Howmet Aerospace sees revenue decline 37 percent in Q3

Howmet Aerospace, headquartered in Pittsburgh, has reported revenue of $1.13 billion for the third quarter of 2020, a year-over-year decrease of 37 percent, which the company attributes to disruptions in the commercial aerospace and commercial transportation markets, primarily driven by the COVID-19 pandemic and Boeing 737 Max production declines. The company says these declines were somewhat offset by growth in defense aerospace and industrial gas turbine markets.

The company’s primary businesses focus on jet engine components, aerospace fastening systems and titanium structural parts necessary for mission-critical performance and efficiency in aerospace and defense applications, as well as forged aluminum wheels for commercial transportation.

Howmet Aerospace says income from continuing operations totaled $36 million, or 8 cents per share, in the third quarter versus income from continuing operations of $58 million, or 13 cents per share for the same quarter in 2019. Income from continuing operations excluding special items was $13 million, or 3 cents per share, in the third quarter of 2020 compared with $148 million, or 33 cents per share, in the third quarter of 2019. Quarterly income from continuing operations included a $23 million benefit from special items, principally related to a benefit of discrete tax items, partially offset by restructuring and other charges.

Howmet’s operating income for the quarter was $73 million versus $256 million in the third quarter of 2019. Operating income excluding special items was $100 million, down 69 percent year over year, and includes the buyout of an unfavorable long-term contract for $8 million. The year-over-year decline was also because of significant disruptions in the commercial aerospace and commercial transportation markets driven by COVID-19 and 737 Max production declines resulting in unfavorable volume and product mix, partly offset by growth in the defense aerospace and industrial gas turbine markets, variable and fixed cost reductions and favorable product pricing, according to the company. Operating income margin, excluding special items, was down approximately 900 basis points year over year to 8.8 percent.

In the news release announcing its quarterly performance, Howmet Aerospace Executive Chairman and Co-Chief Executive Officer John Plant says, “As expected, Howmet Aerospace faced significant headwinds in the third quarter 2020 from the impact of the COVID-19 pandemic, reflected in our commercial aerospace revenues down 56 percent year over year. Nevertheless, third-quarter 2020 results were in line with our expectations and included strong cash generation. We continue to focus on price increases, variable cost flexing, structural cost reduction and capex reduction to drive free cash flow.”

Plant continues, “We expect that third-quarter 2020 revenue and earnings will represent the low point for the year as commercial transportation and industrial gas turbine markets continue to recover, and we see fourth-quarter 2020 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins returning to the 20 percent to 21 percent range. In fact, we have improved our full-year 2020 outlook, strengthening sales, increasing adjusted EBITDA and lifting adjusted earnings per share. Howmet Aerospace remains focused on the trajectory of margins as we move into 2021.”

He adds that Howmet’s liquidity position is “strong,” which he attributes to the company’s “strict and disciplined approach to costs and spending.” Plant says the company expects to end the year with approximately $1.5 billion in cash, adding that its $1 billion revolving credit facility remains undrawn.

Cash provided from operations during the quarter was $35 million, cash used for financing activities was $62 million and cash provided from investing activities was $108 million. Adjusted free cash flow for the third quarter was $143 million, inclusive of an approximate $45 million reduction in Howmet accounts receivable securitization program and $14 million of cash severance payments, the company notes.

Howmet’s Engine Products segment reported revenue of $485 million, a decrease of 43 percent from Q3 2019 because of declines in the commercial aerospace market resulting from COVID-19 and 737 Max production declines, partly offset by growth in the defense aerospace and industrial gas turbine markets. Segment operating profit was $39 million, down 76 percent year over year, driven by volume declines and an $8 million impact from the exit of an unfavorable long-term contract, partially offset by variable and fixed cost reductions and favorable product pricing. Segment operating profit margin decreased approximately 1,110 basis points year over year to 8 percent.

Its Fastening Systems segment reported revenue of $271 million, a decrease of 31 percent year over for the quarter, in light of declines in the commercial aerospace and commercial transportation markets, primarily driven by COVID-19 and 737 Max production declines, according to the company. Segment operating profit was $33 million, a 68 percent reduction year over year, driven by volume declines, unfavorable product mix and delayed cost actions in Europe. The negatives were partially offset by other variable and fixed cost reductions and favorable product pricing, Howmet says. Segment operating profit margin decreased approximately 1,390 basis points year over year to 12.2 percent.

The company’s Engineered Structures segment reported revenue of $206 million, a decrease of 35 percent year over year because of declines in the commercial aerospace market. Its operating profit was $10 million, down 75 percent year over year, driven by volume declines and unfavorable product mix, partially offset by variable and fixed cost reductions and favorable product pricing. Segment operating profit margin decreased approximately 770 basis points year over year to 4.9 percent, according to Howmet.

Its Forged Wheels segment reported revenue of $172 million, a decrease of 29 percent year over year due to declines in the commercial transportation markets related to the pandemic. Segment operating profit was $35 million, down 42 percent year over year, driven by volume declines, partially offset by variable and fixed cost reductions. Segment operating profit margin decreased approximately 460 basis points year over year to 20.3 percent.

Howmet also updated its outlook for the year:

• Full-year 2020 revenue increased to a range of $5.22 billion to $5.28 billion, while its adjusted EBITDA increased to $1.04 billion to $1.07 billion, its adjusted EBITDA margin narrowed to 19.8 percent to 20.2 percent and its earnings per share excluding special items increased to 68 cents to 76 cents.
• Fourth quarter 2020 revenue increased to $1.2 billion to $1.26 billion, while adjusted EBITDA increased to $240 million to $270 million and its EBITDA margin was adjusted to 20 percent to 21 percent, with earnings per share excluding special items ranging from 13 cents to 21 cents.
• Second quarter 2020 to fourth quarter 2020 adjusted free cash flow remained unchanged at $350 million to $450 million.
• Howmet predicted a year-end 2020 cash balance of approximately $1.5 billion.