 , and a reduction in debt issuance costs of$11 , partially offset by debt issuances in the third quarter of 2021 of$700 (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference), incremental common stock repurchases of$110 , and increased dividends paid to common stock shareholders of$16 . On an annual basis, the debt repurchases in 2022 will decrease Interest expense, net by approximately$3 .
The Company maintains a credit facility pursuant to its Five-Year Revolving Credit Agreement (the "Credit Agreement") with a syndicate of lenders and issuers named therein (See Note N to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for reference).
The Company has an effective shelf registration statement on Form S-3, filed with theSEC , which allows for offerings of debt securities from time to time. The Company may opportunistically issue new debt securities under such registration statement or otherwise in accordance with securities laws, including but not limited to in order to refinance existing indebtedness. The Company may in the future repurchase additional portions of its debt or equity securities from time to time, in either the open market or through privately negotiated transactions, in accordance with applicableSEC and other legal requirements. The timing, prices, and sizes of purchases depend upon prevailing trading prices, general economic and market conditions, and other factors, including applicable securities laws. Such purchases may be completed by means of trading plans established from time to time in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, block trades, private transactions, open market repurchases, tender offers, and/or accelerated share repurchase agreements or other derivative transactions. The Company's costs of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short and long-term debt ratings assigned to the Company by the major credit rating agencies.
The Company's credit ratings from the three major credit rating agencies are as follows:
Issuer Rating Outlook Date of Last Update
Standard and Poor's Ratings Service ("S&P") BB+ Stable December 3, 2021
Moody's Investors Service ("Moody's") Ba1 Stable April 27, 2022
Fitch Investors Service ("Fitch") BBB- Stable March 22, 2022
On April 27, 2022 , Moody's upgraded Howmet's long-term debt rating from Ba2 to
Ba1 citing the Company's ability to improve its financial leverage, strong cash
generation, and well-balanced financial policies and affirmed the current
outlook as stable.
On
Investing Activities
Cash used for investing activities was$106 in the nine months endedSeptember 30, 2022 compared to cash provided from investing activities of$144 in the nine months endedSeptember 30, 2021 . The change of$250 was primarily due to cash receipts from sold receivables of$267 in 2021, which did not have activity in the current year as a result of the termination of an accounts receivables securitization program inAugust 2021 , and an increase in capital expenditures of$10 . The net cash funding from the sale of accounts receivable was neither a use of cash nor a source of cash during 2022 and 2021. These changes were partially offset by incremental proceeds from the sale of assets of$34 , which was primarily due to the sale of the 31 -------------------------------------------------------------------------------- corporate center. In the second quarter of 2022, the Company sold the corporate headquarters inPittsburgh, PA. The proceeds from the sale of the corporate headquarters were$44 , excluding$3 of transaction costs, and a carrying value of$41 . The Company entered into a 12-year lease with the purchaser for a portion of the property.
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 byHowmet 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 reflectHowmet Aerospace's expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, statements, forecasts and outlook relating to the condition of end markets; future financial results or operating performance; future strategic actions;Howmet Aerospace's strategies, outlook, and business and financial prospects; and any future repurchases of its debt or equity securities. These statements reflect beliefs and assumptions that are based onHowmet Aerospace's perception of historical trends, current conditions and expected future developments, as well as other factorsHowmet Aerospace believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict, which could cause actual results to differ materially from those indicated by these statements. Such risks and uncertainties include, but are not limited to: (a) uncertainty of the duration, extent and impact of the COVID-19 pandemic onHowmet Aerospace's business, results of operations, and financial condition; (b) deterioration in global economic and financial market conditions generally (including as a result of COVID-19 and its effects, among other things, on global supply, demand, and distribution disruptions); (c) unfavorable changes in the markets served byHowmet Aerospace ; (d) the impact of potential cyber attacks and information technology or data security breaches; (e) the loss of significant customers or adverse changes in customers' business or financial conditions; (f) manufacturing difficulties or other issues that impact product performance, quality or safety; (g) inability of suppliers to meet obligations due to supply chain disruptions or otherwise; (h) the inability to achieve revenue growth, cash generation, cost savings, restructuring plans, cost reductions, improvement in profitability, or strengthening of competitiveness and operations anticipated or targeted; (i) inability to meet increased demand, production targets or commitments; (j) competition from new product offerings, disruptive technologies or other developments; (k) geopolitical, economic, and regulatory risks relating toHowmet Aerospace's global operations, including geopolitical and diplomatic tensions, instabilities and conflicts, as well as compliance withU.S. and foreign trade and tax laws, sanctions, embargoes and other regulations; (l) the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation, which can exposeHowmet Aerospace to substantial costs and liabilities; (m) failure to comply with government contracting regulations; (n) adverse changes in discount rates or investment returns on pension assets; and (o) the other risk factors summarized inHowmet Aerospace's Form 10-K for the year endedDecember 31, 2021 and other reports filed with theU.S. Securities and Exchange Commission . Market projections are subject to the risks discussed above and other risks in the market. The statements in a presentation or document are made as of the date of such presentation or document.Howmet Aerospace disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.
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