10-QPeriod: Q3 FY2019

Howmet Aerospace Inc. Quarterly Report for Q3 Ended Sep 30, 2019

Filed November 5, 2019For Securities:HWM

Summary

Howmet Aerospace Inc. (HWM), formerly Arconic Inc., reported third quarter and nine-month results for 2019, highlighting a shift in strategic direction with a planned separation into two independent companies: Howmet Aerospace (Engineered Products and Forgings) and Arconic Corporation (Global Rolled Products). Sales saw a modest increase of 1% in Q3 and 2% year-to-date, primarily driven by volume growth in aerospace and transportation sectors, alongside favorable pricing in certain segments. However, net income declined significantly, largely due to substantial restructuring and other charges, particularly a $428 million impairment of long-lived assets within the Engineered Products and Forgings segment and charges related to planned business divestitures. The company's financial position shows a decrease in cash and cash equivalents compared to the prior year-end, influenced by significant share repurchases totaling $1.1 billion year-to-date. Debt levels have decreased, with the company repaying its convertible notes. Despite operational improvements and cost-saving initiatives, the substantial restructuring charges masked underlying operational performance, making it crucial for investors to monitor the progress and execution of the planned separation and its impact on future profitability and financial health.

Financial Highlights

50 data points
Beta

Revenue

$1.79B

Net Income

$95.00M

5.3% Net Margin

EPS (Diluted)

$0.21

Total Assets

$17.48B

Cash & Equivalents

$1.32B

Free Cash Flow

$42.00M

Financial Statements
Beta
Revenue$1.79B
R&D Expenses$6.00M
SG&A Expenses$89.00M
Operating Income$256.00M
Interest Expense$85.00M
Net Income$95.00M
EPS (Basic)$0.22
EPS (Diluted)$0.21
Shares Outstanding (Basic)436.00M
Shares Outstanding (Diluted)457.00M

Key Highlights

  • 1Sales increased by 1% to $3.56 billion in Q3 2019 and by 2% to $10.79 billion for the nine months ended September 30, 2019, driven by volume growth in aerospace and transportation, and favorable pricing in certain segments.
  • 2Net income declined significantly, with Q3 net income at $95 million ($0.21 diluted EPS) compared to $161 million ($0.32 diluted EPS) in Q3 2018, and year-to-date net income at $161 million ($0.35 diluted EPS) versus $424 million ($0.86 diluted EPS) in the prior year.
  • 3Restructuring and other charges significantly impacted profitability, totaling $119 million in Q3 2019 and $630 million year-to-date, largely due to a $428 million impairment of long-lived assets in the Engineered Products and Forgings segment and charges related to divestitures.
  • 4The company repurchased $1.1 billion of its common stock year-to-date, contributing to a decrease in cash and cash equivalents from $2.28 billion at year-end 2018 to $1.32 billion at September 30, 2019.
  • 5Long-term debt decreased to $4.91 billion at September 30, 2019, from $5.90 billion at December 31, 2018, aided by the maturity and repayment of $403 million in convertible notes.
  • 6The company is undergoing a planned separation into two independent, publicly-traded companies: Howmet Aerospace Inc. (EP&F businesses) and Arconic Corporation (GRP businesses), targeting completion in the second quarter of 2020.
  • 7Segment operating profit for Engineered Products and Forgings increased by 28% in Q3 2019 to $363 million, while Global Rolled Products saw a 50% increase to $161 million in Q3 2019, indicating underlying operational improvements despite the net income decline.

Frequently Asked Questions

The filing indicates a mixed financial performance. While sales showed modest growth driven by aerospace and transportation demand, net income was substantially impacted by significant restructuring charges, including asset impairments and planned divestitures. The company is undergoing a major separation, which adds complexity and potential costs. Investors should closely monitor the execution of the separation strategy and its impact on future profitability, as well as the ongoing demand in key end markets like aerospace.

The primary driver for the decrease in net income was a substantial increase in 'Restructuring and other charges'. This included a significant $428 million impairment of long-lived assets within the Engineered Products and Forgings segment, charges related to the planned sale of the Brazilian rolling mill and UK forgings business, and other layoff and asset impairment costs. These charges significantly outweighed the operational improvements seen in segment operating profits.

The planned separation aims to create two more focused, independent companies: Howmet Aerospace (remaining company, focused on EP&F) and Arconic Corporation (spun-off, focused on GRP). This is expected to allow each entity to better pursue its strategic objectives and capital allocation strategies. The separation process itself incurred costs of $25 million in Selling, General, and Administrative expenses in Q3 2019 and $44 million year-to-date. Investors should track the progress of this separation, which is targeted for completion in Q2 2020, and its potential effects on operational efficiency and shareholder value.

Cash and cash equivalents decreased to $1.32 billion at September 30, 2019, from $2.28 billion at the end of 2018, largely due to $1.1 billion in share repurchases. The company has reduced its long-term debt, notably repaying its convertible notes upon maturity. Arconic maintains a $3 billion revolving credit facility and other credit agreements, indicating access to liquidity, though credit ratings are mixed (BBB- Negative from S&P, Ba2 Speculative Grade from Moody's, BB+ Positive from Fitch). The significant share repurchases suggest a focus on returning capital to shareholders, which, coupled with the strategic separation, implies active management of its financial resources.