Howmet Aerospace Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Unless noted otherwise, financial amounts are in USD millions.
Business context
Howmet supplies engineered components for aerospace, commercial transportation, and industrial markets through Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. Aerospace generated approximately 60% of 2021 revenue; commercial transportation 23%; and industrial and other markets 17%. The 2020 separation of Arconic Corporation means its results are presented as discontinued operations for periods before the separation.
Financial results and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Sales | $4,972 | $5,259 | Down 5% |
| Operating income | $748 | $626 | Up $122 |
| Income from continuing operations | $258 | $211 | Up 22% |
| Diluted EPS from continuing operations | $0.59 | $0.48 | Up $0.11 |
| Segment operating profit* | $939 | $890 | Up 6% |
| Cash provided by operations | $449 | $9 | Up $440 |
| Capital expenditures | $199 | $267 | Down $68 |
| Cash and cash equivalents at year-end | $720 | $1,610 | Down $890 |
| Total debt reported in MD&A | $4,232 | $5,075 | Down $843 |
Cost of goods sold was 72.3% of sales, versus 73.7% in 2020. Operating income was approximately 15.0% of sales. Operating cash flow less capital expenditures was approximately $250, calculated from the reported figures. Cash used for financing was $1,444, primarily reflecting debt repayments, $430 of share repurchases, and dividends. The balance sheet showed current assets of $2,737 and current liabilities of $1,253. Cash and restricted cash totaled $722 at year-end.
Segment performance: Engine Products sales were $2,282 and segment operating profit was $440; Fastening Systems, $1,044 and $190; Engineered Structures, $725 and $54; Forged Wheels, $921 and $255. These segment-profit figures are management’s non-GAAP measure and exclude special items and corporate results.
Material changes and unusual items
- Sales fell mainly because of continued weakness in commercial aerospace, including the effects of COVID-19 and lower Boeing 787 production, and lower defense aerospace volumes. Commercial transportation and industrial gas turbine markets improved; favorable product pricing added $97 to sales.
- Segment operating profit rose despite lower sales, supported by cost reductions, pricing, and stronger commercial transportation and industrial gas turbine demand. Forged Wheels profit increased 67%; Fastening Systems and Engineered Structures profit declined.
- Interest expense fell by $58 to $259 as average debt declined. Debt-redemption losses increased to $146, including premiums on early debt repayments and tenders.
- Restructuring and other charges were $90, including $75 of pension settlement accounting and accelerated depreciation and other costs associated with facility closures. The filing anticipates a further $5–$15 of plant-fire-related charges in 2022.
- Howmet repurchased approximately 13.4 million shares for $430 and resumed common dividends in the third quarter. It issued $700 of 3.000% notes due 2029 while redeeming or repurchasing other debt.
- Goodwill was $4,067 at year-end. No goodwill impairment was recorded in 2021; the Engineered Structures reporting unit’s estimated fair value exceeded carrying value by approximately 30% in the annual test.
Outlook, risks, and contingencies
Management expected 2022 sales to increase, earnings per share to grow, and operating cash flow to increase versus 2021, with capital expenditures below depreciation and amortization. It also expected 2022 capital expenditures to be approximately 4% of sales. Management forecast a 24.5%–25.5% effective tax rate. Expected market recovery was qualified by continued reduced Boeing 787 production effects into 2022, and the company noted possible customer supply-chain constraints in Forged Wheels.
Key risks include the uncertain COVID-19 recovery and aerospace demand, customer and program concentration, Boeing production levels, supply-chain availability and inflation in materials, energy, freight, and labor, manufacturing disruptions, labor availability, competition, cybersecurity, pension funding, and foreign-exchange and geopolitical exposure. General Electric, Raytheon Technologies, and Boeing represented approximately 13%, 9%, and 5% of 2021 third-party sales, respectively.
Legal and contingent matters include Grenfell Tower-related proceedings and investigations, with Arconic Corporation contractually responsible for specified related liabilities, and a UK proceeding by Lehman Brothers International (Europe) seeking approximately $64 plus interest over historical swap transactions; Howmet said it intended to defend the claim. Howmet also disclosed a contingent guarantee, shared with Arconic Corporation, tied to an Alcoa Corporation energy agreement, with an estimated present value of approximately $1,406 in the event of default; management considered default risk remote. Environmental remediation reserves were $15. The filing states that other pending matters could affect results, although management did not expect them, based on then-available facts, to have a material adverse effect in aggregate.
The $1,000 revolving credit facility had no borrowings at year-end. Its leverage covenant had temporary, higher limits through 2022; dividends and repurchases during that period were subject to conditions and aggregate caps. Credit ratings were S&P BB+, Moody’s Ba2, and Fitch BBB-, each with a stable outlook.
Most important facts for investors to verify
- Whether commercial aerospace recovery, especially Boeing 787 production, matches management’s 2022 assumptions.
- Whether operating cash flow improves sustainably, given working-capital movements and the 2021 cash balance decline.
- Debt balances, refinancing and redemption costs, covenant headroom, and the restrictions on dividends and repurchases.
- Segment-level volume, pricing, and margin trends, particularly in Fastening Systems and Engineered Structures.
- Potential exposure from litigation, separation-related indemnities, the Alcoa energy guarantee, and pension obligations.
- Assumptions supporting goodwill valuations and deferred-tax-asset realizability; the auditor identified Engineered Structures goodwill impairment testing as a critical audit matter.
*Segment operating profit is a non-GAAP measure; it reconciled to $324 of income from continuing operations before income taxes after corporate expense, restructuring charges, interest, debt-redemption loss, and other expense.