10-QPeriod: Q2 FY2018

Howmet Aerospace Inc. Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 2, 2018For Securities:HWM

Summary

Howmet Aerospace Inc. (HWM), formerly Arconic Inc., reported sales of $3.57 billion for the second quarter of 2018, an increase of 10% year-over-year, driven by strong volume growth across key markets such as aerospace, automotive, and construction, along with higher aluminum prices and favorable foreign currency movements. Despite revenue growth, net income for the quarter declined to $120 million ($0.24 per diluted share) from $212 million ($0.43 per diluted share) in the prior year. This decrease was primarily influenced by the absence of a significant gain from a debt-for-equity exchange in the prior year, higher aluminum prices, and certain one-time costs, which offset the positive contributions from sales volume and reduced selling, general, administrative, and interest expenses. The company experienced a shift in its cost of goods sold as a percentage of sales, rising to 81.2% from 78.2% year-over-year, attributed to increased aluminum prices, an unfavorable product mix, and specific charges, including a $23 million inventory adjustment. Cash flow from operations was negative for the first six months of 2018, showing an outflow of $260 million, compared to $316 million in the prior year, primarily due to higher working capital requirements and pension contributions, partially offset by improved operating results.

Financial Highlights

50 data points
Beta

Revenue

$3.57B

Net Income

$120.00M

3.4% Net Margin

EPS (Diluted)

$0.24

Total Assets

$18.22B

Cash & Equivalents

$1.46B

Free Cash Flow

$5.00M

Financial Statements
Beta
Revenue$3.57B
R&D Expenses$29.00M
SG&A Expenses$158.00M
Operating Income$324.00M
Interest Expense$89.00M
Net Income$120.00M
EPS (Basic)$0.25
EPS (Diluted)$0.24
Shares Outstanding (Basic)483.00M
Shares Outstanding (Diluted)502.00M

Key Highlights

  • 1Sales increased by 10% to $3.57 billion in Q2 2018 compared to Q2 2017, driven by volume and aluminum prices.
  • 2Net income decreased by 43% to $120 million ($0.24/share) in Q2 2018 from $212 million ($0.43/share) in Q2 2017, largely due to the absence of a prior year gain and increased costs.
  • 3Cost of goods sold as a percentage of sales increased to 81.2% from 78.2% year-over-year, impacted by higher aluminum prices and an inventory adjustment charge.
  • 4Restructuring and other charges significantly decreased to $15 million in Q2 2018 from $26 million in Q2 2017.
  • 5Interest expense decreased by 51% to $89 million in Q2 2018 due to lower debt levels and the absence of early redemption costs.
  • 6The company continues to face significant litigation and environmental remediation matters, with ongoing assessments and potential future liabilities.
  • 7Arconic announced plans to sell its Building and Construction Systems (BCS) business in July 2018, as part of its portfolio review strategy.

Frequently Asked Questions

The decrease in net income was primarily driven by the absence of a significant gain from a debt-for-equity exchange with investment banks that occurred in the second quarter of 2017. This, combined with higher aluminum prices, increased costs related to customer claims settlements, and a physical inventory adjustment charge, more than offset the positive impact of sales volume growth and lower selling, general, administrative, and interest expenses.

Rising aluminum prices are negatively impacting the company's profitability. While higher prices contribute to increased sales revenue, they also significantly increase the cost of goods sold, leading to a higher COGS as a percentage of sales (81.2% in Q2 2018 vs. 78.2% in Q2 2017). This, along with unfavorable product mix, puts pressure on profit margins.

For the first six months of 2018, the company used $260 million in cash from operations, an improvement from $316 million in the prior year period. However, cash usage was higher than expected due to increased working capital requirements (receivables and inventories) and significant pension contributions. While there was an improvement, managing working capital and pension funding remains a key focus for improving operating cash flow.

Arconic is involved in several significant legal and environmental matters. These include ongoing environmental remediation projects, most notably the Grasse River PCB cleanup in Massena, NY. Legally, the company is dealing with class-action lawsuits related to the Reynobond PE product and the Grenfell Tower fire, as well as a tax audit in Spain. While the company believes these cases are without merit, they present potential future liabilities and ongoing costs.