UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 20192022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3610
HOWMET AEROSPACE INC.
(Exact name of registrant as specified in its charter)
| Delaware | 25-0317820 | |||||||
| (State of incorporation) | (I.R.S. Employer Identification No.) | |||||||
201 Isabella Street, Suite 200,, Pittsburgh,, Pennsylvania15212-5872
(Address of principal executive offices) (Zip code)
Investor Relations----------------(412) 553-1950
Office of the Secretary-----------(412) (412) 553-1940
(Registrant’s telephone numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $1.00 per share | New York Stock Exchange | |||||||
$3.75 Cumulative Preferred Stock, par value $100.00 per share | NYSE American | |||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ✓ No .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No ✓.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ✓ No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ✓ No .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [✓]☑ Accelerated filer []☐ Non-accelerated filer []☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ✓
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ✓.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). Yes ☐ No ☐
The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $11$13 billion. As of February 21, 2020,10, 2023, there were 435,918,568412,282,856 shares of common stock, par value $1.00 per share, of the registrant outstanding.
Documents incorporated by reference.
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for its 20202023 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (Proxy Statement).
Explanatory Note
On April 1, 2020, Arconic Inc. completed the separation of its business into two independent, publicly-traded companies: Howmet Aerospace Inc. (the new name for Arconic Inc.) and Arconic Corporation. The financial results of Arconic Corporation for all periods prior to April 1, 2020 have been retrospectively reflected in the Statement of Consolidated Operations as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods prior to April 1, 2020. The cash flows, comprehensive income, and equity related to Arconic Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows, Statement of Consolidated Comprehensive Income, and Statement of Changes in Consolidated Equity, respectively, for all periods prior to April 1, 2020.
TABLE OF CONTENTS
| Part I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Part III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| Part IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
Note on Incorporation by Reference
In this Form 10-K, selected items of information and data are incorporated by reference to portions of Howmet Aerospace Inc.’s definitive proxy statement for its 2023 Annual Meeting of Shareholders (the “Proxy Statement”), which we expect to file with the Proxy Statement.Securities and Exchange Commission within 120 days after Howmet Aerospace Inc.’s fiscal year ended December 31, 2022. Unless otherwise provided herein, any reference in this report to disclosures in the Proxy Statement shall constitute incorporation by reference of only that specific disclosure into this Form 10-K.
Forward-Looking Statements
This report contains (and oral communications made by ArconicHowmet Aerospace Inc. (“Howmet”) may contain) statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect Arconic’sHowmet’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, statements, forecasts and outlook relating to the growthcondition of the aerospace, automotive, commercial transportation and other end markets; statements and guidance regarding future financial results, operating performance, or operating performance; statements about Arconic’sestimated or expected future capital expenditures; future strategic actions; Howmet's strategies, outlook, and business and financial prospects; and any future dividends and repurchases of its debt or equity securities. These statements regarding potential share gains. Forward-looking statements are not guarantees of future performancereflect beliefs and are subject to risks, uncertainties, and changes in circumstancesassumptions that are difficult to predict.based on Howmet’s perception of historical trends, current conditions and expected future developments, as well as other factors Howmet believes are appropriate in the circumstances. Although ArconicHowmet believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties, and uncertainties.
changes in circumstances that are difficult to predict. For a discussion of some of the specific factors that may cause Arconic’sHowmet’s actual results to differ materially from those projected in any forward-looking statements, see the following sections of this report: Part I, Item 1A.1A (Risk Factors), Part II, Item 7.7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), including the disclosures under Segment Information and Critical Accounting Policies and Estimates, and Note VT to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data)8. Market projections are subject to the risks discussed in this report and other risks in the market. ArconicHowmet disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law.
PART I
Item 1. Business.
General
Howmet Aerospace Inc. (formerly known as Arconic Inc. (“Arconic” or the “Company”) is a global leaderDelaware corporation with its principal office in lightweight metals engineeringPittsburgh, Pennsylvania and manufacturing. Arconic’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, building and construction, industrial applications, defense, and packaging.
The Company’s Internet address is http://www.howmet.com. Howmet makes available free of the Company’s jurisdiction of incorporation from Pennsylvaniacharge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to Delaware (the “Reincorporation”) by merging (the “Reincorporation Merger”) with a direct wholly owned Delaware subsidiary, Arconic (in this section, “Arconic Delaware”those reports filed or following the Reincorporation, the “Company”),furnished pursuant to an Agreement and PlanSection 13(a) or 15(d) of Merger (the “Reincorporation Merger Agreement”), dated as of October 12, 2017, by and
Background
As described below, Howmet Aerospace Inc. was previously named Arconic Inc. and, prior to that, Alcoa Inc.
The Arconic Inc. Separation Transaction. On April 1, 2020, Arconic Inc. separated its businesses (the “Exchange Act”“Arconic Inc. Separation Transaction”), into two independent, publicly traded companies: Howmet Aerospace Inc. (the new name for Arconic Inc.) and (iii) Arconic Delaware is deemed to beCorporation. Following this separation, Howmet retained the successor issuerEngine Products, Fastening Systems, Engineered Structures, and Forged Wheels businesses; and its prior Rolled Products, Aluminum Extrusions, and Building and Construction Systems businesses were spun-off to Arconic Pennsylvania.
The 2017 Reincorporation in Delaware. On December 31, 2017, Arconic Inc., then a Pennsylvania corporation, changed its jurisdiction of common stock, par value $1.00 per share, of Arconic Delaware (the “Arconic Delaware Common Stock”). There was no change in the Exchange Act File Number assigned by the SEC as a result of the Reincorporation.incorporation from Pennsylvania to Delaware.
Alcoa CorporationInc. Separation Transaction
Transaction. On November 1, 2016, Alcoa Inc. completed the separation of its business (the “Alcoa Inc. Separation Transaction”) into two independent, publicly traded companies (the “Separation of Alcoa”) – Alcoa Corporation andcompanies: Arconic Inc. (the new name for Alcoa Inc., which, through the transactions described above, later became Howmet Aerospace Inc.). and Alcoa Corporation. Following this separation, the Separation of Alcoa, Alcoa Corporation holdsCompany retained the Engineered Products and Solutions, Global Rolled Products, and Transportation and Construction Solutions businesses; and its previous Alumina and Primary Metals segments, thebusinesses, rolling mill at theoperations in Warrick, Indiana operations and the 25.1% stakeinterest in the Ma’aden Rolling Company in Saudi Arabia previously held by the Company. The Company retained the Global Rolled Products (other than the rolling mill at the Warrick, Indiana operations and the 25.1% ownership stake in the Ma’aden Rolling Company), Engineered Products and Solutions and Transportation and Construction Solutions segments.
Overview
Howmet is a leading global provider of the parties following the Distribution of Alcoa, including the following: Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, certain Patent, Know-How, Trade Secret License and Trademark License Agreements, Toll Processing and Services Agreement, Master Agreementadvanced engineered solutions for the Supply of Primary Aluminum, Massena Leaseaerospace and Operations Agreement, Fusina Lease and Operations Agreement, and Stockholder and Registration Rights Agreement.transportation industries. The Toll Processing and Services Agreement expired by its terms at the end of 2018.
Howmet is a global company operating in 20 countries. Based upon the existing company, which will be renamedcountry where the point of shipment occurred, North America and Europe generated 71% and 22%, respectively, of Howmet’s sales in 2022. In addition, Howmet Aerospace Inc.has operating activities in numerous countries and change its stock ticker from “ARNC” to “HWM” in connection with the separation. The Global Rolled Products (GRP) businesses (global rolled products, aluminum extrusionsregions outside of North America and buildingEurope, including China and construction systems) will be held by a new company that will be named Arconic Corporation at separation and that intends to list its common stock on the New York Stock Exchange under the symbol “ARNC.”Japan.
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Description of the Business
For the Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
Innovative flat-rolled products | 39 | % | 40 | % | 39 | % | ||
| Engine products | 24 | % | 21 | % | 21 | % | ||
| Fastening systems | 11 | % | 11 | % | 11 | % | ||
| Engineered structures | 8 | % | 13 | % | 13 | % | ||
Aerospace (Commercial and machined metal products (titanium and aluminum) for various end markets.Defense) Market.
Commercial Transportation Market. The commercial transportation market represented approximately 23% of the Company’s revenue in April2022. The Company invented the forged aluminum truck wheel in 1948, and continues to advance technology to deliver breakthrough solutions that make trucks and buses lighter, more fuel efficient and sharper-looking. Howmet’s forged aluminum wheels are a leading choice for commercial trucks and mass transportation vehicles because they can reduce weight and save fuel. The strength of 2018, was moved to Corporate. In the first quarterCompany’s rivets, bolts and fasteners offers another light-weighting solution that delivers performance.
Industrial and Other Markets. Industrial and other markets include industrial gas turbines, oil and gas, and other industrials, which represented approximately 15% of 2019, the Company transferred its aluminum extrusions operations (Aluminum Extrusions) from itsCompany’s revenue in 2022.
Howmet has four reportable segments, which are organized by product on a worldwide basis: Engine Products, Fastening Systems, Engineered Structures business unit within the EP&F segment to the GRP segment, based on synergies with GRP including similar customer base, technologies, and manufacturing capabilities.Forged Wheels.
Fastening Systems. Systems
Fastening Systems produces aerospace and industrial fasteners, latches, bearings, fluid fittings and installation tools. In addition to highly engineered aerospace fasteners with a broad range of fastening systems, as well asthe segment also supplies the commercial transportation, fasteners.renewable, and material handling industries. The business’s high-tech, multi-material fastening systems are found nose to tail on commercial and military aircraft, and aero engines. The business’s products are also critical components ofas well as on jet engines, industrial gas turbines, automobiles, commercial transportation vehicles, wind turbines, solar power systems, and construction and industrial equipment.equipment.
Engineered Structures. Structures
Engineered Structures produces titanium and aluminum ingots and mill products for aerospace and defense applications and is vertically integrated to produce structural investment castings,titanium forgings, extrusions, forming and extrusions,machining services for airframe, wing, aero-engine, and landing gear components. Engineered Structures also provides multi-material airframe subassembliesproduces aluminum forgings, nickel forgings, and solutions related to advanced technologiesaluminum machined components and materials, such as 3D printingassemblies for aerospace and titanium aluminides.defense applications. The principal markets served by Engineered Structures are commercial aerospace, defense aerospace, and land and sea defense.
Forged Wheels.Wheels
Forged Wheels providesmanufactures forged aluminum wheels for trucks, buses, and trailers and related products for heavy-duty trucks and the global commercial transportation markets.market. The Company’s portfolio of wheels is sold under the product brand name Alcoa® Wheels, which are five times stronger and 47% lighter than steel wheels. The Ultra ONE® Wheel with MagnaForce® alloy is the lightest portfolio of wheels on the market. The Company’s proprietary Dura-Bright® surface treatment is unmatched in appearance and corrosion protection.
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For additional discussion of the EP&Feach segment's business, see “Results of Operations—Segment Information” in Part II, Item 7.7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note DB to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data)8.
Sales by Market and Significant Customer Revenue
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Aerospace - Commercial | 46 | % | 41 | % | 50 | % | |||||||||||
| Aerospace - Defense | 16 | % | 19 | % | 19 | % | |||||||||||
| Commercial Transportation | 23 | % | 23 | % | 16 | % | |||||||||||
| Industrial and Other | 15 | % | 17 | % | 15 | % | |||||||||||
In December 2019, Arconic c2022, General Electric Company and Raytheon Technologies Corporation represented approximately losed12% and 9%, respectively, of the saleCompany’s third-party sales. The loss of its forgings business in the United Kingdom subject to working capital and other adjustments. The forgings business primarily produced steel, titanium, and nickel based forged components for aerospace, mining, and off-highway markets and its operating results and assets and liabilities were included in the EP&F segment.any such significant customer could have a material adverse effect on such businesses. See Part I, Item 1A (Risk Factors).
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The Company's Principal Facilities1(1)
| Country | Facility Location | Segment | Products | |||||||||||||||||
| Australia | Oakleigh | Fastening Systems | Fasteners | |||||||||||||||||
| Canada | Georgetown, Ontario(2) | Engine Products | Aerospace Castings | |||||||||||||||||
| Laval, Québec | Engine Products; Engineered Structures | Aerospace Castings and Machining | ||||||||||||||||||
| China | Suzhou(2) | Engine Products; Fastening Systems; Forged Wheels | Fasteners, Rings and Wheels Machining | |||||||||||||||||
| France | Dives-sur-Mer | Engine Products | Aerospace and Industrial Gas Turbine Castings | |||||||||||||||||
| Evron | Engine Products | Aerospace and Specialty Castings | ||||||||||||||||||
| Gennevilliers | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
St. Cosme-en-Vairais | Fastening Systems | Fasteners | ||||||||||||||||||
| Toulouse | Fastening Systems | Fasteners | ||||||||||||||||||
| Us-par-Vigny | Fastening Systems | Fasteners | ||||||||||||||||||
| Germany | Bestwig | Engine Products | Aerospace Castings | |||||||||||||||||
| Erwitte | Engine Products | Machining of Aerospace Castings | ||||||||||||||||||
Hildesheim-Bavenstedt | Fastening Systems | Fasteners | ||||||||||||||||||
Kelkheim | Fastening Systems | Fasteners | ||||||||||||||||||
| Hungary | Nemesvámos | Fastening Systems | Fasteners | |||||||||||||||||
| Székesfehérvár | Engine Products; Forged Wheels | Aerospace and Industrial Gas Turbine Castings and Forgings | ||||||||||||||||||
| Japan | JÔetsu City | Wheels Machining | ||||||||||||||||||
| Nomi | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
| Mexico | Ciudad Acuña | Engine Products; Fastening Systems | Aerospace Castings/ | |||||||||||||||||
| Monterrey | Forged Wheels | Forgings | ||||||||||||||||||
| Morocco | Casablanca | Fastening Systems | Fasteners | |||||||||||||||||
| United Kingdom | Ecclesfield | Metal, Billets | ||||||||||||||||||
Exeter | Engine Products | Aerospace and Industrial Gas Turbine Castings and Alloy | ||||||||||||||||||
| Glossop | Metal, Billets | |||||||||||||||||||
| Ickles | Metal, Billets | |||||||||||||||||||
Leicester | Fastening Systems | Fasteners | ||||||||||||||||||
| Low Moor | Engineered Structures | Extrusions | ||||||||||||||||||
Redditch | Fastening Systems | Fasteners | ||||||||||||||||||
| Telford | Fastening Systems | Fasteners | ||||||||||||||||||
| Welwyn Garden City | Engineered Structures | Aerospace Formed Parts | ||||||||||||||||||
4
| Country | Facility Location | Segment | Products | |||||||||||||||||
| United States | Tucson, AZ(2) | Fastening Systems | Fasteners | |||||||||||||||||
Carson, CA(2) | Fastening Systems | Fasteners | ||||||||||||||||||
City of Industry, CA(2) | Fastening Systems | Fasteners | ||||||||||||||||||
| Fontana, CA | Engine Products | Rings | ||||||||||||||||||
Fullerton, CA(2) | Fastening Systems | Fasteners | ||||||||||||||||||
| Rancho Cucamonga, CA | Engine Products | Rings | ||||||||||||||||||
| Fastening Systems | Fasteners | |||||||||||||||||||
| Aerospace Coatings | ||||||||||||||||||||
| Aerospace Machining | ||||||||||||||||||||
| Forgings, Disks | ||||||||||||||||||||
| La Porte, IN | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
| Whitehall, MI | Engine Products | Aerospace and Industrial Gas Turbine Castings and Coatings, Titanium Alloy and Specialty Products | ||||||||||||||||||
| Washington, MO | Engineered Structures | Aerospace Formed Parts, Titanium Mill Products | ||||||||||||||||||
| Big Lake, MN | Engineered Structures | Aerospace Machining | ||||||||||||||||||
| New Brighton, MN | Engineered Structures | Aerospace Machining | ||||||||||||||||||
| Dover, NJ | Engine Products | Aerospace and Industrial Gas Turbine Castings and Alloy | ||||||||||||||||||
Kingston, NY | Fastening Systems | Fasteners | ||||||||||||||||||
| Rochester, NY | Engine Products | Rings | ||||||||||||||||||
| Barberton, OH | Wheels Machining | |||||||||||||||||||
Canton, OH | Titanium Mill Products | |||||||||||||||||||
| Cleveland, OH | Engine Products; Engineered Structures; Forged Wheels | Forgings, Investment Casting Equipment, and Aerospace Components | ||||||||||||||||||
| Niles, OH | Engineered Structures | Titanium Mill Products | ||||||||||||||||||
Morristown, TN | Engine Products | Aerospace and Industrial Gas Turbine Ceramic Products | ||||||||||||||||||
Houston, TX | Engineered Structures | Extrusions | ||||||||||||||||||
Waco, TX | Fastening Systems | Fasteners | ||||||||||||||||||
| Wichita Falls, TX | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
Hampton, VA | Engine Products | Aerospace and Industrial Gas Turbine Castings | ||||||||||||||||||
| Martinsville, VA | Engineered Structures | Titanium Mill Products | ||||||||||||||||||
5
Sources and Availability of Raw Materials
Important raw materials purchased in 20192022 for each of the Company’s reportable segments are listed below.
| Engine Products | Fastening Systems | Engineered | ||||||||||||||||||
| Energy | Energy | |||||||||||||||||||
| Cobalt | Energy | Nickel Alloys | Primary and Scrap Aluminum | |||||||||||||||||
| Nickel | Titanium Scrap | |||||||||||||||||||
| Titanium | ||||||||||||||||||||
| Vanadium Alloys | ||||||||||||||||||||
Generally, otherraw materials are purchased from third-party suppliers under competitively priced supply contracts or bidding arrangements. The Company believes that the raw materials necessary to its business are and will continue to be available.
Patents, Trade Secrets and Trademarks
The Company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The Company’s rights under its patents, as well as the products made and sold under them, are important to the Company as a whole and, to varying degrees, important to each business segment. The patents owned by ArconicHowmet generally concern metal alloys, particular products, manufacturing equipment or techniques. Arconic’sHowmet’s business as a whole is not, however, materially dependent on any single patent, trade secret or trademark. As a result of product development and technological advancement, the Company continues to pursue patent protection in jurisdictions throughout the world. As of the end of 2019,2022, the Company’s worldwide patent portfolio consists of approximately 1,635938 granted patents (1,004 EP&F patents and 631 GRP patents) and 538205 pending patent applications (284 EP&F patent applications and 254 GRP patent applications).applications.
The Company also has a significant number of trade secrets, mostly regarding manufacturing processes and material compositions that give many of its businesses important advantages in their markets. The Company continues to strive to improve those processes and generate new material compositions that provide additional benefits. With respect to domestic and international registered trademarks, the Company has many that have significant recognition within the markets that are served. Examples include the name “Arconic” and the Arconic symbol for aluminum, nickel, and titanium products, Howmet® metal castings, Huck® fasteners, Kawneer® building panels and Dura-Bright® wheels with easy-clean surface treatments. A significant trademark filing campaign for the names “Howmet” and “Howmet Aerospace” along with its “H” logo was initiated in 2019, in support of the corporate launch of Howmet Aerospace Inc. As of the end of 2019,2022, the Company’s worldwide trademark portfolio consists of approximately 2,0661,569 registered trademarks (1,450 EP&F trademarks and 616 GRP trademarks) and 81894 pending trademark applications (361 EP&F trademark applications and 457 GRP trademark applications).applications. The Company’s rights under its trademarks are important to the Company as a whole and, to varying degrees, important to each business segment.
Competitive Conditions
Principal competitors in the EP&F segment include Berkshire Hathaway Inc., through its 2016 acquisition of Precision Castparts Corporation and subsidiaries, for titanium and titanium-based alloys, precision forgings, seamless rolled rings,
investment castings, including airfoils, and aerospace fasteners; VSMPO (Russia) for titanium and titanium-based alloys and precision forgings; theAllegheny Technologies, Inc.’s High-Performance Materials & Components segment of Allegheny Technologies, Inc. (ATI) for titanium and titanium-based alloys and precision forgings, and investment castings;forgings; Lisi Aerospace (France) for aerospace fasteners; and Aubert & Duval (part of Eramet Group in France) for precision forgings. Other competitors include Doncasters Group Ltd. (U.K.) and Consolidated Precision Products Corp. (owned by Warburg Pincus and Berkshire Partners) for investment castings; Weber Metals (part of Otto Fuchs) for precision forgings; and Forgital and Frisa (Mexico) for seamless rings.
6
Several of Arconic’sHowmet’s largest customers have captive superalloy furnaces for producing airfoil investment castings for their own use. Many other companies around the world also produce superalloy investment castings, and some of these companies currently compete with ArconicHowmet in the aerospace and other markets, while others are capable of competing with the Company should they choose to do so.
International competition in the investment castings,, fasteners, rings and forgings markets may also increase in the future as a result of strategic alliances among engine original equipment manufacturers (OEMs)(“OEMs”), aero-structure prime contractors, and overseas companies, especially in developing markets, particularly where “offset” or “local content” requirements create purchase obligations with respect to products manufactured in or directed to a particular country.
regulations, see “Risk Factors.” Information relating to environmental matters is included in Note VT to the Consolidated Financial Statements in Part II, Item 8under the caption “Environmental Matters.” Approved
Human Capital
To attract, recruit, develop and retain world-class talent, the Company has created a culture that embraces diversity, drives inclusion, and empowers and engages our employees. Our Code of Conduct describes how we lead with integrity and work with one another while supporting our stakeholders. The Company provides competitive wages, benefits and terms of employment.
Attracting and recruiting candidates through workforce planning, increased hiring efficiency and effective onboarding has been a priority for the Company. The Company’s new Applicant Tracking System supports the dissemination of our job vacancies to a wider range of diverse partners. As an example, our campus recruitment platform provides an ability to proactively reach a broad talent network as the system of record for more than 9.2 million students and 1,300 schools across the United States. To retain new talent, the Company offers an onboarding program to develop a sense of belonging, teamwork and productivity that is uniform across the organization.
The Company enables our employees to own their development and create rewarding careers that draw on their aptitudes and support their ambitions. Using a human capital expendituresmanagement platform, employees can build a professional profile to share their career aspirations and learn new skills. This platform allows us to align employee goals and growth with the Company’s future business needs so that we can pinpoint potential successor candidates and build their readiness for new or expanded facilitiestheir future roles. Our talent review and succession planning process is an ongoing priority and is sponsored and led by our CEO with oversight by the Board of Directors.
We have started to use a data-driven approach to track how our employees are progressing through our organization. We seek to identify high performers and support their development into potential future leaders, with a particular focus on providing equitable opportunities to individuals who are members of underrepresented groups. Our Employee Resource Groups continue to be fundamental to building our culture of inclusion. Focusing on Gender, LGBTQ+, African Heritage, Hispanic, Veteran, European and Next Generation, these networks provide colleagues with valuable support and advice, create development opportunities, and provide leadership with feedback that raises awareness of issues and challenges. The Company also provides diversity awareness training and resources. Our Board of Directors and Executive Leadership team review diversity, equity and inclusion activity on a regular basis, and have been actively involved in ‘Meet the Leader’ sessions with our employees throughout the year.
Howmet’s strong health and safety culture empowers our employees and contractors to take personal responsibility for environmental control are $14 milliontheir actions and the safety of their coworkers. This culture is supported by internal policies, standards, rules and procedures that clearly articulate our stringent requirements for 2020working safely in all of our worldwide facilities. The Company embeds annual health and estimated expenditures for such purposes are $15million for 2021.safety goals and objectives into its operating plans to progress against our ultimate goal of zero incidents. We prioritize our risk management processes toward the prevention of fatality and serious injury.
Employees
Total worldwide employment at the end of 20192022 was approximately 41,70021,400 employees in 2823 countries. Many, but less than 50%,
Within the United States, there are eight collective bargaining agreements with varying expiration dates between Howmet and various labor unions. Of these eight, the largest workforce covered under a collective bargaining agreement is between Howmet and the United Autoworkers (“UAW”) at our Whitehall, Michigan location. This covers approximately 1,300 employees; the current agreement expires on March 31, 2023. The Whitehall, Michigan location has been preparing for the expiration of thesethis collective bargaining agreement over the course of several months and has started negotiations with the union prior to the
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agreement’s expiration date. In addition to the employees covered by the Whitehall UAW collective bargaining agreement, approximately 1,700 other employees in the United States are also represented by labor unions. The Company believes that relations with its employees and any applicable union representatives generally are good.
On a regional basis, collective bargaining agreements with varying expiration dates cover employees in Europe, and Russia, North America, South America, and Asia. The Company believes that it has positive relationships with its employees and any respective labor union representatives.
Executive Officers of the Registrant
The names, ages, positions and areas of responsibility of the executive officers of the Company as of February 26, 202014, 2023 are listed below. The Company’s executive officers are annually elected or appointed to serve until the next annual meeting of the Board of Directors (held in conjunction with the annual meeting of shareholders), except in the case of earlier death, retirement, resignation or removal.
Michael N. Chanatry, 62, Vice President and Chief Commercial Officer. Mr. Chanatry was initially elected Vice President and Chief Commercial Officer of Howmet effective May 16, 2018. Prior to joining Howmet, from 2015 to April 2018, he was Vice President of Supply Chain for General Electric’s Power Division. Mr. Chanatry served as General Manager of Supply Chain for General Electric Appliances from 2013 to 2015; and General Electric Aviation Systems from 2009 to 2013. Prior to his leadership roles at General Electric Power, General Electric Appliances and General Electric Aviation Systems, Mr. Chanatry held numerous positions within the General Electric Aviation & Aerospace divisions, as well as at Lockheed Martin from 1983 to 2009.
Ken Giacobbe, 54,57, Executive Vice President and Chief Financial Officer. Mr. Giacobbe was initially elected Executive Vice President and Chief Financial Officer of ArconicHowmet effective November 1, 2016. Mr. Giacobbe joined ArconicHowmet in 2004 as Vice President of Finance for Global Extruded Products, part of Alcoa Forgings and Extrusions. He then served as Vice President of Finance for the Company’s Building and Construction Systems business from 2008 until 2011. In 2011, he assumed the role of Group Controller for the Engineered Products and ForgingsSolutions segment. From January 2013 until October 2016, Mr. Giacobbe served as Chief Financial Officer of the Engineered Products and ForgingsSolutions segment. Before joining Arconic,Howmet, Mr. Giacobbe held senior finance roles at Avaya and Lucent Technologies.
Lola F. Lin, 48, Executive Vice President, Chief Legal and Compliance Officer and Secretary. Ms. Lin was initially elected Executive Vice President, Chief Legal Officer and Secretary of Howmet effective June 28, 2021. Prior to joining Howmet, she served as Senior Vice President and General Counsel of Airgas, Inc. from 2016 to May 2021. Prior to her time at Airgas, Ms. Lin held various legal roles at Air Liquide USA LLC from 2007 to 2016, including as Vice President and Deputy General Counsel. Prior to her roles at Airgas Inc. and Air Liquide, Ms. Lin held roles at Dell Inc., Sutherland Asbill & Brennan LLP and Locke Liddell & Sapp LLP.
Neil E. Marchuk, 62,65, Executive Vice President, Chief Human Resources.Resources Officer and Interim President, Fastening Systems. Mr. Marchuk was initially elected to his current positionExecutive Vice President and Chief Human Resources Officer of Howmet effective March 1, 2019. Prior to joining Arconic,Howmet, from January 2016 to February 2019, he was Executive Vice President and Chief Human Resources Officer at Adient, an automotive manufacturer. From July 2006 to May 2015, Mr. Marchuk was Executive Vice President of Human Resource at TRW Automotive, and served as TRW’s Vice President, Human Resources from September 2004 to July 2006. 2006. Prior to joining TRW, from December 2001 to August 2004, Mr. Marchuk was Director, Corporate Human Resources for E.I. Du Pont De Nemours and Company (“E.I. Du Pont”). From September 1999 to November 2001, Mr. Marchuk was Director, Global HR Delivery for E.I. Du Pont. From February 1999 to August 1999, Mr. Marchuk served E.I. Du Pont as its Global HR Director, Global Services Division.
John C. Plant, 66,69, Executive Chairman and Chief Executive Officer. Mr. Plant was appointed Howmet’s Chief Executive Officer effective October 14, 2021, and was Co-Chief Executive Officer from April 2020 to October 2021. From February 2019 to April 2020, he was the Chief Executive Officer of Arconic effective February 6, 2019.Inc., as the Company was then known prior to its separation. He has served as Arconic's Chairmanchairman of Howmet's Board of Directors since October 2017 and as a member of the Board since February 2016. Mr. Plant previously served as Chairman of the Board, President and Chief Executive Officer of TRW Automotive from 2011 to 2015, and as its President and Chief Executive Officer from 2003 to 2011. TRW Automotive was acquired by ZF Friedrichshafen AG in May 2015. Mr. Plant was a co-member of the Chief Executive Office of TRW Inc. from 2001 to 2003 and an Executive Vice President of TRW from 1999 (when the company's 1999 acquisition ofcompany acquired Lucas VarityVarity) to 2003. Prior to TRW, Mr. Plant was President of Lucas Varity Automotive and managing director of the Electrical and Electronics division from 1991 through 1997.
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Table of ANN INC., the parent company of ANN TAYLOR and LOFT brands, based in New York. Prior to ANN INC., she served as Vice President, Deputy General Counsel and Assistant Secretary at Colgate-Palmolive, where she held various legal roles from November 1997 to January 2013. She began her career as a litigator in New York, practicing at major law firms, including Cravath, Swaine & Moore and Sidley & Austin.Contents
Item 1A. Risk Factors.
Risks Related to Our Business and Operations
The markets for Arconic’sHowmet’s products are highly cyclical, and such markets and Howmet’s operationsare influenced by a number of factors, including global economic conditions.
In particular, Arconicaddition, Howmet derives a significant portion of itsour revenue from products sold to the aerospace industry, which can be highlyis cyclical and reflective of changes in the general economy. The commercial aerospace industry is historically driven by the demand from commercial airlines for new aircraft. The U.S.aircraft and international commercial aviation industries may face challenges arising from competitive pressures and fuel costs.spare parts. Demand for commercial aircraft and spare parts is influenced by airline industry profitability, trends in airline passenger traffic domestically and globally, the state of U.S., regional and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors including the effects of terrorism, health and safety concerns, environmental constraints imposed upon aircraft operators, the retirement of older aircraft, the performance and cost of alternative materials, and technological improvements to aircraft.factors. The militarydefense aerospace cycle is highly dependent on U.S. and foreign government funding; however,and, it is also driven by the effects of terrorism, a changing global politicalgeopolitical environment, U.S. foreign policy, the retirement ofwhether older military aircraft are retired, and technological improvements to new engines.
engines and airframes. Further, the demand for Arconic’s automotive and groundHowmet’s commercial transportation products is driven by the number of vehicles produced by automotive and commercial transportation manufacturers and volume of aluminum content per vehicle. The automotive industry is sensitive to general economic conditions, including credit markets and interest rates, and consumer spending and
The ongoing conflict between Russia and outsideUkraine has impacted global energy markets, particularly in Europe, leading to high volatility and increasing prices for crude oil, natural gas and other energy supplies. Higher energy costs result in increases in operating expenses at our manufacturing facilities, in the expense of shipping raw materials to our facilities, and in the expense of shipping products to our customers. The costs of certain raw materials (including, but not limited to, nickel, titanium, aluminum, industry.cobalt, and rhenium) necessary for the manufacture of Howmet’s products and other manufacturing and operating costs are influenced by market forces and governmental constraints, including inflation, supply and demand, and shortages, and could be further influenced by export limits, sanctions, new or increased import duties, and countervailing or anti-dumping duties. Recent high levels of inflation worldwide and in the United States has resulted in an increase in the costs of materials and labor. While we generally attempt to pass along higher raw material and energy costs to our customers through contractual agreements in the form of price increases, there can be a delay between an increase in our costs and our ability to increase the prices of our products. Additionally, we may not be able to increase the prices of our products due to competitive pricing pressure and other factors. If the Company is unable to offset significant cost increases through customer price increases, productivity improvements, cost reduction or other programs, Howmet’s business, operating results or financial condition could be materially adversely affected.
If Howmet’s operations, particularly one of its key manufacturing facilities, were to be disrupted, including because of significant competition, whichequipment failures, natural disasters, power outages, fires, explosions, terrorism, theft, sabotage, adverse weather conditions, public health crises, labor disputes, labor shortages or other reasons, Howmet may be unable to effectively meet its obligations to, or demand from, its customers. In addition, the manufacture of many of Howmet’s products is a complex process. Manufacturing problems arising from equipment failure or malfunction, inadvertent failure to follow regulatory or customer specifications and procedures, including those related to quality or safety, and problems with raw materials could have an adverse impact on the Company’s ability to fulfill orders or meet product quality or performance requirements, which may result in negative publicity and damage to our reputation, adversely impacting product demand and customer relationships. Interruptions in production capability could increase Howmet’s costs and reduce its sales, including causing the Company to
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incur costs for premium freight, make substantial capital expenditures, or purchase alternative material at higher costs to fulfill customer orders. Additionally, a delivery delay by us due to production interruptions could subject us to liability from customer claims that such delay resulted in losses to the customer. Furthermore, product manufacturing or performance issues could result in recalls, customer penalties, contract cancellation and product liability exposure in addition to a material adverse effect on profitability.
Howmet has supply arrangements with suppliers for various materials and services, including raw materials. We maintain annual or long-term contracts for a majority of our supply requirements, and, for the remainder, we depend on spot purchases. There can be no assurance that we will be able to renew, or obtain replacements for, any of our long-term contracts when they expire on terms that are as favorable as our existing agreements, or at all. For certain raw materials and services, we depend on a number of limited source or sole source suppliers. Supply constraints could impact our production or force us to purchase materials and other supplies from alternative sources, which may not be available in sufficient quantities or at prices that are favorable to us. Howmet could also have exposure if a key supplier is unable to deliver sufficient quantities of a necessary material on a timely basis. Several of our suppliers have recently had constraints on their ability to supply Howmet with its full requirements due to lack of capacity, labor shortages and/or material availability. If such constraints continue or escalate, it could result in an adverse impact on our business. Because of approval, license and qualification requirements applicable to manufacturers and/or their suppliers, sources of alternatives to mitigate supply disruptions may not be readily available to Howmet. Any delay in supply from these suppliers could prevent us from meeting customer demand for our products. The availability and costs of certain raw materials necessary for the production of Howmet’s products may also be influenced by private or government entities, including as a result of changes in geopolitical conditions or regulatory requirements, labor relations between the producers and their work forces, and unstable governments in exporting nations. Any of the foregoing supply chain disruptions or those due to trade barriers, business continuity, quality, cyberattacks, transportation, delivery or logistics challenges, weather, natural disaster, or pandemic events could adversely affect Howmet’s business, results of operations or financial condition.
Howmet’s business depends, in part, on its ability to successfully meet program demand, production targets and commitments.
Howmet is currently under contract to supply components for a number of existing and new commercial, general aviation, military aircraft and aircraft engine programs. Many of these contracts contemplate production increases over the next several years. If Howmet fails to meet production targets and commitments, or encounters difficulty or unexpected costs in meeting such levels, it could have a material adverse effect on the Company’s reputation, business, operating results andor financial condition. Similarly, to the extent demand for our products increases rapidly and significantly in future periods, we may not be able to ramp up production quickly enough to meet the demand, which could result in lost opportunities for growth and adversely affect our business, financial condition, results of operations or competitive position.
Howmet’s global operations require qualified and skilled personnel with relevant industry and technical experience. Shortages in certain skills, in areas such as engineering, manufacturing and technology, and other labor market inadequacies have created more competition for talent. A sustained labor shortage, lack of skilled labor, increased turnover, labor inflation, or increase in general labor costs could lead to higher labor, recruiting or training costs to attract and retain personnel. If the Company fails to attract, train, develop and retain a global workforce with the skills and in the locations we need to operate and grow our business, our business and operations could be adversely impacted. Furthermore, the continuity of key personnel and the preservation of institutional knowledge are vital to the success of the Company’s growth and business strategy. The loss of key personnel could significantly harm Howmet’s business, and any unplanned turnover or failure to develop adequate succession plans for key positions could deplete the Company’s institutional knowledge base, result in loss of technical or other expertise, delay or impede the execution of the Company’s business plans and erode Howmet’s competitiveness.
Howmet could be adversely affected by the loss of key customers or significant changes in the business or financial condition or the loss of a significant customer orits customers.
Additionally, a significant downturn or deterioration in the business or financial condition or loss of a key customer supplied by ArconicHowmet could adversely affect Arconic’sHowmet’s financial results. Arconic’s Howmet’s
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customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products, supply chain constraints or other difficulties in their businesses. For example, our sales were negatively affected by Boeing’s pause in 2019, Boeing announceddeliveries of its 787 aircraft from May 2021 through 2022 as a temporary reduction in the production rate of, and subsequently announced a temporary suspension of production of, the Boeing 737 MAX aircraft, which has resulted in, and is expected to continue to result in, a reduction in sales of aluminum sheet and plate and other products that Arconic produces for Boeing airplanes. As no firm timeline has been established for either the adjustment of Boeing’s manufacturing plans, or for returning the aircraft into service, we are currently unable to definitively quantify any such potential impact.
Information technology system failures, cyber attackscyberattacks and security breaches may threaten the integrity of Arconic’sHowmet’s intellectual property and other sensitive information, disrupt its business operations, and result in reputational harm and other negative consequences that could havehaving a material adverse effect on its financial condition and results of operations.
our data. The Company believes that it faces a heightened threatthreats of cyber attackscyberattacks due to the industries it serves, the locations of its operations, and its technological innovations. The Company has experienced cybersecurity attacks in the past, including breaches of its information technology systems in which information was taken, and may experience them in the future, potentially with more frequency or sophistication. Based on information known to date,Although past attacks havedid not hadresult in known losses of any critical data or have a material impact on Arconic’sHowmet’s financial condition or results of operations. However, due to the evolving nature of cybersecurity threats,operations, the scope and impact of any future incident cannot be predicted.
Our business, results of operations, financial condition and/or breaches could require significant management attention and resources,cash flows have been and could result incontinue to be adversely impacted materially by the diminutioncontinued effects of the value ofCOVID-19 pandemic.
The COVID-19 pandemic affecting the Company’s investment in researchglobal community has had and development.
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loss of customers, costs of supplies, supply chain disruptions, manufacturing difficulties and disruptions, investment returns, our credit profile, our credit ratings, and interest rates.
Howmet faces significant competition, which may have an adverse effect on profitability.
As discussed in “Competitive Conditions” in Part I, Item 1(Business) of this report, the markets for Howmet’s products are highly competitive. Howmet’s competitors include a variety of both U.S. and non-U.S. companies in our product markets, which could include existing customers. New entrants in our markets, new product offerings, new and/or emerging technologies in the marketplace, or new facilities may compete with or replace Howmet products. The willingness of customers to accept alternate solutions for the products sold by Howmet, pricing pressure from competitors, and technological advancements or other developments by or affecting Howmet’s competitors or customers could adversely affect Howmet’s business, financial condition or the market priceresults of its securities.
While ArconicHowmet intends to continue to develop innovative new products and services, it may not be able to successfully differentiate its products or services from those of its competitors or match the level of research and development spending of its competitors, including those developing technology to displace Arconic’s current products. In addition, Arconic may not be able to adapt to evolving markets and technologies or achieve and maintain technological advantages. There can be no assurance
In addition, Howmet may face increased competition due to industry consolidation. Companies that anyare strategic partners in some areas of Arconic’s newHowmet’s business may acquire or form alliances with Howmet’s competitors, thereby reducing their business with Howmet. Industry consolidation may result in stronger competitors who are better able to obtain favorable terms from suppliers or who are better able to compete as sole-source vendors for customers. Consolidation within Howmet’s customer base may result in customers who are better able to exert leverage in negotiating prices and other terms of sale, or may lead to reduced demand for Howmet’s products or services, development programs or technologies will be commercially adopted or beneficial to Arconic.
A decline in Arconic’sHowmet’s financial performance or outlook or a deterioration incould negatively impact its credit profile,could negatively impact the Company’s its access to capital markets reduce its liquidity and increase its borrowing costs.
An adverse decline in the liability discount rate, lower-than-expected investment return on pension assets and other factors could adversely affect Arconic’sHowmet’s results of operations or amount of pension funding contributions in future periods.
America. These valuations reflect assumptions about financial market and other economic conditions, which may change based ondue to changes in key economic indicators. The most significant year-end assumptions used by ArconicHowmet to estimate pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the expected long-term rate of return on plan assets. In addition, ArconicHowmet is required to make an annual measurement of plan assets and
liabilities, which may result in a significant charge to shareholders’ equity. For a discussion regarding how Arconic’sHowmet’s financial statements can be affected by pension and other postretirement benefits accounting policies, see “Critical Accounting Policies and Estimates-PensionEstimates—Pension and Other Postretirement Benefits” in Part II, Item 7. (Management’s(Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note HF to the Consolidated Financial Statements-Pension and Other Postretirement BenefitsStatements in Part II, Item 8. (Financial Statements and Supplementary Data). Although GAAP expense and pension funding contributions are impacted by different regulations and requirements, the key economic factors that affect GAAP expense would also likely affect the amount of cash or securities Arconic would contribute to the pension plans.
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Dividends and share repurchases fall within the discretion of our Board of Directors and depend on a number of factors.
Share repurchases and the declaration of dividends fall within the discretion of Howmet’s Board of Directors, and the Board’s decision regarding such matters depends on many factors, including Howmet’s financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of the Company’s debt obligations, industry practice, legal requirements, regulatory constraints and other factors that the Board deems relevant. There can be no assurance that the Company will declare dividends or repurchase stock in the future in any particular amounts, or at all.
Risks Related to Legal and Regulatory Matters
Howmet may be exposed to significant legal proceedings, investigations or changes in U.S. federal, state or foreign law, regulation or policy.
The manufacture and sale of our products expose Howmet to potential product liability, personal injury, property damage and related claims. In the event that a Howmet product fails to perform as expected, regardless of fault, or is used in an unexpected manner, and such failure or use results in, or is alleged to result in, bodily injury and/or property damage or other losses, Howmet may be subject to product liability lawsuits and other claims, or may participate in a recall or other corrective action involving such product. In addition, if a Howmet product is perceived to be defective or unsafe, Howmet’s sales could decrease, its reputation could be adversely impacted and Howmet could be exposed to government investigations or regulatory enforcement actions. Howmet is also subject to a variety of global legal and regulatory compliance risks in connection with its business and products. These risks include, among other things, potential claims, class action lawsuits or compliance issues, including those relating to securities laws, employment laws, intellectual property rights, cyber, security and privacy, insurance, commercial matters, antitrust and competition, human rights, third-party relationships, ESG (including climate-related/sustainability and other) rules and regulations, supply chain operations and the manufacture and sale of products. An adverse outcome in one or more of proceedings or investigations, or unfavorable changes in laws, regulations or policies, or other contingencies that the Company cannot predict with certainty, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows, including reputational harm, loss of customers and substantial monetary damages and/or non-monetary penalties. For additional information regarding the legal proceedings involving the Company, see Note Vto the Consolidated Financial Statements in Part II, Item 8.
Our business may be adversely affected if we fail to comply with government contracting regulations.
We derive a portion of our revenue from sales to U.S. and foreign governments and their respective agencies. Such contracts are subject to various procurement laws and regulations and contract provisions relating to their formation, administration and performance. New laws and regulations or changes to existing ones (including, but not limited to, those related to subcontracting, cybersecurity and specialty metals) can increase our risks and/or costs. Failure to comply with these laws, regulations or provisions in our government contracts could result in the imposition of various civil and criminal penalties, termination of contracts, forfeiture of profits, suspension of payments, increased pricing pressure or suspension from future government contracting. If our government contracts are terminated, if we are suspended from government work, or if our ability to compete for new contracts is adversely affected, our financial condition and results of operation could be adversely affected.
Howmet’s global operations expose Howmet to risks that could adversely affect its business, financial condition, results of operations, cash flows or the market price of its securities.
Howmet has operations or activities in numerous countries and regions outside the United States, including Europe, Mexico, China, and Japan. As a result, Howmet’s global operations are affected by economic, political, legal, and other conditions in the United States and foreign countries in which Howmet does business, including (i) economic and commercial instability risks, including changes in local government laws, regulations and policies, such as those related to tariffs, sanctions and trade barriers, taxation, exchange controls, employment regulations and repatriation of assets or earnings; (ii) geopolitical risks such as political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions, and renegotiation or nullification of existing agreements; (iii) war, cyber threats, terrorist activities or other dangerous conditions; (iv) compliance with applicable U.S. and foreign laws, including antitrust and competition regulations, the Foreign Corrupt Practices Act and other anti-bribery and corruption laws, and laws concerning trade, including the International Traffic in Arms Regulations, the Export Administration Regulations, and the sanctions, regulations and embargoes administered by the U.S. Department of Treasury’s Office of Foreign Assets Control; (v) aggressive, selective or lax enforcement of laws and regulations by foreign governmental authorities; (vi) exposure to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, economic factors, and currency controls in the countries in which it operates; and (vii) imposition of currency controls. Although the effect of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect Howmet’s business, financial condition or results of operations.
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Howmet may face challenges to its intellectual property rights which could adversely affect the Company’s reputation, business and competitive position.
Howmet owns important intellectual property, including patents, trademarks, copyrights and trade secrets. The Company’s intellectual property plays an important role in maintaining Howmet’s competitive position in a number of the markets that the Company serves. Howmet’s competitors may develop technologies that are similar or superior to Howmet’s proprietary technologies, or design around the patents Howmet owns or licenses. Despite its controls and safeguards, Howmet’s technology may be misappropriated by its employees, its competitors or other third parties. The pursuit of remedies for any misappropriation of Howmet intellectual property is expensive and the ultimate remedies may be deemed insufficient. Further, in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of misappropriation of Howmet intellectual property increases, despite efforts the Company undertakes to protect it. Developments or assertions by or against Howmet relating to intellectual property rights, and any inability to protect or enforce Howmet’s rights sufficiently, could adversely affect Howmet’s business and competitive position.
Unanticipated changes in Arconic’sHowmet’s tax provisions or exposure to additional tax liabilities could affect Arconic’sHowmet’s future profitability.
Labor disputes and other employee relations issues could adversely affect Arconic’sHowmet’s business, financial condition or results of operations.
A significant portion of Arconic’sHowmet’s employees are represented by labor unions in a number ofseveral countries under various collective bargaining agreements, each with varying durations and expiration dates. For more information, see “Employees” in Part I, Item 1. (Business) of this report. While Arconic previously has been successful in renegotiating its collective bargaining agreements with various unions, ArconicHowmet may not be able to satisfactorily renegotiate allnegotiate successor collective bargaining agreements upon expiration, in the United States and other countries, when they expire. In addition, existing collective bargaining agreements may not preventwithout a strikerisk of labor disputes, including strikes or work stoppage at Arconic’s facilities in the future. Arconicstoppages. Howmet may also be subject to general country strikes or work stoppages unrelated to its business or collective bargaining agreements. Any such labor disputes or work stoppages (or potential work stoppages) could have a material adverse effect on Arconic’sHowmet’s business, financial condition or results of operations.
In addition, the industrial activities conducted at Arconic’sHowmet’s facilities present a significant risk of injury or death to our employees customers or third parties that may be on site. We have experienced serious injuries in the past, notwithstanding the safety protocols, practices and precautions we take. Our operations are subject to regulation by various federal, state and local agencies in the United States, including the Occupational Safety and Health Administration, and regulation by foreign government entities abroad responsible for employee health and safety, including the Occupational Safety and Health Administration. From timesafety. Material liabilities relating to time, we have incurred fines for violations of various health and safety standards. While we maintain insurance and have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any injury, death or death that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage andother workers’ compensation claims could have a material adverse effect on our results of operations and financial condition or result in negative publicity and/or significant reputational harm.
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Table of new and changing requirements. For example, the European Union’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, imposed significant new requirements on how companies process and transfer personal data, as well as significant fines for non-compliance. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes, which could have a material adverse effect on Arconic’s financial condition and results of operations. In addition, the payment of potentially significant fines or penalties in the event of a breach of the GDPR or other privacy and information security laws, as well as the negative publicity associated with such a breach, could damage the Company’s reputation and adversely impact product demand and customer relationships.Contents
Increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap-and-trade systems and additional limits on emissions of greenhouse gases, or Corporate Average Fuel Economy (CAFE) standardswhich in the United States.turn may trigger customer decarbonization requirements. New or revised laws, regulations and regulationspolicies in this area and customer decarbonization requirements could directly and indirectly affect ArconicHowmet and its customers and suppliers, including by increasing the costs of production or impacting demand for certain products, which could result in an adverse effect on our financial condition, results of operations and cash flows. Additionally, Howmet utilizes natural gas, electricity and other fuels to operate its facilities. Significant increased energy costs and/or costs to transition to renewable energy sources, as a result of new laws, such as carbon pricing or product energy efficiency requirements, or as a result of customer requirements, could be passed along to the Company and its customers and suppliers. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by the Company or its customers or suppliers. Also, Arconic relies
Physical risks associated with climate change may result in an increase of the exposure to, and impact of, events with damage due to flooding, extreme winds and extreme precipitation for Howmet locations, suppliers or customers. Prolonged periods of drought may result in wildfires and/or restrictions on natural gas, electricity, fuel oilprocess water use. These climate-related impacts may have an adverse effect on production capacity of Howmet sites, suppliers and transport fuel to operate its facilities. Any increased costscustomers. These types of these energy sources becauseincidents could have a material adverse effect on our results of new laws could be passed alongoperations and financial condition.
With respect to the Company and its customers and suppliers, which could also have a negative impact on Arconic’s profitability.
In connection with our separation transactions, we entered into various agreements with Arconic announcedCorporation and Alcoa Corporation, including respective Separation and Distribution agreements pursuant to which Arconic Corporation and Alcoa Corporation agreed to indemnify us for certain liabilities, and we agreed to indemnify those parties for certain liabilities. We rely on these parties to satisfy their performance and payment obligations under these agreements. If either party is unable or unwilling to satisfy its obligations under its applicable agreements, we could incur operational difficulties and/or material losses. The indemnities that it expectedwe are required to reduceprovide Alcoa Corporation and Arconic Corporation under these agreements are currently not material. If either Alcoa Corporation or Arconic Corporation, as applicable, is not able to fully satisfy its quarterly common stock dividend from $0.06indemnification obligations to $0.02 per share. us, we may be required to bear such losses. Each of these risks could negatively affect our business, results of operations and financial condition.
The Arconic Board of Directors’ decisions regarding the payment of dividends will depend on many factors, such as Arconic’s financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of the Company’s debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that Arconic’s Board of Directors deems relevant. Arconic’s Board of Directors may determine to further reduce or eliminate Arconic’s common stock dividend in the event of material future deteriorations in business conditions or in other circumstances.
It was a condition to the Distributiondistribution of Alcoa that (i) the private letter ruling from the Internal Revenue Service (the “IRS”) regarding certain U.S. federal income tax matters relatingall outstanding shares of Arconic Corporation common stock to the Company’s stockholders (the “Distribution of Arconic”), which effected the Arconic Inc. Separation of Alcoa and the Distribution of Alcoa received by Arconic remain valid and be satisfactory to Arconic’s Board of Directors and (ii) ArconicTransaction, that we receive an opinion of itsour outside counsel satisfactory to the Board of Directors, regarding the qualification of the Distribution of Alcoa, together with certain related transactions,distribution as a transaction that is generally tax-free, for U.S. federal income tax purposes, under“reorganization” within the meaning of Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). Both of these conditions wereThis condition was satisfied prior to the Distribution of Alcoa.Arconic. However, if any of the IRS private letter ruling and the opinion of counsel were based upon and relied on, among other things, various facts, and assumptions, as well as certain representations, statements andor undertakings of Arconic and Alcoa Corporation, including those relating to the past and future conduct of Arconic and Alcoa Corporation. If any of these representations, statements or undertakingsopinion is, or becomes, inaccurate or incomplete, or if Arconic or Alcoa Corporation breaches any of its representations or covenants contained in any of the Separation of Alcoa-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel, the IRS private letter ruling and/or the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.
conclusions in the opinion of counsel. Accordingly, notwithstanding receipt by Arconic of the IRS private letter ruling and the opinion of counsel, there can be no assurance that the IRS will not assert that the Distribution of Alcoa and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes or that a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, Arconic, Alcoa Corporationwe, our stockholders and Arconic shareholdersCorporation could be subject to significant U.S. federal income tax liability.
Under the Tax Matters Agreement that Arconictax matters agreement we entered into with AlcoaArconic Corporation Alcoain connection with the Arconic Inc. Separation Transaction, Arconic Corporation may be required to indemnify Arconic againstus for any additional taxes and related amounts resulting from (i) an acquisition of all or a portion of the equity securities or assets of Alcoa Corporation, whether by merger or otherwise (and regardless of whether Alcoa Corporation participated in or otherwise facilitated the acquisition), (ii) issuing equity securities beyondseparation due to certain thresholds, (iii) repurchasing shares of Alcoa Corporation stock other than in certain open-market transactions, (iv) ceasing actively to conduct certain of its businesses, (v) other actions, or failures to act by Alcoa Corporation or (vi) any of Alcoaincluding Arconic Corporation’s representations, covenants or undertakings contained in any of the Separation of Alcoa-relatedseparation agreement and certain other agreements, and documents or in any documents relating to the IRS private letter ruling and/orincluding the opinion of counsel, being incorrect or violated. However, the indemnity from AlcoaArconic Corporation may not be insufficientable to protect Arconic against the full amount of such additional taxes or related liabilities, and Alcoa Corporation may be unable tofully satisfy its indemnification obligations fully. Moreover, even if Arconic ultimately succeeds in recovering from Alcoa Corporation any amounts for which Arconic is held liable, Arconic may be temporarily required to bear such losses.obligations. In addition, Arconic and Arconic’s subsidiarieswe may incur certainother tax costs in connection with the Arconic Inc. Separation of Alcoa,Transaction, including non-U.S. tax costs resulting from separationstransactions in non-U.S. jurisdictions, which may be material. Each of these risks could negatively affect Arconic’sour business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
areas. See the table and related textregarding the Company's principal facilities in the Engineered Products and Forgings FacilitiesPart I, Item 1 section on page 7 of this report.(Business).
Item 3. Legal Proceedings.
In the ordinary course of its business, ArconicHowmet is involved in a number of lawsuits and claims, both actual and potential.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is listed on the New York Stock Exchange.Exchange under the symbol “HWM.” Prior to the Arconic Inc. Separation of Alcoa Corporation fromTransaction on April 1, 2020, the Company the Company’s common stock tradedwas known as Arconic Inc. and was listed under the symbol “AA.” In connection with the Separation of Alcoa, on November 1, 2016, the Company changed its stock symbol and its common stock began trading under the symbol “ARNC.”
The number of holders of record of common stock was approximately 10,8749,404 as of February 21, 2020.13, 2023.
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Stock Performance Graph
The following graph compares the most recent five-year performance of the Company’s common stock with (1) the Standard & Poor’s (S&P)(“S&P”) 500® Index, (2) the S&P 500® Industrials Index, a group of 70 companies categorized by Standard & Poor’s as active in the “industrials” market sector, and (3) the S&P Aerospace & Defense Select Industry Index, a group of 32 companies categorized by Standard & Poor’s as active in the “aerospace & defense” industry. which comprises General Dynamics Corporation, Howmet Aerospace Inc., Huntington Ingalls Industries, L3Harris Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Technologies Corporation, Textron Inc., The Boeing Company, and Transdigm Group Inc.
The graph assumes, in each case, an initial investment of $100 on December 31, 2014,2017, and the reinvestment of dividends. HistoricalThe historical prices prior toof the Separation of Alcoa on November 1, 2016,Company presented in the graph and table have been adjusted to reflect the valueimpact of the April 2020 Arconic Inc. Separation transaction.Transaction. Because the starting point of the graph is December 31, 2017, the effect of the November 2016 Alcoa Inc. Separation Transaction is already reflected in the Company’s stock price on December 31, 2017. The graph, table and related information shall not be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
| As of December 31, | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||||||||||||||||||||||
| Howmet Aerospace Inc. | $ | 100.00 | $ | 62.78 | $ | 115.45 | $ | 139.82 | $ | 156.14 | $ | 193.87 | |||||||||||||||||||||||||||||
S&P 500® Index | 100.00 | 95.62 | 125.72 | 148.85 | 191.58 | 156.89 | |||||||||||||||||||||||||||||||||||
S&P 500® Industrials Index | 100.00 | 86.71 | 112.17 | 124.59 | 150.89 | 142.63 | |||||||||||||||||||||||||||||||||||
| S&P Aerospace & Defense Index | 100.00 | 91.93 | 119.81 | 100.56 | 113.86 | 133.64 | |||||||||||||||||||||||||||||||||||
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| As of December 31, | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||
| Arconic Inc. | $ | 100 | $ | 63.15 | $ | 53.54 | $ | 79.44 | $ | 49.70 | $ | 91.24 | |||||||||||
S&P 500® Index | 100 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 | |||||||||||||||||
S&P 500® Industrials Index | 100 | 97.47 | 115.85 | 140.22 | 121.58 | 157.29 | |||||||||||||||||
| S&P Aerospace & Defense Select Industry Index | 100 | 105.43 | 125.36 | 177.24 | 162.93 | 212.35 | |||||||||||||||||
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
| October 1 - October 31, 2019 | — | $ | — | — | $ | 400,000,000 | ||||||||
November 1 - November 30, 2019(2) | 1,626,681 | $ | 30.74 | 1,626,681 | $ | 350,000,000 | ||||||||
| December 1 - December 31, 2019 | — | $ | — | — | $ | 350,000,000 | ||||||||
Total for quarter ended December 31, 2019 | 1,626,681 | |||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)(1)(2) | ||||||||||||||||||||||
| October 1 - October 31, 2022 | — | $ | — | — | $ | 1,012 | ||||||||||||||||||||
| November 1 - November 30, 2022 | — | $ | — | — | $ | 1,012 | ||||||||||||||||||||
| December 1 - December 31, 2022 | 1,677,711(3) | $ | 38.83 | 1,674,082 | $ | 947 | ||||||||||||||||||||
| Total for quarter ended December 31, 2022 | 1,677,711 | $ | 38.83 | 1,674,082 | ||||||||||||||||||||||
(1)Excludes commissions cost.
(2)On February 5, 2018,August 18, 2021, the Company announced that its Board of Directors (the Board) had authorized thea share repurchase program of up to $500$1,500 million of the Company's outstanding common stockstock. After giving effect to the share repurchases made through the fourth quarter of 2022, approximately $947 million Board authorization remained available as of January 1, 2023. Under the Company’s share repurchase programs (the "February 2018 Share“Share Repurchase Program"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 wasis no stated expiration for the February 2018 Share Repurchase Program, and no shares were repurchased during 2018. On February 8, 2019,Programs. Under its Share Repurchase Programs, the Company announced thatmay repurchase shares from time to time, in amounts, at prices, and at such times as the Board had authorizedCompany deems appropriate, subject to market conditions, legal requirements and other considerations. The Company is not obligated to repurchase any specific number of shares or to do so at any particular time, and the repurchaseShare Repurchase Programs may be suspended, modified or terminated at any time without prior notice.
(3)Amount includes the surrender of an additional $500 million3,629 shares of the Company's outstandingHowmet common stock effective throughby a participant in the end of 2020. On May 20, 2019,Company’s stock incentive plan to the Company announced thatto satisfy the Board had authorizedexercise price and tax withholding obligations of employee stock options at the repurchasetime of a further $500 millionexercise. These surrendered shares are not part of the Company's outstanding common stock (the "May 2019any Share Repurchase Program"). There was no stated expiration for the May 2019 Share Repurchase Program.Programs.
Item 6. Selected Financial Data.
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| For the year ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Sales | $ | 14,192 | $ | 14,014 | $ | 12,960 | $ | 12,394 | $ | 12,413 | |||||||||
| Amounts attributable to Arconic: | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 470 | $ | 642 | $ | (74 | ) | $ | (1,062 | ) | $ | (157 | ) | ||||||
| Income (loss) from discontinued operations | — | — | — | 121 | (165 | ) | |||||||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | $ | (941 | ) | $ | (322 | ) | ||||||
| Earnings (loss) per share attributable to Arconic common shareholders: | |||||||||||||||||||
| Basic: | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 1.05 | $ | 1.33 | $ | (0.28 | ) | $ | (2.58 | ) | $ | (0.54 | ) | ||||||
| Income (loss) from discontinued operations | — | — | — | 0.27 | (0.39 | ) | |||||||||||||
| Net income (loss) | $ | 1.05 | $ | 1.33 | $ | (0.28 | ) | $ | (2.31 | ) | $ | (0.93 | ) | ||||||
| Diluted: | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 1.03 | $ | 1.30 | $ | (0.28 | ) | $ | (2.58 | ) | $ | (0.54 | ) | ||||||
| Income (loss) from discontinued operations | — | — | — | 0.27 | (0.39 | ) | |||||||||||||
| Net income (loss) | $ | 1.03 | $ | 1.30 | $ | (0.28 | ) | $ | (2.31 | ) | $ | (0.93 | ) | ||||||
| Cash dividends declared per common share | $ | 0.12 | $ | 0.24 | $ | 0.24 | $ | 0.36 | $ | 0.36 | |||||||||
| Total assets | 17,578 | 18,693 | 18,718 | 20,038 | 36,477 | ||||||||||||||
| Total debt | 5,940 | 6,330 | 6,844 | 8,084 | 8,827 | ||||||||||||||
| Cash provided from (used for) operations | 406 | 217 | (39 | ) | 95 | 764 | |||||||||||||
| Capital expenditures: | |||||||||||||||||||
| Capital expenditures—continuing operations | 586 | 768 | 596 | 827 | 789 | ||||||||||||||
| Capital expenditures—discontinued operations | — | — | — | 298 | 391 | ||||||||||||||
| Total capital expenditures | $ | 586 | $ | 768 | $ | 596 | $ | 1,125 | $ | 1,180 | |||||||||
Table of Alcoa”). The results of operations of Alcoa Corporation for all periods prior to the Separation of Alcoa were retrospectively reflected in the table above as discontinued operations and, as such, were excluded from continuing operations for all prior periods presented prior to the Separation of Alcoa. The cash flow information presented in the table above included the cash flows related to Alcoa Corporation for the first ten months of 2016 and full year 2015.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in millions, except share and per-share amounts; shipmentsamounts)
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in thousandsconjunction with, our consolidated financial statements and notes thereto included in Part II, Item 8 (Financial Statements and Supplementary Data) of metric tons [kmt])this Form 10-K.
Overview
Our Business
Management Review of 20192022 and Outlook
The Company derived approximately 46% of its revenue from products sold to the commercial aerospace market for the Futureyear ended December 31, 2022 which is substantially less than the pre-pandemic 2019 annual rate of approximately 60%. Due to the global COVID-19 pandemic and its impact on the commercial aerospace industry to date, there has been a decrease in domestic and international air travel, which in turn has adversely affected demand for narrow-body and wide-body aircraft. Although domestic air travel now approximates pre-pandemic levels, China domestic air travel is still below pre-pandemic 2019 levels on an average monthly basis in 2022. International travel also continues to be lower than pre-pandemic 2019 levels. We expect commercial aerospace growth to continue, with narrow-body demand returning faster than wide-body demand. The commercial wide-body aircraft market is taking longer to recover, which is creating a shift in our product mix compared to pre-pandemic conditions. In addition to the impact from the pandemic, the timing and level of future aircraft builds by OEMs are subject to changes and uncertainties, such as declines in Boeing 787 production rates due to delays in its recertification, which may cause our future results to differ from prior periods due to changes in product mix in certain segments.
In 2019,2022, Sales increased 1%14% over 20182021 primarily as a result of volume growthhigher sales in the commercial aerospace packaging, commercial transportation, and industrial end markets;market, an increase in material cost pass through of $225, and favorable product pricing in the Global Rolled Products (GRP) and Engineered Products and Forgings (EP&F) segments;of $67, partially offset by lower aluminum prices;sales in the defense aerospace market. Price increases are in excess of material and inflationary cost pass through to our customers.
Income from continuing operations before income taxes increased 87% from 2021. Total Segment Adjusted EBITDA(1) increased 13% from 2021 due to favorable sales in the commercial aerospace market, cost reductions, and favorable product pricing, partially offset by Boeing 787 production declines and lower sales of $216 from divestitures of forgings businesses in the United Kingdom (divested in December 2019)defense aerospace market and Eger, Hungary (divested in December 2018), Latin America extrusions (divested in April 2018), and the completed ramp down of Arconic's North American packaging operations (in December 2018). In the segments, Segment operating profit increased 27% from 2018 due to favorable product pricing, net cost savings, lower raw material costs including aluminum price, and higher volumes, partially offset by the impact of the Tennessee plant transition to industrial production, operational challenges at one aluminum extrusions plant, and higher variable compensationinflationary costs.
Management continued its focus on liquidity and cash flows as well as improving its operating performance through cost reductions, streamlined organizational structures, margin enhancement, and profitable revenue, generation.efficient operations, and margin enhancement. Management has also continued its intensified focus on capital efficiency. ThisManagement’s focus and the related results enabled ArconicHowmet to end 20192022 with a solid financial position.
The following financial information reflects certain key highlights of Arconic’s 2019Howmet’s 2022 results:
•Sales of $14,192, up 1%$5,663, an increase of 14% from 2018,2021, with growthhigher sales in key end markets, and the commercial aerospace market;
•Net income from continuing operations of $470,$469, or $1.03$1.11 per diluted share;
•Income from continuing operations before income taxes of $606, an increase of $282, or 87%, from 2021; •Total Segment Adjusted EBITDA(1) of $1,352, an increase of $152, or 13%, from 2021; • |
Cash on hand and restricted cash at the end of the year of $1,648;$792;
•Cash provided from operations of $733; cash used for financing activities of $526; and cash used for investing activities of $135;
•Purchased approximately 11 million shares of Common Stock under the Share Repurchase Programs for approximately $400;
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•Total debt of $5,940,$4,162, a decrease of $390$70 from 2018,2021, reflecting repaymentrepurchases of $403$69 of convertible notesthe 5.125% Notes due October 2024 (the “5.125% Notes”) during 2022; and
•The Company’s common stock had a closing price of $39.41 per share at December 30, 2022, an increase of $26.21 per share, or 199%, since the Arconic Inc. Separation Transaction on April 1, 2020, compared to an increase of 55% for both the S&P 500® Index and S&P Aerospace & Defense Select Industry Index over the same period.
(1)See below in October 2019.
In 2023, management projects sales to increase as we expect solid growth in the commercial aerospace market, and related information, see page 43.
Results of Operations
Earnings Summary
Sales. Sales for 20192022 were $14,192$5,663 compared with $14,014$4,972 in 2018,2021, an increase of $178,$691, or 1%14%. The increase was primarily due to volumehigher sales in the commercial aerospace market, an increase in material cost pass through of $225, and favorable product pricing of $67, partially offset by lower sales in the defense aerospace market. Price increases are in excess of material and inflationary pass through to our customers.
Sales for 2021 were $4,972 compared with $5,259 in 2020, a decrease of $287, or 5%. The decrease was primarily due to lower sales in the commercial aerospace market driven by the impact of COVID-19 and Boeing 787 production declines and lower sales in the defense aerospace market, partially offset by growth in the aerospace, packaging, commercial transportation and industrial end markets;gas turbine markets as well as favorable product pricing of $97. Price increases are in excess of material and mix in the GRP segment; and favorable product pricing in the EP&F segment when fulfilling volume above contractual share, renewing contracts, and selling non-contractual spot business; partially offset by lower aluminum prices; lower sales of $216 from the completed ramp down of Arconic's North American packaging operations (in December 2018) and the divestitures of forgings businesses in the United Kingdom (divested in December 2019) and Hungary (divested in December 2018), and the Latin America extrusions business (divested in April 2018); and unfavorable foreign currency movements.
Cost of Goods Sold (COGS)goods sold (“COGS”). COGS as a percentage of Sales was 79.1%72.5% in 20192022 compared with 81.3%72.3% in 2018.2021. The decreaseincrease was primarily due to lower raw materialincreased costs including aluminum prices; net cost savings; favorable product pricing; and costs incurred in 2018 that did not recur in 2019 related to settlements of certain customer claims of $38 noted abovethree plant fires, as well as material cost pass through and a charge related to a physical inventory adjustment at one plantincreased net headcount, primarily in the GRP segmentEngine Products and Fastening Systems segments, in anticipation of $23. These positive impacts werefuture revenue increases, partially offset by unfavorablehigher volumes and favorable product mix; a charge for environmental remediation at Grasse Riverpricing. The Company had total COGS charges of $25; the impairment$59 in 2022, offset by partial insurance claims reimbursements of energy business assets of $10; and a charge primarily for a one-time signing bonus for employees associated with the collective bargaining agreement negotiation of $9. In June of 2019 the Company and the United Steelworkers reached a tentative three-year labor agreement covering approximately 3,400 employees at four U.S. locations; the previous labor agreement expired on May 15, 2019. The tentative agreement was ratified on July 11, 2019. Additionally,$23, related to fires that occurred in 2019 the Company sustained a fire at a fastenersFastening Systems plant in France (the “France Plant Fire”), at a Forged Wheels plant in Barberton, Ohio in mid-February 2020 (the “Barberton Plant Fire”), and recordeda mechanical failure resulting in substantial heat and fire-related damage to equipment at the Company’s cast house in Barberton, Ohio in the third quarter of 2022 (the “Barberton Cast House Incident”), compared to total COGS charges of $26 for higher operating costs, equipment$28 in 2021, offset by partial insurance claims reimbursements of $32, related to the France Plant Fire and inventory damage, and repairs and cleanup costs.the Barberton Plant Fire. The Company submitted an insurance claim and received a partial settlement of $25, which wasclaims related to these three plant fires were in excess of its $10the insurance deductible. TheDuring the fourth quarter of 2022, the Company settled the insurance claim included $8 of margin not recognized from lost revenue duerelated to the fire.Barberton Plant Fire. The downtime related to these plant fires in 2022 and 2021 reduced production levels and affected productivity at the plants. The Company anticipates a chargeadditional charges related to these plant fires of approximately $5 to $10 to $15 in the first quarter of 2020, with additional impacts in subsequent quarters as the business continues to recover from the fire, which are also expected to be covered by insurance proceeds.2023.
COGS as a percentage of Sales was 81.3%72.3% in 20182021 compared with 78.9%73.7% in 2017.2020. The increasedecrease was primarily due to structural cost reductions and favorable product pricing. Additionally, the result of higher aluminum prices; unfavorable aerospace product mix; higher transportation costs; manufacturing inefficiencies in Engineered Structures; performance shortfalls in the Disks asset group; costs related to settlements of certain customerCompany submitted insurance claims noted above; and the impact of a charge related to a physical inventory adjustment at one plant in the GRP segment of $23 that was recorded in the second quarter of 2018. While a portion of this charge for the physical inventory adjustment related to prior years, the majority related to the first halfFrance Plant Fire and Barberton Plant Fire and received partial settlements of 2018.$32 in 2021 compared to $39 in 2020, which were in excess of the insurance deductibles. In 2021, the Company recorded charges of $28 related to plant fires compared to $41 in 2020. The out-of-period amounts were not material to any interim or annual periods.downtime reduced production levels and affected productivity at the plants.
Selling, General Administrative,general administrative, and Other Expenses (SG&A)other expenses (“SG&A”). SG&A expenses were $704,$288, or 5.1% of Sales, in 2022 compared with $251, or 5.0% of Sales, in 2019 compared with $604, or 4.3% of Sales, in 2018.2021. The increase in SG&A of $100,$37, or 17%15%, was primarily due to higher employment, travel, and lease costs associated with the planned Separation of Arconic of $78 and higher annual incentive compensation accruals and executive compensation costs, partially offset by lower costs driven by overhead cost reductions and lower netin 2022, as well as legal and other advisory costs related to Grenfell Tower of $10, primarily due to insurance reimbursements.reimbursements received in 2021 that did not recur in 2022.
SG&A expenses were $604,$251, or 4.3%5.0% of Sales, in 20182021 compared with $715,$277, or 5.5%5.3% of Sales, in 2017.2020. The decrease in SG&A of $111,$26, or 16%9%, was the result of proxy, advisoryprimarily due to overhead cost reductions in 2021 and governance-related costs of $58, costs related to the Separation of Alcoa Inc. of $18, and costsincurred in 2020 associated with the Company’s Delaware reincorporation of $3Arconic Inc. Separation Transaction that did not recur in 2017, none of which recurred in 2018.
Research and Development Expenses (R&D)development expenses (“R&D”). R&D expenses were $70$32 in 20192022 compared with $103$17 in 2018.2021. The decreaseincrease of $33,$15, or 32%88%, was primarily due to the consolidation of the Company's primary R&D facility in conjunction with ongoing cost reduction efforts.higher spending on technology projects across all segments.
R&D expenses were $103$17 in 2018 compared with $109 in 2017. The decreaseboth 2021 and 2020.
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Provision for Depreciationdepreciation and Amortization (D&A)amortization (“D&A”). The provision for D&A was $536$265 in 20192022 compared with $576$270 in 2018.2021. The decrease of $40,$5, or 7%2%, was primarily driven by lower corporate software amortization and reduced depreciation due to the impactsale of divestitures,the corporate center.
The provision for D&A was $270 in 2021 compared with $279 in 2020. The decrease of $9, or 3%, was primarily driven by lower corporate software amortization and research center depreciation as well as asset impairments$1 of D&A related to the Barberton Plant Fire in 2021 compared to $6 in 2020.
Restructuring and other charges. Restructuring and other charges were $56 in 2022 compared with $90 in 2021 and $182 in 2020.
Restructuring and other charges in 2022 consisted primarily of a $58 charge for U.S. and United Kingdom (“U.K.��) pension plans' settlement accounting and a $6 charge for various other exit costs. These charges were partially offset by a gain of $8 on the sale of assets at a small U.S. manufacturing facility in Engine Products. The Company has closed some small manufacturing facilities and may in the EP&F segment duringfuture close additional small facilities in order to consolidate operations, reduce fixed costs, and exit less profitable businesses.
Restructuring and other charges in 2021 consisted primarily of a $75 charge for U.K. and U.S. pension plans’ settlement accounting, a $15 charge for accelerated depreciation primarily related to the second quarterclosure of 2019 (see small U.S. manufacturing facilities in Engine Products and Fastening Systems, a $7 charge for layoff costs, 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.
Restructuring and other charges in 2020 consisted primarily of a $113charge for layoff costs, a $74 charge for U.K. and U.S. pension plans' settlement accounting, a $5 post-closing adjustment related to the sale of the Company’s U.K. forgings business, a $5 charge for impairment of assets associated with an agreement to sell an aerospace components business in the U.K, which ultimately did not occur and the business was returned to held for use, and a $5 charge related to the impairment of a cost method investment. These charges were partially offset by a benefit of $21 related to the reversal of a number of prior period programs.
See Note EM to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K).
Interest Expense.expense, net. Interest expense, net was $338$229 in 20192022 compared with $378$259 in 2018.2021. The decrease of $40,$30, or 11%12%, was primarily due to lowera reduced average level of debt outstanding, driven byfor the year ended December 31, 2022 compared to the year ended December 31, 2021. On an annual basis, the partial repayment of the aggregate outstanding principal amount of the 1.63% Convertible5.125% Notes ofin 2022 will decrease Interest expense, net by approximately $403 on October 15, 2019, as well as costs incurred of $19 in 2018 related to the premium paid on the early redemption of the Company’s then outstanding 5.72% Senior Notes due 2019 that did not recur in 2019.$4.
Interest expense, net was $378$259 in 20182021 compared with $496$317 in 2017.2020. The decrease of $118,$58, or 24%18%, was the result of higher costs incurred in 2017 related to the early redemption of the Company’s outstanding debt than were incurred during 2018, as well as lower debt outstanding.
See Note RS to the Consolidated Financial Statements in Part II, Item 8.8 (Financial Statements and Supplementary Data) of this Form 10-K), and10-K.
Loss on debt redemption was $146 in 2021 compared with a separation-related guarantee$64 in 2020. The increase of $25, none of which recurred$82, or 128%, was primarily due to debt premiums paid in 2018, and unfavorable foreign currency movements, somewhat2021 on the 6.875% Notes, partially offset by lower non-service related net periodic benefit costdebt redemption or tender premiums, as applicable, paid in 2020 on the repurchases of the 6.150% Notes due 2020 (the “6.150% Notes”) and the benefit of $29 from establishing a tax indemnification receivable reflecting Alcoa Corporation’s 49% share of a Spanish tax reserve (see 5.400% Notes due 2021.
See Note RT to the Consolidated Financial Statements in Part II, Item 8.8 (Financial Statements and Supplementary Data) of this Form 10-K).10-K.
Other expense, net. Other expense, net was $82 in 2022 compared with $19 in 2021. The increase in expense of $63 was primarily driven by the adverse judgment of $65 related to Lehman Brothers International (Europe) (“LBIE”) swaps that were entered into in 2007 and 2008, which were assumed as part of the Firth Rixson acquisition in 2014, an increase from net realized and unrealized losses of $9, primarily related to mark-to-market adjustments on exchange-traded fixed income securities and losses on sales of receivables, and higher non-service related net periodic benefit costs related to pension and other postretirement benefit plans in 2022 of $7, partially offset by the impacts of deferred compensation arrangements of $16
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and higher interest income of $4. Non-service related net periodic benefit costs related to defined benefit plans is expected to increase by approximately $20 from 2022 to 2023.
Other expense, net was $19 in 2021 compared with $74 in 2020. The decrease in expense of $55 was primarily driven by the write-off of an indemnification receivable of $53 related to a Spanish tax reserve, reflecting Alcoa Corporation's 49% share and Arconic Corporation's 33.66% share, that occurred in 2020 and did not occur in 2021 and lower non-service related net periodic benefit costs related to pension and other postretirement benefit plans in 2021 of $17, which were partially offset by an increase in foreign currency gains of $13. Non-service related net periodic benefit costs related to defined benefit plans declined approximately 65% from 2020 to 2021.
Income Taxes.taxes. Arconic’sHowmet’s effective tax rate was 18.3%22.6% (provision on pre-tax income) in 20192022 compared with the U.S. federal statutory rate of 21%. The effective rate differs from the U.S. federal statutory rate primarily as a result of a $94 net$12 charge related to an increase in the valuation allowance on a foreign tax credit carryforward in the U.S., $8 of charges related to U.S. tax on Global Intangible Low-Taxed Income (“GILTI”) and other foreign earnings, $8 of charges related to nondeductible expenses, and $5 of incremental state tax and foreign taxes on earnings also subject to U.S. federal income tax, partially offset by a $6 benefit for the release of a valuation allowance on interest deduction carryforwards in the U.K., a $5 benefit related to a U.S. tax election which caused the deemed liquidation ofaccounting method change, a foreign subsidiary’s assets into its U.S. tax parent,$5 excess benefit for stock compensation, and a $24 net$3 benefit associated with the deductionrelated to a distribution of foreign taxes that were previously claimed asearnings. The Inflation Reduction Act of 2022 (the “Act”) was signed into law on August 16, 2022. The Act includes various tax provisions, including a U.S. foreign1% excise tax credit,on stock repurchases, expanded tax credits for clean energy incentives, and a $12 net benefit for foreigncorporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three-year period in excess of $1,000. The Company does not expect the Act to materially impact its financial statements. Howmet anticipates that the effective tax rate changes, partially offset by the tax impact of $89 of non-deductible executive compensationin 2023 will be between 22.5% and transaction costs, $53 of impairment charges related to the Company’s Brazilian rolling mill operations and other foreign losses with no tax benefit, a $14 charge for U.S. state taxes, and by foreign income subject to U.S. taxes.23.5%.
Net Income.income from continuing operations. Net incomefrom continuing operations was $470 for 2019,$469, or $1.03$1.11 per diluted share, for 2022 compared to Net income of $642 for 2018,$258, or $1.33$0.59 per share.diluted share, in 2021. The decreaseincrease in results of $172$211, or 82%, was primarily due to higher sales in the commercial aerospace market, a decrease in the Loss on debt redemption of $144, favorable product pricing of $67, a decrease of $34 in Restructuring and other charges; higher SG&A expenses due to costs associated with the planned Separation of Arconic of $70 ($78 before-tax)charges, and higher annual incentive compensation accruals and executive compensation costs; and higher Othera decrease in Interest expense, net due toof $30, partially offset by lower sales in the defense aerospace market, an increase in deferred compensation arrangements and related investment performance andother inflationary costs, the benefit recognized in 2018 from establishing a tax indemnification receivable reflecting Alcoa Corporation’s 49% share of a Spanish tax reserve of $28 ($29 before-tax) that did not recur in 2019; partially offset by volume growth; favorable product pricing; net cost savings; lower D&A due to the impact of divestitures as well as asset impairments in the EP&F segment; lower Interest expense due to lower debt outstanding and costs incurred of $15 ($19 before-tax) in 2018adverse judgment related to the premium paid onLBIE legal proceeding of $65, and an increase in the early redemption of debt that did not recur in 2019; lower R&D expenses due to the consolidation of the Company's primary R&D facility in conjunction with ongoing cost reduction efforts; and lower IncomeProvision for income taxes primarily as a result of a benefit related to a U.S. tax election which caused the deemed liquidation of a foreign subsidiary’s assets into its U.S. tax parent.driven by an increase in income before income taxes.
Net incomefrom continuing operations was $642 for 2018,$258, or $1.30$0.59 per diluted share, for 2021 compared to a Net loss of $74 for 2017,$211, or $0.28$0.48 per share.diluted share, in 2020. The increase in results of $716$47, or 22%, was due in part to the following items that occurred in 2017 but did not recur in 2018: a charge for goodwill impairment of $719 ($719 pre-tax); gains related to the sale of a portion of Arconic’s investment in Alcoa Corporation common stock and the Debt-for-Equity Exchange of $405 ($518 pre-tax); and favorable adjustments to contingent earn-out and guarantee liabilities of $97 ($106 pre-tax). Additional favorable impacts in 2018 included: volume growth across both segments; lower SG&A expensesprimarily due to proxy and separation costs incurredcost reductions, a decrease of $92 in 2017 and not recurring in 2018, as well as lower incentive compensation accruals; lower Restructuring and other charges, driven primarily by the gain on saleand a decrease of the Texarkana rolling mill, offset by pension settlement charges and the loss on sale of the forgings business$58 in Hungary; lower Interest expense, net, due to lower long-term debt levels; lower pension expenses; and lower Income taxes. These favorable impacts werelevels, partially offset by unfavorable aerospace product mix, higher aluminum prices, manufacturing inefficiencies in Engineered Structures, performance shortfallslower sales in the Disks asset group, settlements of certain customer claims,commercial aerospace and defense aerospace market, an increase in the Provision for income taxes, and an unfavorable physical inventory adjustment at one plant.increase in the Loss on debt redemption of $82.
Net income. Net income was $469 for 2022, all of which was composed of $469 of income from continuing operations, or $1.11 per diluted share.
Net income was $258 for 2021, all of which was composed of $258 of income from continuing operations, or $0.59 per diluted share.
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Net income was $261 for 2020, composed of $211 of income from continuing operations and $50 from discontinued operations as a result of the Arconic Inc. Separation Transaction, or $0.48 and $0.11 per diluted share, respectively.
See details of discontinued operations in Note C to the Consolidated Financial Statements in Part II, Item 8 (Financial Statements and Supplementary Data) of this Form 10-K.
Segment Information
The Company produces aerospace engine parts and components and aerospace fastening systems and aluminum sheet and plate products for Boeing 737 MAX airplanes. The temporary reductionFrom late December 2019 and throughout 2020, Boeing suspended production of 737 MAX airplanes. While regulatory authorities in the production rateUnited States and certain other jurisdictions lifted grounding orders beginning in late 2020, our sales remained at lower levels throughout 2021 due to the residual impacts of the 737 MAX airplanes that was announced by Boeing in April 2019 did not have a significant impact on the Company's sales or segment operating profit in 2019. In late December 2019, Boeing announced a temporary suspension of production ofgrounding. Sales related to the 737 MAX improved in 2022 year over year, contributing to commercial aerospace growth.
The Company also produces aerospace engine parts and components and aerospace fastening systems for Boeing 787 airplanes. In 2020,Boeing paused deliveries of its 787 aircraft between May 2021 and August 2022. As a result of the Company expects a reductionsignificant decline in Boeing 787 production raterates, our sales remained at lower levels throughout 2022. We expect increased sales related to have a negative impact on sales of approximately $400 along with a corresponding impact on segment operating profitthe Boeing 787 in the EP&F2023 year over year.
Income from continuing operations before income taxes totaled $606 in 2022, $324 in 2021, and GRP segments.
$171 in 2020. Segment operating profitAdjusted EBITDA for all reportable segments totaled $2,015$1,352 in 2019, $1,5862022, $1,200 in 2018,2021, and $1,689$1,152 in 2017. 2020. See below for the reconciliation of Income from continuing operations before income taxes to Total Segment Adjusted EBITDA.
The following information provides Sales, Segment Adjusted EBITDA, and Segment operating profitAdjusted EBITDA Margin for each reportable segment as well as certain shipment data for GRP, for each of the three years in the period ended December 31, 2019. See Note B to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K.2022.
| 2022 | 2021 | 2020 | |||||||||||||||
| Third-party sales | $ | 2,698 | $ | 2,282 | $ | 2,406 | |||||||||||
| Segment Adjusted EBITDA | 729 | 564 | 540 | ||||||||||||||
| Segment Adjusted EBITDA Margin | 27.0 | % | 24.7 | % | 22.4 | % | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Third-party sales | $ | 7,105 | $ | 6,798 | $ | 6,300 | |||||
| Segment operating profit | $ | 1,390 | $ | 1,105 | $ | 1,119 | |||||
Third-party sales for the Engine Products segment increased $416, or 18%, including airfoils; forged jet enginein 2022 compared with 2021, primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as an increase in material cost pass through and favorable product pricing.
Third-party sales for the Engine Products segment decreased $124, or 5%, in 2021 compared with 2020, primarily due to lower volumes in the commercial aerospace market driven by the impact of COVID-19 and Boeing 787 production declines and lower volumes in the defense aerospace market, partially offset by higher volumes in the industrial gas turbine market.
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Segment Adjusted EBITDA for the Engine Products segment increased $165, or 29%, in 2022 compared with 2021, primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as productivity gains and favorable product pricing. The segment added approximately 950 net headcount since the end of 2021 in anticipation of revenue increases into 2023.
Segment Adjusted EBITDA for the Engine Products segment increased $24, or 4%, in 2021 compared with 2020, primarily due to cost reductions and favorable product pricing, partially offset by lower volumes in the commercial aerospace market driven by the impact of COVID-19 and Boeing 787 production declines, and lower volumes in the defense aerospace market.
Segment Adjusted EBITDA Margin for the Engine Products segment increased approximately 230 basis points in 2022 compared with 2021, primarily due to higher volumes in the commercial aerospace and oil and gas markets as well as productivity gains, partially offset by an increase in material cost pass through.
Segment Adjusted EBITDA Margin for the Engine Products segment increased approximately 230 basis points in 2021 compared with 2020, primarily due to cost reductions and favorable product pricing, partially offset by lower volumes in the commercial aerospace market driven by the impact of COVID-19 and Boeing 787 production declines, and lower volumes in the defense aerospace market.
In 2023, as compared to 2022, demand in the commercial aerospace, industrial gas turbine, and oil and gas markets is expected to increase. Additionally, an increase in other inflationary costs is expected to contribute to an increase in sales as the Company generally passes through these costs.
Fastening Systems
| 2022 | 2021 | 2020 | |||||||||||||||
| Third-party sales | $ | 1,117 | $ | 1,044 | $ | 1,245 | |||||||||||
| Segment Adjusted EBITDA | 234 | 239 | 295 | ||||||||||||||
| Segment Adjusted EBITDA Margin | 20.9 | % | 22.9 | % | 23.7 | % | |||||||||||
Fastening Systems produces aerospace fastening systems, as well as commercial transportation fasteners. The business’s high-tech, multi-material fastening systems are found nose to tail on aircraft and aero engines. The business’s products are also critical components (e.g., jet engine disks); extruded, machinedof automobiles, commercial transportation vehicles, and forged aircraft parts (titaniumconstruction and aluminum); and forged aluminum commercial vehicle wheels, all of whichindustrial equipment. Fastening Systems are sold directly to customers and through distributors. Approximately 70%of the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forged and machined metal products (titanium and aluminum) for various end markets. Seasonal decreases in sales are experienced for certain products in the third quarter of the year due to the European summer slowdown. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar, British pound, and euro.
Third-party sales for the euro.
Third-party sales for the Fastening Systems segment decreased $201, or 16%, in 2021 compared with 2020, primarily due to lower volumes in the commercial aerospace market, driven by the impact of COVID-19 and Boeing 787 production declines, partially offset by higher volumes in the commercial transportation and industrial markets.
Segment Adjusted EBITDA for the Fastening Systems segment decreased $5, or 2%, in 2022 compared with 2021, primarily due to Boeing 787 production declines, lower volumes in the industrial market, and inflationary costs, partially offset by higher volumes in the narrow body commercial aerospace and commercial transportation markets. The forgings businesssegment added approximately 400 net headcount since the end of 2021 in anticipation of revenue increases into 2023.
Segment Adjusted EBITDA for the Fastening Systems segment decreased $56, or 19%, in 2021 compared with 2020, primarily due to lower volumes in the commercial aerospace market, driven by the impact of COVID-19 and Boeing 787 production declines, partially offset by cost reductions and higher volumes in the commercial transportation and industrial markets.
Segment Adjusted EBITDA Margin for the Fastening Systems segment decreased approximately 200 basis points in 2022 compared with 2021, primarily due to Boeing 787 production declines, lower volumes in the industrial market, and inflationary costs, partially offset by favorable volumes in the narrow body commercial aerospace and commercial transportation markets.
Segment Adjusted EBITDA Margin for the Fastening Systems segment decreased approximately 80 basis points in 2021 compared with 2020, primarily due to lower volumes in the commercial aerospace market, driven by the impact of COVID-19 and Boeing 787 production declines, partially offset by cost reductions and higher volumes in the commercial transportation and industrial markets.
In 2023, as compared to 2022, demand in the commercial aerospace and industrial markets is expected to increase. Additionally, an increase in other inflationary costs is expected to contribute to an increase in sales as the Company generally passes through these costs.
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Engineered Structures
| 2022 | 2021 | 2020 | |||||||||||||||
| Third-party sales | $ | 790 | $ | 725 | $ | 927 | |||||||||||
| Segment Adjusted EBITDA | 111 | 103 | 125 | ||||||||||||||
| Segment Adjusted EBITDA Margin | 14.1 | % | 14.2 | % | 13.5 | % | |||||||||||
Engineered Structures produces steel, titanium ingots and nickel based forged componentsmill products for aerospace mining, and off-highway markets. This business generated third-partydefense applications and is vertically integrated to produce titanium forgings, extrusions forming and machining services for airframe, wing, aero-engine, and landing gear components. Engineered Structures also produces aluminum forgings, nickel forgings, and aluminum machined components, and assemblies for aerospace and defense applications. The segment’s products are sold directly to customers and through distributors, and sales and costs and expenses of $116, $131, and $127this segment are generally transacted in 2019, 2018, and 2017, respectively, and had 540 employees at the timelocal currency of the divestiture.
Third-party sales for the Engineered Products and ForgingsStructures segment increased $307,$65, or 5%9%, in 20192022 compared with 2018,2021, primarily due to higher volumes in the narrow body commercial aerospace market as a result of higher aerospace and commercial transportation volumeswell as an increase in material cost pass through and favorable product pricing, partially offset by unfavorable foreign currency movements and lower sales of $47 from divestitures of forgings businessesvolumes in the United Kingdom (divested in December 2019)defense aerospace market, including lower F-35 program volumes, and Hungary (divested in December 2018).
Boeing 787 production declines.
Third-party sales for this the Engineered Structures segment decreased $202, or 22%, in 2021 compared with 2020, primarily due to lower volumes in the commercial aerospace market, driven by the impact of COVID-19 and Boeing 787 production declines, and lower volumes in the defense aerospace market, including lower F-35 program volumes.
Segment Adjusted EBITDA for the Engineered Structuressegment increased $498,$8, or 8%, in 20182022 compared with 2017,2021, primarily attributabledue to higher volumes in the narrow body commercial aerospace engines, defense, and commercial transportation end marketsmarket and favorable foreign currency movements,product pricing, partially offset by a decline inlower volumes in the industrial gas turbinedefense aerospace market, including lower F-35 program volumes, and lower aerospace pricing principally in the fasteners business.Boeing 787 production declines as well as inflationary costs.
Segment operating profitAdjusted EBITDA for the Engineered Products and Forgings Structuressegment increased $285,decreased $22, or 26%18%, in 20192021 compared with 2018,2020, primarily due to net cost savings, higherlower volumes as noted previously, favorable product pricing,in the commercial aerospace market, driven by the impact of COVID-19 and Boeing 787 production declines, and lower raw material costs,volumes in the defense aerospace market, including lower F-35 program volumes, partially offset by cost reductions.
Segment Adjusted EBITDA Margin for the unfavorableEngineered Structuressegment decreased approximately 10 basis points in 2022 compared with 2021, primarily due to lower volumes in the defense aerospace market and Boeing 787 production declines as well as continued inflationary cost pressures, partially offset by higher volumes in the narrow body commercial aerospace market.
Segment Adjusted EBITDA Margin for the Engineered Structuressegment increased approximately 70 basis points in 2021 compared with 2020, primarily due to cost reductions, partially offset by lower volumes in the commercial aerospace market, driven by the impact of new product introductions in aerospace enginesCOVID-19 and unfavorable product mix.
In 20202023, as compared to 2019,2022, demand in the commercial aerospace end market, excluding the impact of Boeing 737 MAX, is expected to remain strong, driven by the ramp-up of new aerospace engine platforms. Demand in the defense end market is expected to continue to grow due to the ramp-up of certain aerospace programs, while the commercial transportation end marketincrease. Additionally, an increase in material and other inflationary costs is expected to be down. Net cost savings and favorable pricing are expectedcontribute to continue.
Forged Wheels
| 2022 | 2021 | 2020 | |||||||||||||||
| Third-party sales | $ | 1,058 | $ | 921 | $ | 679 | |||||||||||
| Segment Adjusted EBITDA | 278 | 294 | 192 | ||||||||||||||
| Segment Adjusted EBITDA Margin | 26.3 | % | 31.9 | % | 28.3 | % | |||||||||||
Forged Wheels produces forged aluminum wheels and its full impact continues. The Company has insurance with a deductible of $10.
| 2019 | 2018 | 2017 | |||||||||
| Third-party sales | $ | 7,082 | $ | 7,223 | $ | 6,540 | |||||
| Intersegment sales | 183 | 205 | 183 | ||||||||
| Total sales | $ | 7,265 | $ | 7,428 | $ | 6,723 | |||||
| Segment operating profit | $ | 625 | $ | 481 | $ | 570 | |||||
| Third-party aluminum shipments (kmt) | 1,379 | 1,301 | 1,249 | ||||||||
Third-party sales for the Global Rolled Products Forged Wheels segment increased $137, or 15%, in 2022 compared with 2021, primarily due to an increase in aluminum material and other inflationary cost pass through and higher commercial transportation volumes, partially offset by unfavorable foreign currency movements.
Third-party sales for the Forged Wheels segment increased $242, or 36%, in 2021 compared with 2020, primarily due to higher commercial transportation volumes and an increase in aluminum material cost pass through.
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Segment Adjusted EBITDA for the Forged Wheelssegment decreased $141,$16, or 2%5%, in 20192022 compared with 2018,2021, primarily as a result of lower aluminum prices, the absence of sales of $144 from the completed ramp down of Arconic's North American packaging operations (completed in December 2018), anddue to unfavorable foreign currency movements, partially offset by favorable product pricing and mix and higher volumes incommercial transportation volumes.
Segment Adjusted EBITDA for the packaging, aerospace, and industrial end markets.
Segment operating profitAdjusted EBITDA Margin for the Global Rolled Products Forged Wheelssegment increased $144, or 30%,decreased approximately 560 basis points in 20192022 compared with 2018,2021, primarily due to favorable pricing adjustments on industrialaluminum material and commercial transportation products; favorable aluminum price impacts; netEuropean energy cost savings; favorable product mix; and the impact of a charge incurred in 2018 related to a physical inventory adjustment at one plant that did not recur in 2019; partially offset by operational challenges at one aluminum extrusions plant and the impact of the Tennessee plant transition to industrial production.
Segment Adjusted EBITDA Margin for the Forged Wheelssegment increased approximately 360 basis points in 2021 compared with 2020, primarily due to higher commercial transportation volumes, fixed cost reductions, and industrial volumes.maximizing production in low-cost countries, partially offset by aluminum material cost pass through.
In mid-February 2020, a fire occurred at the Company’s forged wheels plant located in Barberton, Ohio. The downtime reduced production levels and affected productivity at the plant. During the fourth quarter of 2022, the Company settled the insurance claim related to the Barberton Plant Fire.
In 2023, as compared to 2019,2022, demand from the automotive end market is expected to be up, while headwinds will continue in the commercial transportation end market. The aerospace airframe end market will be heavily influencedmarkets served by the 737 MAX situation. GrowthForged Wheels is expected withto decrease in most regions due to lower OEM builds. A decrease in material costs partially offset by an increase in other inflationary costs is expected to contribute to a net decrease in sales as the Tennessee industrial products ramp-up. The BCS business expects continued growth and margin expansion. Net productivity improvements areCompany generally passes through these costs. Sales in the Forged Wheels segment could also anticipated to continue.be negatively impacted by component supply chain constraints at our customers.
Reconciliation of Total segment operating profitSegment Adjusted EBITDA to Consolidated incomeIncome from continuing operations before income taxes
| 2022 | 2021 | 2020 | |||||||||||||||
| Income from continuing operations before income taxes | $ | 606 | $ | 324 | $ | 171 | |||||||||||
| Loss on debt redemption | 2 | 146 | 64 | ||||||||||||||
| Interest expense, net | 229 | 259 | 317 | ||||||||||||||
Other expense, net(1) | 82 | 19 | 74 | ||||||||||||||
| Operating income | $ | 919 | $ | 748 | $ | 626 | |||||||||||
| Segment provision for depreciation and amortization | 258 | 261 | 262 | ||||||||||||||
| Unallocated amounts: | |||||||||||||||||
| Restructuring and other charges | 56 | 90 | 182 | ||||||||||||||
| Corporate expense | 119 | 101 | 82 | ||||||||||||||
| Total Segment Adjusted EBITDA | $ | 1,352 | $ | 1,200 | $ | 1,152 | |||||||||||
(1)See the Contingencies section of Note V to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
| 2019 | 2018 | 2017 | |||||||||
| Total segment operating profit | $ | 2,015 | $ | 1,586 | $ | 1,689 | |||||
| Unallocated amounts: | |||||||||||
| Impairment of goodwill | — | — | (719 | ) | |||||||
| Restructuring and other charges | (620 | ) | (9 | ) | (165 | ) | |||||
| Corporate expense | (360 | ) | (252 | ) | (325 | ) | |||||
| Consolidated operating income | $ | 1,035 | $ | 1,325 | $ | 480 | |||||
| Interest expense | (338 | ) | (378 | ) | (496 | ) | |||||
| Other (expense) income, net | (122 | ) | (79 | ) | 486 | ||||||
| Consolidated income from continuing operations before income taxes | $ | 575 | $ | 868 | $ | 470 | |||||
See Impairment of Goodwill, Restructuring and Other Charges,other charges, D&A, Loss on debt redemption, Interest Expense,expense, net, and Other Expense (Income), Net,expense, net discussions above under Results“Results of OperationsOperations” for reference.
Corporate expense increased $108,$18, or 43%18%, in 20192022 compared with 20182021, primarily due to higher net costs related to the France Plant Fire, the Barberton Plant Fire, and the Barberton Cast House Incident of $39, higher employment, travel, and lease costs in 2022, and higher nonrecurring legal and other advisory reimbursements received in 2021 compared to 2022 of $1, partially offset by 2021 costs of $32 associated with closures, shutdowns, and other items which did not recur in 2022.
Corporate expense increased $19, or 23%, in 2021 compared with 2020, primarily due to costs associated with the planned Separationclosures, shutdowns, and other items of Arconic of $78; higher annual incentive compensation accruals$32 and executive compensation costs; environmental remediation costs for Grasse River of $25; impairment of energy business assets of $10; net impacts associated with a fire at a fasteners plant of $9 (net of insurance reimbursements);nonrecurring legal and collective bargaining agreement negotiation costs of $9; partially offset by costs incurredother advisory reimbursements received in 20182020 that did not recur in 2019 related2021 aggregating to settlements of certain customer claims of $38;$8, partially offset by lower costs driven by overhead cost reductions; lower research and development expenses;reductions, as well as costs incurred in 2020 associated with the Arconic Inc. Separation Transaction of $7 that did not recur in 2021 and lower net legal and other advisory costs related to Grenfell Tower of $10 primarily due to insurance reimbursements.
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Table of $18 in 2017, neither of which recurred in 2018. Also, lower expenses driven by lower annual incentive compensation accruals and overhead cost reductions were partially offset by costs incurred in the second quarter of 2018 related to the settlements of certain customer claims primarily related to product introductions of $38, an increase in legal and other advisory costs related to Grenfell Tower of $4, and strategy and portfolio review costs of $7 in 2018.Contents
Environmental Matters
See the Environmental Matters section of Note VT to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Liquidity and Capital Resources
Cash provided from operations and financing activities is expected to be adequate to cover Arconic’sHowmet's operational and business needs over the next 12 months. For an analysis of long-term liquidity, see Contractual Obligations“Contractual Obligations” and Off-Balance“Off-Balance Sheet ArrangementsArrangements” below.
At December 31, 2019,2022, cash and cash equivalents of ArconicHowmet were $1,648,$791, of which $414$283 was held by Arconic'sHowmet's non-U.S. subsidiaries. If the cash held by non-U.S. subsidiaries were to be repatriated to the U.S., the companyCompany does not expect there to be additional material income tax consequences.
The cash flows related to Arconic Corporation have not been segregated and are included in the Statement of Consolidated Cash Flows for the period prior to the Arconic Inc. Separation Transaction.
Operating Activities
Cash provided from operations in 20192022 was $406$733 compared with $217$449 in 2018. 2021 and $9 in 2020.
The increase in cash provided from operations of $189,$284, or 87%63%, between 2022 and 2021 was primarily due to lower working capital of $165, higher operating results of $89, and lower pension contributions of $30,$53, partially offset by higher working capitalpayments on noncurrent liabilities of $112.$37. The components of the change in working capital included unfavorablefavorable changes in receivables of $176, including collections of employee retention credit receivables, accrued expenses of $169, accounts payable of $395$102, and taxes, including income taxes, of $106,$29, partially offset by favorable changesinventories of $294 and prepaid expenses and other current assets of $17.
The increase in receivables of $165 and accrued expenses of $148.
Financing Activities
Cash used for financing activities was $1,568$526 in 20192022 compared with $649$1,444 in 20182021 and $1,015$369 in 2017.2020.
The use of cash in 20192022 was primarily related to the repurchase of $1,150common stock of $400, the repayments on the aggregate outstanding principal amount of long-term debt of approximately $69, and dividends paid to shareholders of $44. These items were partially offset by proceeds from the exercise of employee stock options of $16. On an annual basis, the partial repayment of the 5.125% Notes due October 2024 (the “5.125% Notes”) in 2022 will decrease Interest expense, net by approximately $4.
The use of cash in 2021 was primarily related to the repayments on the aggregate outstanding principal amount of long-term debt of approximately $1,537, repurchase of common stock (see Note Hof $430, premiums paid on the redemption of debt of $138, dividends paid to shareholders of $19, and debt issuance costs of $11. These items were partially offset by long-term debt issuance of $700 and proceeds from the Consolidated Financial Statementsexercise of employee stock options of $22.
The use of cash in Part II, Item 8. (Financial Statements and Supplementary Data);2020 was primarily related to the repayments on borrowings under certain revolving credit facilities (see below) and repayments on debt, primarily the aggregate outstanding principal amount of the 1.63% Convertible6.150% Notes of approximately $403 (see Note P$2,040, cash distributed to Arconic Corporation at the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data);Arconic Inc. Separation Transaction of $500, repurchase of common stock of $73, debt issuance costs of $61, premiums paid on the redemption of debt of $59, and dividends paid to shareholders of $57.$11. These items were partially offset by additions tolong-term debt for borrowings under certain revolving credit facilitiesissuance of $400$2,400 (of which $1,200 went with Arconic Corporation at the Arconic Inc. Separation Transaction) and proceeds from the exercise of employee stock options of $56.$33.
The Company has an effective shelf registration statement on Form S-3, filed with the SEC, which allows for offerings of debt securities from time to time. The Company may opportunistically issue new debt securities under such registration statement or otherwise in accordance with securities laws, including but not limited to in order to refinance existing indebtedness.
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The use of cash in 2017 was principally the result of $1,634 in repayments on borrowings under certain revolvingCompany maintains a credit facilities (see below) and repayments on debt, primarily relatedfacility pursuant to the early redemption of the Company’s 6.50% Bonds due 2018, 6.75% Notes due 2018, and a portion of the 5.72% Notes due 2019 (see Note P to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data) of this Form 10-K); $162 in dividends to shareholders; and $52 in premiums paid on early redemption of debt. These items were partially offset by $816 in additions to debt, primarily from borrowings under certain revolving credit facilities, and $50 of proceeds from the exercise of stock options.
The Company’s costs of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short-short-term and long-term debt ratings assigned to Arconicthe Company by the major credit rating agencies.
The Company's credit ratings from the three major credit rating agencies are as follows:
| Issuer Rating | Outlook | Date of Last Update | ||||||||||||||||||
| S&P Ratings Service | BB+ | Stable | November 29, 2022 | |||||||||||||||||
| Moody’s Investors Service (“Moody’s”) | Ba1 | Stable | April 27, 2022 | |||||||||||||||||
| Fitch Investors Service (“Fitch”) | BBB- | Stable | March 22, 2022 | |||||||||||||||||
On May 1, 2017, Standard and Poor’s Ratings Services (S&P)November 29, 2022, S&P affirmed Arconic’sthe following ratings for Howmet: long-term debt at BBB-, an investment grade rating, with a stableBB+ and the current outlook and its short-term debt at A-3. as stable.
On February 7, 2019, S&P placed the rating on negative credit watch and, subsequently, on April 26, S&P affirmed the27, 2022, Moody’s upgraded Howmet’s long-term debt rating from Ba2 to Ba1 citing the Company’s ability to improve its financial leverage, strong cash generation, and well-balanced financial policies and affirmed the current outlook as stable.
On March 22, 2022, Fitch affirmed the following ratings for Howmet: long-term debt at BBB- but changedand the current outlook to negative. On January 28, 2020, S&P affirmed the long-term debt rating at BBB- but changed the outlook to stable in expectation of the separation impact. On November 1, 2016, Moody’s Investor Service (Moody’s) downgraded Arconic’s long-term debt rating
Investing Activities
Cash used for investing activities was $135 in 2022 compared with cash provided from investing activities of $107 in 2021 and $271 in 2020.
The use of cash in 2022 was $583capital expenditures of $193 primarily related to various automation projects, information technology upgrades, and sustaining capital projects across all segments, partially offset by proceeds from the sale of assets of $58, which was primarily due to the sale of the corporate center and a manufacturing facility in 2019 comparedEngine Products. In the second quarter of 2022, the Company sold the corporate headquarters in Pittsburgh, PA. The proceeds from the sale of the corporate headquarters were $44, excluding $3 of transaction costs, and a carrying value of $41. The Company entered into a 12-year lease with $565the purchaser for a portion of the property. Additionally, in 2018the fourth quarter of 2022, the Company sold the property of an Engine Products segment’s manufacturing facility. The proceeds from the sale of this property were $15 and $1,320a carrying value of $7.
The source of cash in 2017.2021 was primarily cash receipts from sold receivables of $267 and proceeds from the sale of a small manufacturing plant in France of $8 and the sale of assets at a small U.S. manufacturing facility in Fastening Systems of $23, partially offset by capital expenditures of $199 primarily related to capacity expansion investments in Hungary and Mexico in Forged Wheels and various automation projects. As a result of accounts receivables securitization program changes in 2021, there was no additional activity related to cash receipts from sold receivables within investing activities in the Statement of Consolidated Cash Flows in future periods. The net cash funding from the sale of accounts receivable was neither a use of cash nor a source of cash during 2022.
The source of cash in 20192020 was primarily due to cash receipts from sold receivables of $995,$422 and proceeds from the sale of assetsa rolling mill business in Itapissuma, Brazil of $50 and businessesa hard alloy extrusions plant in South Korea of $103$62, both of which were related to Arconic Corporation (see Note CS to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data), and the sale of fixed income securities of $73, partially offset by capital expenditures of $586, including expansion of a wheels plant in Hungary, expansion of aerospace airfoils capacity in the United States, and transition of the Tennessee plant to industrial production.8
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Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations. ArconicObligations
Howmet is required to make future payments under various contracts, including long-term purchase obligations, financing arrangements, and lease agreements. ArconicHowmet also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects. As
In order to better understand Howmet’s outstanding contractual obligations, the table below represents a summary of these commitments as of December 31, 2019, a summary of Arconic’s outstanding contractual obligations is as follows2022 (these contractual obligations are grouped in the same manner as they are classified in the Statement of Consolidated Cash Flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information):
| Total | 2020 | 2021-2022 | 2023-2024 | Thereafter | Total | 2023 | 2024-2025 | 2026-2027 | Thereafter | |||||||||||||||||||||||||||||||||||||||
| Operating activities: | Operating activities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Energy-related purchase obligations | $ | 57 | $ | 29 | $ | 25 | $ | 3 | $ | — | ||||||||||||||||||||||||||||||||||||||
| Raw material purchase obligations | 569 | 495 | 64 | 8 | 2 | Raw material purchase obligations | $ | 413 | $ | 257 | $ | 154 | $ | 2 | $ | — | ||||||||||||||||||||||||||||||||
| Other purchase obligations | 134 | 80 | 49 | 5 | — | Other purchase obligations | 8 | 8 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Operating leases | 317 | 81 | 108 | 58 | 70 | Operating leases | 134 | 39 | 47 | 24 | 24 | |||||||||||||||||||||||||||||||||||||
| Interest related to total debt | 1,975 | 344 | 444 | 344 | 843 | Interest related to total debt | 1,413 | 227 | 376 | 238 | 572 | |||||||||||||||||||||||||||||||||||||
| Estimated minimum required pension funding | 1,705 | 475 | 655 | 575 | — | Estimated minimum required pension funding | 325 | 45 | 132 | 148 | — | |||||||||||||||||||||||||||||||||||||
| Other postretirement benefit payments | 655 | 80 | 160 | 155 | 260 | Other postretirement benefit payments | 102 | 11 | 22 | 21 | 48 | |||||||||||||||||||||||||||||||||||||
| Layoff and other restructuring payments | 34 | 34 | — | — | — | Layoff and other restructuring payments | 8 | 2 | 6 | — | — | |||||||||||||||||||||||||||||||||||||
| Deferred revenue arrangements | 36 | 6 | 30 | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Uncertain tax positions | 220 | — | — | — | 220 | Uncertain tax positions | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||
| Financing activities: | Financing activities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Total debt | 5,940 | 1,028 | 1,871 | 1,246 | 1,795 | Total debt | 4,181 | — | 1,681 | 625 | 1,875 | |||||||||||||||||||||||||||||||||||||
| Dividends to shareholders | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Investing activities: | Investing activities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital projects | 401 | 247 | 121 | 33 | — | Capital projects | 156 | 125 | 31 | — | — | |||||||||||||||||||||||||||||||||||||
| Totals | $ | 12,043 | $ | 2,899 | $ | 3,527 | $ | 2,427 | $ | 3,190 | Totals | $ | 6,741 | $ | 714 | $ | 2,449 | $ | 1,058 | $ | 2,520 | |||||||||||||||||||||||||||
Obligations for Operating Activities
Operating leases represent multi-year obligations for certain land and buildings, plant equipment, vehicles, and computer equipment.
Interest related to total debt is based on interest rates in effect as of December 31, 20192022 and is calculated on debt with maturities that extend to 2042.
Estimated minimum required pension funding and other postretirement benefit payments are based on actuarial estimates using current assumptions for discount rates, long-term rate of return on plan assets, and health care cost trend rates, among others. It is Arconic’sHowmet’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable countrythe benefits laws and tax laws.laws of the applicable country. Periodically, ArconicHowmet contributes additional amounts as deemed appropriate. The estimates reported in the preceding table include amounts sufficient to meet the minimum required, along with approximately $60 of contributions in 2020 related to actions designed to reduce future obligations. ArconicHowmet has determined that it is not practicable to present pension funding and other postretirement benefit payments beyond 20242027 and 2029,2032, respectively.
Layoff and other restructuring payments to be paid within one year primarily relate to severance costs, special layoff benefit payments, and lease termination costs.
Uncertain tax positions taken or expected to be taken on an income tax return may result in additional payments to tax authorities. The amount in the preceding table includes interest and penalties accrued related to such positions as of December 31, 2019.2022. The total amount of uncertain tax positions is included in the “Thereafter” column as the Company is not able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary. Tax assessments received may also result in payments to be made in order to preserve our right to appeal any tax positions challenged by tax authorities for which we have concluded that we are more likely than not to prevail.
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Contingencies such as legal proceedings and environmental matters may also result in additional cash payments. The timing of these payments, if necessary, depends on several factors, including the timing of litigation and settlements of liability claims. Accordingly, amounts have not been included in the preceding table. See Note V to the Consolidated Financial Statements in Part II, Item 8 (Financial Statements and Supplementary Data) of this Form 10-K for further discussion.
Obligations for Financing Activities
The Company’s Board of Directors authorized a share repurchase program of up to $1,500 of the Company's outstanding common stock. After giving effect to the share repurchases made through the fourth quarter of 2022, approximately $947 Board authorization remained available as of January 1, 2023. There is no stated expiration for the Share Repurchase Programs. Accordingly, amounts have not been included in the preceding table. See “Liquidity and Capital Resources” for additional information.
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by management as of December 31, 2019.2022. Funding levels may vary in future years based on anticipated construction schedules of the projects. It is expected that significant expansion projects will be funded through various sources, including cash provided from operations. Total capital expenditures are anticipated to be less than four percentapproximately 4% of sales in 2020.2023.
Off-Balance Sheet Arrangements
At December 31, 2019, Arconic2022, the Company had outstanding bank guarantees related to tax matters, outstanding debt, workers’ compensation, environmental obligations, energy contracts, and customs duties, among others. The total amount committed under these guarantees, which expire at various dates between 20202023 and 2040, was $31$13 at December 31, 2019.2022.
Pursuant to the Separation and Distribution Agreement, dated as of October 31, 2016, between ArconicHowmet and Alcoa Corporation, ArconicHowmet was required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of $9 and $6 at both December 31, 20192022 and 2018, respectively,2021, and were included in Other noncurrent liabilities and deferred credits onin the accompanying Consolidated Balance Sheet. The remaining guarantee, for which the Company and Arconic was required to provide guarantees related to two long-term supply agreements for energy for Alcoa Corporation facilities in the event of an Alcoa Corporation payment default. In October 2017, Alcoa Corporation announced that it had terminated one of the two agreements, the electricity contract with Luminant Generation Company LLC that was tied to its Rockdale Operations, effective as of October 1, 2017. As a result of the termination of the Rockdale electricity contract, Arconic recorded income of $25 in the fourth quarter of 2017 associated with reversing the fair value of the electricity contract guarantee. For the remaining long-term supply agreement, Arconic is required to provide a guarantee up to an estimated present value amount of approximately $1,353 and $1,087 at December 31, 2019 and December 31, 2018, respectively, in the event of an Alcoa Corporation payment default. This guarantee expires in 2047. For this guarantee, subject to its provisions, Arconic isare secondarily liable in the event of a payment default by Alcoa Corporation. ArconicCorporation, 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 $1,040 and $1,406 at December 31, 2022 and 2021, respectively, in the event of an Alcoa Corporation payment default. In December 2019, Arconic entered into2020, December 2021, and December 2022, a one-year insurance policysurety bond with a limit of $80 relating to the remaining long-term energy supply agreement. The premiumthis guarantee was obtained by Alcoa Corporation to protect Howmet's obligation. This surety bond is expected to be paid by Alcoa Corporation. The decision to enter into a claims purchase agreement or insurance policy will be maderenewed on an annual basis going forward.by Alcoa Corporation.
Pursuant to the Separation and Distribution Agreement,Agreements between the Company and Arconic wasCorporation and between the Company and Alcoa Corporation, the Company is required to retain letters of credit of $52 $53 (which are included in the $120 in the above paragraph) that had previously been provided related to boththe Company, Arconic Corporation, and Alcoa Corporation workers’ compensation claims whichthat occurred prior to the respective separation transactions of April 1, 2020 and November 1, 2016. Arconic Corporation and Alcoa Corporation workers’ compensation claims and letter of credit fees paid by Arconicthe Company are being proportionally billed to, and are being fully reimbursed by, Arconic Corporation and Alcoa Corporation.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 $120 in the above paragraph). 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.
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Howmet has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, energy contracts, and customs duties. The total amount committed under these annual surety bonds, which expire and automatically renew at various dates, primarily in 2020,2023 and 2024, was $50$43 at December 31, 2019.2022.
Pursuant to the Separation and Distribution Agreement,Agreements between the Company and Arconic wasCorporation and between the Company and Alcoa Corporation, the Company is required to provide surety bonds of $22 (which are included in the $43 in the above paragraph) that had previously been provided related to the Company, Arconic Corporation and Alcoa Corporation workers’ compensation claims whichpaid that occurred prior to the respective separation transactions of April 1, 2020 and November 1, 20162016. Arconic Corporation and as a result, Arconic has $24 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconicthe Company are being proportionally billed to, and are being fully reimbursed by, Arconic Corporation and Alcoa Corporation.
Critical Accounting Policies and Estimates
The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain judgments, estimates, and assumptions regarding uncertainties that affect the amounts reported in the Consolidated Financial Statements and disclosed in the accompanying Notes. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, including considerations relating to the impact of COVID-19 and changes in the aerospace industry as a result of the pandemic. The impact of these changes is rapidly changing and of unknown duration and macroeconomic impact and, as a result, these conditions remain highly uncertain. Areas that require significant judgments, estimates, and assumptions include accounting for environmental and litigation matters; the testing of goodwill, other intangible assets, and properties, plants, and equipment, and other intangible assets for impairment; estimating fair value of businesses acquired or divested; pension plans and other postretirement benefits obligations; stock-based compensation; and income taxes.
Management uses historical experience and all available information to make these judgments, estimates, and assumptions, and actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes provide a meaningful and fair perspective of the Company.
A summary of the Company’s significant accounting policies is included in Note AA to the Consolidated Financial Statements.Statements of this Form 10-K. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the Consolidated Financial Statements with useful and reliable information about the Company’s operating results and financial condition.
this Form 10-K.
Properties, Plants, and Equipment and Other Intangible Assets.Properties, plants, and equipment and Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is measured as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a DCF model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of the assets also require significant judgments.
Discontinued Operations and Assets Held for Sale. The fair values of all businesses to be divested are estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements.
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Pension and Other Postretirement Benefits. Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (health care cost trend rates, retirement age, and mortality). The pension and other postretirement benefits obligation was $1,719 and $2,461, with a funded status of $(749) and $(930) at December 31, 2022 and 2021, respectively. The total benefit obligation reduction of $742 was primarily driven by changes in discount rate. The improvement in the funded status of $181 was primarily driven by changes in discount rates partially offset by actual asset losses in comparison to expected asset returns. Excluding settlements and curtailments, net periodic benefit cost of pension and other postretirement benefits is expected to be approximately $40 in 2023 compared to $22 and $16 in 2022 and 2021, respectively. These costs increased by $6, or 38%, in 2022 compared to 2021 as a result of changes in discount rates and annuity purchases.
Employer contributions for pension benefits were $43 and $96 for the years ended December 31, 2022 and 2021, respectively. No additional employer contributions for pension benefits were required for the pension settlements in 2022. Benefits paid for other postretirement benefits were $13 and $17 for the years ended December 31, 2022 and 2021, respectively. Total pension contributions and other postretirement benefits paid decreased by $57, or 50%, in 2022 compared to 2021 primarily driven by additional 2021 contributions related to annuity buyouts and funding balances of the plans. Cash pension contributions in 2023 are expected to be approximately $45. Howmet’s funded status under the Employee Retirement Income Security Act was approximately 87% as of January 1, 2022.
The interest rate used to discount future estimated liabilities for the U.S. is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary, while both the U.K. and Canada utilize models developed by the respective actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, industrials, transportation, and utilities, among others. The yield curve model parallelsmodels parallel the plans’ projected cash flows, which have ana global average duration of 10 years. The underlying cash flows of the bonds included in the modelmodels exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. In 2019, 2018,2022, 2021, and 2017,2020, the discount rate used to determine benefit obligations for U.S. pension and other postretirement benefit plans was 3.30%5.40%, 4.35%2.70%, and 3.75%2.40%, respectively. The impact on the liabilities of a change in the discount rate of 1/4 of 1% would be approximately $220$36 and either a charge or credit of approximatelyless than $1 to after-tax earnings in the following year.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (a fair value at the plan measurement date is used for certain non-U.S. plans).assets. 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 2019, 2018,2022, 2021, and 2017,2020, management used 7.00%6.70%, 7.00%6.20%, and 7.75%6.00%, respectively, as its weighted-average global expected long-term rate of return on plan assets, which was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. Theseclass for each plan. These rates fellwere within the respective range of the 20-year moving average of actual performance and the expected future
return developed by asset class.class for each plan. The increase in expected long-term rate of return of plan assets compared to prior years is due to current asset allocations and estimates of future returns by country. For 2020,2023, management anticipates that 7.00% will be the expected long-term rate of return. The decrease of 75 basis points in the 2018 expected long-term rate of return was due to a decrease in the expected return by asset class and the 20-year moving average.for global plan assets will remain at approximately 7%. A change in the assumption for the expected long-term rate of return on plan assets of 1/4 of 1% would impact after-tax earnings by approximately $9$3 for 2020.2023.
In 2019,2022, net income of $146 (after-tax) was recorded in other comprehensive loss, primarily due to the increase in the discount rate and amortization of actuarial losses, partially offset by plan asset returns that were less than expected. In 2021, net income of $181 (after-tax) was recorded in other comprehensive loss, primarily due to the increase in the discount rate, plan asset performance that was greater than expected, and amortization of actuarial losses.In 2020, a net loss of $388$46 (after-tax) was recorded in other comprehensive loss, primarily due to the decrease in the discount rate, of 105 basis points, which was partially offset by the plan asset performance that was greater than expected, and by the amortization of actuarial losses.In 2018, a net loss of $114 (after-tax) was recorded in other comprehensive loss, primarily due to the impact of the adoption of new accounting guidance that permits a reclassification to Retained earnings (accumulated deficit) for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, as well as the plan asset performance that was less than expected, which were partially offset by the increase in the discount rate of 60 basis points and the amortization of actuarial losses. In 2017, a net loss of $220 (after-tax) was recorded in other comprehensive loss, primarily due to the decrease in the discount rate of 45 basis points and plan asset performance less than expected, which were partially offset by the amortization of actuarial losses.
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Stock-Based Compensation. ArconicHowmet recognizes compensation expense for employee equity grants using the non-substantive vesting period approach, in which the expense is recognized ratably over the requisite service period based on the grant date fair value. Forfeitures are accounted for as they occur. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance awards containing a market condition is valued using a Monte Carlo valuation model. Determining the fair value at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
Compensation expense recorded in 2019, 2018,2022, 2021, and 20172020 was $78$54 ($7049 after-tax), $50$40 ($3936 after-tax), and $54$46 ($3642 after-tax), respectively.
Income Taxes. The provision (benefit) for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision (benefit) for income taxes represents income taxes paid or payable (or received or receivable) for thebased on current year pre-tax income plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Arconic’sHowmet’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carrybackcarry-back periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’sHowmet’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
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.
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Recently IssuedAdopted Accounting Guidance.
See the Recently IssuedAdopted Accounting Guidance section of Note BA to the Consolidated Financial Statements in Part II, Item 8.8 (Financial Statements and Supplementary Data) of this Form 10-K.
Recently Issued Accounting Guidance.
See the Recently Issued Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II, Item 8 (Financial Statements and Supplementary Data) of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not material.
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Item 8. Financial Statements and Supplementary Data.
| Page | |||||
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | |||||
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Management’s Reports to ArconicHowmet Shareholders
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of ArconicHowmet Aerospace Inc. and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best judgments and estimates. The other financial information included in the annual report is consistent with that in the financial statements.
Management also recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control—Integrated Framework (2013)(2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019,2022, based on criteria in Internal Control—Integrated Framework (2013)(2013) issued by the COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20192022 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 | ||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of ArconicHowmet Aerospace Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheetsheets of ArconicHowmet Aerospace Inc. and its subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of operations, of comprehensive income (loss), of changes in equity, of comprehensive income and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established inInternal 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, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
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.
37
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Goodwill Impairment Assessment - Engine Products and– Engineered Structures Reporting UnitsUnit
As described in Notes A and NP to the consolidated financial statements, the Company’s consolidated goodwill balance was $4,493$4,013 million as of December 31, 2019,2022, and the amount of the goodwill associated with the Engine Products and Engineered Structures reporting unitsunit was $2,164 million and $289 million, respectively.$304 million. Goodwill is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist. TheUnder 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, (volumes and pricing), production costs, capital spending and discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Engine Products and Engineered Structures reporting unitsunit is a critical audit matter are there wasthe significant judgment by management when developingdetermining the fair value measurements of the reporting units.unit. This in turn led to a high degree of auditor judgment, effortsubjectivity, and subjectivityeffort in performing procedures and evaluating audit evidencemanagement’s significant assumptions related to management’s cash flow projections and significant assumptions, including sales growth, (volumes and pricing), production costs, and discount rates.rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual goodwill impairment assessment, including controls over the valuation of the Company’s Engineered Structures reporting units.unit. These procedures also included, among others (i) testing management’s process for developingdetermining the fair value estimates;of the reporting unit; (ii) evaluating the appropriateness of the discounted cash flow model and performing sensitivity analyses over the assumptions in the model; (iii) testing the completeness accuracy, and relevanceaccuracy of underlying data used in the model; and (iv) evaluating the reasonableness of the significant assumptions used by management includingrelated to sales growth, (volumes and pricing), production costs, and discount rates.rate. Evaluating management’s significant assumptions related to sales growth (volumes and pricing) and production costs involved evaluating whether the significant assumptions used by management were reasonable by consideringconsidering: (i) the current and past performance of the reporting units, obtaining evidence to supportunit; (ii) the reasonableness of the assumptions,consistency with relevant industry data; and (iii) considering whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the discounted cash flow models and certain significant assumptions, including the discount rates.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 26, 202014, 2023
We have served as the Company’s auditor since 1950.
38
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| $ | 14,192 | $ | 14,014 | $ | 12,960 | ||||||
| Cost of goods sold (exclusive of expenses below) | 11,227 | 11,397 | 10,221 | ||||||||
| Selling, general administrative, and other expenses | 704 | 604 | 715 | ||||||||
| Research and development expenses | 70 | 103 | 109 | ||||||||
| Provision for depreciation and amortization | 536 | 576 | 551 | ||||||||
| — | — | 719 | |||||||||
| 620 | 9 | 165 | |||||||||
| Operating income | 1,035 | 1,325 | 480 | ||||||||
| 338 | 378 | 496 | |||||||||
| 122 | 79 | (486 | ) | ||||||||
| Income before income taxes | 575 | 868 | 470 | ||||||||
| 105 | 226 | 544 | |||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | ||||
| Net income (loss) | $ | 477 | $ | 651 | $ | (127 | ) | ||||
| Earnings (loss) per share - basic | $ | 1.05 | $ | 1.33 | $ | (0.28 | ) | ||||
| Earnings (loss) per share - diluted | $ | 1.03 | $ | 1.30 | $ | (0.28 | ) | ||||
| Average shares outstanding - basic | 446 | 483 | 451 | ||||||||
| Average shares outstanding - diluted | 463 | 503 | 451 | ||||||||
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| $ | 5,663 | $ | 4,972 | $ | 5,259 | ||||||||||||
| Cost of goods sold (exclusive of expenses below) | 4,103 | 3,596 | 3,878 | ||||||||||||||
| Selling, general administrative, and other expenses | 288 | 251 | 277 | ||||||||||||||
| Research and development expenses | 32 | 17 | 17 | ||||||||||||||
| Provision for depreciation and amortization | 265 | 270 | 279 | ||||||||||||||
| 56 | 90 | 182 | |||||||||||||||
| Operating income | 919 | 748 | 626 | ||||||||||||||
| 2 | 146 | 64 | |||||||||||||||
| 229 | 259 | 317 | |||||||||||||||
| 82 | 19 | 74 | |||||||||||||||
| Income from continuing operations before income taxes | 606 | 324 | 171 | ||||||||||||||
| 137 | 66 | (40) | |||||||||||||||
| Income from continuing operations after income taxes | $ | 469 | $ | 258 | $ | 211 | |||||||||||
| — | — | 50 | |||||||||||||||
| Net income | $ | 469 | $ | 258 | $ | 261 | |||||||||||
| Net income | $ | 467 | $ | 256 | $ | 259 | |||||||||||
| Earnings per share - basic | |||||||||||||||||
| Continuing operations | $ | 1.12 | $ | 0.60 | $ | 0.48 | |||||||||||
| Discontinued operations | $ | — | $ | — | $ | 0.11 | |||||||||||
| Earnings per share - diluted | |||||||||||||||||
| Continuing operations | $ | 1.11 | $ | 0.59 | $ | 0.48 | |||||||||||
| Discontinued operations | $ | — | $ | — | $ | 0.11 | |||||||||||
| Average shares outstanding - basic | 416 | 430 | 435 | ||||||||||||||
| Average shares outstanding - diluted | 421 | 435 | 439 | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
39
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Comprehensive Income (Loss)
(in millions)
| Arconic | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | $ | — | $ | — | $ | — | $ | 470 | $ | 642 | $ | (74 | ) | |||||||||||||||
| Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits | (388 | ) | 255 | (220 | ) | — | — | — | (388 | ) | 255 | (220 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | (13 | ) | (146 | ) | 252 | — | — | 2 | (13 | ) | (146 | ) | 254 | ||||||||||||||||||||||
| Net change in unrealized gains on debt securities | 3 | (1 | ) | (134 | ) | — | — | — | 3 | (1 | ) | (134 | ) | ||||||||||||||||||||||
| Net change in unrecognized gains/losses on cash flow hedges | (3 | ) | (23 | ) | 26 | — | — | — | (3 | ) | (23 | ) | 26 | ||||||||||||||||||||||
| Total Other comprehensive (loss) income, net of tax | (401 | ) | 85 | (76 | ) | — | — | 2 | (401 | ) | 85 | (74 | ) | ||||||||||||||||||||||
| Comprehensive income (loss) | $ | 69 | $ | 727 | $ | (150 | ) | $ | — | $ | — | $ | 2 | $ | 69 | $ | 727 | $ | (148 | ) | |||||||||||||||
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 469 | $ | 258 | $ | 261 | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in unrecognized net actuarial loss and prior service cost (benefit) related to pension and other postretirement benefits | 146 | 181 | (46) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (131) | (96) | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in unrecognized gains (losses) on cash flow hedges | 7 | (5) | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Other comprehensive income, net of tax | 22 | 80 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | $ | 491 | $ | 338 | $ | 277 | |||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
40
Howmet Aerospace Inc. and subsidiaries
Consolidated Balance Sheet
(in millions)
| December 31, | 2019 | 2018 | |||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 1,648 | $ | 2,277 | |||
| 967 | 1,047 | ||||||
| 484 | 451 | ||||||
| 2,429 | 2,492 | ||||||
| Prepaid expenses and other current assets | 314 | 314 | |||||
| Total current assets | 5,842 | 6,581 | |||||
| 5,463 | 5,704 | ||||||
| 4,493 | 4,500 | ||||||
| 608 | 573 | ||||||
| 658 | 919 | ||||||
| 514 | 416 | ||||||
| Total assets | $ | 17,578 | $ | 18,693 | |||
| Liabilities | |||||||
| Current liabilities: | |||||||
| Accounts payable, trade | $ | 2,043 | $ | 2,129 | |||
| Accrued compensation and retirement costs | 432 | 370 | |||||
| Taxes, including income taxes | 87 | 118 | |||||
| Accrued interest payable | 112 | 113 | |||||
| 418 | 356 | ||||||
| 1,034 | 434 | ||||||
| Total current liabilities | 4,126 | 3,520 | |||||
| 4,906 | 5,896 | ||||||
| 2,460 | 2,230 | ||||||
| 714 | 723 | ||||||
| 751 | 739 | ||||||
| Total liabilities | 12,957 | 13,108 | |||||
| Equity | |||||||
| Arconic shareholders’ equity: | |||||||
| 55 | 55 | ||||||
| 433 | 483 | ||||||
| 7,319 | 8,319 | ||||||
| 129 | (358 | ) | |||||
| (3,329 | ) | (2,926 | ) | ||||
| Total Arconic shareholders’ equity | 4,607 | 5,573 | |||||
| Noncontrolling interests | 14 | 12 | |||||
| Total equity | 4,621 | 5,585 | |||||
| Total liabilities and equity | $ | 17,578 | $ | 18,693 | |||
| December 31, | 2022 | 2021 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 791 | $ | 720 | |||||||
| 506 | 367 | ||||||||||
| 31 | 53 | ||||||||||
| 1,609 | 1,402 | ||||||||||
| Prepaid expenses and other current assets | 206 | 195 | |||||||||
| Total current assets | 3,143 | 2,737 | |||||||||
| 2,332 | 2,467 | ||||||||||
| 4,013 | 4,067 | ||||||||||
| 54 | 184 | ||||||||||
| 521 | 549 | ||||||||||
| 192 | 215 | ||||||||||
| Total assets | $ | 10,255 | $ | 10,219 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable, trade | $ | 962 | $ | 732 | |||||||
| Accrued compensation and retirement costs | 195 | 198 | |||||||||
| Taxes, including income taxes | 48 | 61 | |||||||||
| Accrued interest payable | 75 | 74 | |||||||||
| 202 | 183 | ||||||||||
| — | 5 | ||||||||||
| Total current liabilities | 1,482 | 1,253 | |||||||||
| 4,162 | 4,227 | ||||||||||
| 633 | 771 | ||||||||||
| 109 | 153 | ||||||||||
| 268 | 307 | ||||||||||
| Total liabilities | 6,654 | 6,711 | |||||||||
| Equity | |||||||||||
| Howmet Aerospace Inc. shareholders’ equity: | |||||||||||
| 55 | 55 | ||||||||||
| 412 | 422 | ||||||||||
| 3,947 | 4,291 | ||||||||||
| 1,028 | 603 | ||||||||||
| (1,841) | (1,863) | ||||||||||
| Total equity | 3,601 | 3,508 | |||||||||
| Total liabilities and equity | $ | 10,255 | $ | 10,219 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
41
Howmet Aerospace Inc. and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Operating activities | |||||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | ||||
| Adjustments to reconcile net income (loss) to cash provided from (used for) operations: | |||||||||||
| Depreciation and amortization | 536 | 576 | 551 | ||||||||
| Deferred income taxes | (19 | ) | 31 | 434 | |||||||
| — | — | 719 | |||||||||
| Restructuring and other charges | 620 | 9 | 165 | ||||||||
| Net loss (gain) from investing activities - asset sales | 7 | 10 | (513 | ) | |||||||
| 115 | 130 | 217 | |||||||||
| Stock-based compensation | 60 | 50 | 67 | ||||||||
| Other | 13 | 75 | 112 | ||||||||
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||||||
| (Increase) in receivables | (977 | ) | (1,142 | ) | (915 | ) | |||||
| (Increase) in inventories | (3 | ) | (74 | ) | (192 | ) | |||||
| Decrease (increase) in prepaid expenses and other current assets | 4 | (1 | ) | 11 | |||||||
| (Decrease) increase in accounts payable, trade | (56 | ) | 339 | 62 | |||||||
| (Decrease) in accrued expenses | (42 | ) | (190 | ) | (116 | ) | |||||
| (Decrease) increase in taxes, including income taxes | (2 | ) | 104 | (23 | ) | ||||||
| Pension contributions | (268 | ) | (298 | ) | (310 | ) | |||||
| (Increase) in noncurrent assets | (7 | ) | (20 | ) | (41 | ) | |||||
| (Decrease) in noncurrent liabilities | (45 | ) | (24 | ) | (193 | ) | |||||
| Cash provided from (used for) operations | 406 | 217 | (39 | ) | |||||||
| Financing Activities | |||||||||||
| Net change in short-term borrowings (original maturities of three months or less) | 2 | (7 | ) | (2 | ) | ||||||
| 400 | 600 | 816 | |||||||||
| (806 | ) | (1,103 | ) | (1,634 | ) | ||||||
| — | (17 | ) | (52 | ) | |||||||
| Proceeds from exercise of employee stock options | 56 | 16 | 50 | ||||||||
| Dividends paid to shareholders | (57 | ) | (119 | ) | (162 | ) | |||||
| Distributions to noncontrolling interests | — | — | (14 | ) | |||||||
| (1,150 | ) | — | — | ||||||||
| Other | (13 | ) | (19 | ) | (17 | ) | |||||
| Cash used for financing activities | (1,568 | ) | (649 | ) | (1,015 | ) | |||||
| Investing Activities | |||||||||||
| Capital expenditures | (586 | ) | (768 | ) | (596 | ) | |||||
| 103 | 309 | (9 | ) | ||||||||
| 73 | 9 | 890 | |||||||||
| 995 | 1,016 | 792 | |||||||||
| (2 | ) | (1 | ) | 243 | |||||||
| Cash provided from investing activities | 583 | 565 | 1,320 | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | (4 | ) | 9 | |||||||
| Net change in cash, cash equivalents and restricted cash | (579 | ) | 129 | 275 | |||||||
| Cash, cash equivalents and restricted cash at beginning of year | 2,282 | 2,153 | 1,878 | ||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 1,703 | $ | 2,282 | $ | 2,153 | |||||
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Operating activities | |||||||||||||||||
| Net income | $ | 469 | $ | 258 | $ | 261 | |||||||||||
| Adjustments to reconcile net income to cash provided from operations: | |||||||||||||||||
| Depreciation and amortization | 265 | 270 | 338 | ||||||||||||||
| Deferred income taxes | 79 | 38 | 2 | ||||||||||||||
| Restructuring and other charges | 56 | 90 | 164 | ||||||||||||||
| Net realized and unrealized losses | 18 | 9 | 8 | ||||||||||||||
| 24 | 18 | 51 | |||||||||||||||
| Stock-based compensation | 54 | 41 | 45 | ||||||||||||||
| 2 | 146 | 64 | |||||||||||||||
| Other | 12 | 20 | (5) | ||||||||||||||
| Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: | |||||||||||||||||
| Increase in receivables | (161) | (337) | (238) | ||||||||||||||
| (Increase) decrease in inventories | (234) | 60 | 74 | ||||||||||||||
| (Increase) decrease in prepaid expenses and other current assets | (6) | 11 | (2) | ||||||||||||||
| Increase (decrease) in accounts payable, trade | 246 | 144 | (381) | ||||||||||||||
| Increase (decrease) in accrued expenses | 23 | (146) | (217) | ||||||||||||||
| (Decrease) increase in taxes, including income taxes | (12) | (41) | 98 | ||||||||||||||
| Pension contributions | (43) | (96) | (257) | ||||||||||||||
| Decrease (increase) in noncurrent assets | 1 | (13) | 39 | ||||||||||||||
| Decrease in noncurrent liabilities | (60) | (23) | (35) | ||||||||||||||
| Cash provided from operations | 733 | 449 | 9 | ||||||||||||||
| Financing Activities | |||||||||||||||||
| Net change in short-term borrowings | (5) | (9) | (15) | ||||||||||||||
| — | 700 | 2,400 | |||||||||||||||
| (69) | (1,538) | (2,043) | |||||||||||||||
| — | (11) | (61) | |||||||||||||||
| (2) | (138) | (59) | |||||||||||||||
| (400) | (430) | (73) | |||||||||||||||
| Proceeds from exercise of employee stock options | 16 | 22 | 33 | ||||||||||||||
| (44) | (19) | (11) | |||||||||||||||
| Net cash transferred to Arconic Corporation at separation | — | — | (500) | ||||||||||||||
| Other | (22) | (21) | (40) | ||||||||||||||
| Cash used for financing activities | (526) | (1,444) | (369) | ||||||||||||||
| Investing Activities | |||||||||||||||||
| (193) | (199) | (267) | |||||||||||||||
| 58 | 32 | 114 | |||||||||||||||
| Sales of debt securities | — | 6 | — | ||||||||||||||
| — | 267 | 422 | |||||||||||||||
| Other | — | 1 | 2 | ||||||||||||||
| Cash (used for) provided from investing activities | (135) | 107 | 271 | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2) | (1) | (3) | ||||||||||||||
| Net change in cash, cash equivalents and restricted cash | 70 | (889) | (92) | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 722 | 1,611 | 1,703 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 792 | $ | 722 | $ | 1,611 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
42
Howmet Aerospace Inc. and subsidiaries
Statement of Changes in Consolidated Equity
(in millions, except per-share amounts)
| Arconic Shareholders | ||||||||||||||||||||||||
Preferred stock | Mandatory convertible preferred stock | Common stock | Additional capital | Retained earnings (accumulated deficit) | Accumulated Other Comprehensive Loss | Noncontrolling interests | Total equity | |||||||||||||||||
| Balance at December 31, 2016 | $ | 55 | $ | 3 | $ | 438 | $ | 8,214 | $ | (1,027 | ) | $ | (2,568 | ) | $ | 26 | $ | 5,141 | ||||||
| Net loss | — | — | — | — | (74 | ) | — | — | (74 | ) | ||||||||||||||
| — | — | — | — | — | (76 | ) | 2 | (74 | ) | |||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||
| Preferred–Class B @ $20.1563 per share | — | — | — | — | (51 | ) | — | — | (51 | ) | ||||||||||||||
| Common @ $0.24 per share | — | — | — | — | (109 | ) | — | — | (109 | ) | ||||||||||||||
| — | — | — | 67 | — | — | — | 67 | |||||||||||||||||
| — | — | — | 21 | — | — | — | 21 | |||||||||||||||||
| — | (3 | ) | 39 | (36 | ) | — | — | — | — | |||||||||||||||
| — | — | 4 | — | — | — | — | 4 | |||||||||||||||||
| Distributions | — | — | — | — | — | — | (14 | ) | (14 | ) | ||||||||||||||
| Other | — | — | — | — | 15 | — | — | 15 | ||||||||||||||||
| Balance at December 31, 2017 | $ | 55 | $ | — | $ | 481 | $ | 8,266 | $ | (1,248 | ) | $ | (2,644 | ) | $ | 14 | $ | 4,924 | ||||||
| — | — | — | — | 367 | (367 | ) | — | — | ||||||||||||||||
| Net income | — | — | — | — | 642 | — | — | 642 | ||||||||||||||||
| — | — | — | — | — | 85 | — | 85 | |||||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||
| Common @ $0.24 per share | — | — | — | — | (117 | ) | — | — | (117 | ) | ||||||||||||||
| — | — | — | 50 | — | — | — | 50 | |||||||||||||||||
| — | — | 2 | 3 | — | — | — | 5 | |||||||||||||||||
| Other | — | — | — | — | — | — | (2 | ) | (2 | ) | ||||||||||||||
| Balance at December 31, 2018 | $ | 55 | $ | — | $ | 483 | $ | 8,319 | $ | (358 | ) | $ | (2,926 | ) | $ | 12 | $ | 5,585 | ||||||
| — | — | — | — | 75 | (2 | ) | — | 73 | ||||||||||||||||
| Net income | — | — | — | — | 470 | — | — | 470 | ||||||||||||||||
| — | — | — | — | — | (401 | ) | — | (401 | ) | |||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||
| Common @ $0.12 per share | — | — | — | — | (56 | ) | — | — | (56 | ) | ||||||||||||||
| — | — | (55 | ) | (1,095 | ) | — | — | — | (1,150 | ) | ||||||||||||||
| — | — | — | 57 | — | — | — | 57 | |||||||||||||||||
| — | — | 5 | 36 | — | — | — | 41 | |||||||||||||||||
| Other | — | — | — | 2 | — | — | 2 | 4 | ||||||||||||||||
| Balance at December 31, 2019 | $ | 55 | $ | — | $ | 433 | $ | 7,319 | $ | 129 | $ | (3,329 | ) | $ | 14 | $ | 4,621 | |||||||
| Howmet Shareholders | |||||||||||||||||||||||||||||
| Preferred stock | Common stock | Additional capital | Retained earnings (Accumulated deficit) | Accumulated other comprehensive loss | Noncontrolling interests | Total equity | |||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 55 | $ | 433 | $ | 7,319 | $ | 113 | $ | (3,329) | $ | 14 | $ | 4,605 | |||||||||||||||
| Net income | — | — | — | 261 | — | — | 261 | ||||||||||||||||||||||
| — | — | — | — | 16 | — | 16 | |||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.02 per share | — | — | — | (8) | — | — | (8) | ||||||||||||||||||||||
| — | (3) | (70) | — | — | — | (73) | |||||||||||||||||||||||
| — | — | 45 | — | — | — | 45 | |||||||||||||||||||||||
| — | 3 | (9) | — | — | — | (6) | |||||||||||||||||||||||
| — | — | (2,617) | — | 1,370 | (14) | (1,261) | |||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 55 | $ | 433 | $ | 4,668 | $ | 364 | $ | (1,943) | $ | — | $ | 3,577 | |||||||||||||||
| Net income | — | — | — | 258 | — | — | 258 | ||||||||||||||||||||||
| — | — | — | — | 80 | — | 80 | |||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.04 per share | — | — | — | (17) | — | — | (17) | ||||||||||||||||||||||
| — | (13) | (417) | — | — | — | (430) | |||||||||||||||||||||||
| — | — | 40 | — | — | — | 40 | |||||||||||||||||||||||
| — | 2 | — | — | — | — | 2 | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 55 | $ | 422 | $ | 4,291 | $ | 603 | $ | (1,863) | $ | — | $ | 3,508 | |||||||||||||||
| Net income | — | — | — | 469 | — | — | 469 | ||||||||||||||||||||||
| — | — | — | — | 22 | — | 22 | |||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||
| Preferred–Class A @ $3.75 per share | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||
| Common @ $0.10 per share | — | — | — | (42) | — | — | (42) | ||||||||||||||||||||||
| — | (12) | (388) | — | — | — | (400) | |||||||||||||||||||||||
| — | — | 54 | — | — | — | 54 | |||||||||||||||||||||||
| — | 2 | (10) | — | — | — | (8) | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 55 | $ | 412 | $ | 3,947 | $ | 1,028 | $ | (1,841) | $ | — | $ | 3,601 | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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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 (“Arconic”Howmet” or the “Company” or “we” or “our”) are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP)(“GAAP”) and require management to make certain judgments, estimates, and assumptions. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, including considerations relating to the impact of COVID-19 and changes in the aerospace industry as a result of the pandemic. The impact of these changes is rapidly changing and of unknown duration and macroeconomic impact and, as a result, these conditions remain highly uncertain. We have made our best estimates using all relevant information available at the time, but it is possible that our estimates will differ from our actual results and affect the Consolidated Financial Statements in future periods and potentially require adverse adjustments to the recoverability of goodwill, intangible and long-lived assets, the realizability of deferred tax assets, and other judgments and estimations and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see Note B).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 spun off and was named Arconic Corporation. In the thirdsecond quarter of 2019,2020, in conjunction with the Arconic Inc. Separation Transaction, the Company realigned its operations by eliminating its Transportationseparating the former EP&F segment into four new segments: Engine Products, Fastening Systems, Engineered Structures and Construction Solutions (TCS) segment and transferring the Forged Wheels business to the Engineered Products and Forgings (EP&F) segment and the Building and Construction Systems (BCS) business to the Global Rolled Products (GRP) segment.Wheels. See Note DB for further details.
The Company announced the separationderived approximately 46%, 41%, and 49% of its portfolio into two independent, publicly-traded companies (the "Separationrevenue from products sold to the commercial aerospace market for the years ended December 31, 2022, 2021, and 2020, respectively, which is substantially less than the pre-pandemic 2019 annual rate of Arconic")approximately 60%. Due to the global COVID-19 pandemic and its impact on the commercial aerospace industry to date, there has been a decrease in domestic and international air travel, which in turn has adversely affected demand for narrow-body and wide-body aircraft. Although domestic air travel now approximates pre-pandemic levels, China domestic air travel is still below pre-pandemic 2019 levels on an average monthly basis in 2022. International travel also continues to be lower than pre-pandemic 2019 levels. We expect commercial aerospace growth to continue with narrow-body demand returning faster than wide-body demand. The EP&F segment will remaincommercial wide-body aircraft market is taking longer to recover, which is creating a shift in our product mix compared to pre-pandemic conditions. In addition to the existing company (Remain Co.)impact from the pandemic, the timing and level of future aircraft builds by original equipment manufacturers are subject to changes and uncertainties, such as declines in Boeing 787 production rates due to delays in its recertification, which will be renamed Howmet Aerospace Inc. at separation. The GRP segment will comprise Spin Co. and will be named Arconic Corporation at separation. The Company is targetingmay cause our future results to complete the Separation of Arconic on April 1, 2020. See Note U for further details.differ from prior periods due to changes in product mix in certain segments.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of ArconicHowmet Aerospace Inc. and companies in which ArconicHowmet Aerospace Inc. has a controlling interest. Intercompany transactions have been eliminated. Investments in affiliates in which ArconicHowmet Aerospace Inc. cannot exercise significant influence that do not have readily determinable fair values are accounted for at cost minusless impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Management also evaluates whether an Arconica Howmet Aerospace Inc. entity or interest is a variable interest entity and whether ArconicHowmet Aerospace Inc. is the primary beneficiary. Consolidation is required if both of these criteria are met. ArconicHowmet Aerospace Inc. does not have any variable interest entities requiring consolidation.
Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
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Inventory Valuation. Inventories are carried at the lower of cost andor net realizable value with cost for approximately half of U.S. inventories determined under the last-in, first-out (LIFO) method. The cost of other inventories is determined under a combination of the first-in, first-out (FIFO)(“FIFO”), last-in, first-out (“LIFO”), and average-cost methods. See Note N for further details.
Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets.
The following table details the weighted-average useful lives of structures and machinery and equipment by reporting segment (numbers in years):
| Structures | Machinery and equipment | ||
| Engineered Products and Forgings | 29 | 17 | |
| Global Rolled Products | 31 | 21 | |
| Structures | Machinery and equipment | ||||||||||
| Engine Products | 30 | 17 | |||||||||
| Fastening Systems | 27 | 17 | |||||||||
| Engineered Structures | 28 | 19 | |||||||||
| Forged Wheels | 28 | 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, (income), net (see policy below for assets classified as held for sale and discontinued operations). Repairs and maintenance are charged to expense as incurred. Interest related to the construction of qualifying assets is capitalized as part of the construction costs.
Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is measured as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF)(“DCF”) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of the assets also require significant judgments. See Note OM for further information.details.
Goodwill. Goodwill is not amortized; instead, it is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or realign a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. For 2019, Arconic had 7Howmet has four reporting units composed of which 4 were included in the EngineeredEngine Products, and Forgings (EP&F) segment (FasteningFastening Systems, Engineered Structures, Engine Products, and Forged Wheels), and 3 were included in the Global Rolled Products (GRP) segment (Global Rolled Products, Aluminum Extrusions, and BCS). More than 90% of Arconic’s total goodwill at December 31, 2019 was allocated to the 4 EP&F reporting units: Engine Products ($2,164), Fastening Systems ($1,607), Engineered Structures ($289), and Forged Wheels ($7).segments.
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.
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The following table details the weighted-average useful lives of software and other intangible assets by reporting segment (numbers in years):
| Software | Other intangible assets | ||
| Engineered Products and Forgings | 5 | 32 | |
| Global Rolled Products | 5 | 13 | |
| Software | Other intangible assets | ||||||||||
| Engine Products | 7 | 32 | |||||||||
| Fastening Systems | 6 | 23 | |||||||||
| Engineered Structures | 4 | 18 | |||||||||
| Forged Wheels | 4 | 25 | |||||||||
Leases. The Company determines whether a contract contains a lease at inception. The Company leases land and buildings, plant equipment, vehicles, and computer equipment which have been classified as operating leases. Certain real estate leases include one or more options to renew; the exercise of lease renewal options is at the Company’s discretion. The Company includes renewal option periods in the lease term when it is determined that the options are reasonably certain to be exercised. Certain of Arconic'sHowmet's real estate lease agreements include rental payments that either have fixed contractual increases over time or adjust periodically for inflation. Certain of the Company's lease agreements include variable lease payments. The variable portion of payments is not included in the initial measurement of the right-of-use asset or lease liability due to the uncertainty of the payment amount and is recorded as lease cost in the period incurred. The Company also rents or subleases certain real estate to third parties, which is not material to the consolidated financial statements.
Operating lease right-of-use assets and lease liabilities with an initial term greater than 12 months are recorded on the balance sheet at the present value of the future minimum lease payments over the lease term at the lease commencement date and are recognized as lease expense on a straight-line basis over the lease term. The Company uses an incremental collateralized borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, as most of its leases do not provide an implicit rate. The operating lease right-of-use assets also include any lease prepayments made and wereare reduced by lease incentives and accrued exit costs.
Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future sales, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery are recognized when probable and as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that ArconicHowmet has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters.and Contingent Liabilities. For assertedFrom time to time, we are involved in various lawsuits, claims, investigations, and assessments, liabilities are recorded when an unfavorable outcomeproceedings. These matters may include speculative claims for substantial or indeterminate amounts of a matter is deemed to be probable and the loss is reasonably estimable.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. OnceIf an unfavorable outcome is deemed probable management weighsand the probabilityamount of the potential loss can be estimated, losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to beprobable but the loss is not reasonably estimable, or if an unfavorable outcome is deemed reasonably possible, then the matter is disclosed andbut no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Revenue Recognition. The Company's contracts with customers are comprised of acknowledged purchase orders incorporating the Company’s standard terms and conditions, or for larger customers, may also generally include terms under negotiated multi-year agreements. These contracts with customers typically consist of the manufacture of products which represent single performance obligations that are satisfied upon transfer of control of the product to the customer. The Company produces fastening systems; seamless rolled rings; investment castings, including airfoils and forged jet engine components;airfoils; extruded, machined and formed aircraft parts; aluminum sheet and plate; integrated aluminum structural systems; architectural extrusions; and forged aluminum commercial vehicle wheels. Transfer of control is assessed based on alternative use of the products we produce and our enforceable right to payment for performance to date under the contract terms. Transfer of control and revenue recognition generally occur upon shipment or delivery of the product, which is when title, ownership and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck, train, or vessel). An invoice for payment is issued at time of shipment. Our business unitssegments set commercial terms on which ArconicHowmet sells products to its customers. These terms are influenced by industry custom, market conditions, product line (specialty versus commodity products), and other considerations.
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In certain circumstances, ArconicHowmet receives advanced payments from its customers for product to be delivered in future periods. These advanced payments are recorded as deferred revenue until the product is delivered and title and risk of loss have passed to the customer in accordance with the terms of the contract. Deferred revenue is included in Other current liabilities and Other noncurrent liabilities and deferred credits onin the accompanying Consolidated Balance Sheet. Advanced payments were $32 and $46 at December 31, 2022 and 2021, respectively.
Income Taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Arconic’sHowmet’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (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 Arconic’sHowmet’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measuredremeasured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
It is Howmet’s policy to treat taxes due from future inclusions in United States (“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. ArconicHowmet recognizes compensation expense for employee equity grants using the non-substantive vesting period approach, in which the expense is recognized ratably over the requisite service period based on the grant date fair value. Forfeitures are accounted for as they occur. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. The fair value of performance awards containing a market condition is valued using a Monte Carlo valuation model. Determining the fair value at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
Foreign Currency. The local currency is the functional currency for Arconic’sHowmet’s significant operations outside the United States,U.S., except for certain operations in Canada, the United Kingdom (“U.K.”), and Russia,France, where the U.S. dollar is used as the functional currency. The determination of the functional currency for Arconic’sHowmet’s operations is made based on the appropriate economic and management indicators.
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Acquisitions. Arconic’sHowmet’s business acquisitions are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. For all acquisitions, operating results are included in the Statement of Consolidated Operations from the date of the acquisition.
Discontinued Operations and Assets Held for Sale. For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale. Businesses to be divested are generally classified in the Consolidated Financial Statements as either discontinued operations or held for sale.
For businesses classified as discontinued operations, the balance sheet amounts and results of operations should beare reclassified from their historical presentation to assets and liabilities of discontinued operations on the Consolidated Balance Sheet and to discontinued operations on the Statement of Consolidated Operations, respectively, for all periods presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the Statement of Consolidated Operations. The Statement of Consolidated Cash Flows is not required to be reclassified for discontinued operations for any period. Segment information does not include the assets or operating results of businesses classified as discontinued operations for all periods presented. These businesses are expected to be disposed of within one year.
For businesses classified as held for sale that do not qualify for discontinued operations treatment, the balance sheet and cash flow amounts should beare 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. In February 2016,
On January 1, 2021, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) issued changes(“FASB”) that were intended to thesimplify various aspects of accounting for income taxes by eliminating certain exceptions contained in existing guidance and presentation of leases. These changes require lesseesamending other guidance to recognize a right-of-use asset and lease liability on the balance sheet, initially measured at the present value of the future lease payments for all operating leases with a term greater than 12 months.
income tax accounting matters. The adoption of this new lease standard resulted in the Company recording operating lease right-of-use assets and lease liabilities of approximately $320 on the Consolidated Balance Sheet as of January 1, 2019. Also, the Company reclassified cash proceeds of $119 from Other noncurrent liabilities and deferred credits, assets of $24 from Properties, plants, and equipment, net, and deferred tax assets of $22 from Other noncurrent assets to Retained earnings (accumulated deficit) reflecting the cumulative effect of an accounting change related to the sale-leaseback of the Texarkana, Texas cast house (see Note S). The adoption of the standard had no impact on the Statement of Consolidated Operations or Statement of Consolidated Cash Flows.
In August 2018, the FASB issued guidance that impacts disclosures for defined benefit pension plans and other postretirement benefit plans. These changes becomebecame effective for Arconic'sHowmet's annual report for the year endingended December 31, 2020 with early adoption permitted. Management has determined that the adoption of this guidance willwhich did not have a material impact on theits Consolidated Financial Statements.
Recently Issued Accounting Guidance.
In December 2019,September 2022, the FASB issued guidance that is intended to simplify various aspects related toenhance the accounting for income taxes.transparency of disclosures regarding supplier finance programs. These changes become effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on January 1, 2021, with early adoption permitted.rollforward information, which is effective for fiscal years beginning after December 15, 2023. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements.
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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. In December 2022, the FASB deferred the sunset date to December 31, 2024. In February 2023, the Company amended its Five-Year Revolving Credit Agreement to replace LIBOR with the term secured overnight financing rate (“Term SOFR”) as the reference rate for U.S. dollar-denominated loans (See Note R). Management has concluded that the impact of these changes is not expected to 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.
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 | |||||||||||||||||
| Sales | $ | 1,575 | |||||||||||||||
| Cost of goods sold | 1,293 | ||||||||||||||||
| Selling, general administrative, research and development and other expenses | 106 | ||||||||||||||||
| Provision for depreciation and amortization | 58 | ||||||||||||||||
| Restructuring and other credits | (18) | ||||||||||||||||
| Operating income from discontinued operations | 136 | ||||||||||||||||
| Interest expense, net | 7 | ||||||||||||||||
| Other expense, net | 41 | ||||||||||||||||
| Income from discontinued operations | 88 | ||||||||||||||||
| Provision for income taxes | 38 | ||||||||||||||||
| Income from discontinued operations after income taxes | $ | 50 | |||||||||||||||
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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 | |||||||||||||||||
| Capital expenditures | $ | 72 | |||||||||||||||
| Proceeds from the sales of businesses | 112 | ||||||||||||||||
| Provision for depreciation and amortization | 58 | ||||||||||||||||
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.
D. Segment and Geographic Area Information
Engine Products
Engine Products produces investment castings, including similar customer base, technologies, and manufacturing capabilities. Prior period financial information has been recast to conform to current year presentation.
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. Fastening Systems’ products are also critical components of commercial transportation vehicles, automobiles, construction and industrial equipment, and renewable energy sectors.
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 superalloys); investment castings (nickel superalloys, titanium,forgings, and aluminum), including airfoils; forged jet enginealuminum machined components (e.g., jet engine disks); extruded, machined and forged aircraft parts (titaniumassemblies for aerospace and aluminum); anddefense applications.
Forged Wheels
Forged Wheels provides forged aluminum commercial vehicle wheels all of which are sold directly to customers and through distributors. Approximately 70%ofrelated products for heavy-duty trucks and the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forged and machined metal products (titanium and aluminum) for various end markets. Seasonal decreases in sales are experienced for certain products in the third quarter of the year due to the European summer slowdown.
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The operating results and assets of Arconic’sthe Company's reportable segments were as follows:
| Year ended | Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | ||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Third-party sales | $ | 2,698 | $ | 1,117 | $ | 790 | $ | 1,058 | $ | 5,663 | |||||||||||||||||||
| Inter-segment sales | 4 | — | 6 | — | 10 | ||||||||||||||||||||||||
| Total sales | $ | 2,702 | $ | 1,117 | $ | 796 | $ | 1,058 | $ | 5,673 | |||||||||||||||||||
| Profit and loss: | |||||||||||||||||||||||||||||
| Segment Adjusted EBITDA | $ | 729 | $ | 234 | $ | 111 | $ | 278 | $ | 1,352 | |||||||||||||||||||
| Restructuring and other charges | 29 | 8 | 7 | 2 | 46 | ||||||||||||||||||||||||
| Provision for depreciation and amortization | 125 | 45 | 48 | 40 | 258 | ||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||
| Capital expenditures | $ | 94 | $ | 39 | $ | 17 | $ | 28 | $ | 178 | |||||||||||||||||||
| Total assets | 4,784 | 2,661 | 1,273 | 701 | 9,419 | ||||||||||||||||||||||||
| 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 Adjusted EBITDA | $ | 564 | $ | 239 | $ | 103 | $ | 294 | $ | 1,200 | |||||||||||||||||||
| 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 Adjusted EBITDA | $ | 540 | $ | 295 | $ | 125 | $ | 192 | $ | 1,152 | |||||||||||||||||||
| 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 | ||||||||||||||||||||||||
| Engineered Products and Forgings | Global Rolled Products | Total | |||||||||
| 2019 | |||||||||||
| Sales: | |||||||||||
| Third-party sales | $ | 7,105 | $ | 7,082 | $ | 14,187 | |||||
| Intersegment sales | — | 183 | 183 | ||||||||
| Total segment sales | $ | 7,105 | $ | 7,265 | $ | 14,370 | |||||
| Profit and loss: | |||||||||||
| Segment operating profit | $ | 1,390 | $ | 625 | $ | 2,015 | |||||
| Restructuring and other charges | 509 | 81 | 590 | ||||||||
| Provision for depreciation and amortization | 269 | 233 | 502 | ||||||||
| 2018 | |||||||||||
| Sales: | |||||||||||
| Third-party sales | $ | 6,798 | $ | 7,223 | $ | 14,021 | |||||
| Intersegment sales | — | 205 | 205 | ||||||||
| Total segment sales | $ | 6,798 | $ | 7,428 | $ | 14,226 | |||||
| Profit and loss: | |||||||||||
| Segment operating profit | $ | 1,105 | $ | 481 | $ | 1,586 | |||||
| Restructuring and other charges | 70 | (157 | ) | (87 | ) | ||||||
| Provision for depreciation and amortization | 289 | 253 | 542 | ||||||||
| 2017 | |||||||||||
| Sales: | |||||||||||
| Third-party sales | $ | 6,300 | $ | 6,540 | $ | 12,840 | |||||
| Intersegment sales | — | 183 | 183 | ||||||||
| Total segment sales | $ | 6,300 | $ | 6,723 | $ | 13,023 | |||||
| Profit and loss: | |||||||||||
| Segment operating profit | $ | 1,119 | $ | 570 | $ | 1,689 | |||||
| Restructuring and other charges | 30 | 83 | 113 | ||||||||
| Provision for depreciation and amortization | 275 | 243 | 518 | ||||||||
| 2019 | |||||||||||
| Assets: | |||||||||||
| Capital expenditures | $ | 344 | $ | 189 | $ | 533 | |||||
| Goodwill | 4,067 | 426 | 4,493 | ||||||||
Total assets(1) | 10,034 | 4,907 | 14,941 | ||||||||
| 2018 | |||||||||||
| Assets: | |||||||||||
| Capital expenditures | $ | 407 | $ | 308 | $ | 715 | |||||
| Goodwill | 4,186 | 314 | 4,500 | ||||||||
| Total assets | 10,494 | 4,845 | 15,339 | ||||||||
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| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Total segment capital expenditures | $ | 178 | $ | 182 | $ | 158 | |||||||||||
| Corporate and discontinued operations | 15 | 17 | 109 | ||||||||||||||
| Capital expenditures | $ | 193 | $ | 199 | $ | 267 | |||||||||||
The following tables reconcile certain segment information to consolidated totals:totals. Differences between the total segment and consolidated totals are in Corporate.
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Sales: | |||||||||||||||||
| Total segment sales | $ | 5,673 | $ | 4,982 | $ | 5,269 | |||||||||||
| Elimination of inter-segment sales | (10) | (10) | (12) | ||||||||||||||
| Corporate | — | — | 2 | ||||||||||||||
| Consolidated sales | $ | 5,663 | $ | 4,972 | $ | 5,259 | |||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Sales: | |||||||||||
| Total segment sales | $ | 14,370 | $ | 14,226 | $ | 13,023 | |||||
| Elimination of intersegment sales | (183 | ) | (205 | ) | (183 | ) | |||||
| Corporate | 5 | (7 | ) | 120 | |||||||
| Consolidated sales | $ | 14,192 | $ | 14,014 | $ | 12,960 | |||||
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Total Segment Adjusted EBITDA | $ | 1,352 | $ | 1,200 | $ | 1,152 | |||||||||||
| Segment provision for depreciation and amortization | (258) | (261) | (262) | ||||||||||||||
| Unallocated amounts: | |||||||||||||||||
| Restructuring and other charges | (56) | (90) | (182) | ||||||||||||||
| Corporate expense | (119) | (101) | (82) | ||||||||||||||
| Operating income | $ | 919 | $ | 748 | $ | 626 | |||||||||||
| Loss on debt redemption | (2) | (146) | (64) | ||||||||||||||
| Interest expense, net | (229) | (259) | (317) | ||||||||||||||
| (82) | (19) | (74) | |||||||||||||||
| Income from continuing operations before income taxes | $ | 606 | $ | 324 | $ | 171 | |||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Total segment operating profit | $ | 2,015 | $ | 1,586 | $ | 1,689 | |||||
| Unallocated amounts: | |||||||||||
| Impairment of goodwill | — | — | (719 | ) | |||||||
| Restructuring and other charges | (620 | ) | (9 | ) | (165 | ) | |||||
| Corporate expense | (360 | ) | (252 | ) | (325 | ) | |||||
| Consolidated operating income | $ | 1,035 | $ | 1,325 | $ | 480 | |||||
| Interest expense | (338 | ) | (378 | ) | (496 | ) | |||||
| Other (expense) income, net | (122 | ) | (79 | ) | 486 | ||||||
| Consolidated income before income taxes | $ | 575 | $ | 868 | $ | 470 | |||||
| December 31, | 2022 | 2021 | |||||||||
| Assets: | |||||||||||
| Total segment assets | $ | 9,419 | $ | 9,262 | |||||||
| Unallocated amounts: | |||||||||||
| Cash and cash equivalents | 791 | 720 | |||||||||
| Deferred income taxes | 54 | 184 | |||||||||
| Corporate fixed assets, net | 91 | 133 | |||||||||
| Fair value of derivative contracts | 6 | 2 | |||||||||
| Accounts receivable securitization | (250) | (250) | |||||||||
| Other | 144 | 168 | |||||||||
| Consolidated assets | $ | 10,255 | $ | 10,219 | |||||||
| December 31, | 2019 | 2018 | |||||
| Assets: | |||||||
| Total segment assets | $ | 14,941 | $ | 15,339 | |||
| Unallocated amounts: | |||||||
| Cash and cash equivalents | 1,648 | 2,277 | |||||
| Deferred income taxes | 608 | 573 | |||||
| Corporate fixed assets, net | 326 | 334 | |||||
| Fair value of derivative contracts | 6 | 37 | |||||
| Other | 49 | 133 | |||||
| Consolidated assets | $ | 17,578 | $ | 18,693 | |||
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| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Sales: | |||||||||||
| Innovative flat-rolled products | $ | 5,471 | $ | 5,604 | $ | 5,000 | |||||
| Engine products | 3,452 | 3,220 | 2,965 | ||||||||
| Fastening systems | 1,561 | 1,531 | 1,484 | ||||||||
| Engineered structures | 1,123 | 1,081 | 1,023 | ||||||||
| Architectural aluminum systems | 1,118 | 1,135 | 1,069 | ||||||||
| Forged wheels | 969 | 966 | 828 | ||||||||
| Aluminum extrusions | 493 | 484 | 471 | ||||||||
| Other | 5 | (7 | ) | 120 | |||||||
| $ | 14,192 | $ | 14,014 | $ | 12,960 | ||||||
Geographic information for sales was as follows (based upon the country wheredestination of the point of sale occurred)sale):
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Sales: | |||||||||||
| United States | $ | 9,548 | $ | 9,137 | $ | 8,167 | |||||
| France | 864 | 936 | 965 | ||||||||
| United Kingdom | 732 | 737 | 721 | ||||||||
| Hungary | 719 | 823 | 739 | ||||||||
| China | 630 | 632 | 615 | ||||||||
| Russia | 511 | 553 | 500 | ||||||||
| Germany | 322 | 302 | 309 | ||||||||
| Canada | 313 | 285 | 261 | ||||||||
| Japan | 190 | 170 | 141 | ||||||||
| Brazil | 159 | 214 | 285 | ||||||||
| Other | 204 | 225 | 257 | ||||||||
| $ | 14,192 | $ | 14,014 | $ | 12,960 | ||||||
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Sales: | |||||||||||||||||
| United States | $ | 2,928 | $ | 2,542 | $ | 2,782 | |||||||||||
| France | 394 | 330 | 327 | ||||||||||||||
| Japan | 319 | 319 | 388 | ||||||||||||||
| Germany | 292 | 257 | 309 | ||||||||||||||
| Mexico | 235 | 225 | 185 | ||||||||||||||
| United Kingdom | 228 | 213 | 231 | ||||||||||||||
| Italy | 180 | 181 | 181 | ||||||||||||||
| Canada | 138 | 127 | 119 | ||||||||||||||
| China | 111 | 71 | 75 | ||||||||||||||
| Poland | 96 | 77 | 76 | ||||||||||||||
| Other | 742 | 630 | 586 | ||||||||||||||
| $ | 5,663 | $ | 4,972 | $ | 5,259 | ||||||||||||
Geographic information for long-lived tangible assets was as follows (based upon the physical location of the assets):
| December 31, | 2022 | 2021 | |||||||||
| Long-lived assets: | |||||||||||
| United States | $ | 1,793 | $ | 1,868 | |||||||
| Hungary | 193 | 205 | |||||||||
| France | 114 | 127 | |||||||||
| United Kingdom | 107 | 116 | |||||||||
| Germany | 58 | 66 | |||||||||
| Mexico | 58 | 61 | |||||||||
| China | 46 | 53 | |||||||||
| Other | 74 | 79 | |||||||||
| $ | 2,443 | $ | 2,575 | ||||||||
| December 31, | 2019 | 2018 | |||||
| Long-lived assets: | |||||||
| United States | $ | 4,193 | $ | 4,148 | |||
| China | 338 | 326 | |||||
| Hungary | 302 | 257 | |||||
| Russia | 233 | 253 | |||||
| United Kingdom | 189 | 253 | |||||
| France | 185 | 163 | |||||
| Germany | 86 | 84 | |||||
| Canada | 57 | 61 | |||||
| Mexico | 57 | 45 | |||||
| Brazil | 5 | 54 | |||||
| Other | 69 | 60 | |||||
| $ | 5,714 | $ | 5,704 | ||||
53
The following table disaggregates segment revenue by major end market served. Differences between total segment totals and consolidated Arconictotals are in Corporate. In 2018, Corporate included $38
| Engine Products | Fastening Systems | Engineered Structures | Forged Wheels | Total Segment | |||||||||||||||||||||||||
| Year ended December 31, 2022 | |||||||||||||||||||||||||||||
| Aerospace - Commercial | $ | 1,495 | $ | 616 | $ | 495 | $ | — | $ | 2,606 | |||||||||||||||||||
| Aerospace - Defense | 526 | 158 | 239 | — | 923 | ||||||||||||||||||||||||
| Commercial Transportation | — | 225 | — | 1,058 | 1,283 | ||||||||||||||||||||||||
| Industrial and Other | 677 | 118 | 56 | — | 851 | ||||||||||||||||||||||||
| Total end-market revenue | $ | 2,698 | $ | 1,117 | $ | 790 | $ | 1,058 | $ | 5,663 | |||||||||||||||||||
| 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 | |||||||||||||||||||
The Company derived 62%, 60%, and 69% of costs related to settlementsits revenue for the years ended December 31, 2022, 2021, and 2020, respectively, from aerospace (commercial and defense) markets.
General Electric Company and Raytheon Technologies Corporation represented approximately 12% and 9%, respectively, of certain customer claimsthe Company’s third-party sales for the year ended December 31, 2022, primarily related to product introductions.from the Engine Products segment.
| For the year ended December 31, | Engineered Products and Forgings | Global Rolled Products | Total Segment | ||||||||
| 2019 | |||||||||||
| Aerospace | $ | 5,075 | $ | 1,251 | $ | 6,326 | |||||
| Transportation | 1,289 | 2,418 | 3,707 | ||||||||
| Building and construction | — | 1,300 | 1,300 | ||||||||
| Industrial and Other | 741 | 2,113 | 2,854 | ||||||||
| Total end-market revenue | $ | 7,105 | $ | 7,082 | $ | 14,187 | |||||
| 2018 | |||||||||||
| Aerospace | $ | 4,722 | $ | 1,116 | $ | 5,838 | |||||
| Transportation | 1,302 | 2,550 | 3,852 | ||||||||
| Building and construction | — | 1,357 | 1,357 | ||||||||
| Industrial and Other | 774 | 2,200 | 2,974 | ||||||||
| Total end-market revenue | $ | 6,798 | $ | 7,223 | $ | 14,021 | |||||
| 2017 | |||||||||||
| Aerospace | $ | 4,347 | $ | 1,109 | $ | 5,456 | |||||
| Transportation | 1,098 | 2,072 | 3,170 | ||||||||
| Building and construction | — | 1,269 | 1,269 | ||||||||
| Industrial and Other | 855 | 2,090 | 2,945 | ||||||||
| Total end-market revenue | $ | 6,300 | $ | 6,540 | $ | 12,840 | |||||
Restructuring and other charges for each year in the three-year period ended December 31, 2019 were comprised of the following:
| 2019 | 2018 | 2017 | |||||||||
| Non-cash asset impairments | $ | 570 | $ | 13 | $ | 58 | |||||
| Layoff costs | 103 | 20 | 64 | ||||||||
| Pension and Other postretirement benefits - net settlement and curtailment charges | (49 | ) | 91 | — | |||||||
| (20 | ) | (109 | ) | 57 | |||||||
| Other | 26 | 13 | (3 | ) | |||||||
| Reversals of previously recorded layoff costs | (10 | ) | (19 | ) | (11 | ) | |||||
| Restructuring and other charges | $ | 620 | $ | 9 | $ | 165 | |||||
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Layoff costs | $ | — | $ | 7 | $ | 113 | |||||||||||
| Net reversals of previously recorded layoff reserves | (1) | (3) | (21) | ||||||||||||||
| Pension, other post-retirement benefits and deferred compensation - net settlement and curtailments | 58 | 75 | 69 | ||||||||||||||
| Non-cash asset impairments and accelerated depreciation | 1 | 15 | 5 | ||||||||||||||
| (8) | (8) | 8 | |||||||||||||||
| Other | 6 | 4 | 8 | ||||||||||||||
| Restructuring and other charges | $ | 56 | $ | 90 | $ | 182 | |||||||||||
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.
54
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 GRP segment;closure of small U.S. manufacturing facilities in Engine Products and Fastening Systems; a $7 charge of $103 ($78 after-tax) for layoff costs, including the separation of approximately
As of December 31, 2019,2022, 80 of the 253 employees were separated. The remaining separations associated withfor the 20182021 restructuring programs were essentially complete. In 2019 and 2018, cash payments of $4 and $9, respectively, were made against layoff reserves relatedare expected to the 2018 restructuring programs.be completed in 2023 with certain final payouts expected to occur in 2024.
As of December 31, 2019,2022, the employee separations associated with the 20172020 restructuring programs were essentially complete. In 2019, 2018, and 2017, cash payments of $5, $34, and $28, respectively, were made against layoff reserves related to the 2017 restructuring programs.complete.
Activity and reserve balances for restructuring charges were as follows:
| Layoff costs | Other exit costs | Total | |||||||||||||||
| Reserve balances at December 31, 2019 | $ | 13 | $ | — | $ | 13 | |||||||||||
| 2020 Activity | |||||||||||||||||
| Cash payments | (51) | — | (51) | ||||||||||||||
| Restructuring and other charges | 161 | 21 | 182 | ||||||||||||||
Other(1) | (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(2) | (75) | (7) | (82) | ||||||||||||||
| Reserve balances at December 31, 2021 | $ | 17 | $ | 2 | $ | 19 | |||||||||||
| 2022 Activity | |||||||||||||||||
| Cash payments | $ | (9) | $ | (7) | $ | (16) | |||||||||||
| Restructuring and other charges | 56 | — | 56 | ||||||||||||||
Other(3) | (58) | 7 | (51) | ||||||||||||||
| Reserve balances at December 31, 2022 | $ | 6 | $ | 2 | $ | 8 | |||||||||||
Layoff costs | Other exit costs | Total | |||||||||
| Reserve balances at December 31, 2016 | $ | 50 | $ | 9 | $ | 59 | |||||
| 2017 | |||||||||||
| Cash payments | (59 | ) | (6 | ) | (65 | ) | |||||
| Restructuring charges | 64 | 1 | 65 | ||||||||
Other(1) | 1 | (2 | ) | (1 | ) | ||||||
| Reserve balances at December 31, 2017 | $ | 56 | $ | 2 | $ | 58 | |||||
| 2018 | |||||||||||
| Cash payments | $ | (47 | ) | $ | (2 | ) | $ | (49 | ) | ||
| Restructuring charges | 111 | 13 | 124 | ||||||||
Other(2) | (110 | ) | 2 | (108 | ) | ||||||
| Reserve balances at December 31, 2018 | $ | 10 | $ | 15 | $ | 25 | |||||
| 2019 | |||||||||||
| Cash payments | $ | (74 | ) | $ | (5 | ) | $ | (79 | ) | ||
| Restructuring charges | 56 | 574 | 630 | ||||||||
Other(3) | 39 | (581 | ) | (542 | ) | ||||||
| Reserve balances at December 31, 2019 | $ | 31 | $ | 3 | $ | 34 | |||||
(1) |
In 2019, Other2020, 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 for other exit costs included a charge of $428$5 for impairment of the Disks long-lived asset group;assets; a charge of $112 for impairment of assets associated with agreement to sell the Company’s Brazilian rolling mill operations, the U.K. forgings business, and a small additive business; a charge of $25 for impairment of properties, plants, and equipment$5 post-closing adjustment related to the Company’s primary research and development facility andsale of a trade name intangible asset;business; a $5 charge of $12 for lease terminations; a charge of $9 for accelerated depreciation as the impacts were primarily reflected in various noncurrent asset accounts; a charge of $5 related to the impairment of a cost method investmentinvestment; a $2 charge for accelerated depreciation; a $1 charge for impairment of GRP,assets due to a facility closure and a $6 charge of $1 related tofor various other miscellaneous items; partiallyexit costs, which were offset by a gain of $20$3 on the sale of assets.
55
(2)In 2021, other for layoff costs included $75 in settlement accounting charges related to contingent consideration from the Texarkana sale. Additionally, Other included the reclassification of $9 in leaseU.K. and U.S. pension plans; while other for 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.
(3)In 2022, other for layoff costs included $58 in settlement accounting charges related to reduce right-of-useU.S. and U.K. pension plans; while other for other exit costs included a gain of $8 on the sale of assets, within Other noncurrent assets in accordance with the new lease accounting standard.which was offset by a $1 charge for accelerated depreciation.
The remaining reserves at December 31, 2022 are expected to be paid in cash during 2020.2023 and 2024.
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Amount charged to interest expense, net | $ | 229 | $ | 259 | $ | 317 | |||||||||||
| 2 | 146 | 64 | |||||||||||||||
| Amount capitalized | 6 | 8 | 11 | ||||||||||||||
| Total | $ | 237 | $ | 413 | $ | 392 | |||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Amount charged to expense | $ | 338 | $ | 378 | $ | 496 | |||||
| Amount capitalized | 33 | 23 | 22 | ||||||||
| $ | 371 | $ | 401 | $ | 518 | ||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Non-service related net periodic benefit cost | $ | 116 | $ | 112 | $ | 154 | |||||
| Interest income | (25 | ) | (23 | ) | (19 | ) | |||||
| Foreign currency (gains) losses, net | (1 | ) | 26 | (5 | ) | ||||||
| Net loss (gain) from asset sales | 7 | 10 | (513 | ) | |||||||
| Other, net | 25 | (46 | ) | (103 | ) | ||||||
| $ | 122 | $ | 79 | $ | (486 | ) | |||||
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| $ | 16 | $ | 9 | $ | 26 | ||||||||||||
| Interest income | (6) | (2) | (5) | ||||||||||||||
| Foreign currency (gains) losses, net | (1) | 2 | (11) | ||||||||||||||
| Net realized and unrealized losses | 18 | 9 | 8 | ||||||||||||||
| Deferred compensation | (8) | 8 | 10 | ||||||||||||||
| 65 | — | — | |||||||||||||||
Other, net(1) | (2) | (7) | 46 | ||||||||||||||
| Total | $ | 82 | $ | 19 | $ | 74 | |||||||||||
(1)In 2019, Other, net included an increase in deferred compensation arrangements and related investment performance. In 2018, Non-service related net periodic benefit cost included lower net actuarial losses as a result of pension actions taken during 2018 (see Note F) and2020, Other, net included a benefitcharge from establishingthe write-off of a tax indemnification receivable of $29$53 reflecting the aggregate of Alcoa Corporation’s 49% share and Arconic Corporation's 33.66% share of a Spanish tax reserve (see Note VT). In 2017, Net loss (gain) from asset salesincluded a gain on the sale of a portion of Arconic’s investment in Alcoa Corporation common stock of $351 (see Note U) and a gain of $167 on the Debt-for-Equity Exchange (see Note U). In 2017, Other, net included an adjustment of $81 to the contingent earn-out liability related to the 2014 acquisition of Firth Rixson (see Note S) and an adjustment of $25 associated with a separation-related guarantee liability (see Note T).
In 2022, a result of this change,certain U.S. pension plan attained funding levels that allowed full lump sum payments. These payments resulted in 2018, the Company recorded a decrease to the Accrued pension benefit liability of $136 related to the reduction of future benefits ($141 offset in Accumulated other comprehensive loss) and curtailmentsettlement charges of $5 in Restructuring and other charges.
56
In 2018,December 2022, the company communicatedCanadian pension plan was amended to plan participants that effectiveprovide for termination of the plan. As a result, the Company recognized a reduction of $2 in the first quarter of 2019,pension benefit accruals for future service and compensation for employees in the United Kingdom defined benefit pension plans will cease. The planobligation through curtailment, resulted in a $13 decrease in the Accrued pension benefits liability which was offset in Accumulated other comprehensive loss. Additionally, on October 29, 2018,loss in the United Kingdom High Court ruled that defined benefitConsolidated Balance Sheet. The wind-up efforts and satisfaction of all plan liabilities are expected to be completed in 2023.
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, offering Guaranteed Minimum Pensions must review benefits accrued between May 1990 to April 1997 to ensure gender pay equality. The reviewwhich resulted in an increase to the Accrued pension benefits liabilitysettlement charges of $9$23 and a corresponding curtailment charge that was$66, respectively, that were recorded in Restructuring and other charges.charges in the Statement of Consolidated Operations. These actions reduced the number of pension plan participants in the U.K. by approximately 70%.
In 2019,2020, 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 the life insurance benefit effective May 1, 2019, and certain health care subsidies effective December 31, 2019.2021, 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 changes, in 2019,amendments, the Company recorded a decrease to the Accrued other postretirement benefits liability of $75,$6 in 2020, which was offset by a curtailment benefit of $58 in Restructuring and other charges and $17 in Accumulated other comprehensive loss.
In June 2019,the first quarter of 2021, the Company and the United Steelworkers (USW) reachedannounced a tentative three-year labor agreement that was ratified onplan 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 11, 2019 covering approximately 3,400 employees at four U.S. locations; the previous labor agreement expired on May 15, 2019. In 2019,1, 2021. The administration change is expected to reduce costs to the Company recognized $9through 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 Cost of goods sold on the accompanying 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.Accumulated other comprehensive loss.
In 2019 and 2018,October 2021, the Company applied settlement accountingundertook additional actions to U.S.reduce gross pension plans dueobligations by $125 by purchasing group annuity contracts with a third-party carrier to lump sum payments to participants whichpay and administer future annuity payments. These actions resulted in a settlement chargescharge of $9$34 and $96 that were recorded in Restructuring and other charges.
charges in the fourth quarter ended December 31, 2021 in the Statement of Consolidated Operations. The funded status of allthe plans have not been significantly impacted.
57
Obligations and Funded Status
| Pension benefits | Other postretirement benefits | ||||||||||||||||||||||
| December 31, | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Change in benefit obligation | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 2,296 | $ | 2,713 | $ | 165 | $ | 215 | |||||||||||||||
| Service cost | 4 | 4 | 2 | 2 | |||||||||||||||||||
| Interest cost | 51 | 47 | 4 | 5 | |||||||||||||||||||
| Amendments | — | 3 | — | (31) | |||||||||||||||||||
Actuarial gains(1) | (553) | (55) | (38) | (10) | |||||||||||||||||||
| Settlements | (72) | (275) | — | — | |||||||||||||||||||
| Curtailments | (2) | — | — | — | |||||||||||||||||||
| Benefits paid | (102) | (140) | (13) | (17) | |||||||||||||||||||
| Medicare Part D subsidy receipts | — | — | — | 1 | |||||||||||||||||||
| Foreign currency translation impact | (23) | (1) | — | — | |||||||||||||||||||
Benefit obligation at end of year(2) | $ | 1,599 | $ | 2,296 | $ | 120 | $ | 165 | |||||||||||||||
Change in plan assets(2) | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 1,531 | $ | 1,724 | $ | — | $ | — | |||||||||||||||
| Actual (loss) return on plan assets | (383) | 124 | — | — | |||||||||||||||||||
| Employer contributions | 43 | 96 | — | — | |||||||||||||||||||
| Benefits paid | (87) | (123) | — | — | |||||||||||||||||||
| Administrative expenses | (12) | (12) | — | — | |||||||||||||||||||
| Settlement payments | (98) | (277) | — | — | |||||||||||||||||||
| Foreign currency translation impact | (24) | (1) | — | — | |||||||||||||||||||
Fair value of plan assets at end of year(2) | $ | 970 | $ | 1,531 | $ | — | $ | — | |||||||||||||||
| Funded status | $ | (629) | $ | (765) | $ | (120) | $ | (165) | |||||||||||||||
| Amounts recognized in the Consolidated Balance Sheet consist of: | |||||||||||||||||||||||
| Noncurrent assets | $ | 20 | $ | 22 | $ | — | $ | — | |||||||||||||||
| Current liabilities | (16) | (16) | (11) | (12) | |||||||||||||||||||
| Noncurrent liabilities | (633) | (771) | (109) | (153) | |||||||||||||||||||
| Net amount recognized | $ | (629) | $ | (765) | $ | (120) | $ | (165) | |||||||||||||||
| Amounts recognized in Accumulated Other Comprehensive Loss consist of: | |||||||||||||||||||||||
| Net actuarial loss (gain) | $ | 907 | $ | 1,067 | $ | (28) | $ | 11 | |||||||||||||||
| Prior service cost (benefit) | 2 | 3 | (40) | (49) | |||||||||||||||||||
| Net amount recognized, before tax effect | $ | 909 | $ | 1,070 | $ | (68) | $ | (38) | |||||||||||||||
| Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss consist of: | |||||||||||||||||||||||
| Net actuarial benefit | $ | (53) | $ | (81) | $ | (38) | $ | (10) | |||||||||||||||
| Amortization of accumulated net actuarial loss | (107) | (125) | (1) | — | |||||||||||||||||||
| Prior service (benefit) cost | (1) | 3 | — | (31) | |||||||||||||||||||
| Amortization of prior service (cost) benefit | — | (7) | 9 | 9 | |||||||||||||||||||
| Net amount recognized, before tax effect | $ | (161) | $ | (210) | $ | (30) | $ | (32) | |||||||||||||||
| Pension benefits | Other postretirement benefits | ||||||||||||||
| December 31, | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Change in benefit obligation | |||||||||||||||
| Benefit obligation at beginning of year | $ | 6,476 | $ | 7,359 | $ | 806 | $ | 927 | |||||||
| Service cost | 25 | 46 | 7 | 7 | |||||||||||
| Interest cost | 235 | 219 | 28 | 28 | |||||||||||
| Amendments | — | 18 | (78 | ) | (25 | ) | |||||||||
| Actuarial losses (gains) | 974 | (372 | ) | 100 | (51 | ) | |||||||||
| Settlements | (23 | ) | (146 | ) | — | — | |||||||||
| Curtailments | — | (154 | ) | — | — | ||||||||||
| Benefits paid | (477 | ) | (422 | ) | (82 | ) | (86 | ) | |||||||
| Medicare Part D subsidy receipts | — | — | 5 | 6 | |||||||||||
| Foreign currency translation impact | 39 | (72 | ) | — | — | ||||||||||
Benefit obligation at end of year(1) | $ | 7,249 | $ | 6,476 | $ | 786 | $ | 806 | |||||||
Change in plan assets(1) | |||||||||||||||
| Fair value of plan assets at beginning of year | $ | 4,334 | $ | 4,862 | $ | — | $ | — | |||||||
| Actual return on plan assets | 731 | (144 | ) | — | — | ||||||||||
| Employer contributions | 268 | 298 | — | — | |||||||||||
| Benefits paid | (453 | ) | (397 | ) | — | — | |||||||||
| Administrative expenses | (34 | ) | (33 | ) | — | — | |||||||||
| Settlements | (22 | ) | (178 | ) | — | — | |||||||||
| Foreign currency translation impact | 44 | (74 | ) | — | — | ||||||||||
Fair value of plan assets at end of year(1) | $ | 4,868 | $ | 4,334 | $ | — | $ | — | |||||||
| Net funded status | $ | (2,381 | ) | $ | (2,142 | ) | $ | (786 | ) | $ | (806 | ) | |||
| Amounts recognized in the Consolidated Balance Sheet consist of: | |||||||||||||||
| Noncurrent assets | $ | 104 | $ | 111 | $ | — | $ | — | |||||||
| Current liabilities | (25 | ) | (23 | ) | (72 | ) | (83 | ) | |||||||
| Noncurrent liabilities | (2,460 | ) | (2,230 | ) | (714 | ) | (723 | ) | |||||||
| Net amount recognized | $ | (2,381 | ) | $ | (2,142 | ) | $ | (786 | ) | $ | (806 | ) | |||
| Amounts recognized in Accumulated Other Comprehensive Loss consist of: | |||||||||||||||
| Net actuarial loss | $ | 3,375 | $ | 2,957 | $ | 179 | $ | 87 | |||||||
| Prior service cost (benefit) | 1 | 3 | (37 | ) | (27 | ) | |||||||||
| Net amount recognized, before tax effect | $ | 3,376 | $ | 2,960 | $ | 142 | $ | 60 | |||||||
| Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss consist of: | |||||||||||||||
| Net actuarial loss (gain) | $ | 566 | $ | (19 | ) | $ | 100 | $ | (52 | ) | |||||
| Amortization of accumulated net actuarial loss | (148 | ) | (264 | ) | (8 | ) | (7 | ) | |||||||
| Prior service cost (benefit) | — | 19 | (78 | ) | (25 | ) | |||||||||
| Amortization of prior service (cost) benefit | (2 | ) | (26 | ) | 68 | 35 | |||||||||
| Net amount recognized, before tax effect | $ | 416 | $ | (290 | ) | $ | 82 | $ | (49 | ) | |||||
(2)At December 31, 2022, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $1,459, $833, and $(626), respectively. 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.
58
Pension Plan Benefit Obligations
| Pension benefits | |||||||||||
| 2022 | 2021 | ||||||||||
| The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans were as follows: | |||||||||||
| Projected benefit obligation | $ | 1,599 | $ | 2,296 | |||||||
| Accumulated benefit obligation | 1,598 | 2,293 | |||||||||
| 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 | 1,482 | 1,982 | |||||||||
| Fair value of plan assets | 833 | 1,193 | |||||||||
| 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 | 1,481 | 1,981 | |||||||||
| Fair value of plan assets | 833 | 1,193 | |||||||||
| Pension benefits | |||||||
| 2019 | 2018 | ||||||
| The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans were as follows: | |||||||
| Projected benefit obligation | $ | 7,249 | $ | 6,476 | |||
| Accumulated benefit obligation | 7,219 | 6,444 | |||||
| The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets was as follows: | |||||||
| Projected benefit obligation | 6,064 | 5,435 | |||||
| Fair value of plan assets | 3,579 | 3,182 | |||||
| The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets was as follows: | |||||||
| Accumulated benefit obligation | 6,045 | 5,415 | |||||
| Fair value of plan assets | 3,579 | 3,179 | |||||
Components of Net Periodic Benefit Cost
Pension benefits(1) | Other postretirement benefits(2) | ||||||||||||||||||||||||||||||||||
| For the year ended December 31, | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Service cost | $ | 4 | $ | 4 | $ | 12 | $ | 2 | $ | 2 | $ | 3 | |||||||||||||||||||||||
| Interest cost | 51 | 47 | 97 | 4 | 5 | 10 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (80) | (90) | (136) | — | — | — | |||||||||||||||||||||||||||||
| Recognized net actuarial loss | 49 | 56 | 78 | 1 | — | 3 | |||||||||||||||||||||||||||||
| Amortization of prior service cost (benefit) | — | 1 | — | (9) | (9) | (6) | |||||||||||||||||||||||||||||
Settlements(3) | 58 | 69 | 76 | — | — | — | |||||||||||||||||||||||||||||
Curtailments(4) | — | 6 | — | — | — | (2) | |||||||||||||||||||||||||||||
Net periodic benefit cost(5) | $ | 82 | $ | 93 | $ | 127 | $ | (2) | $ | (2) | $ | 8 | |||||||||||||||||||||||
| Discontinued operations | — | — | 20 | — | — | 6 | |||||||||||||||||||||||||||||
| Net amount recognized in Statement of Consolidated Operations | $ | 82 | $ | 93 | $ | 107 | $ | (2) | $ | (2) | $ | 2 | |||||||||||||||||||||||
Pension benefits(1) | Other postretirement benefits(2) | ||||||||||||||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||
| Service cost | $ | 25 | $ | 46 | $ | 90 | $ | 7 | $ | 7 | $ | 7 | |||||||||||
| Interest cost | 235 | 219 | 234 | 28 | 28 | 30 | |||||||||||||||||
| Expected return on plan assets | (286 | ) | (306 | ) | (332 | ) | — | — | — | ||||||||||||||
| Recognized net actuarial loss | 139 | 168 | 220 | 4 | 7 | 5 | |||||||||||||||||
| Amortization of prior service cost (benefit) | 2 | 3 | 5 | (6 | ) | (7 | ) | (8 | ) | ||||||||||||||
Settlements(3) | 9 | 96 | — | — | — | — | |||||||||||||||||
Curtailments(4) | — | 23 | — | (58 | ) | (28 | ) | — | |||||||||||||||
Net periodic benefit cost(5) | $ | 124 | $ | 249 | $ | 217 | $ | (25 | ) | $ | 7 | $ | 34 | ||||||||||
(2)In 2021 and 2020, net periodic benefit cost for other postretirement benefits reflects a reduction of less than $1 and $1, respectively, related |
(3)In 2022, settlements were related to U.S. and U.K. lump sum benefit payments. 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. See Note E for further details.
(4)In 2021, the curtailment was due to plan termination. In 2020, the curtailment was due to workforce reductions.
(5)Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses; curtailments and settlements were included in Net Periodic Benefit CostRestructuring and other charges; and all other cost components were recorded in Other expense, netin the Statement of Consolidated Operations.
| Pension benefits | Other postretirement benefits | ||||||
| December 31, | 2020 | 2020 | |||||
| Net actuarial loss recognition | $ | 176 | $ | 8 | |||
| Prior service cost (benefit) recognition | — | (7 | ) | ||||
59
Assumptions
Weighted average assumptions used to determine benefit obligations for U.S. pension and other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):follows:
| December 31, | 2022 | 2021 | |||||||||
| Discount rate | 5.40 | % | 2.70 | % | |||||||
| Cash balance plan interest crediting rate | 3.00 | % | 3.00 | % | |||||||
| December 31, | 2019 | 2018 | |||
| Discount rate | 3.30 | % | 4.35 | % | |
| Rate of compensation increase | — | 3.50 | |||
| 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 model parallelsmodels parallel the plans’ projected cash flows, which have ana global average duration of of 10 years. The underlying cash flows of the bonds included in the modelmodels 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 and is not reported in the preceding table effective December 31, 2019.obligation.
Weighted average assumptions used to determine net periodic benefit cost for U.S. pension and other postretirement benefit plans were as follows (assumptionsfollows:
| 2022 | 2021 | 2020 | |||||||||||||||
Discount rate to calculate service cost(1) | 2.80 | % | 2.80 | % | 3.30 | % | |||||||||||
Discount rate to calculate interest cost(1) | 2.50 | % | 2.10 | % | 2.70 | % | |||||||||||
| Expected long-term rate of return on plan assets | 6.70 | % | 6.20 | % | 6.00 | % | |||||||||||
| 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 non-U.S.most pension plans didfor the full annual period. The discount rates for certain plans were updated during 2022, 2021, and 2020 to reflect the remeasurement of these plans due to settlements and/or curtailments. The weighted-average rates reflecting these remeasurements does not significantly differ materially):
| 2019 | 2018 | 2017 | ||||||
Discount rate to calculate service cost(1) | 4.35 | % | 3.75 | % | 4.20 | % | ||
Discount rate to calculate interest cost(1) | 4.00 | 3.30 | 3.60 | |||||
| Expected long-term rate of return on plan assets | 7.00 | 7.00 | 7.75 | |||||
| Rate of compensation increase | 3.50 | 3.50 | 3.50 | |||||
| Cash balance plan interest crediting rate | 3.00 | 3.00 | 3.00 | |||||
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).assets. 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 2019, 2018,2023, management anticipates that approximately 7% will continue to be the expected long-term rate of return for global plan assets. EROA assumptions are developed by country. Annual changes in the weighted average EROA are impacted by the relative size of the assets by country.
For 2022, 2021, and 2017,2020, 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 fellwere within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. In 2018, management reduced the expected long-term rate of return by 75 basis points due to a decrease in the expected return by asset class and the 20-year moving average. For 2020, management anticipates that 7.00% will be the expected long-term rate of return.
Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):
| 2019 | 2018 | 2017 | ||||||
| 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 | 2023 | 2022 | 2021 | |||||
| 2022 | 2021 | 2020 | |||||||||||||||
| 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 | 2025 | 2024 | 2023 | ||||||||||||||
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by Arconic’sHowmet’s other postretirement benefit plans. For 2020,2023, a 5.5%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 (3.8)%1.80% to 0.7%11.30%. Management does not believe this three-year range is indicative of expected increases for future health care costs over the long-term.
60
| 1% increase | 1% decrease | ||||||
| Effect on other postretirement benefit obligations | $ | 23 | $ | (22 | ) | ||
| Effect on total of service and interest cost components | 1 | (1 | ) | ||||
Plan Assets
| Asset class | Policy range(1) | |||||||||||||
| Equities | 20–55% | |||||||||||||
| Fixed income | 25–55% | |||||||||||||
| Other investments | 15–35% | |||||||||||||
Plan assets at December 31, | ||||||
| Asset class | Policy range | 2019 | 2018 | |||
| Equities | 20–55% | 31 | % | 29 | % | |
| Fixed income | 25–55% | 50 | 48 | |||
| Other investments | 15–35% | 19 | 23 | |||
| Total | 100 | % | 100 | % | ||
The principal objectives underlying the investment of the pension plans’ assets are to ensure that ArconicHowmet 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 achieving diversification across the balance of the asset portfolio.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 discretionary and systematic macro hedge funds, long/shortprivate equity, hedge funds, high yieldprivate 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 the Employee Retirement Income Security Act of 1974 (ERISA)(“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 SQ 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)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 andthat are valued based on the closing price reported in an activequoted prices and other observable market on which the investments are tradeddata (included in Level 1)2) 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 ArconicHowmet 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.
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The following table presents the fair value of pension plan assets classified under the appropriate level of the fair value hierarchy or net asset cost:value:
| December 31, 2022 | Level 1 | Level 2 | Net Asset Value | Total | |||||||||||||||||||
| Equities: | |||||||||||||||||||||||
| Equity securities | $ | — | $ | 133 | $ | 283 | $ | 416 | |||||||||||||||
| Long/short equity hedge funds | — | — | 18 | 18 | |||||||||||||||||||
| Private equity | — | — | 107 | 107 | |||||||||||||||||||
| $ | — | $ | 133 | $ | 408 | $ | 541 | ||||||||||||||||
| Fixed income: | |||||||||||||||||||||||
| Intermediate and long duration government/credit | $ | 107 | $ | 148 | $ | — | $ | 255 | |||||||||||||||
| Other | 6 | 59 | — | 65 | |||||||||||||||||||
| $ | 113 | $ | 207 | $ | — | $ | 320 | ||||||||||||||||
| Other investments: | |||||||||||||||||||||||
| Real estate | $ | — | $ | 3 | $ | 62 | $ | 65 | |||||||||||||||
| Discretionary and systematic macro hedge funds | — | — | 29 | 29 | |||||||||||||||||||
| Other | — | — | 7 | 7 | |||||||||||||||||||
| $ | — | $ | 3 | $ | 98 | $ | 101 | ||||||||||||||||
Net plan assets(1) | $ | 113 | $ | 343 | $ | 506 | $ | 962 | |||||||||||||||
| 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(2) | $ | 141 | $ | 644 | $ | 729 | $ | 1,514 | |||||||||||||||
(1)
| December 31, 2019 | Level 1 | Level 2 | Net asset value | Total | |||||||||||
| Equities: | |||||||||||||||
| Equity securities | $ | 590 | $ | — | $ | 508 | $ | 1,098 | |||||||
| Long/short equity hedge funds | — | — | 260 | 260 | |||||||||||
| Private equity | — | — | 155 | 155 | |||||||||||
| $ | 590 | $ | — | $ | 923 | $ | 1,513 | ||||||||
| Fixed income: | |||||||||||||||
| Intermediate and long duration government/credit | $ | 121 | $ | 1,047 | $ | 1,003 | $ | 2,171 | |||||||
| Other | 126 | 7 | 144 | 277 | |||||||||||
| $ | 247 | $ | 1,054 | $ | 1,147 | $ | 2,448 | ||||||||
| Other investments: | |||||||||||||||
| Real estate | $ | 104 | $ | — | $ | 165 | $ | 269 | |||||||
| Discretionary and systematic macro hedge funds | — | — | 405 | 405 | |||||||||||
| Other | — | — | 240 | 240 | |||||||||||
| $ | 104 | $ | — | $ | 810 | $ | 914 | ||||||||
Net plan assets(1) | $ | 941 | $ | 1,054 | $ | 2,880 | $ | 4,875 | |||||||
| December 31, 2018 | Level 1 | Level 2 | Net Asset Value | Total | |||||||||||
| Equities | |||||||||||||||
| Equity securities | $ | 318 | $ | — | $ | 578 | $ | 896 | |||||||
| Long/short equity hedge funds | — | — | 232 | 232 | |||||||||||
| Private equity | — | — | 147 | 147 | |||||||||||
| $ | 318 | $ | — | $ | 957 | $ | 1,275 | ||||||||
| Fixed income: | |||||||||||||||
| Intermediate and long duration government/credit | $ | 200 | $ | 934 | $ | 770 | $ | 1,904 | |||||||
| Other | 9 | 9 | 152 | 170 | |||||||||||
| $ | 209 | $ | 943 | $ | 922 | $ | 2,074 | ||||||||
| Other investments: | |||||||||||||||
| Real estate | $ | 81 | $ | — | $ | 164 | $ | 245 | |||||||
| Discretionary and systematic macro hedge funds | — | — | 471 | 471 | |||||||||||
| Other | 56 | — | 212 | 268 | |||||||||||
| $ | 137 | $ | — | $ | 847 | $ | 984 | ||||||||
Net plan assets(2) | $ | 664 | $ | 943 | $ | 2,726 | $ | 4,333 | |||||||
Funding and Cash Flows
It is Arconic’sHowmet’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable countrythe benefits laws and tax laws.laws of the applicable country. Periodically, ArconicHowmet contributes additional amounts as deemed appropriate. In 20192022 and 2018,2021, cash contributions to Arconic’sHowmet’s pension plans were $268$43 and $298,$96, respectively. The $268 includes $532021 cash contributions include $12 that was contributed to the Company’s U.S. plans that was in excess of the minimum required under ERISA.
The contributioncontributions to the Company’s pension plans in 2020 is2023 are estimated to be $475$45 (of which $403which $35 is for U.S. plans). The minimum required is $415, along with approximately $60
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Due to actions designed to reduce future obligations.
2021, 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 and expected Medicare Part D subsidy receipts are as follows utilizing the current assumptions outlined above:
| For the year ended December 31, | Pension benefits paid | Gross Other post- retirement benefits | Medicare Part D subsidy receipts | Net Other post- retirement benefits | |||||||||||
| 2020 | $ | 470 | $ | 80 | $ | 5 | $ | 75 | |||||||
| 2021 | 465 | 80 | 5 | 75 | |||||||||||
| 2022 | 460 | 80 | 5 | 75 | |||||||||||
| 2023 | 455 | 80 | 5 | 75 | |||||||||||
| 2024 | 450 | 75 | 5 | 70 | |||||||||||
| Thereafter | 2,120 | 260 | 25 | 235 | |||||||||||
| $ | 4,420 | $ | 655 | $ | 50 | $ | 605 | ||||||||
| For the year ended December 31, | Pension benefits paid | Other post- retirement benefits | |||||||||||||||||||||
| 2023 | $ | 144 | $ | 11 | |||||||||||||||||||
| 2024 | 129 | 11 | |||||||||||||||||||||
| 2025 | 128 | 11 | |||||||||||||||||||||
| 2026 | 126 | 11 | |||||||||||||||||||||
| 2027 | 125 | 10 | |||||||||||||||||||||
| 2028 - 2032 | 581 | 48 | |||||||||||||||||||||
| $ | 1,233 | $ | 102 | ||||||||||||||||||||
Defined Contribution Plans
The components of income from continuing operations before income taxes were as follows:
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| United States | $ | 287 | $ | 28 | $ | 84 | |||||||||||
| Foreign | 319 | 296 | 87 | ||||||||||||||
| Total | $ | 606 | $ | 324 | $ | 171 | |||||||||||
For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| United States | $ | 275 | $ | 518 | $ | 500 | |||||
| Foreign | 300 | 350 | (30 | ) | |||||||
| $ | 575 | $ | 868 | $ | 470 | ||||||
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The provision for income taxes consisted of the following:
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Current: | |||||||||||||||||
Federal(1) | $ | 3 | $ | (9) | $ | (2) | |||||||||||
| Foreign | 53 | 39 | 2 | ||||||||||||||
| State and local | — | (2) | (2) | ||||||||||||||
| 56 | 28 | (2) | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 71 | 22 | (67) | ||||||||||||||
| Foreign | 5 | 11 | 11 | ||||||||||||||
| State and local | 5 | 5 | 18 | ||||||||||||||
| 81 | 38 | (38) | |||||||||||||||
| Total | $ | 137 | $ | 66 | $ | (40) | |||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Current: | |||||||||||
Federal(1) | $ | 4 | $ | 45 | $ | — | |||||
| Foreign | 108 | 138 | 98 | ||||||||
| State and local | 5 | 4 | (2 | ) | |||||||
| 117 | 187 | 96 | |||||||||
| Deferred: | |||||||||||
| Federal | 65 | 146 | 489 | ||||||||
| Foreign | (53 | ) | (94 | ) | 37 | ||||||
| State and local | (24 | ) | (13 | ) | (78 | ) | |||||
| (12 | ) | 39 | 448 | ||||||||
| Total | $ | 105 | $ | 226 | $ | 544 | |||||
A reconciliation of the U.S. federal statutory rate to Arconic’sHowmet’s effective tax rate was as follows (the effective tax rate for all periods2022 and 2021 was a provision on income and for 2020 was a benefit on income):
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| U.S. federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Foreign tax rate differential | 0.1 | (0.7) | (1.2) | ||||||||||||||
U.S. and residual tax on foreign earnings(1) | 1.2 | 6.5 | 5.6 | ||||||||||||||
| U.S. state and local taxes | 0.7 | 1.0 | 2.2 | ||||||||||||||
| Federal cost of state tax | (0.2) | (0.3) | (2.0) | ||||||||||||||
| Permanent differences related to asset disposals and items included in restructuring and other charges | — | (0.3) | 6.8 | ||||||||||||||
| Non-deductible officer compensation | 1.2 | 1.6 | 3.5 | ||||||||||||||
Statutory tax rate and law changes(2) | 0.1 | 1.0 | (15.9) | ||||||||||||||
| Tax holidays | (0.5) | (0.4) | (0.4) | ||||||||||||||
Tax credits(3) | (0.9) | (10.4) | (0.4) | ||||||||||||||
Changes in valuation allowances(4) | 1.4 | 5.1 | 74.8 | ||||||||||||||
Changes in uncertain tax positions(5) | — | — | (116.9) | ||||||||||||||
| Excess benefit for stock compensation | (0.8) | (0.3) | (0.7) | ||||||||||||||
| Prior year tax adjustments | (0.1) | (3.7) | (1.7) | ||||||||||||||
| Other | (0.6) | 0.3 | 1.9 | ||||||||||||||
| Effective tax rate | 22.6 | % | 20.4 | % | (23.4) | % | |||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | |||||
| U.S. federal statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | ||
| Foreign tax rate differential | 2.6 | 2.4 | (8.7 | ) | ||||
| U.S. and residual tax on foreign earnings | 6.0 | 1.6 | (0.1 | ) | ||||
| U.S. State and local taxes | 2.5 | 1.5 | 0.7 | |||||
| Federal benefit of state tax | 0.4 | (0.3 | ) | 3.7 | ||||
Permanent differences related to asset disposals and items included in restructuring and other charges(1) | (22.9 | ) | (16.9 | ) | (167.4 | ) | ||
| Non-deductible transaction costs | 1.6 | — | 0.3 | |||||
| Non-deductible officer compensation | 1.8 | 0.1 | — | |||||
Statutory tax rate and law changes(2) | (0.2 | ) | 6.5 | 52.5 | ||||
| Tax holidays | (3.2 | ) | (1.6 | ) | (3.0 | ) | ||
Changes in valuation allowances(3) | (14.2 | ) | 0.9 | 137.9 | ||||
| Impairment of goodwill | — | — | 53.5 | |||||
| Changes in uncertain tax positions | 6.1 | 12.8 | 10.1 | |||||
Prior year tax adjustments(4) | 15.2 | (2.6 | ) | (0.9 | ) | |||
| Other | 1.6 | 0.6 | 2.1 | |||||
| Effective tax rate | 18.3 | % | 26.0 | % | 115.7 | % | ||
(2)In 2020, final regulations were issued that provided an election |
(3)In 2021, a $32 benefit for income tax years beginning after December 31, 2017, the transition of U.S. international taxation fromcredits related to development incentives in Hungary was recognized.
(4)In 2020, a worldwide$104 valuation allowance was recorded related to deferred tax systemassets that were previously subject to a territorial system, and a one-time transition tax on the non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017. Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118"), Income Tax Accounting Implications of the Tax Cuts and Jobs Act,reserve that was issued by the SEC to address the application of U.S. GAAP for financial reporting. SAB 118 permitted the use of provisional amounts based on reasonable estimatesotherwise released in the financial statements. SAB 118 also provided that the tax impact may be considered incomplete in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act.
(5)In 2020, the 2017 Tax Act in accordance with SAB 118. This charge primarilyCompany 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 $16 charge for the one-time transitionpreviously uncertain U.S. tax and a $43 charge to update deferred tax balances.position was also recognized in 2020.
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The components of net deferred tax assets and liabilities were as follows:
| 2022 | 2021 | ||||||||||||||||||||||
| December 31, | Deferred tax assets | Deferred tax liabilities | Deferred tax assets | Deferred tax liabilities | |||||||||||||||||||
| Depreciation | $ | 11 | $ | 492 | $ | 8 | $ | 538 | |||||||||||||||
| Employee benefits | 232 | 1 | 300 | 3 | |||||||||||||||||||
| Loss provisions | 26 | 1 | 20 | 1 | |||||||||||||||||||
| Deferred income/expense | 62 | 1,161 | 50 | 1,098 | |||||||||||||||||||
| Interest | 99 | — | 105 | — | |||||||||||||||||||
| Tax loss carryforwards | 2,955 | — | 3,226 | — | |||||||||||||||||||
| Tax credit carryforwards | 268 | — | 358 | — | |||||||||||||||||||
| Other | 6 | 6 | 10 | 7 | |||||||||||||||||||
| $ | 3,659 | $ | 1,661 | $ | 4,077 | $ | 1,647 | ||||||||||||||||
| Valuation allowance | (1,965) | — | (2,279) | — | |||||||||||||||||||
| $ | 1,694 | $ | 1,661 | $ | 1,798 | $ | 1,647 | ||||||||||||||||
| 2019 | 2018 | ||||||||||||||
| December 31, | Deferred tax assets | Deferred tax liabilities | Deferred tax assets | Deferred tax liabilities | |||||||||||
| Depreciation | $ | 25 | $ | 729 | $ | 38 | $ | 694 | |||||||
| Employee benefits | 887 | 16 | 836 | 27 | |||||||||||
| Loss provisions | 92 | — | 94 | — | |||||||||||
| Deferred income/expense | 96 | 943 | 22 | 1,102 | |||||||||||
| Interest | 56 | — | — | — | |||||||||||
| Tax loss carryforwards | 2,932 | — | 3,159 | — | |||||||||||
| Tax credit carryforwards | 379 | — | 579 | — | |||||||||||
| Other | 52 | 16 | 94 | 20 | |||||||||||
| $ | 4,519 | $ | 1,704 | $ | 4,822 | $ | 1,843 | ||||||||
| Valuation allowance | (2,256 | ) | — | (2,486 | ) | — | |||||||||
| $ | 2,263 | $ | 1,704 | $ | 2,336 | $ | 1,843 | ||||||||
The following table details the expiration periods of the deferred tax assets presented above:
| December 31, 2022 | Expires within 10 years | Expires within 11-20 years | No Expiration(1) | Other(2) | Total | ||||||||||||||||||||||||
| Tax loss carryforwards | $ | 362 | $ | 533 | $ | 2,060 | $ | — | $ | 2,955 | |||||||||||||||||||
| Tax credit carryforwards | 196 | 59 | 13 | — | 268 | ||||||||||||||||||||||||
Other(3) | — | — | 380 | 56 | 436 | ||||||||||||||||||||||||
| Valuation allowance | (522) | (234) | (1,204) | (5) | (1,965) | ||||||||||||||||||||||||
| $ | 36 | $ | 358 | $ | 1,249 | $ | 51 | $ | 1,694 | ||||||||||||||||||||
(1)Deferred tax assets with no expiration may still have annual limitations on utilization.
| December 31, 2019 | Expires within 10 years | Expires within 11-20 years | No expiration(1) | Other(2) | Total | ||||||||||||||
| Tax loss carryforwards | $ | 452 | $ | 235 | $ | 2,245 | $ | — | $ | 2,932 | |||||||||
| Tax credit carryforwards | 300 | 69 | 10 | — | 379 | ||||||||||||||
| Other | — | — | 120 | 1,088 | 1,208 | ||||||||||||||
| Valuation allowance | (711 | ) | (176 | ) | (1,306 | ) | (63 | ) | (2,256 | ) | |||||||||
| $ | 41 | $ | 128 | $ | 1,069 | $ | 1,025 | $ | 2,263 | ||||||||||
(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 (27%(4%), and taxable temporary differences that reverse within the carryforward period (73%(96%).
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 Arconic’sHowmet’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measuredremeasured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
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Howmet’s foreign tax credits in the United StatesU.S. have a 10-year carryforward period with expirations ranging from 20202023 to 20282027 (as of December 31, 2019)2022). 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. After consideration of all available evidence including potential tax planning strategies, incremental valuation allowances of $46 and $9 were recognized in 2018 and 2017, respectively. No additional valuation allowance was recorded in 2019 as the Company intends to deduct, rather than credit, foreign taxes. Foreign tax credits of $88, $8,$68 and $57$22 expired at the end of 2019, 2018,2022 and 2017,2021, respectively, resulting in a corresponding decrease to the valuation allowance. In 2022, the Company decided to increase the valuation allowance by $12 in order to fully reserve the foreign tax credit carryover after weighing all available evidence including foreign source income projections. The valuation allowance was also reduced in 2021 by $113$9 as a result of Arconic deductingupdated U.S. regulatory guidance concerning the utilization of foreign taxes that weretax credits in connection with the one-time transition tax on the deemed repatriation of previously claimednon-taxed post-1986 earnings and profits of certain foreign subsidiaries enacted as part of the 2017 Act, and by $4 as a U.S.result of a corresponding reduction in the deferred tax asset related to suspended foreign tax credit.credits. At December 31, 2019,2022, the cumulative amount of the valuation allowance was $216.$124. 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.
In 2018, Arconic reduced2022, after weighing all available evidence, the Company released a $6 valuation allowance in the U.K. related to interest deduction carryforwards. 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 $92$104 as a result of increasingreleasing a tax reserve for unrecognized tax benefits in Spain. The valuation allowance reduction was partially offset byfollowing a $20 charge with respect to losses no longer supported by reversing temporary differences. Arconic also recorded an additional valuation allowance of $61 and $675 in 2018 and 2017, respectively, which offsets a deferred tax asset recorded for additional losses reported on thefavorable Spanish tax return related tocase 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 Separation of Alcoa that are not more likely than not to be realized.allowances may increase or decrease based on changes in facts and circumstances.
The following table details the changes in the valuation allowance:
| December 31, | 2019 | 2018 | 2017 | ||||||||
| Balance at beginning of year | $ | 2,486 | $ | 2,584 | $ | 1,940 | |||||
| Increase to allowance | 37 | 136 | 831 | ||||||||
| Release of allowance | (222 | ) | (154 | ) | (246 | ) | |||||
| Acquisitions and divestitures | (2 | ) | — | (1 | ) | ||||||
| Tax apportionment, tax rate and tax law changes | (13 | ) | (14 | ) | (24 | ) | |||||
| Foreign currency translation | (30 | ) | (66 | ) | 84 | ||||||
| Balance at end of year | $ | 2,256 | $ | 2,486 | $ | 2,584 | |||||
| December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Balance at beginning of year | $ | 2,279 | $ | 2,307 | $ | 2,121 | |||||||||||
| Increase to allowance | 40 | 113 | 136 | ||||||||||||||
| Release of allowance | (154) | (94) | (50) | ||||||||||||||
| Tax apportionment, tax rate and tax law changes | (110) | 63 | (23) | ||||||||||||||
| Foreign currency translation | (90) | (110) | 123 | ||||||||||||||
| Balance at end of year | $ | 1,965 | $ | 2,279 | $ | 2,307 | |||||||||||
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. At this time, Arconic has no plans to distribute such earnings in the foreseeable future. If such earnings were to be distributed, ArconicHowmet would expect the potential withholding tax, U.S. state tax, and withholdingU.S. capital gains tax impacts to be immaterial and the potential deferred tax liability associated with future foreign currency gains to be impracticable to determine.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
| December 31, | 2019 | 2018 | 2017 | ||||||||
| Balance at beginning of year | $ | 166 | $ | 73 | $ | 28 | |||||
| Additions for tax positions of the current year | 34 | — | 23 | ||||||||
| Additions for tax positions of prior years | 3 | 143 | 27 | ||||||||
| Reductions for tax positions of prior years | — | (42 | ) | — | |||||||
| Settlements with tax authorities | — | — | — | ||||||||
| Expiration of the statute of limitations | (2 | ) | (6 | ) | (5 | ) | |||||
| Foreign currency translation | (4 | ) | (2 | ) | — | ||||||
| Balance at end of year | $ | 197 | $ | 166 | $ | 73 | |||||
| December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Balance at beginning of year | $ | 2 | $ | 2 | $ | 176 | |||||||||||
| Reductions for tax positions of prior years | — | — | (182) | ||||||||||||||
| Settlements with tax authorities | — | — | (1) | ||||||||||||||
| Foreign currency translation | — | — | 9 | ||||||||||||||
| Balance at end of year | $ | 2 | $ | 2 | $ | 2 | |||||||||||
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 2019, 2018,2022, 2021, and 20172020 would be approximately 13%less than 1%, 5%1%, and 15%1%, respectively, of pre-tax book income. ArconicHowmet does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2020.2023.
It is Arconic’sHowmet’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes onin the accompanying Statement of Consolidated Operations. ArconicHowmet recognized interest of $6, $22less than $1, less than $1, and $1 for 2019, 2018,$2 in 2022, 2021, and 2017,2020, respectively. Due to the expiration of the statute of limitations, settlements with tax authorities, reductions in prior accruals, and refunded overpayments, ArconicHowmet recognized interest income of $0,less than $1, $3, and $2$25 in 2019, 2018,2022, 2021, and 2017,2020, respectively. As of December 31, 2019, 2018,2022, 2021, and 2017,2020, the amount accrued for the payment of interest and penalties was $23, $21,less than $1, less than $1, and $2, respectively.
Preferred Stock. ArconicHowmet has 2two classes of preferred stock: $3.75 Cumulative Preferred Stock (“Class A Preferred StockStock”) 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 both December 31, 20192022 and 2018.2021. Class B Serial Preferred Stock has 10,000,000 shares authorized at a par value of $1 per share. There were 0no shares of Class B Serial Preferred Stock outstanding at both December 31, 20192022 and 2018 (see below).2021.
Common Stock. At December 31, 2019,2022, there were 600,000,000 shares authorized and 432,855,183412,155,057 shares issued and outstanding. Dividends paid were $0.10 per share in 2022 ($0.02 per share in each of $0.12the first, second, and third quarters of 2022 and $0.04 per annumshare in the fourth quarter of 2022), $0.04 per share in 2021 ($0.06 dividend0.02 per share in each of the third and fourth quarters of 2021), and $0.02 per share in 2020 (all in the first quarter of 2019 and $0.02 per quarter for the remainder of the year) in 2019 and $0.24 per annum or $0.06 per quarter in 2018 and 2017.2020).
As of December 31, 2019,2022, 47 million shares of common stock were reserved for issuance under Arconic’sHowmet’s stock-based compensation plans. As of December 31, 2019, 372022, 29 million shares remain available for issuance. ArconicHowmet issues new shares to satisfy the exercise of stock options and the conversion of stock awards.
67
Common Stock Outstanding and settled in cash on December 1, 2015 (principal amount of $115) and the other tranche was due on October 15, 2019 (principal amount of $403), unless earlier converted or purchased by Arconic at the holder’s option under specific conditions. No shares of the Company’s common stock were issued in connection with the maturity or final conversion of this convertible debt. See Note P for additional details.
Share Activity (number of shares)
| Balance at | 432,855,183 | |||||||||||
| Issued for stock-based compensation plans | 3,896,119 | |||||||||||
| Repurchase and retirement of common stock | (3,844,925) | |||||||||||
| Balance at | 432,906,377 | |||||||||||
| Issued for stock-based compensation plans | 2,195,681 | |||||||||||
| Repurchase and retirement of | (13,410,146) | |||||||||||
| Balance at December 31, 2021 | 421,691,912 | |||||||||||
| Issued for stock-based compensation plans | 1,819,651 | |||||||||||
| Repurchase and retirement of common stock | (11,356,506) | |||||||||||
| Balance at December 31, 2022 | 412,155,057 | |||||||||||
The following table provides details for share repurchases during 2022, 2021, and 2020:
| Number of shares | Average price per share(1) | Total | |||||||||||||||
| Q1 2022 open market repurchase | 5,147,307 | $34.00 | $175 | ||||||||||||||
| Q2 2022 open market repurchase | 1,770,271 | $33.89 | $60 | ||||||||||||||
| Q3 2022 open market repurchase | 2,764,846 | $36.17 | $100 | ||||||||||||||
| Q4 2022 open market repurchase | 1,674,082 | $38.83 | $65 | ||||||||||||||
| 2022 Share repurchase total | 11,356,506 | $35.22 | $400 | ||||||||||||||
| Q2 2021 accelerated share repurchase | 5,878,791 | $34.02 | $200 | ||||||||||||||
| Q3 2021 open market repurchase | 769,274 | $32.50 | $25 | ||||||||||||||
| Q4 2021 open market repurchase | 6,762,081 | $30.32 | $205 | ||||||||||||||
| 2021 Share repurchase total | 13,410,146 | $32.07 | $430 | ||||||||||||||
| Q3 2020 open market repurchase | 2,907,094 | $17.36 | $51 | ||||||||||||||
| Q4 2020 open market repurchase | 937,831 | $23.99 | $22 | ||||||||||||||
| 2020 Share repurchase total | 3,844,925 | $18.98 | $73 | ||||||||||||||
| Share delivery date | Number of shares | Average price | Total | ||
| February 21, 2019 | 31,908,831 | ||||
| April 29, 2019 | 4,525,592 | ||||
| February 2019 ASR total | 36,434,423 | $19.21 | $700 | ||
| May 6, 2019 | 7,455,732 | ||||
| June 12, 2019 | 1,561,249 | ||||
| May 2019 ASR total | 9,016,981 | $22.18 | $200 | ||
| August 8, 2019 | 6,791,172 | ||||
| October 3, 2019 | 983,107 | ||||
| August 2019 ASR total | 7,774,279 | $25.73 | $200 | ||
| November 18, 2019 | 428,000 | ||||
| November 19, 2019 | 428,000 | ||||
| November 20, 2019 | 370,000 | ||||
| November 21, 2019 | 400,681 | ||||
| November 2019 share repurchase program | 1,626,681 | $30.74 | $50 | ||
| 2019 Share repurchase total | 54,852,364 | $20.97 | $1,150 | ||
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Stock-Based Compensation
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. At the end of the year, theThe stock price thresholds have beenwere fully reached. The cash payment of $23 will occuroccurred in 2021 in accordance with the terms of the agreements.
In 2019, 2018,2022, 2021, and 2017, Arconic2020, Howmet recognized stock-based compensation expense of $78$54 ($7049 after-tax), $50$40 ($3936 after-tax), and $54$46 ($3642 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.
All stock-based compensation expense recorded in 2022 and 2021 relates to restricted stock unit awards. Cash bonus awards of $21$2 were recorded in 2019.2020. Of the remaining stock-based compensation expense in 2019,2020, more than 95% relates to restricted stock unit awards. The expense related to restricted stock unit awards in 2018 and 2017 was approximately 85%. NaNNo stock-based compensation expense was capitalized in any of those years. Stock-based compensation expense was reduced by $3 and $13$2 in 2019 and 2017, respectively,2021 for certain executive pre-vest cancellations, which were recorded in Restructuring and other charges within the Statement of Consolidated Operations. At December 31, 2019,2022, there was $50$35 (pre-tax) of unrecognized compensation expense related to non-vested stock option grants and non-vested restricted stock unit award grants. This expense is expected to be recognized over a weighted average period of 1.3 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 wasis equivalent to the closing market price of Arconic’sHowmet’s common stock on the date of grant. The weighted average grant date fair value per share of the 20192022 and 2021 performance stock awards with a market condition scaled by a TSR multiplier is $44.44 and $43.41, 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) was $11.93.is $2.57. The grant date fair value of the 2018 performance stock awards containing a market condition (scaled by TSR multiplier) was $20.25. The 20192022, 2021, and 20182020 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 (1.6%(2.0% in 20192022, 0.2% in 2021, and 2.7% in 2018)0.3% in 2020) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. In 20192022, 2021, and 2020, volatility of 39.4%, 56.0%, and 48.3%, respectively, was estimated using implied andHowmet's historical volatility (33.4%). Becausein 2022 and a blended rate of limitedHowmet's historical informationvolatility and a peer-based volatility due to the Arconic Inc. Separation of Alcoa, 2018 volatility (32.0%) was estimated using implied volatility,Transaction and the representative price return approach, which uses price returnsrelated changes in the nature of comparable companies, was used to develop a correlation assumption. For stockthe business in 2021 and 2020. Stock options the fair value was estimated on the date of grant using a lattice-pricing model, which generated a result of $9.79 and $6.26 per option in 2018 and 2017, respectively. There were no stock options issued in 2019. The lattice-pricing model uses a number of assumptions to estimate the fair value of a stock option, including a risk-free interest rate, dividend yield, volatility, exercise behavior, and contractual life. The following paragraph describes in detail the assumptions used to estimate the fair value of stock optionslast granted in 2018 (the assumptions used to estimate the fair value2018.
69
| Stock options | Stock awards | ||||||||||||
Number of options | Weighted average exercise price | Number of awards | Weighted average FMV per award | ||||||||||
| Outstanding, December 31, 2018 | 10 | $ | 24.95 | 7 | $ | 21.13 | |||||||
| Granted | — | — | 4 | 19.80 | |||||||||
| Exercised | (2 | ) | 21.34 | — | — | ||||||||
| Converted | — | — | (3 | ) | 15.78 | ||||||||
| Expired or forfeited | (1 | ) | 28.37 | (1 | ) | 22.10 | |||||||
| Performance share adjustment | — | — | — | 19.96 | |||||||||
| Outstanding, December 31, 2019 | 7 | $ | 25.75 | 7 | $ | 22.05 | |||||||
| Stock options | Stock awards | ||||||||||||||||||||||
| Number of options | Weighted average exercise price per option | Number of awards | Weighted average FMV per award | ||||||||||||||||||||
| Outstanding, December 31, 2021 | 2 | $ | 23.64 | 8 | $ | 16.19 | |||||||||||||||||
| Granted | — | — | 1 | 35.79 | |||||||||||||||||||
| Exercised | (1) | 22.75 | — | — | |||||||||||||||||||
| Converted | — | — | (2) | 16.35 | |||||||||||||||||||
| Expired or forfeited | — | 33.61 | (1) | 24.92 | |||||||||||||||||||
| Outstanding, December 31, 2022 | 1 | $ | 23.86 | 6 | $ | 17.77 | |||||||||||||||||
As of December 31, 2019,2022, the number of stock options outstanding had a weighted average remaining contractual life of 3.42.1 years and a total intrinsic value of $40. Additionally, 5.9 million$15. All of the stock options outstanding were fully vested and exercisableexercisable. In 2022, 2021, and had a weighted average remaining contractual life of 3.0 years, a weighted average exercise price of $25.80, and a total intrinsic value of $36 as of December 31, 2019. In 2019, 2018, and 2017,2020, the cash received from stock option exercises was $56, $16, $22, and $50$33, respectively, and the total tax benefit realized from these exercises was $4,$2, $2, and $4,$3, respectively. The total intrinsic value of stock options exercised during 2019, 2018,2022, 2021, and 20172020 was $17, $7,$10, $10, and $13,$14, respectively. The total intrinsic value of stock awards converted during 2022, 2021, and 2020 was $61, $55, and $104, respectively.
Basic earnings per share (EPS)(“EPS”) amounts are computed by dividing earnings, (loss), 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 ArconicHowmet common shareholders was as follows (shares in millions):
| For the year ended December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| Net income from continuing operations | $ | 469 | $ | 258 | $ | 211 | |||||||||||
| Less: preferred stock dividends declared | 2 | 2 | 2 | ||||||||||||||
| Net income from continuing operations attributable to common shareholders | 467 | 256 | 209 | ||||||||||||||
| Income from discontinued operations | — | — | 50 | ||||||||||||||
| Net income attributable to common shareholders - basic and diluted | $ | 467 | $ | 256 | $ | 259 | |||||||||||
| Average shares outstanding - basic | 416 | 430 | 435 | ||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
| Stock and performance awards | 5 | 5 | 4 | ||||||||||||||
| Average shares outstanding - diluted | 421 | 435 | 439 | ||||||||||||||
| For the year ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Net income (loss) | $ | 470 | $ | 642 | $ | (74 | ) | ||||
| Less: preferred stock dividends declared | (2 | ) | (2 | ) | (53 | ) | |||||
| Net income (loss) available to Arconic common shareholders - basic | 468 | 640 | (127 | ) | |||||||
| Add: interest expense related to convertible notes | 9 | 11 | — | ||||||||
| Net income (loss) available to Arconic common shareholders - diluted | $ | 477 | $ | 651 | $ | (127 | ) | ||||
| Average shares outstanding - basic | 446 | 483 | 451 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Stock options | 1 | 1 | — | ||||||||
| Stock and performance awards | 5 | 5 | — | ||||||||
Convertible notes(1) | 11 | 14 | — | ||||||||
| Average shares outstanding - diluted | 463 | 503 | 451 | ||||||||
Common stock outstanding at December 31, 20192022 and 20182021 was 433approximately 412 million and 483422 million, respectively.
The 14 million decrease in common stockaverage shares outstanding at(basic) for the year ended December 31, 20192022 compared to the year ended December 31, 2021 was primarily due to the impact of share repurchases of approximately 5511 million in 2019 (see Note H).shares repurchased during 2022. As average shares outstanding are used in the calculation forof both basic and diluted EPS, the full impact of share repurchases wasis not realized in EPS in 2019 as the share repurchases occurred at varying points during 2019.year of repurchase.
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, | 2022 | 2021 | 2020 | ||||||||||||||
| Stock options | — | — | 1 | ||||||||||||||
70
| 2019 | 2018 | 2017 | ||||||
| Mandatory convertible preferred stock | n/a | n/a | 39 | |||||
| Convertible notes | — | — | 14 | |||||
Stock options(1) | 1 | 9 | 11 | |||||
| Stock awards | — | — | 7 | |||||
The following table details the activity of the fourthree components that comprise Accumulated other comprehensive lossloss:
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (799) | $ | (980) | $ | (2,732) | |||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Unrecognized net actuarial gain (loss) and prior service cost/benefit | 87 | 111 | (211) | ||||||||||||||||||||||||||||||||
| Tax (expense) benefit | (18) | (26) | 48 | ||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss) before reclassifications, net of tax | 69 | 85 | (163) | ||||||||||||||||||||||||||||||||
Amortization of net actuarial loss and prior service cost(1) | 99 | 123 | 149 | ||||||||||||||||||||||||||||||||
Tax expense(2) | (22) | (27) | (32) | ||||||||||||||||||||||||||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(3) | 77 | 96 | 117 | ||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss) | 146 | 181 | (46) | ||||||||||||||||||||||||||||||||
| Transfer to Arconic Corporation | — | — | 1,798 | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | (653) | $ | (799) | $ | (980) | |||||||||||||||||||||||||||||
| Foreign currency translation | |||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (1,062) | $ | (966) | $ | (596) | |||||||||||||||||||||||||||||
Other comprehensive (loss) income(4) | (131) | (96) | 58 | ||||||||||||||||||||||||||||||||
| Transfer to Arconic Corporation | — | — | (428) | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | (1,193) | $ | (1,062) | $ | (966) | |||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (2) | $ | 3 | $ | (1) | |||||||||||||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||
| Net change from periodic revaluations | (8) | 20 | — | ||||||||||||||||||||||||||||||||
| Tax benefit (expense) | 2 | (4) | — | ||||||||||||||||||||||||||||||||
| Total Other comprehensive (loss) income before reclassifications, net of tax | (6) | 16 | — | ||||||||||||||||||||||||||||||||
| Net amount reclassified to earnings | 17 | (26) | 6 | ||||||||||||||||||||||||||||||||
Tax (expense) benefit(2) | (4) | 5 | (2) | ||||||||||||||||||||||||||||||||
Total amount reclassified from Accumulated other comprehensive income (loss), net of tax(3) | 13 | (21) | 4 | ||||||||||||||||||||||||||||||||
| Total Other comprehensive income (loss) | 7 | (5) | 4 | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 5 | $ | (2) | $ | 3 | |||||||||||||||||||||||||||||
| Accumulated other comprehensive loss balance at end of period | $ | (1,841) | $ | (1,863) | $ | (1,943) | |||||||||||||||||||||||||||||
(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 both Arconic’s shareholdersincome taxes (see Note I) in the Statement of Consolidated Operations.
(3)A positive amount indicates a corresponding charge to earnings and noncontrolling interests:a negative amount indicates a corresponding benefit to earnings.
(4)In all periods presented, no amounts were reclassified to earnings.
71
| Arconic | Noncontrolling Interests | ||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Balance at beginning of period | $ | (2,344 | ) | $ | (2,230 | ) | $ | (2,010 | ) | $ | — | $ | — | $ | — | ||||||||
Adoption of accounting standard (A) | — | (369 | ) | — | — | — | — | ||||||||||||||||
| Other comprehensive (loss) income: | — | ||||||||||||||||||||||
| Unrecognized net actuarial gain and prior service cost/benefit | (587 | ) | 70 | (466 | ) | — | — | — | |||||||||||||||
| Tax benefit (expense) | 129 | (19 | ) | 102 | — | — | — | ||||||||||||||||
| Total Other comprehensive (loss) income before reclassifications, net of tax | (458 | ) | 51 | (364 | ) | — | — | — | |||||||||||||||
Amortization of net actuarial loss and prior service cost(1) | 90 | 262 | 222 | — | — | — | |||||||||||||||||
Tax expense(2) | (20 | ) | (58 | ) | (78 | ) | — | — | — | ||||||||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(3) | 70 | 204 | 144 | — | — | — | |||||||||||||||||
| Total Other comprehensive (loss) income | (388 | ) | 255 | (220 | ) | — | — | — | |||||||||||||||
| Balance at end of period | $ | (2,732 | ) | $ | (2,344 | ) | $ | (2,230 | ) | $ | — | $ | — | $ | — | ||||||||
| Foreign currency translation | |||||||||||||||||||||||
| Balance at beginning of period | $ | (583 | ) | $ | (437 | ) | $ | (689 | ) | $ | — | $ | — | $ | (2 | ) | |||||||
Other comprehensive (loss) income(4) | (13 | ) | (146 | ) | 252 | — | — | 2 | |||||||||||||||
| Balance at end of period | $ | (596 | ) | $ | (583 | ) | $ | (437 | ) | $ | — | $ | — | $ | — | ||||||||
| Debt securities | |||||||||||||||||||||||
| Balance at beginning of period | $ | (3 | ) | $ | (2 | ) | $ | 132 | $ | — | $ | — | $ | — | |||||||||
Other comprehensive income (loss)(5) | 3 | (1 | ) | (134 | ) | — | — | — | |||||||||||||||
| Balance at end of period | $ | — | $ | (3 | ) | $ | (2 | ) | $ | — | $ | — | $ | — | |||||||||
| Cash flow hedges | |||||||||||||||||||||||
| Balance at beginning of period | $ | 4 | $ | 25 | $ | (1 | ) | $ | — | $ | — | $ | — | ||||||||||
| (2 | ) | 2 | — | — | — | — | |||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Net change from periodic revaluations | (9 | ) | (15 | ) | 37 | — | — | — | |||||||||||||||
| Tax benefit (expense) | 3 | 3 | (9 | ) | — | — | — | ||||||||||||||||
| Total Other comprehensive (loss) income before reclassifications, net of tax | (6 | ) | (12 | ) | 28 | — | — | — | |||||||||||||||
| Net amount reclassified to earnings | |||||||||||||||||||||||
Aluminum contracts(6) | 5 | (8 | ) | (2 | ) | — | — | — | |||||||||||||||
Interest rate contracts(8) | — | (2 | ) | — | — | — | — | ||||||||||||||||
Nickel contracts(7) | (1 | ) | (4 | ) | (1 | ) | — | — | — | ||||||||||||||
| Sub-total | 4 | (14 | ) | (3 | ) | — | — | — | |||||||||||||||
Tax (expense) benefit(2) | (1 | ) | 3 | 1 | — | — | — | ||||||||||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax(3) | 3 | (11 | ) | (2 | ) | — | — | — | |||||||||||||||
| Total Other comprehensive (loss) income | (3 | ) | (23 | ) | 26 | — | — | — | |||||||||||||||
| Balance at end of period | $ | (1 | ) | $ | 4 | $ | 25 | $ | — | $ | — | $ | — | ||||||||||
| Accumulated other comprehensive loss | $ | (3,329 | ) | $ | (2,926 | ) | $ | (2,644 | ) | $ | — | $ | — | $ | — | ||||||||
Sale of Receivables ProgramPrograms
The terminated arrangement was with 3 financial institutions to sell certain customer receivables without recourse on a revolving basis. The sale of such receivables is completed using a bankruptcy remote special purpose entity, which is a consolidated subsidiary of Arconic. This arrangement provides up to a maximum funding of $400 for receivables sold. Arconic maintains a beneficial interest, or a right to collect cash, on the sold receivables that have not been funded (deferred purchase program). On March 30, 2012, Arconic initially sold $304 of customer receivables in exchange for $50 in cash and $254 of deferred purchase program under the arrangement. Arconic has received additionalCompany had $44 net cash funding of $300repayments ($3,55841 in draws and $3,258 in repayments) since the program’s inception, including net cash draws totaling $0 ($600 in draws and $600$85 in repayments) in 2019 and net cash draws totaling $0 ($6002021 in draws and $600 in repayments) in 2018.
The Company sold $1,799 of its receivables without recourse and received cash funding under this program during 2022, resulting in derecognition of the GRP businessreceivables from the saleCompany’s Consolidated Balance Sheet. Costs associated with the sales of receivables programare reflected in preparationthe Company’s Statement of Consolidated Operations for the planned Separationperiods in which the sales occur. Cash receipts from sold receivables under the Receivables Purchase Agreement are presented within operating activities in the Statement of Arconic and repurchasedConsolidated Cash Flows.
Other Customer Receivable Sales
In 2022, the remaining $282 unpaidCompany sold $474 of certain customers’ receivables of GRPin exchange for cash (of which $126 was outstanding from customers in a non-cash transaction by reducingat December 31, 2022), the amount of the deferred purchase program receivable.
In 2021, the Company sold $368 of certain customers’ receivables in exchange for doubtful accounts related to customercash (of which $109 was outstanding from customers at December 31, 2021), the proceeds from which are presented in changes in receivables and other receivables:within operating activities in the Statement of Consolidated Cash Flows.
| Customer receivables | Other receivables | ||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Balance at beginning of year | $ | 4 | $ | 8 | $ | 13 | $ | 31 | $ | 34 | $ | 32 | |||||||||||
| Provision for doubtful accounts | 3 | 2 | 1 | 13 | 7 | 9 | |||||||||||||||||
| Write off of uncollectible accounts | (2 | ) | (2 | ) | (5 | ) | (2 | ) | (2 | ) | (1 | ) | |||||||||||
| Recoveries of prior write-offs | — | — | — | (5 | ) | (3 | ) | (3 | ) | ||||||||||||||
| Other | (2 | ) | (4 | ) | (1 | ) | (4 | ) | (5 | ) | (3 | ) | |||||||||||
| Balance at end of year | $ | 3 | $ | 4 | $ | 8 | $ | 33 | $ | 31 | $ | 34 | |||||||||||
| December 31, | 2019 | 2018 | |||||
| Finished goods | $ | 671 | $ | 668 | |||
| Work-in-process | 1,316 | 1,371 | |||||
| Purchased raw materials | 343 | 366 | |||||
| Operating supplies | 99 | 87 | |||||
| Total inventories | $ | 2,429 | $ | 2,492 | |||
| December 31, | 2022 | 2021 | |||||||||
| Finished goods | $ | 490 | $ | 478 | |||||||
| Work-in-process | 748 | 631 | |||||||||
| Purchased raw materials | 317 | 256 | |||||||||
| Operating supplies | 54 | 37 | |||||||||
| Total inventories | $ | 1,609 | $ | 1,402 | |||||||
At December 31, 20192022 and 2018,2021, the portion of total inventories valued on a LIFO basis was $1,257$441 and $1,292,$331, respectively. If valued on an average-cost basis, total inventories would have been $445$220 and $530$192 higher at December 31, 20192022 and 2018,2021, respectively. During 20192022 and 2018,2020, reductions in LIFO inventory quantities caused partial liquidations of the lower cost LIFO inventory base.layers. These liquidations resulted in the recognition of immaterial income amountsexpense of less than $1 in 2019, 2018,2022 and 2017.2020. In 2021, we did not have any LIFO inventory layer liquidations.
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O. Properties, Plants, and Inventories to reflect a physical inventory adjustment at 1 plant in the GRP segment (this plant was previously included in the EP&F segment prior to the transfer of the aluminum extrusions operations from the EP&F segment to the GRP segment inEquipment, Net
| December 31, 2022 | December 31, 2021 | ||||||||||
Land and land rights(1) | $ | 84 | $ | 91 | |||||||
Structures(1) | 986 | 1,034 | |||||||||
| Machinery and equipment | 3,941 | 3,932 | |||||||||
| 5,011 | 5,057 | ||||||||||
Less: accumulated depreciation and amortization(1) | 2,858 | 2,772 | |||||||||
| 2,153 | 2,285 | ||||||||||
| Construction work-in-progress | 179 | 182 | |||||||||
| Properties, plants, and equipment, net | $ | 2,332 | $ | 2,467 | |||||||
(1)In the first quarter of 2019 - see Note C). While a portion of this charge relates to prior years, the majority relates to 2018. The out-of-period amounts were not material to any interim or annual periods.
| December 31, | 2019 | 2018 | |||||
| Land and land rights | $ | 128 | $ | 136 | |||
| Structures: | |||||||
| Engineered Products and Forgings | 812 | 769 | |||||
| Global Rolled Products | 1,304 | 1,317 | |||||
| Other | 269 | 278 | |||||
| 2,385 | 2,364 | ||||||
| Machinery and equipment: | |||||||
| Engineered Products and Forgings | 3,514 | 3,433 | |||||
| Global Rolled Products | 5,401 | 5,356 | |||||
| Other | 378 | 445 | |||||
| 9,293 | 9,234 | ||||||
| 11,806 | 11,734 | ||||||
| Less: accumulated depreciation and amortization | 7,074 | 6,769 | |||||
| 4,732 | 4,965 | ||||||
| Construction work-in-progress | 731 | 739 | |||||
| $ | 5,463 | $ | 5,704 | ||||
Depreciation expense related to Properties, plants, and determined that there was a declineequipment recorded in Provision for depreciation and amortization in the forecasted financial performanceStatement of Consolidated Operations was $227, $232, and $236 for the Disks asset group within the EP&F segment. As such, the Company evaluated the recoverability of the long-lived assets by comparing their carrying value of approximately $515 to the estimated undiscounted net cash flows of the Disks asset group, resulting in an estimated fair value in excess of their carrying value ofyears ended December 31, 2022, 2021, and 2020, respectively.
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, 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 | ||||||||||||||||||||||||
| — | (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 | ||||||||||||||||||||||||
| Translation and other | (38) | (16) | — | — | (54) | ||||||||||||||||||||||||
| Balances at December 31, 2022 | |||||||||||||||||||||||||||||
| Goodwill | 2,830 | 1,595 | 306 | 7 | 4,738 | ||||||||||||||||||||||||
| Accumulated impairment losses | (719) | (4) | (2) | — | (725) | ||||||||||||||||||||||||
| Goodwill, net | $ | 2,111 | $ | 1,591 | $ | 304 | $ | 7 | $ | 4,013 | |||||||||||||||||||
| Engineered Products and Forgings | Global Rolled Products | Total | |||||||||
| Balances at December 31, 2017 | |||||||||||
| Goodwill | $ | 4,931 | $ | 351 | $ | 5,282 | |||||
Accumulated impairment losses(1) | (719 | ) | (28 | ) | (747 | ) | |||||
| Goodwill, net | 4,212 | 323 | 4,535 | ||||||||
| Acquisitions and Divestitures (F) | (1 | ) | — | (1 | ) | ||||||
| Translation and other | (25 | ) | (9 | ) | (34 | ) | |||||
| Balances at December 31, 2018 | |||||||||||
| Goodwill | 4,905 | 342 | 5,247 | ||||||||
| Accumulated impairment losses | (719 | ) | (28 | ) | (747 | ) | |||||
| Goodwill, net | 4,186 | 314 | 4,500 | ||||||||
| (13 | ) | — | (13 | ) | |||||||
| Translation and other | 4 | 2 | 6 | ||||||||
| Transfer from Engineered Structures to Aluminum Extrusions | (110 | ) | 110 | — | |||||||
| Balances at December 31, 2019 | |||||||||||
| Goodwill | 4,786 | 454 | 5,240 | ||||||||
| Accumulated impairment losses | (719 | ) | (28 | ) | (747 | ) | |||||
| Goodwill, net | $ | 4,067 | $ | 426 | $ | 4,493 | |||||
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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 $719 relatedgoodwill allocated to that reporting unit) may be necessary and could be material.
During the first quarter of 2020, we performed a qualitative impairment test of our reporting units as a result of these macroeconomic factors, including Howmet’s market capitalization declining significantly compared to the annual impairment reviewfourth quarter of 2019, equity value of our peer group companies and the overall U.S. stock market significant declines amid market volatility and the onset of the Arconic ForgingsCOVID-19 pandemic and Extrusions business. See Goodwill policyits impact on the aerospace and commercial transportation industries. As a result of this qualitative assessment, the Company performed a quantitative impairment test for the Engineered Structures reporting unit in Note A.the first quarter of 2020 and concluded that although the margin between the fair value of the reporting unit and carrying value had declined from 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.
Other intangible assets were as follows:
| December 31, 2022 | Gross carrying amount | Accumulated amortization | Intangibles, net | ||||||||||||||
| Computer software | $ | 204 | $ | (173) | $ | 31 | |||||||||||
| Patents and licenses | 67 | (66) | 1 | ||||||||||||||
| Other intangibles | 678 | (221) | 457 | ||||||||||||||
| Total amortizable intangible assets | 949 | (460) | 489 | ||||||||||||||
| Indefinite-lived trade names and trademarks | 32 | — | 32 | ||||||||||||||
| Total intangible assets, net | $ | 981 | $ | (460) | $ | 521 | |||||||||||
| December 31, 2019 | Gross carrying amount | Accumulated amortization | Intangibles, net | ||||||||
| Computer software | $ | 744 | $ | (659 | ) | $ | 85 | ||||
| Patents and licenses | 95 | (93 | ) | 2 | |||||||
| Other intangibles | 714 | (175 | ) | 539 | |||||||
| Total amortizable intangible assets | 1,553 | (927 | ) | 626 | |||||||
| Indefinite-lived trade names and trademarks | 32 | — | 32 | ||||||||
| Total other intangible assets | $ | 1,585 | $ | (927 | ) | $ | 658 | ||||
| December 31, 2018 | Gross carrying amount | Accumulated amortization | Intangibles, net | ||||||||
| Computer software | $ | 768 | $ | (657 | ) | $ | 111 | ||||
| Patents and licenses | 110 | (107 | ) | 3 | |||||||
| Other intangibles | 922 | (149 | ) | 773 | |||||||
| Total amortizable intangible assets | 1,800 | (913 | ) | 887 | |||||||
| Indefinite-lived trade names and trademarks | 32 | — | 32 | ||||||||
| Total other intangible assets | $ | 1,832 | $ | (913 | ) | $ | 919 | ||||
| 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 | |||||||||||
Computer software consists primarily of software costs associated with an enterprise business solution within Arconic to drive common systems among allsolutions across Howmet's businesses.
Amortization expense related to the intangible assets recorded in Provision for depreciation and amortization in the tables aboveStatement of Consolidated Operations was $36, $36, and $40 for the years ended December 31, 2019, 2018,2022, 2021, and 2017 was $70, $81, and $71,2020, respectively, and is expected to be in the range of approximately $50$34 to $60$39 annually from 20202023 to 2024.2027.
Operating lease cost, which includesincluded short-term leases and variable lease payments and approximatesapproximated cash paid, was $145, $144,$61, $63, and $113$67 in 2019, 2018,2022, 2021, and 2017,2020, respectively.
Operating lease right-of-use assets and lease liabilities in the Consolidated Balance Sheet were as follows:
| December 31, | 2022 | 2021 | |||||||||||||||
| Right-of-use assets classified in Other noncurrent assets | $ | 111 | $ | 108 | |||||||||||||
Current portion of lease liabilities classified in Other current liabilities | $ | 32 | $ | 33 | |||||||||||||
| Long-term portion of lease liabilities classified in Other noncurrent liabilities and deferred credits | 83 | 81 | |||||||||||||||
| Total lease liabilities | $ | 115 | $ | 114 | |||||||||||||
| December 31, 2019 | |||
| Right-of-use assets classified in Other noncurrent assets | $ | 252 | |
Current portion of lease liabilities classified in Other current liabilities | 71 | ||
| Long-term portion of lease liabilities classified in Other noncurrent liabilities and deferred credits | 194 | ||
| Total lease liabilities | $ | 265 | |
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Future minimum contractual operating lease obligations were as follows:
| December 31, 2019 | December 31, 2018 | ||||||
| 2019 | $ | — | $ | 94 | |||
| 2020 | 81 | 74 | |||||
| 2021 | 62 | 54 | |||||
| 2022 | 46 | 40 | |||||
| 2023 | 34 | 30 | |||||
| 2024 | 24 | — | |||||
| Thereafter | 70 | 87 | |||||
| Total lease payments | $ | 317 | $ | 379 | |||
| Less: Imputed interest | (52 | ) | |||||
| Present value of lease liabilities | $ | 265 | |||||
| 2023 | $ | 39 | |||||||||
| 2024 | 29 | ||||||||||
| 2025 | 18 | ||||||||||
| 2026 | 14 | ||||||||||
| 2027 | 10 | ||||||||||
| Thereafter | 24 | ||||||||||
| Total lease payments | $ | 134 | |||||||||
| Less: Imputed interest | (19) | ||||||||||
| Present value of lease liabilities | $ | 115 | |||||||||
| December 31, | 2022 | 2021 | 2020 | ||||||||||||||
| $ | 34 | $ | 16 | $ | 35 | ||||||||||||
| Weighted-average remaining lease term in years | 6 | 6 | 6 | ||||||||||||||
| Weighted-average discount rate | 5.4 | % | 5.4 | % | 5.6 | % | |||||||||||
R. Debt
Debt.
| December 31, | 2022 | 2021 | |||||||||
| 5.125% Notes, due 2024 | $ | 1,081 | $ | 1,150 | |||||||
| 6.875% Notes, due 2025 | 600 | 600 | |||||||||
| 5.900% Notes, due 2027 | 625 | 625 | |||||||||
| 6.750% Bonds, due 2028 | 300 | 300 | |||||||||
| 3.000% Notes, due 2029 | 700 | 700 | |||||||||
| 5.950% Notes, due 2037 | 625 | 625 | |||||||||
| 4.750% Iowa Finance Authority Loan, due 2042 | 250 | 250 | |||||||||
Other(1) | (19) | (18) | |||||||||
| 4,162 | 4,232 | ||||||||||
| Less: amount due within one year | — | 5 | |||||||||
| Total long-term debt | $ | 4,162 | $ | 4,227 | |||||||
(1)Includes various financing arrangements related to subsidiaries, unamortized debt discounts and 6.0%, respectively.
| December 31, | 2019 | 2018 | |||||
| 1.63% Convertible Notes, due 2019 | $ | — | $ | 403 | |||
| 6.150% Notes, due 2020 | 1,000 | 1,000 | |||||
| 5.40% Notes, due 2021 | 1,250 | 1,250 | |||||
| 5.87% Notes, due 2022 | 627 | 627 | |||||
| 5.125% Notes, due 2024 | 1,250 | 1,250 | |||||
| 5.90% Notes, due 2027 | 625 | 625 | |||||
| 6.75% Bonds, due 2028 | 300 | 300 | |||||
| 5.95% Notes due 2037 | 625 | 625 | |||||
| Iowa Finance Authority Loan, due 2042 (4.75%) | 250 | 250 | |||||
Other(1) | (18 | ) | (29 | ) | |||
| 5,909 | 6,301 | ||||||
| Less: amount due within one year | 1,003 | 405 | |||||
| $ | 4,906 | $ | 5,896 | ||||
The principal amount of long-term debt maturing in each of the next five years is $1,000$1,081 in 2020, $1,2502024, $600 in 2021, $6272025, $625 in 2022, $02027, and no debt maturities in each of 2023 and $1,250 in 2024.2026.
Public Debt. On October 15, 2019,In the 1.63% Convertible Notes ("the Notes") matured in accordance with their termssecond and fourth quarters of 2022, the Company repaidrepurchased in cash on the maturity date theopen market approximately $69 aggregate outstanding principal amount of theits 5.125% Notes due October 2024 (the “5.125% Notes”) and paid approximately $71, including an early termination premium of approximately $403 together$2, which was recorded in Loss on debt redemption in the Statement of Consolidated Operations. In January 2023, the Company repurchased approximately $26 aggregate principal amount of additional 5.125% Notes in the open market.
In the third and fourth quarters of 2021, the Company repurchased an additional $100 aggregate principal amount of its 5.125% Notes 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 accruedthe notes accepted for settlement were $105 and unpaid interest, pursuant$14, respectively, which were recorded in Loss on debt redemption and Interest expense, net, respectively, in the Statement of Consolidated Operations.
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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 terms of the Notes.cash tender offer noted above and to pay related transaction fees, including applicable premiums and expenses.
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 $100,6.875% Notes, the proceeds of which have been used to fund the May 2020 cash tender offers noted above and itsto pay related transaction fees, including applicable premiums and expenses, with the remaining outstanding 6.75% Notes,amount to be used for general corporate purposes. The Company incurred deferred financing costs of $14 associated with aggregate principal amountthe issuance in the second quarter of $345, for $479 in cash including accrued and unpaid interest. As a result of2020.
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 6.50% Bondsearly partial redemption of $300 of its 5.400% Notes. Holders of the 6.150% Notes were paid an aggregate of $1,020 and 6.75%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 a charge of $24 in Loss on debt redemption and Interest expense, net, respectively, in the accompanying Statement of Consolidated Operations for the premium paid for the early redemption of these notes in excess of their carrying value.Operations.
The Company has the option to redeem certain of its Notesnotes and Bondsbonds 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 Facilities.Facility. On July 25, 2014, Arconic entered into aSeptember 28, 2021, the Company amended and restated its Five-Year Revolving Credit Agreement with(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 syndicate of lenders and issuers named therein, which provides for a$1,000 senior unsecured revolving credit facility (the “Credit Facility”). By an Extension Request and Amendment Letter dated as that matures on September 28, 2026, unless extended or earlier terminated in accordance with the provisions of June 5, 2015, the maturity dateCredit Agreement. Howmet may make two one-year extension requests during the term of the Credit Facility, was extended to July 25, 2020. On September 16, 2016, Arconic entered into Amendment No. 1subject to the Five-Year Revolving Credit Agreement to permit the Separation of Alcoa and to amend certain terms oflender consent requirements set forth in the Credit Agreement, including the replacement of the existing financial covenant with a leverage ratio and reduction of total commitments available from $4,000 to $3,000. On June 29, 2018, Arconic entered into Amendment No. 2 (“Amendment No. 2”) to amend and restate the Five-Year Revolving Credit Agreement. The Five-Year Revolving Credit Agreement, as so amended and restated, is herein referred to as the “Credit Agreement.”
The Credit Facility is unsecured and amounts payable under it will rank pari passu with all other unsecured, unsubordinated indebtedness of Arconic.Howmet. Borrowings under the Credit Facility may be denominated in U.S. dollars or euros. On February 13, 2023, the Company amended the Credit Agreement to replace LIBOR with Term SOFR as the reference rate for U.S. dollar-denominated loans. Loans under the Credit Agreement will bear interest at a base rate or, in the case of U.S. dollar-denominated loans, a rate equal to LIBOR,Term SOFR plus adjustment or, in the case of euro-denominated loans, the Euro inter-bank offered rate (“EURIBOR”), plus, in each case, an applicable margin based on the credit ratings of Arconic’sHowmet’s outstanding senior unsecured long-term debt. TheBased on Howmet’s current long-term debt ratings, the applicable margin on base rate loans and LIBOR loans willwould be 0.50% and 1.50%0.40% per annum respectively,and the applicable margin on Term SOFR loans and EURIBOR loans would be 1.40% per annum. The applicable margin is subject to change based on Arconic’s currentthe Company’s long-term debt ratings. Loans may be prepaid without premium or penalty, subject to customary breakage costs.
The obligation of ArconicHowmet 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, million, 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 Arconic;Howmet; and (f) a change in control of Arconic.Howmet.
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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.
During the Covenant Relief Period, which ended on December 31, 2022, the Company was required to maintain a Consolidated Net Debt to Consolidated EBITDA ratio of no greater than 5.00 to 1.00 as of the end of the fiscal quarter for the period of four fiscal quarters ended September 30, 2021, stepping down as of the end of each fiscal quarter to 3.75 to 1.00 as of December 31, 2022. In addition, during the Covenant Relief Period, common stock dividends and share repurchases (see Note J) were permitted only if no loans under the Credit Agreement were outstanding at the time and were limited to an aggregate amount not to exceed $500 during the year ended December 31, 2022. Common stock dividends and share repurchases were $442 during the year ended December 31, 2022. Following the end of the Covenant Relief Period, the restriction on common stock dividends and share repurchases under the Credit Agreement, along with certain covenants, no longer applies.
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 0no amounts outstanding under the Credit Agreement at December 31, 20192022 and 20182021, and 0no amounts were borrowed during 2019, 2018,2022, 2021 or 20172020 under the Credit Facility.Agreement. At December 31, 2022, the Company was in compliance with all covenants under the Credit Agreement. Availability under the Credit Agreement could be reduced in future periods if the Company fails to maintain the required ratios referenced above.
In addition to the Credit Agreement, above, Arconic has a number ofthe Company had several other credit agreements that provideprovided a combined borrowing capacity of $640 as of December 31, 2019, and all of which is due to expireexpired in 2020. The purpose of any borrowingsIn 2020, nothing was borrowed or repaid under these credit arrangements is to provide for working capital requirements and for other general corporate purposes. The covenants contained in all these arrangements are the same as the Credit Agreement. In 2019, 2018, and 2017, Arconic borrowed and repaid $400, $600, and $810, respectively, under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during 2019, 2018, and 2017 were 3.7%, 3.3%, and 2.6%, respectively, and 49 days, 46 days, and 46 days, respectively.
Short-Term Debt. At December 31, 20192022 and 2018,2021, short-term debt was $31zero and $29, respectively. These amounts included $29 and $29 at December 31, 2019 and 2018,$5, 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 ArconicHowmet makes payment to the third-party intermediary on the date stipulated in accordance with the commercial terms negotiated with its vendors. ArconicHowmet records imputed interest related to these arrangements in Interest expense, onnet in the accompanying Statement of Consolidated Operations.
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, Restrictedrestricted cash, Derivatives, Noncurrentderivatives, 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 thatand are carried at fair value which is based on quoted market prices whichprices. The aforementioned securities are classified in Level 1 of the fair value hierarchy.hierarchy and are included in Other noncurrent assets in the Consolidated Balance Sheet. The fair value of Long-term debt, less amount due within one year was based on quoted market prices for public debt and on interest rates that are currently available to ArconicHowmet 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.
| 2019 | 2018 | ||||||||||||||
| December 31, | Carrying value | Fair value | Carrying value | Fair value | |||||||||||
| Long-term debt, less amount due within one year | $ | 4,906 | $ | 5,337 | $ | 5,896 | $ | 5,873 | |||||||
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| 2022 | 2021 | ||||||||||||||||||||||
| December 31, | Carrying value | Fair value | Carrying value | Fair value | |||||||||||||||||||
| Long-term debt, less amounts due within one year | $ | 4,162 | $ | 4,059 | $ | 4,227 | $ | 4,707 | |||||||||||||||
Restricted cash was $55 (see Note S), $6,$1, $2, and $4$1 in 2019, 2018,2022, 2021, and 2017,2020, respectively, and was recorded in Prepaid expenses and other current assets onin the Consolidated Balance Sheet.
Cash paid for interest and income taxes for both continuing and discontinued operations was as follows:
| 2022 | 2021 | 2020 | |||||||||||||||
| Interest, net of amounts capitalized | $ | 224 | $ | 267 | $ | 401 | |||||||||||
| Income taxes, net of amounts refunded | $ | 50 | $ | 53 | $ | (33) | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Interest, net of amount capitalized | $ | 340 | $ | 391 | $ | 508 | |||||
| Income taxes, net of amount refunded | $ | 122 | $ | 74 | $ | 118 | |||||
U. Divestitures
2021 Divestiture
On AugustMarch 15, 2019, Arconic sold inventories and properties, plants, and equipment related to a small energy business within2021, the EP&F segment for $13 in cash. Arconic recognized a charge of $10 related to inventory impairment and recorded the charge in Cost of goods sold in the Statement of Consolidated Operations.
2020 Divestiture
On January 31, 2019 as its use is subject2020, the Company reached an agreement to restriction bysell a small manufacturing plant in the U.K. pension authority until certain U.K. pension plan changes have been made and approved. The forgings business primarily produces steel, titanium, and nickel based forged componentswithin the Engineered Structures segment for aerospace, mining, and off-highway markets and its operating results and assets and liabilities are included in the EP&F segment. The sale remains subject to certain post-closing adjustments. This business generated sales of $116, $131, and $127 in 2019, 2018, and 2017, and had 540 employees at the time of divestiture.
Contingencies
Environmental Matters. ArconicHowmet participates in environmental assessments and cleanups at more than 10030 locations. These include owned or operating facilities and adjoining properties, previously owned or operatingoperated facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)(“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.
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Included in annual operating expenses are the recurring costs of managing hazardous substances and environmental programs. These costs are estimated to be approximatelyless than 1% or less of Cost of goods sold.
Tax. Pursuant to the Tax Matters Agreement, dated as of October 31, 2016, entered into between the Company and Alcoa Corporation in connection with the Separation of Alcoa, the Company shares responsibility with Alcoa Corporation for, and Alcoa Corporation has agreed to partially indemnify the Company with respect to the following matter.
As previouslypreviously 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. In August 2013, theThe Company filed an appeal ofappealed this assessment in Spain’sto Spain's Central Tax Administrative Court, and subsequently to Spain's National Court, each of which was denied in January 2015. Arconic filed another appeal in Spain’s National Court in March 2015 which was denied in July 2018. The National Court’s decision requires the assessment for the 2006 through 2009 tax years to be reissued to take into account the outcome of the 2003 to 2005 audit which was closed in 2017. denied.
The Company estimatesthen appealed the revised assessmentdecision to be $172 (€154), including interest.
the Supreme Court of Spain. In March 2019,November 2020, the Supreme Court of Spain acceptedrendered a decision in favor of the Company's petition to reviewtaxpayer, removing the National Court’sassessment 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 has filedreleased 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 formal appealcombined indemnification receivable of $53 (€45) for Alcoa Corporation's 49% share and Arconic Corporation's 33.66% share of the assessment. The Supreme Court is reviewingtotal reserve, which was recorded in Other expense, net in the assessment on its meritsConsolidated Statement of Operations, that were previously established pursuant to the October 31, 2016 and will render a final decision. InMarch 31, 2020 Tax Matters Agreements, respectively. As of the eventend of 2020, the Company receives an unfavorable ruling fromno longer has a balance recorded for this matter.
Indemnified Matters. The Separation and Distribution Agreement, dated October 31, 2016, that the Supreme Court of Spain, a portion ofCompany entered into with Alcoa Corporation in connection with the assessment may be offset with existing net operating losses and tax credits available to the Spanish consolidated tax group, which would be sharedAlcoa Inc. Separation Transaction, provides for cross-indemnities between the Company and Alcoa Corporation as provided for in the Tax Matters Agreement.
(i) Regulatory Investigations. Arconic Architectural Products SAS (AAP SAS),("AAP SAS") (now a subsidiary of Arconic Corporation) supplied a product, Reynobond PE to its customer a cladding system fabricator, whichwho used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supplied its portion of the cladding system to the façade installer, who then completed and installed the system under the direction of the general contractor. Neither Arconic nor AAP SAS was involved in the design or installation of the system used at the Grenfell Tower, nor did it have a role in any other aspect of the building’s refurbishment or original design. Regulatory investigationsInvestigations into the overall Grenfell Tower matterFire are being conducted, including a criminal investigation by the London Metropolitan Police Service (the “Police”),and a Public Inquiry by the British government and a consumer protection inquiry by a French public authority. The Public Inquiry was announced by the U.K. Prime Minister on June 15, 2017 and subsequently was authorized to examine the circumstances leading up to and surrounding the Grenfell Tower fire in order to make findings of fact and recommendations to the U.K. Government on matters such as the design, construction and modification of the building, the role of relevant public authorities and contractors, the implications of the fire for the adequacy and enforcement of relevant regulations, arrangements in place for handling emergencies and the handling of concerns from residents, among other things. Hearings for Phase 1 of the Public Inquiry began on May 21, 2018 and concluded on December 12, 2018. Phase 2 hearings of the Public Inquiry began in early 2020, following(regarding which a final report will be written and subsequently published. AAP SAS is participating as a Core Participant inparticipant). (ii) United Kingdom Litigation. On December 23, 2020, survivors and estates of decedents of the Public InquiryGrenfell Fire and is also cooperating withemergency responders filed suit against 23 defendants, including the ongoing parallel investigation byCompany. No substantive allegations or requests for relief have been provided. The suits are stayed until the Police. The Company no longer sells the PE product for architectural use on buildings. Given the preliminary nature of these investigations and the uncertainty of potential future litigation, the Company cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.next case management conference, which will be scheduled after April 27, 2023. (iii)
Behrens et al. v. Arconic Inc. et al. As previously reported, on June 6, 2019, 247 plaintiffs comprised of survivors and estates of decedents of the Grenfell Tower fire filed a complaint against “Arconic Inc., Alcoa Inc. and Arconic Architectural Products, LLC” (collectively, for purposes of the description of such proceeding, the “Arconic Defendants”), as well as Saint-Gobain Corporation, d/b/a Celotex and Whirlpool Corporation, in the Court of Common Pleas of Philadelphia County. The complaint alleges claims under Pennsylvania state law for products liability and wrongful death related to the fire. In particular, the plaintiffs allege that the Arconic Defendants knowingly supplied a dangerous product (Reynobond PE) for installation on the Grenfell Tower despite knowing that Reynobond PE was unfit for use above a certain height. The Arconic Defendants removed the case to the (United States District Court for the Eastern District of PennsylvaniaPennsylvania). On June 6, 2019, 247 survivors and estates of decedents of the GrenfellFire 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. The 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. The plaintiffsappealed that decision. The Third Circuit Court of Appeals affirmed the dismissal on June 19, 2019.July 8, 2022, and denied a petition for a rehearing on October 7, 2022. On August 29, 2019,January 5, 2023, the Arconic Defendants moved to dismiss the complaint on the bases, among other things, that: (i) the case should be heardplaintiffs filed a petition for a writ of certiorari in the United Kingdom, not the United States; (ii) thereU.S. Supreme Court, which is no jurisdiction over necessary parties; and (iii) Pennsylvania productscurrently pending. (iv)
Howard v. Arconic Inc. et al. As previously reported, a purported class action complaint related to the Grenfell Tower fire was filed on August 11, 2017 in the (United States District Court for the Western District of PennsylvaniaPennsylvania). In 2017, two purported class actions were filed against Arconic Inc., Klaus Kleinfeld and Klaus Kleinfeld. Aother 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 purportedto a particular registration statement, other SEC filings, product brochures and websites can proceed and dismissed all other claims with prejudice. On December 2, 2022, the court issued an initial case management order, setting forth deadlines for class action complaint was filed in the certification briefing and discovery.Discovery has begun and is ongoing. (v) Raul v. Albaugh, et al. (United States District Court for the Western District of Pennsylvania on September 15, 2017, under the caption Delaware)Sullivan v. Arconic Inc. et al., against Arconic Inc., three former Arconic executives, several current and former Arconic directors, and banks that acted as underwriters for Arconic’s September 18, 2014 preferred stock offering (the “Preferred Offering”). The plaintiff in Sullivan had previously filed a purported class action against the same defendants on July 18, 2017 in the Southern District of New York and, on August 25, 2017, voluntarily dismissed that action without prejudice. On February 7, 2018, on motion from certain putative class members, the court consolidated Howard and Sullivan, closed Sullivan, and appointed lead plaintiffs in the consolidated case. On April 9, 2018, the lead plaintiffs in the consolidated purported class action filed a consolidated amended complaint. The consolidated amended complaint alleged that the registration statement for the Preferred Offering contained false and misleading statements and omitted to state material information, including by allegedly failing to disclose material uncertainties and trends resulting from sales of Reynobond PE for unsafe uses and by allegedly expressing a belief that appropriate risk management and compliance programs had been adopted while concealing the risks posed by Reynobond PE sales. The consolidated amended complaint also alleged that between November 4, 2013 and June 23, 2017 Arconic and Kleinfeld made false and misleading statements and failed to disclose material information about the Company’s commitment to safety, business and financial prospects, and the risks of the Reynobond PE product, including in Arconic’s Form 10-Ks for the fiscal years ended December 31, 2013, 2014, 2015, and 2016, its Form 10-Qs and quarterly financial press releases from the fourth quarter of 2013 through the first quarter of 2017, its 2013, 2014, 2015, and 2016 Annual Reports, its 2016 Annual Highlights Report, and on its official website. The consolidated amended complaint sought, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On June 8, 2018, all defendants moved to dismiss the consolidated amended complaint for failure to state a claim. On June 21, 2019, the Court granted the defendants’ motion to dismiss in full, dismissing the consolidated amended complaint in its entirety without prejudice. On July 23, 2019, the lead plaintiffs filed a second amended complaint. The second amended complaint alleges generally the same claims as the consolidated amended complaint with certain additional allegations, as well as claims that the risk factors set forth in the registration statement for the Preferred Offering were inadequate and that certain additional statements in the sources identified above were misleading. The second amended complaint seeks, among other things, unspecified compensatory damages and an award of attorney and expert fees and expenses. On September 11, 2019, all defendants moved to dismiss the second amended complaint. Plaintiffs’ opposition to that motion was filed by November 1, 2019 and all defendants filed a reply brief on November 26, 2019. Given the preliminary nature of this matter and the uncertainty of litigation, the Company cannot reasonably estimate at this time the likelihood of an unfavorable outcome or the possible loss or range of losses in the event of an unfavorable outcome.
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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, Lehman Brothers International (Europe) (“LBIE”) filed proceedings in the demand letters.High Court of Justice, Business and Property Courts of England and Wales (the “Court”) against two subsidiaries of the Company, FR Acquisitions Corporation (Europe) Ltd and JFB Firth Rixson Inc. (collectively, the “Firth Rixson Entities”). The proceedings concern two interest rate swap transactions with LBIE (collectively, the “ISDAs”). In 2007 and 2008, the Firth Rixson Entities, then owned by Oak Hill, entered into the ISDAs in order to meet their obligation to hedge interest rate exposure under a lending agreement with LBIE. When LBIE went into bankruptcy in 2008, the Firth Rixson Entities entered into alternative swap agreements with another counterparty in order to meet this hedging obligation. The Firth Rixson Entities were acquired by the Company as part of its acquisition of the Firth Rixson business from Oak Hill in 2014. In the LBIE legal proceeding, LBIE claims the amounts owing by the Firth Rixson Entities under the ISDAs to be approximately $64, plus applicable interest. The Court issued its ruling in these proceedings on October 11, 2022 (the “Judgment”). In its ruling, the Court determined that the event of default under the ISDAs caused by LBIE as a result of its insolvency in 2008 and other defaults will conclude upon LBIE’s expected emergence from administration under the Insolvency Act of 1986. The Court ruled that upon such future event and other relevant steps being completed, the timing of which is unknown, the Firth Rixson Entities will be obligated to pay amounts due under the ISDAs. In late 2022, the Court granted LBIE a three-year extension of its bankruptcy administration. The Company recorded $65 in Other current liabilities in the Consolidated Balance Sheet, and took a pre-tax charge of this amount in Other expense, net in the Statement of Consolidated Operations in 2022. The matter of interest was not specifically addressed in the proceeding and no related amounts have been reserved. The Company vigorously disagrees with the ruling including as to any payment obligation in respect of the principal as well as any interest. In December 2022, the Company was granted permission to appeal the Court’s decision.
Other.In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Arconic,theCompany, 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. ArconicHowmet has entered into purchase commitments for raw materials, energy and other goods and services, which total $604 in 2020, $93 in 2021, $45 in 2022, $12$265 in 2023, $4$140 in 2024, $14 in 2025, $2 in 2026, and $2none in 2027 and thereafter.
Guarantees. At December 31, 2019, Arconic2022, 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 20202023 and 2040, was $31$13 at December 31, 2019.2022.
Pursuant to the Separation and Distribution Agreement, dated as of October 31, 2016, between ArconicHowmet and Alcoa Corporation, ArconicHowmet was required to provide certain guarantees for Alcoa Corporation, which had a combined fair value of $9 and $6$6 at both December 31, 20192022 and 2018, respectively,2021, and were included in Other noncurrent liabilities and deferred credits onin the accompanying Consolidated Balance Sheet. Furthermore,The remaining guarantee, for which the Company and Arconic was required to provide guarantees related to 2 long-term supply agreements for energy for Alcoa Corporation facilities in the event of an Alcoa Corporation payment default. In October 2017, Alcoa Corporation announced that it had terminated 1 of the 2 agreements, the electricity contract with Luminant Generation Company LLC that was tied to its Rockdale Operations, effective as of October 1, 2017. As a result of the termination of the Rockdale electricity contract, Arconic recorded income of $25 in the fourth quarter of 2017 associated with reversing the fair value of the electricity contract guarantee. For the remaining long-term supply agreement, Arconic is required to provide a guarantee up to an estimated present value amount of approximately $1,353 and $1,087 at December 31, 2019 and December 31, 2018, respectively, in the event of an Alcoa Corporation payment default. This guarantee expires in 2047. For this guarantee, subject to its provisions, Arconic isare secondarily liable in the event of a payment default by Alcoa Corporation. ArconicCorporation, 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 $1,040 and $1,406 at December 31, 2022 and 2021, respectively, in the event of an Alcoa Corporation default. In December 2019, Arconic entered into2020, December 2021, and December 2022, a one-year insurance policysurety bond with a limit of $80 relating to the remaining long-term energy supply agreement. The premium is expected to be paidthis guarantee was obtained by Alcoa Corporation. The decisionCorporation to enter into a claims purchase agreement or insurance policyprotect Howmet's obligation. This surety bond will be maderenewed on an annual basis going forward.by Alcoa Corporation.
Letters of Credit. ArconicThe Company has outstanding letters of credit, primarily related to workers’ compensation, environmental obligations, and leasinginsurance obligations. The total amount committed under these letters of credit, which automatically renew or expire at various dates, mostly in 2020,2023, was $142$120 at December 31, 2019.2022.
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Pursuant to the Separation and Distribution Agreement,Agreements between the Company and Arconic wasCorporation and between the Company and Alcoa Corporation, the Company is required to retain letters of credit of $52$53 (which are included in the $120 in the above paragraph) that had previously been provided related to boththe Company, Arconic Corporation, and Alcoa Corporation workers’ compensation claims whichthat occurred prior to the respective separation transactions of April 1, 2020 and November 1, 2016. Arconic Corporation and Alcoa Corporation workers’ compensation claims 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 also included in the $120 in the above paragraph). Arconic Corporation has issued surety bonds to cover these environmental obligations. Arconic Corporation is being billed for these letter of credit fees paid by Arconic are being proportionally billed tothe Company and are being fully reimbursed by Alcoa Corporation.will reimburse the Company for any payments made under these letters of credit.
Surety Bonds. ArconicThe Company has outstanding surety bonds primarily related to tax matters, contract performance, workers’ compensation, environmental-related matters, energy contracts, and customs duties. The total amount committed under these annual surety bonds, which expire and automatically renew at various dates, primarily in 2020,2023 and 2024, was $50$43 at December 31, 2019.2022.
Pursuant to the Separation and Distribution Agreement,Agreements between the Company and Arconic wasCorporation and between the Company and Alcoa Corporation, the Company is required to provide surety bonds of $22 (which are included in the $43 in the above paragraph) that had previously been provided related to the Company, Arconic Corporation, and Alcoa Corporation workers’ compensation claims whichthat occurred prior to the respective separation transactions of April 1, 2020 and November 1, 20162016. Arconic Corporation and as a result, Arconic has $24 in outstanding surety bonds relating to these liabilities. Alcoa Corporation workers’ compensation claims and surety bond fees paid by Arconicthe Company are being proportionately billed to, and that portion billed is being fullyare reimbursed by, Alcoa Corporation.
Management evaluated all activity of ArconicHowmet 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 RK for detailsthe open market debt repurchases made subsequent to the fourth quarter of 2022 as well as an amendment to remove GRP from the sale of receivables program.Credit Agreement on February 13, 2023 to replace LIBOR with Term SOFR as the reference rate therein.
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| First | Second(2) | Third | Fourth(3) | Year | |||||||||||
| 2019 | |||||||||||||||
| Sales | $ | 3,541 | $ | 3,691 | $ | 3,559 | $ | 3,401 | $ | 14,192 | |||||
| Net income (loss) | $ | 187 | $ | (121 | ) | $ | 95 | $ | 309 | $ | 470 | ||||
Earnings (loss) per share attributable to Arconic common shareholders(1): | |||||||||||||||
| Basic | |||||||||||||||
| Net income (loss) per share—basic | $ | 0.40 | $ | (0.27 | ) | $ | 0.22 | $ | 0.71 | $ | 1.05 | ||||
| Diluted | |||||||||||||||
| Net income (loss) per share—diluted | $ | 0.39 | $ | (0.27 | ) | $ | 0.21 | $ | 0.70 | $ | 1.03 | ||||
| 2018 | |||||||||||||||
| Sales | $ | 3,445 | $ | 3,573 | $ | 3,524 | $ | 3,472 | $ | 14,014 | |||||
| Net income | $ | 143 | $ | 120 | $ | 161 | $ | 218 | $ | 642 | |||||
Earnings per share attributable to Arconic common shareholders(1): | |||||||||||||||
| Basic | |||||||||||||||
| Net income per share—basic | $ | 0.30 | $ | 0.25 | $ | 0.33 | $ | 0.45 | $ | 1.33 | |||||
| Diluted | |||||||||||||||
| Net income per share—basic | $ | 0.29 | $ | 0.24 | $ | 0.32 | $ | 0.44 | $ | 1.30 | |||||
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
(b) Management’s Annual Report on Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting is included in Part II, Item 8 of this Form 10-K beginning on page 5336.
(c) Attestation Report of the Registered Public Accounting Firm
The effectiveness of Arconic’sHowmet’s internal control over financial reporting as of December 31, 20192022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in Part II, Item 8 of this Form 10-K on page 5437.
(d) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the fourth quarter of 2019,2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 401 of Regulation S-K regarding directors is contained under the caption “Item 1 Election of Directors” of the Proxy Statement and is incorporated by reference. The information required by Item 401 of Regulation S-K regarding executive officers is set forth in Part I, Item 1 of this report under “Executive Officers of the Registrant.”
The information required by Item 405 of Regulation S-K is contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement and is incorporated by reference.
The Company’s Code of Ethics for the CEO, CFO and Other Financial Professionals is publicly available on the Company���sCompany’s Internet website at http://www.arconic.comwww.howmet.com under the section “Investors—Corporate Governance.Governance—Governance and Policies.” The remaining information required by Item 406 of Regulation S-K is contained under the captions “Corporate Governance” and “Corporate Governance—BusinessCode of Conduct Policies and Code of Ethics” of the Proxy Statement and is incorporated by reference.
The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is included under the captions “Item 1 Election of Directors—Nominating Board Candidates—Procedures and Director Qualifications” and “Corporate Governance—Committees of the Board—Audit Committee” of the Proxy Statement and is incorporated by reference.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K is contained under the captions “Director Compensation”, “Executive Compensation” and “Corporate Governance—Recovery of Incentive Compensation” of the Proxy Statement. Such information is incorporated by reference.reference, except as to information required pursuant to Item 402(v) of Regulation S-K relating to pay versus performance.
The information required by Items 407(e)(4) and (e)(5) of Regulation S-K is contained under the captions “Corporate Governance—Compensation Committee Interlocks and Insider Participation” and “Item 3 Advisory Approval of Executive Compensation—Compensation Committee Report” of the Proxy Statement. Such information (other than the Compensation Committee Report, which shall not be deemed to be “filed”) is incorporated by reference.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table gives information requiredabout Howmet’s common stock that could be issued under the Company’s equity compensation plans as of December 31, 2022:
Equity Compensation Plan Information
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||||||||||
| (a) | (b) | (c) | ||||||||||||||||||
Equity compensation plans approved by security holders(1) | 7,411,252(1) | $ | 23.86 | 23,432,811(2) | ||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||||||||||
| Total | 7,411,252 | $ | 23.86 | 23,432,811 | ||||||||||||||||
(1) Includes the 2013 Howmet Aerospace Stock Incentive Plan, as Amended and Restated (approved by Item 201(d)shareholders in May 2019, May 2018, May 2016 and May 2013) (the “2013 Plan”) and the 2009 Alcoa Stock Incentive Plan (approved by shareholders in May 2009). Table amounts are comprised of Regulation S-K relatingthe following:
•936,242 stock options
•3,527,349 restricted share units
•2,947,661 performance share awards (191,217 granted in 2022 at target)
(2) The 2013 Plan authorizes, in addition to securities authorizedstock options, other types of stock-based awards in the form of stock appreciation rights, restricted shares, restricted share units, performance awards and other awards. The shares that remain available for issuance under equity compensation plans is containedthe 2013 Plan may be issued in connection with any one of these awards. Up to 66,666,667 shares may be issued under the caption “Equity Compensationplan. Any award other than an option or a stock appreciation right shall count as 2.33 shares. Options and stock appreciation rights shall be counted as one share for each option or stock appreciation right. In addition, the 2013 Plan Information”provides the following are available to grant under the 2013 Plan: (i) shares that are issued under the 2013 Plan, which are subsequently forfeited, cancelled or expire in accordance with the terms of the Proxy Statementaward and is
The information required by Item 403 of Regulation S-K is contained under the captions “Arconic“Howmet Aerospace Stock Ownership— Ownership���Stock Ownership of Certain Beneficial Owners” and “— “Howmet Aerospace Stock Ownership—Stock Ownership of Directors and Executive Officers” of the Proxy Statement and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 404 of Regulation S-K is contained under the captions “Executive Compensation” (excluding the information under the caption “Compensation Committee Report”) and “Corporate Governance— Related Person Transactions” of the Proxy Statement and is incorporated by reference.
The information required by Item 407(a) of Regulation S-K regarding director independence is contained under the captions “Item 1 Election of Directors” and “Corporate Governance” of the Proxy Statement and is incorporated by reference.
Item 14. Principal Accounting Fees and Services.
The information required by Item 9(e) of Schedule 14A is contained under the captions “Item 2 Ratification of Appointment of Independent Registered Public Accounting Firm—Report of the Audit Committee” and “— “Item 2 Ratification of Appointment of Independent Registered Public Accounting Firm—Audit and Non-Audit Fees” of the Proxy Statement and in its Attachment A (Pre-Approval Policies and Procedures for Audit and Non-Audit Services) thereto and is incorporated by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The consolidated financial statements and exhibits listed below are filed as part of this report.
(1) The Company’s consolidated financial statements, the notes thereto and the report of the Independent Registered Public Accounting Firm are on pages 5437 through 10681 of this report.
(2) Financial statement schedules have been omitted because they are not applicable, not required, or the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits.
Exhibit Number | Description* | |||||||
| Separation and Distribution Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa Corporation, incorporated by reference to | ||||||||
| Tax Matters Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa Corporation, incorporated by reference to | ||||||||
| Employee Matters Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa Corporation, incorporated by reference to | ||||||||
| Amendment No. 1, dated December 13, 2016, to Employee Matters Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa Corporation, incorporated by reference to | ||||||||
| Alcoa Corporation to Arconic Inc. Patent, Know-How, and Trade Secret License Agreement, dated as of October 31, 2016, by and between Alcoa USA Corp. and Arconic Inc., incorporated by reference to | |||||||||
| First Amendment, effective as of November 1, 2016, to the Patent, Know-How and Trade Secret License Agreement by and between Alcoa USA Corp. and Arconic Inc., incorporated by reference to Exhibit 2(d)(1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. | |||||||||
| Second Amendment, effective as of October 18, 2021, to the Patent, Know-How and Trade Secret License Agreement by and between Alcoa USA Corp. and Arconic Inc., incorporated by reference to Exhibit 2(d)(2) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. | |||||||||
| Arconic Inc. to Alcoa Corporation Patent, Know-How, and Trade Secret License Agreement, dated as of October 31, 2016, by and between Arconic Inc. and Alcoa USA Corp., incorporated by reference to | |||||||||
| Amended and Restated Alcoa Corporation to Arconic Inc. Trademark License Agreement, dated as of June 25, 2017, by and between Alcoa USA Corp. and Arconic Inc., incorporated by reference to | |||||||||
| Agreement and Plan of Merger, dated October 12, 2017, by and between Arconic Inc., a Pennsylvania corporation, and Arconic Inc., a Delaware corporation, incorporated by reference to | |||||||||
| Separation and Distribution Agreement, dated as of March 31, 2020, by and between Arconic Inc. and Arconic Rolled Products Corporation, incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 6, 2020. | |||||||||
| Tax Matters Agreement, dated as of March 31, 2020, by and between Arconic Inc. and Arconic Rolled Products Corporation, incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on April 6, 2020. | |||||||||
| Employee Matters Agreement, dated as of March 31, 2020, by and between Arconic Inc. and Arconic Rolled Products Corporation, incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K filed on April 6, 2020. | |||||||||
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| First Amendment to Employee Matters Agreement, dated as of April 10, 2020, by and between Howmet Aerospace Inc. and Arconic Corporation, incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 13, 2020. | ||||||||
| Patent, Know-How, and Trade Secret License Agreement, dated as of March 31, 2020, by and between Arconic Inc. and Arconic Rolled Products Corporation, incorporated by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K filed on April 6, 2020. | ||||||||
| Amendment No. 1, effective as of August 25, 2020, to Patent, Know-How, and Trade Secret License Agreement, dated as of March 31, 2020, by and between Arconic Inc. and Arconic Rolled Products Corporation, incorporated by reference to Exhibit 2(m)(1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. | ||||||||
| Patent, Know-How, and Trade Secret License Agreement, dated as of March 31, 2020, by and between Arconic Rolled Products Corporation and Arconic Inc., incorporated by reference to Exhibit 2.5 to the Company's Current Report on Form 8-K filed on April 6, 2020. | ||||||||
| Trademark License Agreement, dated as of March 31, 2020, by and between Arconic Rolled Products Corporation and Arconic Inc., incorporated by reference to Exhibit 2.6 to the Company's Current Report on Form 8-K filed on April 6, 2020. | ||||||||
| Trademark License Agreement, dated as of March 31, 2020, by and between Arconic Inc. and Arconic Rolled Products Corporation, incorporated by reference to Exhibit 2.7 to the Company's Current Report on Form 8-K filed on April 6, 2020. | ||||||||
| Master Agreement for Product Supply, dated as of March 31, 2020, by and between Arconic Massena LLC, Arconic Lafayette LLC, Arconic Davenport LLC and Arconic Inc., incorporated by reference to Exhibit 2.8 to the Company's Current Report on Form 8-K filed on April 6, 2020. | ||||||||
| Second Supplemental Tax and Project Certificate and Agreement, effective as of April 1, 2020, by and among Arconic Inc., Arconic Davenport LLC and Arconic Rolled Products Corporation, incorporated by reference to Exhibit 2.9 to the Company's Current Report on Form 8-K filed on April 6, 2020. | ||||||||
| Third Supplemental Tax and Project Certificate and Agreement, effective as of January 1, 2023, by and among Howmet Aerospace Inc., Arconic US LLC and Arconic Corporation. | ||||||||
| Metal Supply & Tolling Agreement by and between Arconic-Köfém Mill Products Hungary Kft and Arconic-Köfém Kft, dated January 1, 2020, incorporated by reference to Exhibit 2(t) to the Company's Annual Report on Form 10-K for the year ended December 31, 2020. | ||||||||
| Certificate of Incorporation of | ||||||||
| Bylaws of | ||||||||
| Form of Certificate for Shares of Common Stock of Arconic Inc., a Delaware corporation, incorporated by reference to | ||||||||
| Bylaws. See | ||||||||
| 4(c) | Form of Indenture, dated as of September 30, 1993, between Alcoa Inc. and The Bank of New York Trust Company, N.A., as successor to J. P. Morgan Trust Company, National Association (formerly Chase Manhattan Trust Company, National Association), as successor Trustee to PNC Bank, National Association, as Trustee (undated form of Indenture incorporated by reference to | |||||||
| First Supplemental Indenture, dated as of January 25, 2007, between Alcoa Inc. and The Bank of New York Trust Company, N.A., as successor to J.P. Morgan Trust Company, National Association (formerly Chase Manhattan Trust Company, National Association), as successor Trustee to PNC Bank, National Association, as Trustee, incorporated by reference to | ||||||||
85
| Second Supplemental Indenture, dated as of July 15, 2008, between Alcoa Inc. and The Bank of New York Mellon Trust Company, N.A., as successor in interest to J. P. Morgan Trust Company, National Association (formerly Chase Manhattan Trust Company, National Association, as successor to PNC Bank, National Association), as Trustee, incorporated by reference to | ||||||||
| Fourth Supplemental Indenture, dated as of December 31, 2017, between Arconic Inc., a Pennsylvania corporation, Arconic Inc., a Delaware corporation, and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to | |||||||||
| Fifth Supplemental Indenture, dated as of April 16, 2020, between Howmet Aerospace Inc., a Delaware corporation, and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4(e) to the Company’s Registration Statement on Form S-3 (Registration Statement No. 333-237705) dated April 16, 2020. | |||||||||
| Form of 6.75% Bonds Due 2028, incorporated by reference to | |||||||||
| Form of 5.90% Notes Due 2027, incorporated by reference to | |||||||||
| Form of 5.95% Notes Due 2037, incorporated by reference to | |||||||||
| Form of 5.125% Notes Due 2024, incorporated by reference to | |||||||||
| Description of Arconic Inc.'s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of | |||||||||
| Restated Five-Year Revolving Credit Agreement, dated as of | |||||||||
| Agreement, dated February 1, 2016, by and between Elliott Associates, L.P., Elliott International, L.P., Elliott International Capital Advisors Inc. and Alcoa Inc., incorporated by reference to | ||||||||
| Settlement Agreement, dated as of May 22, 2017, by and among Elliott Associates, L.P., Elliott International, L.P., Elliott International Capital Advisors Inc. and Arconic Inc., incorporated by reference to | ||||||||
| Letter Agreement, by and among Arconic Inc. and Elliott Associates, L.P., Elliott International, L.P. and Elliott International Capital Advisors Inc., dated as of December 19, 2017, incorporated by reference to | ||||||||
| Registration Rights Agreement, by and among Arconic Inc. and Elliott Associates, L.P., Elliott International, L.P. and Elliott International Capital Advisors Inc., dated as of December 19, 2017, incorporated by reference to | ||||||||
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| Amendment to Registration Rights Agreement, by and among Arconic Inc. and Elliott Associates, L.P., Elliott International, L.P. and Elliott International Capital Advisors Inc., dated as of February 2, 2018, incorporated by reference to | ||||||||
Howmet Aerospace Inc. 2020 Annual Cash Incentive Plan (formerly known as the Arconic Inc. 2020 Annual Cash Incentive 2019. | ||||||||
| First Amendment, effective January 1, 2022, to the Howmet Aerospace Hourly Retirement Savings Plan, as Amended and Restated, incorporated by reference to Exhibit 10(g)(1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. | ||||||||
| Howmet Aerospace Salaried Retirement Savings Plan, as Amended and Restated effective January 1, 2021, incorporated by reference to Exhibit 10(g)(2) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. | ||||||||
| Howmet Aerospace Excess Benefits Plan C (formerly | ||||||||
| First Amendment to Howmet Aerospace Excess Benefits Plan C (formerly known as the Arconic Employees’ Excess Benefits Plan | ||||||||
| Second Amendment to Howmet Aerospace Excess Benefits Plan C (formerly known as the Arconic Employees’ Excess Benefits Plan | ||||||||
| Third Amendment to Howmet Aerospace Excess Benefits Plan C (formerly known as the Arconic Employees’ Excess Benefits Plan | |||||||||
| Deferred Fee Plan for Directors, as amended effective July 9, 1999, incorporated by reference to | |||||||||
| Amended and Restated Deferred Fee Plan for Directors, effective | |||||||||
| Non-Employee Director Compensation Policy, effective | |||||||||
| Fee Continuation Plan for Non-Employee Directors, incorporated by reference to | |||||||||
| Amendment to Fee Continuation Plan for Non-Employee Directors, effective November 10, 1995, incorporated by reference to | |||||||||
| Second Amendment to the Fee Continuation Plan for Non-Employee Directors, effective September 15, 2006, incorporated by reference to | |||||||||
| Howmet Aerospace Deferred Compensation Plan (formerly known as the Arconic Deferred Compensation | |||||||||
| First Amendment to the Howmet Aerospace Deferred Compensation Plan (formerly known as the Arconic Deferred Compensation | |||||||||
87
| Summary of the Executive Split Dollar Life Insurance Plan, dated November 1990, incorporated by reference to | ||||||||
| Amended and Restated Dividend Equivalent Compensation Plan, effective January 1, 1997, incorporated by reference to | ||||||||
| Form of Indemnity Agreement between the Company and individual directors or officers, incorporated by reference to | ||||||||
| Form of Indemnification Agreement between the Company and individual directors or officers, incorporated by reference to | ||||||||
| Amended and Restated 2009 Alcoa Stock Incentive Plan, dated February 15, 2011, incorporated by reference to | ||||||||
| First Amendment to Howmet Aerospace Supplemental Pension Plan for Senior Executives (formerly known as the Arconic Supplemental Pension Plan for Senior | ||||||||
| Second Amendment to Howmet Aerospace Supplemental Pension Plan for Senior Executives (formerly known as the Arconic Supplemental Pension Plan for Senior | |||||||||
| Deferred Fee Estate Enhancement Plan for Directors, effective July 10, 1998, incorporated by reference to | |||||||||
| Letter Agreement, by and between Arconic Inc. and | |||||||||
| Letter Agreement, from Arconic Inc. to Ken Giacobbe, dated as of February 14, 2019, incorporated by reference to | |||||||||
| Letter Agreement, by and between Arconic Inc. and John C. Plant, dated as of February | ||||||||
Letter Agreement, by and between Arconic Inc. and John C. Plant, dated as of August 1, 2019, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 2, 2019. | ||||||||
Letter Agreement, by and between Arconic Inc. and John C. Plant, dated as of February 24, 2020, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 25, 2020. |
88
| Letter Agreement between Howmet Aerospace Inc. and John C. Plant, dated as of June 9, 2020, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 12, 2020. | |||||||||
| Letter Agreement, by and between | |||||||||
| Letter Agreement, by and between Howmet Aerospace Inc. and John C. Plant, dated as of December 2, 2022, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 8, 2022. | |||||||||
| Letter Agreement, by and between Arconic Inc. and Neil E. Marchuk, dated as of February 13, 2019, incorporated by reference to | |||||||||
| Letter Agreement between Arconic Inc. and Tolga Oal, dated as of | |||||||||
| Arconic Inc. Legal Fee Reimbursement | |||||||||
2013 | |||||||||
| Terms and Conditions for Stock Option Awards, effective May 3, 2013, incorporated by reference to | ||||||||
| Terms and Conditions for Stock Option Awards under the 2013 | ||||||||
| Global Stock Option Award Agreement, effective January 19, 2018, incorporated by reference to | ||||||||
| Form of Stock Option Award Agreement, incorporated by reference to | ||||||||
| Terms and Conditions for Restricted Share Units for Annual Director Awards under the 2013 | ||||||||
| Terms and Conditions for Restricted Share Units for Annual Director Awards under the 2013 | ||||||||
| Terms and Conditions for Deferred Fee Restricted Share Units for Director Awards under the 2013 | ||||||||
| Global Restricted Share Unit Award Agreement, effective January 19, 2018, incorporated by reference to | ||||||||
| Terms and Conditions for Restricted Share Units issued on or after January 19, 2018, under the 2013 | ||||||||
89
| Form of Restricted Share Unit Award Agreement, incorporated by reference to | ||||||||
| Global Restricted Share Unit Award Agreement, | ||||||||
| Global Stock Option Award Agreement, effective September 30, 2020, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020. | ||||||||
| Global Special Retention Award Agreement, effective September 30, 2020, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020. | ||||||||
| Terms and Conditions for Restricted Share Units, effective September 30, 2020, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020. | ||||||||
Form of Confidentiality, Non-Competition, and Non-Solicitation Agreement, incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q | ||||||||
Restricted Share Unit Award Agreement - Annual Equity Award for | ||||||||
| Subsidiaries of the Registrant. | ||||||||
| Consent of Independent Registered Public Accounting Firm. | ||||||||
| Power of | ||||||||
| Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
| 101. INS | Inline XBRL Instance Document. | |||||||
| 101. SCH | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101. CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101. DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101. LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101. PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | The cover page of this Annual Report on Form 10-K for the year ended December 31, | |||||||
* Exhibit Nos. 10(h)10(f) through 10(xxx)10(yy) are management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K.
Amendments and modifications to other Exhibits previously filed have been omitted when in the opinion of the registrant such Exhibits as amended or modified are no longer material or, in certain instances, are no longer required to be filed as Exhibits.
Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HOWMET AEROSPACE INC. | ||||||||
| February 14, 2023 | /s/ Barbara L. Shultz | |||||||
| Barbara L. Shultz | ||||||||
| Vice President and Controller (Also signing as Principal Accounting Officer) | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||
| /s/ John C. Plant | February | |||||||
John C. Plant | Executive Chairman and Chief Executive Officer | |||||||
| /s/ Ken Giacobbe | February | |||||||
| Ken Giacobbe | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||
James F. Albaugh, Amy E. Alving, Christopher L. Ayers, Elmer L. Doty, Rajiv L. Gupta, Sean O. Mahoney,Sharon R. Barner, Joseph S. Cantie, Robert F. Leduc, David J. Miller, E. Stanley O’Neal,Jody G. Miller, Nicole W. Piasecki and Ulrich R. Schmidt, each as a Director, on February 26, 2020,14, 2023, by Paul Myron,Barbara L. Shultz, their Attorney-in-Fact.*
| *By | /s/ | |||||||
| Attorney-in-Fact | ||||||||
91