Preferred and Common Stock

12 Months Ended

Dec. 31, 2020

Preferred Stock. Howmet has two classes of preferred stock: $3.75 Cumulative Preferred Stock ("Class A Preferred Stock") and Class B Serial Preferred Stock. Class A Preferred Stock has 660,000 shares authorized at a par value of $100 per share with an annual $3.75 cumulative dividend preference per share. There were 546,024 shares of Class A Preferred Stock outstanding at December 31, 2020 and 2019. Class B Serial Preferred Stock has 10,000,000 shares authorized as a par value of $1 per share. There were no shares of Class B Serial Preferred Stock outstanding at December 31, 2020 and 2019.

Common Stock. At December 31, 2020, there were 600,000,000 shares authorized and 432,906,377 shares issued and outstanding. Dividends paid were $0.02 per share in 2020 (all in the first quarter of 2020) and $0.12 per share in 2019 ($0.06 dividend in the first quarter of 2019 and $0.02 per quarter for the remainder of the year) and $0.24 per share in 2018, or $0.06 per quarter in 2018.

As of December 31, 2020, 47 million shares of common stock were reserved for issuance under Howmet’s stock-based compensation plans. As of December 31, 2020, 33 million shares remain available for issuance. Howmet issues new shares to satisfy the exercise of stock options and the conversion of stock awards.

In July 2015, through the acquisition of RTI International Metals Inc. ("RTI"), the Company assumed the obligation to repay two tranches of convertible debt; one tranche was due and settled in cash on December 1, 2015 (principal amount of $115) and the other tranche was due and settled in cash on October 15, 2019 (principal amount of $403). No shares of the Company’s common stock were issued in connection with the maturity or final conversion of this convertible debt.

Common Stock Outstanding and Share Activity (number of shares)




Balance at December 31, 2017									481,416,537
Issued for stock-based compensation plans									1,854,180

Balance at December 31, 2018									483,270,717
Issued for stock-based compensation plans									4,436,830
Repurchase and retirement of common stock									(54,852,364)
Balance at December 31, 2019									432,855,183
Issued for stock-based compensation plans									3,896,119
Repurchase and retirement of common stock									(3,844,925)
Balance at December 31, 2020									432,906,377

On February 19, 2019, the Company entered into an accelerated share repurchase ("ASR") agreement with JPMorgan Chase Bank to repurchase $700 of its common stock (the “February 2019 ASR”), pursuant to the share repurchase programs previously authorized by its Board of Directors (the "Board"). On May 2, 2019, the Company entered into an ASR agreement with JPMorgan Chase Bank to repurchase $200 of its common stock (the "May 2019 ASR"), pursuant to the share repurchase programs previously authorized by its Board.

On May 14, 2019, the Board authorized the repurchase of an additional $500 of its outstanding common stock. Pursuant to the share repurchase programs previously authorized by the Board, the Company entered into an ASR agreement on August 6, 2019 with Goldman Sachs & Co. LLC to repurchase $200 of its common stock (the "August 2019 ASR"). In November 2019, the Company repurchased $50 of its common stock on the open market.

In August/September 2020 and in November 2020, the Company repurchased $51 and $22, respectively, of its common stock on the open market.

Shares repurchased during 2020 and 2019 were $73 and $1,150, respectively. All of the shares repurchased during 2020 and 2019 were immediately retired. After giving effect to the share repurchases made through December 31, 2020, approximately $277 remains available under the prior authorizations by the Board for share repurchases. The amount of share repurchases by the Company may be limited under the terms of the Five-Year Revolving Credit Agreement. (See Note R)

The following table provides details for the share repurchases during 2020 and 2019.


	Number of shares	Average price	Total


August/September 2020 open market repurchase	2,907,094	$17.36	$51

November 2020 open market repurchase	937,831	$23.99	$22

2020 Share repurchase total	3,844,925	$18.98	$73

February 2019 ASR total	36,434,423	$19.21	$700



May 2019 ASR total	9,016,981	$22.18	$200



August 2019 ASR total	7,774,279	$25.73	$200





November 2019 open market repurchase	1,626,681	$30.74	$50

2019 Share repurchase total	54,852,364	$20.97	$1,150

Stock-Based Compensation

Howmet has a stock-based compensation plan under which stock options and/or restricted stock unit awards are granted in the first half of each year to eligible employees. Stock options are granted at the closing market price of Howmet’s common stock on the date of grant and typically vest over a three-year service period (1/3 each year) with a ten-year contractual term. Restricted stock unit awards typically vest over a three-year service period from the date of grant. As part of Howmet’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. Certain of the restricted stock unit awards include performance and market conditions and are granted to certain eligible employees. In 2020 and 2019, performance stock awards were granted to a senior executive that vest either based on achievement of the Arconic Inc. Separation Transaction (see Note C for further details) or the achievement of certain stock price thresholds. For performance stock awards granted to other employees in 2020, the final number of shares earned will be based on Howmet’s achievement of profitability targets over the respective performance periods and will be earned at the end of the third year. Performance stock awards granted in the first quarter of 2019 were converted to restricted stock unit awards (at target), in order to address the pending Arconic Inc. Separation Transaction. For performance stock awards granted in 2018, in order to address the pending Arconic Inc. Separation Transaction, the final number of shares earned will be based on Howmet’s achievement of sales and profitability targets over performance periods in 2018 and 2019. Additionally, the 2020 and 2018 performance stock awards will be scaled by a total shareholder return ("TSR") multiplier, which depends upon relative performance against the TSRs of a group of peer companies.

In conjunction with their employment agreements, certain current and former executives were granted cash bonus awards based on the achievement of certain stock price thresholds. These awards are liability classified and were marked-to-market each quarter using a Monte Carlo simulation. The stock price thresholds have been fully reached. The cash payment of $23 will occur in 2021 in accordance with the terms of the agreements.

In 2020, 2019, and 2018, Howmet recognized stock-based compensation expense of $46 ($42 after-tax), $69 ($63 after-tax), and $40 ($31 after-tax), respectively. Senior executive performance awards granted in April 2020 were modified in June 2020, resulting in incremental compensation expense of $12, which will be 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.

Over 95% of compensation expense recorded in 2020 relates to restricted stock unit awards. Cash bonus awards of $2 and $21 were recorded in 2020 and 2019, respectively. Of the remaining stock-based compensation expense in 2019, more than 95% relates to restricted stock unit awards. The expense related to restricted stock unit awards in 2018 was approximately 80%. No stock-based compensation expense was capitalized in any of those years. Stock-based compensation expense was reduced by $3 in 2019 for certain executive pre-vest cancellations which were recorded in Restructuring and other charges within the Statement of Consolidated Operations. At December 31, 2020, there was $51 (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 1.8 years.

Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For restricted stock unit awards, the fair value was equivalent to the closing market price of Howmet’s common stock on the date of grant. The weighted average grant date fair value of the 2020 performance stock awards with a market condition scaled by a TSR multiplier was $21.33, and the weighted average grant date fair value of the April 2020 senior executive performance stock awards with a market condition (achievement of certain stock price thresholds) was $2.57. The weighted average grant date fair value of the 2019 performance stock awards with a market condition (achievement of certain stock price thresholds) was $11.93. The grant date fair value of the 2018 performance stock awards containing a market condition (scaled by TSR multiplier) was $20.25. The 2020, 2019 and 2018 performance awards were valued using a Monte Carlo model. A Monte Carlo simulation uses assumptions of stock price behavior to estimate the probability of satisfying market conditions and the resulting fair value of the award. The risk-free interest rate (0.3% in 2020, 1.6% in 2019 and in 2.7% 2018) was based on a yield curve of interest rates at the time of the grant based on the remaining performance period. In 2020 volatility was estimated using a blended rate of Howmet's historical volatility and a peer-based volatility (48.3%) due to the Arconic Inc. Separation Transaction and the related changes in the nature of the business. In 2019 volatility was estimated using implied and historical volatility (33.4%). Because of limited historical information due to the Alcoa Inc. Separation Transaction, 2018 volatility (32.0%) was estimated using implied volatility, and the representative price return approach, which uses price returns of comparable companies, was used to develop a correlation assumption. For stock options, the fair value was estimated on the date of grant using a lattice-pricing model, which generated a result of $9.79 per option in 2018. There were no stock options issued in 2020 or 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 options granted in 2018.

The risk-free interest rate (2.5%) was based on a yield curve of interest rates at the time of the grant based on the contractual life of the option. The dividend yield (0.9%) was based on a one-year average. Volatility (34.0%) was based on comparable companies and implied volatilities over the term of the option. Howmet utilized historical option forfeiture data to estimate annual post-vesting forfeitures (6%). Exercise behavior (61%) was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the life of an option (6.0) was an output of the lattice-pricing mod. The activity for stock options and stock awards during 2020 was as follows (options and awards in millions):


	Stock options			Stock awards
	Number of options	Weighted average exercise price		Number of awards	Weighted average FMV per award
Outstanding, December 31, 2019	7	$	25.75	7	$	22.05
Granted	—	—		6	10.89
Exercised	(2)	21.65		—	—
Converted	—	—		(4)	19.54
Expired or forfeited	(1)	30.12		—	19.57
Canceled due to Arconic Inc. Separation Transaction(1)	(1)	27.85		(1)	23.84
Adjustment due to Arconic Inc. Separation Transaction(2)	—	24.35		1	19.10
Performance share adjustment	—	—		—	21.20
Outstanding, December 31, 2020	3	$	24.47	9	$	13.68

(1)As a result of the Arconic Inc. Separation Transaction, all stock options and stock awards relating to Arconic Corporation employees were cancelled.

(2)As a result of the Arconic Inc. Separation Transaction, all stock options and stock awards relating to Howmet employees were adjusted to reflect the Arconic Inc. Separation Transaction.

As of December 31, 2020, the number of stock options outstanding had a weighted average remaining contractual life of 2.9 years and a total intrinsic value of $18. Additionally, 3.1 million of the stock options outstanding were fully vested and exercisable and had a weighted average remaining contractual life of 2.8 years, a weighted average exercise price of $24.32, and a total intrinsic value of $18 as of December 31, 2020. In 2020, 2019, and 2018, the cash received from stock option exercises was $33, $56, and $16 and the total tax benefit realized from these exercises was $3, $4, and $2, respectively. The total intrinsic value of stock options exercised during 2020, 2019, and 2018 was $14, $17, and $7, respectively.