UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 20192020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3610
(Exact name of registrant as specified in its charter)
| Delaware | 25-0317820 | |||||||
| (State of incorporation) | (I.R.S. Employer Identification No.) | |||||||
201 Isabella Street, Suite 200,, Pittsburgh,, Pennsylvania15212-5872
(Address of principal executive offices) (Zip code)
Investor Relations----------------(412) 553-1950
Office of the Secretary-----------(412) (412) 553-1940
(Registrant’s telephone numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $1.00 per share | New York Stock Exchange | |||||||
$3.75 Cumulative Preferred Stock, par value $100.00 per share | NYSE American | |||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ✓ No .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No ✓ .
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ✓ No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ✓ No .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [✓]☑ Accelerated filer []☐ Non-accelerated filer []☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ✓
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ✓.
The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $11$7 billion. As of February 21, 2020,12, 2021, there were 435,918,568433,614,667 shares of common stock, par value $1.00 per share, of the registrant outstanding.
Documents incorporated by reference.
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for its 20202021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (Proxy Statement).
Explanatory Note
On April 1, 2020, Arconic Inc. completed the separation of its business into two independent, publicly-traded companies: Howmet Aerospace Inc. (the new name for Arconic Inc.) and Arconic Corporation. The financial results of Arconic Corporation for all periods prior to April 1, 2020, have been retrospectively reflected in the Statement of Consolidated Operations as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods prior to April 1, 2020. Additionally, the related assets and liabilities associated with Arconic Corporation in the December 31, 2019 Consolidated Balance Sheet are classified as assets and liabilities of discontinued operations. The cash flows, comprehensive income, and equity related to Arconic Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows, Statement of Consolidated Comprehensive Income, and Statement of Changes in Consolidated Equity, respectively, for all periods prior to April 1, 2020.
TABLE OF CONTENTS
| Page(s) | ||||||||
| Part I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Part III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| Part IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
Note on Incorporation by Reference
In this Form 10-K, selected items of information and data are incorporated by reference to portions of the Proxy Statement. Unless otherwise provided herein, any reference in this report to disclosures in the Proxy Statement shall constitute incorporation by reference of only that specific disclosure into this Form 10-K.
PART I
Item 1. Business.
General
Howmet Aerospace Inc. (formerly known as Arconic Inc.) is a Delaware corporation with its principal office in Pittsburgh, Pennsylvania and the successor to Arconic Pennsylvania (as defined below) which was formed in 1888 and formerly known as Alcoa Inc. In this report, unless the context otherwise requires, “Arconic” or“Howmet”, the “Company” means Arconic, “we”, “us” and “our” refer to Howmet Aerospace Inc., a Delaware corporation, and all subsidiariesits consolidated for the purposes of its financial statements.subsidiaries.
The Company’s Internet address is http://www.arconic.com. Arconicwww.howmet.com. Howmet makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC)("SEC"). The Company's website is included in this annual report on Form 10-K as an inactive textual reference only. The information on, or accessible through, the Company’s Internet sitewebsite is not a part of, or incorporated by reference in, this annual report on Form 10-K. The SEC maintains an Internet site that contains these reports at http://www.sec.gov.www.sec.gov.
Forward-Looking Statements
This report contains (and oral communications made by ArconicHowmet may contain) statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect Arconic’sHowmet’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, statements, forecasts and outlook relating to the growthcondition of the aerospace, automotive, commercial transportation and other end markets; statements and guidance regarding future financial results, operating performance, or operating performance; statements about Arconic’sestimated or expected future capital expenditures; future strategic actions; and Howmet's strategies, outlook, and business and financial prospects;prospects. These statements reflect beliefs and statements regarding potential share gains.assumptions that are based on Howmet’s perception of historical trends, current conditions and expected future developments, as well as other factors Howmet believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict. Although ArconicHowmet believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.
For a discussion of some of the specific factors that may cause Arconic’sHowmet’s actual results to differ materially from those projected in any forward-looking statements, see the following sections of this report: Part I, Item 1A.1A (Risk Factors), Part II, Item 7.7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), including the disclosures under Segment Information and Critical Accounting Policies and Estimates, and Note TV to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data). Market projections are subject to the risks discussed in this report and other risks in the market. ArconicHowmet disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law.
Overview
Background
The Arconic hasInc. Separation Transaction
Howmet Aerospace Inc. is the new name for Arconic Inc., following Arconic Inc.’s separation of its businesses on April 1, 2020 (the “Arconic Inc. Separation Transaction”) into two reportable segments, which are organized by product on a worldwide basis:independent, publicly traded companies – Howmet Aerospace Inc. and Arconic Corporation. Following this separation, Howmet retains the Engine Products, Fastening Systems, Engineered Products
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Structures, and Forgings (EP&F)Forged Wheels businesses; and GlobalArconic Corporation holds the Rolled Products, (GRP).Aluminum Extrusions, and Building and Construction Systems businesses. The Company trades under the symbol “HWM” on the New York Stock Exchange, and Arconic Corporation trades under the symbol “ARNC” on the New York Stock Exchange.
The Arconic Inc. Separation Transaction was effected by a distribution of all outstanding shares of Arconic Corporation common stock to the Company’s stockholders (the “Distribution of Arconic”). The Company’s stockholders of record as of the close of business on March 19, 2020 (the “2020 Record Date”) received one share of Arconic Corporation common stock for every four shares of the Company’s common stock held as of the 2020 Record Date. The Company did not issue fractional shares of Arconic Corporation common stock in the Distribution of Arconic. Instead, each stockholder otherwise entitled to receive a fractional share of Arconic Corporation common stock received cash in lieu of fractional shares.
In connection with the Arconic Inc. Separation Transaction, Howmet and Arconic Corporation entered into several agreements that govern the relationship of the parties following the separation, including the following: Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, certain Patent, Know-How and Trade Secret License Agreements, certain Trademark License Agreements, Raw Material Supply Agreements, Second Supplemental Tax and Project Certificate and Agreement, and Lease and Property Management Agreement.
The 2017 Reincorporation of Howmet (then known as Arconic Inc.)
On December 31, 2017 (the “Effective Date”), Arconic Inc., a Pennsylvania corporation (“Arconic Pennsylvania” or, prior to the Reincorporation (as defined below), the “Company”), effected the change of the Company’sArconic Pennsylvania’s jurisdiction of incorporation from Pennsylvania to Delaware (the “Reincorporation”) by merging (the “Reincorporation Merger”) with a direct wholly owned Delaware subsidiary, Arconic Inc. (in this section, “Arconic Delaware” or, following the Reincorporation, the “Company”), pursuant to an Agreement and Plan of Merger, (the “Reincorporation Merger Agreement”), dated as of October 12, 2017, by and
between Arconic Pennsylvania and Arconic Delaware. Arconic Pennsylvania shareholders approved the Reincorporation Merger to effect the Reincorporation at a Special Meeting of Shareholders held on November 30, 2017. As a result of the Reincorporation, (i) Arconic Pennsylvania has ceased to exist, (ii) Arconic Delaware automatically inherited the reporting obligations of Arconic Pennsylvania under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (iii) Arconic Delaware is deemed to be the successor issuer to Arconic Pennsylvania.
The common stock, par value $1.00 per share, of Arconic Pennsylvania (the “Arconic Pennsylvania Common Stock”) was listed for trading on the New York Stock Exchange and traded under the symbol “ARNC.” As of the Effective Date, this symbol, without interruption, representsrepresented shares of common stock, par value $1.00 per share, of Arconic Delaware (the “Arconic Delaware Common Stock”). There was no change in the Exchange Act File Number assigned by the SEC as a result of the Reincorporation.
As of the Effective Date, the rights of the Company’s stockholders began to be governed by the General Corporation Law of the State of Delaware, the Certificate of Incorporation of Arconic Delaware (the “Delaware Certificate”) and the Bylaws of Arconic Delaware (the “Delaware Bylaws”).Delaware.
Other than the change in corporate domicile, the Reincorporation did not result in any change in the business, physical location, management, financial condition or number of authorized shares of the Company, nor did it result in any change in location of its current employees, including management. On the Effective Date, (i) the directors and officers of Arconic Pennsylvania prior to the Reincorporation continued as the directors and officers of Arconic Delaware after the Reincorporation, (ii) each outstanding share of Arconic Pennsylvania Common Stock was automatically converted into one share of Arconic Delaware Common Stock, (iii) each outstanding share of Serial Preferred Stock, par value $100 per share, of Arconic Pennsylvania (the “Arconic Pennsylvania Preferred Stock”) was automatically converted into one share of Serial Preferred Stock, par value $100 per share, of Arconic Delaware (the “Arconic Delaware Preferred Stock”) and (iv) all of Arconic Pennsylvania’s employee benefit and compensation plans immediately prior to the Reincorporation were continued by Arconic Delaware, and each outstanding equity award and notional share unit relating to shares of Arconic Pennsylvania Common Stock was converted into an equity award or notional share unit, as applicable, relating to an equivalent number of shares of Arconic Delaware Common Stock on the same terms and subject to the same conditions. Beginning aton the effective time of the Reincorporation,Effective Date, each certificate representing Arconic Pennsylvania Common Stock or Arconic Pennsylvania Preferred Stock was deemed for all corporate purposes to evidence ownership of Arconic Delaware Common Stock or Arconic Delaware Preferred Stock, as applicable. The Company’s stockholders may, but are not required to, exchange their stock certificates as a result of the Reincorporation.
The foregoing descriptions of the Arconic Delaware Common Stock, the Arconic Delaware Preferred Stock, the Delaware Certificate and the Delaware Bylaws are qualified in their entirety by the full text of the Delaware Certificate and the Delaware Bylaws, which are filed as Exhibits 3(a) and 3(b), respectively, to this report.
Alcoa CorporationInc. Separation Transaction
On November 1, 2016, Alcoa Inc. completed the separation of its business into two independent, publicly traded companies (the “Separation of Alcoa”“Alcoa Inc. Separation Transaction”) – Alcoa Corporation and Arconic Inc. (the new name for Alcoa Inc. and which, through the transactions described above, later became Howmet Aerospace Inc.). and Alcoa Corporation. Following the Alcoa Inc. Separation of Alcoa, Alcoa Corporation holdsTransaction, the Alumina and Primary Metals segments, the rolling mill at the Warrick, Indiana operations and the 25.1% stake in the Ma’aden Rolling Company in Saudi Arabia previously held by the Company. The Company retained the Global Rolled Products (other than the rolling mill at the Warrick, Indiana operations and the 25.1% ownership stake in the Ma’aden Rolling Company), the Engineered Products and Solutions and the Transportation and Construction Solutions segments. Alcoa Corporation comprised the Alumina and Primary Metals segments,
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the rolling mill at the Warrick, Indiana operations, and the 25.1% stake in the Ma’aden Rolling Company in Saudi Arabia previously held by the Company.
The Alcoa Inc. Separation of AlcoaTransaction was effected by a pro rata distribution of 80.1% of the outstanding shares of Alcoa Corporation common stock to the Company’s shareholders (the “Distribution of Alcoa”). The Company’s shareholders of record as of the close of business on October 20, 2016 (the “Record“2016 Record Date”) received one share of Alcoa Corporation common stock for every three shares of the Company’s common stock held as of the 2016 Record Date. The Company did not issue fractional shares of Alcoa Corporation common stock in the Distribution of Alcoa. Instead, each shareholder otherwise entitled to receive a fractional share of Alcoa Corporation common stock received cash in lieu of fractional shares.
The Company distributed 146,159,428 shares of common stock of Alcoa Corporation in the Distribution of Alcoa and retained 36,311,767 shares, or approximately 19.9%, of the common stock of Alcoa Corporation immediately following the Distribution of Alcoa. During 2017, the Company disposed all of its retained interest in Alcoa Corporation.
As a result of the Distribution of Alcoa, Alcoa Corporation became an independent public company trading under the symbol “AA” on the New York Stock Exchange, and the Company tradestraded under the symbol “ARNC” on the New York Stock Exchange.
On October 31, 2016, in connection with the Alcoa Inc. Separation of Alcoa and the Distribution of Alcoa,Transaction, Arconic Inc. entered into several agreements with Alcoa Corporation or its subsidiaries that govern the relationship of the parties following the Distribution of Alcoa, including the following: Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, and certain Patent, Know-How, Trade Secret License and Trademark License Agreements, Toll Processing and Services Agreement, Master Agreement for the Supply of Primary Aluminum, Massena Lease and Operations Agreement, Fusina Lease and Operations Agreement, and Stockholder and Registration Rights Agreement. The Toll Processing and Services Agreement expired by its terms at the end of 2018.Agreements.
Description of the Business
For the Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
Innovative flat-rolled products | 39 | % | 40 | % | 39 | % | ||
| Engine products | 24 | % | 21 | % | 21 | % | ||
| Fastening systems | 11 | % | 11 | % | 11 | % | ||
| Engineered structures | 8 | % | 13 | % | 13 | % | ||
Aerospace (Commercial and machined metal products (titanium and aluminum) for variousDefense) End Market. Howmet’s largest end markets.
Commercial Transportation End Market. The commercial transportation end market represented approximately 16% of the Company’s revenue in April2020. The Company invented the forged aluminum wheel in 1948, and continues to advance technology to deliver breakthrough solutions that make trucks and buses lighter, more fuel efficient and sharper-looking. Howmet’s forged aluminum wheels are a leading choice for commercial trucks and mass transportation vehicles because they can reduce weight and save fuel. The strength of 2018, was moved to Corporate. In the first quarterCompany’s rivets, bolts and fasteners offers another light-weighting solution that delivers performance.
Industrial and Other End Markets. Industrial and other end markets include industrial gas turbines, oil and gas, and other industrials, which represented approximately 15% of 2019, the Company transferred its aluminum extrusions operations (Aluminum Extrusions) from itsCompany’s revenue in 2020.
Howmet has four reportable segments, which are organized by product on a worldwide basis: Engine Products, Fastening Systems, Engineered Structures business unit within the EP&F segment to the GRP segment, based on synergies with GRP including similar customer base, technologies, and manufacturing capabilities.Forged Wheels.
Fastening Systems. Systems
Fastening Systems produces aerospace and industrial fasteners, latches, bearings, fluid fittings and installation tools. A leading producer of highly engineered aerospace fasteners with a broad range of fastening systems, as well asthe segment also supplies the commercial transportation, fasteners.renewable, and material handling industries. The business’s high-tech, multi-material fastening
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systems are found nose to tail on commercial and military aircraft, and aero engines. The business’s products are also critical components ofas well as on jet engines, industrial gas turbines, automobiles, commercial transportation vehicles, wind turbines, solar power systems, and construction and industrial equipment.equipment.
Engineered Structures. Structures
Engineered Structures produces titanium and aluminum ingots and mill products for aerospace and defense applications and is vertically integrated to produce structural investment castings,titanium forgings, extrusions forming and extrusions,machining services for airframe, wing, aero-engine, and landing gear components. Engineered Structures also provides multi-material airframe subassembliesproduces aluminum forgings, nickel forgings, and solutions related to advanced technologiesaluminum machined components and materials, such as 3D printingassemblies for aerospace and titanium aluminides.defense applications. The principal end markets served by Engineered Structures are commercial aerospace, defense aerospace, and land and sea defense.
Forged Wheels.Wheels
Forged Wheels providesmanufactures forged aluminum truck, bus, and trailer wheels and related products for heavy-duty trucks and the commercial transportation markets.end market globally. The Company’s portfolio of wheels is sold under the product brand name Alcoa® Wheels. Its Ultra ONE® Wheel with MagnaForce® alloy is the lightest portfolio of wheels on the market. The Company’s proprietary Dura-Bright® surface treatment is unmatched in appearance and corrosion protection.
For additional discussion of the EP&Feach segment's business, see “Results of Operations—Segment Information” in Part II, Item 7.7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note BD to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements
Sales by End Market and Supplementary Data).Significant Customer Revenue
| For the Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Aerospace - Commercial | 50 | % | 59 | % | 59 | % | |||||||||||
| Aerospace - Defense | 19 | % | 13 | % | 11 | % | |||||||||||
| Commercial Transportation | 16 | % | 17 | % | 18 | % | |||||||||||
| Industrial and Other | 15 | % | 11 | % | 12 | % | |||||||||||
In December 2019, Arconic c2020, General Electric Company, Raytheon Technologies Corporation and The Boeing Company represented approximately losed11%, 9% and 8%, respectively, of the saleCompany’s third-party sales. The loss of its forgings business in the United Kingdom subject to working capital and other adjustments. The forgings business primarily produced steel, titanium, and nickel based forged components for aerospace, mining, and off-highway markets and its operating results and assets and liabilities were included in the EP&F segment.any such significant customer could have a material adverse effect on such businesses. See Part I, Item 1A (Risk Factors).
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| Country | Facility Location | Segment | Products | |||||||||||||||||
| Australia | Oakleigh | Fastening Systems | Fasteners | |||||||||||||||||
| Canada | Georgetown, Ontario2 | Engine Products | Aerospace Castings | |||||||||||||||||
| Laval, Québec | Engine Products; Engineered Structures | Aerospace Castings and Machining | ||||||||||||||||||
| China | Suzhou2 | Engine Products; Fastening Systems; Forged Wheels | Fasteners, Rings and Forgings | |||||||||||||||||
| France | Dives-sur-Mer | Engine Products | Aerospace and Industrial Gas Turbine Castings | |||||||||||||||||
| Evron | Engine Products | Aerospace and Specialty Castings | ||||||||||||||||||
| Gennevilliers | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
| Montbrison | Fastening Systems | Fasteners | ||||||||||||||||||
| �� | St. Cosme-en-Vairais2 | Fastening Systems | Fasteners | |||||||||||||||||
| Toulouse | Fastening Systems | Fasteners | ||||||||||||||||||
| Us-par-Vigny | Fastening Systems | Fasteners | ||||||||||||||||||
| Germany | Bestwig | Engine Products | Aerospace Castings | |||||||||||||||||
| Erwitte | Engine Products | Machining of Aerospace Castings | ||||||||||||||||||
Hildesheim-Bavenstedt2 | Fastening Systems | Fasteners | ||||||||||||||||||
Kelkheim2 | Fastening Systems | Fasteners | ||||||||||||||||||
| Hungary | Nemesvámos | Fastening Systems | Fasteners | |||||||||||||||||
| Székesfehérvár | Engine Products; Forged Wheels | Aerospace and Industrial Gas Turbine Castings and Forgings | ||||||||||||||||||
| Japan | JÔetsu City2 | Forged Wheels | Forgings | |||||||||||||||||
| Nomi | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
| Mexico | Ciudad Acuña2 | Engine Products; Fastening Systems | Aerospace Castings/ | |||||||||||||||||
| Monterrey | Forged Wheels | Forgings | ||||||||||||||||||
| Morocco | Casablanca2 | Fastening Systems | Fasteners | |||||||||||||||||
| United Kingdom | Ecclesfield | Metal, Billets | ||||||||||||||||||
Exeter2 | Engine Products | Aerospace and Industrial Gas Turbine Castings and Alloy | ||||||||||||||||||
| Glossop | Metal, Billets | |||||||||||||||||||
| Ickles | Metal, Billets | |||||||||||||||||||
Leicester2 | Fastening Systems | Fasteners | ||||||||||||||||||
| Low Moor | Engineered Structures | Extrusions | ||||||||||||||||||
Redditch2 | Fastening Systems | Fasteners | ||||||||||||||||||
| Telford | Fastening Systems | Fasteners | ||||||||||||||||||
| Welwyn Garden City | Engineered Structures | Aerospace Formed Parts | ||||||||||||||||||
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| Country | Facility Location | Segment | Products | |||||||||||||||||
| United States | Tucson, AZ2 | Fastening Systems | Fasteners | |||||||||||||||||
Carson, CA2 | Fastening Systems | Fasteners | ||||||||||||||||||
City of Industry, CA2 | Fastening Systems | Fasteners | ||||||||||||||||||
| Fontana, CA | Engine Products | Rings | ||||||||||||||||||
Fullerton, CA2 | Fastening Systems | Fasteners | ||||||||||||||||||
| Rancho Cucamonga, CA | Engine Products | Rings | ||||||||||||||||||
| Sylmar, CA | Fastening Systems | Fasteners | ||||||||||||||||||
| Torrance, CA | Fastening Systems | Fasteners | ||||||||||||||||||
| Branford, CT | Engine Products | Aerospace Coatings | ||||||||||||||||||
| Winsted, CT | Engine Products | Aerospace Machining | ||||||||||||||||||
| Savannah, GA | Engineered Structures | Forgings, Disks | ||||||||||||||||||
| La Porte, IN | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
| Whitehall, MI | Engine Products | Aerospace and Industrial Gas Turbine Castings and Coatings, Titanium Alloy and Specialty Products | ||||||||||||||||||
| Washington, MO | Engineered Structures | Aerospace Formed Parts, Titanium Mill Products | ||||||||||||||||||
| Big Lake, MN | Engineered Structures | Aerospace Machining | ||||||||||||||||||
| New Brighton, MN | Engineered Structures | Aerospace Machining | ||||||||||||||||||
| Dover, NJ | Engine Products | Aerospace and Industrial Gas Turbine Castings and Alloy | ||||||||||||||||||
| Verdi, NV | Engine Products | Rings | ||||||||||||||||||
Kingston, NY2 | Fastening Systems | Fasteners | ||||||||||||||||||
| Rochester, NY | Engine Products | Rings | ||||||||||||||||||
| Barberton, OH | Forged Wheels | Machining of Forgings | ||||||||||||||||||
Canton, OH | Engineered Structures | Ferro-Titanium Alloys and Titanium Mill Products | ||||||||||||||||||
| Cleveland, OH | Engine Products; Engineered Structures; Forged Wheels | Forgings, Investment Casting Equipment, and Aerospace Components | ||||||||||||||||||
| Niles, OH | Engineered Structures | Titanium Mill Products | ||||||||||||||||||
Morristown, TN2 | Engine Products | Aerospace and Industrial Gas Turbine Ceramic Products | ||||||||||||||||||
Houston, TX2 | Engineered Structures | Extrusions | ||||||||||||||||||
Waco, TX2 | Fastening Systems | Fasteners | ||||||||||||||||||
| Wichita Falls, TX | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
Hampton, VA2 | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
| Martinsville, VA | Engineered Structures | Titanium Mill Products | ||||||||||||||||||
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Sources and Availability of Raw Materials
Important raw materials purchased in 20192020 for each of the Company’s reportable segments are listed below.
| Engine Products | Fastening Systems | Engineered | ||||||||||
| Aluminum Alloys | Energy | |||||||||||
| Cobalt | Energy | Nickel Alloys | Primary and Scrap Aluminum | |||||||||
| Nickel Alloys and Stainless Steels | Primary Aluminum | |||||||||||
| Nickel | Steels | |||||||||||
| Titanium Alloys | ||||||||||||
| Titanium | ||||||||||||
Generally, otherraw materials are purchased from third-party suppliers under competitively priced supply contracts or bidding arrangements. The Company believes that the raw materials necessary to its business are and will continue to be available.
Patents, Trade Secrets and Trademarks
The Company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The Company’s rights under its patents, as well as the products made and sold under them, are important to the Company as a whole and, to varying degrees, important to each business segment. The patents owned by ArconicHowmet generally concern metal alloys, particular products, manufacturing equipment or techniques. Arconic’sHowmet’s business as a whole is not, however, materially dependent on any single patent, trade secret or trademark. As a result of product development and technological advancement, the Company continues to pursue patent protection in jurisdictions throughout the world. As of the end of 2019,2020, the Company’s worldwide patent portfolio consists of approximately 1,635959 granted patents (1,004 EP&F patents and 631 GRP patents) and 538183 pending patent applications (284 EP&F patent applications and 254 GRP patent applications).applications.
The Company also has a significant number of trade secrets, mostly regarding manufacturing processes and material compositions that give many of its businesses important advantages in their markets. The Company continues to strive to improve those processes and generate new material compositions that provide additional benefits. With respect to domestic and international registered trademarks, the Company has many that have significant recognition within the markets that are served. Examples include the name “Arconic” and the Arconic symbol for aluminum, nickel, and titanium products, Howmet® metal castings, Huck® fasteners, Kawneer® building panels and Dura-Bright® wheels with easy-clean surface treatments. A significant trademark filing campaign for the names “Howmet” and “Howmet Aerospace” along with its “H” logo was initiated in 2019, in support of the corporate launch of Howmet Aerospace Inc. As of the end of 2019,2020, the Company’s worldwide trademark portfolio consists of approximately 2,0661,372 registered trademarks (1,450 EP&F trademarks and 616 GRP trademarks) and 818329 pending trademark applications (361 EP&F trademark applications and 457 GRP trademark applications).applications. The Company’s rights under its trademarks are important to the Company as a whole and, to varying degrees, important to each business segment.
Competitive Conditions
Principal competitors in the EP&F segment include Berkshire Hathaway Inc., through its 2016 acquisition of Precision Castparts Corporation and subsidiaries, for titanium and titanium-based alloys, precision forgings, seamless rolled rings,
investment castings and aerospace fasteners; VSMPO (Russia) for titanium and titanium-based alloys and precision forgings; the High-Performance Materials & Components segment of Allegheny Technologies, Inc. (ATI) for titanium and titanium-based alloys, precision forgings, and investment castings; Lisi Aerospace (France) for aerospace fasteners; and Aubert & Duval (part of Eramet Group in France) for precision forgings. Other competitors include Doncasters Group Ltd. (UK) and Consolidated Precision Products Corp. (owned by Warburg Pincus and Berkshire Partners) for investment castings; Weber Metals (part of Otto Fuchs) for precision forgings; and Forgital and Frisa (Mexico) for seamless rings.
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aluminum wheel suppliers (both forged and cast aluminum wheels) from China, Taiwan, India and South Korea attempting to penetrate the global commercial transportation market.
Several of Arconic’sHowmet’s largest customers have captive superalloy furnaces for producing airfoil investment castings for their own use. Many other companies around the world also produce superalloy investment castings, and some of these companies currently compete with ArconicHowmet in the aerospace and other markets, while others are capable of competing with the Company should they choose to do so.
International competition in the investment castings, fasteners, rings and forgings markets may also increase in the future as a result of strategic alliances among engine original equipment manufacturers (OEMs)(“OEMs”), aero-structure prime contractors, and overseas companies, especially in developing markets, particularly where “offset” or “local content” requirements create purchase obligations with respect to products manufactured in or directed to a particular country.
Environmental Matters
Information relating to environmental matters is included in Note TV to the Consolidated Financial Statements under the caption “Environmental Matters.” Approved capitalCapital expenditures for new or expanded facilities for environmental control for 2021 and 2022 are $14estimated to be less than $5 million per year.
Human Capital
To recruit, attract, develop and retain world-class talent, the Company has created a culture that embraces diversity, drives inclusion, and empowers and engages our employees.
Training and Development
The Company offers an integrated approach, enabling our employees to own their development and create rewarding careers that draw on their aptitudes and support their ambitions. We provide learning and development opportunities and equip our managers to provide ongoing coaching and feedback, so employees maximize their performance and potential, delivering success for Howmet.
Diversity, Equity and Inclusion
Events in 2020, particularly in the United States, underscored the importance and power of diversity, equity and inclusion ("DEI"). Howmet’s inclusive, respectful and values-based company culture fosters inclusive work environments that leverage the diversity of backgrounds, experience and thought within our organization. The Company partners with key external organizations that focus on DEI, including the Human Rights Campaign, the National Hispanic Corporate Council and Diversity Best Practices, to review and continuously improve our DEI initiatives. We continue to seek additional partners to further eliminate discrimination and implicit bias from the Company’s policies and processes.
During 2020, we renewed our commitment to supporting our six employee resource groups ("ERGs") – Howmet African Heritage Network, Howmet Hispanic Network, Howmet Next Generation Network, Howmet Pride Network, Howmet Veterans Network and Howmet Women’s Network. The ERGs provide workplace networks for employees who have shared characteristics, special interests or life experiences. They offer a conduit to professional development, strengthen business impact internally and externally, and promote commitments to a diverse workplace. During 2020, the ERGs provided a positive way for the Company to direct dedicated company resources toward employee education, community building and social impact initiatives.
The Company also provided diversity awareness training on implicit bias and estimated expendituresadded inclusion to our leadership competency development in 2020.
Health and Safety
Howmet’s strong health and safety culture empowers our employees and contractors to take personal responsibility for such purposes are $15milliontheir actions and the safety of their coworkers. This culture is supported by internal policies, standards, rules and procedures that clearly articulate our stringent requirements for 2021.working safely in all of our facilities worldwide. The Company embeds annual health and safety goals and objectives into its operating plans to progress against our ultimate goal of zero incidents. We prioritize our risk management processes toward the prevention of fatality and serious injury potential to focus on the hazards that have the potential for life-altering outcomes.
COVID-19 represented the biggest health challenge in the history of our Company, impacting our employees, suppliers and customers. This adverse situation became a unifying moment, as our employees worked tirelessly to establish internal and external programs and protocols to protect our people and processes, which were deemed essential for the aerospace, defense and transportation industries. Through our pandemic deployment system, the Company readied our plants around the world with a comprehensive toolbox based on risk. We structured our location pandemic programs around entry screening, self- assessment of symptoms, hygiene, masks, social distancing and robust implementation of tracing and quarantine protocols.
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Special pandemic-related policies for leave and alternative schedules were put in place to incentivize staying at home when sick. In addition, for employees who could meet their work commitments remotely, we provided resources and equipment to enable them to work from home. Access to mental health and resilience support was communicated and made available through our employee assistance partners.
Employees
Total worldwide employment at the end of 20192020 was approximately 41,70019,700 employees in 2824 countries. Many, but less than 50%, of these employees are represented by labor unions. The Company believes that relations with its employees and any applicable union representatives generally are good.
There are nine collective bargaining agreements in the United States with varying expiration dates. In the United States, the largest collective bargaining agreement is the master collective bargaining agreement between ArconicHowmet and the United Steelworkers (USW).Autoworkers ("UAW") at our Whitehall, Michigan location. The USW masterWhitehall UAW agreement covers approximately 3,000 employees at fourU.S. locations;1,000 employees; the current labor agreement expires on May 15, 2022. There are 17March 31, 2023. In addition to the employees covered by the Whitehall UAW agreement, approximately 1,600 other collective bargaining agreementsemployees in the United States with varying expiration dates, including those in the master agreement.are also represented by labor unions.
On a regional basis, collective bargaining agreements with varying expiration dates cover employees in Europe, and Russia, North America, South America, and Asia.
Executive Officers of the Registrant
The names, ages, positions and areas of responsibility of the executive officers of the Company as of February 26, 202016, 2021 are listed below. The Company’s executive officers are elected or appointed to serve until the next annual meeting of the Board of Directors (held in conjunction with the annual meeting of shareholders), except in the case of earlier death, retirement, resignation or removal.
Ken Giacobbe, 54,55, Executive Vice President and Chief Financial Officer. Mr. Giacobbe was elected Executive Vice President and Chief Financial Officer of ArconicHowmet effective November 1, 2016. Mr. Giacobbe joined ArconicHowmet in 2004 as Vice President of Finance for Global Extruded Products, part of Alcoa Forgings and Extrusions. He then served as Vice President of Finance for the Company’s Building and Construction Systems business from 2008 until 2011. In 2011, he assumed the role of Group Controller for the Engineered Products and ForgingsSolutions segment. From January 2013 until October 2016, Mr. Giacobbe served as Chief Financial Officer of the Engineered Products and ForgingsSolutions segment. Before joining Arconic,Howmet, Mr. Giacobbe held senior finance roles at Avaya and Lucent Technologies.
Neil E. Marchuk, 62,63, Executive Vice President and Chief Human Resources.Resources Officer. Mr. Marchuk was elected to his current positionExecutive Vice President and Chief Human Resources Officer of Howmet effective March 1, 2019. Prior to joining Arconic,Howmet, from January 2016 to February 2019, he was Executive Vice President and Chief Human Resources Officer at Adient, an automotive manufacturer. From July 2006 to May 2015, Mr. Marchuk was Executive Vice President of Human Resource at TRW Automotive, and served as TRW’s Vice President, Human Resources from September 2004 to July 2006. Prior to joining TRW, from December 2001 to August 2004, Mr. Marchuk was Director Corporate Human Resources for E.I. Du Pont De Nemours and Company (“E.I. Du Pont”). From September 1999 to November 2001, Mr. Marchuk was Director Global HR Delivery for E.I. Du Pont. From February 1999 to August 1999, Mr. Marchuk served E.I. Du Pont as its Global HR Director Global Services Division.
Paul Myron, 53,54, Vice President and Controller. Mr. Myron was elected Vice President and Controller of ArconicHowmet effective November 1, 2016. Mr. Myron joined ArconicHowmet as a systems analyst in Pittsburgh and in 1992 relocated to the Company’s
Davenport, Iowa facility as a product accountant. He served in numerous financial management positions from 1995 until 2000 when he was named Commercial Manager and Controller for the Atlantic division of the Alcoa World Alumina and Chemicals business. In 2002, Mr. Myron was appointed Vice President of Finance, Alcoa Primary Metals and later became Vice President of Finance, Alcoa World Alumina and Chemicals. In 2005 Mr. Myron was named Director of Financial Planning and Analysis, accountable for Arconic’sthe Company’s financial planning, analysis, and reporting worldwide. In February 2012, he became Director of Finance Initiatives for the Engineered Products and ForgingsSolutions segment, overseeing specific financial initiatives and projects within the group. From July 2012 until his most recent appointment, Mr. Myron served as Vice President, Finance and Business Excellence for the Arconic Power and Propulsion business.
Tolga I. Oal, 49, Co-Chief Executive Officer.Mr. Oal was appointed Co-Chief Executive Officer of Howmet effective April 1, 2020. He served as President of Arconic Engineered Structures from May 2019 to April 2020. Prior to joining Howmet, Mr. Oal held leadership roles as President Driveline, President Americas and Senior Vice President Purchasing for American Axle & Manufacturing in Detroit, Michigan from September 2015 to April 2019. From June 2008 to September 2015, Mr. Oal held several leadership positions at TRW Automotive, including Vice President and General Manager of the Global Electronics Business Unit. Prior to his experience at TRW, Mr. Oal spent several years at Siemens VDO Automotive in Europe and the United States.
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John C. Plant, 66,67, Chairman and ChiefCo-Chief Executive Officer. Mr. Plant was appointed Co-Chief Executive Officer of Howmet effective April 1, 2020. He was the Company’s Chief Executive Officer of Arconic effectivefrom February 6, 2019.2019 to April 1, 2020. He has served as Arconic'sHowmet's Chairman since October 2017 and as a member of the Board since February 2016. Mr. Plant previously served as Chairman of the Board, President and Chief Executive Officer of TRW Automotive from 2011 to 2015, and as its President and Chief Executive Officer from 2003 to 2011. TRW Automotive was acquired by ZF Friedrichshafen AG in May 2015. Mr. Plant was a co-member of the Chief Executive Office of TRW Inc. from 2001 to 2003 and an Executive Vice President of TRW from the company's 1999 acquisition of Lucas Varity to 2003. Prior to TRW, Mr. Plant was President of Lucas Varity Automotive and managing director of the Electrical and Electronics division from 1991 through 1997.
Katherine H. Ramundo, 52,53, Executive Vice President, Chief Legal Officer and Secretary. Ms. Ramundo was elected to her current positionExecutive Vice President, Chief Legal Officer and Secretary of Howmet effective November 1, 2016. Prior to joining Arconic,Howmet, from January 2013 through August 2015, she was Executive Vice President, General Counsel and Secretary of ANN INC., the parent company of ANN TAYLOR and LOFT brands, based in New York. Prior to ANN INC., she served as Vice President, Deputy General Counsel and Assistant Secretary at Colgate-Palmolive, where she held various legal roles from November 1997 to January 2013. She began her career as a litigator in New York, practicing at major law firms, including Cravath, Swaine & Moore and Sidley & Austin.
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Item 1A. Risk Factors.
Risks Related to Our Business and Operations
Our business, results of operations, financial condition and/or cash flows have been and could continue to be materially adversely affected by the effects of the COVID-19 pandemic.
Any outbreaks of contagious diseases, public health epidemics or pandemics and other adverse public health developments in countries where we, our employees, customers and suppliers operate could have a material and adverse effect on our business, results of operations, financial condition and/or cash flows. Specifically, the COVID-19 pandemic affecting the global community, including the United States, Europe and South America, is adversely impacting our operations, and the nature and extent of the impact over time is highly uncertain and beyond our control. The extent to which COVID-19 further affects our operations over time will depend on future developments, which are highly uncertain, including the duration of the pandemic, the continued severity of the virus, resurgences and emergence of variants of the virus, the efficacy and availability of vaccines, and the extent of actions that may be taken to contain its impact. These actions include, but are not limited to, declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations, many of which have been implemented across much of the globe and all of which have negatively affected our business. The longer the duration, the greater the impact on our business and the more heightened the risk of a continuing material adverse effect on our business, results of operations, financial conditions and/or cash flows, as well as on our business strategies and initiatives. We continue to monitor guidelines proposed by federal, state and local, as well as foreign, governments with respect to measures for continued operation, which may change over time depending on public health, safety and other considerations. We are continuing to focus on the safety and protection of our workforce by continuing to implement additional safety protocols in light of COVID-19.
As a result of COVID-19 and the measures designed to contain its spread, our global sales, including to customers in the aerospace and commercial transportation industries that are impacted by COVID-19, have been and are expected to continue to be negatively impacted due to the disruption in demand, which has had and over time could continue to have a material adverse effect on our business, results of operations, financial condition and/or cash flows. The COVID-19 pandemic has subjected our operations, financial performance and financial condition to a number of risks, including, but not limited to, those discussed below:
•Business and operations risks: We continue to monitor the evolving situation relating to COVID-19 to determine whether we will need to significantly modify our business practices or take actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders. We have had a number of smaller manufacturing locations that have experienced periods of shutdowns. Future shutdowns will be dependent on facts and circumstances as they unfold, including based on the restrictions and limitations noted above. Additional shutdowns, while not required by governmental authorities, may be necessary to match our production to the reduced demand of our customers. In addition, due to the foregoing factors and potential further disruptions, we may be unable to perform fully on our contracts and our costs may increase. We may also face challenges in restoring our production levels if and when COVID-19 abates, including as a result of government-imposed or other limitations that prevent the return of all or a portion of our workforce, continue to disrupt demand and/or limit the capabilities of our suppliers. As a result of COVID-19 and its potential impact on the aerospace industry, the possibility exists that a sustained impact to our operations, financial results and market capitalization may require material impairments of our assets, including, but not limited to, goodwill, intangible assets, long-lived assets, and right-of-use assets. While we have already implemented plans to reduce costs, including certain headcount reductions, reductions in certain cash outflows, suspension of our common stock dividend and reductions in the levels of our capital expenditures, the longer-term impact of the COVID-19 pandemic is uncertain, but could continue to have a material adverse effect on our business, results of operations, financial condition and/or cash flows.
•Customer and supplier risks: We have limited visibility into future demand due to the disruptions resulting from COVID-19. The sharp decrease in air travel resulting from the COVID-19 pandemic and the measures that governments and private organizations worldwide have implemented in an attempt to contain its spread is adversely affecting, and will likely continue to adversely affect, airlines and airframers and their respective demand for our customers’ products and services. Aircraft manufacturers are reducing production rates due to fewer expected aircraft deliveries and, as a result, demand for products in the OEM market has significantly decreased. Several of our aerospace and commercial transportation customers temporarily suspended operations at certain production sites,
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reduced operations and production rates, and/or took cost-cutting actions, including, but not limited to, General Electric Company, Raytheon Technologies Corporation and The Boeing Company, which represented approximately 11%, 9% and 8%, respectively, of our third-party sales in 2020. Due to the foregoing factors and other cost-cutting measures, we are experiencing, and expect to continue experiencing, lower demand and volume for our products, customer requests for potential payment deferrals, pricing concessions or other contract modifications, and delays in deliveries and the achievement of other billing milestones. COVID-19 may also limit the ability of our counterparties generally to perform their obligations to us, including, but not limited to, our customers’ ability to make timely payments to us. These trends may lead to charges, impairments and other adverse financial impacts over time, as noted above, as we have historically depended upon the strength of these industries, particularly the commercial aerospace industry. In addition, the ongoing COVID-19 pandemic may negatively impact customer contract negotiations, including the ability to negotiate acceptable terms in contract renewal negotiations and our ability to obtain new customers. Similarly, our suppliers may not have the materials, capacity, or capability to manufacture our products according to our schedule and specifications. To date, we have not experienced significant disruption to our supply chain. If our suppliers’ operations were to be impacted, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would adversely affect our business, results of operations, financial condition and/or cash flows. The duration of the current disruptions to our customers and to our supply chain, and related financial impact to us, cannot be estimated at this time. Should such disruption continue for an extended period of time, the impact will have a material adverse effect on our business, results of operations, financial condition and/or cash flows. Ultimately, the demand for our products is, in turn, driven by demand for transportation and for people to travel within and between various countries. Should the COVID-19 pandemic cause a long-term deterioration in demand for transportation or travel due to fear or anxiety related to health concerns, governmental restriction, economic hardships, or increased use of electronic communication technologies embraced during the COVID-19 related shutdowns, the effects on our business may extend well beyond the current COVID-19 health crisis and immediate related governmental actions.
•Market risks: The current financial market dynamics and volatility pose heightened risks to our liquidity. For example, dramatically lower interest rates and lower expected asset valuations and returns can materially impact the calculation of long-term liabilities such as our pension. In addition, extreme volatility in financial markets has had and may continue to have adverse impacts on other asset valuations such as the value of the investment portfolios supporting our pension. Our long-term liabilities are sensitive to numerous factors and assumptions that can move in offsetting directions and should be considered as of the time of a relevant measurement event.
•Liquidity and credit risks: We currently have the ability to borrow up to $1.0 billion under our Five-Year Revolving Credit Agreement (the “Credit Agreement”), which was amended in June 2020. A prolonged period of generating lower financial results and cash from operations could adversely affect our financial condition, including in respect of satisfying both required and voluntary pension funding requirements, could result in potential increases in net debt or reductions in EBITDA, and could otherwise negatively affect our ability to achieve our strategic objectives. If the foregoing or other factors negatively impact our ability to comply with the financial covenant in the Credit Agreement, our ability to draw under the Credit Agreement would be adversely affected. There can also be no assurance that we will not face credit rating downgrades as a result of weaker than anticipated performance of our business or other factors, including overall market conditions. Rating downgrades could further adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets, and a significant downgrade could have an adverse commercial impact on our business. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding (including for receivables securitization or supply chain finance programs used to finance working capital) or our ability to refinance certain of our indebtedness, which could adversely affect our business, financial position, results of operations and/or cash flows. Although the U.S. federal and other governments have announced a number of funding programs to support businesses, our ability or willingness to access funding under such programs may be limited by regulations or other guidance, including eligibility criteria, or by further change or uncertainty related to the terms of these programs.
The COVID-19 pandemic may also exacerbate other risks disclosed herein, including, but not limited to, risks related to global economic conditions, competition, loss of customers, costs of supplies, manufacturing difficulties and disruptions, investment returns, our credit profile, our credit ratings and interest rates. We expect that the longer the period of disruption from COVID-19 continues, the more material the adverse impact will be on our business operations, financial performance, results of operations and/or cash flows. In addition, the COVID-19 pandemic may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not expect to present significant risks to our business, results of operations, financial conditions and/or cash flows.
The markets for Arconic’sHowmet’s products are highly cyclical and are influenced by a number of factors, including global economic conditions.
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Howmet is subject to cyclical fluctuations in global economic conditions and lightweight metals end-use markets. ArconicHowmet sells many products to industries that are cyclical, such as the aerospace automotive,and commercial transportation and building and construction industries, and the demand for its products is sensitive to, and quickly impacted by, demand for the finished goods manufactured by its customers in these industries, which may change as a result of changes in regional or worldwide economies, currency exchange rates, energy prices or other factors beyond its control.
In particular, ArconicHowmet derives a significant portion of its revenue from products sold to the aerospace industry, which can be highly cyclical and reflective of changes in the general economy. The commercial aerospace industry is historically driven by the demand from commercial airlines for new aircraft.aircraft and spare parts. The U.S. and international commercial aviation industries may face challenges arising from competitive pressures and fuel costs. Demand for commercial aircraft and spare parts is influenced by airline industry profitability, trends in airline passenger traffic, the state of U.S., regional and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors including the effects of terrorism, health and safety concerns (including as a result of the COVID-19 pandemic), environmental constraints imposed upon aircraft operators, the retirement of older aircraft, the performance and cost of alternative materials, and technological improvements to aircraft. The military aerospace cycle is highly dependent on U.S. and foreign government funding; however, it is also driven by the effects of terrorism, a changing global politicalgeopolitical environment, U.S. foreign policy, the retirement of older military aircraft, and technological improvements to new engines.
Further, the demand for Arconic’s automotive and groundHowmet’s commercial transportation products is driven by the number of vehicles produced by automotive and commercial transportation manufacturers and volume of aluminum content per vehicle. The automotive industry is sensitive to general economic conditions, including credit marketsmanufacturers. Commercial transportation and interest rates, and consumer spending and
The manufacture of many of Arconic’sHowmet’s products is a highly exacting and complex process. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols, specifications and procedures, including those related to quality or safety, problems with raw materials, supply chain interruptions, natural disasters, labor unrest and environmental factors. Such problems could have an adverse impact on the Company’s ability to fulfill orders or onmeet product quality or on performance. Product manufacturing or performance issues could result in recalls, customer penalties, contract cancellation and product liability exposure. Because of approval, license and qualification
requirements applicable to manufacturers and/or their suppliers, alternatives to mitigate manufacturing disruptions may not be readily available to ArconicHowmet or its customers. Accordingly, manufacturing problems, product defects or other risks associated with our products, could result in significant costs to and liability for us that could have a material adverse effect on our business, financial condition or results of operations, including the payment of potentially substantial monetary damages, fines or penalties, as well as negative publicity and damage to our reputation, which could adversely impact product demand and customer relationships.
A material disruption of Arconic’sHowmet’s operations, particularly at one or more of the Company’sits manufacturing facilities, could adversely affect Arconic’sHowmet’s business.
If Arconic’sHowmet’s operations, particularly one of the Company’sits key manufacturing facilities, were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, terrorism, theft, sabotage, adverse weather conditions, public health crises, labor disputes or other reasons, ArconicHowmet may be unable to effectively meet its obligations to or demand from its customers, which could adversely affect Arconic’sHowmet’s financial performance.
Interruptions in production could increase Arconic’sHowmet’s costs and reduce its sales. Any interruption in production capability could require the Company to incur costs for premium freight, make substantial capital expenditures, or purchase alternative material at higher costs to fill customer orders, which could negatively affect Arconic’sHowmet’s profitability and financial condition. Furthermore, because customers may be dependent on planned deliveries froma delivery delay by us customers that have to reschedule their own production due to our delivery delays may be ableproduction interruptions could subject us to pursue financialliability from customer claims against us, and we may incur coststhat such delay resulted in losses to correct such problems in addition to any liability resulting from such claims. Arconicthe customer. Howmet maintains property damage insurance that the Company believes to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from significant production interruption or shutdown caused by an insured loss. However, any recovery under Arconic’sHowmet’s insurance policies may not offset the lost profits or increased costs that may be experienced during the disruption of operations, which could adversely affect Arconic’sHowmet’s business, results of operations, financial condition and cash flow.
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Information technology system failures, cyber attacks and security breaches may threaten the integrity of Arconic’sHowmet’s intellectual property and other sensitive information, disrupt its business operations, and result in reputational harm and other negative consequences that could have a material adverse effect on its financial condition and results of operations.
The Company believes that it faces a heightened threat of cyber attacks due to the industries it serves, the locations of its operations and its technological innovations. The Company has experienced cybersecurity attacks in the past, including breaches of its information technology systems in which information was taken, and may experience them in the future, potentially with more frequency or sophistication. Based on information known to date, past attacks have not had a material impact on Arconic’sHowmet’s financial condition or results of operations. However, due to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted.
However, a breakdown in existing controls and procedures around the Company’s cybersecurity environment may prevent ArconicHowmet from detecting, reporting or responding to cyber incidents in a timely manner and could have a material adverse effect on the Company’s financial condition or the market price of its securities.
Howmet has supply arrangements with a limited number of strategic projects, including advanced alloy development, engineered finishessuppliers for raw materials. We maintain annual or long-term contracts for a majority of our supply requirements, and product design, rolling technology, and other advanced manufacturing technologies.
From time to time, increasing demand levels have caused regional supply constraints in the industry and further increases in demand levels could exacerbate these issues. Such constraints could impact our production or technologies willforce us to purchase primary metal and other supplies from alternative sources, which may not be commercially adoptedavailable in sufficient quantities or beneficialon terms that are favorable to Arconic.
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Howmet has long-term contracts with a significant suppliers exposes usnumber of its customers, some of which are subject to the riskrenewal, renegotiation or re-pricing at periodic intervals or upon changes in competitive supply conditions. Howmet’s failure to successfully renew, renegotiate or favorably re-price such agreements, or a material deterioration in or termination of default by the supplier on our contractual agreements, and this risk is increased by weak and deteriorating economic conditions onthese customer relationships, could result in a global, regionalreduction or industry sector level.loss in customer purchase volume or revenue.
Howmet’s customers may also change their business strategies or modify their business relationships with Howmet, including to reduce the amount of Howmet’s products they purchase or to switch to alternative suppliers. If Howmet’s customers reduce, terminate or delay purchases from Howmet due to the foregoing factors or otherwise and Howmet is unsuccessful in enforcing its contract rights or replacing such business in whole or in part or replaces it with less profitable business, our financial condition and results of operations. Changes in the valuation of the U.S. dollar against other currencies, including the Euro, British pound, Canadian dollar, Chinese yuan (renminbi), Japanese yen and Russian ruble, may affect Arconic’s profitability as some important inputs are purchased in other currencies, while the Company’s products are generally sold in U.S. dollars.
From time to time, Howmet may announce future targets or goals for its business, including revenue growth, cash generation, cost savings, restructuring plans, cost reductions and improvements in profitability. Future targets and goals reflect the Company’s beliefs and assumptions and are based on the Company’s then current expectations, its perception of historical trends, and estimates and projections about the environment, economies and markets in which Howmet operates, as well as other applicable factors. As such, they are inherently subject to significant business, economic, competitive and other employee relations issuesuncertainties regarding future events, including the risks discussed in this report. The actual outcome may be materially different. Failure by the Company to achieve the targets or goals at the levels or by the dates targeted, if at all, may have a material adverse effect on its business, financial condition, results of operations or the market price of its securities.
In addition, the implementation of Howmet’s business strategy may involve the entry into and the execution of complex projects, which place significant demands on the Company’s management and personnel, and may depend on numerous factors beyond the Company’s control. There can be no assurance that such projects will be completed within budgeted costs, on a timely basis, or at all, whether due to the risks described in this report, or other factors. The failure to complete a material project as planned, or a significant delay in its execution, could adversely affect Arconic’shave an adverse effect on Howmet’s business, financial condition or results of operations.
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As discussed in Part I, Item 1 (Business-Competitive Conditions) of this report, the markets for Howmet’s products are highly competitive. Howmet’s competitors include a variety of both U.S. and non-U.S. companies in our product markets. New product offerings, new technologies in the marketplace or new facilities may compete with or replace Howmet products. The willingness of customers to accept substitutes for the products sold by Howmet, the ability of large customers to exert leverage in the marketplace to affect the pricing for Howmet’s products, and technological advancements or other developments by or affecting Howmet’s competitors or customers could adversely affect Howmet’s business, financial condition or results of operations.
Howmet’s competitive position and future performance depends, in part, on the Company’s ability to:
•identify and evolve with emerging technological and broader industry trends in Howmet’s end markets;
•identify and successfully execute on a strategy to remain an essential and sustainable element of our customers’ supply chains;
•fund, develop, manufacture and bring innovative new products to market quickly and cost-effectively;
•monitor disruptive technologies and understand customers’ and competitors’ abilities to deploy such technologies; and
•achieve sufficient return on investment for new products based on capital expenditures and research and development spending.
Howmet is working on new developments for a number of strategic projects, including advanced alloy development, engineered product design, and other advanced manufacturing technologies. While Howmet intends to continue to develop innovative new products and services, it may not be able to successfully differentiate its products or services from those of its competitors or match the level of research and development spending of its competitors, including those developing technology to displace Howmet’s current products. In addition, Howmet may not be able to adapt to evolving markets and technologies or achieve and maintain technological advantages. There can be no assurance that any of Howmet’s new products, development programs or technologies will be commercially adopted or be beneficial to Howmet.
Howmet’s business depends, in part, on its ability to meet increased program demand successfully and to mitigate the impact of program cancellations, reductions and delays.
Howmet is currently under contract to supply components for a number of new and existing commercial, general aviation, military aircraft and aircraft engine programs. Many of these contracts contemplate production increases over the next several years. If Howmet fails to meet production levels or encounters difficulty or unexpected costs in meeting such levels, it could have a material adverse effect on the Company’s business, financial condition or results of operations. Similarly, program cancellations, reductions or delays could also have a material adverse effect on Howmet’s business.
Risks Related to Legal and Regulatory Matters
Product liability, product safety, personal injury, property damage, and recall claims and investigations may materially affect Howmet’s financial condition and damage its reputation.
The manufacture and sale of our products expose Howmet to potential product liability, personal injury, property damage and related claims. These claims may arise from allegations of failure to meet product specifications, product design flaws and malfunction of products, as well as from misuse of our products, use of our products in an unintended, unapproved or unrecommended manner, or use of our products with systems not manufactured or sold by us. New data and information, including information about the ways in which Howmet’s products are used, may lead Howmet, regulatory authorities, government agencies or other entities or organizations to publish guidelines or recommendations, or impose restrictions, related to the manufacturing or use of Howmet’s products.
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In the event that a Howmet product fails to perform as expected, regardless of fault, or is used in an unexpected manner, and such failure or use results in, or is alleged to result in, bodily injury and/or property damage or other losses, Howmet may be subject to product liability lawsuits and other claims, or may be required or requested by its customers to participate in a recall or other corrective action involving such product. In addition, if a Howmet product is perceived to be defective or unsafe, Howmet’s sales could decrease, its reputation could be adversely impacted and it could be subject to further liability claims. Moreover, events that give rise to actual, potential or perceived product safety concerns could expose Howmet to government investigations or regulatory enforcement actions.
There can be no assurance that Howmet will be successful in defending any such proceedings or that insurance available to Howmet will be sufficient to cover any losses associated with such proceedings. An adverse outcome in one or more of these proceedings or investigations could: (i) have a material adverse effect on Howmet’s business, financial condition or profitability; (ii) impose substantial monetary damages and/or non-monetary penalties; (iii) result in additional litigation, regulatory investigations or other proceedings involving Howmet; (iv) result in loss of customers; (v) require highly skilled executiveschanges to our products or business operations; or (vi) damage Howmet’s reputation and/or negatively impact the market price of Howmet’s common stock. Even if Howmet successfully defends against these types of claims, Howmet could still be required to spend a substantial amount of money in connection with legal proceedings or investigations with respect to such claims; Howmet’s management could be required to devote significant time, attention and staff with relevant industryoperational resources responding to and technical experience. The inabilitydefending against these claims and responding to these investigations; and Howmet’s reputation could suffer. Product liability claims and related lawsuits and investigations, product recalls, and allegations of the Companyproduct safety or quality issues, regardless of their validity or ultimate outcome, may have a material adverse effect on Howmet’s business, financial condition and reputation and on our ability to attract and retain such peoplecustomers.
Our business may be adversely impact Arconic’saffected if we fail to comply with government contracting regulations.
We derive a portion of our revenue from sales to U.S. and foreign governments and their respective agencies, as a subcontractor of their prime contractors. Such contracts are subject to various procurement laws and regulations and contract provisions relating to their formation, administration and performance. Failure to comply with these laws, regulations or provisions in our government contracts could result in the imposition of various civil and criminal penalties, termination of contracts, forfeiture of profits, suspension of payments, increased pricing pressure or suspension from future government contracting. If our government contracts are terminated, if we are suspended from government work, or if our ability to meet project demands adequatelycompete for new contracts is adversely affected, our financial condition and fill rolesresults of operation could be adversely affected.
Howmet’s global operations expose Howmet to risks that could adversely affect its business, financial condition, results of operations, cash flows or the market price of its securities.
Howmet has operations or activities in existing operations. Skills shortages in engineering, manufacturing, technology, constructionnumerous countries and maintenance contractorsregions outside the United States, including Europe, Canada, Mexico, China, and Japan. As a result, Howmet’s global operations are affected by economic, political and other labor market inadequacies may also impact activities. These shortages may adversely impactconditions in the costforeign countries in which Howmet does business, as well as U.S. laws regulating international trade, including:
•economic and schedulecommercial instability risks, including those caused by sovereign and private debt default, corruption, and changes in local government laws, regulations and policies, such as those related to tariffs, sanctions and trade barriers (including tariffs imposed by the United States as well as retaliatory tariffs imposed by China or other foreign entities), taxation, data privacy, exchange controls, employment regulations and repatriation of development projectsassets or earnings;
•geopolitical risks such as political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions, and renegotiation or nullification of existing agreements;
•war, terrorist activities, kidnapping of personnel or other dangerous conditions;
•major public health issues, such as an outbreak of a pandemic or epidemic (such as Sudden Acute Respiratory Syndrome, Avian Influenza, H7N9 virus, coronavirus (including COVID-19), and the costEbola virus), which could cause disruptions in Howmet’s operations, workforce, supply chain or end markets;
•difficulties enforcing contractual rights and efficiencyintellectual property, including a lack of existing operations.remedies for misappropriation in certain jurisdictions;
•compliance with antitrust and competition regulations;
•rising labor costs or labor unrest, including strikes;
•compliance with foreign labor laws, which generally provide for increased notice, severance and consultation requirements as compared to U.S. laws;
•aggressive, selective or lax enforcement of laws and regulations by foreign governmental authorities;
•compliance with the continuityForeign Corrupt Practices Act and other anti-bribery and corruption laws;
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•compliance with U.S. laws concerning trade, including the International Traffic in Arms Regulations, the Export Administration Regulations, and the preservationsanctions, regulations and embargoes administered by the U.S. Department of institutional knowledge are vital toTreasury’s Office of Foreign Assets Control;
•imposition of currency controls; and
•adverse tax audit rulings.
Although the successeffect of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect Howmet’s business, financial condition, or results of operations. The Company’s growthinternational operations subject Howmet to complex and business strategy. Thedynamic laws and regulations that, in some cases, could result in conflict or inconsistency between applicable laws of different jurisdictions and/or legal obligations. While Howmet believes it has adopted appropriate risk management, compliance programs and insurance arrangements to address and reduce the associated risks, such measures may provide inadequate protection against costs, penalties, liabilities or other potential risks such as loss of key membersexport privileges or repatriation of management and other personnelassets that may arise from such events.
Howmet may face challenges to its intellectual property rights which could significantly harm Arconic’sadversely affect the Company’s reputation, business and any unplanned turnover,competitive position.
Howmet owns important intellectual property, including patents, trademarks, copyrights and trade secrets. The Company’s intellectual property plays an important role in maintaining Howmet’s competitive position in a number of the markets that the Company serves. Howmet’s competitors may develop technologies that are similar or failuresuperior to develop adequate succession plans for key positions, could depleteHowmet’s proprietary technologies or design around the Company’s institutional knowledge base, result in loss of technicalpatents Howmet owns or licenses. Despite its controls and safeguards, Howmet’s technology may be misappropriated by its employees, its competitors or other expertise, delaythird parties. The pursuit of remedies for any misappropriation of Howmet intellectual property is expensive and the ultimate remedies may be deemed insufficient. Further, in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of misappropriation of Howmet intellectual property increases, despite efforts the Company undertakes to protect it. Developments or impede the execution of the Company’sassertions by or against Howmet relating to intellectual property rights, and any inability to protect or enforce Howmet’s rights sufficiently, could adversely affect Howmet’s business plans and erode Arconic’s competitiveness.competitive position.
The global and diverse nature of Arconic’sHowmet’s operations means that these risks will continue to exist, and additional legal proceedings and contingencies may arise from time to time. While ArconicHowmet believes it has adopted appropriate risk management and compliance programs to address and reduce these risks, including insurance arrangements with respect to these risks, such measures may provide inadequate protection against liabilities that may arise. In addition, various factors or developments can lead the Company to change current estimates of liabilities or make such estimates for matters previously unsusceptible to reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the Company cannot predict with certainty could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in a particular period. Litigation and compliance efforts may require substantial attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on the Company’s financial position, results of operations and cash flows. For additional information regarding the legal proceedings involving the Company, including proceedings and investigations relating to the June 13, 2017 fire at the Grenfell Tower in London, U.K., see the discussion in Part I, Item 3. (Legal Proceedings) of this report and in Note TV to the Consolidated Financial Statements in Part II, Item 8.
Unanticipated changes in Howmet’s tax provisions or exposure to additional tax liabilities could affect Howmet’s future profitability.
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Table of Contents (Financial Statements and Supplementary Data).
Labor disputes and other employee healthrelations issues could adversely affect Howmet’s business, financial condition or results of operations.
A significant portion of Howmet’s employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and safety, includingexpiration dates. For more information, see “Employees” in Part I, Item 1 (Business) of this report. While Howmet previously has been successful in renegotiating its collective bargaining agreements with various unions, Howmet may not be able to satisfactorily renegotiate all collective bargaining agreements in the Occupational SafetyUnited States and Health Administration. From time to time, we have incurred fines for violations of various health and safety standards. While we maintain insurance and have in place policies to minimize such risks, weother countries when they expire. In addition, existing collective bargaining agreements may nevertheless be unable to avoid material liabilities for any injurynot prevent a strike or death that may occurwork stoppage at Howmet’s facilities in the future. These types of incidentsHowmet may notalso be covered bysubject to general country strikes or may exceed our insurance coverage andwork stoppages unrelated to its business or collective bargaining agreements. Any such work stoppages (or potential work stoppages) could have a material adverse effect on our results of operations andHowmet’s business, financial condition or result in negative publicity and/or significant reputational harm.results of operations.
The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements. For example, the European Union’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, imposed significant new requirements on how companies process and transfer personal data, as well as significant fines for non-compliance. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes, which could have a material adverse effect on Arconic’sHowmet’s financial condition and results of operations. In addition, the payment of potentially significant fines or penalties in the event of a breach of the GDPR or other privacy and information security laws, as well as the negative publicity associated with such a breach, could damage the Company’s reputation and adversely impact product demand and customer relationships.
Failure to comply with domestic or international employment and related laws could result in penalties or costs that could have a material adverse effect on Arconic’sHowmet’s business results.
Howmet’s operations worldwide are subject to numerous complex and increasingly stringent health, safety and environmental laws and regulations. The costs of complying with such laws and regulations, including participation in assessments and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Environmental laws may impose cleanup liability on owners and occupiers of contaminated property, including present, past or divested properties, regardless of whether the owners and occupiers caused the contamination or whether the activity that
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caused the contamination was lawful at the time it was conducted. Environmental matters for which Howmet may be liable may arise in the future at its present sites, at sites owned or operated by its predecessors or affiliates, at sites that it may acquire in the future, or at third-party sites used by Howmet, its predecessors or affiliates for material and waste handling and disposal. Compliance with health, safety and environmental laws and regulations, including remediation obligations, may prove to be more challenging and costly than the Company anticipates. Howmet’s results of operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to certain sites as well as other health and safety risks relating to its operations and products. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, including increased remediation costs, all of which can have a material and adverse effect on the Company’s financial condition, results of operations and cash flows.
In addition, the industrial activities conducted at Howmet’s facilities present a significant risk of injury or death to our employees, customers or third parties that may be on site. We have experienced serious injuries in the past, notwithstanding the safety protocols, practices and precautions we take. Our operations are subject to regulation by various federal, state and local agencies in the United States and regulation by foreign government entities abroad responsible for employee health and safety, including the Occupational Safety and Health Administration. From time to time, we have incurred fines for violations of various health and safety standards. In addition to industrial activities, the global COVID-19 pandemic will continue to significantly impact the health of our employees and increase the cost of health and safety measures within our operations. Significant community transmission in the vicinity of our operations is likely to impact the workforce availability due to quarantine and isolation practices. Social distancing, mask use, testing and other measures increase costs of operation. While we maintain insurance and have in place policies to minimize risks associated with industrial activities and COVID-19, we may nevertheless be unable to avoid material liabilities relating to any injury, death or other workers compensation claims. These types of incidents may not be covered by or may exceed our insurance coverage and could have a material adverse effect on our results of operations and financial condition or result in negative publicity and/or significant reputational harm.
Howmet may be affected by global climate change or by legal, regulatory, or market responses to such change.
Increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap-and-trade systems, additional limits on emissions of greenhouse gases or Corporate Average Fuel Economy (CAFE)(“CAFE”) standards in the United States. New or revised laws and regulations in this area could directly and indirectly affect ArconicHowmet and its customers and suppliers, including by increasing the costs of production or impacting demand for certain products, which could result in an adverse effect on our financial condition, results of operations and cash flows. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by the Company or its customers or suppliers. Also, ArconicHowmet relies on natural gas, electricity, fuel oil and transport fuel to operate its facilities. Any increased costs of these energy sources because of new laws could be passed along to the Company and its customers and suppliers, which could also have a negative impact on Arconic’sHowmet’s profitability.
Risks Related to Liquidity and Capital Resources
A decline in Howmet’s financial performance or outlook or a deterioration in its credit profile could negatively impact the Company’s access to capital markets, its liquidity and its borrowing costs.
Howmet has significant capital requirements and depends, in part, upon the issuance of debt to fund its operations and contractual commitments and pursue strategic actions. A decline in the United Kingdom’s economicCompany’s financial performance or outlook due to internal or external factors could affect the Company’s access to, and other relationships with the European Unionavailability or cost of, financing on acceptable terms and conditions. There can be no assurance that Howmet will have access to the global capital market on terms the Company finds acceptable. Limitations on Howmet’s ability to access the global capital markets, a reduction in the Company’s liquidity or an increase in borrowing costs could materially and adversely affect Howmet’s ability to maintain or grow its business, which in turn may adversely affect its financial condition and results of operations.
A downgrade of Howmet’s credit ratings could limit its ability to obtain future financing, increase borrowing costs and costs relating to credit facilities, adversely affect the market price of Howmet securities,trigger collateral postings, or otherwise impair its business, financial condition, and results of operations.
Howmet’s credit ratings are important to the Company’s cost of capital. The major credit rating agencies evaluate our creditworthiness and give us specified credit ratings. These ratings are based on a number of factors, including our financial strength and financial policies as well as our strategies, operations, execution and timeliness of financial reporting. These credit ratings are limited in scope, and do not address all material risks related to investment in us, but rather reflect only the view of each rating agency at the time the rating is issued. Nonetheless, the credit ratings Howmet receives impact our borrowing costs
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as well as the terms upon which we will have access to capital. Failure to maintain sufficiently high credit ratings could adversely affect Arconic.the interest rate in future financings, our liquidity or our competitive position, and could also restrict our access to capital markets. For information on our credit ratings, see "Liquidity and Capital Resources" in Part II, Item 7(Management’s Discussion and Analysis of Financial Condition and Results of Operations).
Limitations on Howmet’s ability to access the global capital markets, a reduction in Howmet’s liquidity or an increase in borrowing costs could materially and adversely affect Howmet’s ability to maintain or grow its business, which in turn may adversely affect its financial condition, liquidity and results of operations.
Howmet’s business and growth prospects may be negatively impacted by limits in its capital expenditures.
Howmet requires substantial capital to invest in growth opportunities and to maintain and prolong the life and capacity of its existing facilities. Insufficient cash generation or capital project overruns may negatively impact Howmet’s ability to fund as planned its sustaining and return-seeking capital projects. Over the long term, Howmet’s ability to take advantage of improved market conditions or growth opportunities in its businesses may be constrained by earlier capital expenditure restrictions, which could adversely affect the long-term value of its business and the Company’s position in relation to its competitors.
An adverse decline in the liability discount rate, lower-than-expected investment return on pension assets and other factors could adversely affect Howmet’s results of operations or amount of pension funding contributions in future periods.
Howmet’s results of operations may be negatively affected by the amount of expense Howmet records for its pension and other postretirement benefit plans, reductions in the fair value of plan assets and other factors. Howmet calculates income or expense for its plans using actuarial valuations in accordance with accounting principles generally accepted in the United KingdomStates of America ("GAAP").
These valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions used by Howmet to estimate pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the European Unionexpected long-term rate of return on plan assets. In addition, Howmet is required to make an annual measurement of plan assets and liabilities, which may result in a significant charge to retain accessshareholders’ equity. For a discussion regarding how Howmet’s financial statements can be affected by pension and other postretirement benefits accounting policies, see “Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” in Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note H to each other’s respective markets either during the transitionConsolidated Financial Statements in Part II, Item 8. Although GAAP expense and pension funding contributions are impacted by different regulations and requirements, the key economic factors that affect GAAP expense would also likely affect the amount of cash or securities Howmet would contribute to the pension plans.
Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve the plans’ funded status. The Moving Ahead for Progress in the 21st Century Act (“MAP-21”), enacted in 2012, provided temporary relief for employers like Howmet who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974 by allowing the use of a 25-year average discount rate within an upper and lower range for purposes of determining minimum funding obligations. In 2014, the Highway and Transportation Funding Act ("HATFA") extended the relief provided by MAP-21 and modified the interest rates that had been set by MAP-21. In 2015, the Bipartisan Budget Act of 2015 ("BBA 2015") extended the relief period provided by HATFA. Howmet believes that the relief provided by BBA 2015 will moderately reduce the cash flow sensitivity of the Company’s U.S. pension plans’ funded status over the next several years due to recent and potential future declines in discount rates. However, higher than expected pension contributions due to a decline in the plans’ funded status as a result of unpredictable future declines in the discount rate or more permanently.lower-than-expected investment returns on plan assets could have a material negative effect on the Company’s cash flows. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase the Company’s liabilities related to such plans, which could adversely affect our liquidity and results of operations.
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Howmet is exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, economic factors, and currency controls in the countries in which it operates.
Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, competitive factors in the countries in which Howmet operates, and volatility or deterioration in the global economic and financial environment could affect Howmet’s revenue, expenses and results of operations. Changes in the valuation of the U.S. dollar against other currencies, including the Euro, British pound, Canadian dollar, Chinese yuan (renminbi), and Japanese yen, may affect Howmet’s profitability.
In addition, a portion of Howmet’s indebtedness, including borrowings, if any, under the Company’s Five-Year Credit Facility, bears interest at rates equal to the London Interbank Offering Rate (“LIBOR”) plus an applicable margin based on the credit ratings of Howmet’s outstanding senior unsecured long-term debt. Accordingly, the Company is subject to risk from changes in interest rates on the variable component of the rate. Further, LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include changes in the cost of Howmet’s variable rate indebtedness.
Howmet also faces risks arising from the imposition of cash repatriation restrictions and exchange controls. Cash repatriation restrictions and exchange controls may limit the Company’s ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by Howmet’s foreign subsidiaries or businesses located in or conducted within a country imposing restrictions or controls. While Howmet currently has no need, and does not intend, to repatriate or convert cash held in countries that have significant restrictions or controls in place, should the Company need to do so to fund its operations, it may be unable to repatriate or convert such cash, or be unable to do so without incurring substantial costs. Howmet currently has operations in countries that have cash repatriation restrictions or exchange controls in place, including China, and, if the Company were to need to repatriate or convert such cash, these controls and restrictions may have an adverse effect on Howmet’s operating results and financial condition.
Dividends on Arconic common stock could be reduced or eliminated in the event of material future deterioration in business conditions or in other circumstances.
Share repurchases and the declaration of dividends fall within the discretion of Howmet’s Board of Directors, and the Company’s dividend policy may change at any time without advance notice to Arconic’s stockholders. For example, on February 8, 2019, in connection with the Company’s ongoing strategic and portfolio review, Arconic announced that it expected to reduce its quarterly common stock dividend from $0.06 to $0.02 per share. The Arconic Board of Directors’ decisionsBoard’s decision regarding the payment of dividends will dependsuch matters depends on many factors, such as Arconic’sincluding Howmet’s financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of the Company’s debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that Arconic’sthe Board of Directors deems relevant. Arconic’s Board of Directors may determineIn addition, under the Company’s amendment to further reducethe Credit Agreement, during the period from June 30, 2020 through December 31, 2021 (unless the Company ends this period earlier in accordance with the amendment or eliminate Arconic’sotherwise), common stock dividenddividends and share repurchases are permitted only if no borrowings are outstanding under the Credit Agreement and are limited to an aggregate amount of $100 million through June 30, 2021, with such limit increasing to an aggregate amount of $250 million after June 30, 2021 if the Consolidated Net Debt to Consolidated EBITDA ratio is no greater than 3.75 to 1.00. The Company suspended dividends in April 2020 to preserve cash and provide flexibility in light of the impact of the COVID-19 pandemic. Since June 30, 2020, the Company has repurchased approximately $73 million of its common stock. There can be no assurance that the Company will declare dividends or repurchase stock in the eventfuture in any particular amounts, or at all.
General Risks
Failure to attract and retain a highly skilled and diverse global workforce, or provide adequate succession plans for key personnel could adversely affect Howmet’s operations and competitiveness.
Howmet’s global operations require highly skilled personnel with relevant industry and technical experience. Shortages in certain skills, in areas such as engineering, manufacturing and technology and other labor market inadequacies have created more competition for talent among us and other companies both within and outside of material future deteriorationsour industry. If the Company fails to attract, develop and retain a diverse global workforce with the skills and in the locations we need to operate and grow our business, conditionsour operations could be adversely impacted.
In addition, the continuity of key personnel and the preservation of institutional knowledge are vital to the success of the Company’s growth and business strategy. The loss of key members of management and other personnel could significantly harm Howmet’s business, and any unplanned turnover, or failure to develop adequate succession plans for key positions, could deplete the Company’s institutional knowledge base, result in loss of technical or other expertise, delay or impede the execution of the Company’s business plans and erode Howmet’s competitiveness.
Howmet may be unable to realize the expected benefits from acquisitions, divestitures and strategic alliances.
Howmet has made, and may continue to plan and execute, acquisitions and divestitures and take other actions to grow its business or streamline its portfolio. There is no assurance that anticipated benefits will be realized. Acquisitions present significant challenges and risks, including the effective integration of the business into the Company, unanticipated costs and
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liabilities, and the ability to realize anticipated benefits, such as growth in market share, revenue or margins, at the levels or in the timeframe expected. The Company may be unable to manage acquisitions successfully. Additionally, adverse factors may prevent Howmet from realizing the benefits of its growth projects, including unfavorable global economic conditions, currency fluctuations, or unexpected delays in target timelines.
With respect to portfolio optimization actions such as divestitures, curtailments and closures, Howmet may face barriers to exit from unprofitable businesses or operations, including high exit costs or objections from customers, suppliers, unions, local or national governments, or other circumstances.stakeholders. In addition, Howmet may retain unforeseen liabilities for divested entities or businesses, including, but not limited to, if a buyer fails to honor all commitments. Howmet’s business operations are capital intensive, and curtailment or closure of operations or facilities may include significant charges, including employee separation costs, asset impairment charges and other measures.
In addition, Howmet has participated in, and may continue to participate in, strategic alliances, joint ventures and other similar arrangements from time to time. Strategic alliances and joint ventures inherently involve special risks. Even if Howmet holds majority interests or maintains operational control in such arrangements, its partners may have opposing economic or business interests, exercise veto rights to block Howmet actions, take action contrary to Howmet’s policies or objectives, or, as a result of financial or other difficulties, be unable to fulfill their obligations.
There can be no assurance that acquisitions, growth investments, divestitures, closures, strategic alliances, joint ventures or similar arrangements will be undertaken or completed in their entirety as planned or that they will be beneficial to Howmet, whether due to the above-described risks, unfavorable global economic conditions, increases in costs, currency fluctuations, geopolitical risks, or other factors.
Anti-takeover provisions could prevent or delay a change in control of Arconic,Howmet, including a takeover attempt by a third party and limit the power of Arconic’sHowmet’s shareholders.
In connection with the Arconic Inc. Separation Transaction, we entered into a separation and distribution agreement with Arconic Corporation and also entered into various other agreements, including a tax matters agreement, an agreement related to the Davenport plant, an employee matters agreement, intellectual property license agreements, metal supply agreements and real estate and office leases. The separation and distribution agreement, the tax matters agreement and the employee matters agreement, together with the documents and agreements by which the internal reorganization of the Company prior to the separation was effected, determined the allocation of assets and liabilities between us and Arconic Corporation following the Arconic Inc. Separation Transaction for those respective areas and included any necessary indemnifications related to liabilities and obligations. We will rely on Arconic Corporation to satisfy its performance and payment obligations under these agreements. If Arconic Corporation is unable or unwilling to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties and/or losses.
In connection with the Arconic Inc. Separation Transaction, Arconic Corporation agreed to indemnify us for certain liabilities and we agreed to indemnify Arconic Corporation for certain liabilities. If we are required to pay under these indemnities to Arconic Corporation, our financial results could be negatively impacted. The Arconic Corporation indemnity may not be sufficient to hold us harmless from the full amount of Alcoaliabilities for which Arconic Corporation is allocated responsibility, and Arconic Corporation may not be able to satisfy its indemnification obligations in the future.
Pursuant to the separation and distribution agreement and certain other agreements with Arconic Corporation, Arconic Corporation has agreed to indemnify us for certain liabilities, and we have agreed to indemnify Arconic Corporation for certain liabilities, in each case for uncapped amounts. Indemnities that we may be required to provide Arconic Corporation are not subject to any cap, may be significant and could negatively impact our business. Third parties could also seek to hold us responsible for any of the liabilities that Arconic Corporation has agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in
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furtherance of the Company’s operations. Further, the indemnity from Arconic Corporation may not be sufficient to protect us against the full amount of such liabilities, and Arconic Corporation may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Arconic Corporation any amounts for which we are held liable, we may be temporarily required to bear such losses. Each of these risks could negatively affect our business, results of operations and financial condition.
The Arconic Inc. Separation Transaction could result in substantial tax liability.
It was a condition to the Distribution of Arconic that we receive an opinion of our outside counsel, satisfactory to our Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as a “reorganization” within the meaning of Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). This condition was satisfied prior to the Distribution of Arconic. However, the opinion of counsel was based upon and relied on, among other things, various facts and assumptions, as well as certain representations, statements and undertakings by us and Arconic Corporation, including those relating to the past and future conduct by us and Arconic Corporation. If any of these facts, assumptions, representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if we or Arconic Corporation breach any of our representations or covenants contained in the separation agreement and certain other agreements and documents or in any documents relating to the opinion of counsel, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.
Notwithstanding our receipt of the opinion of counsel, the Internal Revenue Service (the “IRS”) could determine that the Distribution of Arconic and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings upon which the opinion of counsel was based are false or have been violated. In addition, the opinion of counsel represents the judgment of such counsel and is not binding on the IRS or any court, and the IRS or a court may disagree with the conclusions in the opinion of counsel. Accordingly, notwithstanding receipt of the opinion of counsel, there can be no assurance that: (i) the IRS will not assert that the Distribution of Arconic and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes; or (ii) a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, we, our stockholders and Arconic Corporation, could be subject to significant U.S. federal income tax liability.
If the Distribution of Arconic fails to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, in general, for U.S. federal income tax purposes, we would recognize taxable gain as if we had sold the Arconic Corporation common stock in a taxable sale for its fair market value, and our stockholders who received such Arconic Corporation shares in the Distribution of Arconic would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
Under current U.S. federal income tax law, even if the Distribution of Arconic, together with certain related transactions, otherwise qualifies for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code, the Distribution of Arconic may nevertheless be rendered taxable to us as a result of certain post-distribution transactions, including certain acquisitions of shares or assets of ours or Arconic Corporation. Under the tax matters agreement entered into between us and Arconic Corporation in connection with the Arconic Inc. Separation Transaction, Arconic Corporation may be required to indemnify us for any taxes resulting from the Arconic Inc. Separation Transaction (and any related costs and other damages) to the extent such amounts resulted from (i) an acquisition of all or a portion of the equity securities or assets of Arconic Corporation, whether by merger or otherwise (and regardless of whether we participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by Arconic Corporation, or (iii) any of Arconic Corporation’s representations, covenants or undertakings contained in the separation agreement and certain other agreements and documents or in any documents relating to the opinion of counsel being incorrect or violated. However, the indemnity from Arconic Corporation may not be sufficient to protect us against the full amount of such additional taxes or related liabilities, and Arconic Corporation may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Arconic Corporation any amounts for which we are held liable, we may be temporarily required to bear such losses. In addition, we and our subsidiaries may incur certain tax costs in connection with the Arconic Inc. Separation Transaction, including non-U.S. tax costs resulting from transactions (including the internal reorganization) in non-U.S. jurisdictions, which may be material. Each of these risks could negatively affect our business, results of operations and financial condition.
The Alcoa Inc. Separation Transaction could result in substantial tax liability.
It was a condition to the Distribution of Alcoa that (i) the private letter ruling from the Internal Revenue Service (the “IRS”) regarding certain U.S. federal income tax matters relating to the Alcoa Inc. Separation of AlcoaTransaction and the Distribution of Alcoa received by ArconicHowmet remain valid and be satisfactory to Arconic’sHowmet’s Board of Directors and (ii) ArconicHowmet receive an opinion of its outside counsel, satisfactory to the Board of Directors, regarding the qualification of the Distribution of Alcoa, together with certain related transactions, as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). Both of these conditions were satisfied prior to the Distribution of Alcoa. However, the IRS private letter ruling and the opinion of counsel were based upon and relied on, among other things, various facts and assumptions, as well as certain representations, statements and
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undertakings of ArconicHowmet and Alcoa Corporation, including those relating to the past and future conduct of ArconicHowmet and Alcoa Corporation. If any of these representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if ArconicHowmet or Alcoa Corporation breaches any of its representations or covenants contained in any of the Alcoa Inc. Separation of Alcoa-relatedTransaction-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel, the IRS private letter ruling and/or the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.
Notwithstanding Arconic’sHowmet’s receipt of the IRS private letter ruling and the opinion of counsel, the IRS could determine that the Distribution of Alcoa and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings upon which the IRS private letter ruling or the opinion of counsel was based are false or have been violated. In addition, the IRS private letter ruling does not address all of the issues that are relevant to determining whether the Distribution of Alcoa, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes, and the opinion of counsel represents the judgment of such counsel and is not binding on the IRS or any court and the IRS or a court may disagree with the
conclusions in the opinion of counsel. Accordingly, notwithstanding receipt by ArconicHowmet of the IRS private letter ruling and the opinion of counsel, there can be no assurance that (i) the IRS will not assert that the Distribution of Alcoa and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposespurposes; or that(ii) a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, Arconic,Howmet, Alcoa Corporation and ArconicHowmet shareholders could be subject to significant U.S. federal income tax liability.
If the Distribution of Alcoa, together with certain related transactions, fails to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code, in general, for U.S. federal income tax purposes, ArconicHowmet would recognize taxable gain as if it had sold the Alcoa Corporation common stock in a taxable sale for its fair market value and ArconicHowmet shareholders who received Alcoa Corporation shares in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
Under current U.S. federal income tax law, even if the Distribution of Alcoa, together with certain related transactions, otherwise qualifies for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code, the Distribution of Alcoa may nevertheless be rendered taxable to ArconicHowmet and its shareholders as a result of certain post-Distribution of Alcoa transactions, including certain acquisitions of shares or assets of ArconicHowmet or Alcoa Corporation. The possibility of rendering the Distribution of Alcoa taxable as a result of such transactions may limit Arconic’sHowmet’s ability to pursue certain equity issuances, strategic transactions or other transactions that would otherwise maximize the value of Arconic’sHowmet’s business. Under the Tax Matters Agreement that ArconicHowmet entered into with Alcoa Corporation, Alcoa Corporation may be required to indemnify ArconicHowmet against any additional taxes and related amounts resulting from (i) an acquisition of all or a portion of the equity securities or assets of Alcoa Corporation, whether by merger or otherwise (and regardless of whether Alcoa Corporation participated in or otherwise facilitated the acquisition), (ii) issuing equity securities beyond certain thresholds, (iii) repurchasing shares of Alcoa Corporation stock other than in certain open-market transactions, (iv) ceasing actively to conduct certain of its businesses, (v) other actions or failures to act by Alcoa Corporation or (vi)(iii) any of Alcoa Corporation’s representations, covenants or undertakings contained in any of the Alcoa Inc. Separation of Alcoa-relatedTransaction-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel being incorrect or violated. However, the indemnity from Alcoa Corporation may be insufficient to protect ArconicHowmet against the full amount of such additional taxes or related liabilities, and Alcoa Corporation may be unable to satisfy its indemnification obligations fully. Moreover, even if ArconicHowmet ultimately succeeds in recovering from Alcoa Corporation any amounts for which ArconicHowmet is held liable, ArconicHowmet may be temporarily required to bear such losses. In addition, ArconicHowmet and Arconic’sHowmet’s subsidiaries may incur certain tax costs in connection with the Alcoa Inc. Separation of Alcoa,Transaction, including tax costs resulting from separations in non-U.S. jurisdictions, which may be material. Each of these risks could negatively affect Arconic’sHowmet’s business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
areas. See the table and related textregarding the Company's principal facilities in the Engineered Products and Forgings Facilities section on page 7 of this report.Part I, Item 1. (Business).
Item 3. Legal Proceedings.
In the ordinary course of its business, ArconicHowmet is involved in a number of lawsuits and claims, both actual and potential. For a discussion of legal proceedings, see Note V to the Consolidated Financial Statements in Part II, Item 8, in addition to the matters set forth below.
Environmental Matters
Other Matters
As previously reported, Arconic Inc. andHowmet, its subsidiaries and former subsidiaries are defendants in lawsuits filed on behalf of persons alleging injury as a result of occupational or other exposure to asbestos. Arconic,Howmet, its subsidiaries and former subsidiaries have numerous insurance policies over many years that provide coverage for asbestos related claims. ArconicThe Company has significant insurance coverage and believes that Arconic’sHowmet’s reserves are adequate for its known asbestos exposure related liabilities. The costs of defense and settlement have not been and are not expected to be material to the results of operations, cash flows, and financial position of the Company.
Inc. We have included the matters discussed below in which the Company remains party to proceedings relating to Alcoa Corporation in accordance with SEC regulations.Corporation. The Separation and Distribution Agreement, dated October 31, 2016, entered into between the Company and Alcoa Corporation in connection with the Alcoa Inc. Separation of Alcoa,Transaction, provides for cross-indemnities between the Company and Alcoa Corporation for claims subject to indemnification. The Company does not expect any of such matters to result in a net claim against it.
St. Croix Proceedings
Red Dust Docket Cases, (St. Croix) f/k/a Abednego, Laurie L.A., et al. v. St. Croix Alumina, L.L.C., et al. As previously reported, onOn January 14, 2010, ArconicAlcoa Inc. was served with a multi-plaintiff action complaint involving several thousand individual persons claiming to be residents of St. Croix who are alleged to have suffered personal injury or property damage from Hurricane Georges or winds blowing material from the St. Croix Alumina, L.L.C. (“SCA”) facility on the island of St. Croix (U.S. Virgin Islands) since the time of the hurricane. This complaint, Abednego, et al. v. Alcoa, et al., was filed in the Superior Court of the Virgin Islands, St. Croix Division. Following an unsuccessful attempt by ArconicAlcoa Inc. and SCA to remove the case to federal court, the case has been lodged in the Superior Court. The complaint names as defendants the same entities that were sued in a February 1999 action arising out of the impact of Hurricane Georges on the island and added as a defendant the current owner of the alumina facility property.
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Superior Court, respectively. By order dated August 10, 2015, the Superior Court dismissed plaintiffs’ complaints without prejudice to re-file the complaints individually, rather than as a multi-plaintiff filing. The order also preserves the defendants’ grounds for dismissal if new, individual complaints are filed. On July 7, 2017, the Court issued an order and associated memoranda on plaintiff’s multiple motions for extension of time to file the individual Complaints.complaints. Following the court’s July 7, 2017 order, a total of 429 complaints were filed and accepted by the court by the deadline of July 30, 2017 (and consolidated into the Red Dust Claims docket (Master Case No.: SX-15-CV-620)). These complaints include claims of about 1,260 individual plaintiffs.
On November 5, 2018, notice of an order of reassignment was entered, transferring the claims to the newly created Complex Litigation Division of the Superior Court of the Virgin Islands, Division of St. Croix. On January 28, 2019, the plaintiffs filed a motion asking for a determination that expert testimony will not be required on the issue of causation, which defendants opposed. The Court has not ruled on that motion.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is listed on the New York Stock Exchange. Exchange under the symbol “HWM.”
Prior to the Arconic Inc. Separation of Alcoa Corporation fromTransaction on April 1, 2020, the Company the Company’s common stock tradedwas known as Arconic Inc. and was listed under the symbol “AA.” In connection with the Separation of Alcoa, on November 1, 2016, the Company changed its stock symbol and its common stock began trading under the symbol “ARNC.”
On October 5, 2016, the Company’s common shareholders approved a 1-for-3 reverse stock split of the Company’s outstanding and authorized shares of common stock (the “Reverse Stock Split”). AsThe Company’s common stock began trading on a result of the Reverse Stock Split,Split-adjusted basis on October 6, 2016, in which every three shares of issued and outstanding common stock were combined into one issued and outstanding share of common stock, without any change in the par value per share. The Reverse Stock Split reduced
Prior to the number of shares of common stock outstanding from approximately 1.3 billion shares to approximately 0.4 billion shares, and proportionately decreased the number of authorized shares of common stock from 1.8 billion to 0.6 billion shares. The Company’s common stock began tradingAlcoa Inc. Separation Transaction on a Reverse Stock Split-adjusted basis on October 6, 2016.
The number of holders of record of common stock was approximately 10,87410,920 as of February 21, 2020.12, 2021.
Stock Performance Graph
The following graph compares the most recent five-year performance of the Company’s common stock with (1) the Standard & Poor’s (S&P) 500® Index, (2) the S&P 500® Industrials Index, a group of 7073 companies categorized by Standard & Poor’s as active in the “industrials” market sector, and (3) the S&P Aerospace & Defense Select Industry Index, a group of 32 companies categorized by Standard & Poor’s as active in the “aerospace & defense” industry. which comprises General Dynamics Corporation, Howmet Aerospace Inc., Huntington Ingalls Industries, L3Harris Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Technologies Corporation, Teledyne Technologies Incorporated, Textron Inc., The Boeing Company, and Transdigm Group Inc.
The graph assumes, in each case, an initial investment of $100 on December 31, 2014,2015, and the reinvestment of dividends. HistoricalThe historical prices prior toof the Separation of Alcoa on November 1, 2016,Company presented in the graph and table have been adjusted to reflect the valueimpact of the Arconic Inc. Separation transaction.Transaction, the Reverse Stock Split, and the Alcoa Inc. Separation Transaction. The graph, table and related information shall not be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
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| As of December 31, | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||||||||||||||||||
| Howmet Aerospace, Inc. | $ | 100.00 | $ | 84.78 | $ | 125.78 | $ | 78.70 | $ | 144.47 | $ | 151.66 | |||||||||||||||||||||||||||||
S&P 500® Index | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | |||||||||||||||||||||||||||||||||||
S&P 500® Industrials Index | 100.00 | 118.86 | 143.86 | 124.74 | 161.38 | 179.23 | |||||||||||||||||||||||||||||||||||
| S&P Aerospace & Defense Index | 100.00 | 118.90 | 168.11 | 154.54 | 201.41 | 169.05 | |||||||||||||||||||||||||||||||||||
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| As of December 31, | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||
| Arconic Inc. | $ | 100 | $ | 63.15 | $ | 53.54 | $ | 79.44 | $ | 49.70 | $ | 91.24 | |||||||||||
S&P 500® Index | 100 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 | |||||||||||||||||
S&P 500® Industrials Index | 100 | 97.47 | 115.85 | 140.22 | 121.58 | 157.29 | |||||||||||||||||
| S&P Aerospace & Defense Select Industry Index | 100 | 105.43 | 125.36 | 177.24 | 162.93 | 212.35 | |||||||||||||||||
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
| October 1 - October 31, 2019 | — | $ | — | — | $ | 400,000,000 | ||||||||
November 1 - November 30, 2019(2) | 1,626,681 | $ | 30.74 | 1,626,681 | $ | 350,000,000 | ||||||||
| December 1 - December 31, 2019 | — | $ | — | — | $ | 350,000,000 | ||||||||
Total for quarter ended December 31, 2019 | 1,626,681 | |||||||||||||
| (in millions except share and per share amounts) | ||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)(2) | ||||||||||||||||||||||
| October 1 - October 31, 2020 | — | $ | — | — | $ | 299.5 | ||||||||||||||||||||
| November 1 - November 30, 2020 | 937,831 | $ | 23.99 | 937,831 | $ | 277.0 | ||||||||||||||||||||
| December 1 - December 31, 2020 | — | $ | — | — | $ | 277.0 | ||||||||||||||||||||
| Total for quarter ended December 31, 2020 | 937,831 | $ | 23.99 | 937,831 | ||||||||||||||||||||||
(1) Excludes commissions cost
(2) On February 5, 2018,May 20, 2019, the Company announced that its Board of Directors (the Board) had authorized the repurchase of up to $500 million of the Company's outstanding common stock (the "February 2018 Share"Share Repurchase Program"). by means of trading plans established from time to time in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, block trades, private transactions, open market repurchases and/or accelerated share repurchase agreements or other derivative transactions. There was no stated expiration for the February 2018 Share Repurchase Program and no shares were repurchased during 2018. On February 8, 2019,under which the Company announced that the Board had authorized themay repurchase of an additional $500 million of the Company's outstanding common stock, effective through the end of 2020. On May 20, 2019, the Company announced that the Board had authorized the repurchase of a further $500 million of the Company's outstanding common stock (the "May 2019shares from time to time and pursuant to such terms, as and if it deems appropriate. The Share Repurchase Program"). There was no stated expiration for the May 2019 Share Repurchase Program.
Item 6. Selected Financial Data.
| For the year ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Sales | $ | 14,192 | $ | 14,014 | $ | 12,960 | $ | 12,394 | $ | 12,413 | |||||||||
| Amounts attributable to Arconic: | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 470 | $ | 642 | $ | (74 | ) | $ | (1,062 | ) | $ | (157 | ) | ||||||
| Income (loss) from discontinued operations | — | — | — | 121 | (165 | ) | |||||||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | $ | (941 | ) | $ | (322 | ) | ||||||
| Earnings (loss) per share attributable to Arconic common shareholders: | |||||||||||||||||||
| Basic: | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 1.05 | $ | 1.33 | $ | (0.28 | ) | $ | (2.58 | ) | $ | (0.54 | ) | ||||||
| Income (loss) from discontinued operations | — | — | — | 0.27 | (0.39 | ) | |||||||||||||
| Net income (loss) | $ | 1.05 | $ | 1.33 | $ | (0.28 | ) | $ | (2.31 | ) | $ | (0.93 | ) | ||||||
| Diluted: | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 1.03 | $ | 1.30 | $ | (0.28 | ) | $ | (2.58 | ) | $ | (0.54 | ) | ||||||
| Income (loss) from discontinued operations | — | — | — | 0.27 | (0.39 | ) | |||||||||||||
| Net income (loss) | $ | 1.03 | $ | 1.30 | $ | (0.28 | ) | $ | (2.31 | ) | $ | (0.93 | ) | ||||||
| Cash dividends declared per common share | $ | 0.12 | $ | 0.24 | $ | 0.24 | $ | 0.36 | $ | 0.36 | |||||||||
| Total assets | 17,578 | 18,693 | 18,718 | 20,038 | 36,477 | ||||||||||||||
| Total debt | 5,940 | 6,330 | 6,844 | 8,084 | 8,827 | ||||||||||||||
| Cash provided from (used for) operations | 406 | 217 | (39 | ) | 95 | 764 | |||||||||||||
| Capital expenditures: | |||||||||||||||||||
| Capital expenditures—continuing operations | 586 | 768 | 596 | 827 | 789 | ||||||||||||||
| Capital expenditures—discontinued operations | — | — | — | 298 | 391 | ||||||||||||||
| Total capital expenditures | $ | 586 | $ | 768 | $ | 596 | $ | 1,125 | $ | 1,180 | |||||||||
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Table of Financial Condition and Results of Operations in Part II, Item 7Contents. and the Consolidated Financial Statements and Notes in Part II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in millions, except per-share amounts; shipments in thousands of metric tons [kmt])amounts)
Overview
Our Business
Management Review of 20192020 and Outlook for the Future
In 2020, Sales decreased 26% over 2019 Sales increased 1% over 2018primarily as a result of volume growthlower volumes in the commercial aerospace packaging,and commercial transportation markets driven by the impacts of COVID-19 and industrial end markets;737 MAX and favorable product pricing787 production declines along with a decrease in the Global Rolled Products (GRP) and Engineered Products and Forgings (EP&F) segments; partially offset by lower aluminum prices; and lower sales of $216 from divestitures$116 due to the divestiture of the forgings businessesbusiness in the United Kingdom (divested in December 2019)2019, all partially offset by 14% and Eger, Hungary (divested28% sales growth in December 2018), Latin America extrusions (divested in April 2018),the defense aerospace and the completed ramp down of Arconic's North American packaging operations (in December 2018). industrial gas turbine markets, respectively, as well as favorable product pricing.
In the segments, Segment operating profit increased 27%decreased 36% from 20182019 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 lower raw material costs including aluminum price, and higher volumes, partially offset by14% and 28% sales growth in the impact of the Tennessee plant transition todefense aerospace and industrial production, operational challenges at one aluminum extrusions plant, and higher variable compensation costs.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 ArconicHowmet to end 20192020 with a solid financial position.
The following financial information reflects certain key highlights of Arconic’s 2019Howmet’s 2020 results:
•Sales of $14,192, up 1%$5,259 down 26% from 2018,2019, with growthsignificant reductions in key endsales in commercial aerospace and commercial transportation markets, driven by COVID-19 and 737 MAX and 787 production declines;
•Net income from continuing operations of $470,$211, or $1.03$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 $406;$9; cash used for financing activities of $1,568, reflecting the Company’s repurchase of $1,150 of its common stock and the repayment of convertible notes in 2019;$369; and cash provided from investing activities of $583;$271;
•Cash on hand at the end of the year of $1,648;$1,610; and
•Total debt of $5,940,$5,075, primarily due to a decrease of $390$865 from 2018,2019, reflecting repaymentrepayments of $403$2,040 along with $20 of convertibleother debt, partially offset by issuance of debt during the second quarter of 2020 of $1,200 notes in October 2019.due 2025.
(1)For See below in Results of Operations for the reconciliation of Total segment operating profit to Consolidated incomeIncome from continuing operations before income taxes and related information, see page 43.taxes.
The Company rapidly executed on the separation plan that was announced induring February 2019 and is targetingwith completion of the separation on April 1, 2020. The company will separateCompany separated into two independent, publicly-traded companies, to be named Howmet Aerospace Inc. (Remain Co.) and Arconic Corporation (Spin Co.) (the “Separation of Arconic”“Arconic Inc. Separation Transaction”). Remain Co. will beHowmet Aerospace is comprised of the Company’s Engineered Products and Forgings businesses (engine products, fastening systems, engineered structures, and forged wheels) and will be renamed Howmet Aerospace Inc. at separation and change itsis listed under the stock ticker from “ARNC” toof “HWM.” Spin Co. will beArconic Corporation is comprised of the Company’sformer Global Rolled Products businessessegment (global rolled products, aluminum extrusions, and building and construction systems) and will be held by ais under the new company that will be namedname Arconic Corporation, at separation and that intends to list its common stocklisted 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 $14,192$7,098 compared with $14,014$6,778 in 2018, an increase of $178,$320, or 1%5%. The increase was primarily due to volume growth in the aerospace, packaging, commercial transportation, and industrial end markets; favorable product pricing and mix in the GRP segment; and favorable product pricing in the EP&F segment when fulfilling volume above contractual share and renewing contracts, and selling non-contractual spot business;contracts; partially offset by lower aluminum prices; lower sales of $216 from the completed ramp down of Arconic's North American packaging operations (in December 2018) and the divestitures of forgings businesses in the United Kingdom (divested in December 2019) and Hungary (divested in December 2018), and the Latin America extrusions business (divested in April 2018); and unfavorable foreign currency movements.
Cost of Goods Sold (COGS). COGS as a percentage of Sales was 79.1%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 81.3%75.4% in 2018. The decrease was primarily due to lower raw material costs including aluminum prices;costs; net costcosts savings; favorable product pricing; and costs incurred in 2018 that did not recur in 2019 related to settlements of certain customer claims, of $38 noted above and a charge related to a physical inventory adjustment at one plant in the GRP segment of $23. These positive impacts were partially offset by an unfavorable product mix; a charge for environmental remediation at Grasse River of $25;mix and the impairment of energy business assets of $10; and a charge primarily for a one-time signing bonus for employees associated with the collective bargaining agreement negotiation of $9. In June of 2019 the Company and the United Steelworkers reached a tentative three-year labor agreement covering approximately 3,400 employees at four U.S. locations; the previous labor agreement expired on May 15, 2019. The tentative agreement was ratified on July 11, 2019.$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 a 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. The Company anticipates a charge of approximately $10 to $15 in the first quarter of 2020, with additional impacts in subsequent quarters as the business continues to recover from the fire, which are also expected to be covered by insurance proceeds.
Selling, General Administrative, and Other Expenses (SG&A). SG&A expenses were $704,$277, or 5.0%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 $604,$371, or 4.3%5.5% of Sales, in 2018. The increase in SG&A of $100,$29, or 17%8%, was primarily due to costs associated with the plannedArconic Inc. Separation Transaction of Arconic of $78$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 $70$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 $103$41 in 2018. The decrease of $33,$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 $536$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 $576$314 in 2018. The decrease of $40,$19, or 7%,6% was primarily due to the impact of divestitures, as well as asset impairments inof the EP&F segmentDisks long-lived asset group during the second quarter of 2019 (see Note OM 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 $620$182 in 2020 compared with $582 in 2019 comparedand $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 $9an agreement to sell an aerospace components business in 2018the U.K that did not occur and $165 in 2017.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 included asset impairments of $556, related toa $428 charge for impairment of the Disks long-lived asset groupgroup; a $69 charge for layoff costs; a $46 charge for impairment of $428, agreementsassets associated with an agreement to sell the Company’s Brazilian rolling mill operations, the U.K. forgings business, andbusiness; a small additive business$14 charge for impairment of $112, and a trade name intangible asset and properties, plant,plants, and equipment related to the Company’s primary research and development facilityfacility; a $13 loss on sale of $25; 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 layoff costs of $103, including the separation of approximately 1,310 employees;other exit costs; which were partially offset by a benefit fromof $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 of $58; and a gain for contingent consideration received from the sale of the Texarkana rolling mill of $20.subsidiaries.
Restructuring and other charges in 2018 consisted primarily includedof a$96 charge for pension and other postretirement benefits net settlements and curtailments of $91;plan settlement accounting; a $23 charge for pension curtailment; a $43 loss on the sale of thea Hungary forgings business of $43; andbusiness; a $18 charge for layoff costs of $20, including the separation of approximately 125 employees; partially offset bycosts; a gain on the asset sale of the Texarkana rolling mill of $154.
See Note EC to the 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 $378$377 in 2018. The decrease of $40,$39, or 11%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.
Other Expense (Income), Net. Other expense (income), net was $122$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 $79Other expense (income), net of $(30) in 2018. The increase in Other expense, net of $43$61 was primarily due to an increase in deferred compensation arrangements and related investment performanceexpense 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$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 did not recur in 2019,provide for an exclusion of certain high-taxed foreign earnings from the calculation of Global Intangible Low-Taxed Income ("GILTI"), partially offset by favorableU.S. tax on foreign currency movements.
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jurisdictions and subject to U.S. taxes including GILTI, foreign losses with no tax 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,and other nondeductible expenses, partially offset by a $24 net benefit associated with the deduction of foreign taxes that were previously claimed as a U.S. foreign tax credit, and a $12 net benefit for a foreign tax rate changes, partially offset by the tax impact of $89 of non-deductible executive compensation and transaction costs, $53 of impairment charges related to the Company’s Brazilian rolling mill operations and other foreign losses with no tax benefit, a $14 charge for U.S. state taxes, and by foreign income subject to U.S. taxes.change.
Net Income.Income from Continuing Operations. Net incomefrom continuing operations was $470 for 2019,$211, or $1.03$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 of $642from continuing operations was $126, or $0.27 per diluted share, for 2018,2019 compared to $309, or $1.33$0.63 per share.diluted share, for 2018. The decrease in results of $172$183, or 59%, was primarily due to higher Restructuring and other charges;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 expenses duecosts related primarily to costs associated with the planned Separation of Arconic of $70 ($78 before-tax) and higher annual incentive compensation accruals and executive compensation costs; andcosts, higher Other expense, net due to an increase in deferred compensation arrangements and related investment performanceexpense, and the benefit recognized in 2018 from establishing a tax indemnification receivable reflecting Alcoa Corporation’s 49% share of a Spanish tax reserve of $28 ($29 before-tax)$29 that did not recur in 2019;2019, partially offset by volume growth;growth, favorable product pricing;pricing, net cost savings;savings, lower D&A due to the impact of divestitures as well as asset impairments inrelated to the EP&F segment;Disks long-lived asset group, lower Interest expense due to lower debt outstanding and costs incurred of $15 ($19 before-tax)$19 in 2018 related to the premium paid on the early redemption of debt that did not recur in 2019; lower R&D expenses due to the consolidation of the Company's primary R&D facility in conjunction with ongoing cost reduction efforts;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 $1.30$0.63 and $0.67 per diluted share, compared to a Net lossrespectively.
See details of $74 for 2017, or $0.28 per share. The increasediscontinued operations in results of $716 was due in partNote C to the following items that occurredConsolidated Financial Statements in 2017 but did not recur in 2018: a charge for goodwill impairmentPart II, Item 8. (Financial Statements and Supplementary Data) of $719 ($719 pre-tax); gains related to the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and the Debt-for-Equity Exchange of $405 ($518 pre-tax); and favorable adjustments to contingent earn-out and guarantee liabilities of $97 ($106 pre-tax). Additional favorable impacts in 2018 included: volume growth across both segments; lower SG&A expenses due to proxy and separation costs incurred in 2017 and not recurring in 2018, as well as lower incentive compensation accruals; lower Restructuring and other charges driven primarily by the gain on sale of the Texarkana rolling mill, offset by pension settlement charges and the loss on sale of the forgings business in Hungary; lower Interest expense due to lower debt levels; lower pension expenses; and lower Income taxes. These favorable impacts were partially offset by unfavorable aerospace product mix, higher aluminum prices, manufacturing inefficiencies in Engineered Structures, performance shortfalls in the Disks asset group, settlements of certain customer claims, and an unfavorable physical inventory adjustment at one plant.this Form 10-K.
Segment Information
In the thirdsecond quarter of 2019,2020, the Company realigned its operations by eliminating its Transportation and Construction Solutions (TCS) segment and transferring the Forged Wheels business to its EP&F segment and the Building and Solutions Systems (BCS) business to its GRP segment, consistent with how the ChiefCo-Chief Executive Officer is assessingOfficers assess operating performance and allocating capital in conjunction with the plannedArconic Inc. Separation of ArconicTransaction (see Note UC to the Consolidated Financial Statements in Part II Item 8. (Financial Statements and Supplementary Data)8 of this Form 10-K). The Latin America extrusions business, which was formerly part of the Company's TCS segment until its sale in April of 2018 (see Note S to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K), was moved to Corporate. In the first quarter of 2019, management transferred its aluminum extrusions operations from its Engineered Structures business unit within the EP&F segment to the GRP segment, based on synergies with the GRP segment including similar customer base, technologies, and manufacturing capabilities. Prior period financial information has been recast to conform to current year presentation.
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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 $2,015$890 in 2020, $1,390 in 2019, $1,586and $1,105 in 2018, and $1,689 in 2017.2018. The following information provides Sales and Segment operating profit for each reportable segment as well as certain shipment data for GRP, for each of the three years in the period ended December 31, 2019.2020. See Note Bbelow for the reconciliation of Income from continuing operations before income taxes to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K.Total segment operating profit.
| 2020 | 2019 | 2018 | |||||||||||||||
| Third-party sales | $ | 2,406 | $ | 3,320 | $ | 3,092 | |||||||||||
| Segment operating profit | $ | 417 | $ | 621 | $ | 464 | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Third-party sales | $ | 7,105 | $ | 6,798 | $ | 6,300 | |||||
| Segment operating profit | $ | 1,390 | $ | 1,105 | $ | 1,119 | |||||
Third-party sales for the euro.
Third-party sales for the EngineeredEngine Products and Forgings segment increased $307,$228 or 5%,7% in 2019 compared with 2018, primarily as a result of higher aerospacecommercial and commercial transportationdefense 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).
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, compared with 2017, primarily attributable to performance shortfalls in the Disks asset group; manufacturing inefficiencies in the Engineered Structures business, associated with the now resolved forging press outageand had 180 employees at the Cleveland facility that impactedtime of the fourth quarter of 2018 with higher costs of $10; unfavorable aerospace engine mix and new product introductions; and lower aerospace pricing principally in the fasteners business; partly offset by the strength in aerospace engine, defense, and commercial transportation volumes and net cost savings.divestiture.
In 20202021 compared to 2019,2020, demand in the commercialindustrial gas turbines and defense aerospace end market, excluding the impact of Boeing 737 MAX,markets is expected to remain strong, driven by the ramp-up of new aerospace engine platforms. Demand in the defense end market is expected to continue to grow due to the ramp-up of certain aerospace programs,increase while the commercial transportationaerospace end market is expected to be down. Netdown driven by the impact of COVID-19. Favorable product pricing and cost savings and favorable pricingreductions 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 service at reduced production levels, the extenttail on aircraft and aero engines. The business’s products are also critical components of the damage and the financial impact are not yet known as the investigation into the cause of the fire and its full impact continues. The Company has insurance with a deductible of $10.
| 2019 | 2018 | 2017 | |||||||||
| Third-party sales | $ | 7,082 | $ | 7,223 | $ | 6,540 | |||||
| Intersegment sales | 183 | 205 | 183 | ||||||||
| Total sales | $ | 7,265 | $ | 7,428 | $ | 6,723 | |||||
| Segment operating profit | $ | 625 | $ | 481 | $ | 570 | |||||
| Third-party aluminum shipments (kmt) | 1,379 | 1,301 | 1,249 | ||||||||
Third-party sales for the Global Rolled ProductsFastening Systems segment decreased $141,$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 as a result of lower aluminum prices, the absence of sales of $144 from the completed ramp down of Arconic's North American packaging operations (completed in December 2018), and unfavorable foreign currency movements, partially offset by favorable product pricing and mix andattributable to higher volumes in the packaging, aerospace and industrialcommercial transportation end markets.markets, partially offset by unfavorable foreign currency movements.
In 20202021 compared to 2019,2020, demand fromin the automotivecommercial aerospace end market is expected to be up, while headwinds will continuedown 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 Structuressegment 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 Structuressegment 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 Structuressegment 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 Wheelssegment 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 Wheelssegment 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 aerospace airframe end market will be heavily influenceddowntime 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 the 737 MAX situation. GrowthForged Wheels is expected with the Tennessee industrial products ramp-up. The BCS business expects continued growth and margin expansion. Net productivity improvementsto increase in most regions. Commercial transportation OEMs are also anticipatedexpected to continue.increase output as global economies recover from 2020 COVID-19 lows.
Reconciliation of Total segment operating profit to Consolidated incomeIncome 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 | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Total segment operating profit | $ | 2,015 | $ | 1,586 | $ | 1,689 | |||||
| Unallocated amounts: | |||||||||||
| Impairment of goodwill | — | — | (719 | ) | |||||||
| Restructuring and other charges | (620 | ) | (9 | ) | (165 | ) | |||||
| Corporate expense | (360 | ) | (252 | ) | (325 | ) | |||||
| Consolidated operating income | $ | 1,035 | $ | 1,325 | $ | 480 | |||||
| Interest expense | (338 | ) | (378 | ) | (496 | ) | |||||
| Other (expense) income, net | (122 | ) | (79 | ) | 486 | ||||||
| Consolidated income from continuing operations before income taxes | $ | 575 | $ | 868 | $ | 470 | |||||
See Impairment of Goodwill, 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 $108,$62, or 43%37%, in 2019 compared with 2018 primarily due to costs associated with the plannedArconic Inc. Separation Transaction of Arconic of $78;$5; higher annual incentive compensation accruals and executive compensation costs; environmental remediation costs for Grasse River of $25; impairment of energy business assets of $10; 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 primarily due to insurance reimbursements.$10.
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Environmental Matters
See the Environmental Matters section of Note TV to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Liquidity and Capital Resources
Cash provided from operations and financing activities is expected to be adequate to cover Arconic’sHowmet'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, 2019,2020, cash and cash equivalents of ArconicHowmet were $1,648,$1,610, of which $414$253 was held by Arconic'sHowmet'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 20192020 was $406$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 $189,$244, or 87%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 $112.$57 and noncurrent liabilities of $21. The components of the change in working capital included unfavorable changes in accounts payable of $395$340 and taxes, including income taxes of $106, partially offset by favorable changes in receivables of $165 and accrued expenses of $148.
Financing Activities
Cash used for financing activities was $369 in 2020 compared with $1,568 in 2019 compared withand $649 in 20182018.
The use of cash in 2020 was primarily related to the repayments on borrowings under certain revolving credit facilities (see below) and $1,015repayments 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 2017.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 HJ to the Consolidated Financial Statements in Part II, Item 8. (FinancialFinancial 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 PR 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 additions to debt for borrowings under certain revolving credit facilities of $400 and 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 PR to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and
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Supplementary Data)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 use of cash in 2017 was principally the result of $1,634 in repayments on borrowings under certain revolving credit facilities (see below) and repayments on debt, primarily related to the early redemption of the Company’s 6.50% Bonds due 2018, 6.75% Notes due 2018, and a portion of the 5.72% Notes due 2019 (see Note P to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K); $162 in dividends to shareholders; and $52 in premiums paid on early redemption of debt. These items were partially offset by $816 in additions to debt, primarily from borrowings under certain revolving credit facilities, and $50 of proceeds from the exercise of stock options.
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 Arconicthe Company by the major credit rating agencies.
| 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 $583$271 in 2020 compared with $528 in 2019 compared withand $565 in 20182018.
The source of cash in 2020 was primarily cash receipts from sold receivables of $422 and $1,320proceeds from the sale a rolling mill business in 2017.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 due to 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 NoteNotes CS 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 $586,$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.production (which was part of Arconic Corporation at the Arconic Inc. Separation Transaction).
The source of cash in 2018 includedwas 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 Szekesfehervar,Székesfehérvár, Hungary.
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Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations.Obligations Arconic
Howmet is required to make future payments under various contracts, including long-term purchase obligations, financing arrangements, and lease agreements. ArconicHowmet also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects.
As of December 31, 2019,2020, a summary of Arconic’sHowmet’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 funding | 514 | 140 | 229 | 145 | — | ||||||||||||||||||||||||
| Other postretirement benefit payments | 146 | 17 | 32 | 30 | 67 | ||||||||||||||||||||||||
| Layoff and other restructuring payments | 54 | 54 | — | — | — | ||||||||||||||||||||||||
| 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 | |||||||||||||||||||
| Total | 2020 | 2021-2022 | 2023-2024 | Thereafter | |||||||||||||||
| Operating activities: | |||||||||||||||||||
| Energy-related purchase obligations | $ | 57 | $ | 29 | $ | 25 | $ | 3 | $ | — | |||||||||
| Raw material purchase obligations | 569 | 495 | 64 | 8 | 2 | ||||||||||||||
| Other purchase obligations | 134 | 80 | 49 | 5 | — | ||||||||||||||
| Operating leases | 317 | 81 | 108 | 58 | 70 | ||||||||||||||
| Interest related to total debt | 1,975 | 344 | 444 | 344 | 843 | ||||||||||||||
| Estimated minimum required pension funding | 1,705 | 475 | 655 | 575 | — | ||||||||||||||
| Other postretirement benefit payments | 655 | 80 | 160 | 155 | 260 | ||||||||||||||
| Layoff and other restructuring payments | 34 | 34 | — | — | — | ||||||||||||||
| Deferred revenue arrangements | 36 | 6 | 30 | — | — | ||||||||||||||
| Uncertain tax positions | 220 | — | — | — | 220 | ||||||||||||||
| Financing activities: | |||||||||||||||||||
| Total debt | 5,940 | 1,028 | 1,871 | 1,246 | 1,795 | ||||||||||||||
| Dividends to shareholders | — | — | — | — | — | ||||||||||||||
| Investing activities: | |||||||||||||||||||
| Capital projects | 401 | 247 | 121 | 33 | — | ||||||||||||||
| Totals | $ | 12,043 | $ | 2,899 | $ | 3,527 | $ | 2,427 | $ | 3,190 | |||||||||
Obligations for Operating Activities
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, 20192020 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 Arconic’sHowmet’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, ArconicHowmet contributes additional amounts as deemed appropriate. The estimates reported in the preceding table include amounts sufficient to meet the minimum required, along with approximately $60 of contributions in 2020 related to actions designed to reduce future obligations. Arconicrequired. 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, 2019.2020. 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
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by management as of December 31, 2019.2020. 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 less than four percentapproximately 4% of sales in 2020.2021.
Off-Balance Sheet Arrangements
At December 31, 2019, Arconic2020, 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 20202021 and 2040 was $31$44 at December 31, 2019.2020.
Pursuant to the Separation and Distribution Agreement between Arconicthe Company and Alcoa Corporation, Arconic wasthe Company is required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of $9$12 and $6$9 at December 31, 20192020 and 2018,2019, respectively, and were included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. Arconic was required to provide guarantees related to two long-term supply agreements for energy for Alcoa Corporation facilities in the event of an Alcoa Corporation payment default. In October 2017, Alcoa Corporation announced that it had terminated one of the two agreements, the electricity contract with Luminant Generation Company LLC that was tied to its Rockdale Operations, effective as of October 1, 2017. AsFor a result of the termination of the Rockdale electricity contract, Arconic recorded income of $25 in the fourth quarter of 2017 associated with reversing the fair value of the electricity contract guarantee. For the remaining long-term supply agreement, Arconicthe Company is required to provide a guarantee up to an estimated present value amount of approximately $1,353$1,398 and $1,087$1,353 at December 31, 20192020 and December 31, 2018,2019, respectively, in the event of an Alcoa Corporation payment default. This guarantee expires in 2047. For this guarantee, subject to its provisions, Arconicthe Company is secondarily liable in the event of a payment default by Alcoa Corporation. ArconicThe 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 remaining long-term energy supply agreement. The premium is expected to be paid by Alcoa Corporation. The decisionIn December 2020, a surety bond with a limit of $80 relating to enter into a claims purchasethe long-term energy supply agreement or insurance policywas obtained by Alcoa Corporation to protect Howmet's obligation. This surety bond will be maderenewed on an annual basis going forward.basis.
Pursuant to the Separation and Distribution Agreement,Agreements between the Company and Arconic wasCorporation and between the Company and Alcoa Corporation, the Company is required to retain letters of credit of $52$53 that had previously been provided related to boththe 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 Arconicthe Company are being proportionally billed to and are being fully 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.
Pursuant to the Separation and Distribution Agreement,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, 20162016. Arconic Corporation and as a result, Arconic has $24 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claimsletters of credit and surety bond fees paid by Arconicthe Company are being proportionally billed to and are being fully 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 accounting for environmental and litigation matters; 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 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. For 2019, ArconicHowmet had sevenfour reporting units of which four were included in the EP&F segment (Fastening(Engine Products, Fastening Systems, Engineered Structures, Engine Products, and Forged Wheels), and three were included in the GRP segment (Global Rolled Products, Aluminum Extrusions, and BCS.) 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.
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)("WACC") between the current and prior years for each reporting unit.
During the 2019first 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 sevenfour of its reporting units. The estimated fair values for each of the sevenfour reporting units exceeded their respective carrying values by more than 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. ArconicHowmet uses a discounted cash flow (DCF)("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, (volumes and pricing), 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. ArconicHowmet 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 EP&F segment.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 ana global average duration of 1012 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, 2018, and 2017,2018, the discount rate used to determine benefit obligations for U.S. pension and other postretirement benefit plans was 3.30%2.40%, 4.35%3.00%, and 3.75%4.00%, respectively. The impact on the liabilities of a change in the discount rate of 1/4 of 1% would be approximately $220$90 and either a charge or credit of approximately $1 to after-tax 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, 2018, and 2017,2018, management used 7.00%6.00%, 7.00%5.60%, and 7.75%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. TheseThese 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 2020,2021, management anticipates that 7.00%6.00% will be the expected long-term rate of return. The decrease of 75 basis points inreturn for the 2018 expected long-term rate of return was due to a decrease in the expected return by asset class and the 20-year moving average.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 after-tax earnings by approximately $9$4 for 2020.2021.
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, of 105 basis points, 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 (accumulated deficit) 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 of 60 basis points and the amortization of actuarial losses. In 2017, a net loss of $220 (after-tax) was recorded in other comprehensive loss, primarily due to the decrease in the discount rate of 45 basis points and plan asset performance less than expected, which were partially offset by the amortization of actuarial losses.
Stock-Based Compensation. ArconicHowmet 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 and 2017 was $78$46 ($7042 after-tax), $50$69 ($3963 after-tax), and $54$40 ($3631 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) for thebased 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 Arconic’sHowmet’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 carrybackcarry-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 Arconic’sHowmet’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, ArconicHowmet 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 income 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 AB 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 AB 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.
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Item 8. Financial Statements and Supplementary Data.
Management’s Reports to ArconicHowmet Shareholders
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of ArconicHowmet Aerospace Inc. and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best judgments and estimates. The other financial information included in the annual report is consistent with that in the financial statements.
Management also recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)("COSO"). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019,2020, based on criteria in Internal Control—Integrated Framework (2013) issued by the COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20192020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
| /s/ John C. Plant | ||
John C. Plant Executive Chairman and | ||
| /s/ Tolga Oal | ||
| Tolga Oal Co-Chief Executive Officer | ||
| /s/ Ken Giacobbe | ||
Ken Giacobbe Executive Vice President and Chief Financial Officer | ||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of ArconicHowmet Aerospace Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of ArconicHowmet Aerospace Inc. and its subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, of comprehensive income, (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note AB to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
47
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Goodwill Impairment Assessment - Engine Products andAssessments – Engineered Structures Reporting UnitsUnit
As described in Notes A and NP to the consolidated financial statements, the Company’s consolidated goodwill balance was $4,493$4,102 million as of December 31, 2019,2020, and the amount of the goodwill associated with the Engine Products and Engineered Structures reporting unitsunit was $2,164 million and $289 million, respectively.$304 million. Goodwill is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist. During the first quarter of 2020, management performed a quantitative impairment test for the Engineered Structures reporting unit and concluded that it was not impaired. The evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Fair value is estimated using a discounted cash flow model. The determination of fair value using this technique requires management to use significant estimates and assumptions related to forecasting operating cash flows, including sales growth, (volumes and pricing), production costs, capital spending, and discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessmentassessments of the Engine Products and Engineered Structures reporting unitsunit is a critical audit matter are there wasthe significant judgment by management when developing the fair value measurements of the reporting units.unit. This in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s cash flow projections and significant assumptions includingrelated to sales growth, (volumes and pricing), production costs, and discount rates.rate for the first quarter assessment, and sales growth and production costs for the annual impairment assessment. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual goodwill impairment assessment,assessments, including controls over the valuation of the Company’s Engineered Structures reporting units.unit. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow modelmodels and performing sensitivity analyses over the assumptions in the model;assumptions; testing the completeness accuracy, and relevanceaccuracy of underlying data used in the model;models; and evaluating the reasonableness of the significant assumptions used by management includingrelated to sales growth, (volumes and pricing), production costs, and discount rates.rate for the first quarter assessment and sales growth and production costs for the annual impairment assessment. Evaluating management’s assumptions related to sales growth (volumes and pricing) and production costs involved evaluating whether the assumptions used by management were reasonable by considering (i) the current and past performance of the reporting units, obtaining evidence to supportunit, (ii) the reasonableness of the assumptions,consistency with relevant industry data, and (iii) considering whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the discounted cash flow models and, certain significant assumptions, includingfor the first quarter assessment, the discount rates.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 26, 202016, 2021
We have served as the Company’s auditor since 1950.
48
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| $ | 14,192 | $ | 14,014 | $ | 12,960 | ||||||
| Cost of goods sold (exclusive of expenses below) | 11,227 | 11,397 | 10,221 | ||||||||
| Selling, general administrative, and other expenses | 704 | 604 | 715 | ||||||||
| Research and development expenses | 70 | 103 | 109 | ||||||||
| Provision for depreciation and amortization | 536 | 576 | 551 | ||||||||
| — | — | 719 | |||||||||
| 620 | 9 | 165 | |||||||||
| Operating income | 1,035 | 1,325 | 480 | ||||||||
| 338 | 378 | 496 | |||||||||
| 122 | 79 | (486 | ) | ||||||||
| Income before income taxes | 575 | 868 | 470 | ||||||||
| 105 | 226 | 544 | |||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | ||||
| Net income (loss) | $ | 477 | $ | 651 | $ | (127 | ) | ||||
| Earnings (loss) per share - basic | $ | 1.05 | $ | 1.33 | $ | (0.28 | ) | ||||
| Earnings (loss) per share - diluted | $ | 1.03 | $ | 1.30 | $ | (0.28 | ) | ||||
| Average shares outstanding - basic | 446 | 483 | 451 | ||||||||
| Average shares outstanding - diluted | 463 | 503 | 451 | ||||||||
| For the year ended December 31, | 2020 | 2019 | 2018 | ||||||||||||||
| $ | 5,259 | $ | 7,098 | $ | 6,778 | ||||||||||||
| Cost of goods sold (exclusive of expenses below) | 3,878 | 5,214 | 5,114 | ||||||||||||||
| Selling, general administrative, and other expenses | 277 | 400 | 371 | ||||||||||||||
| Research and development expenses | 17 | 28 | 41 | ||||||||||||||
| Provision for depreciation and amortization | 279 | 295 | 314 | ||||||||||||||
| 182 | 582 | 163 | |||||||||||||||
| Operating income | 626 | 579 | 775 | ||||||||||||||
| 381 | 338 | 377 | |||||||||||||||
| 74 | 31 | (30) | |||||||||||||||
| Income before income taxes | 171 | 210 | 428 | ||||||||||||||
| (40) | 84 | 119 | |||||||||||||||
| Income from continuing operations after income taxes | $ | 211 | $ | 126 | $ | 309 | |||||||||||
| 50 | 344 | 333 | |||||||||||||||
| Net income | $ | 261 | $ | 470 | $ | 642 | |||||||||||
| Net income | $ | 259 | $ | 477 | $ | 651 | |||||||||||
| Earnings per share - basic | |||||||||||||||||
| Continuing operations | $ | 0.48 | $ | 0.28 | $ | 0.64 | |||||||||||
| Discontinued operations | $ | 0.11 | $ | 0.77 | $ | 0.69 | |||||||||||
| Earnings per share - diluted | |||||||||||||||||
| Continuing operations | $ | 0.48 | $ | 0.27 | $ | 0.63 | |||||||||||
| Discontinued operations | $ | 0.11 | $ | 0.76 | $ | 0.67 | |||||||||||
| Average shares outstanding - basic | 435 | 446 | 483 | ||||||||||||||
| Average shares outstanding - diluted | 439 | 463 | 503 | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
49
Statement of Consolidated Comprehensive Income (Loss)
(in millions)
| Arconic | Noncontrolling Interests | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | For the year ended December 31, | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | $ | — | $ | — | $ | — | $ | 470 | $ | 642 | $ | (74 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | Net income | $ | 261 | $ | 470 | $ | 642 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | (388 | ) | 255 | (220 | ) | — | — | — | (388 | ) | 255 | (220 | ) | Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | (46) | (388) | 255 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (13 | ) | (146 | ) | 252 | — | — | 2 | (13 | ) | (146 | ) | 254 | Foreign currency translation adjustments | 58 | (13) | (146) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in unrealized gains on debt securities | 3 | (1 | ) | (134 | ) | — | — | — | 3 | (1 | ) | (134 | ) | Net change in unrealized gains on debt securities | 0 | 3 | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in unrecognized gains/losses on cash flow hedges | (3 | ) | (23 | ) | 26 | — | — | — | (3 | ) | (23 | ) | 26 | Net change in unrecognized gains/losses on cash flow hedges | 4 | (3) | (23) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Other comprehensive (loss) income, net of tax | (401 | ) | 85 | (76 | ) | — | — | 2 | (401 | ) | 85 | (74 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | $ | 69 | $ | 727 | $ | (150 | ) | $ | — | $ | — | $ | 2 | $ | 69 | $ | 727 | $ | (148 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss), net of tax | Total Other comprehensive income (loss), net of tax | 16 | (401) | 85 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | Comprehensive income | $ | 277 | $ | 69 | $ | 727 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
50
Howmet Aerospace Inc and subsidiaries
Consolidated Balance Sheet
(in millions)
| December 31, | 2019 | 2018 | |||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 1,648 | $ | 2,277 | |||
| 967 | 1,047 | ||||||
| 484 | 451 | ||||||
| 2,429 | 2,492 | ||||||
| Prepaid expenses and other current assets | 314 | 314 | |||||
| Total current assets | 5,842 | 6,581 | |||||
| 5,463 | 5,704 | ||||||
| 4,493 | 4,500 | ||||||
| 608 | 573 | ||||||
| 658 | 919 | ||||||
| 514 | 416 | ||||||
| Total assets | $ | 17,578 | $ | 18,693 | |||
| Liabilities | |||||||
| Current liabilities: | |||||||
| Accounts payable, trade | $ | 2,043 | $ | 2,129 | |||
| Accrued compensation and retirement costs | 432 | 370 | |||||
| Taxes, including income taxes | 87 | 118 | |||||
| Accrued interest payable | 112 | 113 | |||||
| 418 | 356 | ||||||
| 1,034 | 434 | ||||||
| Total current liabilities | 4,126 | 3,520 | |||||
| 4,906 | 5,896 | ||||||
| 2,460 | 2,230 | ||||||
| 714 | 723 | ||||||
| 751 | 739 | ||||||
| Total liabilities | 12,957 | 13,108 | |||||
| Equity | |||||||
| Arconic shareholders’ equity: | |||||||
| 55 | 55 | ||||||
| 433 | 483 | ||||||
| 7,319 | 8,319 | ||||||
| 129 | (358 | ) | |||||
| (3,329 | ) | (2,926 | ) | ||||
| Total Arconic shareholders’ equity | 4,607 | 5,573 | |||||
| Noncontrolling interests | 14 | 12 | |||||
| Total equity | 4,621 | 5,585 | |||||
| Total liabilities and equity | $ | 17,578 | $ | 18,693 | |||
| December 31, | 2020 | 2019 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,610 | $ | 1,577 | |||||||
| 328 | 583 | ||||||||||
| 29 | 349 | ||||||||||
| 1,488 | 1,607 | ||||||||||
| Prepaid expenses and other current assets | 217 | 285 | |||||||||
| 0 | 1,442 | ||||||||||
| Total current assets | 3,672 | 5,843 | |||||||||
| 2,592 | 2,629 | ||||||||||
| 4,102 | 4,067 | ||||||||||
| 272 | 209 | ||||||||||
| 571 | 599 | ||||||||||
| 234 | 316 | ||||||||||
| 0 | 3,899 | ||||||||||
| Total assets | $ | 11,443 | $ | 17,562 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable, trade | $ | 599 | $ | 976 | |||||||
| Accrued compensation and retirement costs | 205 | 285 | |||||||||
| Taxes, including income taxes | 102 | 65 | |||||||||
| Accrued interest payable | 89 | 112 | |||||||||
| 289 | 229 | ||||||||||
| 376 | 1,034 | ||||||||||
| 0 | 1,424 | ||||||||||
| Total current liabilities | 1,660 | 4,125 | |||||||||
| 4,699 | 4,906 | ||||||||||
| 985 | 1,030 | ||||||||||
| 198 | 200 | ||||||||||
| 324 | 438 | ||||||||||
| 0 | 2,258 | ||||||||||
| Total liabilities | 7,866 | 12,957 | |||||||||
| 0 | 0 | ||||||||||
| Equity | |||||||||||
| Howmet Aerospace shareholders’ equity: | |||||||||||
| 55 | 55 | ||||||||||
| 433 | 433 | ||||||||||
| 4,668 | 7,319 | ||||||||||
| 364 | 113 | ||||||||||
| (1,943) | (3,329) | ||||||||||
| Total Howmet Aerospace shareholders’ equity | 3,577 | 4,591 | |||||||||
| Noncontrolling interests | 0 | 14 | |||||||||
| Total equity | 3,577 | 4,605 | |||||||||
| Total liabilities and equity | $ | 11,443 | $ | 17,562 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
51
Howmet Aerospace Inc and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
| For the year ended December 31, | 2019 | 2018 | 2017 | For the year ended December 31, | 2020 | 2019 | 2018 | |||||||||||||||||||||
| Operating activities | Operating activities | |||||||||||||||||||||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | |||||||||||||||||||||
| Adjustments to reconcile net income (loss) to cash provided from (used for) operations: | ||||||||||||||||||||||||||||
| Net income | Net income | $ | 261 | $ | 470 | $ | 642 | |||||||||||||||||||||
| Adjustments to reconcile net income to cash used for operations: | Adjustments to reconcile net income to cash used for operations: | |||||||||||||||||||||||||||
| Depreciation and amortization | 536 | 576 | 551 | Depreciation and amortization | 338 | 536 | 576 | |||||||||||||||||||||
| Deferred income taxes | (19 | ) | 31 | 434 | Deferred income taxes | 2 | (19) | 31 | ||||||||||||||||||||
| — | — | 719 | ||||||||||||||||||||||||||
| Restructuring and other charges | 620 | 9 | 165 | Restructuring and other charges | 164 | 620 | 9 | |||||||||||||||||||||
| Net loss (gain) from investing activities - asset sales | 7 | 10 | (513 | ) | ||||||||||||||||||||||||
| 115 | 130 | 217 | ||||||||||||||||||||||||||
| Net loss from investing activities - asset sales | Net loss from investing activities - asset sales | 8 | 7 | 10 | ||||||||||||||||||||||||
| 51 | 115 | 130 | ||||||||||||||||||||||||||
| Stock-based compensation | 60 | 50 | 67 | Stock-based compensation | 45 | 60 | 50 | |||||||||||||||||||||
| Other | 13 | 75 | 112 | Other | 59 | 13 | 75 | |||||||||||||||||||||
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||||||||||||||||||||||
| (Increase) in receivables | (977 | ) | (1,142 | ) | (915 | ) | (Increase) in receivables | (238) | (977) | (1,142) | ||||||||||||||||||
| (Increase) in inventories | (3 | ) | (74 | ) | (192 | ) | ||||||||||||||||||||||
| Decrease (increase) in prepaid expenses and other current assets | 4 | (1 | ) | 11 | ||||||||||||||||||||||||
| Decrease (increase) in inventories | Decrease (increase) in inventories | 74 | (3) | (74) | ||||||||||||||||||||||||
| (Increase) decrease in prepaid expenses and other current assets | (Increase) decrease in prepaid expenses and other current assets | (2) | 4 | (1) | ||||||||||||||||||||||||
| (Decrease) increase in accounts payable, trade | (56 | ) | 339 | 62 | (Decrease) increase in accounts payable, trade | (381) | (1) | 339 | ||||||||||||||||||||
| (Decrease) in accrued expenses | (42 | ) | (190 | ) | (116 | ) | (Decrease) in accrued expenses | (217) | (42) | (190) | ||||||||||||||||||
| (Decrease) increase in taxes, including income taxes | (2 | ) | 104 | (23 | ) | |||||||||||||||||||||||
| Decrease (increase) in taxes, including income taxes | Decrease (increase) in taxes, including income taxes | 98 | (2) | 104 | ||||||||||||||||||||||||
| Pension contributions | (268 | ) | (298 | ) | (310 | ) | Pension contributions | (257) | (268) | (298) | ||||||||||||||||||
| (Increase) in noncurrent assets | (7 | ) | (20 | ) | (41 | ) | ||||||||||||||||||||||
| Decrease (increase) in noncurrent assets | Decrease (increase) in noncurrent assets | 39 | (7) | (20) | ||||||||||||||||||||||||
| (Decrease) in noncurrent liabilities | (45 | ) | (24 | ) | (193 | ) | (Decrease) in noncurrent liabilities | (35) | (45) | (24) | ||||||||||||||||||
| Cash provided from (used for) operations | 406 | 217 | (39 | ) | ||||||||||||||||||||||||
| Cash provided from operations | Cash provided from operations | 9 | 461 | 217 | ||||||||||||||||||||||||
| Financing Activities | Financing Activities | |||||||||||||||||||||||||||
| Net change in short-term borrowings (original maturities of three months or less) | 2 | (7 | ) | (2 | ) | Net change in short-term borrowings (original maturities of three months or less) | (15) | 2 | (7) | |||||||||||||||||||
| 400 | 600 | 816 | ||||||||||||||||||||||||||
| (806 | ) | (1,103 | ) | (1,634 | ) | |||||||||||||||||||||||
| — | (17 | ) | (52 | ) | ||||||||||||||||||||||||
| 2,400 | 400 | 600 | ||||||||||||||||||||||||||
| (2,043) | (806) | (1,103) | ||||||||||||||||||||||||||
| (61) | 0 | 0 | ||||||||||||||||||||||||||
| (59) | 0 | (17) | ||||||||||||||||||||||||||
| Proceeds from exercise of employee stock options | 56 | 16 | 50 | Proceeds from exercise of employee stock options | 33 | 56 | 16 | |||||||||||||||||||||
| Dividends paid to shareholders | (57 | ) | (119 | ) | (162 | ) | Dividends paid to shareholders | (11) | (57) | (119) | ||||||||||||||||||
| Distributions to noncontrolling interests | — | — | (14 | ) | ||||||||||||||||||||||||
| (1,150 | ) | — | — | |||||||||||||||||||||||||
| (73) | (1,150) | 0 | ||||||||||||||||||||||||||
| Net cash transferred to Arconic Corporation at separation | Net cash transferred to Arconic Corporation at separation | (500) | 0 | 0 | ||||||||||||||||||||||||
| Other | (13 | ) | (19 | ) | (17 | ) | Other | (40) | (13) | (19) | ||||||||||||||||||
| Cash used for financing activities | (1,568 | ) | (649 | ) | (1,015 | ) | Cash used for financing activities | (369) | (1,568) | (649) | ||||||||||||||||||
| Investing Activities | Investing Activities | |||||||||||||||||||||||||||
| Capital expenditures | (586 | ) | (768 | ) | (596 | ) | ||||||||||||||||||||||
| 103 | 309 | (9 | ) | |||||||||||||||||||||||||
| 73 | 9 | 890 | ||||||||||||||||||||||||||
| 995 | 1,016 | 792 | ||||||||||||||||||||||||||
| (2 | ) | (1 | ) | 243 | ||||||||||||||||||||||||
| Cash provided from investing activities | 583 | 565 | 1,320 | |||||||||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | (4 | ) | 9 | ||||||||||||||||||||||||
| (267) | (641) | (768) | ||||||||||||||||||||||||||
| 114 | 103 | 309 | ||||||||||||||||||||||||||
| Sales of investments | Sales of investments | 0 | 73 | 9 | ||||||||||||||||||||||||
| 422 | 995 | 1,016 | ||||||||||||||||||||||||||
| Other | Other | 2 | (2) | (1) | ||||||||||||||||||||||||
| Cash provided from Investing Activities | Cash provided from Investing Activities | 271 | 528 | 565 | ||||||||||||||||||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | Effect of exchange rates on cash, cash equivalents and restricted cash | (3) | 0 | (4) | ||||||||||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | (579 | ) | 129 | 275 | Net change in cash, cash equivalents and restricted cash | (92) | (579) | 129 | ||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 2,282 | 2,153 | 1,878 | Cash, cash equivalents and restricted cash at beginning of year | 1,703 | 2,282 | 2,153 | |||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 1,703 | $ | 2,282 | $ | 2,153 | Cash, cash equivalents and restricted cash at end of year | $ | 1,611 | $ | 1,703 | $ | 2,282 | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
52
Howmet and subsidiaries
Statement of Changes in Consolidated Equity
(in millions, except per-share amounts)
| Arconic Shareholders | ||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Retained earnings (accumulated deficit) | Accumulated Other Comprehensive Loss | Noncontrolling interests | Total equity | |||||||||||||||||
| Balance at December 31, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,214 | $ | (1,027 | ) | $ | (2,568 | ) | $ | 26 | $ | 5,141 | ||||||
| Net loss | — | — | — | — | (74 | ) | — | — | (74 | ) | ||||||||||||||
| — | — | — | — | — | (76 | ) | 2 | (74 | ) | |||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||
| Preferred–Class B @ $20.1563 per share | — | — | — | — | (51 | ) | — | — | (51 | ) | ||||||||||||||
| Common @ $0.24 per share | — | — | — | — | (109 | ) | — | — | (109 | ) | ||||||||||||||
| — | — | — | 67 | — | — | — | 67 | |||||||||||||||||
| — | — | — | 21 | — | — | — | 21 | |||||||||||||||||
| — | (3 | ) | 39 | (36 | ) | — | — | — | — | |||||||||||||||
| — | — | 4 | — | — | — | — | 4 | |||||||||||||||||
| Distributions | — | — | — | — | — | — | (14 | ) | (14 | ) | ||||||||||||||
| Other | — | — | — | — | 15 | — | — | 15 | ||||||||||||||||
| Balance at December 31, 2017 | $ | 55 | $ | — | $ | 481 | $ | 8,266 | $ | (1,248 | ) | $ | (2,644 | ) | $ | 14 | $ | 4,924 | ||||||
| — | — | — | — | 367 | (367 | ) | — | — | ||||||||||||||||
| Net income | — | — | — | — | 642 | — | — | 642 | ||||||||||||||||
| — | — | — | — | — | 85 | — | 85 | |||||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||
| Common @ $0.24 per share | — | — | — | — | (117 | ) | — | — | (117 | ) | ||||||||||||||
| — | — | — | 50 | — | — | — | 50 | |||||||||||||||||
| — | — | 2 | 3 | — | — | — | 5 | |||||||||||||||||
| Other | — | — | — | — | — | — | (2 | ) | (2 | ) | ||||||||||||||
| Balance at December 31, 2018 | $ | 55 | $ | — | $ | 483 | $ | 8,319 | $ | (358 | ) | $ | (2,926 | ) | $ | 12 | $ | 5,585 | ||||||
| — | — | — | — | 75 | (2 | ) | — | 73 | ||||||||||||||||
| Net income | — | — | — | — | 470 | — | — | 470 | ||||||||||||||||
| — | — | — | — | — | (401 | ) | — | (401 | ) | |||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||
| Common @ $0.12 per share | — | — | — | — | (56 | ) | — | — | (56 | ) | ||||||||||||||
| — | — | (55 | ) | (1,095 | ) | — | — | — | (1,150 | ) | ||||||||||||||
| — | — | — | 57 | — | — | — | 57 | |||||||||||||||||
| — | — | 5 | 36 | — | — | — | 41 | |||||||||||||||||
| Other | — | — | — | 2 | — | — | 2 | 4 | ||||||||||||||||
| Balance at December 31, 2019 | $ | 55 | $ | — | $ | 433 | $ | 7,319 | $ | 129 | $ | (3,329 | ) | $ | 14 | $ | 4,621 | |||||||
| Howmet Shareholders | |||||||||||||||||||||||||||||
| Preferred stock | Common stock | Additional capital | Retained earnings (accumulated deficit) | Accumulated Other Comprehensive Loss | Noncontrolling interests | Total equity | |||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 55 | $ | 481 | $ | 8,266 | $ | (1,264) | $ | (2,644) | $ | 14 | $ | 4,908 | |||||||||||||||
| — | — | — | $ | 367 | (367) | — | 0 | ||||||||||||||||||||||
| Net income | — | — | — | 642 | — | — | 642 | ||||||||||||||||||||||
| — | — | — | — | 85 | — | 85 | |||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.24 per share | — | — | — | (117) | — | — | (117) | ||||||||||||||||||||||
| — | — | 50 | — | — | — | 50 | |||||||||||||||||||||||
| — | 2 | 3 | — | — | — | 5 | |||||||||||||||||||||||
| Other | — | — | — | — | — | (2) | (2) | ||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 55 | $ | 483 | $ | 8,319 | $ | (374) | $ | (2,926) | $ | 12 | $ | 5,569 | |||||||||||||||
| — | — | — | 75 | (2) | — | 73 | |||||||||||||||||||||||
| Net income | — | — | — | 470 | — | — | 470 | ||||||||||||||||||||||
| — | — | — | — | (401) | — | (401) | |||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.12 per share | — | — | — | (56) | — | — | (56) | ||||||||||||||||||||||
| — | (55) | (1,095) | — | — | — | (1,150) | |||||||||||||||||||||||
| — | — | 57 | — | — | — | 57 | |||||||||||||||||||||||
| — | 5 | 36 | — | — | — | 41 | |||||||||||||||||||||||
| Other | — | — | 2 | — | — | 2 | 4 | ||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 55 | $ | 433 | $ | 7,319 | $ | 113 | $ | (3,329) | $ | 14 | $ | 4,605 | |||||||||||||||
| Net income | — | — | — | 261 | — | — | 261 | ||||||||||||||||||||||
| — | — | — | — | 16 | — | 16 | |||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.02 per share | — | — | — | (8) | — | — | (8) | ||||||||||||||||||||||
| — | (3) | (70) | — | — | — | (73) | |||||||||||||||||||||||
| — | — | 45 | — | — | — | 45 | |||||||||||||||||||||||
| — | 3 | (9) | — | — | — | (6) | |||||||||||||||||||||||
| — | — | (2,617) | — | 1,370 | (14) | (1,261) | |||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 55 | $ | 433 | $ | 4,668 | $ | 364 | $ | (1,943) | $ | 0 | $ | 3,577 | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
53
Howmet Aerospace and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except per-share amounts)
A. Summary of Significant Accounting Policies
Basis of Presentation. The Consolidated Financial Statements of Howmet Aerospace Inc. (formerly known as Arconic Inc.) and subsidiaries (“Arconic”Howmet” or the “Company”) are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP)("GAAP") and require management to make certain judgments, estimates, and assumptions. 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 the global pandemic coronavirus (“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. We have made our best estimates using all relevant information available at the time, but it is possible that our estimates will differ from our actual results and affect the Consolidated Financial Statements in future periods and potentially require adverse adjustments to the recoverability of goodwill, intangible and long-lived assets, the realizability of deferred tax assets and other judgments and estimations and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see Note B).
The separation of Arconic Inc. into 2 standalone, publicly-traded companies, Howmet Aerospace Inc. and Arconic Corporation, (the “Arconic Inc. Separation Transaction”) occurred on April 1, 2020. The Engineered Products and Forgings ("EP&F") segment remained in the existing company which was renamed Howmet Aerospace Inc. The Global Rolled Products ("GRP") segment was the Spin Co. and was named Arconic Corporation. In the thirdsecond quarter of 2019,2020, in conjunction with the Arconic Inc. Separation Transaction, the Company realigned its operations by eliminating its Transportationseparating the former EP&F segment into 4 new segments: Engine Products, Fastening Systems, Engineered Structures and Construction Solutions (TCS) segment and transferring the Forged Wheels business to the Engineered Products and Forgings (EP&F) segment and the Building and Construction Systems (BCS) business to the Global Rolled Products (GRP) segment.Wheels. See Note BD for further details.
The Company derived approximately 69%, 71% and 70% of its revenue from products sold to the aerospace end-market for the years ended December 31, 2020, 2019 and 2018. As a result of COVID-19 and its impact on the aerospace industry to-date, the possibility exists that there could be a sustained impact to our operations and financial results. Since the start of the pandemic, certain original equipment manufacturer (“OEM”) customers have reduced production or suspended manufacturing operations in North America and Europe on a temporary basis. While the pandemic has resulted in the temporary closure of a small number of the Company's manufacturing facilities, all of our manufacturing facilities are currently operating. Since the duration of the pandemic is uncertain, the Company is taking a series of actions to address the financial impact, including announcing certain headcount reductions and reducing certain cash outflows by suspending dividends on common stock and reducing the level of its capital expenditures to preserve cash and maintain liquidity.
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 during 2020. Although management has determined that such misclassification did not materially misstate the Statement of Consolidated Cash Flows for the year ended December 31, 2019, the Company announcedhas revised it resulting in a $55 increase to previously reported capital expenditures and decrease to cash provided from investing activities with a corresponding reduction (decrease) in accounts payable, trade and increase in cash provided by operations.
A $16 deferred tax error was identified related to periods prior to 2018 during 2020. Although management has determined it was not material to any periods, the separationCompany has revised its Statement of its portfolio into two independent, publicly-traded companies (the "SeparationChanges in Consolidated Equity for the years ended December 31, 2019 and 2018 to present the correction as a reduction to Retained Earnings as of Arconic").December 31, 2017. The EP&F segment will remain inaccompanying Consolidated Balance Sheet at December 31, 2019 also reflects the existing company (Remain Co.) which will be renamed Howmet Aerospace Inc. at separation. The GRP segment will comprise Spin Co. and will be named Arconic Corporation at separation. The Company is targeting to complete the Separation of Arconic on April 1, 2020. See Note Urevision for further details.such tax item.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of ArconicHowmet Aerospace Inc. and companies in which ArconicHowmet Aerospace Inc. has a controlling interest. Intercompany transactions have been eliminated. Investments in affiliates in which ArconicHowmet Aerospace Inc. cannot exercise significant influence that do not have readily
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determinable fair values are accounted for at cost minusless impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Management also evaluates whether an Arconica Howmet Aerospace Inc. entity or interest is a variable interest entity and whether ArconicHowmet Aerospace Inc. is the primary beneficiary. Consolidation is required if both of these criteria are met. ArconicHowmet Aerospace Inc. does not have any variable interest entities requiring consolidation.
Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
Inventory Valuation. Inventories are carried at the lower of cost and net realizable value with cost for approximately half of U.S. inventories determined under the last-in, first-out (LIFO) method. The cost of other inventories is determined under a combination of the first-in, first-out (FIFO)("FIFO"), last-in, first-out ("LIFO") and average-cost methods. See Note N for further details.
Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets.
The following table details the weighted-average useful lives of structures and machinery and equipment by reporting segment (numbers in years):
| Structures | Machinery and equipment | ||
| Engineered Products and Forgings | 29 | 17 | |
| Global Rolled Products | 31 | 21 | |
| Structures | Machinery and equipment | ||||||||||
| Engine Products | 30 | 16 | |||||||||
| Fastening Systems | 28 | 17 | |||||||||
| Engineered Structures | 28 | 18 | |||||||||
| Forged Wheels | 29 | 18 | |||||||||
Gains or losses from the sale of asset groups are generally recorded in Restructuring and other charges while the sale of individual assets are recorded in Other expense (income), net (see policy below for assets classified as held for sale and discontinued operations). Repairs and maintenance are charged to expense as incurred. Interest related to the construction of qualifying assets is capitalized as part of the construction costs.
Properties, plants, and equipment 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 discounted cash flow (DCF)("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. See Note MO for further information.details.
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. For 2019, ArconicHowmet had 74 reporting units composed of which 4 were included in the EngineeredEngine Products, and Forgings (EP&F) segment (FasteningFastening Systems, Engineered Structures Engine Products, and Forged Wheels), and 3 were included in the Global Rolled Products (GRP) segment (Global Rolled Products, Aluminum Extrusions, and BCS). More than 90% of Arconic’s total goodwill at December 31, 2019 was allocated to the 4 EP&F reporting units: Engine Products ($2,164), Fastening Systems ($1,607), Engineered Structures ($289), and Forged Wheels ($7).segments.
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.
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an impairment is more likely than not, a quantitative impairment test will be performed. Arconic’sHowmet'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)("WACC") between the current and prior years for each reporting unit.
During the 2019first 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 continue 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 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 and is expected to negatively impact the Company’s sales globally 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 74 of its reporting units. The estimated fair values for each of the 74 reporting units exceeded their respective carrying values by more than 50%, thus, there was 0 goodwill impairment. 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. ArconicHowmet uses a 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, (volumes and pricing), 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. Arconic would recognize anThe annual goodwill impairment chargetests in the fourth quarter of 2020, 2019 and 2018 indicated that goodwill was not impaired for any of the Company’s reporting units. If actual results or external market factors decline significantly from management’s estimates, future goodwill impairment charges (or 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.unit) may be necessary and could be material.
In the first quarter of 2019,2020, management transferred its aluminum extrusionsSavannah, Georgia business (Aluminum Extrusions) from the Engine Products reporting unit to the Engineered Structures within the EP&F segment to the GRP segment, based on synergies with the GRP segment including similar customer base, technologies, and manufacturing capabilities. Management assessed and concluded that the remaining Engineered Structures business unit and the Aluminum Extrusions business unit represent reporting units.unit. As a result of the reorganization, goodwill of $110 was reallocated from Engineered Structures to Aluminum Extrusions and these reporting units were evaluated for impairment during the first quarter of 2019.2020. The estimated fair value of each of these reporting units substantially exceeded their carrying value; thus, there was no goodwill impairment. In the second quarter of 2019, managementthe Company transferred its castings operations from Engineered Structures to Engine Products within the EP&F segment based on process expertise for investment castings that existed within Engine Products. As a result, goodwill of $105 was reallocated from Engineered Structures to Engine Products and these reporting units were evaluated for impairment during the second quarter of 2019. The estimated fair value of each of these reporting units substantially exceeded their carrying value; thus, there was no impairment. As a result of the elimination of the TCS segment in the third quarter of 2019 (see Note B), the Company transferred $7 of
In the second quarter of 2019, as a result of the decline in the forecasted financial performance and related impairment of long-lived assets of the Disks asset group withinwhich composed business currently in the Engine Products and Engineered Structures segments (see Note MO), the Company also performed an interim impairment evaluation of goodwill for Engine Products. The estimated fair value of the Engine Products reporting unit was substantially in excess of its carrying value; thus, there was no impairment of goodwill.
In connection with the interim impairment evaluation of long-lived assets for the Disks asset group within Engine Products in the second quarter of 2018, (see Note M), which resulted from a decline in forecasted financial performance for the business in connection with its updated three-year strategic plan, the Company also performed an interim impairment evaluation of goodwill for Engine Products. The estimated fair value of the reporting unit was substantially in excess of the carrying value; thus, there was 0 impairment of goodwill.
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Other Intangible Assets. Intangible assets with indefinite useful lives are not amortized while intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited.
The following table details the weighted-average useful lives of software and other intangible assets by reporting segment (numbers in years):
| Software | Other intangible assets | ||
| Engineered Products and Forgings | 5 | 32 | |
| Global Rolled Products | 5 | 13 | |
| Software | Other intangible assets | ||||||||||
| Engine Products | 7 | 33 | |||||||||
| Fastening Systems | 6 | 23 | |||||||||
| Engineered Structures | 4 | 10 | |||||||||
| Forged Wheels | 4 | 23 | |||||||||
Leases. The Company determines whether a contract contains a lease at inception. The Company leases land and buildings, plant equipment, vehicles, and computer equipment which have been classified as operating leases. Certain real estate leases include one or more options to renew; the exercise of lease renewal options is at the Company’s discretion. The Company includes renewal option periods in the lease term when it is determined that the options are reasonably certain to be exercised. Certain of Arconic'sHowmet's real estate lease agreements include rental payments that either have fixed contractual increases over time or adjust periodically for inflation. Certain of the Company's lease agreements include variable lease payments. The variable portion of payments is not included in the initial measurement of the right-of-use asset or lease liability due to the uncertainty of the payment amount and is recorded as lease cost in the period incurred. The Company also rents or subleases certain real estate to third parties, which is not material to the consolidated financial statements.
Operating lease right-of-use assets and lease liabilities with an initial term greater than 12 months are recorded on the balance sheet at the present value of the future minimum lease payments over the lease term at the lease commencement date and are recognized as lease expense on a straight-line basis over the lease term. The Company uses an incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, as most of its leases do not provide an implicit rate. The operating lease right-of-use assets also include any lease prepayments made and were reduced by lease incentives and accrued exit costs.
Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future sales, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery are recognized when probable and as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that ArconicHowmet has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar
historical matters, among others. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Revenue Recognition. The Company's contracts with customers are comprised of acknowledged purchase orders incorporating the Company’s standard terms and conditions, or for larger customers, may also generally include terms under negotiated multi-year agreements. These contracts with customers typically consist of the manufacture of products which represent single performance obligations that are satisfied upon transfer of control of the product to the customer. The Company produces fastening systems; seamless rolled rings; investment castings, including airfoils and forged jet engine components;airfoils; extruded, machined and formed aircraft parts; aluminum sheet and plate; integrated aluminum structural systems; architectural extrusions; and forged aluminum commercial vehicle wheels. Transfer of control is assessed based on alternative use of the products we produce and our enforceable right to payment for performance to date under the contract terms. Transfer of control and revenue recognition generally occur upon shipment or delivery of the product, which is when title, ownership and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the
57
product, the country of origin, and the type of transportation (truck, train, or vessel). An invoice for payment is issued at time of shipment. Our business unitssegments set commercial terms on which ArconicHowmet sells products to its customers. These terms are influenced by industry custom, market conditions, product line (specialty versus commodity products), and other considerations.
In certain circumstances, ArconicHowmet receives advanced payments from its customers for product to be delivered in future periods. These advanced payments are recorded as deferred revenue until the product is delivered and title and risk of loss have passed to the customer in accordance with the terms of the contract. Deferred revenue is included in Other current liabilities and Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. Advanced payments were $97 and $85 at December 31, 2020 and December 31, 2019, respectively.
Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year 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 Arconic’sHowmet’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 carryback 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 Arconic’sHowmet’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. 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-measuredremeasured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
In 2018, Arconicthe Company 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 Global Intangible Low TaxedLow-Taxed Income (GILTI) income("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.
Stock-Based Compensation. ArconicHowmet 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.
Foreign Currency. The local currency is the functional currency for Arconic’sHowmet’s significant operations outside the United States ("U.S."), except for certain operations in Canada, United Kingdom and Russia,France, where the U.S. dollar is used as the functional currency. The determination of the functional currency for Arconic’sHowmet’s operations is made based on the appropriate economic and management indicators.
Acquisitions. Arconic’sHowmet’s business acquisitions are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included in the Statement of Consolidated Operations from the date of the acquisition.
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Discontinued Operations and Assets Held for Sale. For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is 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. Depreciation and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale. Businesses to be divested are generally classified in the Consolidated Financial Statements as either discontinued operations or held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations should be reclassified from their historical presentation to assets and liabilities of discontinued operations on the Consolidated Balance Sheet and to discontinued operations on the Statement of Consolidated Operations, respectively, for all periods presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the Statement of Consolidated Operations. The Statement of Consolidated Cash Flows is not required to be reclassified for discontinued operations for any period. Segment information does not include the assets or operating results of businesses classified as discontinued operations for all periods presented. These businesses are expected to be disposed of within one year.
For businesses classified as held for sale that do not qualify for discontinued operations treatment, the balance sheet and cash flow amounts should be reclassified from their historical presentation to assets and liabilities of operations held for sale for all periods presented. The results of operations continue to be reported in continuing operations. The gains or losses associated with these divested businesses are recorded in Restructuring and other charges on the Statement of Consolidated Operations. The segment information includes the assets and operating results of businesses classified as held for sale for all periods presented.
B. Recently Adopted and Recently Issued Accounting Guidance
Recently Adopted Accounting Guidance.
On January 1, 2020, the Company adopted changes issued by the Financial Accounting Standards Board ("FASB") related to the impairment model for expected credit losses. The new impairment model (known as the current expected credit loss ("CECL") model) is based on expected losses rather than incurred losses. The Company recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments and requires the measurement of expected credit losses on assets including those that have a low risk of loss. The adoption of this new guidance did not have a material impact on the Consolidated Financial Statements.
In August 2018, the FASB issued guidance that impacts disclosures for defined benefit pension plans and other postretirement benefit plans. These changes became effective for Howmet's annual report for the year ended December 31, 2020 which did not have a material impact on its Consolidated Financial Statements.
In February 2016, the Financial Accounting Standards Board (FASB)FASB issued changes to the accounting and presentation of leases. These changes requirerequired lessees to recognize a right-of-use asset and lease liability on the balance sheet, initially measured at the present value of the future lease payments for all operating leases with a term greater than 12 months.
These changes became effective for Arconicthe Company on January 1, 2019 and have been applied using the modified retrospective approach as of the date of adoption, under which leases existing at, or entered into after, January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company also elected to separate lease components from non-lease components for all classes of assets.
The adoption of this new lease standard resulted in the Company recording operating lease right-of-use assets and lease liabilities of approximately $320 on the Consolidated Balance Sheet as of January 1, 2019. Also, the Company reclassified cash proceeds of $119 from Other noncurrent liabilities and deferred credits, assets of $24 from Properties, plants, and equipment, net, and deferred tax assets of $22 from Other noncurrent assets to Retained earnings (accumulated deficit) reflecting the cumulative effect of an accounting change related to the sale-leaseback of the Texarkana, Texas cast house (see Note S). The adoption of the new lease standard had no impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows. The Company entered into a sale leaseback arrangement in October 2018 for a cast house that is now part of Arconic Corporation, and due to continuing involvement, the gain on sale was deferred. In connection with the adoption of the new lease accounting standard on January 1, 2019, the arrangement no longer required that the gain be deferred. As such, the associated $73 deferred gain, net of tax was recognized as a cumulative effect of an accounting change within Accumulated deficit in its Consolidated Balance Sheet and Statement of Changes in Consolidated Equity.
In August 2017, the FASB issued guidance that made more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amended the presentation and disclosure requirements and changed how companies assess effectiveness. It is
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intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. These changes became effective for Arconicthe Company on January 1, 2019. For cash flow hedges, ArconicHowmet recorded a cumulative effect adjustment of $2 related to eliminating the separate measurement of ineffectiveness by decreasing Accumulated other comprehensive loss and increasing Retained earnings (accumulated deficit) on the accompanyingits Consolidated Balance Sheet.Sheet and Statement of Changes in Consolidated Equity. The amendments to presentation and disclosure are required prospectively. ArconicHowmet has determined that under the new accounting guidance it is able to more broadly use cash flow hedge accounting for its variable priced inventory purchases and customer sales.
In February 2018, the FASB issued guidance that allows an optional reclassification from Accumulated other comprehensive loss to Accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. Stranded tax effects were created when deferred taxes, originally established in Other comprehensive income at 35%, were revalued to 21% as a component of income tax expense from continuing operations. The Company elected to early adopt this provision in the fourth quarter of 2018 and reclassified $367 of beneficial stranded tax effects in Accumulated other comprehensive loss to Retained earnings (accumulated deficit) in its Consolidated Balance Sheet and Statement of Changes in Consolidated Equity.
Recently Issued Accounting Guidance. In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes became effective for Arconic on January 1, 2020. Management has determined that the adoption of this guidance did not have a material impact on the Consolidated Financial Statements.
In December 2019, the FASB issued guidance that is intended to simplify various aspects related to the accounting for income taxes. These changes becomebecame effective for Howmet on January 1, 2021, with early2021. The adoption permitted.of this new guidance will not have a material impact on its Consolidated Financial Statements.
In March 2020, the FASB issued amendments that provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
On April 1, 2020, the Company completed the previously announced separation of its business into two independent, publicly-traded companies. Following the Arconic Inc. Separation Transaction, Arconic Corporation held the Global Rolled Products businesses (global rolled products, aluminum extrusions, and building and construction systems) previously held by the Company. The Company retained the Engineered Products and Forgings businesses (engine products, fastening systems, engineered structures, and forged wheels).
The Company's Board of Directors approved the completion of the separation on February 5, 2020, which was effected by the distribution (the "Distribution") by the Company of all of the outstanding common stock of Arconic Corporation on April 1, 2020 to the Company’s stockholders who held shares as of the close of business on March 19, 2020 (the "Record Date"). In the Distribution, each Company stockholder of record as of the Record Date received one share of Arconic Corporation common stock for every four shares of the Company’s common stock held as of the Record Date. The Company did not issue fractional shares of Arconic Corporation common stock in the Distribution. Instead, each stockholder otherwise entitled to a fractional share of Arconic Corporation common stock received cash in lieu of fractional shares.
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 Distribution, including the following:a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, certain Patent, Know-How, Trade Secret License and Trademark License Agreements, and Raw Material Supply Agreements.
On February 7, 2020, Arconic Corporation completed an offering of $600 aggregate principal amount of 6.125% senior secured second-lien notes due 2028. On March 25, 2020, Arconic Corporation entered into a credit agreement which provided for a $600 aggregate principal amount seven-year senior secured first-lien loan B facility and a revolving credit facility which is guaranteed by certain of Arconic Corporation's wholly-owned domestic subsidiaries and secured on a first-priority basis by liens on substantially all assets of Arconic Corporation and subsidiary guarantors. Arconic Corporation used the proceeds to make payment to the Company to fund the transfer of certain assets to Arconic Corporation relating to the Arconic Inc. Separation Transaction and for general corporate purposes. The Company incurred debt issuance costs of $45 associated with these issuances for the first quarter of 2020 and year ended December 31, 2020.
On February 1, 2020, the Company completed the sale of its rolling mill in Itapissuma, Brazil for $50 in cash which resulted in a loss of $59, of which $53 was recognized in discontinued operations in the second half of 2019 and $6 in the first quarter of 2020 and year ended December 31, 2020. On March 1, 2020, the Company sold its hard alloy extrusions plant in South Korea
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for $62 in cash, which resulted in a gain that was recognized in discontinued operations in the first quarter of 2020 and year ended December 31, 2020.
On October 31, 2018, the Company sold its Texarkana, Texas rolling mill and cast house, which had a combined net book value of $63, to Ta Chen International, Inc. for $302 in cash, including the settlement of post-closing adjustments, plus additional contingent consideration of up to $50. The contingent consideration related to the achievement of various milestones within 36 months of the transaction closing date associated with operationalizing the rolling mill equipment. As part of the agreement, the Company produced aluminum slab at the facility for a period of 18months through a lease back of the cast house building and equipment. The sale of the rolling mill and cast house had been accounted for separately. The gain on the sale of the rolling mill of $154, including the fair value of contingent consideration of $5, was recorded in 2018. In 2019, the Company received additional contingent consideration of $20 and recorded a gain. These amounts were recorded in discontinued operations in the Statement of Consolidated Operations. The Company had continuing involvement related to the lease back of the cast house. As a result, in 2018, the Company continued to treat the cast house building and equipment that it sold to Ta Chen as owned. In conjunction with the adoption of the new lease accounting standard on January 1, 2019 (see Note B), the Company's continuing involvement no longer required deferral of the recognition of the cast house sale. As such, the cash proceeds, properties, plant and equipment and deferred tax assets related to the cast house were reclassified to Retained earnings as a cumulative effect of an accounting change of $73 in 2018.
Discontinued Operations
The results of operations of Arconic Corporation are presented as discontinued operations in the Statement of Consolidated Operations as summarized below:
| Year ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Sales | $ | 1,576 | $ | 7,094 | $ | 7,236 | ||||||||||||||
| Cost of goods sold | 1,292 | 6,013 | 6,283 | |||||||||||||||||
| Selling, general administrative, research and development and other expenses | 106 | 346 | 295 | |||||||||||||||||
| Provision for depreciation and amortization | 59 | 241 | 262 | |||||||||||||||||
| Restructuring and other charges (credits) | (18) | 38 | (154) | |||||||||||||||||
| Interest expense | 7 | 0 | 1 | |||||||||||||||||
| Other expense, net | 42 | 91 | 109 | |||||||||||||||||
| Income from discontinued operations | 88 | 365 | 440 | |||||||||||||||||
| Provision for income taxes | 38 | 21 | 107 | |||||||||||||||||
| Income from discontinued operations after income taxes | $ | 50 | $ | 344 | $ | 333 | ||||||||||||||
The following table presents purchases of properties, plant and equipment (capital expenditures), proceeds from the sale of businesses and provision for depreciation and amortization of discontinued operations related to Arconic Corporation:
| Year ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Capital expenditures | $ | 72 | $ | 210 | $ | 308 | ||||||||||||||
| Proceeds from the sales of businesses | $ | 112 | $ | 20 | $ | 309 | ||||||||||||||
| Provision for depreciation and amortization | $ | 59 | $ | 241 | $ | 262 | ||||||||||||||
On April 1, 2020, management evaluated the net assets of Arconic Corporation for potential impairment and determined that no impairment charge was required.
The cash flows and equity related to Arconic Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows or Statement of Comprehensive Income for all periods presented prior to the Arconic Inc. Separation Transaction.
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The carrying amount of the major classes of assets and liabilities related to Arconic Corporation classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheet consisted of the following:
| December 31, 2019 | ||||||||
| Total Assets of Discontinued Operations | ||||||||
| Cash and cash equivalents | $ | 71 | ||||||
| Receivables from customers | 385 | |||||||
| Other receivables | 135 | |||||||
| Inventories | 822 | |||||||
| Prepaid expenses and other current assets | 29 | |||||||
| Current assets of discontinued operations | 1,442 | |||||||
| Properties, plants, and equipment, net | 2,834 | |||||||
| Goodwill | 426 | |||||||
| Intangibles, net | 60 | |||||||
| Deferred income taxes | 383 | |||||||
| Other noncurrent assets | 196 | |||||||
| Noncurrent assets of discontinued operations | 3,899 | |||||||
| Total assets of discontinued operations | $ | 5,341 | ||||||
| Total Liabilities of Discontinued Operations: | ||||||||
| Accounts payable, trade | $ | 1,067 | ||||||
| Accrued compensation and retirement costs | 147 | |||||||
| Taxes, including income taxes | 22 | |||||||
| Other current liabilities | 188 | |||||||
| Current liabilities of discontinued operations | 1,424 | |||||||
| Accrued pension benefits | 1,429 | |||||||
| Accrued other postretirement benefits | 514 | |||||||
| Other noncurrent liabilities and deferred credits | 315 | |||||||
| Noncurrent liabilities of discontinued operations | 2,258 | |||||||
| Total liabilities of discontinued operations | $ | 3,682 | ||||||
D. Segment and Geographic Area Information
Following the Arconic Inc. Separation Transaction, Howmet’s operations consist of 4 worldwide reportable segments as follows:
Engine Products
Engine Products produces investment castings, including airfoils, and seamless rolled rings primarily for aircraft engines and industrial gas turbines. Engine Products produces rotating parts as well as structural parts.
Fastening Systems
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.
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Engineered Structures
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.
Forged Wheels
Forged Wheels provides forged aluminum wheels and related products for heavy-duty trucks and the commercial transportation markets.
Goodwill
During the first quarter of 2020, Howmet's market capitalization declined significantly compared to the fourth quarter of 2019. Over the same period, financialthe 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, global sales 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 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 been recastand is expected to conform to current year presentation.negatively impact the Company’s sales globally in the aerospace industry. If our actual results or external market factors decline significantly from management’s estimates, future goodwill impairment charges may be necessary and could be material. During the second and third quarters of 2020, there were no indicators of impairment identified for the Engineered Structures reporting unit.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note A). Transactions among segments are established based on negotiation among the parties. Differences between segment totals and Arconic’sHowmet’s consolidated totals for line items not reconciled are in Corporate.
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The operating results and assets of Arconic’sthe Company's reportable segments were as follows:
| Year ended | Year ended | Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | ||||||||||||||||||||||||||||||||||
| 2020 | 2020 | |||||||||||||||||||||||||||||||||||||||
| Sales: | Sales: | |||||||||||||||||||||||||||||||||||||||
| Third-party sales | Third-party sales | $ | 2,406 | $ | 1,245 | $ | 927 | $ | 679 | $ | 5,257 | |||||||||||||||||||||||||||||
| Inter-segment sales | Inter-segment sales | 5 | 0 | 7 | 0 | 12 | ||||||||||||||||||||||||||||||||||
| Total sales | Total sales | $ | 2,411 | $ | 1,245 | $ | 934 | $ | 679 | $ | 5,269 | |||||||||||||||||||||||||||||
| Profit and loss: | Profit and loss: | |||||||||||||||||||||||||||||||||||||||
| Segment operating profit | Segment operating profit | $ | 417 | $ | 247 | $ | 73 | $ | 153 | $ | 890 | |||||||||||||||||||||||||||||
| Restructuring and other charges | Restructuring and other charges | 36 | 39 | 28 | 3 | 106 | ||||||||||||||||||||||||||||||||||
| Provision for depreciation and amortization | Provision for depreciation and amortization | 123 | 48 | 52 | 39 | 262 | ||||||||||||||||||||||||||||||||||
| Other: | Other: | |||||||||||||||||||||||||||||||||||||||
| Capital expenditures | Capital expenditures | $ | 77 | $ | 39 | $ | 19 | $ | 23 | $ | 158 | |||||||||||||||||||||||||||||
| Total Assets | Total Assets | $ | 4,756 | $ | 2,707 | $ | 1,444 | $ | 628 | $ | 9,535 | |||||||||||||||||||||||||||||
| Engineered Products and Forgings | Global Rolled Products | Total | ||||||||||||||||||||||||||||||||||||||
| 2019 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Sales: | Sales: | |||||||||||||||||||||||||||||||||||||||
| Third-party sales | $ | 7,105 | $ | 7,082 | $ | 14,187 | Third-party sales | $ | 3,320 | $ | 1,561 | $ | 1,255 | $ | 969 | $ | 7,105 | |||||||||||||||||||||||
| Intersegment sales | — | 183 | 183 | |||||||||||||||||||||||||||||||||||||
| Total segment sales | $ | 7,105 | $ | 7,265 | $ | 14,370 | ||||||||||||||||||||||||||||||||||
| Inter-segment sales | Inter-segment sales | 11 | 0 | 13 | 0 | 24 | ||||||||||||||||||||||||||||||||||
| Total sales | Total sales | $ | 3,331 | $ | 1,561 | $ | 1,268 | $ | 969 | $ | 7,129 | |||||||||||||||||||||||||||||
| Profit and loss: | Profit and loss: | |||||||||||||||||||||||||||||||||||||||
| Segment operating profit | $ | 1,390 | $ | 625 | $ | 2,015 | Segment operating profit | $ | 621 | $ | 396 | $ | 120 | $ | 253 | $ | 1,390 | |||||||||||||||||||||||
| Restructuring and other charges | 509 | 81 | 590 | Restructuring and other charges | 297 | 6 | 199 | 4 | 506 | |||||||||||||||||||||||||||||||
| Provision for depreciation and amortization | 269 | 233 | 502 | Provision for depreciation and amortization | 131 | 48 | 58 | 32 | 269 | |||||||||||||||||||||||||||||||
| Other: | Other: | |||||||||||||||||||||||||||||||||||||||
| Capital expenditures | Capital expenditures | $ | 211 | $ | 36 | $ | 27 | $ | 70 | $ | 344 | |||||||||||||||||||||||||||||
| Total Assets | Total Assets | $ | 5,445 | $ | 2,810 | $ | 1,151 | $ | 629 | $ | 10,035 | |||||||||||||||||||||||||||||
| 2018 | 2018 | |||||||||||||||||||||||||||||||||||||||
| Sales: | Sales: | |||||||||||||||||||||||||||||||||||||||
| Third-party sales | $ | 6,798 | $ | 7,223 | $ | 14,021 | Third-party sales | $ | 3,092 | $ | 1,531 | $ | 1,209 | $ | 966 | $ | 6,798 | |||||||||||||||||||||||
| Intersegment sales | — | 205 | 205 | |||||||||||||||||||||||||||||||||||||
| Total segment sales | $ | 6,798 | $ | 7,428 | $ | 14,226 | ||||||||||||||||||||||||||||||||||
| Inter-segment sales | Inter-segment sales | 16 | 0 | 19 | 0 | 35 | ||||||||||||||||||||||||||||||||||
| Total sales | Total sales | $ | 3,108 | $ | 1,531 | $ | 1,228 | $ | 966 | $ | 6,833 | |||||||||||||||||||||||||||||
| Profit and loss: | Profit and loss: | |||||||||||||||||||||||||||||||||||||||
| Segment operating profit | $ | 1,105 | $ | 481 | $ | 1,586 | Segment operating profit | $ | 464 | $ | 357 | $ | 64 | $ | 220 | $ | 1,105 | |||||||||||||||||||||||
| Restructuring and other charges | 70 | (157 | ) | (87 | ) | Restructuring and other charges | 47 | 17 | (5) | 0 | 59 | |||||||||||||||||||||||||||||
| Provision for depreciation and amortization | 289 | 253 | 542 | Provision for depreciation and amortization | 141 | 48 | 69 | 31 | 289 | |||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||
| Sales: | ||||||||||||||||||||||||||||||||||||||||
| Third-party sales | $ | 6,300 | $ | 6,540 | $ | 12,840 | ||||||||||||||||||||||||||||||||||
| Intersegment sales | — | 183 | 183 | |||||||||||||||||||||||||||||||||||||
| Total segment sales | $ | 6,300 | $ | 6,723 | $ | 13,023 | ||||||||||||||||||||||||||||||||||
| Profit and loss: | ||||||||||||||||||||||||||||||||||||||||
| Segment operating profit | $ | 1,119 | $ | 570 | $ | 1,689 | ||||||||||||||||||||||||||||||||||
| Restructuring and other charges | 30 | 83 | 113 | |||||||||||||||||||||||||||||||||||||
| Provision for depreciation and amortization | 275 | 243 | 518 | |||||||||||||||||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||
| Other: | Other: | |||||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | 344 | $ | 189 | $ | 533 | Capital expenditures | $ | 217 | $ | 47 | $ | 53 | $ | 90 | $ | 407 | |||||||||||||||||||||||
| Goodwill | 4,067 | 426 | 4,493 | |||||||||||||||||||||||||||||||||||||
Total assets(1) | 10,034 | 4,907 | 14,941 | |||||||||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | 407 | $ | 308 | $ | 715 | ||||||||||||||||||||||||||||||||||
| Goodwill | 4,186 | 314 | 4,500 | |||||||||||||||||||||||||||||||||||||
| Total assets | 10,494 | 4,845 | 15,339 | |||||||||||||||||||||||||||||||||||||
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The following table reconciles Total segment capital expenditures, which are presented on an accrual basis, with Capital expenditures as presented on the statement of cash flows. Differences between segment and O). Segment assets forconsolidated totals are in Corporate and discontinued operations, including the EP&F segment at December 31, 2019 were impacted by a long-lived asset impairment chargeimpact of $428 recordedchanges in accrued capital expenditures during the second quarter of 2019 (see Note M).period.
| For the year ended December 31, | 2020 | 2019 | 2018 | |||||||||||||||||
| Total segment capital expenditures | $ | 158 | $ | 344 | $ | 407 | ||||||||||||||
| Corporate and discontinued operations | 109 | 297 | 361 | |||||||||||||||||
| Capital expenditures | $ | 267 | $ | 641 | $ | 768 | ||||||||||||||
The following tables reconcile certain segment information to consolidated totals:
| For the year ended December 31, | 2020 | 2019 | 2018 | ||||||||||||||
| Sales: | |||||||||||||||||
| Total segment sales | $ | 5,269 | $ | 7,129 | $ | 6,833 | |||||||||||
| Elimination of inter-segment sales | (12) | (24) | (35) | ||||||||||||||
| Corporate | 2 | (7) | (20) | ||||||||||||||
| Consolidated sales | $ | 5,259 | $ | 7,098 | $ | 6,778 | |||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Sales: | |||||||||||
| Total segment sales | $ | 14,370 | $ | 14,226 | $ | 13,023 | |||||
| Elimination of intersegment sales | (183 | ) | (205 | ) | (183 | ) | |||||
| Corporate | 5 | (7 | ) | 120 | |||||||
| Consolidated sales | $ | 14,192 | $ | 14,014 | $ | 12,960 | |||||
| For the year ended December 31, | 2020 | 2019 | 2018 | ||||||||||||||
| Total segment operating profit | $ | 890 | $ | 1,390 | $ | 1,105 | |||||||||||
| Unallocated amounts: | |||||||||||||||||
| Restructuring and other charges | (182) | (582) | (163) | ||||||||||||||
| Corporate expense | (82) | (229) | (167) | ||||||||||||||
| Consolidated operating income | $ | 626 | $ | 579 | $ | 775 | |||||||||||
| Interest expense | (381) | (338) | (377) | ||||||||||||||
| Other (expense) income, net | (74) | (31) | 30 | ||||||||||||||
| Income from continuing operations before income taxes | $ | 171 | $ | 210 | $ | 428 | |||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Total segment operating profit | $ | 2,015 | $ | 1,586 | $ | 1,689 | |||||
| Unallocated amounts: | |||||||||||
| Impairment of goodwill | — | — | (719 | ) | |||||||
| Restructuring and other charges | (620 | ) | (9 | ) | (165 | ) | |||||
| Corporate expense | (360 | ) | (252 | ) | (325 | ) | |||||
| Consolidated operating income | $ | 1,035 | $ | 1,325 | $ | 480 | |||||
| Interest expense | (338 | ) | (378 | ) | (496 | ) | |||||
| Other (expense) income, net | (122 | ) | (79 | ) | 486 | ||||||
| Consolidated income before income taxes | $ | 575 | $ | 868 | $ | 470 | |||||
| December 31, | 2020 | 2019 | |||||||||
| Assets: | |||||||||||
| Total segment assets | $ | 9,535 | $ | 10,035 | |||||||
| Unallocated amounts: | |||||||||||
| Cash and cash equivalents | 1,610 | 1,577 | |||||||||
| Deferred income taxes | 272 | 209 | |||||||||
| Corporate fixed assets, net | 140 | 135 | |||||||||
| Fair value of derivative contracts | 5 | 6 | |||||||||
| Discontinued operations | 0 | 5,341 | |||||||||
| Accounts receivable securitization | (241) | (61) | |||||||||
| Other | 122 | 320 | |||||||||
| Consolidated assets | $ | 11,443 | $ | 17,562 | |||||||
| December 31, | 2019 | 2018 | |||||
| Assets: | |||||||
| Total segment assets | $ | 14,941 | $ | 15,339 | |||
| Unallocated amounts: | |||||||
| Cash and cash equivalents | 1,648 | 2,277 | |||||
| Deferred income taxes | 608 | 573 | |||||
| Corporate fixed assets, net | 326 | 334 | |||||
| Fair value of derivative contracts | 6 | 37 | |||||
| Other | 49 | 133 | |||||
| Consolidated assets | $ | 17,578 | $ | 18,693 | |||