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# Howmet Aerospace Inc. (HWM): Business, Risks and Management Discussion Dollar amounts are in US$ millions unless stated otherwise. ## Business *From the FY2025 Form 10-K (fiscal year ended December 31, 2025), accession 0000004281-26-000012, updated where noted from the Q2 2026 Form 10-Q (accession 0000004281-26-000025) and the Form 8-K of May 28, 2026 (accession 0001104659-26-067497).* Howmet Aerospace makes highly engineered metal components, mostly for jet engines and aircraft. Its main products are investment-cast airfoils and structural castings and seamless rolled rings for jet engines and industrial gas turbines, aerospace fastening systems, titanium and aluminum forgings, extrusions and machined airframe parts, and forged aluminum wheels for heavy trucks, buses and trailers. It sells mainly to engine makers and aircraft builders (OEMs) and their supply chains, both directly and through distributors. The company says that, wingtip to wingtip and nose to tail, it can produce more than 90% of all structural and rotating aero-engine components. Revenue comes from new-build production and from aftermarket engine spares, which the company repeatedly names as a growth driver. **Revenue by end market (share of sales):** | End market | 2025 | 2024 | 2023 | |---|---|---|---| | Aerospace – Commercial | 53% | 52% | 49% | | Aerospace – Defense | 17% | 16% | 15% | | Commercial Transportation | 15% | 17% | 21% | | Gas Turbines | 11% | 10% | 10% | | Other | 4% | 5% | 5% | Gas turbines covers industrial gas turbines and oil and gas. The company links demand in this market to electricity generation for the data-center build-out. Measured by point of shipment, North America generated 72% of 2025 sales and Europe 22%. Howmet operates in 19 countries. RTX Corporation and GE Aerospace each made up about 11% of 2025 third-party sales, mainly through Engine Products. In the first six months of 2026, GE Aerospace made up about 14% and RTX about 10%. **Four reportable segments, organized by product:** - **Engine Products**: investment castings, including airfoils with advanced cooling and coatings, and seamless rolled rings, mainly for aircraft engines and industrial gas turbines. It makes both rotating and structural parts. This is the largest and highest-margin segment. - **Fastening Systems**: aerospace fastening systems (the Huck brand among them), plus commercial transportation, industrial and renewable-energy fasteners and installation tools. Brunner (acquired February 2026) and CAM (acquired April 2026) are reported in this segment. - **Engineered Structures**: titanium ingots and mill products, and vertically integrated titanium forgings, extrusions and machining for airframe, wing, aero-engine and landing-gear parts. It also makes aluminum forgings, machined components and assemblies for aerospace and defense. - **Forged Wheels**: lightweight forged aluminum wheels sold under the licensed Alcoa® Wheels brand, with MagnaForce® alloy and the Dura-Bright® surface treatment. The company says the wheels give up to 59% weight savings per tractor-trailer compared with steel wheels. **FY2025 segment results (as originally reported in the 10-K):** | Segment | Third-party sales | Segment Adj. EBITDA | Margin | |---|---|---|---| | Engine Products | 4,320 | 1,438 | 33.3% | | Fastening Systems | 1,745 | 530 | 30.4% | | Engineered Structures | 1,148 | 243 | 21.2% | | Forged Wheels | 1,039 | 296 | 28.5% | | Total | 8,252 | 2,507 | | In the first quarter of 2026, Howmet moved a titanium alloy location at Whitehall, Michigan, from Engine Products to Engineered Structures. The May 28, 2026 Form 8-K recast the history on the new basis. For FY2025, Engine Products becomes $4,242 of sales and $1,416 of Segment Adjusted EBITDA (33.4% margin), and Engineered Structures becomes $1,226 and $265 (21.6%). Consolidated results are unchanged. Segment Adjusted EBITDA is a non-GAAP measure. **Competitive position and assets.** Howmet considers itself a market leader in most of its principal markets. Its main competitor across castings, forgings, rings and fasteners is Precision Castparts (owned by Berkshire Hathaway). Others include VSMPO (Russia) and ATI in titanium and forgings, Lisi Aerospace in fasteners, Aubert & Duval in forgings, and Doncasters and Consolidated Precision Products in castings. Several of its largest customers have their own superalloy furnaces for airfoil castings. Chinese, Taiwanese, Indian, Korean and Turkish entrants are increasingly targeting the wheels market. At the end of 2025 the company held about 1,020 granted patents and 180 pending applications, plus trade secrets mainly in manufacturing processes and material compositions. Key raw materials include nickel, cobalt, titanium (sponge, scrap and alloys), aluminum, platinum, superalloys and energy. **People.** At the end of 2025 Howmet had about 25,430 employees in 23 countries. About 3,860 U.S. employees (26% of the U.S. workforce) are unionized. The largest agreement, with the UAW at the Engine Products plant in Whitehall, Michigan, covers about 1,865 employees and runs to April 2028. The UAW agreement at Cleveland, Ohio covers about 730 employees and runs to February 2029. The next significant U.S. plant agreement expires in 2027. John C. Plant is Executive Chairman and CEO. Patrick Winterlich, previously CFO of Hexcel, became CFO on December 1, 2025. **Corporate history.** Howmet was formerly Arconic Inc. and, before that, Alcoa Inc. (formed in 1888). It took its current shape on April 1, 2020, when Arconic Inc. spun off its rolled products, extrusions and building systems businesses as Arconic Corporation and kept the four businesses that now make up Howmet. Cross-indemnity agreements with Alcoa Corporation and Arconic Corporation from those separations are still in force. Under them, Arconic Corporation indemnifies Howmet for liabilities related to the 2017 Grenfell Tower fire. ## Risk factors *From the FY2025 Form 10-K, Item 1A, accession 0000004281-26-000012. The Q2 2026 10-Q reports no material changes.* - **Cyclical end markets.** About 70% of 2025 revenue came from aerospace. Commercial aerospace demand depends on airline profitability, passenger traffic, aircraft financing and OEM build rates. Defense demand depends on government budgets, including shutdowns and debt-ceiling disputes. Commercial transportation demand depends on truck and trailer build cycles. Changes in OEM build rates also shift Howmet's product mix. - **Customer concentration and Boeing.** RTX and GE Aerospace each made up about 11% of 2025 sales. The company says Boeing production rates have had, and are expected to have, a material impact on its results. It cites Boeing's quality problems, which kept the FAA from approving 737 MAX rate increases until October 2025, and the Boeing strike in late 2024. Long-term contracts come up for renewal and re-pricing, and customers may in-source or switch suppliers. - **Input costs, tariffs and pass-through lag.** Costs of nickel, titanium, aluminum, cobalt, superalloys and energy can be volatile. Titanium prices can be affected by the Russia–Ukraine conflict, and customers that fail to return titanium scrap force more purchases at inflated prices. The company points to U.S. tariffs imposed in 2025 and early 2026 and to retaliatory measures. Howmet generally passes costs through to customers, but with a delay that can compress margins, and competitive pressure may limit price increases. - **Limited and sole-source suppliers.** Some inputs, such as titanium sponge and specialized alloys, come from a small number of suppliers or a single supplier. Because qualification requirements apply, alternative suppliers may not be readily available. - **Manufacturing disruption and quality.** The processes are complex, and a failure at a key plant, such as equipment breakdown, fire or a labor stoppage, could lead to missed deliveries, customer claims, recalls and reputational damage. - **Production ramp risk.** Many contracts assume production increases over several years. Failing to meet targets, or being unable to add capacity fast enough, could cost business. - **Workforce.** Growth requires hiring and training skilled labor in a tight market. Howmet also relies on key personnel and succession planning, and union contracts carry a risk of strikes. - **Cybersecurity and AI.** The company has suffered past breaches in which information was taken, though without a material impact. It also cites risks from employees or vendors misusing AI. - **Competition and consolidation.** Risks include new entrants and technologies, consolidation among competitors that creates stronger rivals, and consolidation among customers that gives them more pricing leverage. - **Global operations.** The company has exposure to tariffs, sanctions, export controls (ITAR/EAR), anti-corruption law, currency moves, and the wars in Ukraine and the Middle East. - **Acquisitions.** The 10-K flagged the risks of completing and integrating the approximately $1.8 billion CAM acquisition: closing conditions, financing costs, and whether expected synergies and tax benefits would be realized. The deal closed on April 6, 2026, so integration risk now applies. - **Liquidity and credit.** A weaker performance could hurt credit ratings and access to capital. Pension costs depend on discount rates and asset returns. Dividends and buybacks are at the Board's discretion. - **Legal, regulatory and government contracting.** Risks include product liability, compliance failures under government procurement rules (including specialty-metals and cybersecurity requirements), and loss of intellectual property, including through AI. - **Tax.** Changes in tax law, including the OECD Pillar Two global minimum tax, and shifts in the jurisdictional mix of earnings could change the tax rate. - **Environmental, health and safety, and climate.** Risks include remediation at current and former sites, the danger of serious injury in industrial operations, carbon-pricing costs, and physical climate risk to plants. - **Separation agreements.** Howmet relies on Arconic Corporation and Alcoa Corporation to meet their indemnification obligations. ## Management's discussion of FY2025 *From the FY2025 Form 10-K, Item 7, accession 0000004281-26-000012.* **Results.** Sales rose 11% to $8,252 (from $7,430). Management attributed the growth to the commercial aerospace, defense aerospace and gas turbines markets, including engine spares, as well as favorable pricing and cost pass-through, partly offset by lower commercial-transportation volumes. Management says price increases exceeded material and inflationary cost pass-through. Cost of goods sold fell to 65.8% of sales from 68.9% on higher volumes, pricing and productivity. These gains were partly offset by added headcount, mainly in Engine Products, hired ahead of expected revenue growth. Income before income taxes rose 33% to $1,840. Net income rose 31% to $1,508, or $3.71 per diluted share (up 32% from $2.81). Total Segment Adjusted EBITDA (non-GAAP) rose 25% to $2,507. **Below operating income:** - SG&A was $370 (4.5% of sales). R&D was $37. - Restructuring and other charges were $84, mostly an $89 U.K. pension settlement charge. - Net interest expense fell to $151 from $182 as debt was reduced. Management expects the 2025 debt actions to cut annual interest expense by about $22. - Loss on debt redemption was $15. - The effective tax rate was 18.0%, helped by FDII, R&D credits and stock-compensation benefits. Management guided to a 2026 rate of 20.5%–21.5%. **Segments (as originally reported, before the 2026 recast):** - *Engine Products*: sales up $585 (16%) and Segment Adjusted EBITDA up $288 (25%) on commercial aerospace, defense and gas turbine growth, including spares. Margin rose about 250 bps. The segment added about 1,445 net employees in the year, which raised near-term recruiting and training costs. - *Fastening Systems*: sales up $169 (11%) and EBITDA up $124 (31%). Margin rose about 460 bps on commercial aerospace growth and productivity, partly offset by weak commercial transportation. - *Engineered Structures*: sales up $83 (8%) and EBITDA up $77 (46%) on defense aerospace. Margin rose about 560 bps. Management is focused on streamlining the plant footprint and product mix. - *Forged Wheels*: sales down $15 (1%) on lower commercial-transportation volumes, partly offset by aluminum pass-through. EBITDA rose $9 (3%) on headcount cuts and currency. **Cash flow and capital allocation:** - Operating cash flow rose 45% to $1,884, from $1,298. - Capital expenditures were $453, mainly for Engine Products capacity expansion and automation. - Howmet bought back about 4.4 million shares for about $700 and paid $181 in dividends. The quarterly common dividend went from $0.10 to $0.12 in the second half of 2025. - On December 17, 2025, it redeemed all 546,024 outstanding Class A preferred shares at $100 per share plus accrued dividends. - Total debt fell $265 to $3,050. Howmet redeemed the $625 of 5.900% notes due 2027 early, prepaid $140 of the USD term loan, and issued $500 of 4.550% notes due 2032 in November 2025. - Year-end cash was $742, of which $462 was held outside the U.S. - Credit ratings: S&P raised Howmet to BBB+ in September 2025, Fitch raised it to BBB+ in March 2025, and Moody's rates it Baa1. **2026 outlook (as of February 2026).** Management expected 2026 sales, earnings per share and operating cash flow to grow, driven by commercial aerospace, defense aerospace and gas turbines, including spares. It expected capital spending to stay elevated at about 5% of sales for capacity expansion in aerospace and gas turbines. It expected commercial transportation to stay weak, with recovery starting in the second half of 2026. The 10-K described the pending CAM acquisition as expected to close in the first half of 2026, financed through some mix of commercial paper or debt facilities, new debt securities and cash on hand. ## Current quarter: Q2 2026 (quarter ended June 30, 2026) *From the Q2 2026 Form 10-Q, accession 0000004281-26-000025, and the second-quarter earnings release furnished as Exhibit 99.1 to the Form 8-K of August 6, 2026, accession 0001104659-26-091610. Guidance and non-GAAP figures come from the release.* **Headline results.** Sales rose 24% to $2,547 from $2,053. For the first half, sales rose 22% to $4,860 from $3,995. The release puts organic growth, which excludes the year's acquisitions and divestiture, at 21%. It reports commercial aerospace revenue up 28%, defense aerospace up 11% and gas turbines up 38%. The 10-Q attributes the growth to these markets, including engine spares, together with pricing, cost pass-through and the CAM and Brunner acquisitions. Lower commercial-transportation volumes and the March 31 sale of the Savannah disk-forging plant partly offset the gains. - Cost of goods sold fell to 62.7% of sales from 66.5%. - SG&A rose to $148 from $89, reflecting acquired headcount and acquisition costs. Corporate expense included $22 of acquisition and acquisition-related costs. - D&A rose to $84 from $69, partly from amortization of the inventory step-up on acquired businesses. - Net interest expense rose to $51 from $38 because of the new notes. Management expects the 2026 debt actions to raise annual interest expense by about $38. - The tax rate including discrete items was 17.7%, compared with 13.2% a year earlier. - Net income was $534, or $1.33 per diluted share, compared with $407 and $1.00. For the first half, net income was $1,114 ($2.77), compared with $751 ($1.84). - The release reports adjusted EBITDA (non-GAAP) of $817, a 32.1% margin, up about 340 bps. Adjusted EPS was $1.33, compared with $0.91. - Aerospace made up about 68% of first-half revenue. **Segments, Q2 2026 compared with Q2 2025:** | Segment | Third-party sales | Change | Segment Adj. EBITDA | Change | Margin | |---|---|---|---|---|---| | Engine Products | 1,373 | +32% | 517 | +51% | 37.7% (+470 bps) | | Fastening Systems | 589 | +37% | 177 | +40% | 30.1% (+90 bps) | | Engineered Structures | 269 | −13% | 64 | −6% | 23.8% (+170 bps) | | Forged Wheels | 316 | +14% | 88 | +16% | 27.8% (+30 bps) | | Total | 2,547 | | 846 | | | - *Engine Products*: growth came from commercial and defense aerospace and gas turbines, including spares. The segment added about 485 net employees in the quarter, and about 720 in the first half. - *Fastening Systems*: most of the growth came from the CAM and Brunner acquisitions, along with commercial and defense aerospace. The acquisitions held back the margin gain. CAM has been included since the second quarter and Brunner since February. - *Engineered Structures*: sales and EBITDA fell because of the Savannah divestiture and product rationalization. The margin improved on operational efficiency and lower headcount. Management expects the footprint optimization, including the Savannah sale, and the product-mix rationalization to lower the segment's 2026 revenue in commercial and defense aerospace. - *Forged Wheels*: higher aluminum and other cost pass-through drove sales growth. The release says volumes were 8% lower than a year earlier but up 7% from the first quarter, which it describes as the start of a North American commercial-transportation recovery. Cost reductions, including lower headcount, drove the EBITDA increase. **Portfolio changes in the first half of 2026** (10-Q Note C): - **Brunner Manufacturing Co. Inc.**, a privately held fastener maker in Wisconsin, was acquired on February 6, 2026 for about $120 in cash, net of $2 of cash acquired. - **Consolidated Aerospace Manufacturing, LLC (CAM)** was bought from Stanley Black & Decker on April 6, 2026 for about $1,812, net of $1 of cash acquired and subject to customary adjustments. CAM makes fasteners, fluid fittings, connectors and other engineered aerospace parts. Howmet financed it with the March 2026 notes, commercial paper and cash. Preliminary purchase accounting for the two deals combined records $1,082 of goodwill and $425 of intangible assets. From their acquisition dates through June 30, the two businesses contributed about 2% of consolidated sales and about 1% of net income. - **Savannah, Georgia disk-forging facility** (Engineered Structures) was sold on March 31, 2026 for $230. About $225 was received in the first quarter, and the rest is expected in the fourth quarter of 2026. The sale produced a $93 gain, recorded in Restructuring and other credits. The plant had about $130 of 2025 sales and about 160 employees. **Financing and balance sheet in 2026:** - **Credit lines.** On February 9, Howmet entered a $1,000 five-year revolving credit facility, maturing February 7, 2031, and a $600 364-day facility, maturing February 8, 2027. Nothing was drawn under either. - **New notes.** On March 3, it issued $400 of 3.750% notes due 2028, $300 of 3.900% notes due 2029 and $500 of 4.750% notes due 2036, raising net proceeds of $1,193. - **Commercial paper.** $450 was outstanding at June 30 at a weighted average rate of 4.018%, against a $1,000 program. - **Yen loan and swap.** On May 22, Howmet prepaid the yen-denominated term loan: ¥29,702 million, about $187 according to the May 28, 2026 Form 8-K; the release says about $186. It also swapped its $300 of 6.750% bonds due 2028 into a yen liability of about ¥47,760 million at about 3.88%. Together these actions are expected to cut annual interest expense by about $12. - **Ratings.** Fitch raised its long-term rating to A- on February 13. Moody's moved its outlook on Baa1 to positive on May 7. **Cash flow and capital return, first half 2026:** - Operating cash flow was $1,036, compared with $699. Investing used $1,900, including $1,929 for the acquisitions. - The release reports Q2 free cash flow (non-GAAP) of $479 after $104 of capital expenditures. - Second-quarter buybacks totaled 1,197,056 shares at an average price of $250.61, or about $300. **Guidance (August 6, 2026 release, non-GAAP except revenue).** Full-year 2026 guidance was raised: | Metric | Q3 2026 range | FY2026 range | |---|---|---| | Revenue | $2,565–$2,585 | $10,000–$10,100 (baseline $10,050, up $400 from prior guidance) | | Adjusted EBITDA | $825–$835 | $3,210–$3,250 (margin about 32.1%–32.2%) | | Adjusted EPS | $1.34–$1.36 | $5.23–$5.31 (baseline $5.27, up $0.33) | | Free cash flow | | $1,850–$1,950 (baseline up $150) | **Management's view.** - The CEO said every major market is growing. He pointed to record commercial aircraft backlogs, rising engine-spares demand, and demand in gas turbines that customers are already revising upward. He said defense remains healthy, with growth expected over the medium term in missiles, drones and collaborative combat aircraft. - He said CAM integration is on track. He also said capital spending will need to rise further in 2027 to support organic growth in aerospace and gas turbines. - The 10-Q expects the modest commercial-transportation recovery that began in the second quarter to continue through the second half of 2026. It expects capital expenditures of about 5% of 2026 sales. - In April 2026, a Paris appeals court cut the remaining French tax penalties on Howmet's 2010–2012 tax years to about $4 (€3 million). Howmet expects to pay them in 2026. ## Subsequent events *From the Q2 2026 Form 10-Q, Note R (Subsequent Events) and Note I, accession 0000004281-26-000025. The dividend item is from the August 6, 2026 earnings release, accession 0001104659-26-091610.* - **Share repurchases after quarter-end.** In July 2026, Howmet bought back another $200 of common stock at an average price of $276.61 per share, retiring about 0.7 million shares. After these purchases, about $697 of the $3,500 Board authorization remained as of August 3, 2026. The release says repurchases from January through July 2026 totaled $800, more than the $700 repurchased in all of 2025. - **Dividend increase.** On July 27, 2026, the Board declared a quarterly common dividend of $0.14 per share, up 17% from $0.12. It was payable August 25, 2026 to shareholders of record on August 7, 2026. - The 10-Q's subsequent-events note discloses no acquisitions, divestitures, new borrowings or litigation outcomes after June 30, 2026.