Howmet Aerospace Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also provides fourth-quarter results. Unless otherwise noted, amounts are in millions of dollars. Howmet manufactures engineered components for aerospace, defense, commercial transportation and industrial markets. On April 1, 2020, it separated Arconic Corporation; historical operating results were recast to show that business as discontinued operations, but prior-period cash flows were not separated.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $5,259 | $7,098 |
| Operating income | $626 | $579 |
| Income from continuing operations | $211; $0.48 diluted EPS | $126; $0.27 diluted EPS |
| Net income, including discontinued operations | $261 | $470 |
| Cash from operations | $9 | $461 |
| Capital expenditures | $267 | $641 |
| Cash and cash equivalents at year-end | $1,610 | $1,577 |
| Total debt | $5,075 | $5,940 |
- Sales fell 26%. Approximate gross margin was 26.3% (versus 26.5%); operating margin was 11.9% (versus 8.2%). Continuing-operations net margin was 4.0% (versus 1.8%).
- Segment operating profit, a company-defined non-GAAP measure, declined 36% to $890 from $1,390. Segment operating margin on third-party sales was approximately 16.9%, versus 19.6%.
- Operating cash flow dropped to $9, principally reflecting weaker operating results and working-capital movements. Operating cash flow less capital expenditures was approximately negative $258.
- Year-end cash less total debt was approximately negative $3,465. The company reported $376 of debt due within one year and an undrawn revolving credit facility with commitments of up to $1.0 billion. It was in compliance with credit covenants at year-end.
- The current ratio was approximately 2.2, based on reported current assets of $3,672 and current liabilities of $1,660. The prior-year balance sheet included assets and liabilities of discontinued operations, so balance-sheet comparisons are not directly like-for-like.
Material changes versus prior periods
- Commercial aerospace and commercial transportation weakness—driven by COVID-19, the 737 MAX production suspension and lower 787 production—were the main causes of the sales and segment-profit decline. Defense aerospace sales grew 14% and industrial gas turbine sales grew 28%, partly offsetting the declines.
- All four segments reported lower sales and operating profit: Engine Products sales declined 28%, Fastening Systems 20%, Engineered Structures 26% and Forged Wheels 30%.
- Continuing-operations net income rose to $211 from $126, despite the sales downturn. The comparison benefited substantially from a $428 nonrecurring Disks asset impairment recorded in 2019, lower SG&A and favorable pricing; higher debt-redemption premiums and weaker volumes partly offset these benefits.
- Interest expense increased to $381 from $338, including $59 of premiums on early debt redemptions. Debt fell by $865 year over year after repayments, partly offset by $1,200 of 6.875% notes due 2025.
- Cash from operations fell sharply, while capital expenditures were reduced. The company also distributed $500 to Arconic Corporation at separation and repurchased $73 of its own shares, compared with $1,150 of repurchases in 2019.
Outlook, commentary, risks and unusual items
- Management said cash and financing resources were expected to cover operating and business needs over the next 12 months. It forecast 2021 capital expenditures at approximately 4% of sales and an effective tax rate of 26.5%–28.5%.
- Management expected 2021 demand to increase in defense aerospace and industrial gas turbines, and in most commercial transportation regions; commercial aerospace demand was expected to remain down because of COVID-19. Cost reductions and favorable pricing were expected to continue. No consolidated 2021 revenue or earnings guidance was provided in the supplied filing text.
- The common dividend was suspended in April 2020 to preserve cash. Credit-agreement terms restrict dividends and buybacks during the covenant-relief period. The revolving facility was reduced from $1.5 billion to $1.0 billion, with temporary leverage covenant limits through 2021.
- COVID-19, air-travel recovery, customer production rates, the 737 MAX/787 programs, manufacturing interruptions, supplier availability, raw-material costs, customer concentration, competition, pension funding, foreign exchange, credit ratings and covenant compliance are material risks. GE, Raytheon Technologies and Boeing represented approximately 11%, 9% and 8% of 2020 third-party sales, respectively.
- Notable charges and developments included $113 of layoff costs, $74 of pension settlement charges, and a $41 charge related to plant fires in 2020. A fire at the Barberton forged-wheels plant reduced production; Howmet received $39 in insurance settlements during 2020.
- A favorable Spanish Supreme Court decision led to a $64 tax-reserve release, while Howmet wrote off a $53 indemnification receivable related to amounts allocated to Alcoa Corporation and Arconic Corporation. The Grenfell Tower litigation and investigations remained unresolved; Arconic Corporation agreed to indemnify Howmet for certain associated liabilities. Howmet said it could not reasonably estimate potential losses for those proceedings.
- Goodwill was $4.1 billion. No goodwill impairment was recorded in the 2020 annual test; the Engineered Structures reporting unit’s fair-value cushion had narrowed to approximately 15% in a first-quarter test before exceeding carrying value by more than 50% at year-end.
Key facts for investors to verify
- How quickly commercial aerospace demand and production recover, and the resulting volume, pricing and margin effects.
- Whether operating cash flow improves from $9 and whether working-capital actions and lower capital spending are sustainable.
- Debt maturities, interest costs, credit ratings and compliance with the amended revolving-credit covenants; confirm the January 2021 redemption of the remaining $361 of 5.4% notes.
- The scope and financial exposure of Grenfell-related claims, separation indemnities and other legal or environmental contingencies.
- The assumptions supporting the $4.1 billion goodwill balance, pension funding needs, and the expected 2021 tax rate and capital expenditures.