Howmet Aerospace Inc.

HWM

US4432011082

Aerospace & Defense

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HOWMET AEROSPACE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

February 16, 2021 at 04:53 pm EST

(dollars in millions, except per-share amounts)
Overview
Our Business
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 end markets.
Howmet is a global company operating in 20 countries. Based upon the country
where the point of shipment occurred, the United States and Europe generated 68%
and 21%, respectively, of Howmet's sales in 2020. In addition, Howmet has
operating activities in numerous countries and regions outside the United States
and Europe, including Canada, Mexico, China and Japan. Governmental policies,
laws and regulations, and other economic factors, including inflation and
fluctuations in foreign currency exchange rates and interest rates, affect the
results of operations in countries with such operating activities.
Management Review of 2020 and Outlook for the Future
In 2020, Sales decreased 26% over 2019 primarily as a result of lower volumes in
the commercial aerospace and commercial transportation markets driven by the
impacts of COVID-19 and 737 MAX and 787 production declines along with a
decrease in sales of $116 due to the divestiture of the forgings business in the
United Kingdom in December 2019, all partially offset by 14% and 28% sales
growth in the defense aerospace and industrial gas turbine markets,
respectively, as well as favorable product pricing.
In the segments, Segment operating profit decreased 36% from 2019 due to lower
volumes in the commercial aerospace and commercial transportation markets driven
by the impacts of COVID-19 and 737 MAX and 787 production declines and
unfavorable product mix, partially offset by favorable product pricing, net cost
savings and 14% and 28% sales growth in the defense aerospace and industrial gas
turbine markets, respectively.
Management continued its focus on liquidity and cash flows as well as improving
its operating performance through cost reductions, streamlined organizational
structures, margin enhancement, and profitable revenue generation. Management
has continued its intensified focus on capital efficiency. This focus and the
related results enabled Howmet to end 2020 with a solid financial position.
The following financial information reflects certain key highlights of Howmet's
2020 results:
•Sales of $5,259 down 26% from 2019, with significant reductions in sales in
commercial aerospace and commercial transportation markets, driven by COVID-19
and 737 MAX and 787 production declines;
•Net income from continuing operations of $211, or $0.48 per diluted share;
•Income from continuing operations before income taxes of $171, a decrease of
$39, or 19%, from 2019;
•Total segment operating profit of $890, a decrease of $500, or 36%, from
2019(1);
•Cash provided from operations of $9; cash used for financing activities of
$369; and cash provided from investing activities of $271;
•Cash on hand at the end of the year of $1,610; and
•Total debt of $5,075, primarily due to a decrease of $865 from 2019, reflecting
repayments of $2,040 along with $20 of other debt, partially offset by issuance
of debt during the second quarter of 2020 of $1,200 notes due 2025.
(1) See below in Results of Operations for the reconciliation of Total segment
operating profit to Income from continuing operations before income taxes.
The Company rapidly executed on the separation plan that was announced during
February 2019 with completion of the separation on April 1, 2020. The Company
separated into two independent, publicly-traded companies, Howmet Aerospace Inc.
and Arconic Corporation (the "Arconic Inc. Separation Transaction"). Howmet
Aerospace is comprised of the Engineered Products and Forgings businesses
(engine products, fastening systems, engineered structures, and forged wheels)
and is listed under the stock ticker of "HWM." Arconic Corporation is comprised
of the former Global Rolled Products segment (global rolled products, aluminum
extrusions, and building and construction systems) and is under the new company
name Arconic Corporation, listed on the New York Stock Exchange under the symbol
"ARNC."
Results of Operations
Earnings Summary
Sales. Sales for 2020 were $5,259 compared with $7,098 in 2019, a decrease of
$1,839, or 26%. The decrease was primarily a result of lower volumes in the
commercial aerospace and commercial transportation markets driven by the impacts
of
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COVID-19 and 737 MAX and 787 production declines along with a decrease in sales
of $116 due to the divestiture of the forgings business in the U.K. in December
2019, all partially offset by growth in the defense aerospace and industrial gas
turbine markets and favorable product pricing.
Sales for 2019 were $7,098 compared with $6,778 in 2018, an increase of $320, or
5%. The increase was primarily due to volume growth in aerospace, commercial
transportation, and industrial end markets; and favorable pricing when
fulfilling volume above contractual share and renewing contracts; partially
offset by lower sales from the divestitures of forgings businesses in the United
Kingdom (divested in December 2019) and Hungary (divested in December 2018); and
unfavorable foreign currency movements.
Cost of Goods Sold (COGS). COGS as a percentage of Sales was 73.7% in 2020
compared with 73.5% in 2019. The increase was primarily due to the impact of
COVID-19 and lower volumes, partially offset by net cost savings, favorable
product pricing, intentional product exits, and the impairment of energy
business assets of $10 in the second quarter of 2019. In 2019, the Company
sustained a fire at a fasteners plant in France. Additionally, in mid-February
2020, a fire occurred at the Company's forged wheels plant located in Barberton,
Ohio. The Company submitted insurance claims related to these plant fires and
received partial settlements of $39 in 2020 compared to $25 in 2019, which were
in excess of the insurance deductible. In 2020, the Company recorded charges of
$41 related to plant fires compared to $26 in 2019. The downtime reduced
production levels and affected productivity at the plants.
COGS as a percentage of Sales was 73.5% in 2019 compared with 75.4% in 2018. The
decrease was primarily due to lower raw material costs; net costs savings;
favorable product pricing; and costs incurred in 2018 that did not recur in 2019
related to settlements of certain customer claims, partially offset by an
unfavorable product mix and the impairment of energy business assets of $10.
Additionally, in 2019, the Company sustained a fire at a fasteners plant in
France and recorded charges of $26 for higher operating costs, equipment and
inventory damage, and repairs and cleanup costs. The Company submitted an
insurance claim and received partial settlement of $25, which was in excess of
its $10 insurance deductible. The insurance claim included $8 of margin not
recognized from lost revenue due to the fire.
Selling, General Administrative, and Other Expenses (SG&A). SG&A expenses were
$277, or 5.3% of Sales, in 2020 compared with $400, or 5.6% of Sales, in 2019.
The decrease in SG&A of $123, or 31%, was primarily due to overhead cost
reductions and lower net legal and other advisory costs related to Grenfell
Tower of $20, partially offset by higher costs associated with the Arconic Inc.
Separation Transaction through June 30, 2020 of $2.
SG&A expenses were $400, or 5.6% of Sales, in 2019 compared with $371, or
5.5% of Sales, in 2018. The increase in SG&A of $29, or 8%, was primarily due to
costs associated with the Arconic Inc. Separation Transaction of $5 and higher
annual incentive compensation accruals and executive compensation costs,
partially offset by lower costs driven by overhead cost reductions and lower net
legal and other advisory costs related to Grenfell Tower of $10, primarily due
to insurance reimbursements.
Research and Development Expenses (R&D). R&D expenses were $17 in 2020 compared
with $28 in 2019. The decrease of $11, or 39%, was primarily due to the
continued consolidation of the Company's primary R&D facility in conjunction
with ongoing cost reduction efforts.
R&D expenses were $28 in 2019 compared with $41 in 2018. The decrease of $13, or
32%, was primarily due to the consolidation of the Company's primary R&D
facility in conjunction with ongoing cost reduction efforts.
Provision for Depreciation and Amortization (D&A). The provision for D&A was
$279 in 2020 compared with $295 in 2019. The decrease of $16, or 5%, was
primarily driven by asset impairments of the Disks long-lived assets group
during the second quarter of 2019 (see Notes   O   and   P   to the Consolidated
Financial Statements in Part II, Item 8. (Financial Statements and Supplementary
Data) of this Form 10-K) and the impact of divestitures as well as lower
corporate software amortization and research center depreciation, which were
partially offset by increased Forged Wheels D&A due to the capacity expansion in
Hungary, capacity expansions at two U.S. facilities and an additional $6 D&A
related to the Barberton fire.
The provision for D&A was $295 in 2019 compared with $314 in 2018. The decrease
of $19, or 6% was primarily due to the impact of divestitures, as well as asset
impairments of the Disks long-lived asset group during the second quarter of
2019 (see Note   O   and   P   to the Consolidated Financial Statements in Part
II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K).
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Restructuring and Other Charges. Restructuring and other charges were $182 in
2020 compared with $582 in 2019 and $163 in 2018.
Restructuring and other charges in 2020 consisted primarily of a $113 charge for
layoff costs, a $74 charge for U.K. and U.S. pension plans' settlement
accounting; a $5 post-closing adjustment related to the sale of the Company's
U.K. forgings business; a $5 charge for impairment of assets associated with an
agreement to sell an aerospace components business in the U.K that did not occur
and the business was returned to held for use; $5 charge related to the
impairment of a cost method investment, which were partially offset by a benefit
of $21 related to the reversal of a number of prior period programs;
Restructuring and other charges in 2019 consisted primarily of a $428 charge for
impairment of the Disks long-lived asset group; a $69 charge for layoff costs; a
$46 charge for impairment of assets associated with an agreement to sell the
U.K. forgings business; a $14 charge for impairment of properties, plants, and
equipment related to the Company's primary research and development facility; a
$13 loss on sale of assets primarily related to a small additive business; a $12
charge for other exit costs from lease terminations primarily related to the
exit of the corporate aircraft; a $9 settlement accounting charge for U.S.
pension plans; a $5 charge for impairment of a cost method investment; and a $7
charge for other exit costs; which were partially offset by a benefit of $16
related to the elimination of the life insurance benefit for the U.S. salaried
and non-bargaining hourly retirees of the Company and its subsidiaries.
Restructuring and other charges in 2018 consisted primarily of a $96 charge for
pension plan settlement accounting; a $23 charge for pension curtailment; a $43
loss on sale of a Hungary forgings business; a $18 charge for layoff costs; a
$12 charge for contract termination costs and asset impairments associated with
the shutdown of a facility in Acuna, Mexico; which were offset partially by a
$28 postretirement curtailment benefit.
See Note   E   to the Consolidated Financial Statements in Part II, Item 8.
(Financial Statements and Supplementary Data) of this Form 10-K.
Interest Expense. Interest expense was $381 in 2020 compared with $338 in 2019.
The increase of $43, or 13%, was primarily due to premiums paid on the early
redemption of debt of $59 which was offset by lower debt outstanding in 2020
driven by the early redemption of $1,000, $889 and $151 of the principal amount
of the 6.150% Notes, 5.400% Notes due in 2021 and 5.870% Notes due in 2022,
respectively, in April and May 2020, which was offset by the issuance on April
24, 2020 of the 6.875% Notes due 2025 in the aggregate principal amount of
$1,200.
Interest expense was $338 in 2019 compared with $377 in 2018. The decrease of
$39, or 10%, was primarily due to lower debt outstanding, driven by the
repayment of the aggregate outstanding principal amount of the 1.63% Convertible
Notes of approximately $403 on October 15, 2019, as well as costs incurred of
$19 in 2018 related to the premium paid on the early redemption of the Company's
then outstanding 5.72% Senior Notes due in 2019 that did not recur in 2019.
On January 15, 2021, the Company completed the early redemption of all of the
remaining $361 aggregate principal amount of the 5.400% Notes due in April 2021
(the "5.400% Notes") as well as $5 in accrued interest. The redemption of these
5.400% Notes will save approximately $5 in Interest expense, net in the first
quarter of 2021 and $19 annually.
Other Expense (Income), Net. Other expense (income), net was $74 in 2020
compared with $31 in 2019. The increase in expense of $43 was primarily driven
by the write-off of an indemnification receivable related to a Spanish tax
reserve reflecting Alcoa Corporation's 49% share and Arconic Corporation's
33.66% share of a Spanish tax reserve of $53 and lower interest income of $19,
which were partially offset by lower deferred compensation expense of $14 and
favorable foreign currency movements of $16.
Other expense (income), net was $31 in 2019 compared with Other expense
(income), net of $(30) in 2018. The increase in Other expense, net of $61 was
primarily due to an increase in deferred compensation expense of $32 and the
benefit recognized in 2018 from establishing a tax indemnification receivable
reflecting Alcoa Corporation's 49% share of a Spanish tax reserve of $29.
Income Taxes. Howmet's effective tax rate was 23.4% (benefit on pre-tax income)
in 2020 compared with the U.S. federal statutory rate of 21%. The effective rate
differs from the U.S. federal statutory rate primarily as a result of a $64
benefit related to the release of an income tax reserve following a favorable
Spanish tax case decision, a $30 benefit related to the recognition of a
previously uncertain U.S. tax position, and a $30 benefit for a U.S. tax law
change related to the issuance of final regulations that provide for an
exclusion of certain high-taxed foreign earnings from the calculation of Global
Intangible Low-Taxed Income ("GILTI"), partially offset by U.S. tax on foreign
earnings, $8 of charges related to the remeasurement of deferred tax balances as
a result of the Arconic Inc. Separation Transaction, the tax impact of $49 of
nondeductible loss related to the reversal of indemnification receivables
associated with the favorable Spanish tax case decision, and the tax impact of
other nondeductible expenses.
Howmet's effective tax rate was 40.0% (provision on pre-tax income) in 2019
compared with the U.S. federal statutory rate of 21%. The effective rate differs
from the U.S. federal statutory rate primarily as a result of foreign income
taxed in higher rate
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jurisdictions and subject to U.S. taxes including GILTI, foreign losses with no
tax benefit, and other nondeductible expenses, partially offset by a $24 benefit
associated with the deduction of foreign taxes that were previously claimed as a
U.S. foreign tax credit, and a $12 benefit for a foreign tax rate change.
Howmet's effective tax rate was 27.8% (provision on pre-tax income) in 2018
compared with the U.S. federal statutory rate of 21%. The effective tax rate
differs from the U.S. federal statutory rate primarily as a result of a $60
charge to establish a tax reserve in Spain, a $59 net charge resulting from the
Company's finalized analysis of the U.S. Tax Cuts and Jobs Act of 2017 (the
"2017 Act"), and foreign income taxed in higher rate jurisdictions and subject
to U.S. taxes including GILTI, partially offset by a $74 benefit related to the
reversal of a foreign recapture obligation, a $38 benefit to reverse a foreign
tax reserve that was effectively settled, and a $10 benefit for the release of
U.S. valuation allowances.
Howmet anticipates that the effective tax rate in 2021 will be between 26.5% and
28.5%. However, changes in the current economic environment, tax legislation or
rate changes, currency fluctuations, ability to realize deferred tax assets,
movements in stock price impacting tax benefits or deficiencies on stock-based
payment awards, and the results of operations in certain taxing jurisdictions
may cause this estimated rate to fluctuate.
Net Income from Continuing Operations. Net income from continuing operations was
$211, or $0.48 per diluted share, for 2020 compared to $126, or $0.27 per
diluted share, in 2019. The increase in results of $85, or 67%, was primarily
due to the non-recurring 2019 impact of the $428 charge for impairment of the
Disks long-lived asset group included in Restructuring and other charges, a
decrease of $123 due to lower SG&A costs, favorable product pricing, and a net
$10 related to the settlement of the Spanish corporate income tax audit,
partially offset by a decrease in volumes in the commercial aerospace and
commercial transportation markets, the impact of COVID-19, and an increase in
premiums paid on the early redemption of debt of $59.
Net income from continuing operations was $126, or $0.27 per diluted share, for
2019 compared to $309, or $0.63 per diluted share, for 2018. The decrease in
results of $183, or 59%, was primarily due to higher Restructuring charges
primarily due to the non-recurring 2019 impact of the $428 charge for impairment
of the Disks long-lived asset group, higher SG&A costs related primarily to
annual incentive compensation accruals and executive compensation costs, higher
Other expense, net due to an increase in deferred compensation expense, and the
benefit recognized in 2018 from establishing a tax indemnification receivable
reflecting Alcoa Corporation's 49% share of a Spanish tax reserve of $29 that
did not recur in 2019, partially offset by volume growth, favorable product
pricing, net cost savings, lower D&A due to the impact of divestitures as well
as asset impairments related to the Disks long-lived asset group, lower Interest
expense due to lower debt outstanding and costs incurred of $19 in 2018 related
to the premium paid on the early redemption of debt that did not recur in 2019,
and lower Income taxes primarily as a result of a benefit related to a U.S. tax
election which caused the deemed liquidation of a foreign subsidiary's assets
into its U.S. tax parent.
Net Income. Net income was $261 for 2020 composed of $211 of income from
continuing operations and $50 from discontinued operations, or $0.48 and $0.11
per diluted share, respectively.
Net income was $470 for 2019 composed of $126 of income from continuing
operations and $344 from discontinued operations, or $0.27 and $0.76 per diluted
share, respectively.
Net income was $642 for 2018 composed of $309 of income from continuing
operations and $333 from discontinued operations, or $0.63 and $0.67 per diluted
share, respectively.
See details of discontinued operations in Note   C   to the Consolidated
Financial Statements in Part II, Item 8. (Financial Statements and Supplementary
Data) of this Form 10-K.
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
operating profit. Howmet's definition of Segment operating profit is Operating
income excluding Special items. Special items include Restructuring and Other
charges and Impairment of Goodwill. Segment operating profit may not be
comparable to similarly titled measures of other companies. Differences between
segment totals and consolidated Howmet are in Corporate.
In the second quarter of 2020, the Company realigned its operations consistent
with how the Co-Chief Executive Officers assess operating performance and
allocating capital in conjunction with the Arconic Inc. Separation Transaction
(see Note   C   to the Consolidated Financial Statements in Part II Item 8 of
this Form 10-K). Prior period financial information has been recast to conform
to current year presentation.
The Company produces aerospace engine parts and components and aerospace
fastening systems for Boeing 737 MAX airplanes. In late December 2019, Boeing
announced a temporary suspension of production of the 737 MAX airplanes. This
decline in production had a negative impact on sales and segment operating
profit in the Engine Products, Fastening Systems and Engineered Structures
segments for the full year ended December 31, 2020. While regulatory authorities
in the United
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States and certain other jurisdictions lifted grounding orders beginning in late
2020, our sales could continue to be negatively affected from the residual
impacts of the 737 MAX grounding.
Income from continuing operations before income taxes totaled $171 in 2020, $210
in 2019, and $428 in 2018. Segment operating profit for all reportable segments
totaled $890 in 2020, $1,390 in 2019, and $1,105 in 2018. The following
information provides Sales and Segment operating profit for each reportable
segment for each of the three years in the period ended December 31, 2020. See
below for the reconciliation of Income from continuing operations before income
taxes to Total segment operating profit.
Engine Products
                             2020         2019         2018
Third-party sales          $ 2,406      $ 3,320      $ 3,092
Segment operating profit   $   417      $   621      $   464


Engine Products produces investment castings, including airfoils, and seamless
rolled rings primarily for aircraft engines (aerospace commercial and defense)
and industrial gas turbines. Engine Products produces rotating parts as well as
structural parts, which are sold directly to customers. Generally, the sales and
costs and expenses of this segment are transacted in the local currency of the
respective operations, which are mostly the U.S. dollar, British pound and Euro.
Third-party sales for the Engine Products segment decreased $914 or 28% in 2020
compared with 2019, primarily due to lower volumes in the commercial aerospace
end market driven by the impact of COVID-19 and the suspension of 737 MAX
production, along with a decrease in sales of $116 from the divestiture of the
forgings business in the U.K. (December 2019) (see Note   U   to the
Consolidated Financial Statements in Part II Item 8 of this Form 10-K),
partially offset by higher volumes in the defense aerospace and industrial gas
turbines end markets as well as favorable product pricing.
Third-party sales for the Engine Products segment increased $228 or 7% in 2019
compared with 2018, primarily as a result of higher commercial and defense
aerospace volumes and favorable product pricing, partially offset by unfavorable
foreign currency movements and lower sales of $47 from divestitures of forgings
businesses in the United Kingdom (divested in December 2019) and Hungary
(divested in December 2018).
Operating profit for the Engine Products segment decreased $204, or 33%, in 2020
compared with 2019, primarily due to lower commercial aerospace sales volumes
from the suspension of 737 MAX production, and COVID-19 productivity impacts,
partially offset by cost reductions, favorable product pricing, and favorable
sales volumes in the defense aerospace and industrial gas turbines end markets.
Operating profit for the Engine Products segment increased $157 or 34% in 2019
compared with 2018, due to net cost savings, higher sales volumes as noted
previously, favorable product pricing, and lower raw material costs, partially
offset by the unfavorable impact of new product introductions in aerospace
engines and unfavorable product mix.
On December 1, 2019, the Company completed the divestiture of its forgings
business in the United Kingdom. The forgings business primarily produces steel,
titanium, and nickel based forged components for aerospace, mining, and
off-highway markets. This business generated third-party sales of $116 and $131
in 2019 and 2018, respectively, and had 540 employees at the time of the
divestiture.
On December 31, 2018, as part of the Company's then ongoing strategy and
portfolio review, the Company completed the sale of its forgings business in
Hungary that manufactured high volume steel forgings for drivetrain components
in the European heavy-duty truck and automotive market. This business generated
third-party sales of $32 in 2018, and had 180 employees at the time of the
divestiture.
In 2021 compared to 2020, demand in industrial gas turbines and defense
aerospace end markets is expected to increase while the commercial aerospace end
market is expected to be down driven by the impact of COVID-19. Favorable
product pricing and cost reductions are expected to continue.

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Fastening Systems
                             2020         2019         2018
Third-party sales          $ 1,245      $ 1,561      $ 1,531
Segment operating profit   $   247      $   396      $   357


Fastening Systems produces aerospace fastening systems, as well as commercial
transportation fasteners. The business's high-tech, multi-material fastening
systems are found nose to tail on aircraft and aero engines. The business's
products are also critical components of automobiles, commercial transportation
vehicles, and construction and industrial equipment. Fastening Systems are sold
directly to customers and through distributors. Generally, the sales and costs
and expenses of this segment are transacted in the local currency of the
respective operations, which are mostly the U.S. dollar, British pound and euro.
Third-party sales for the Fastening Systems segment decreased $316 or 20% in
2020 compared with 2019, primarily due to lower sales volumes in the commercial
aerospace end market driven by the impact of COVID-19 and the suspension of 737
MAX production, along with lower volumes in the commercial transportation end
market also impacted by the effects of COVID-19, only slightly offset by volume
growth in the Industrial end market and favorable product pricing.
Third-party sales for this segment increased $30, or 2%, in 2019 compared with
2018, primarily attributable to higher volumes in the aerospace and commercial
transportation end markets, partially offset by unfavorable foreign currency
movements.
Operating profit for the Fastening Systems segment decreased $149, or 38%, in
2020 compared with 2019, primarily due to lower commercial aerospace and
commercial transportation sales volumes and COVID-19 productivity impacts,
partially offset by cost reductions and favorable product pricing.
Operating profit for the Fastening Systems segment increased $39, or 11%, in
2019 compared with 2018, due to net cost savings and higher volumes as noted
previously, partially offset by an unfavorable product mix.
In 2021 compared to 2020, demand in the commercial aerospace end market is
expected to be down driven by the impact of COVID-19. Favorable cost reductions
are expected to continue.
Engineered Structures
                            2020        2019         2018

Third-party sales $ 927 $ 1,255 $ 1,209 Segment operating profit $ 73 $ 120 $ 64




Engineered Structures produces titanium ingots and mill products for aerospace
and defense applications and is vertically integrated to produce titanium
forgings, extrusions forming and machining services for airframe, wing,
aero-engine, and landing gear components. Engineered Structures also produces
aluminum forgings, nickel forgings, and aluminum machined components and
assemblies for aerospace and defense applications. The segments products are
sold directly to customers and through distributors and sales, costs, and
expenses of this segment are generally transacted in the local currency of the
respective operations, which are mostly the U.S. dollar, British pound and the
euro.
Third-party sales for the Engineered Structures segment decreased $328, or 26%,
in 2020 compared with 2019, primarily due to lower sales volumes in the
commercial aerospace end market driven by COVID-19, Boeing 787 production
declines and 737 MAX production suspension, partially offset by an increase in
the defense aerospace sales volume and favorable product pricing.
Third-party sales for the Engineered Structures segment increased $46, or 4%, in
2019 compared with 2018, primarily the result of higher aerospace end market
sales volumes and favorable product pricing, partially offset by unfavorable
foreign currency movements.
Operating profit for the Engineered Structures segment decreased $47, or 39%, in
2020 compared with 2019, primarily due to lower commercial aerospace sales
volumes and COVID-19 productivity impacts, partially offset by cost reductions,
and favorable product pricing.
Operating profit for the Engineered Structures segment increased $56 or 88%, in
2019 compared with 2018, primarily due to net cost savings, favorable product
pricing, lower raw material costs, and higher aerospace end market sales
volumes, partially offset by unfavorable product mix.
In 2021 compared to 2020, demand in the commercial aerospace end market is
expected to be down driven by the impact of COVID-19. Favorable cost reductions
are expected to continue.
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Forged Wheels
                            2020       2019       2018
Third-party sales          $ 679      $ 969      $ 966
Segment operating profit   $ 153      $ 253      $ 220


Forged Wheels provides forged aluminum wheels and related products for
heavy-duty trucks, trailers, and buses globally. Forged Wheels' products are
sold directly to OEMs and through distributors with the sales and costs and
expenses of this segment transacted in local currency.
Third-party sales for the Forged Wheels segment decreased $290, or 30%, in 2020
compared with 2019, primarily due to lower volumes in the commercial
transportation end market driven by COVID-19 and production downtime related to
the Barberton plant fire (discussed below).
Third-party sales for the Forged Wheels segment increased $3, effectively flat
in 2019 compared with 2018, primarily the result of stable volumes in the
commercial transportation end market.
Operating profit for the Forged Wheels segment decreased $100, or 40%, in 2020
compared with 2019, primarily due to lower commercial transportation sales
volumes and COVID-19 productivity impacts, partially offset by cost reductions.
Operating profit for the Forged Wheels segment increased $33 or 15%, in 2019
compared with 2018, primarily due to net cost savings and lower raw material
costs.
In mid-February 2020, a fire occurred at the Company's forged wheels plant
located in Barberton, Ohio. The downtime reduced production levels and affected
productivity at the plant. The Company has insurance with a deductible of $10.
In 2021 compared to 2020, demand in the commercial transportation markets served
by Forged Wheels is expected to increase in most regions. Commercial
transportation OEMs are expected to increase output as global economies recover
from 2020 COVID-19 lows.
Reconciliation of Total segment operating profit to Income from continuing
operations before income taxes
                                                          2020        2019

2018

Income from continuing operations before income taxes $ 171 $ 210

$   428
Interest expense                                           381          338          377
Other expense (income), net                                 74           31          (30)
Consolidated operating income                            $ 626      $   579      $   775
Unallocated amounts:
Restructuring and other charges                            182          582

163


Corporate expense                                           82          229

167


Total segment operating profit                           $ 890      $ 1,390

$ 1,105




Total segment operating profit is a non-GAAP financial measure. Management
believes that this measure is meaningful to investors because management reviews
the operating results of the segments of the Company excluding Corporate
results.
See Restructuring and Other Charges, Interest Expense, and Other Expense
(Income), Net, discussions above under Results of Operations for reference.
Corporate expense decreased $147, or 64%, in 2020 compared with 2019 primarily
due to lower annual incentive compensation accruals and executive compensation
costs, lower costs driven by overhead cost reductions, lower contract services
and outsourcing costs; lower research and development expenses; and lower net
legal and other advisory costs along with costs incurred in 2019 that did not
recur in 2020, including the impacts of facility fires, net of insurance of $6
and collective bargaining agreement negotiation costs of $9. Costs associated
with the Arconic Inc. Separation Transaction of $7, were an increase of $2
compared to 2019.
Corporate expense increased $62, or 37%, in 2019 compared with 2018 primarily
due to costs associated with the Arconic Inc. Separation Transaction of $5;
higher annual incentive compensation accruals and executive compensation costs;
net impacts associated with a fire at a fasteners plant of $9 (net of insurance
reimbursements); and collective bargaining agreement negotiation costs of $9;
partially offset by costs incurred in 2018 that did not recur in 2019 related to
settlements of certain customer claims of $38; lower costs driven by overhead
cost reductions; lower research and development expenses; and lower net legal
and other advisory costs related to Grenfell Tower of $10.
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Environmental Matters
See the Environmental Matters section of Note   V   to the Consolidated
Financial Statements in Part II, Item 8 of this Form 10-K.
Liquidity and Capital Resources
Howmet maintains a disciplined approach to cash management and strengthening of
its balance sheet. Management continued to focus on actions to improve Howmet's
cost structure and liquidity, providing the Company with the ability to operate
effectively. Such actions included procurement efficiencies and overhead
rationalization to reduce costs, working capital initiatives, and maintaining a
sustainable level of capital expenditures.
Cash provided from operations and financing activities is expected to be
adequate to cover Howmet's operational and business needs over the next 12
months. For an analysis of long-term liquidity, see Contractual Obligations and
Off-Balance Sheet Arrangements below.
At December 31, 2020, cash and cash equivalents of Howmet were $1,610, of which
$253 was held by Howmet's non-U.S. subsidiaries. If the cash held by non-U.S.
subsidiaries were to be repatriated to the U.S., the company does not expect
there to be additional material income tax consequences.
The cash flows related to Arconic Corporation have not been segregated and are
included in the Statement of Consolidated Cash Flows for all periods prior to
the Arconic Inc. Separation Transaction.
During 2020 the Company identified a misclassification in the presentation of
changes in accounts payable and capital expenditures in its previously issued
Statement of Consolidated Cash Flows, and has revised its Statement of
Consolidated Cash Flows for 2019. See Note   A   to the Consolidated Financial
Statements in Part II, Item 8 of this Form 10-K for additional detail.
Operating Activities
Cash provided from operations in 2020 was $9 compared with $461 in 2019 and $217
in 2018.
The decrease in cash used for operations of $452, or 98%, between 2020 and 2019
was primarily due to lower operating results of $874, partially offset by lower
working capital of $355 and lower noncurrent assets of $46, noncurrent
liabilities of $10 and pension contributions of $11. The components of the
change in working capital included favorable changes in receivables of $739,
inventories of $77, and taxes, including income taxes of $100, offset by
accounts payable of $380, accrued expenses of $175 and prepaid expenses and
other current assets of $6.
The increase of $244, or 112%, between 2019 and 2018 was primarily due to higher
operating results of $279 and lower pension contributions of $30 and noncurrent
assets of $13, partially offset by higher working capital of $57 and noncurrent
liabilities of $21. The components of the change in working capital included
unfavorable changes in accounts payable of $340 and taxes, including income
taxes of $106, partially offset by favorable changes in receivables of $165
accrued expenses of $148, inventories of $71 and prepaid expenses and other
current assets of $5.
Financing Activities
Cash used for financing activities was $369 in 2020 compared with $1,568 in 2019
and $649 in 2018.
The use of cash in 2020 was primarily related to the repayments on borrowings
under certain revolving credit facilities (see below) and repayments on debt,
primarily the aggregate outstanding principal amount of the 6.15% Notes due 2020
of approximately $2,040 (see Note   R   to the Consolidated Financial Statements
in Part II, Item 8. Financial Statements and Supplementary Data), cash
distributed to Arconic Corporation at the Arconic Inc. Separation Transaction of
$500, repurchase of common stock of $73 (see Note   J   to the Consolidated
Financial Statements in Part II, Item 8. Financial Statements and Supplementary
Data), debt issuance costs of $61, premiums paid on the redemption of debt of
$59, and dividends paid to shareholders of $11. These items were partially
offset by long-term debt issuance of $2,400 (of which $1,200 went with Arconic
Corporation at the Arconic Inc. Separation Transaction) and proceeds from the
exercise of employee stock options of $33.
The use of cash in 2019 was primarily related to the repurchase of $1,150 of
common stock (see Note   J   to the Consolidated Financial Statements in Part
II, Item 8. Financial Statements and Supplementary Data); repayments on
borrowings under certain revolving credit facilities (see below) and repayments
on debt, primarily the aggregate outstanding principal amount of the 1.63%
Convertible Notes of approximately $403 (see Note   R   to the Consolidated
Financial Statements in Part II, Item 8. (Financial Statements and Supplementary
Data)); and dividends paid to shareholders of $57. These items were partially
offset by proceeds from the exercise of employee stock options of $56.
The use of cash in 2018 was principally the result of $1,103 in repayments on
borrowings under certain revolving credit facilities (see below) and repayments
on debt, primarily related to the early redemption of the then remaining
outstanding 5.72% Notes due in 2019 (see Note   R   to the Consolidated
Financial Statements in Part II, Item 8. (Financial Statements and
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Supplementary Data of this Form 10-K)) and $119 in dividends to shareholders.
These items were partially offset by $600 in additions to debt, primarily from
borrowings under certain revolving credit facilities.
The Company maintains a Five-Year Revolving Credit Agreement (the "Credit
Agreement") with a syndicate of lenders and issuers named therein. On June 26,
2020, the Company entered into an amendment to its Credit Agreement to modify
certain terms which provided relief from its existing financial covenant through
December 31, 2021 and reduced total commitment available from $1,500 to $1,000.
See Note   R   to the Consolidated Financial Statements in Part II, Item 8.
Financial Statements and Supplementary Data of this Form 10-K. In addition to
the Credit Agreement, the Company has other credit facilities from time to time.
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 applicable SEC 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.
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:
                                        Long-Term Debt               Short-Term Debt                Outlook            Date of Last Update
Standard and Poor's                           BB+                           B                      Negative             September 9, 2020
Moody's                                       Ba3             Speculative Grade Liquidity-2        Negative               April 23, 2020
Fitch                                        BBB-                           B                       Stable                April 22, 2020


Investing Activities
Cash provided from investing activities was $271 in 2020 compared with $528 in
2019 and $565 in 2018.
The source of cash in 2020 was primarily cash receipts from sold receivables of
$422 and proceeds from the sale a rolling mill business in Itapissuma, Brazil
for $50 and a hard alloy extrusions plant in South Korea for $62 which were
related to Arconic Corporation (see Notes   C   and   U   to the Consolidated
Financial Statements in Part II, Item 8 (Financial Statements and Supplementary
Data)), partially offset by capital expenditures of $267.
The source of cash in 2019 was primarily cash receipts from sold receivables of
$995, proceeds from the sale of assets and businesses of $103 primarily from the
sale of a forgings business in the U.K. for $64 and the sale of inventories and
properties, plants, and equipment related to a small energy business for $13 as
well as contingent consideration of $20 related to the sale of the Texarkana,
Texas rolling mill (which was part of Arconic Corporation at the Arconic Inc.
Separation Transaction) (see Notes   C   and   U   to the Consolidated Financial
Statements in Part II, Item 8. (Financial Statements and Supplementary Data)),
and the sale of fixed income securities of $73, partially offset by capital
expenditures of $641, including expansion of a wheels plant in Hungary,
expansion of aerospace airfoils capacity in the United States, and transition of
the Tennessee plant to industrial production (which was part of Arconic
Corporation at the Arconic Inc. Separation Transaction).

The source of cash in 2018 was primarily cash receipts from sold receivables of
$1,016 and proceeds from the sale of the Texarkana, Texas rolling mill and cast
house of $302 which was related to Arconic Corporation, partially offset by
capital expenditures of $768, including the horizontal heat treat furnace at the
Davenport, Iowa plant (which was part of Arconic Corporation at the Arconic Inc.
Separation Transaction) and an expansion of a wheels plant in Székesfehérvár,
Hungary.

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Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
Howmet is required to make future payments under various contracts, including
long-term purchase obligations, financing arrangements, and lease agreements.
Howmet also has commitments to fund its pension plans, provide payments for
other postretirement benefit plans, and fund capital projects.
As of December 31, 2020, a summary of Howmet's outstanding contractual
obligations is as follows (these contractual obligations are grouped in the same
manner as they are classified in the Statement of Consolidated Cash Flows in
order to provide a better understanding of the nature of the obligations and to
provide a basis for comparison to historical information):
                                        Total             2021             2022-2023           2024-2025           Thereafter

Operating activities:

Raw material purchase obligations $ 205 $ 159 $

38 $ 8 $ -
Other purchase obligations 54 51 3 - -
Operating leases 163 44 59 28 32
Interest related to total debt 1,941 286 519 400 736
Estimated minimum required pension 514 140 229 145 -
funding
Other postretirement benefit 146 17 32 30 67
payments
Layoff and other restructuring 54 54 - - -
payments

Uncertain tax positions 2 - - - 2
Financing activities:
Total debt 5,102 376 476 2,450 1,800

Investing activities:
Capital projects 169 123 46 - -

Totals $ 8,350 $ 1,250 $ 1,402 $ 3,061 $ 2,637

Obligations for Operating Activities
Raw material purchase obligations consist mostly of aluminum, cobalt, nickel,
and various other metals with expiration dates ranging from less than one year
to five years. Many of these purchase obligations contain variable pricing
components, and, as a result, actual cash payments may differ from the estimates
provided in the preceding table. The Company generally passes through metal
costs in customer contracts with limited exceptions. In connection with the
Arconic Inc. Separation Transaction, the Company entered into several agreements
with Arconic Corporation that govern the relationship between the Company and
Arconic Corporation following the separation, including Raw Material Supply
Agreements.
Operating leases represent multi-year obligations for certain land and
buildings, plant equipment, vehicles, and computer equipment.
Interest related to total debt is based on interest rates in effect as of
December 31, 2020 and is calculated on debt with maturities that extend to 2042.
Estimated minimum required pension funding and postretirement benefit payments
are based on actuarial estimates using current assumptions for discount rates,
long-term rate of return on plan assets, and health care cost trend rates, among
others. It is Howmet's policy to fund amounts for pension plans sufficient to
meet the minimum requirements set forth in applicable country benefits laws and
tax laws. Periodically, Howmet contributes additional amounts as deemed
appropriate. The estimates reported in the preceding table include amounts
sufficient to meet the minimum required. Howmet has determined that it is not
practicable to present pension funding and other postretirement benefit payments
beyond 2024 and 2029, respectively.
Layoff and other restructuring payments to be paid within one year primarily
relate to severance costs, special layoff benefit payments, and lease
termination costs.
Uncertain tax positions taken or expected to be taken on an income tax return
may result in additional payments to tax authorities. The amount in the
preceding table includes interest and penalties accrued related to such
positions as of December 31, 2020. The total amount of uncertain tax positions
is included in the "Thereafter" column as the Company is not able to reasonably
estimate the timing of potential future payments. If a tax authority agrees with
the tax position taken or expected to be taken or the applicable statute of
limitations expires, then additional payments will not be necessary.
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Obligations for Financing Activities
Howmet has historically paid quarterly dividends on its preferred and common
stock. Including dividends on preferred stock, the Company paid $11 in dividends
to shareholders during 2020. Because all dividends are subject to approval by
Howmet's Board of Directors, amounts are not included in the preceding table
unless such authorization has occurred. As of December 31, 2020, there were
432,906,377 shares of outstanding common stock and 546,024 shares of outstanding
Class A preferred stock. In 2020, the preferred stock dividend was $3.75 per
share. Dividend of $0.02 per share on the Company's common stock was paid in the
first quarter of 2020. As the duration of the COVID-19 pandemic is uncertain,
the Company is taking a series of actions to address the financial impact,
including the suspension of dividends on common stock in April 2020. See Part
I, Item 1A (Risk Factors).
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by
management as of December 31, 2020. Funding levels may vary in future years
based on anticipated construction schedules of the projects. It is expected that
significant expansion projects will be funded through various sources, including
cash provided from operations. Total capital expenditures are anticipated to be
approximately 4% of sales in 2021.
Off-Balance Sheet Arrangements
At December 31, 2020, the Company had outstanding bank guarantees related to tax
matters, outstanding debt, workers' compensation, environmental obligations,
energy contracts, and customs duties, among others. The total amount committed
under these guarantees, which expire at various dates between 2021 and 2040 was
$44 at December 31, 2020.
Pursuant to the Separation and Distribution Agreement between the Company and
Alcoa Corporation, the Company is required to provide certain guarantees for
Alcoa Corporation, which had a combined fair value of $12 and $9 at December 31,
2020 and 2019, respectively, and were included in Other noncurrent liabilities
and deferred credits on the accompanying Consolidated Balance Sheet. For a
long-term supply agreement, the Company is required to provide a guarantee up to
an estimated present value amount of approximately $1,398 and $1,353 at
December 31, 2020 and December 31, 2019, respectively, in the event of an Alcoa
Corporation payment default. This guarantee expires in 2047. For this guarantee,
subject to its provisions, the Company is secondarily liable in the event of a
payment default by Alcoa Corporation. The Company currently views the risk of an
Alcoa Corporation payment default on its obligations under the contract to be
remote. In December 2019, Arconic Inc. entered into a one-year insurance policy
with a limit of $80 relating to the long-term energy supply agreement. The
premium is expected to be paid by Alcoa Corporation. In December 2020, a surety
bond with a limit of $80 relating to the long-term energy supply agreement was
obtained by Alcoa Corporation to protect Howmet's obligation. This surety bond
will be renewed on an annual basis.
Howmet has outstanding letters of credit primarily related to workers'
compensation, environmental obligations, and leasing obligations. The total
amount committed under these letters of credit, which automatically renew or
expire at various dates, mostly in 2021, was $105 at December 31, 2020.
Pursuant to the Separation and Distribution Agreements between the Company and
Arconic Corporation and between the Company and Alcoa Corporation, the Company
is required to retain letters of credit of $53 that had previously been provided
related to the Company, Arconic Corporation, and Alcoa Corporation workers'
compensation claims which occurred prior to the respective separation
transactions of April 1, 2020 and November 1, 2016. Arconic Corporation and
Alcoa Corporation workers' compensation claims and letter of credit fees paid by
the Company are being proportionally billed to and are being reimbursed by
Arconic Corporation and Alcoa Corporation. Also, the Company was required to
provide letters of credit for certain Arconic Corporation environmental
obligations and, as a result, the Company has $29 of outstanding letters of
credit relating to liabilities (which are included in the $105 in the above
paragraph). $13 of these outstanding letters of credit are pending cancellation
and will be deemed cancelled once returned by the beneficiary. Arconic
Corporation has issued surety bonds to cover these environmental obligations.
Arconic Corporation is being billed for these letter of credit fees paid by the
Company and will reimburse the Company for any payments made under these letters
of credit.
Howmet has outstanding surety bonds primarily related to tax matters, contract
performance, workers' compensation, environmental-related matters, and customs
duties. The total amount committed under these surety bonds, which expire at
various dates, primarily in 2021, was $43 at December 31, 2020.
Pursuant to the Separation and Distribution Agreements between the Company and
Arconic Corporation and between the Company and Alcoa Corporation, the Company
was required to provide surety bonds of $26 (which are included in the $43 in
the above paragraph) that had previously been provided, related to the Company,
Arconic Corporation and Alcoa Corporation workers' compensation claims which
occurred prior to the respective separation transactions of April 1, 2020 and
November 1, 2016. Arconic Corporation and Alcoa Corporation workers'
compensation letters of credit and surety bond fees paid by the Company are
being proportionally billed to and are being reimbursed by Arconic Corporation
and Alcoa Corporation.
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Critical Accounting Policies and Estimates
The preparation of the Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make certain judgments, estimates, and assumptions
regarding uncertainties that affect the amounts reported in the Consolidated
Financial Statements and disclosed in the accompanying Notes. These estimates
are based on historical experience and, in some cases, assumptions based on
current and future market experience, including considerations relating to the
impact of COVID-19. The impact of COVID-19 is rapidly changing and of unknown
duration and macroeconomic impact and as a result, these considerations remain
highly uncertain. Areas that require significant judgments, estimates, and
assumptions include the testing of goodwill, other intangible assets, and
properties, plants, and equipment for impairment; estimating fair value of
businesses acquired or divested; pension plans and other postretirement benefits
obligations; stock-based compensation; and income taxes.
Management uses historical experience and all available information to make
these judgments, estimates, and assumptions, and actual results may differ from
those used to prepare the Company's Consolidated Financial Statements at any
given time. Despite these inherent limitations, management believes that
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and accompanying Notes
provide a meaningful and fair perspective of the Company.
A summary of the Company's significant accounting policies is included in Note
A to the Consolidated Financial Statements. Management believes that the
application of these policies on a consistent basis enables the Company to
provide the users of the Consolidated Financial Statements with useful and
reliable information about the Company's operating results and financial
condition.
Goodwill. Goodwill is not amortized; instead, it is reviewed for impairment
annually (in the fourth quarter) or more frequently if indicators of impairment
exist or if a decision is made to sell or realign a business. A significant
amount of judgment is involved in determining if an indicator of impairment has
occurred. Such indicators may include deterioration in general economic
conditions, negative developments in equity and credit markets, adverse changes
in the markets in which an entity operates, increases in input costs that have a
negative effect on earnings and cash flows, or a trend of negative or declining
cash flows over multiple periods, among others. The fair value that could be
realized in an actual transaction may differ from that used to evaluate the
impairment of goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit
level, which is defined as an operating segment or one level below an operating
segment. Howmet had four reporting units (Engine Products, Fastening Systems,
Engineered Structures, and Forged Wheels) for 2020.
In reviewing goodwill for impairment, an entity has the option to first assess
qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not (greater
than 50%) that the estimated fair value of a reporting unit is less than its
carrying amount. If an entity elects to perform a qualitative assessment and
determines that an impairment is more likely than not, the entity is then
required to perform the quantitative impairment test (described below),
otherwise no further analysis is required. An entity also may elect not to
perform the qualitative assessment and, instead, proceed directly to the
quantitative impairment test. The ultimate outcome of the goodwill impairment
review for a reporting unit should be the same whether an entity chooses to
perform the qualitative assessment or proceeds directly to the quantitative
impairment test.
The Company determines annually, based on facts and circumstances, which of its
reporting units will be subject to the qualitative assessment. For those
reporting units where a qualitative assessment is either not performed or for
which the conclusion is that an impairment is more likely than not, a
quantitative impairment test will be performed. Howmet's policy is that a
quantitative impairment test be performed for each reporting unit at least once
during every three-year period.
Under the qualitative assessment, various events and circumstances (or factors)
that would affect the estimated fair value of a reporting unit are identified
(similar to impairment indicators above). These factors are then classified by
the type of impact they would have on the estimated fair value using positive,
neutral, and adverse categories based on current business conditions.
Additionally, an assessment of the level of impact that a particular factor
would have on the estimated fair value is determined using high, medium, and low
weighting. Furthermore, management considers the results of the most recent
quantitative impairment test completed for a reporting unit and compares the
weighted average cost of capital ("WACC") between the current and prior years
for each reporting unit.
During the first quarter of 2020, Howmet's market capitalization declined
significantly compared to the fourth quarter of 2019. Over the same period, the
equity value of our peer group companies, and the overall U.S. stock market also
declined significantly amid market volatility. In addition, as a result of the
COVID-19 pandemic and measures designed to contain the spread, sales globally to
customers in the aerospace and commercial transportation industries impacted by
COVID-19 have been and are expected to be negatively impacted as a result of
disruption in demand. As a result of these macroeconomic factors, we performed a
qualitative impairment test to evaluate whether it is more likely than not that
the fair value of any of our
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reporting units is less than its carrying value. As a result of this assessment,
the Company performed a quantitative impairment test in the first quarter for
the Engineered Structures reporting unit and concluded that though the margin
between the fair value of the reporting unit and carrying value had declined
from approximately 60% to approximately 15%, it was not impaired. Consistent
with prior practice, a discounted cash flow model was used to estimate the
current fair value of the reporting unit. The significant assumptions and
estimates utilized to determine fair value were developed utilizing current
market and forecast information reflecting the disruption in demand that has had
and is expected to have a negative impact on the Company's global sales in the
aerospace industry. During the second and third quarters of 2020, there were no
indicators of impairment identified for the Engineered Structures reporting
unit.
During the 2020 annual review of goodwill in the fourth quarter, management
proceeded directly to the quantitative impairment test for all four of its
reporting units. The estimated fair values for each of the four reporting units
exceeded their respective carrying values by 50% or greater; thus, there was no
goodwill impairment. The annual goodwill impairment tests performed in the
fourth quarter of 2019 and 2018 also indicated that goodwill was not impaired
for any of the Company's reporting units.
Under the quantitative impairment test, the evaluation of impairment involves
comparing the current fair value of each reporting unit to its carrying value,
including goodwill. Howmet uses a discounted cash flow ("DCF") model to estimate
the current fair value of its reporting units when testing for impairment, as
management believes forecasted cash flows are the best indicator of such fair
value. A number of significant assumptions and estimates are involved in the
application of the DCF model to forecast operating cash flows, including sales
growth, production costs, capital spending, and discount rate. Most of these
assumptions vary significantly among the reporting units. Cash flow forecasts
are generally based on approved business unit operating plans for the early
years and historical relationships in later years. The WACC rate for the
individual reporting units is estimated with the assistance of valuation
experts. Howmet would recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit's fair value without exceeding the
total amount of goodwill allocated to that reporting unit.
Properties, Plants, and Equipment and Other Intangible Assets. Properties,
plants, and equipment and Other intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets (asset group) may not be recoverable. Recoverability of assets is
determined by comparing the estimated undiscounted net cash flows of the
operations related to the assets (asset group) to their carrying amount. An
impairment loss would be recognized when the carrying amount of the assets
(asset group) exceeds the estimated undiscounted net cash flows. The amount of
the impairment loss to be recorded is measured as the excess of the carrying
value of the assets (asset group) over their fair value, with fair value
determined using the best information available, which generally is a DCF model.
The determination of what constitutes an asset group, the associated estimated
undiscounted net cash flows, and the estimated useful lives of the assets also
require significant judgments.
During the second quarter of 2019, the Company updated its five-year strategic
plan and determined that there was a decline in the forecasted financial
performance for the Disks asset group within the Engine Products and Forgings
segment at that time. As such, the Company evaluated the recoverability of the
Disks asset group long-lived assets by comparing the carrying value to the
undiscounted cash flows of the Disks asset group. The carrying value exceeded
the undiscounted cash flows and therefore the Disks asset group long-lived
assets were deemed to be impaired. The impairment charge was measured as the
amount of carrying value in excess of fair value of the long-lived assets, with
fair value determined using a DCF model and a combination of sales comparison
and cost approach valuation methods including an estimate for economic
obsolescence. The impairment charge of $428, of which $247 and $181 related to
the Engine Products and Engineered Structures segments, respectively, which was
recorded in the second quarter of 2019, impacted properties, plants, and
equipment; intangible assets; and certain other noncurrent assets by $198, $197,
and $33, respectively. The impairment charge was recorded in Restructuring and
other charges in the Statement of Consolidated Operations.
Discontinued Operations and Assets Held for Sale. The fair values of all
businesses to be divested are estimated using accepted valuation techniques such
as a DCF model, valuations performed by third parties, earnings multiples, or
indicative bids, when available. A number of significant estimates and
assumptions are involved in the application of these techniques, including the
forecasting of markets and market share, sales volumes and prices, costs and
expenses, and multiple other factors. Management considers historical experience
and all available information at the time the estimates are made; however, the
fair value that is ultimately realized upon the divestiture of a business may
differ from the estimated fair value reflected in the Consolidated Financial
Statements.
Pension and Other Postretirement Benefits. Liabilities and expenses for pension
and other postretirement benefits are determined using actuarial methodologies
and incorporate significant assumptions, including the interest rate used to
discount the future estimated liability, the expected long-term rate of return
on plan assets, and several assumptions relating to the employee workforce
(health care cost trend rates, retirement age, and mortality).
The interest rate used to discount future estimated liabilities for the U.S. is
determined using a Company-specific yield curve model (above-median) developed
with the assistance of an external actuary, while both the U.K. and Canada
utilize models
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developed by the respective actuary. The cash flows of the plans' projected
benefit obligations are discounted using a single equivalent rate derived from
yields on high quality corporate bonds, which represent a broad diversification
of issuers in various sectors, including finance and banking, industrials,
transportation, and utilities, among others. The yield curve model parallels the
plans' projected cash flows, which have a global average duration of 12 years.
The underlying cash flows of the bonds included in the model exceed the cash
flows needed to satisfy the Company's plans' obligations multiple times. In
2020, 2019, and 2018, the discount rate used to determine benefit obligations
for pension and other postretirement benefit plans was 2.40%, 3.00%, and 4.00%,
respectively. The impact on the liabilities of a change in the discount rate of
1/4 of 1% would be approximately $90 and either a charge or credit of
approximately $1 to earnings in the following year.
The expected long-term rate of return on plan assets is generally applied to a
five-year market-related value of plan assets (a fair value at the plan
measurement date is used for certain non-U.S. plans). The process used by
management to develop this assumption is one that relies on a combination of
historical asset return information and forward-looking returns by asset class.
As it relates to historical asset return information, management focuses on
various historical moving averages when developing this assumption. While
consideration is given to recent performance and historical returns, the
assumption represents a long-term, prospective return. Management also
incorporates expected future returns on current and planned asset allocations
using information from various external investment managers and consultants, as
well as management's own judgment.
For 2020, 2019, and 2018, management used 6.00%, 5.60%, and 5.90%, respectively,
as its expected long-term rate of return on plan assets, which was based on the
prevailing and planned strategic asset allocations, as well as estimates of
future returns by asset class. These rates fell within the respective range of
the 20-year moving average of actual performance and the expected future return
developed by asset class. For 2021, management anticipates that 6.00% will be
the expected long-term rate of return for the plan assets. A change in the
assumption for the expected long-term rate of return on plan assets of 1/4 of 1%
would impact earnings by approximately $4 for 2021.
In 2020, a net loss of $46 (after-tax) was recorded in other comprehensive loss,
primarily due to the decrease in the discount rate, partially offset by the plan
asset performance that was greater than expected, and by amortization of
actuarial losses. After adjusting for the impact of Arconic Corporation's
obligation, the net pension and other postretirement benefit obligation
decreased less than 2% during 2020. In 2019, a net loss of $388 (after-tax) was
recorded in other comprehensive loss, primarily due to the decrease in the
discount rate, which was partially offset by the plan asset performance that was
greater than expected, and by the amortization of actuarial losses. In 2018, a
net loss of $114 (after-tax) was recorded in other comprehensive loss, primarily
due to the impact of the adoption of new accounting guidance that permits a
reclassification to Retained earnings for stranded tax effects resulting from
the Tax Cuts and Jobs Act of 2017, as well as the plan asset performance that
was less than expected, which were partially offset by the increase in the
discount rate and the amortization of actuarial losses.
Stock-Based Compensation. Howmet recognizes compensation expense for employee
equity grants using the non-substantive vesting period approach, in which the
expense is recognized ratably over the requisite service period based on the
grant date fair value. Forfeitures are accounted for as they occur. The fair
value of new stock options is estimated on the date of grant using a
lattice-pricing model. The fair value of performance awards containing a market
condition is valued using a Monte Carlo valuation model. Determining the fair
value at the grant date requires judgment, including estimates for the average
risk-free interest rate, dividend yield, volatility, and exercise behavior.
These assumptions may differ significantly between grant dates because of
changes in the actual results of these inputs that occur over time.
Compensation expense recorded in 2020, 2019, and 2018 was $46 ($42 after-tax),
$69 ($63 after-tax), and $40 ($31 after-tax), respectively.
Income Taxes. The provision (benefit) for income taxes is determined using the
asset and liability approach of accounting for income taxes. Under this
approach, the provision (benefit) for income taxes represents income taxes paid
or payable (or received or receivable) based on current year pre-tax income plus
the change in deferred taxes during the year. Deferred taxes represent the
future tax consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid, and result from differences between the
financial and tax bases of Howmet's assets and liabilities and are adjusted for
changes in tax rates and tax laws when enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized. In evaluating the need
for a valuation allowance, management considers all potential sources of taxable
income, including income available in carry-back periods, future reversals of
taxable temporary differences, projections of taxable income, and income from
tax planning strategies, as well as all available positive and negative
evidence. Positive evidence includes factors such as a history of profitable
operations, projections of future profitability within the carryforward period,
including from tax planning strategies, and Howmet's experience with similar
operations. Existing favorable contracts and the ability to sell products into
established markets are additional positive evidence. Negative evidence includes
items such as cumulative losses, projections of future losses, or carryforward
periods that are not long enough to allow for the utilization of a deferred tax
asset based on existing projections of income. Deferred tax assets for which no
valuation allowance is recorded may not be realized upon changes in facts and
circumstances, resulting in a future charge to establish a valuation allowance.
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Existing valuation allowances are re-examined under the same standards of
positive and negative evidence. If it is determined that it is more likely than
not that a deferred tax asset will be realized, the appropriate amount of the
valuation allowance, if any, is released. Deferred tax assets and liabilities
are also re-measured to reflect changes in underlying tax rates due to law
changes and the granting and lapse of tax holidays.
The 2017 Act created a new requirement that certain income earned by foreign
subsidiaries, Global Intangible Low Taxed Income ("GILTI"), must be included in
the gross income of the U.S. shareholder. In 2018, Howmet made a final
accounting policy election to apply a tax law ordering approach when considering
the need for a valuation allowance on net operating losses expected to offset
GILTI inclusions. Under this approach, reductions in cash tax savings are not
considered as part of the valuation allowance assessment. Instead, future GILTI
inclusions are considered a source of taxable income that support the
realizability of deferred tax assets.
Tax benefits related to uncertain tax positions taken or expected to be taken on
a tax return are recorded when such benefits meet a more likely than not
threshold. Otherwise, these tax benefits are recorded when a tax position has
been effectively settled, which means that the statute of limitations has
expired or the appropriate taxing authority has completed their examination even
though the statute of limitations remains open. Interest and penalties related
to uncertain tax positions are recognized as part of the provision for income
taxes and are accrued beginning in the period that such interest and penalties
would be applicable under relevant tax law until such time that the related tax
benefits are recognized.
Recently Adopted Accounting Guidance. See the Recently Adopted Accounting
Guidance section of Note B to the Consolidated Financial Statements in Part
II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K.
Recently Issued Accounting Guidance. See the Recently Issued Accounting Guidance
section of Note B to the Consolidated Financial Statements in Part II, Item
8. (Financial Statements and Supplementary Data) of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not material.
45

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Table of Contents

Latest news about Howmet Aerospace Inc.

Goldman Sachs Adjusts Howmet Aerospace Price Target to $77 From $65	Apr. 16	MT
Kenneth Steiner Submits a Shareholder Proposal to Howmet Aerospace	Apr. 08	CI
Baird Raises Price Target on Howmet Aerospace to $74 From $65, Maintains Outperform Rating	Apr. 08	MT
UBS Adjusts Howmet Aerospace Price Target to $71 From $66, Maintains Neutral Rating	Apr. 02	MT
Jefferies Raises Howmet Aerospace Price Target to $80 From $74, Maintains Buy Rating	Apr. 01	MT
Howmet Aerospace Appoints Johan Wall as President, Engineered Structures, Effective April 8, 2024	Mar. 25	CI
Transcript : Howmet Aerospace Inc. Presents at BofA Securities Global Industrials Conference 2024, Mar-19-2024 07:50 AM	Mar. 19
Howmet Aerospace Initiated at Outperform by RBC With $75 Price Target, Expects 'Execution, Capital Allocation to Support Elevated Sentiment'	Mar. 18	MT
Wall St Week Ahead-US value stocks draw bargain hunters while AI fever rages	Mar. 03	RE
Wall St Week Ahead-US value stocks draw bargain hunters while AI fever rages	Mar. 01	RE
Phew! The party continues!	Feb. 22
ANALYST RECOMMENDATIONS : Datadog, Doordash, Nvidia, Trimble, Walmart...	Feb. 22
KeyBanc Raises Price Target on Howmet Aerospace to $70 From $60, Keeps Overweight Rating	Feb. 21	MT
Transcript : Howmet Aerospace Inc. Presents at Barclays 41st Annual Industrial Select Conference 2024, Feb-21-2024 07:25 AM	Feb. 21
Barclays Adjusts Price Target on Howmet Aerospace to $65 From $60, Maintains Overweight Rating	Feb. 20	MT
UBS Adjusts Howmet Aerospace Price Target to $66 From $57, Maintains Neutral Rating	Feb. 15	MT
Deutsche Bank Adjusts Howmet Aerospace Price Target to $68 From $63, Maintains Buy Rating	Feb. 14	MT
Transcript : Howmet Aerospace Inc., Q4 2023 Earnings Call, Feb 13, 2024	Feb. 13
Howmet Aerospace Q4 Adjusted Earnings, Sales Rise; 2024 Guidance Issued	Feb. 13	MT
Aerospace supplier Howmet forecasts strong Q1 on aviation demand	Feb. 13	RE
Earnings Flash (HWM) HOWMET AEROSPACE Posts Q4 Revenue $1.73B, vs. Street Est of $1.65B	Feb. 13	MT
Earnings Flash (HWM) HOWMET AEROSPACE Reports Q4 EPS $0.57, vs. Street Est of $0.46	Feb. 13	MT
Tranche Update on Howmet Aerospace Inc.'s Equity Buyback Plan announced on August 18, 2021.	Feb. 13	CI
Howmet Aerospace Inc. Reports Earnings Results for the Fourth Quarter Ended December 31, 2023	Feb. 13	CI
Howmet Aerospace Inc. Provides Revenue Guidance for the First Quarter and Year 2024	Feb. 13	CI

Chart Howmet Aerospace Inc.

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Company Profile

Howmet Aerospace Inc. is a provider of advanced engineered solutions for the aerospace and transportation industries. The Companyâs segments include Engine Products, Fastening Systems, Engineered Structures and Forged Wheels. The Engine Products segment utilizes advanced designs and techniques to support engine programs and produces components for aircraft engines and industrial gas turbines. The Fastening Systems segment produces aerospace and industrial fastening systems, as well as commercial transportation fasteners and installation tools. The Engineered Structures segment produces titanium ingots and mill products for aerospace and defense applications and is vertically integrated to produce titanium forgings, extrusions, forming and machining services for airframe, wing, aero-engine, and landing gear components. The Forged Wheels segment manufactures forged aluminum wheels for trucks, buses, and trailers and related products for the global commercial transportation market.

Sector

Aerospace & Defense

Calendar

2024-05-02 - Q1 2024 Earnings Release

Related indices

S&P 500

More about the company

Income Statement Evolution

More financial data

Ratings for Howmet Aerospace Inc.

Trading Rating

Investor Rating

ESG Refinitiv

B+

More Ratings

Analysts' Consensus

Sell

Buy

Mean consensus

BUY

Number of Analysts

Last Close Price

64.76 USD

Average target price

71.65 USD

Spread / Average Target

+10.64%

Consensus

EPS Revisions

Estimates Revisions

Quarterly earnings - Rate of surprise

Company calendar

Sector Other Aircraft Parts Manufacturing

	1st Jan change	Capi.
HOWMET AEROSPACE INC.	+19.70%	26.45B
TRANSDIGM GROUP INC.	+22.82%	69.09B
HEICO CORPORATION	+14.51%	25.08B
AECC AVIATION POWER CO.,LTD	-8.11%	12.64B
MTU AERO ENGINES AG	+14.62%	12.91B
CURTISS-WRIGHT CORPORATION	+13.70%	9.7B
AVIC AIRBORNE SYSTEMS CO., LTD.	-10.85%	7.85B
MEGGITT PLC	-.--%	7.35B
SPIRIT AEROSYSTEMS HOLDINGS, INC.	+1.10%	3.73B
AECC AERO-ENGINE CONTROL CO.,LTD.	-7.24%	3.35B

Other Aircraft Parts Manufacturing

Howmet Aerospace Inc.

Equities

HWM

US4432011082

Aerospace & Defense

HOWMET AEROSPACE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

EPS Revisions