filings.toolsItem 8. Financial Statements and Supplementary Data.
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Item 8. Financial Statements and Supplementary Data.
Management’s Reports to Howmet Shareholders
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Howmet 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”). 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, 2021, 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, 2021 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 Chief Executive Officer |
| /s/ Ken Giacobbe | ||
| Ken Giacobbe Executive Vice President and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Howmet Aerospace Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Howmet Aerospace Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note B 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment – Engineered Structures Reporting Unit
As described in Notes A and P to the consolidated financial statements, the Company’s consolidated goodwill balance was $4,067 million as of December 31, 2021, and the amount of the goodwill associated with the Engineered Structures reporting unit was $304 million. Goodwill is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist. 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. Fair value is estimated by management 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, production costs, capital spending, and discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Engineered Structures reporting unit is a critical audit matter are the significant judgment by management when determining the fair value of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to sales growth, production costs, and discount rate. In addition, the audit effort involved the use of professionals with specialized skill and 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 goodwill impairment assessment, including controls over the valuation of the Company’s Engineered Structures reporting unit. These procedures also included, among others (i) testing management’s process for determining the fair value of the reporting unit; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the reasonableness of the significant assumptions used by management related to sales growth, production costs, and discount rate. Evaluating management’s significant assumptions related to sales growth and production costs involved evaluating whether the significant assumptions used by management were reasonable by considering (i) the current and past performance of the reporting unit; (ii) the 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 model and the evaluation of the reasonableness of the discount rate significant assumption.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 14, 2022
We have served as the Company’s auditor since 1950.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Sales (D) | $ | 4,972 | $ | 5,259 | $ | 7,098 | |||||||||||
| Cost of goods sold (exclusive of expenses below) | 3,596 | 3,878 | 5,214 | ||||||||||||||
| Selling, general administrative, and other expenses | 251 | 277 | 400 | ||||||||||||||
| Research and development expenses | 17 | 17 | 28 | ||||||||||||||
| Provision for depreciation and amortization | 270 | 279 | 295 | ||||||||||||||
| Restructuring and other charges (E) | 90 | 182 | 582 | ||||||||||||||
| Operating income | 748 | 626 | 579 | ||||||||||||||
| Loss on debt redemption (R) | 146 | 64 | — | ||||||||||||||
| Interest expense, net (F) | 259 | 317 | 338 | ||||||||||||||
| Other expense, net (G) | 19 | 74 | 31 | ||||||||||||||
| Income before income taxes | 324 | 171 | 210 | ||||||||||||||
| Provision (benefit) for income taxes (I) | 66 | (40) | 84 | ||||||||||||||
| Income from continuing operations after income taxes | $ | 258 | $ | 211 | $ | 126 | |||||||||||
| Income from discontinued operations after income taxes (C) | — | 50 | 344 | ||||||||||||||
| Net income | $ | 258 | $ | 261 | $ | 470 | |||||||||||
| Amounts Attributable to Howmet Aerospace Inc. Common Shareholders (K): | |||||||||||||||||
| Net income | $ | 256 | $ | 259 | $ | 477 | |||||||||||
| Earnings per share - basic | |||||||||||||||||
| Continuing operations | $ | 0.60 | $ | 0.48 | $ | 0.28 | |||||||||||
| Discontinued operations | $ | — | $ | 0.11 | $ | 0.77 | |||||||||||
| Earnings per share - diluted | |||||||||||||||||
| Continuing operations | $ | 0.59 | $ | 0.48 | $ | 0.27 | |||||||||||
| Discontinued operations | $ | — | $ | 0.11 | $ | 0.76 | |||||||||||
| Average Shares Outstanding (J): | |||||||||||||||||
| Average shares outstanding - basic | 430 | 435 | 446 | ||||||||||||||
| Average shares outstanding - diluted | 435 | 439 | 463 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Comprehensive Income
(in millions)
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 258 | $ | 261 | $ | 470 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax (L): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in unrecognized net actuarial loss and prior service cost (benefit) related to pension and other postretirement benefits | 181 | (46) | (388) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (96) | 58 | (13) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in unrealized gains on debt securities | — | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in unrecognized (losses) gains on cash flow hedges | (5) | 4 | (3) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss), net of tax | 80 | 16 | (401) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | $ | 338 | $ | 277 | $ | 69 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Consolidated Balance Sheet
(in millions)
| December 31, | 2021 | 2020 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 720 | $ | 1,610 | |||||||
| Receivables from customers, less allowances of $— in 2021 and $1 in 2020 (M) | 367 | 328 | |||||||||
| Other receivables (M) | 53 | 29 | |||||||||
| Inventories (N) | 1,402 | 1,488 | |||||||||
| Prepaid expenses and other current assets | 195 | 217 | |||||||||
| Total current assets | 2,737 | 3,672 | |||||||||
| Properties, plants, and equipment, net (O) | 2,467 | 2,592 | |||||||||
| Goodwill (A and P) | 4,067 | 4,102 | |||||||||
| Deferred income taxes (I) | 184 | 272 | |||||||||
| Intangibles, net (P) | 549 | 571 | |||||||||
| Other noncurrent assets (A and Q) | 215 | 234 | |||||||||
| Total assets | $ | 10,219 | $ | 11,443 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable, trade | $ | 732 | $ | 599 | |||||||
| Accrued compensation and retirement costs | 198 | 205 | |||||||||
| Taxes, including income taxes | 61 | 102 | |||||||||
| Accrued interest payable | 74 | 89 | |||||||||
| Other current liabilities (A and Q) | 183 | 289 | |||||||||
| Short-term debt (R and S) | 5 | 376 | |||||||||
| Total current liabilities | 1,253 | 1,660 | |||||||||
| Long-term debt, less amount due within one year (R and S) | 4,227 | 4,699 | |||||||||
| Accrued pension benefits (H) | 771 | 985 | |||||||||
| Accrued other postretirement benefits (H) | 153 | 198 | |||||||||
| Other noncurrent liabilities and deferred credits (A and Q) | 307 | 324 | |||||||||
| Total liabilities | 6,711 | 7,866 | |||||||||
| Contingencies and commitments (V) | |||||||||||
| Equity | |||||||||||
| Howmet Aerospace Inc. shareholders’ equity: | |||||||||||
| Preferred stock (J) | 55 | 55 | |||||||||
| Common stock (J) | 422 | 433 | |||||||||
| Additional capital (J) | 4,291 | 4,668 | |||||||||
| Retained earnings (A) | 603 | 364 | |||||||||
| Accumulated other comprehensive loss (A and L) | (1,863) | (1,943) | |||||||||
| Total Howmet Aerospace Inc. shareholders’ equity | 3,508 | 3,577 | |||||||||
| Noncontrolling interests | — | — | |||||||||
| Total equity | 3,508 | 3,577 | |||||||||
| Total liabilities and equity | $ | 10,219 | $ | 11,443 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Operating activities | |||||||||||||||||
| Net income | $ | 258 | $ | 261 | $ | 470 | |||||||||||
| Adjustments to reconcile net income to cash provided from operations: | |||||||||||||||||
| Depreciation and amortization | 270 | 338 | 536 | ||||||||||||||
| Deferred income taxes | 38 | 2 | (19) | ||||||||||||||
| Restructuring and other charges | 90 | 164 | 620 | ||||||||||||||
| Net loss from investing activities—asset sales | 9 | 8 | 7 | ||||||||||||||
| Net periodic pension benefit cost (H) | 18 | 51 | 115 | ||||||||||||||
| Stock-based compensation | 41 | 45 | 60 | ||||||||||||||
| Loss on debt redemption (R) | 146 | 64 | — | ||||||||||||||
| Other | 20 | (5) | 13 | ||||||||||||||
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||||||||||||
| Increase in receivables | (337) | (238) | (977) | ||||||||||||||
| Decrease (increase) in inventories | 60 | 74 | (3) | ||||||||||||||
| Decrease (increase) in prepaid expenses and other current assets | 11 | (2) | 4 | ||||||||||||||
| Increase (decrease) in accounts payable, trade | 144 | (381) | (1) | ||||||||||||||
| Decrease in accrued expenses | (146) | (217) | (42) | ||||||||||||||
| (Decrease) increase in taxes, including income taxes | (41) | 98 | (2) | ||||||||||||||
| Pension contributions | (96) | (257) | (268) | ||||||||||||||
| (Increase) decrease in noncurrent assets | (13) | 39 | (7) | ||||||||||||||
| Decrease in noncurrent liabilities | (23) | (35) | (45) | ||||||||||||||
| Cash provided from operations | 449 | 9 | 461 | ||||||||||||||
| Financing Activities | |||||||||||||||||
| Net change in short-term borrowings (original maturities of three months or less) | (9) | (15) | 2 | ||||||||||||||
| Additions to debt (original maturities greater than three months) (R) | 700 | 2,400 | 400 | ||||||||||||||
| Payments on debt (original maturities greater than three months) (R) | (1,538) | (2,043) | (806) | ||||||||||||||
| Debt issuance costs (C and R) | (11) | (61) | — | ||||||||||||||
| Premiums paid on early redemption of debt (R) | (138) | (59) | — | ||||||||||||||
| Proceeds from exercise of employee stock options | 22 | 33 | 56 | ||||||||||||||
| Dividends paid to shareholders (J) | (19) | (11) | (57) | ||||||||||||||
| Repurchase of common stock (J) | (430) | (73) | (1,150) | ||||||||||||||
| Net cash transferred to Arconic Corporation at separation | — | (500) | — | ||||||||||||||
| Other | (21) | (40) | (13) | ||||||||||||||
| Cash used for financing activities | (1,444) | (369) | (1,568) | ||||||||||||||
| Investing Activities | |||||||||||||||||
| Capital expenditures (D and T) | (199) | (267) | (641) | ||||||||||||||
| Proceeds from the sale of assets and businesses (U) | 32 | 114 | 103 | ||||||||||||||
| Sales of investments | 6 | — | 73 | ||||||||||||||
| Cash receipts from sold receivables (M) | 267 | 422 | 995 | ||||||||||||||
| Other | 1 | 2 | (2) | ||||||||||||||
| Cash provided from investing activities | 107 | 271 | 528 | ||||||||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | (1) | (3) | — | ||||||||||||||
| Net change in cash, cash equivalents and restricted cash | (889) | (92) | (579) | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 1,611 | 1,703 | 2,282 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 722 | $ | 1,611 | $ | 1,703 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Statement of Changes in Consolidated Equity
(in millions, except per-share amounts)
| Howmet Shareholders | |||||||||||||||||||||||||||||
| Preferred stock | Common stock | Additional capital | Retained earnings (Accumulated deficit) | Accumulated other comprehensive loss | Noncontrolling interests | Total equity | |||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 55 | $ | 483 | $ | 8,319 | $ | (374) | $ | (2,926) | $ | 12 | $ | 5,569 | |||||||||||||||
| Adoption of accounting standard (B) | — | — | — | 75 | (2) | — | 73 | ||||||||||||||||||||||
| Net income | — | — | — | 470 | — | — | 470 | ||||||||||||||||||||||
| Other comprehensive loss (L) | — | — | — | — | (401) | — | (401) | ||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.12 per share | — | — | — | (56) | — | — | (56) | ||||||||||||||||||||||
| Repurchase and retirement of common stock (J) | — | (55) | (1,095) | — | — | — | (1,150) | ||||||||||||||||||||||
| Stock-based compensation (J) | — | — | 57 | — | — | — | 57 | ||||||||||||||||||||||
| Common stock issued: compensation plans (J) | — | 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 | ||||||||||||||||||||||
| Other comprehensive income (L) | — | — | — | — | 16 | — | 16 | ||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.02 per share | — | — | — | (8) | — | — | (8) | ||||||||||||||||||||||
| Repurchase and retirement of common stock (J) | — | (3) | (70) | — | — | — | (73) | ||||||||||||||||||||||
| Stock-based compensation (J) | — | — | 45 | — | — | — | 45 | ||||||||||||||||||||||
| Common stock issued: compensation plans (J) | — | 3 | (9) | — | — | — | (6) | ||||||||||||||||||||||
| Distributions to Arconic Corporation (C) | — | — | (2,617) | — | 1,370 | (14) | (1,261) | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 55 | $ | 433 | $ | 4,668 | $ | 364 | $ | (1,943) | $ | — | $ | 3,577 | |||||||||||||||
| Net income | — | — | — | 258 | — | — | 258 | ||||||||||||||||||||||
| Other comprehensive income (L) | — | — | — | — | 80 | — | 80 | ||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.04 per share | — | — | — | (17) | — | — | (17) | ||||||||||||||||||||||
| Repurchase and retirement of common stock (J) | — | (13) | (417) | — | — | — | (430) | ||||||||||||||||||||||
| Stock-based compensation (J) | — | — | 40 | — | — | — | 40 | ||||||||||||||||||||||
| Common stock issued: compensation plans (J) | — | 2 | — | — | — | — | 2 | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 55 | $ | 422 | $ | 4,291 | $ | 603 | $ | (1,863) | $ | — | $ | 3,508 |
The accompanying notes are an integral part of the consolidated financial statements.
Howmet Aerospace Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except share and 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 (“Howmet” or the “Company” or “we”) are prepared in conformity with accounting principles generally accepted in the United States of America (“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 COVID-19 pandemic. 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.
The separation of Arconic Inc. into two 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 second quarter of 2020, in conjunction with the Arconic Inc. Separation Transaction, the Company realigned its operations by separating the former EP&F segment into four new segments: Engine Products, Fastening Systems, Engineered Structures and Forged Wheels. See Note D for further details.
The financial results of Arconic Corporation for all periods prior to the Arconic Inc. Separation Transaction 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 presented. 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 the Arconic Inc. Separation Transaction. See Note C for additional information related to the Arconic Inc. Separation Transaction and discontinued operations.
The Company derived approximately 60%, 69%, and 71% of its revenue from products sold to the aerospace market for the years ended December 31, 2021, 2020, and 2019. As a result of the global COVID-19 pandemic 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 resulted in the temporary closure of a small number of the Company's manufacturing facilities during 2020, all of our manufacturing facilities are currently operating. Since the duration of the pandemic is uncertain, management has taken a series of actions to address the financial impact, including fixed and variable cost reductions, such as headcount reductions in certain segments, and reducing the level of capital expenditures to preserve cash and maintain liquidity.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of Howmet Aerospace Inc. and companies in which Howmet Aerospace Inc. has a controlling interest. Intercompany transactions have been eliminated. Investments in affiliates in which Howmet Aerospace Inc. cannot exercise significant influence that do not have readily determinable fair values are accounted for at cost less 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 a Howmet Aerospace Inc. entity or interest is a variable interest entity and whether Howmet Aerospace Inc. is the primary beneficiary. Consolidation is required if both of these criteria are met. Howmet 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 or net realizable value with the cost of inventories determined under a combination of the first-in, first-out (“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 | ||||||||||
| Engine Products | 30 | 17 | |||||||||
| Fastening Systems | 27 | 17 | |||||||||
| Engineered Structures | 28 | 19 | |||||||||
| Forged Wheels | 29 | 18 |
Gains or losses from the sale of asset groups or properties are generally recorded in Restructuring and other charges while the sale of individual assets are recorded in Other expense, 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”) 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 O for further 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. Howmet has four reporting units composed of the Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels 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. The qualitative evaluation is an assessment of factors, including reporting unit-specific operating results as well as industry, market, and general economic conditions. 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.
Howmet determines annually, based on facts and circumstances, which of its reporting units will be subject to the qualitative assessment. 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). Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (“WACC”) between the current and prior years for each reporting unit. For those reporting units where a qualitative assessment is either not performed or for which the conclusion is that an impairment is more likely than not, a quantitative impairment test will be performed. Howmet's policy is that a quantitative impairment test be performed for each reporting unit at least once during every three-year period.
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 | ||||||||||
| Engine Products | 9 | 34 | |||||||||
| Fastening Systems | 6 | 23 | |||||||||
| Engineered Structures | 4 | 10 | |||||||||
| Forged Wheels | 4 | 24 |
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 Howmet'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 are 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 Howmet 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 and Contingent Liabilities. From time to time, we are involved in various lawsuits, claims, investigations, and proceedings. These matters may include speculative claims for substantial or indeterminate amounts of damages. 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. If an unfavorable outcome is deemed probable and the amount of the potential loss can be estimated, the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed probable but the loss is not reasonably estimable, or if an unfavorable outcome is deemed reasonably possible, then the matter is disclosed but no liability is recorded. 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; extruded, machined and formed aircraft parts; 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 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 segments set commercial terms on which Howmet 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, Howmet 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 in the Consolidated Balance Sheet. Advanced payments were $46 and $85 at December 31, 2021 and 2020, 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 Howmet’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) 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 Howmet’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. 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 remeasured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
It is Howmet’s policy 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-Taxed Income (“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.
It is Howmet’s policy to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.
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. Howmet recognizes compensation expense for employee equity grants using the non-substantive vesting period approach, in which the expense is recognized ratably over the requisite service period based on the grant date fair value. Forfeitures are accounted for as they occur. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance awards containing a market condition is valued using a Monte Carlo valuation model. Determining the fair value at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
Foreign Currency. The local currency is the functional currency for Howmet’s significant operations outside the United States (“U.S.”), except for certain operations in Canada, the United Kingdom, and France, where the U.S. dollar is used as the functional currency. The determination of the functional currency for Howmet’s operations is made based on the appropriate economic and management indicators.
Acquisitions. Howmet’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.
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 are 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 are 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, 2021, the Company adopted changes issued by the Financial Accounting Standards Board (“FASB”) that were intended to simplify various aspects of accounting for income taxes by eliminating certain exceptions contained in existing guidance and amending other guidance to simplify several other income tax accounting matters. The adoption of this new guidance did not have a material impact on the Consolidated Financial Statements.
On January 1, 2020, the Company adopted changes issued by the 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 FASB issued changes to the accounting and presentation of leases. These changes required lessees to recognize a right-of-use asset and lease liability on the balance sheet, initially measured at the present value of lease payments for all operating leases with a term greater than 12 months. These changes became effective for the 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. The adoption of the new lease standard had no impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows. As a result of the new standard, a gain of $73 (net of tax) on a 2018 sale leaseback transaction was no longer required to be deferred and the accumulated deficit within the Consolidated Balance Sheet and Statement of Changes in Consolidated Equity were increased accordingly.
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 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 the Company on January 1, 2019. For cash flow hedges, Howmet 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 on its Consolidated Balance Sheet and Statement of Changes in Consolidated Equity. The amendments to presentation and disclosure are required prospectively. Howmet 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.
Recently Issued Accounting Guidance.
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 does not believe the impact of these changes will have a material impact on the Consolidated Financial Statements.
C. Arconic Inc. Separation Transaction and Discontinued Operations
On April 1, 2020, the Company completed the separation of its business into two independent, publicly-traded companies, which was effected by the distribution (the “Distribution”) by the Company of all of the outstanding common stock of Arconic Corporation to the Company’s stockholders. 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).
In connection with the Arconic Inc. Separation Transaction, the Company entered into several agreements with Arconic Corporation, 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 Restructuring and other charges within 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 for $62 in cash, which resulted in a gain that was recognized in Restructuring and other charges within 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 included 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. 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.
Discontinued Operations
The results of operations of Arconic Corporation are presented as Income from discontinued operations after income taxes in the Statement of Consolidated Operations as summarized below:
| Year ended December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Sales | $ | 1,575 | $ | 7,094 | |||||||||||||
| Cost of goods sold | 1,293 | 6,013 | |||||||||||||||
| Selling, general administrative, research and development and other expenses | 106 | 346 | |||||||||||||||
| Provision for depreciation and amortization | 58 | 241 | |||||||||||||||
| Restructuring and other (credits) charges | (18) | 38 | |||||||||||||||
| Operating income from discontinued operations | 136 | 456 | |||||||||||||||
| Interest expense, net | 7 | — | |||||||||||||||
| Other expense, net | 41 | 91 | |||||||||||||||
| Income from discontinued operations | 88 | 365 | |||||||||||||||
| Provision for income taxes | 38 | 21 | |||||||||||||||
| Income from discontinued operations after income taxes | $ | 50 | $ | 344 |
The following table presents purchases of properties, plants, and equipment, proceeds from the sale of businesses, and the provision for depreciation and amortization of discontinued operations related to Arconic Corporation:
| Year ended December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Capital expenditures | $ | 72 | $ | 210 | |||||||||||||
| Proceeds from the sales of businesses | $ | 112 | $ | 20 | |||||||||||||
| Provision for depreciation and amortization | $ | 58 | $ | 241 |
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.
The carrying amount of the major classes of assets and liabilities related to Arconic Corporation were classified as assets and liabilities of discontinued operations in the 2019 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
Howmet is a global leader in lightweight metals engineering and manufacturing. Howmet’s innovative, multi-material products, which include nickel, titanium, aluminum, and cobalt, are used worldwide in the aerospace (commercial and defense), commercial transportation, and industrial and other markets. Segment performance under Howmet’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is Segment operating profit. Howmet’s definition of Segment operating profit is Operating income excluding Special items. Special items include Restructuring and other charges and Impairment of Goodwill. Segment operating profit may not be comparable to similarly titled measures of other companies. Differences between the total segment and consolidated totals are in Corporate.
Following the Arconic Inc. Separation Transaction, Howmet’s operations consist of four 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, industrial and other 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 commercial transportation vehicles, automobiles, construction and industrial equipment, and renewable energy sector.
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.
The operating results and assets of the Company's reportable segments were as follows:
| Year ended | Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | ||||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 2,282 | $ | 1,044 | $ | 725 | $ | 921 | $ | 4,972 | |||||||||||||||||||
| Inter-segment sales | 4 | — | 6 | — | 10 | ||||||||||||||||||||||||
| Total sales | $ | 2,286 | $ | 1,044 | $ | 731 | $ | 921 | $ | 4,982 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Segment operating profit | $ | 440 | $ | 190 | $ | 54 | $ | 255 | $ | 939 | |||||||||||||||||||
| Restructuring and other charges | 74 | — | 16 | — | 90 | ||||||||||||||||||||||||
| Provision for depreciation and amortization | 124 | 49 | 49 | 39 | 261 | ||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||
| Capital expenditures | $ | 74 | $ | 42 | $ | 21 | $ | 45 | $ | 182 | |||||||||||||||||||
| Total Assets | 4,663 | 2,635 | 1,280 | 684 | 9,262 | ||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 2,406 | $ | 1,245 | $ | 927 | $ | 679 | $ | 5,257 | |||||||||||||||||||
| Inter-segment sales | 5 | — | 7 | — | 12 | ||||||||||||||||||||||||
| Total sales | $ | 2,411 | $ | 1,245 | $ | 934 | $ | 679 | $ | 5,269 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Segment operating profit | $ | 417 | $ | 247 | $ | 73 | $ | 153 | $ | 890 | |||||||||||||||||||
| Restructuring and other charges | 36 | 39 | 28 | 3 | 106 | ||||||||||||||||||||||||
| Provision for depreciation and amortization | 123 | 48 | 52 | 39 | 262 | ||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||
| Capital expenditures | $ | 77 | $ | 39 | $ | 19 | $ | 23 | $ | 158 | |||||||||||||||||||
| Total Assets | 4,756 | 2,707 | 1,444 | 628 | 9,535 | ||||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 3,320 | $ | 1,561 | $ | 1,255 | $ | 969 | $ | 7,105 | |||||||||||||||||||
| Inter-segment sales | 11 | — | 13 | — | 24 | ||||||||||||||||||||||||
| Total sales | $ | 3,331 | $ | 1,561 | $ | 1,268 | $ | 969 | $ | 7,129 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Segment operating profit | $ | 621 | $ | 396 | $ | 120 | $ | 253 | $ | 1,390 | |||||||||||||||||||
| Restructuring and other charges | 297 | 6 | 199 | 4 | 506 | ||||||||||||||||||||||||
| Provision for depreciation and amortization | 131 | 48 | 58 | 32 | 269 | ||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||
| Capital expenditures | $ | 211 | $ | 36 | $ | 27 | $ | 70 | $ | 344 | |||||||||||||||||||
| Total Assets | 5,445 | 2,810 | 1,151 | 629 | 10,035 |
The following table reconciles Total segment capital expenditures, which are presented on an accrual basis, with Capital expenditures as presented on the Statement of Consolidated Cash Flows. Differences between the total segment and consolidated totals are in Corporate and discontinued operations, including the impact of changes in accrued capital expenditures during the period.
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Total segment capital expenditures | $ | 182 | $ | 158 | $ | 344 | |||||||||||
| Corporate and discontinued operations | 17 | 109 | 297 | ||||||||||||||
| Capital expenditures | $ | 199 | $ | 267 | $ | 641 |
The following tables reconcile certain segment information to consolidated totals:
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Sales: | |||||||||||||||||
| Total segment sales | $ | 4,982 | $ | 5,269 | $ | 7,129 | |||||||||||
| Elimination of inter-segment sales | (10) | (12) | (24) | ||||||||||||||
| Corporate | — | 2 | (7) | ||||||||||||||
| Consolidated sales | $ | 4,972 | $ | 5,259 | $ | 7,098 |
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Total segment operating profit | $ | 939 | $ | 890 | $ | 1,390 | |||||||||||
| Unallocated amounts: | |||||||||||||||||
| Restructuring and other charges | (90) | (182) | (582) | ||||||||||||||
| Corporate expense | (101) | (82) | (229) | ||||||||||||||
| Consolidated operating income | $ | 748 | $ | 626 | $ | 579 | |||||||||||
| Loss on debt redemption | (146) | (64) | — | ||||||||||||||
| Interest expense, net | (259) | (317) | (338) | ||||||||||||||
| Other expense, net | (19) | (74) | (31) | ||||||||||||||
| Income from continuing operations before income taxes | $ | 324 | $ | 171 | $ | 210 |
| December 31, | 2021 | 2020 | |||||||||
| Assets: | |||||||||||
| Total segment assets | $ | 9,262 | $ | 9,535 | |||||||
| Unallocated amounts: | |||||||||||
| Cash and cash equivalents | 720 | 1,610 | |||||||||
| Deferred income taxes | 184 | 272 | |||||||||
| Corporate fixed assets, net | 133 | 140 | |||||||||
| Fair value of derivative contracts | 2 | 5 | |||||||||
| Accounts receivable securitization | (239) | (241) | |||||||||
| Other | 157 | 122 | |||||||||
| Consolidated assets | $ | 10,219 | $ | 11,443 |
Segment assets include third-party receivables while the accounts receivable securitization item includes the impact of sold receivables under the Company's Accounts Receivable securitization programs. (See Note M)
Geographic information for sales was as follows (based upon the destination of the sale):
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Sales: | |||||||||||||||||
| United States | $ | 2,542 | $ | 2,782 | $ | 3,534 | |||||||||||
| France | 330 | 327 | 546 | ||||||||||||||
| Japan | 319 | 388 | 480 | ||||||||||||||
| Germany | 257 | 309 | 385 | ||||||||||||||
| Mexico | 225 | 185 | 277 | ||||||||||||||
| United Kingdom | 213 | 231 | 420 | ||||||||||||||
| Italy | 181 | 181 | 195 | ||||||||||||||
| Canada | 127 | 119 | 179 | ||||||||||||||
| Poland | 77 | 76 | 131 | ||||||||||||||
| China | 71 | 75 | 168 | ||||||||||||||
| Other | 630 | 586 | 783 | ||||||||||||||
| $ | 4,972 | $ | 5,259 | $ | 7,098 |
Geographic information for long-lived tangible assets was as follows (based upon the physical location of the assets):
| December 31, | 2021 | 2020 | |||||||||
| Long-lived assets: | |||||||||||
| United States | $ | 1,868 | $ | 1,967 | |||||||
| Hungary | 205 | 213 | |||||||||
| France | 127 | 150 | |||||||||
| United Kingdom | 116 | 109 | |||||||||
| Germany | 66 | 78 | |||||||||
| Mexico | 61 | 62 | |||||||||
| China | 53 | 59 | |||||||||
| Canada | 39 | 44 | |||||||||
| Japan | 25 | 25 | |||||||||
| Other | 15 | 16 | |||||||||
| $ | 2,575 | $ | 2,723 |
The following table disaggregates segment revenue by major market served. Differences between total segment and consolidated totals are in Corporate.
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| Year ended December 31, 2021 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 1,105 | $ | 537 | $ | 387 | $ | — | $ | 2,029 | |||||||||||||||||||
| Aerospace - Defense | 523 | 158 | 270 | — | 951 | ||||||||||||||||||||||||
| Commercial Transportation | — | 208 | — | 921 | 1,129 | ||||||||||||||||||||||||
| Industrial and Other | 654 | 141 | 68 | — | 863 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 2,282 | $ | 1,044 | $ | 725 | $ | 921 | $ | 4,972 | |||||||||||||||||||
| Year ended December 31, 2020 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 1,247 | $ | 808 | $ | 542 | $ | — | $ | 2,597 | |||||||||||||||||||
| Aerospace - Defense | 557 | 156 | 303 | — | 1,016 | ||||||||||||||||||||||||
| Commercial Transportation | — | 155 | — | 679 | 834 | ||||||||||||||||||||||||
| Industrial and Other | 602 | 126 | 82 | — | 810 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 2,406 | $ | 1,245 | $ | 927 | $ | 679 | $ | 5,257 | |||||||||||||||||||
| Year ended December 31, 2019 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 2,229 | $ | 1,060 | $ | 897 | $ | — | $ | 4,186 | |||||||||||||||||||
| Aerospace - Defense | 475 | 158 | 256 | — | 889 | ||||||||||||||||||||||||
| Commercial Transportation | 20 | 227 | — | 970 | 1,217 | ||||||||||||||||||||||||
| Industrial and Other | 596 | 116 | 102 | (1) | 813 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 3,320 | $ | 1,561 | $ | 1,255 | $ | 969 | $ | 7,105 |
The Company derived 60%, 69%, and 71% of its revenue for the year ended December 31, 2021, 2020, and 2019, respectively, from aerospace markets.
General Electric Company represented approximately 13% of the Company’s third-party sales for the year ended December 31, 2021, primarily from the Engine Products segment.
E. Restructuring and Other Charges
Restructuring and other charges were comprised of the following:
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Layoff costs | $ | 7 | $ | 113 | $ | 69 | |||||||||||
| Net reversals of previously recorded layoff reserves | (3) | (21) | (6) | ||||||||||||||
| Pension, Other post-retirement benefits (costs) and deferred compensation - net settlement and curtailments | 75 | 69 | (7) | ||||||||||||||
| Non-cash asset impairments and accelerated depreciation (O) | 15 | 5 | 442 | ||||||||||||||
| Net (gain) loss related to divestitures of assets and businesses (U) | (8) | 8 | 63 | ||||||||||||||
| Other | 4 | 8 | 21 | ||||||||||||||
| Restructuring and other charges | $ | 90 | $ | 182 | $ | 582 |
Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements and the expected timetable for completion of the plans.
2021 Actions. In 2021, Howmet recorded Restructuring and other charges of $90, which included a $75 charge for U.K. and U.S. pension plans' settlement accounting; a $15 charge for accelerated depreciation primarily related to the closure of small U.S. manufacturing facilities in Engine Products and Fastening Systems; a $7 charge for layoff costs, including the separation of 253 employees (171 in Engineered Structures, 75 in Engine Products, 6 in Fastening Systems and 1 in Corporate); a $4 charge for impairment of assets associated with an agreement to sell a small manufacturing business in France, and a $4 charge
for various other exit costs. These charges were partially offset by a gain of $12 on the sale of assets at a small U.S. manufacturing facility in Fastening Systems and a benefit of $3 related to the reversal of a number of layoff reserves related to prior periods.
As of December 31, 2021, 66 of the 253 employees were separated. The remaining separations for the 2021 restructuring programs are expected to be completed in 2022.
2020 Actions. In 2020, Howmet recorded Restructuring and other charges of $182, which included a $113 charge for layoff costs, including the separation of 4,301 employees (1,706 in Engine Products, 1,675 in Fastening Systems, 805 in Engineered Structures, 92 in Forged Wheels and 23 in Corporate); a $69 net charge for Pension, Other postretirement benefits and deferred compensation - net settlement and curtailments, composed of a $74 charge for U.K. and U.S. pension plans' settlement accounting offset by a $3 benefit from the termination of a deferred compensation plan and a $2 curtailment benefit related to a postretirement plan; a $5 post-closing adjustment related to the sale of the Company’s U.K. forgings business (which was formerly part of the Engine Products segment); a $5 charge for impairment of assets associated with an agreement to sell an aerospace components business in the U.K. (within the Engineered Structures segment), which ultimately did not occur and the business was returned to held for use; $5 charge related to the impairment of a cost method investment; a $2 charge for accelerated depreciation; a $1 charge for impairment of assets due to a facility sale, and a $6 charge for various other exit costs. These charges were partially offset by a benefit of $21 related to the reversal of a number of prior period programs and a gain of $3 on the sale of assets.
As of December 31, 2021, the employee separations associated with the 2020 restructuring programs were essentially complete.
2019 Actions. In 2019, Howmet recorded Restructuring and other charges of $582, which included a $428 charge for impairment of the Disks long-lived asset group; a $69 charge for layoff costs, including the separation of 917 employees (103 in Engine Products, 128 in Engineered Structures, 132 in Fastening Systems, 60 in Forged Wheels and 494 in Corporate); a $46 charge for impairment of assets associated with an agreement to sell the UK forging business; a $14 charge for impairment of properties, plants, and equipment related to the Company’s primary research and development facility; a $13 loss on sale of assets primarily related to a small additive business; a $12 charge for other exit costs from lease terminations primarily related to the exit of the corporate aircraft; a $9 settlement accounting charge for U.S. pension plans; a $5 charge for impairment of a cost method investment; a $2 net charge for executive severance net of the benefit of forfeited executive stock compensation and a $7 charge for other exit costs; partially offset by a benefit of $16 related to the elimination of the life insurance benefit for U.S. salaried and non-bargaining hourly retirees of the Company and its subsidiaries; a benefit of $6 for the reversal of a number of layoff reserves related to prior periods, and a net gain of $1 on the sales of assets.
In 2019, the Company recorded an impairment charge of $428 related to the Disks long-lived asset group, of which $247 and $181 was related to the Engine Products and Engineered Structures segments, respectively, as the carrying value exceeded the forecasted undiscounted cash flows composed of a write-down of properties, plants, and equipment, intangible assets and certain other noncurrent assets. See Note O for additional details.
As of December 31, 2021, the employee separations associated with the 2019 restructuring programs were complete.
Activity and reserve balances for restructuring charges were as follows:
| Layoff costs | Other exit costs | Total | |||||||||||||||
| Reserve balances at December 31, 2018 | $ | 13 | $ | 9 | $ | 22 | |||||||||||
| 2019 Activity | |||||||||||||||||
| Cash payments | (63) | — | (63) | ||||||||||||||
| Restructuring and other charges | 58 | 524 | 582 | ||||||||||||||
| Other(1) | 5 | (533) | (528) | ||||||||||||||
| Reserve balances at December 31, 2019 | $ | 13 | $ | — | $ | 13 | |||||||||||
| 2020 Activity | |||||||||||||||||
| Cash payments | $ | (51) | $ | — | $ | (51) | |||||||||||
| Restructuring and other charges | 161 | 21 | 182 | ||||||||||||||
| Other(2) | (69) | (21) | (90) | ||||||||||||||
| Reserve balances at December 31, 2020 | $ | 54 | $ | — | $ | 54 | |||||||||||
| 2021 Activity | |||||||||||||||||
| Cash payments | $ | (41) | $ | (2) | $ | (43) | |||||||||||
| Restructuring and other charges | 79 | 11 | 90 | ||||||||||||||
| Other(3) | (75) | (7) | (82) | ||||||||||||||
| Reserve balances at December 31, 2021 | $ | 17 | $ | 2 | $ | 19 |
(1)In 2019, Other for layoff costs included reclassifications of a $16 credit for elimination of life insurance benefits for U.S. salaried and non-bargaining hourly retirees, a charge of $9 for pension plan settlement accounting, as the impacts were reflected in the Company's separate liabilities for Accrued pension benefits and Accrued other postretirement benefits; a $2 net charge for executive severance net of the benefit of forfeited executive stock compensation. In 2019, Other exit costs included a charge of $428 for impairment of the Disks long-lived asset group; a charge of $59 for impairment of assets associated with agreement to sell the U.K. forgings business, and a small additive business; a charge of $14 for impairment of properties, plants, and equipment related to the Company’s primary research and development facility; a charge of $12 for lease terminations; a $5 charge for impairment of a cost method investment, a charge of $7 related to other miscellaneous items and a $9 reclassification of lease exit costs to reduce right of use assets in Other noncurrent assets in accordance with the adoption of the new lease accounting standard; partially offset by a gain of $1 on the sales of assets.
(2)In 2020, Other for layoff costs included $74 in settlement accounting charges related to U.K. and U.S. pension plans, offset by a $3 benefit from the termination of a deferred compensation plan and a $2 curtailment benefit related to a postretirement plan; while Other exit costs included a charge of $5 for impairment of assets; a $5 post-closing adjustment related to the sale of a business; a $5 charge related to the impairment of a cost method investment; a $2 charge for accelerated depreciation; a $1 charge for impairment of assets due to a facility closure and a $6 charge for various other exit costs, which were offset by a gain of $3 on the sale of assets.
(3)In 2021, Other for layoff costs included $75 in settlement accounting charges related to U.K. and U.S. pension plans; while Other exit costs included a charge of $15 for accelerated depreciation and a $4 charge for various other exit costs, which were offset by a gain of $12 on the sale of assets.
The remaining reserves at December 31, 2021 are expected to be paid in cash during 2022.
F. Interest Cost Components
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Amount charged to interest expense, net | $ | 259 | $ | 317 | $ | 338 | |||||||||||
| Loss on debt redemption | 146 | 64 | — | ||||||||||||||
| Amount capitalized | 8 | 11 | 33 | ||||||||||||||
| Total | $ | 413 | $ | 392 | $ | 371 |
G. Other Expense, Net
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Non-service related net periodic benefit cost (H) | $ | 9 | $ | 26 | $ | 17 | |||||||||||
| Interest income | (2) | (5) | (24) | ||||||||||||||
| Foreign currency losses (gains), net | 2 | (11) | 5 | ||||||||||||||
| Net loss from asset sales | 9 | 8 | 10 | ||||||||||||||
| Deferred compensation | 8 | 10 | 24 | ||||||||||||||
| Other, net(1) | (7) | 46 | (1) | ||||||||||||||
| Total | $ | 19 | $ | 74 | $ | 31 |
(1)In 2020, Other, net included a charge from the write-off of a tax indemnification receivable of $53 reflecting the aggregate of Alcoa Corporation’s 49% share and Arconic Corporation's 33.66% share of a Spanish tax reserve (see Note V).
H. Pension and Other Postretirement Benefits
Howmet maintains pension plans covering most U.S. employees and certain employees in foreign locations. Pension benefits generally depend on length of service and job grade. Substantially all benefits are paid through pension trusts that are sufficiently funded to ensure that all plans can pay benefits to retirees as they become due. Most salaried and non-bargaining hourly U.S. employees hired after March 1, 2006, participate in a defined contribution plan instead of a defined benefit plan.
Howmet also maintains health care and life insurance postretirement benefit plans covering eligible U.S. retired employees. Generally, the medical plans are unfunded and pay a percentage of medical expenses, reduced by deductibles and other coverage. Life benefits are generally provided by insurance contracts. Howmet retains the right, subject to existing agreements, to change or eliminate these benefits. All salaried and certain non-bargaining hourly U.S. employees hired after January 1, 2002 and certain bargaining hourly U.S. employees hired after July 1, 2010, are not eligible for postretirement health care benefits. All salaried and certain hourly U.S. employees that retire on or after April 1, 2008 are not eligible for postretirement life insurance benefits. Effective May 1, 2019, salaried employees and retirees are not eligible for postretirement life insurance benefits.
Effective January 1, 2015, Howmet no longer offers postretirement health care benefits to Medicare-eligible, primarily non-bargaining, U.S. retirees through Company-sponsored plans. Qualifying retirees may access these benefits in the marketplace by purchasing coverage directly from insurance carriers. Subsidies to these retirees ceased effective December 31, 2021. Some of these retirees remain eligible for Medicare Part B reimbursement.
In 2019, the Company communicated to plan participants that for its U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries, it would eliminate the life insurance benefit effective May 1, 2019, and certain health care subsidies effective December 31, 2019. As a result of these changes in 2019, the Company recorded a decrease to the Accrued other postretirement benefits liability of $75, which was offset by a curtailment benefit of $58 (of which $16 was recorded in Restructuring and other charges and $42 related to Arconic Corporation in Discontinued Operations) and $17 in Accumulated other comprehensive loss.
In June 2019, the Company and the United Steelworkers (“USW”) reached a tentative three-year labor agreement that was ratified on July 11, 2019 covering approximately 3,400 employees at four U.S. locations of Arconic Corporation; the previous labor agreement expired on May 15, 2019. In 2019, the Company recognized $9 in Discontinued operations in the Statement of Consolidated Operations primarily for a one-time signing bonus for employees. Additionally, on July 25, 2019, the USW ratified a new four-year labor agreement covering approximately 560 employees at the Company’s Niles, Ohio facility. The prior labor agreement expired on June 30, 2018.
In 2021, 2020, and 2019, the Company applied settlement accounting to U.S. pension plans due to lump sum payments to participants, which resulted in settlement charges of $12, $8, and $9, respectively, that were recorded in Restructuring and other charges.
In 2021 and 2020, the Company undertook a number of actions to reduce pension obligations in the U.K. by offering lump sum payments to certain plan participants and entering into group annuity contracts with a third-party carrier to pay and administer future annuity payments. The Company applied settlement accounting to these U.K. pension plans, which resulted in settlement charges of $23 and $66, respectively, that were recorded in Restructuring and other charges in the Statement of Consolidated Operations. These actions reduced the number of pension plan participants in the U.K. by approximately 70%.
In 2020, the Company communicated to plan participants that for its U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries, it would eliminate certain health care subsidies effective December 31, 2021, and that for certain bargained retirees of the Company, it would eliminate certain health care subsidies effective December 31, 2021 and the life insurance benefit effective August 1, 2020. As a result of these amendments, the Company recorded a decrease to the Accrued other postretirement benefits liability of $6 in 2020, which was offset in Accumulated other comprehensive loss.
In the first quarter of 2021, the Company announced a plan administration change of certain of its Medicare-eligible prescription drug benefits to an Employer Group Waiver Plan with a wrap-around secondary plan effective July 1, 2021. The administration change is expected to reduce costs to the Company through the usage of Medicare Part D and drug manufacturer subsidies. Due to this amendment, along with the associated plan remeasurements, the Company recorded a decrease to its Accrued other postretirement benefits liability of $39, which was offset in Accumulated other comprehensive loss in the Consolidated Balance Sheet.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARPA 2021”) was signed into law in the United States. ARPA 2021, in part, provides temporary relief for employers who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974. Considering the impact of ARPA 2021, Howmet’s pension contributions and other postretirement benefit payments in 2021 were approximately $110.
In October 2021, the Company undertook additional actions to reduce gross pension obligations by $125 by purchasing group annuity contracts with a third-party carrier to pay and administer future annuity payments. These actions resulted in a settlement charge of $34 and were recorded in Restructuring and other charges in the fourth quarter ended December 31, 2021 in the Statement of Consolidated Operations. The funded status of the plans have not been significantly impacted.
The funded status of all of Howmet’s pension plans are measured as of December 31 each calendar year. Howmet’s funded status under the Employee Retirement Income Security Act of 1974 (“ERISA”) was approximately 76% as of January 1, 2021.
Obligations and Funded Status
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| December 31, | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Change in benefit obligation | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 2,713 | $ | 7,249 | $ | 215 | $ | 786 | |||||||||||||||
| Transfer to Arconic Corporation | — | (4,355) | — | (569) | |||||||||||||||||||
| Service cost | 4 | 6 | 2 | 2 | |||||||||||||||||||
| Interest cost | 47 | 71 | 5 | 7 | |||||||||||||||||||
| Amendments | 3 | 6 | (31) | (11) | |||||||||||||||||||
| Actuarial (gains) losses(1) | (55) | 313 | (10) | 14 | |||||||||||||||||||
| Settlements | (275) | (398) | — | — | |||||||||||||||||||
| Benefits paid | (140) | (153) | (17) | (17) | |||||||||||||||||||
| Medicare Part D subsidy receipts | — | — | 1 | 3 | |||||||||||||||||||
| Foreign currency translation impact | (1) | (26) | — | — | |||||||||||||||||||
| Benefit obligation at end of year(2) | $ | 2,296 | $ | 2,713 | $ | 165 | $ | 215 | |||||||||||||||
| Change in plan assets**(2)** | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 1,724 | $ | 4,868 | $ | — | $ | — | |||||||||||||||
| Transfer to Arconic Corporation | — | (2,982) | — | — | |||||||||||||||||||
| Actual return on plan assets | 124 | 203 | — | — | |||||||||||||||||||
| Employer contributions | 96 | 227 | — | — | |||||||||||||||||||
| Benefits paid | (123) | (136) | — | — | |||||||||||||||||||
| Administrative expenses | (12) | (12) | — | — | |||||||||||||||||||
| Settlement payments | (277) | (413) | — | — | |||||||||||||||||||
| Foreign currency translation impact | (1) | (31) | — | — | |||||||||||||||||||
| Fair value of plan assets at end of year(2) | $ | 1,531 | $ | 1,724 | $ | — | $ | — | |||||||||||||||
| Funded status | $ | (765) | $ | (989) | $ | (165) | $ | (215) | |||||||||||||||
| Amounts recognized in the Consolidated Balance Sheet consist of: | |||||||||||||||||||||||
| Noncurrent assets | $ | 22 | $ | 12 | $ | — | $ | — | |||||||||||||||
| Current liabilities | (16) | (16) | (12) | (17) | |||||||||||||||||||
| Noncurrent liabilities | (771) | (985) | (153) | (198) | |||||||||||||||||||
| Net amount recognized | $ | (765) | $ | (989) | $ | (165) | $ | (215) | |||||||||||||||
| Amounts recognized in Accumulated Other Comprehensive Loss consist of: | |||||||||||||||||||||||
| Net actuarial loss | $ | 1,067 | $ | 1,274 | $ | 11 | $ | 22 | |||||||||||||||
| Prior service cost (benefit) | 3 | 6 | (49) | (28) | |||||||||||||||||||
| Net amount recognized, before tax effect | $ | 1,070 | $ | 1,280 | $ | (38) | $ | (6) | |||||||||||||||
| Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss consist of: | |||||||||||||||||||||||
| Net actuarial (benefit) loss | $ | (81) | $ | 166 | $ | (10) | $ | 14 | |||||||||||||||
| Amortization of accumulated net actuarial (loss) gain | (125) | (123) | — | 1 | |||||||||||||||||||
| Loss transferred to Arconic Corporation | — | (2,144) | — | (170) | |||||||||||||||||||
| Prior service cost (benefit) | 3 | 5 | (31) | (11) | |||||||||||||||||||
| Amortization of prior service benefit | (7) | — | 9 | 5 | |||||||||||||||||||
| Prior service credit transferred to Arconic Corporation | — | — | — | 13 | |||||||||||||||||||
| Net amount recognized, before tax effect | $ | (210) | $ | (2,096) | $ | (32) | $ | (148) |
(1)At December 31, 2021, the actuarial gains impacting the benefit obligation were due to changes in discount rate, alternative interest cost method, actual asset returns in excess of expected returns and other changes including census data.
(2)At December 31, 2021, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $2,039, $1,278, and $(761), respectively. At December 31, 2020, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $2,327, $1,361, and $(966), respectively.
Pension Plan Benefit Obligations
| Pension benefits | |||||||||||
| 2021 | 2020 | ||||||||||
| The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans were as follows: | |||||||||||
| Projected benefit obligation | $ | 2,296 | $ | 2,713 | |||||||
| Accumulated benefit obligation | 2,293 | 2,707 | |||||||||
| The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were as follows: | |||||||||||
| Projected benefit obligation | 1,982 | 2,364 | |||||||||
| Fair value of plan assets | 1,193 | 1,364 | |||||||||
| The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows: | |||||||||||
| Accumulated benefit obligation | 1,981 | 2,359 | |||||||||
| Fair value of plan assets | 1,193 | 1,364 |
Components of Net Periodic Benefit Cost
| Pension benefits**(1)** | Other postretirement benefits**(2)** | ||||||||||||||||||||||||||||||||||
| For the year ended December 31, | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Service cost | $ | 4 | $ | 12 | $ | 25 | $ | 2 | $ | 3 | $ | 7 | |||||||||||||||||||||||
| Interest cost | 47 | 97 | 235 | 5 | 10 | 28 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (90) | (136) | (286) | — | — | — | |||||||||||||||||||||||||||||
| Recognized net actuarial loss | 56 | 78 | 139 | — | 3 | 4 | |||||||||||||||||||||||||||||
| Amortization of prior service cost (benefit) | 1 | — | 2 | (9) | (6) | (6) | |||||||||||||||||||||||||||||
| Settlements(3) | 69 | 76 | 9 | — | — | — | |||||||||||||||||||||||||||||
| Curtailments(4) | 6 | — | — | — | (2) | (58) | |||||||||||||||||||||||||||||
| Net periodic benefit cost(5) | $ | 93 | $ | 127 | $ | 124 | $ | (2) | $ | 8 | $ | (25) | |||||||||||||||||||||||
| Discontinued operations | — | 20 | 95 | — | 6 | (15) | |||||||||||||||||||||||||||||
| Net amount recognized in Statement of Consolidated Operations | $ | 93 | $ | 107 | $ | 29 | $ | (2) | $ | 2 | $ | (10) |
(1)In 2021, 2020, and 2019, net periodic benefit cost for U.S. pension plans was $61, $58, and $127, respectively.
(2)In 2021, 2020, and 2019, net periodic benefit cost for other postretirement benefits reflects a reduction of less than $1, $1, and $11, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.
(3)In 2021, settlements were related to U.S. and U.K. actions including the purchase of group annuity contracts and lump sum benefit payments. In 2020, settlements were related to U.K. actions including lump sum benefit payments and the purchase of group annuity contracts as well as U.S. lump sum benefit payments. In 2019, settlements were due to workforce reductions and the payment of lump sum benefits. (See Note E)
(4)In 2021, the curtailment was due to plan termination. In 2020, the curtailment was due to workforce reductions. In 2019, curtailments were due to a reduction of future benefits, resulting in the recognition of favorable and unfavorable plan amendments.
(5)Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses, and Research and development expenses; curtailments and settlements were included in Restructuring and other charges; and all other cost components were recorded in Other expense, net in the Statement of Consolidated Operations.
Assumptions
Weighted average assumptions used to determine benefit obligations for pension and other postretirement benefit plans were as follows:
| December 31, | 2021 | 2020 | |||||||||
| Discount rate | 2.70 | % | 2.40 | % | |||||||
| Cash balance plan interest crediting rate | 3.00 | % | 3.00 | % |
The U.S. discount rate 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 developed internally by their 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 models parallel the plans’ projected cash flows, which have a global average duration of 11 years. The underlying cash flows of the bonds included in the models exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times.
Benefit accruals for future compensation under the Company’s major salaried and non-bargained hourly defined benefit pension plans have ceased. The rate of compensation increase no longer impacts the determination of the benefit obligation.
Weighted average assumptions used to determine net periodic benefit cost for pension and other postretirement benefit plans were as follows:
| 2021 | 2020 | 2019 | |||||||||||||||
| Discount rate to calculate service cost(1) | 2.80 | % | 3.30 | % | 4.30 | % | |||||||||||
| Discount rate to calculate interest cost(1) | 2.10 | % | 2.70 | % | 3.90 | % | |||||||||||
| Expected long-term rate of return on plan assets | 6.20 | % | 6.00 | % | 5.60 | % | |||||||||||
| Rate of compensation increase(2) | — | % | — | % | 3.50 | % | |||||||||||
| Cash balance plan interest crediting rate | 3.00 | % | 3.00 | % | 3.00 | % |
(1)In all periods presented, the respective global discount rates were used to determine net periodic benefit cost for most pension plans for the full annual period. However, the discount rates for a limited number of plans were updated during 2021, 2020, and 2019 to reflect the remeasurement of these plans due to new union labor agreements, settlements, and/or curtailments. The updated discount rates used were not significantly different from the discount rates presented.
(2)Benefit accruals for future compensation under the Company’s major salaried and non-bargained hourly defined benefit pension plans have ceased. The rate of compensation increase no longer impacts the determination of the benefit obligation.
The expected long-term rate of return on plan assets (“EROA”) 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 2021, 2020, and 2019, the U.S. expected long-term rate of return used by management was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. These rates were within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. For 2022, management anticipates that 7.00% will continue to be the expected long-term rate of return for the U.S. Pension plans. EROA assumptions are developed by country. Annual changes in the weighted average EROA are impacted by the relative size of the assets by country.
Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows:
| 2021 | 2020 | 2019 | |||||||||||||||
| Health care cost trend rate assumed for next year | 5.50 | % | 5.50 | % | 5.50 | % | |||||||||||
| Rate to which the cost trend rate gradually declines | 4.50 | % | 4.50 | % | 4.50 | % | |||||||||||
| Year that the rate reaches the rate at which it is assumed to remain | 2024 | 2023 | 2023 |
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by Howmet’s other postretirement benefit plans. For 2022, a 5.50% trend rate will be used, reflecting management’s best estimate of the change in future health care costs covered by the plans. The plans’ actual annual health care cost trend experience over the past three years has ranged from 2.20% to 5.70%. Management does not believe this three-year range is indicative of expected increases for future health care costs over the long-term.
Plan Assets
Howmet’s pension plans’ investment policy at December 31, 2021 by asset class, were as follows:
| Asset class | Policy range**(1)** | |||||||||||||
| Equities | 20–55% | |||||||||||||
| Fixed income | 25–55% | |||||||||||||
| Other investments | 15–35% | |||||||||||||
(1)Policy range is for U.S. plan assets only, as both the U.K. and Canadian asset investment allocations are controlled by a third-party trustee with input from Howmet.
The principal objectives underlying the investment of the pension plans’ assets are to ensure that Howmet can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify investments across and within various asset classes to protect asset values against adverse movements. Specific objectives for long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities, and attaining and maintaining a sufficiently funded status. The use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. The investment strategy uses long duration cash bonds and derivative instruments to offset a portion of the interest rate sensitivity of U.S. pension liabilities. Exposure to broad equity risk is decreased and diversified through investments in hedge funds, private equity, private credit, private real estate, high-yield bonds, global and emerging market debt, and global and emerging market equities. Investments are further diversified by strategy, asset class, geography, and sector to enhance returns and mitigate downside risk. A large number of external investment managers are used to gain broad exposure to the financial markets and to mitigate manager-concentration risk.
Investment practices comply with the requirements of ERISA and other applicable laws and regulations.
The following section describes the valuation methodologies used to measure the fair value of pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified (see Note S for the definition of fair value and a description of the fair value hierarchy).
Equities. These securities consist of: (i) direct investments in the stock of publicly traded U.S. and non-U.S. companies, and equity derivatives, that are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (ii) the plans’ share of commingled funds that are invested in the stock of publicly traded companies and are valued at the net asset value of shares held at December 31 (included in Level 1 and Level 2); and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) that are valued at net asset value.
Fixed income. These securities consist of: (i) U.S. government debt that are generally valued using quoted prices (included in Level 1); (ii) cash and cash equivalents invested in publicly-traded funds and are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (iii) publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds and debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data (included in Level 2); (iv) fixed income derivatives that are generally valued using industry standard models with market-based observable inputs (included in Level 2); and (v) cash and cash equivalents invested in institutional funds and are valued at net asset value.
Other investments. These investments include, among others: (i) exchange traded funds, such as gold, and real estate investment trusts and are valued based on the closing price reported in an active market on which the investments are traded (included in Level 1) and (ii) direct investments of discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued at net asset value.
The fair value methods described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Howmet believes the valuation methods used by the plans’ trustees are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table presents the fair value of pension plan assets classified under the appropriate level of the fair value hierarchy or net asset value:
| December 31, 2021 | Level 1 | Level 2 | Net Asset Value | Total | |||||||||||||||||||
| Equities: | |||||||||||||||||||||||
| Equity securities | $ | 2 | $ | 197 | $ | 409 | $ | 608 | |||||||||||||||
| Long/short equity hedge funds | — | — | 60 | 60 | |||||||||||||||||||
| Private equity | — | — | 126 | 126 | |||||||||||||||||||
| $ | 2 | $ | 197 | $ | 595 | $ | 794 | ||||||||||||||||
| Fixed income: | |||||||||||||||||||||||
| Intermediate and long duration government/credit | $ | 124 | $ | 328 | $ | — | $ | 452 | |||||||||||||||
| Other | 15 | 119 | — | 134 | |||||||||||||||||||
| $ | 139 | $ | 447 | $ | — | $ | 586 | ||||||||||||||||
| Other investments: | |||||||||||||||||||||||
| Real estate | $ | — | $ | — | $ | 64 | $ | 64 | |||||||||||||||
| Discretionary and systematic macro hedge funds | — | — | 47 | 47 | |||||||||||||||||||
| Other | — | — | 23 | 23 | |||||||||||||||||||
| $ | — | $ | — | $ | 134 | $ | 134 | ||||||||||||||||
| Net plan assets(1) | $ | 141 | $ | 644 | $ | 729 | $ | 1,514 |
| December 31, 2020 | Level 1 | Level 2 | Net Asset Value | Total | |||||||||||||||||||
| Equities: | |||||||||||||||||||||||
| Equity securities | $ | 274 | $ | 89 | $ | 68 | $ | 431 | |||||||||||||||
| Long/short equity hedge funds | — | — | 77 | 77 | |||||||||||||||||||
| Private equity | — | — | 87 | 87 | |||||||||||||||||||
| $ | 274 | $ | 89 | $ | 232 | $ | 595 | ||||||||||||||||
| Fixed income: | |||||||||||||||||||||||
| Intermediate and long duration government/credit | $ | 78 | $ | 579 | $ | 31 | $ | 688 | |||||||||||||||
| Other | 63 | 254 | — | 317 | |||||||||||||||||||
| $ | 141 | $ | 833 | $ | 31 | $ | 1,005 | ||||||||||||||||
| Other investments: | |||||||||||||||||||||||
| Real estate | $ | 31 | $ | — | $ | 52 | $ | 83 | |||||||||||||||
| Discretionary and systematic macro hedge funds | — | — | 94 | 94 | |||||||||||||||||||
| Other | — | — | 23 | 23 | |||||||||||||||||||
| $ | 31 | $ | — | $ | 169 | $ | 200 | ||||||||||||||||
| Net plan assets(2) | $ | 446 | $ | 922 | $ | 432 | $ | 1,800 |
(1)As of December 31, 2021, the total fair value of pension plans’ assets excludes a net receivable of $17, which represents securities purchased and sold but not yet settled plus interest and dividends earned on various investments.
(2)As of December 31, 2020, the total fair value of pension plans’ assets excludes a net payable of $76, which represents securities purchased and sold but not yet settled plus interest and dividends earned on various investments.
Funding and Cash Flows
It is Howmet’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in the benefits laws and tax laws of the applicable country. Periodically, Howmet contributes additional amounts as deemed appropriate. In 2021 and 2020, cash contributions to Howmet’s pension plans were $96 and $227, respectively, which includes $12 and $25, respectively, contributed to the Company’s U.S. plans that was in excess of the minimum required under ERISA.
The contributions to the Company’s pension plans in 2022 are estimated to be $44 (of which $35 is for U.S. plans), all of which are minimum required contributions.
During the third quarter of 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate the Alcoa Inc. pension plans between the Company and Alcoa Corporation. The plan stipulated that the Company make cash contributions of $150 over a period of 30 months (from November 1, 2016) to its two largest pension plans. The Company satisfied the requirements of the plan by making payments of $34, $66, and $50 in April 2019, March 2018, and April 2017, respectively.
Due to the plan administration change of certain Medicare-eligible prescription drug benefits to an Employer Group Waiver Plan with a wrap-around secondary plan, there will be no direct Medicare Part D subsidy receipts going forward. Benefit payments expected to be paid to pension and other postretirement benefit plans’ participants are as follows utilizing the current assumptions outlined above:
| For the year ended December 31, | Pension benefits paid | Other post- retirement benefits | |||||||||||||||||||||
| 2022 | $ | 152 | $ | 12 | |||||||||||||||||||
| 2023 | 149 | 12 | |||||||||||||||||||||
| 2024 | 145 | 12 | |||||||||||||||||||||
| 2025 | 145 | 11 | |||||||||||||||||||||
| 2026 | 141 | 11 | |||||||||||||||||||||
| 2027 - 2031 | 671 | 53 | |||||||||||||||||||||
| $ | 1,403 | $ | 111 |
Defined Contribution Plans
Howmet sponsors savings and investment plans in various countries, primarily in the U.S. Howmet’s contributions and expenses related to these plans were $66, $73, and $87 in 2021, 2020, and 2019, respectively. U.S. employees may contribute a portion of their compensation to the plans, and Howmet matches a portion of these contributions in equivalent form of the investments elected by the employee.
I. Income Taxes
The components of income from continuing operations before income taxes were as follows:
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| United States | $ | 28 | $ | 84 | $ | 128 | |||||||||||
| Foreign | 296 | 87 | 82 | ||||||||||||||
| Total | $ | 324 | $ | 171 | $ | 210 |
The provision for income taxes consisted of the following:
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal(1) | $ | (9) | $ | (2) | $ | — | |||||||||||
| Foreign | 39 | 2 | 86 | ||||||||||||||
| State and local | (2) | (2) | — | ||||||||||||||
| 28 | (2) | 86 | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 22 | (67) | 33 | ||||||||||||||
| Foreign | 11 | 11 | (41) | ||||||||||||||
| State and local | 5 | 18 | 6 | ||||||||||||||
| 38 | (38) | (2) | |||||||||||||||
| Total | $ | 66 | $ | (40) | $ | 84 |
(1)Includes U.S. taxes related to foreign income.
A reconciliation of the U.S. federal statutory rate to Howmet’s effective tax rate was as follows (the effective tax rate for 2021 and 2019 was a provision on income and 2020 was a benefit on income):
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| U.S. federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Foreign tax rate differential | (0.7) | (1.2) | 10.9 | ||||||||||||||
| U.S. and residual tax on foreign earnings(1) | 6.5 | 5.6 | 15.3 | ||||||||||||||
| U.S. State and local taxes | 1.0 | 2.2 | 0.8 | ||||||||||||||
| Federal (cost) benefit of state tax | (0.3) | (2.0) | 1.2 | ||||||||||||||
| Permanent differences related to asset disposals and items included in restructuring and other charges | (0.3) | 6.8 | (1.3) | ||||||||||||||
| Non-deductible officer compensation | 1.6 | 3.5 | 4.9 | ||||||||||||||
| Statutory tax rate and law changes(2) | 1.0 | (15.9) | (0.6) | ||||||||||||||
| Tax holidays | (0.4) | (0.4) | (8.2) | ||||||||||||||
| Tax credits(3) | (10.4) | (0.4) | (1.3) | ||||||||||||||
| Changes in valuation allowances(4) | 5.1 | 74.8 | (52.2) | ||||||||||||||
| Changes in uncertain tax positions(5) | — | (116.9) | 0.3 | ||||||||||||||
| Prior year tax adjustments(6) | (3.7) | (1.7) | 44.3 | ||||||||||||||
| Other | — | 1.2 | 4.9 | ||||||||||||||
| Effective tax rate | 20.4 | % | (23.4) | % | 40.0 | % |
(1)It is Howmet’s policy to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.
(2)In 2020, final regulations were issued that provided an election to exclude from GILTI any foreign earnings subject to a local country tax rate of at least 90% of the U.S. tax rate. The Company recorded a $30 benefit related to this tax law change.
(3)In 2021, a $32 benefit for income tax credits related to development incentives in Hungary was recognized.
(4)In 2020, a $104 valuation allowance was recorded related to deferred tax assets that were previously subject to a reserve that was otherwise released in 2020 as a result of a favorable Spanish tax case decision. In 2019, the Company released a $112 valuation allowance related to 2015 and 2016 foreign tax credits, subsequent to filing U.S. amended tax returns to deduct, rather than credit, foreign taxes.
(5)In 2020, the Company released a $64 reserve liability and a $104 reserve recorded as a contra balance against deferred tax assets as a result of a favorable Spanish tax case decision. A $30 benefit related to a previously uncertain U.S. tax position was also recognized in 2020.
(6)In 2019, the Company filed U.S. amended tax returns to deduct, rather than credit, 2015 and 2016 foreign taxes resulting in a $112 tax cost associated with the write-off of the deferred tax asset for the credit, partially offset by a $24 tax benefit for the deduction.
The components of net deferred tax assets and liabilities were as follows:
| 2021 | 2020 | ||||||||||||||||||||||
| December 31, | Deferred tax assets | Deferred tax liabilities | Deferred tax assets | Deferred tax liabilities | |||||||||||||||||||
| Depreciation | $ | 8 | $ | 538 | $ | 21 | $ | 506 | |||||||||||||||
| Employee benefits | 300 | 3 | 364 | — | |||||||||||||||||||
| Loss provisions | 20 | 1 | 24 | 1 | |||||||||||||||||||
| Deferred income/expense | 50 | 1,098 | 41 | 1,033 | |||||||||||||||||||
| Interest | 105 | — | 3 | — | |||||||||||||||||||
| Tax loss carryforwards | 3,226 | — | 3,267 | — | |||||||||||||||||||
| Tax credit carryforwards | 358 | — | 378 | — | |||||||||||||||||||
| Other | 10 | 7 | 7 | 13 | |||||||||||||||||||
| $ | 4,077 | $ | 1,647 | $ | 4,105 | $ | 1,553 | ||||||||||||||||
| Valuation allowance | (2,279) | — | (2,307) | — | |||||||||||||||||||
| $ | 1,798 | $ | 1,647 | $ | 1,798 | $ | 1,553 |
The following table details the expiration periods of the deferred tax assets presented above:
| December 31, 2021 | Expires within 10 years | Expires within 11-20 years | No Expiration**(1)** | Other**(2)** | Total | ||||||||||||||||||||||||
| Tax loss carryforwards | $ | 422 | $ | 580 | $ | 2,224 | $ | — | $ | 3,226 | |||||||||||||||||||
| Tax credit carryforwards | 278 | 66 | 14 | — | 358 | ||||||||||||||||||||||||
| Other(3) | — | — | 424 | 69 | 493 | ||||||||||||||||||||||||
| Valuation allowance | (637) | (293) | (1,329) | (20) | (2,279) | ||||||||||||||||||||||||
| $ | 63 | $ | 353 | $ | 1,333 | $ | 49 | $ | 1,798 |
(1)Deferred tax assets with no expiration may still have annual limitations on utilization.
(2)Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference.
(3)A substantial amount of Other deferred tax assets relates to employee benefits that will become deductible for tax purposes in jurisdictions with unlimited expiration over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (10%), and taxable temporary differences that reverse within the carryforward period (90%).
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) 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 Howmet’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. 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 remeasured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
It is Howmet’s policy 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.
Howmet’s foreign tax credits in the United States have a 10-year carryforward period with expirations ranging from 2022 to 2027 (as of December 31, 2021). Valuation allowances were initially established in prior years on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. Foreign tax credits of $22 and $88 expired at the end of 2021 and 2019, respectively, resulting in a corresponding decrease to the valuation allowance. The valuation allowance was also reduced in 2021 by $9 as a result of updated U.S. regulatory guidance concerning the utilization of foreign tax credits in connection with the one-time transition tax on the deemed repatriation of previously non-taxed post-1986 earnings and profits of certain foreign subsidiaries enacted as part of the 2017 Act, and by $4 as a result of a corresponding reduction in the deferred tax asset related to suspended foreign tax credits. The valuation allowance was also reduced by $113 in 2019 as a result of the Company filing amended tax returns to deduct foreign taxes that were previously claimed as a U.S. foreign tax credit. At December 31, 2021, the cumulative amount of the valuation allowance was $180. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.
During 2021, the Company concluded that it would not pursue a deduction related to a capital investment for which a deferred tax asset of $9 and offsetting valuation allowance had previously been recorded. As such, both the deferred tax asset and the valuation allowance were eliminated. The need for valuation allowances against other capital investments will be reassessed on a continuing basis. As of December 31, 2021, there is no valuation allowance recorded related to capital investments.
The Company recorded a net $3 increase, $20 increase, and $11 decrease to U.S. state valuation allowances in 2021, 2020 and 2019, respectively. After weighing all available positive and negative evidence, the Company determined the adjustments based on the underlying net deferred tax assets that were more likely than not realizable based on projected taxable income. Changes in fully reserved U.S. state tax losses, credits and other deferred tax assets resulting from expirations, audit adjustments, tax rate, and tax law changes also resulted in a corresponding net $20 increase, $58 decrease, and $5 increase in the valuation allowance in 2021, 2020, and 2019, respectively. Valuation allowances of $632 remain against state deferred tax assets expected to expire before utilization. The need for valuation allowances against state deferred tax assets will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances.
In 2021, after weighing all available evidence, the Company recognized a discrete income tax cost to establish a valuation allowance of $8 in Switzerland. In 2020, the Company increased a valuation allowance by $104 as a result of releasing a tax reserve following a favorable Spanish tax case decision. The need for valuation allowances will be reassessed by entity and by jurisdiction on a continuous basis in future periods and, as a result, the allowances may increase or decrease based on changes in facts and circumstances.
The following table details the changes in the valuation allowance:
| December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Balance at beginning of year | $ | 2,307 | $ | 2,121 | $ | 2,357 | |||||||||||
| Increase to allowance | 113 | 136 | 19 | ||||||||||||||
| Release of allowance | (94) | (50) | (211) | ||||||||||||||
| Acquisitions and divestitures | — | — | (2) | ||||||||||||||
| Tax apportionment, tax rate and tax law changes | 63 | (23) | (13) | ||||||||||||||
| Foreign currency translation | (110) | 123 | (29) | ||||||||||||||
| Balance at end of year | $ | 2,279 | $ | 2,307 | $ | 2,121 |
Foreign U.S. GAAP earnings that have not otherwise been subject to U.S. tax, will generally be exempt from future U.S. tax under the 2017 Act when distributed. Such distributions, as well as distributions of previously taxed foreign earnings, could potentially be subject to U.S. state tax in certain states, and foreign withholding taxes. Foreign currency gains/losses related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed. The Company has made the determination to no longer permanently reinvest earnings in certain subsidiaries and has consequently recognized $9 of tax charges related to withholding tax and capital gains on amounts distributable in those entities in excess of tax basis. To the extent that additional earnings are distributed from other foreign subsidiaries, Howmet
would expect the potential withholding tax, U.S. state tax, and U.S. capital gains tax impacts to be immaterial and the potential deferred tax liability associated with future currency gains to be impracticable to determine.
Howmet and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Howmet is no longer subject to income tax examinations by tax authorities for years prior to 2014. All U.S. tax years prior to 2021 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining the Company’s income tax returns for various tax years through 2020. The Company had net cash income tax payments of $53 and $122 in 2021 and 2019, respectively, and net cash refunds of $33 in 2020.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
| December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Balance at beginning of year | $ | 2 | $ | 176 | $ | 148 | |||||||||||
| Additions for tax positions of the current year | — | — | 34 | ||||||||||||||
| Additions for tax positions of prior years | — | — | — | ||||||||||||||
| Reductions for tax positions of prior years | — | (182) | (1) | ||||||||||||||
| Settlements with tax authorities | — | (1) | — | ||||||||||||||
| Expiration of the statute of limitations | — | — | (2) | ||||||||||||||
| Foreign currency translation | — | 9 | (3) | ||||||||||||||
| Balance at end of year | $ | 2 | $ | 2 | $ | 176 |
For all periods presented, a portion of the balance pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2021, 2020, and 2019 would be approximately 1%, 1%, and 36%, respectively, of pre-tax book income. Howmet does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2022.
It is Howmet’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes in the Statement of Consolidated Operations. Howmet recognized interest of less than $1, $2, and $6 in 2021, 2020, and 2019, respectively. Due to the expiration of the statute of limitations, settlements with tax authorities, reductions in prior accruals, and refunded overpayments, Howmet recognized interest income of $3, $25, and less than $1 in 2021, 2020, and 2019, respectively. As of December 31, 2021, 2020, and 2019, the amount accrued for the payment of interest and penalties was less than $1, $2, and $23, respectively.
J. Preferred and Common Stock
Preferred Stock. Howmet has two classes of preferred stock: $3.75 Cumulative Preferred Stock (“Class A Preferred Stock”) and Class B Serial Preferred Stock. Class A Preferred Stock has 660,000 shares authorized at a par value of $100 per share with an annual $3.75 cumulative dividend preference per share. There were 546,024 shares of Class A Preferred Stock outstanding at December 31, 2021 and 2020. Class B Serial Preferred Stock has 10,000,000 shares authorized as a par value of $1 per share. There were no shares of Class B Serial Preferred Stock outstanding at December 31, 2021 and 2020.
Common Stock. At December 31, 2021, there were 600,000,000 shares authorized and 421,691,912 shares issued and outstanding. Dividends paid were $0.04 per share in 2021 ($0.02 per share in each of the third and fourth quarters of 2021), $0.02 per share in 2020 (all in the first quarter of 2020), and $0.12 per share in 2019 ($0.06 per share in the first quarter of 2019 and $0.02 per share in each of the second, third, and fourth quarters of 2019).
As of December 31, 2021, 47 million shares of common stock were reserved for issuance under Howmet’s stock-based compensation plans. As of December 31, 2021, 31 million shares remain available for issuance. Howmet issues new shares to satisfy the exercise of stock options and the conversion of stock awards.
In July 2015, through the acquisition of RTI International Metals Inc. (“RTI”), the Company assumed the obligation to repay two tranches of convertible debt; one tranche was due and settled in cash on December 1, 2015 (principal amount of $115) and the other tranche was due and settled in cash on October 15, 2019 (principal amount of $403). No shares of the Company’s common stock were issued in connection with the maturity or final conversion of this convertible debt.
Common Stock Outstanding and Share Activity (number of shares)
| Balance at December 31, 2018 | 483,270,717 | ||||||||||
| Issued for stock-based compensation plans | 4,436,830 | ||||||||||
| Repurchase and retirement of common stock | (54,852,364) | ||||||||||
| Balance at December 31, 2019 | 432,855,183 | ||||||||||
| Issued for stock-based compensation plans | 3,896,119 | ||||||||||
| Repurchase and retirement of common stock | (3,844,925) | ||||||||||
| Balance at December 31, 2020 | 432,906,377 | ||||||||||
| Issued for stock-based compensation plans | 2,195,681 | ||||||||||
| Repurchase and retirement of common stock | (13,410,146) | ||||||||||
| Balance at December 31, 2021 | 421,691,912 |
The following table provides details for share repurchases during 2021, 2020, and 2019:
| Number of shares | Average price per share**(1)** | Total | |||||||||||||||
| May 2021/June 2021 accelerated share repurchase (“ASR”) total | 5,878,791 | $34.02 | $200 | ||||||||||||||
| August 2021 open market repurchase | 769,274 | $32.50 | $25 | ||||||||||||||
| October 2021 open market repurchase | 879,307 | $30.71 | $27 | ||||||||||||||
| November 2021 open market repurchase | 2,336,733 | $30.79 | $72 | ||||||||||||||
| December 2021 open market repurchase | 3,546,041 | $29.91 | $106 | ||||||||||||||
| 2021 Share repurchase total | 13,410,146 | $32.07 | $430 | ||||||||||||||
| August/September 2020 open market repurchase | 2,907,094 | $17.36 | $51 | ||||||||||||||
| November 2020 open market repurchase | 937,831 | $23.99 | $22 | ||||||||||||||
| 2020 Share repurchase total | 3,844,925 | $18.98 | $73 | ||||||||||||||
| February 2019 ASR total | 36,434,423 | $19.21 | $700 | ||||||||||||||
| May 2019 ASR total | 9,016,981 | $22.18 | $200 | ||||||||||||||
| August 2019 ASR total | 7,774,279 | $25.73 | $200 | ||||||||||||||
| November 2019 open market repurchase | 1,626,681 | $30.74 | $50 | ||||||||||||||
| 2019 Share repurchase total | 54,852,364 | $20.97 | $1,150 |
(1)Excludes commissions cost.
The total value of shares repurchased during 2021, 2020, and 2019 were $430, $73, and $1,150, respectively. All of the shares repurchased during 2021, 2020, and 2019 were immediately retired. After giving effect to the share repurchases made through December 31, 2021, approximately $1,347 remained available for share repurchases as of January 1, 2022 under the prior authorizations by the Board. Under the Company’s share repurchase programs (the “Share Repurchase Programs”), the Company may repurchase shares 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 is no stated expiration for the Share Repurchase Programs. Under its Share Repurchase Programs, the Company may repurchase shares from time to time, in amounts, at prices, and at such times as the Company deems appropriate, subject to market conditions, legal requirements and other considerations, including limits under the Company’s Five-Year Revolving Credit Agreement (see Note R). The Company is not obligated to repurchase any specific number of shares or to do so at any particular time, and the Share Repurchase Programs may be suspended, modified or terminated at any time without prior notice.
In January 2022, the Company repurchased approximately 3 million shares of its common stock under the Share Repurchase Programs at an average price of $33.81 per share (excluding commissions cost) for approximately $100 in cash. After the share repurchases made through January 31, 2022, approximately $1,247 remains authorized for common stock share repurchases. Fully diluted shares outstanding as of January 31, 2022 were approximately 425 million.
Stock-Based Compensation
Howmet has a stock-based compensation plan under which stock options and/or restricted stock unit awards are granted, generally, in the first half of each year to eligible employees. Stock options are granted at the closing market price of Howmet’s common stock on the date of grant and typically vest over a three-year service period (1/3 each year) with a ten-year contractual term. Restricted stock unit awards typically vest over a three-year service period from the date of grant. As part of Howmet’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. Certain of the restricted stock unit awards include performance and market conditions and are granted to certain eligible employees. In 2020 and 2019, performance stock awards were granted to a senior executive that vest either based on achievement of the Arconic Inc. Separation Transaction (see Note C for further details) or the achievement of certain stock price thresholds. For performance stock awards granted in 2021 and for annual performance awards granted in 2020, the final number of shares earned will be based on Howmet’s achievement of profitability targets over the respective performance periods and will be earned at the end of the third year. Performance stock awards granted in the first quarter of 2019 were converted to restricted stock unit awards (at target), in order to address the pending Arconic Inc. Separation Transaction. For performance stock awards granted in 2018, in order to address the pending Arconic Inc. Separation Transaction, the final number of shares earned was based on Howmet’s achievement of sales and profitability targets over performance periods in 2018 and 2019. Additionally, the annual 2021 and 2020 performance stock awards will be scaled by a total shareholder return (“TSR”) multiplier, which depends upon relative performance against the TSRs of a group of peer companies.
In conjunction with their employment agreements, certain current and former executives were granted cash bonus awards based on the achievement of certain stock price thresholds. These awards are liability classified and were marked-to-market each quarter using a Monte Carlo simulation. The stock price thresholds were fully reached. The cash payment of $23 occurred in 2021 in accordance with the terms of the agreements.
In 2021, 2020, and 2019, Howmet recognized stock-based compensation expense of $40 ($36 after-tax), $46 ($42 after-tax), and $69 ($63 after-tax), respectively. Senior executive performance awards granted in April 2020 were modified in June 2020, resulting in incremental compensation expense of $12, which is amortized over the remaining service period ending April 1, 2023. Additionally, the effect of the Arconic Inc. Separation Transaction was a modification of the original stock options and restricted stock award units. The modifications were designed with the intention that the intrinsic value of the stock option or stock award were the same both previous to and after the adjustments. An immaterial charge was recorded to Restructuring and other charges related to the modification.
Substantially all compensation expense recorded in 2021 relates to restricted stock unit awards. Cash bonus awards of $2 and $21 were recorded in 2020, and 2019, respectively. Of the remaining stock-based compensation expense in 2020 and 2019, more than 95% relates to restricted stock unit awards. No stock-based compensation expense was capitalized in any of those years. Stock-based compensation expense was reduced by $2 in 2021 and $3 in 2019 for certain executive pre-vest cancellations, which were recorded in Restructuring and other charges within the Statement of Consolidated Operations. At December 31, 2021, there was $68 (pre-tax) of unrecognized compensation expense related to non-vested restricted stock unit award grants. This expense is expected to be recognized over a weighted average period of 1.8 years.
Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For restricted stock unit awards, the fair value is equivalent to the closing market price of Howmet’s common stock on the date of grant. The weighted average grant date fair value per share of the 2021 and 2020 performance stock awards with a market condition scaled by a TSR multiplier is $43.41 and $21.33, respectively. The weighted average grant date fair value per share of the April 2020 senior executive performance stock awards with a market condition (achievement of certain stock price thresholds) is $2.57. The weighted average grant date fair value per share of the 2019 performance stock awards with a market condition (achievement of certain stock price thresholds) is $11.93. The 2021, 2020, and 2019 performance awards were valued using a Monte Carlo model. A Monte Carlo simulation uses assumptions of stock price behavior to estimate the probability of satisfying market conditions and the resulting fair value of the award. The risk-free interest rate (0.2% in 2021, 0.3% in 2020, and in 1.6% in 2019) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. In 2021 and 2020, volatility of 56.0% and 48.3%, respectively, was estimated using a blended rate of Howmet's historical volatility and a peer-based volatility due to the Arconic Inc. Separation Transaction and the related changes in the nature of the business. In 2019, volatility of 33.4% was estimated using implied and historical volatility. There were no stock options issued in 2021, 2020, and 2019.
The activity for stock options and stock awards during 2021 was as follows (options and awards in millions):
| Stock options | Stock awards | ||||||||||||||||||||||
| Number of options | Weighted average exercise price per option | Number of awards | Weighted average FMV per award | ||||||||||||||||||||
| Outstanding, December 31, 2020 | 3 | $ | 24.47 | 9 | $ | 13.68 | |||||||||||||||||
| Granted | — | — | 2 | 32.15 | |||||||||||||||||||
| Exercised | (1) | 21.70 | — | — | |||||||||||||||||||
| Converted | — | — | (2) | 19.52 | |||||||||||||||||||
| Expired or forfeited | — | 34.68 | (1) | 20.94 | |||||||||||||||||||
| Outstanding, December 31, 2021 | 2 | $ | 23.64 | 8 | $ | 16.19 |
As of December 31, 2021, the stock options outstanding had a weighted average remaining contractual life of 2.6 years and a total intrinsic value of $15. All of the stock options outstanding were fully vested and exercisable. In 2021, 2020, and 2019, the cash received from stock option exercises was $22, $33, and $56 and the total tax benefit realized from these exercises was $2, $3, and $4, respectively. The total intrinsic value of stock options exercised during 2021, 2020, and 2019 was $10, $14, and $17, respectively. The total intrinsic value of stock awards converted during 2021, 2020, and 2019 was $55, $104, and $48, respectively.
K. Earnings Per Share
Basic earnings per share (“EPS”) amounts are computed by dividing earnings, after the deduction of preferred stock dividends declared, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The information used to compute basic and diluted EPS attributable to Howmet common shareholders was as follows (shares in millions):
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Net income from continuing operations | $ | 258 | $ | 211 | $ | 126 | |||||||||||
| Less: preferred stock dividends declared | 2 | 2 | 2 | ||||||||||||||
| Net income from continuing operations attributable to common shareholders | 256 | 209 | 124 | ||||||||||||||
| Income from discontinued operations | — | 50 | 344 | ||||||||||||||
| Net income attributable to common shareholders - basic | 256 | 259 | 468 | ||||||||||||||
| Add: interest expense related to convertible notes | — | — | 9 | ||||||||||||||
| Net income attributable to common shareholders - diluted | $ | 256 | $ | 259 | $ | 477 | |||||||||||
| Average shares outstanding - basic | 430 | 435 | 446 | ||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
| Stock options | — | — | 1 | ||||||||||||||
| Stock and performance awards | 5 | 4 | 5 | ||||||||||||||
| Convertible notes(1) | — | — | 11 | ||||||||||||||
| Average shares outstanding - diluted | 435 | 439 | 463 |
(1)The convertible notes matured on October 15, 2019 (see Note R). No shares of the Company’s common stock were issued in connection with the maturity or the final conversion of the convertible notes. As of October 15, 2019, the calculation of average diluted shares outstanding ceased to include the approximately 15 million shares of common stock and the corresponding interest expense previously attributable to the convertible notes.
Common stock outstanding at December 31, 2021 and 2020 was approximately 422 million and 433 million, respectively.
The 5 million decrease in average shares outstanding (basic) for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to the 13 million shares repurchased during 2021. As average shares outstanding are used in the calculation for both basic and diluted EPS, the full impact of share repurchases was not realized in EPS for the year ended December 31, 2021 as share repurchases occurred at varying points during the year ended December 31, 2021.
The following shares were excluded from the calculation of average shares outstanding – diluted as their effect was anti-dilutive (shares in millions).
| For the year ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Stock options | — | 1 | 1 | ||||||||||||||
(1)
L. Accumulated Other Comprehensive Loss
The following table details the activity of the four components that comprise Accumulated other comprehensive loss:
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Pension and other postretirement benefits (H) | |||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (980) | $ | (2,732) | $ | (2,344) | |||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Unrecognized net actuarial gain (loss) and prior service cost/benefit | 111 | (211) | (587) | ||||||||||||||||||||||||||||||||
| Tax (expense) benefit | (26) | 48 | 129 | ||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss) before reclassifications, net of tax | 85 | (163) | (458) | ||||||||||||||||||||||||||||||||
| Amortization of net actuarial loss and prior service cost(1) | 123 | 149 | 90 | ||||||||||||||||||||||||||||||||
| Tax expense(2) | (27) | (32) | (20) | ||||||||||||||||||||||||||||||||
| Total amount reclassified from Accumulated other comprehensive loss, net of tax(3) | 96 | 117 | 70 | ||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss) | 181 | (46) | (388) | ||||||||||||||||||||||||||||||||
| Transfer to Arconic Corporation | — | 1,798 | — | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | (799) | $ | (980) | $ | (2,732) | |||||||||||||||||||||||||||||
| Foreign currency translation | |||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (966) | $ | (596) | $ | (583) | |||||||||||||||||||||||||||||
| Other comprehensive (loss) income(4) | (96) | 58 | (13) | ||||||||||||||||||||||||||||||||
| Transfer to Arconic Corporation | — | (428) | — | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | (1,062) | $ | (966) | $ | (596) | |||||||||||||||||||||||||||||
| Debt securities | |||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | — | $ | — | $ | (3) | |||||||||||||||||||||||||||||
| Other comprehensive income(5) | — | — | 3 | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 3 | $ | (1) | $ | 4 | |||||||||||||||||||||||||||||
| Adoption of accounting standard(6) | — | — | (2) | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Net change from periodic revaluations | 20 | — | (9) | ||||||||||||||||||||||||||||||||
| Tax benefit | (4) | — | 3 | ||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss) before reclassifications, net of tax | 16 | — | (6) | ||||||||||||||||||||||||||||||||
| Net amount reclassified to earnings | (26) | 6 | 4 | ||||||||||||||||||||||||||||||||
| Tax benefit (expense)(2) | 5 | (2) | (1) | ||||||||||||||||||||||||||||||||
| Total amount reclassified from Accumulated other comprehensive (loss) income, net of tax(3) | (21) | 4 | 3 | ||||||||||||||||||||||||||||||||
| Total Other comprehensive (loss) income | (5) | 4 | (3) | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | (2) | $ | 3 | $ | (1) | |||||||||||||||||||||||||||||
| Accumulated other comprehensive loss balance at end of period | $ | (1,863) | $ | (1,943) | $ | (3,329) |
(1)These amounts were recorded in Other expense, net (see Note G) and Restructuring and other charges (see Note E) in the Statement of Consolidated Operations.
(2)These amounts were included in Provision (benefit) for income taxes (see Note I) in the Statement of Consolidated Operations.
(3)A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.
(4)In all periods presented, no amounts were reclassified to earnings.
(5)Realized gains and losses were included in Other expense, net, in the Statement of Consolidated Operations.
(6)Adjustment was related to eliminating the separate measurement of hedge ineffectiveness as part of the adoption of new hedge accounting guidance.
M. Receivables
Sale of Receivables Programs
The Company has historically maintained two accounts receivables securitization arrangements. The net cash funding from the sale of accounts receivable was neither a use of cash nor a source of cash during 2021.
The first was an arrangement with financial institutions to sell certain customer receivables without recourse on a revolving basis (the “Receivables Sale Program”) and was terminated on August 30, 2021. This arrangement historically provided up to a maximum funding of $300 for receivables sold. The Company maintained a beneficial interest, or a right to collect cash, on the sold receivables that have not been funded (deferred purchase program receivable). In connection with the termination, the Company repurchased the remaining $211 of unpaid receivables, paying $160 in cash and reducing the $51 deferred purchase program receivable to zero (in a non-cash transaction).
The Company had net cash repayments totaling $44 ($41 in draws and $85 in repayments) in 2021 and net cash repayments totaling $146 ($207 in draws and $353 in repayments) in 2020.
As of December 31, 2021, there was no deferred purchase program receivable included in Other receivables in the Consolidated Balance Sheet. As of December 31, 2020, the deferred purchase program receivable was $12, which was included in Other receivables in the Consolidated Balance Sheet. The deferred purchase program receivable was reduced as collections of the underlying receivables occurred.
Cash receipts from customer payments on sold receivables (which were cash receipts on the underlying trade receivables that had been previously sold) as well as cash receipts and cash disbursements from draws and repayments under the program were presented as cash receipts from sold receivables within investing activities in the Statement of Consolidated Cash Flows through the termination of the Receivables Sale Program on August 30, 2021. As a result of the termination, there were no additional changes related to cash receipts from sold receivables within investing activities in the Statement of Consolidated Cash Flows in the fourth quarter of 2021.
The second accounts receivables securitization arrangement is one in which the Company, through a wholly-owned special purpose entity (“SPE”), has a receivables purchase agreement (the “Receivables Purchase Agreement”) such that the SPE may sell certain receivables to financial institutions until the earlier of August 30, 2024 or a termination event. The Receivables Purchase Agreement also contains customary representations and warranties, as well as affirmative and negative covenants. Pursuant to the Receivables Purchase Agreement, the Company does not maintain effective control over the transferred receivables, and therefore accounts for these transfers as sales of receivables.
Cash received from collections of sold receivables is used by the SPE to fund additional purchases of receivables on a revolving basis. This arrangement historically provided up to a maximum funding of $125 for receivables sold. On August 30, 2021, the Company entered into an amendment to add the subsidiaries that were previously part of the terminated Receivables Sale Program and, as a result, the maximum funding limit was increased by $200 to $325. The SPE sold the $211 of receivables, which were repurchased as a result of the termination of the Receivables Sale Program, in exchange for cash.
The Company sold $1,057 of its receivables without recourse and received cash funding under this program during 2021, resulting in derecognition of the receivables from the Company’s Consolidated Balance Sheet. As of December 31, 2021 and December 31, 2020, $250 and $46, respectively, remained outstanding from the customer. As collateral against the sold receivables, the SPE maintains a certain level of unsold receivables, which was $79 and $33 at December 31, 2021 and December 31, 2020, respectively. Costs associated with the sales of receivables are reflected in the Company’s Consolidated Statements of Operations for the periods in which the sales occur. Cash receipts from sold receivables under the Receivables Purchase Agreement, excluding the receipts associated with the August 30, 2021 termination of the Receivables Sale Program, are presented within operating activities in the Statement of Consolidated Cash Flows.
The Company had accounts receivable securitization arrangements totaling $325 at December 31, 2021, of which $250 was drawn. The Company had accounts receivable securitization arrangements totaling $425 at December 31, 2020, of which $250 was drawn.
Other Customer Receivable Sales
In 2021, the Company sold $368 of certain customer’s receivables in exchange for cash (of which $109 remained outstanding from the customer at December 31, 2021), the proceeds from which are presented in changes in receivables within operating activities in the Statement of Consolidated Cash Flows.
In 2020, the Company sold $181 of certain customers’ receivables in exchange for cash (of which $50 remained outstanding from the customer at December 31, 2020), the proceeds from which are presented in changes in receivables within operating activities in the Statement of Consolidated Cash Flows.
N. Inventories
| December 31, | 2021 | 2020 | |||||||||
| Finished goods | $ | 478 | $ | 528 | |||||||
| Work-in-process | 631 | 629 | |||||||||
| Purchased raw materials | 256 | 292 | |||||||||
| Operating supplies | 37 | 39 | |||||||||
| Total inventories | $ | 1,402 | $ | 1,488 |
At December 31, 2021 and 2020, the portion of inventories valued on a LIFO basis was $523 and $458, respectively. These amounts exclude the effects of LIFO valuation reductions, which were $192 and $131 at December 31, 2021 and 2020, respectively.
O. Properties, Plants, and Equipment, Net
| December 31, 2021 | December 31, 2020 | ||||||||||
| Land and land rights | $ | 91 | $ | 98 | |||||||
| Structures | 1,034 | 1,033 | |||||||||
| Machinery and equipment | 3,932 | 3,879 | |||||||||
| 5,057 | 5,010 | ||||||||||
| Less: accumulated depreciation and amortization | 2,772 | 2,626 | |||||||||
| 2,285 | 2,384 | ||||||||||
| Construction work-in-progress | 182 | 208 | |||||||||
| Properties, plants, and equipment, net | $ | 2,467 | $ | 2,592 |
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 Engineered 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, 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 in 2019.
Depreciation expense related to Properties, plants, and equipment recorded in Provision for depreciation and amortization in the Statement of Consolidated Operations was $232, $236, and $234 for the years ended December 31, 2021, 2020, and 2019, respectively.
P. Goodwill and Other Intangible Assets
The following table details the changes in the carrying amount of goodwill:
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total | |||||||||||||||||||||||||
| Balances at December 31, 2019 | |||||||||||||||||||||||||||||
| Goodwill | $ | 2,883 | $ | 1,607 | $ | 289 | $ | 7 | $ | 4,786 | |||||||||||||||||||
| Accumulated impairment losses | (719) | — | — | — | (719) | ||||||||||||||||||||||||
| Goodwill, net | 2,164 | 1,607 | 289 | 7 | 4,067 | ||||||||||||||||||||||||
| Impairment (See Note U) | — | — | (2) | — | (2) | ||||||||||||||||||||||||
| Translation and other | 24 | 13 | — | — | 37 | ||||||||||||||||||||||||
| Transfer from Engine Products to Engineered Structures(1) | (17) | — | 17 | — | — | ||||||||||||||||||||||||
| Balances at December 31, 2020 | |||||||||||||||||||||||||||||
| Goodwill | 2,890 | 1,620 | 306 | 7 | 4,823 | ||||||||||||||||||||||||
| Accumulated impairment losses | (719) | — | (2) | — | (721) | ||||||||||||||||||||||||
| Goodwill, net | 2,171 | 1,620 | 304 | 7 | 4,102 | ||||||||||||||||||||||||
| Impairment (See Note U) | — | (4) | — | — | (4) | ||||||||||||||||||||||||
| Translation and other | (22) | (9) | — | — | (31) | ||||||||||||||||||||||||
| Balances at December 31, 2021 | |||||||||||||||||||||||||||||
| Goodwill | 2,868 | 1,611 | 306 | 7 | 4,792 | ||||||||||||||||||||||||
| Accumulated impairment losses | (719) | (4) | (2) | — | (725) | ||||||||||||||||||||||||
| Goodwill, net | $ | 2,149 | $ | 1,607 | $ | 304 | $ | 7 | $ | 4,067 |
(1)In the first quarter of 2020, the Savannah operations was transferred from the Engine Products segment to the Engineered Structures segment and, as a result, goodwill of $17 was reallocated.
During the 2021 annual review of goodwill in the fourth quarter, management elected to perform qualitative assessments on the Engine Products and Forged Wheels reporting units and performed quantitative impairment tests on the Engineered Structures and Fastening Systems reporting units. The estimated fair values for the Engineered Structures and Fastening Systems reporting units exceeded their respective carrying values by approximately 30% and 50%, respectively; thus, there were no goodwill impairments. Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Howmet uses a discounted cash flow (“DCF”) model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including sales growth, production costs, capital spending, and discount rate. Assumptions can vary 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. The annual goodwill impairment tests in the fourth quarter of 2021, 2020, and 2019 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) may be necessary and could be material.
During the first quarter of 2020, Howmet's market capitalization declined significantly compared to the fourth quarter of 2019. Over the same period, the equity value of our peer group companies and the overall U.S. stock market also declined significantly amid market volatility. In addition, as a result of the COVID-19 pandemic and measures designed to contain the spread, global sales to customers in the aerospace and commercial transportation industries impacted by COVID-19 had been and were expected to be negatively impacted, compared to 2019, 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 of 2020 for the Engineered Structures reporting unit and concluded that although 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. Since the first quarter of 2020, there have been no indicators of impairment identified for the Engineered Structures reporting unit or any other reporting units or indefinite-lived intangible assets.
On January 1, 2020, management performed a quantitative impairment test of the Engines Products and Engineered Structures segments in connection with the Savannah business transfer. The estimated fair value of each of these reporting units substantially exceeded their carrying value; thus, there was no goodwill impairment at the date the business was transferred.
In the second quarter of 2019, the Company performed an interim impairment evaluation of goodwill for Engine Products in connection with the impairment of the long-lived assets of the Disks asset group. 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.
Other intangible assets were as follows:
| December 31, 2021 | Gross carrying amount | Accumulated amortization | Intangibles, net | ||||||||||||||
| Computer software | $ | 206 | $ | (175) | $ | 31 | |||||||||||
| Patents and licenses | 67 | (65) | 2 | ||||||||||||||
| Other intangibles | 686 | (202) | 484 | ||||||||||||||
| Total amortizable intangible assets | 959 | (442) | 517 | ||||||||||||||
| Indefinite-lived trade names and trademarks | 32 | — | 32 | ||||||||||||||
| Total intangible assets, net | $ | 991 | $ | (442) | $ | 549 |
| December 31, 2020 | Gross carrying amount | Accumulated amortization | Intangibles, net | ||||||||||||||
| Computer software | $ | 194 | $ | (169) | $ | 25 | |||||||||||
| Patents and licenses | 67 | (65) | 2 | ||||||||||||||
| Other intangibles | 700 | (188) | 512 | ||||||||||||||
| Total amortizable intangible assets | 961 | (422) | 539 | ||||||||||||||
| Indefinite-lived trade names and trademarks | 32 | — | 32 | ||||||||||||||
| Total intangible assets, net | $ | 993 | $ | (422) | $ | 571 |
During the second quarter of 2019, the Company recorded a charge of $197 for intangible asset impairments associated with the Disks long-lived asset group which was recorded in Restructuring and other charges in the Statement of Consolidated Operations. See Note O for additional details.
Computer software consists primarily of software costs associated with enterprise business solutions across Howmet's businesses.
Amortization expense related to the intangible assets recorded in Provision for depreciation and amortization in the Statement of Consolidated Operations was $36, $40, and $58 for the years ended December 31, 2021, 2020, and 2019, respectively, and is expected to be in the range of approximately $34 to $39 annually from 2022 to 2026.
Q. Leases
Operating lease cost, which included short-term leases and variable lease payments and approximated cash paid, was $63, $67, and $84 in 2021, 2020, and 2019, respectively.
Operating lease right-of-use assets and lease liabilities in the Consolidated Balance Sheet were as follows:
| December 31, | 2021 | 2020 | |||||||||||||||
| Right-of-use assets classified in Other noncurrent assets | $ | 108 | $ | 131 | |||||||||||||
| Current portion of lease liabilities classified in Other current liabilities | $ | 33 | $ | 38 | |||||||||||||
| Long-term portion of lease liabilities classified in Other noncurrent liabilities and deferred credits | 81 | 100 | |||||||||||||||
| Total lease liabilities | $ | 114 | $ | 138 |
Future minimum contractual operating lease obligations were as follows at December 31, 2021:
| 2022 | $ | 38 | |||||||||
| 2023 | 28 | ||||||||||
| 2024 | 19 | ||||||||||
| 2025 | 12 | ||||||||||
| 2026 | 10 | ||||||||||
| Thereafter | 27 | ||||||||||
| Total lease payments | $ | 134 | |||||||||
| Less: Imputed interest | (20) | ||||||||||
| Present value of lease liabilities | $ | 114 |
| December 31, | 2021 | 2020 | 2019 | ||||||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 16 | $ | 35 | $ | 26 | |||||||||||
| Weighted-average remaining lease term in years | 6 | 6 | 6 | ||||||||||||||
| Weighted-average discount rate | 5.4 | % | 5.6 | % | 5.9 | % |
R. Debt
Debt.
| December 31, | 2021 | 2020 | |||||||||
| 5.400% Notes, due 2021(1) | $ | — | $ | 361 | |||||||
| 5.870% Notes, due 2022(2) | — | 476 | |||||||||
| 5.125% Notes, due 2024 | 1,150 | 1,250 | |||||||||
| 6.875% Notes, due 2025 | 600 | 1,200 | |||||||||
| 5.900% Notes, due 2027 | 625 | 625 | |||||||||
| 6.750% Bonds, due 2028 | 300 | 300 | |||||||||
| 3.000% Notes due 2029 | 700 | — | |||||||||
| 5.950% Notes, due 2037 | 625 | 625 | |||||||||
| 4.750% Iowa Finance Authority Loan, due 2042 | 250 | 250 | |||||||||
| Other(3) | (18) | (12) | |||||||||
| 4,232 | 5,075 | ||||||||||
| Less: amount due within one year | 5 | 376 | |||||||||
| Total long-term debt | $ | 4,227 | $ | 4,699 |
(1)Redeemed on January 15, 2021.
(2)Redeemed on May 3, 2021.
(3)Includes various financing arrangements related to subsidiaries, unamortized debt discounts and unamortized debt issuance costs related to outstanding notes and bonds listed in the table above.
The principal amount of long-term debt maturing in each of the next five years is $1,150 in 2024, $600 in 2025, and no long-term debt maturities in each of 2022, 2023, and 2026.
Public Debt. In the third and fourth quarters of 2021, the Company repurchased an additional $100 aggregate principal amount of its 5.125% Notes due 2024 in the open market and paid approximately $111, including an early termination premium and accrued interest of approximately $10 and $1, respectively, which were recorded in Loss on debt redemption and Interest expense, net, respectively, in the Statement of Consolidated Operations.
On September 2, 2021, the Company completed a cash tender offer and repurchased approximately $600 aggregate principal amount of its 6.875% Notes due 2025 (the “6.875% Notes”). The amount of tender premium and accrued interest associated with the notes accepted for settlement were $105 and $14, respectively, which were recorded in Loss on debt redemption and Interest expense, net, respectively, in the Statement of Consolidated Operations.
On September 1, 2021, the Company completed an offering of $700 aggregate principal amount of 3.000% Notes due 2029, the proceeds of which were used to fund the cash tender offer noted above and to pay related transaction fees, including applicable premiums and expenses.
On May 3, 2021, the Company completed the early redemption of all the remaining $476 aggregate principal amount of its 5.870% Notes due 2022 (the “5.870% Notes”) and paid an aggregate of $503, including $5 of accrued interest. The Company also incurred an early termination premium and other costs of $23, which was recorded in Loss on debt redemption in the Statement of Consolidated Operations.
On January 15, 2021 the Company completed the early redemption of all the remaining $361 of its 5.400% Notes due 2021 (the “5.400% Notes”) at par and paid $5 in accrued interest.
On May 21, 2020, the Company completed a cash tender offer and repurchased $589 and $151 of principal amount of the 5.400% Notes and its 5.870% Notes, respectively. The amount of early tender premium and accrued interest associated with the notes accepted for early settlement were $24 and $4, respectively, which were recorded in Loss on debt redemption and Interest expense, net, respectively, in the Statement of Consolidated Operations.
On April 24, 2020, the Company completed an offering of $1,200 aggregate principal amount of 6.875% Notes, the proceeds of which have been used to fund the May 2020 cash tender offers noted above and to pay related transaction fees, including applicable premiums and expenses, with the remaining amount to be used for general corporate purposes. The Company incurred deferred financing costs of $14 associated with the issuance in the second quarter of 2020.
On April 6, 2020, the Company completed the early redemption of all $1,000 of its 6.150% Notes due 2020 (the “6.150% Notes”) and the early partial redemption of $300 of its 5.400% Notes. Holders of the 6.150% Notes were paid an aggregate of $1,020 and holders of the 5.400% Notes were paid an aggregate of $315, plus accrued and unpaid interest up to, but not including, the redemption date. The Company incurred early termination premium and accrued interest of $35 and $17, respectively, which were recorded in Loss on debt redemption and Interest expense, net, respectively, in the Statement of Consolidated Operations.
The Company has the option to redeem certain of its notes and bonds in whole or part, at any time at a redemption price equal to the greater of principal amount or the sum of the present values of the remaining scheduled payments, discounted using a defined treasury rate plus a spread, plus in either case accrued and unpaid interest to the redemption date.
Credit Facility. On September 28, 2021, the Company amended and restated its Five-Year Revolving Credit Agreement (as so amended and restated, the “Credit Agreement”). Capitalized terms used in this “Credit Facility” section but not otherwise defined shall have the meanings given to such terms in the Credit Agreement.
The Credit Agreement provides a $1,000 senior unsecured revolving credit facility (the “Credit Facility”) that matures on September 28, 2026, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. Howmet may make two one-year extension requests during the term of the Credit Facility, subject to the lender consent requirements set forth in the Credit Agreement. Subject to the terms and conditions of the Credit Agreement, the Company may from time to time request increases in lender commitments under the Credit Facility, not to exceed $500 in aggregate principal amount, and may also request the issuance of letters of credit, subject to a letter of credit sublimit of $500 of the Credit Facility. Under the provisions of the Credit Agreement, based on Howmet’s current long-term debt ratings, Howmet pays an annual fee of 0.23% of the total commitment to maintain the Credit Facility.
The Credit Facility is unsecured and amounts payable under it will rank pari passu with all other unsecured, unsubordinated indebtedness of Howmet. Borrowings under the Credit Facility may be denominated in U.S. dollars or euros. Loans will bear interest at a base rate or a rate equal to LIBOR (subject to the Replacement Benchmark in accordance with the terms of the Credit Agreement), plus, in each case, an applicable margin based on the credit ratings of Howmet’s outstanding senior unsecured long-term debt. Based on Howmet’s current long-term debt ratings, the applicable margin on base rate loans and LIBOR loans would be 0.40% and 1.40% per annum. The applicable margin is subject to change based on the Company’s long-term debt ratings. Loans may be prepaid without premium or penalty, subject to customary breakage costs.
The obligation of Howmet to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an “Event of Default” as defined in the Credit Agreement. Such Events of Default include, among others, (a) non-payment of obligations; (b) breach of any representation or warranty in any material respect; (c) non-performance of covenants and obligations; (d) with respect to other indebtedness in a principal amount in excess of $100, a default thereunder that causes such indebtedness to become due prior to its stated maturity or a default in the payment at maturity of any principal of such indebtedness; (e) the bankruptcy or insolvency of Howmet; and (f) a change in control of Howmet.
Under the Credit Agreement, the Company’s ratio of Consolidated Net Debt to Consolidated EBITDA as of the end of each fiscal quarter for the period of the four fiscal quarters of the Company most recently ended, is required to be no greater than 3.50 to 1.00; provided, however, that during the Covenant Relief Period through December 31, 2022 (unless the Company elects to terminate the Covenant Relief Period earlier in accordance with the Credit Agreement), the Company’s Consolidated Net Debt to Consolidated EBITDA ratio cannot exceed the levels set forth below:
| No greater than | |||||
| (i) for the quarter ending December 31, 2021 | 4.75 to 1.00 | ||||
| (ii) for the quarter ending March 31, 2022 | 4.50 to 1.00 | ||||
| (iii) for the quarter ending June 30, 2022 | 4.50 to 1.00 | ||||
| (iv) for the quarter ending September 30, 2022 | 4.25 to 1.00 | ||||
| (v) for the quarter ending December 31, 2022 | 3.75 to 1.00 | ||||
During the Covenant Relief Period, common stock dividends and share repurchases (see Note J) are permitted only if no loans under the Credit Agreement are outstanding at the time and were limited to an aggregate amount not to exceed $450 during the year ended December 31, 2021 and are limited to an aggregate amount not to exceed $500 during the year ending December 31, 2022.
The Credit Agreement includes additional covenants, including, among others, (a) limitations on Howmet’s ability to incur liens securing indebtedness for borrowed money, (b) limitations on Howmet’s ability to consummate a merger, consolidation or sale of all or substantially all of its assets, and (c) limitations on Howmet’s ability to change the nature of its business.
There were no amounts outstanding under the Credit Agreement at December 31, 2021 and 2020, and no amounts were borrowed during 2021, 2020, or 2019 under the Credit Agreement.
In addition to the Credit Agreement, the Company had several other credit agreements that provided a borrowing capacity of $640 as of December 31, 2019, and all of which expired in 2020. In 2020, nothing was borrowed or repaid under these arrangements. In 2019, Howmet borrowed and repaid $400 under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during 2019 was 3.7% and 49 days, respectively. The purpose of any borrowings under these credit arrangements was to provide for working capital requirements and for other general corporate purposes.
Short-Term Debt. At December 31, 2021 and 2020, short-term debt was $5 and $14, respectively, substantially all of which related to accounts payable settlement arrangements with certain vendors and third-party intermediaries. These arrangements provide that, at the vendor’s request, the third-party intermediary advances the amount of the scheduled payment to the vendor, less an appropriate discount, before the scheduled payment date, and Howmet makes payment to the third-party intermediary on the date stipulated in accordance with the commercial terms negotiated with its vendors. Howmet records imputed interest related to these arrangements in Interest expense, net in the Statement of Consolidated Operations.
S. Other Financial Instruments
Fair Value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
-
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
-
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
-
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
The carrying values of Cash and cash equivalents, restricted cash, derivatives, noncurrent receivables, and Short-term debt included in the Consolidated Balance Sheet approximate their fair value. The Company holds exchange-traded fixed income securities which are considered available-for-sale securities that are carried at fair value which is based on quoted market prices
which are classified in Level 1 of the fair value hierarchy and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheet. The fair value of Long-term debt, less amounts due within one year was based on quoted market prices for public debt and on interest rates that are currently available to Howmet for issuance of debt with similar terms and maturities for non-public debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
| 2021 | 2020 | ||||||||||||||||||||||
| December 31, | Carrying value | Fair value | Carrying value | Fair value | |||||||||||||||||||
| Long-term debt, less amounts due within one year | $ | 4,227 | $ | 4,707 | $ | 4,699 | $ | 5,426 |
Restricted cash was $2, $1, and $55 (see Note U) in 2021, 2020, and 2019, respectively, and was recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheet.
T. Cash Flow Information
Cash paid for interest and income taxes for both continuing and discontinued operations was as follows:
| 2021 | 2020 | 2019 | |||||||||||||||
| Interest, net of amounts capitalized | $ | 267 | $ | 401 | $ | 340 | |||||||||||
| Income taxes, net of amounts refunded | $ | 53 | $ | (33) | $ | 122 |
The Company incurred capital expenditures that remain unpaid at December 31, 2021, 2020, and 2019 of $49, $50, and $133 respectively, which result in cash outflows for investing activities in subsequent periods.
U. Acquisitions and Divestitures
2021 Divestitures
On June 1, 2021, the Company completed the sale of a small manufacturing plant in France within the Fastening Systems segment for $10 (of which $8 of cash was received in the second quarter of 2021). An agreement to sell was reached on March 15, 2021, which resulted in a charge of $4 related to the non-cash impairment of the net book value of the business, primarily goodwill, in the first quarter of 2021 which was recorded in Restructuring and other charges in the Statement of Consolidated Operations.
2020 Divestiture
On January 31, 2020, the Company reached an agreement to sell a small manufacturing plant in the U.K. within the Engineered Structures segment for $12 in cash, and therefore was classified as held for sale. As a result of entering into the agreement, a charge of $12 was recognized related to a non-cash impairment of the net book value of the business, primarily properties, plants, and equipment in the first quarter of 2020, which was recorded in Restructuring and other charges in the Statement of Consolidated Operations. As the sale did not close, the Company changed the classification from held for sale to held for use in the second quarter of 2020 and recorded these assets at their lower of carrying value (assuming no initial reclassification for held for sale was made) or fair value. The result was a reversal of $7 related to a non-cash impairment in the second quarter of 2020. These charges were recorded in Restructuring and other charges in the Statement of Consolidated Operations.
2019 Divestitures
On May 31, 2019, the Company sold a small additive manufacturing facility within the Engineered Structures segment for $1 in cash, which resulted in a loss of $13 recorded in Restructuring and other charges in the Statement of Consolidated Operations in 2019.
On August 15, 2019, the Company sold inventories and properties, plants, and equipment related to a small energy business within the Engineered Structures segment for $13 in cash. The Company recognized a charge of $10 related to inventory impairment and recorded the charge in Cost of goods sold in the Statement of Consolidated Operations in 2019.
On December 1, 2019, the Company completed the sale of its forgings business in the United Kingdom (U.K.) for $64 in cash, which resulted in a loss on sale of $46 which was recorded in Restructuring and other charges in the Statement of Consolidated Operations in 2019. The Company settled certain post-closing adjustments which resulted in a $5 reduction in the purchase price and an additional loss of sale which was recorded in Restructuring and other charges in the Statement of Consolidated Operations in 2020. The sale was subject to certain tax post-closing adjustments. Of the cash proceeds received, $53 was recorded as Restricted cash within Prepaid expenses and other current assets on the Consolidated Balance Sheet at December 31, 2019 as its use is subject to restriction by the U.K. pension authority until certain U.K. pension plan changes have been
made and approved. The restriction on these proceeds was removed in the second quarter of 2020. The forgings business primarily produces 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 Engine Products segment. This business generated third party sales of $116 in 2019 and had 540 employees at the time of divestiture.
V. Contingencies and Commitments
Contingencies
Environmental Matters. Howmet participates in environmental assessments and cleanups at more than 30 locations. These include owned or operating facilities and adjoining properties, previously owned or operated facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, and technological changes, among others.
The Company's remediation reserve balance was $15 and $10 at December 31, 2021 and 2020, respectively, recorded in Other noncurrent liabilities and deferred credits in the Consolidated Balance Sheet (of which $6 and $5, respectively, were classified as a current liability), and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. The increase in 2021 is primarily associated with site monitoring costs at previously owned properties in California, which will determine if any additional remediation is required. Payments related to remediation expenses applied against the reserve were $2 in each of 2021 and 2020, and included expenditures currently mandated, as well as those not required by any regulatory authority or third party.
Included in annual operating expenses are the recurring costs of managing hazardous substances and environmental programs. These costs are estimated to be less than 1% of Cost of goods sold.
Tax. As previously reported, in July 2013, following a Spanish corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received mainly disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by the Company. The Company appealed this assessment to Spain's Central Tax Administrative Court, and subsequently to Spain's National Court, each of which was denied.
The Company then appealed the decision to the Supreme Court of Spain. In November 2020, the Supreme Court of Spain rendered a decision in favor of the taxpayer, removing the assessment in its entirety. The decision is final and cannot be further appealed.
As a result of the favorable decision, in the fourth quarter of 2020, the Company released an income tax reserve, including interest, of $64 (€54), which was recorded in Provision (benefit) for income taxes in the Consolidated Statement of Operations, that was previously established in the third quarter of 2018. In addition, the Company reversed a combined indemnification receivable of $53 (€45) for Alcoa Corporation's 49% share and Arconic Corporation's 33.66% share of the total reserve, which was recorded in Other expense, net in the Consolidated Statement of Operations, that were previously established pursuant to the October 31, 2016 and March 31, 2020 Tax Matters Agreements, respectively. As of the end of 2020, the Company no longer has a balance recorded for this matter.
Indemnified Matters. The Separation and Distribution Agreement, dated October 31, 2016, entered into between the Company and Alcoa Corporation in connection with the Alcoa Inc. Separation Transaction, provides for cross-indemnities between the Company and Alcoa Corporation for claims subject to indemnification. The Separation and Distribution Agreement, dated March 31, 2020, entered into between the Company and Arconic Corporation in connection with the Arconic Inc. Separation Transaction, provides for cross-indemnities between the Company and Arconic Corporation for claims subject to indemnification. Among other claims that are covered by these indemnities, Arconic Corporation indemnifies the Company (f/k/a Arconic Inc. and f/k/a Alcoa Inc.) for all potential liabilities associated with the fire that occurred at the Grenfell Tower in London, U.K. on June 14, 2017 (“Grenfell Fire”), including the following:
(i) Regulatory Investigations*.* Arconic Architectural Products SAS ("AAP SAS") (now a subsidiary of Arconic Corporation) supplied Reynobond PE to its customer who used the product as one component of the overall cladding system on Grenfell Tower. Regulatory Investigations into the overall Grenfell Fire are being conducted, including a criminal investigation by the London Metropolitan Police Service and a Public Inquiry by the British government (regarding which AAP SAS is a participant). (ii) United Kingdom Litigation*.* On December 23, 2020, survivors and estates of decedents of the Grenfell Fire filed suit against 23 defendants, including the Company. No substantive allegations or requests for relief have been provided. The suits are stayed with a conference to be held after April 4, 2022. (iii) Behrens et al. v. Arconic Inc. et al. (United States District Court for the Eastern District of Pennsylvania). On June 6, 2019, 247 survivors and estates of decedents of the Grenfell
Fire filed a complaint against Arconic Inc., Alcoa Inc. and Arconic Architectural Products, LLC (now a subsidiary of Arconic Corporation), among others, for product liability and wrongful death. Plaintiffs seek monetary damages exceeding $75,000 (amount not in millions) for each plaintiff. On September 16, 2020, the court dismissed the U.S. case, determining that the U.K. is the appropriate jurisdiction for the case. Plaintiffs are appealing. (iv) Howard v. Arconic Inc. et al. (United States District Court for the Western District of Pennsylvania). In 2017, two purported class actions were filed against Arconic Inc., Klaus Kleinfeld and other former Arconic Inc. executives and directors, and certain banks. The actions, which later were consolidated, allege violations of the federal securities laws relating to the Grenfell Fire. On June 23, 2021, the court ruled that certain claims related to a particular registration statement, other SEC filings, product brochures and websites can proceed and dismissed all other claims with prejudice. A status conference was held before the court on January 11, 2022 during which the court heard argument from both parties on the pending motion for certification of an interlocutory appeal. The motion remains pending. (v) Raul v. Albaugh, et al. (United States District Court for the District of Delaware). On June 22, 2018, a derivative complaint was filed nominally on behalf of Arconic Inc. by a purported Arconic Inc. stockholder against the then members of Arconic Inc.’s Board of Directors, Klaus Kleinfeld and Ken Giacobbe, naming Arconic Inc. as a nominal defendant. The complaint asserts claims under federal securities laws, most of which are similar to those in Howard, claims under Delaware state law for breaches of fiduciary duty, gross mismanagement and abuse of control, as well as allegations that the defendants improperly authorized the sale of Reynobond PE for unsafe uses. The case has been stayed until the final resolution of the Howard case and the Regulatory Investigations. (vi) Stockholder Demands. Following the Grenfell Fire, the then Arconic Inc. Board of Directors (the “Board”) received letters, purportedly sent on behalf of stockholders, reciting allegations similar to the Howard and Raul cases and demanding that the Board authorize Arconic Inc. to initiate litigation against members of management, the Board and others. On May 28, 2019, the Board adopted the findings and recommendations of its Special Litigation Committee and rejected the stockholders’ demands. On June 28, 2021, one of the stockholders whose demand was rejected asked the current Howmet Board of Directors to reconsider the decision of the Board, which was declined. On August 4, 2021, another stockholder whose demand was rejected requested books and records relating to, among other things, the Board’s decision to reject his initial demand, which the Company declined. There has been no further correspondence with either stockholder.
Legal Proceedings. Lehman Brothers International (Europe) (“LBIE”) Proceeding. On June 26, 2020, LBIE filed formal proceedings against two Firth Rixson entities (“Firth”) in the High Court of Justice, Business and Property Courts of England and Wales. The proceedings relate to interest rate swap transactions that Firth entered into with LBIE in 2007 to 2008. In 2008, LBIE commenced insolvency proceedings, an event of default under the agreements, rendering LBIE unable to meet its obligations under the swaps and suspending Firth’s payment obligations. In the court proceedings, LBIE seeks a declaration that Firth has a contractual obligation to pay the amounts owing to LBIE under the agreements upon its emergence from insolvency proceedings which is expected to occur by 2023, which LBIE claims to be approximately $64, plus applicable interest. Firth will continue to maintain its position that multiple events of default under the agreements related to LBIE’s insolvency proceeding cannot be cured or continue indefinitely, which the Company believes are meritorious defenses. A virtual hearing in this matter occurred on January 13 and 14, 2021 in London, England, and a ruling has yet to be issued to date. Given the importance of the case for LBIE and Firth, it is expected that irrespective of the outcome of the most recent hearing, the case will be appealed and any requirement for the parties to pay amounts under the agreements will be stayed. An appeal of the case could continue into 2023. The Company intends to vigorously defend against these claims.
Other. In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against the Company, including those pertaining to environmental, product liability, safety and health, employment, tax and antitrust matters. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot currently be determined because of the considerable uncertainties that exist. Therefore, it is possible that the Company’s liquidity or results of operations in a period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the results of operations, financial position or cash flows of the Company.
Commitments
Purchase Obligations. Howmet has entered into purchase commitments for raw materials, energy and other goods and services, which total $229 in 2022, $95 in 2023, $80 in 2024, $2 in 2025, and none in 2026 and thereafter.
Operating Leases. See Note Q for the operating lease future minimum contractual obligations.
Guarantees. At December 31, 2021, Howmet 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 2022 and 2040, was $15 at December 31, 2021.
Pursuant to the Separation and Distribution Agreement, dated as of October 31, 2016, between Howmet and Alcoa Corporation, Howmet was required to provide certain guarantees for Alcoa Corporation, which had a fair value of $6 and $12 at December 31, 2021 and 2020, respectively, and were included in Other noncurrent liabilities and deferred credits in the
Consolidated Balance Sheet. The remaining guarantee, for which the Company and Arconic Corporation are secondarily liable in the event of a payment default by Alcoa Corporation, relates to a long-term energy supply agreement that expires in 2047 at an Alcoa Corporation facility. The Company currently views the risk of an Alcoa Corporation payment default on its obligations under the contract to be remote. The Company and Arconic Corporation are required to provide a guarantee up to an estimated present value amount of approximately $1,406 and $1,398 at December 31, 2021 and 2020, respectively, in the event of an Alcoa Corporation payment default. In December 2020 and again in December 2021, a surety bond with a limit of $80 relating to this guarantee was obtained by Alcoa Corporation to protect Howmet's obligation. This surety bond will be renewed on an annual basis by Alcoa Corporation.
Letters of Credit. The Company has outstanding letters of credit, primarily related to workers’ compensation, environmental obligations, and leasing obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2022, was $119 at December 31, 2021.
Pursuant to the Separation and Distribution Agreements between the Company and Arconic Corporation and between the Company and Alcoa Corporation, the Company is required to retain letters of credit of $53 (which are included in the $119 in the above paragraph) that had previously been provided related to the Company, Arconic Corporation, and Alcoa Corporation workers’ compensation claims that occurred prior to the respective separation transactions of April 1, 2020 and November 1, 2016. Arconic Corporation and Alcoa Corporation workers’ compensation and letters of credit fees paid by the Company are proportionally billed to, and are reimbursed by, Arconic Corporation and Alcoa Corporation, respectively. Also, the Company was required to provide letters of credit for certain Arconic Corporation environmental obligations and, as a result, the Company has $17 of outstanding letters of credit relating to such liabilities (which are included in the $119 in the above paragraph). Less than $1 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.
Surety Bonds. The Company has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, and customs duties. The total amount committed under these annual surety bonds, which expire and automatically renew at various dates, primarily in 2022 and 2023, was $47 at December 31, 2021.
Pursuant to the Separation and Distribution Agreements between the Company and Arconic Corporation and between the Company and Alcoa Corporation, the Company is required to provide surety bonds of $25 (which are included in the $47 in the above paragraph) that had previously been provided related to the Company, Arconic Corporation, and Alcoa Corporation workers’ compensation claims paid that occurred prior to the respective separation transactions of April 1, 2020 and November 1, 2016. Arconic Corporation and Alcoa Corporation workers’ compensation claims and surety bond fees paid by the Company are proportionately billed to, and are reimbursed by, Arconic Corporation and Alcoa Corporation.
W. Subsequent Events
Management evaluated all activity of Howmet and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements, except as noted below:
See Note J for the common stock repurchases made subsequent to the fourth quarter of 2021.
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