Howmet Aerospace (HWM) FY2025 Earnings Quality Report

Grade: F — Strong Operating Year With Balance Sheet Legacies

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-12, FY ended December 31, 2025) + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP — Unqualified opinion (1 critical audit matter: valuation of U.S. defined benefit pension plan obligations)

One-line verdict: Howmet put up one of the cleanest operating years in the 10-K set. Sales rose 11% to $8,252M, net income rose 31% to $1,508M, and diluted EPS jumped 32% to $3.71. COGS-to-sales improved from 68.9% to 65.8% — a 310bp gross margin expansion — driven by "product price increases are in excess of material and inflationary cost pass through to our customers." Commercial aerospace and defense aerospace demand, plus IGT (industrial gas turbine) demand from data centers, drove the growth. But the screening engine flags B4 (Gross Margin) as a fraud pattern because "gross margin rose +3.1pp while AR increased and AP decreased" — a classic revenue-pull-forward signal. The other flags are structural: cash $0.7B covers only 23% of $3.2B debt (C4 fail), goodwill+intangibles $4.5B at 84% of equity (D1 fail). And the company's stock price is up 1,453% since the 2020 Arconic separation vs. 177% for the S&P 500. This is a quality franchise whose balance sheet still reflects its Alcoa legacy and where the margin expansion deserves a second look.

A Specialized Aerospace Supplier With Engine Products Pricing Power

Howmet was spun off from Arconic on April 1, 2020, itself the product of the 2016 split of Alcoa. The MD&A notes: "The Company's common stock had a closing price of $205.02 per share as of December 31, 2025, an increase of $191.82 per share, or 1453%, since the Arconic Inc. Separation Transaction on April 1, 2020, compared to an increase of 177% for the S&P 500 Index and 178% for the S&P 500 Aerospace & Defense Index over the same period."

The business operates in four segments — the 10-K doesn't break them out in the intro but mentions them throughout: Engine Products (investment castings for jet engines), Fastening Systems (aerospace and commercial transportation fasteners), Engineered Structures (aerospace structural components), and Forged Wheels (forged aluminum wheels for commercial trucks).

Financial Performance: Pricing + Volume + Productivity

From the Earnings Summary in the MD&A:

Howmet's MD&A explains the sales growth directly: "Sales for 2025 were $8,252 compared with $7,430 in 2024, an increase of $822, or 11%. The increase was primarily due to growth in the commercial aerospace, defense aerospace, and gas turbines markets, including engine spares, favorable product pricing, and cost pass through, partially offset by lower volumes in the commercial transportation market. Product price increases are in excess of material and inflationary cost pass through to our customers."

That last sentence is crucial — it is the single most transparent statement of pricing power in the 10-K set. Howmet's specialty investment castings are single-sourced into critical jet engine components; customers have no practical alternative for many parts, which is why Howmet can price ahead of costs.

COGS Improvement

From the MD&A: "COGS as a percentage of Sales was 65.8% in 2025 compared with 68.9% in 2024. The decrease was primarily due to higher volumes, favorable product pricing and productivity gains, partially offset by increased net headcount, primarily in the Engine Products segment, in support of expected revenue increases."

And: "The Company had no COGS net reimbursements in 2025 compared to total COGS net reimbursements of $18 in 2024 due to the final settlement of the insurance claim related to a mechanical failure that occurred in 2022 resulting in substantial heat and fire-related damage to equipment at the Forged Wheels cast house in Barberton, Ohio (the Barberton Cast House Incident) in the second quarter of 2024 and the final settlement of the insurance claim related to the fires that occurred in 2019 at a Fastening Systems plant in France (the France Plant Fire) in the fourth quarter of 2024."

The 2024 $18M COGS reimbursement was a tailwind that did not repeat in 2025 — so the underlying margin improvement is even cleaner than reported.

Restructuring: The UK Pension Charge

From the MD&A: "Restructuring and other charges were $84 in 2025 compared with $21 in 2024 and $23 in 2023. Restructuring and other charges in 2025 consisted primarily of $89 charges for U.K. pension p..." (truncated). Howmet recognized an $89M UK pension plan charge in 2025. This contributed to the restructuring line jump from $21M to $84M.

2026 Outlook

The MD&A explicitly guides: "In 2026, management projects sales to increase as we expect solid growth in the commercial aerospace, defense aerospace, and gas turbines markets, and the Company's strong position in those markets is expected to continue, including engine spares. Earnings per share is expected to grow as management continues to focus on revenue growth and operational performance. Cash provided from operations is expected to increase for the full year in 2026 compared with 2025, resulting from a continued focus on operating performance. Capital expenditures are expected to remain elevated with additional investments in capacity expansions to support aerospace and gas turbines market growth and share gains."

Elevated capex is a positive signal — it means management sees the aerospace and IGT demand as sustained.

Cash Flow: Outstanding

OCF of $1,884M on net income of $1,508M is strong conversion. From the MD&A: "Repurchased the Company's common stock of approximately 4.4 million shares under the Share Repurchase Program for approximately $700" and "Total debt of $3,050, a net decrease of $265 from 2024, reflecting the early redemption of the 5.900% Notes due February 2027 (the 2027 Notes) of $625 and the early prepayment of its USD Term Loan Facility during various periods in 2025 of $140, partially offset by the November 2025 issuance of $500 aggregate principal amount of the 4.550% Notes due 2032 (the 2032 Notes)."

Howmet is deploying cash across three channels: debt paydown, buybacks ($700M), and capital expenditures. The net debt reduction of $265M during the year is a genuine deleveraging action.

Balance Sheet

C4 Cash vs Debt: FAIL — but trending the right direction. Cash $0.7B covers 23% of debt. Total debt fell $265M year-over-year.

D1 Goodwill + Intangibles: FAIL. $4.5B = 84% of equity. The goodwill is a legacy of the Arconic/Alcoa corporate history — Howmet inherited it in the 2020 spin.

The 18-Point Screening

Revenue Quality

Clean revenue quality. AR growing just 2pp faster than revenue is well within normal.

Expense Quality

B4 is the most concerning flag. Schilit's *Financial Shenanigans* describes this pattern: when gross margin expands while accounts receivable rises and accounts payable falls, it can indicate that the company is:

However, for Howmet, there is a plausible benign explanation: the pricing power described by the MD&A. If Howmet raised prices faster than costs (as the MD&A explicitly states), gross margin would expand without any manipulation. The flag is mechanical and warrants investigation, but the qualitative story supports the margin expansion.

B2 (capex +41% on revenue +11%) is watch-flagged. This is forward-looking — the MD&A confirms "Capital expenditures are expected to remain elevated with additional investments in capacity expansions to support aerospace and gas turbines market growth and share gains."

Cash Flow Quality

Balance Sheet

Acquisition Risk

Manipulation Score

Key Risks from the 10-K

1. Commercial Aerospace Cyclicality

Item 1A: "The markets for Howmet's products are cyclical, and such markets and Howmet's operations are influenced by a number of factors, including global economic conditions and regulations. Howmet is subject to cyclical fluctuations in global economic conditions and lightweight metals end-use markets. Howmet sells many products to industries that are cyclical, such as the aerospace and commercial transportation industries, and the demand for our products is sensitive to, and quickly impacted by, demand for the finished goods manufactured by our customers in these industries."

Aerospace is not currently in a down cycle — Howmet is enjoying tailwinds from Boeing/Airbus backlogs and defense spending. But the same cyclicality that benefits the company on the way up punishes it on the way down.

2. Defense Budget Dependence

Item 1A: "The defense aerospace cycle is highly dependent on U.S. and foreign government defense spending, which can be impacted by a government's shifting priorities and budget compromises. It is also impacted by the effects of terrorism, a changing global geopolitical environment, U.S. foreign policy, the impact of government shutdowns and federal debt ceiling on funding and appropriations, whether older military aircraft are retired, and technological improvements to new engines and airframes."

3. Raw Material Concentration — Titanium, Nickel, Cobalt

Item 1A: "The costs of certain raw materials (including, but not limited to, nickel, titanium, aluminum, cobalt, and superalloy materials) necessary for the manufacture of Howmet's products and other manufacturing and operating costs are influenced by market forces, including inflation, supply and demand, and shortages. For example, as the Russia-Ukraine conflict continues, global titanium prices may con..." (truncated).

Russia is a major producer of titanium sponge (via VSMPO-AVISMA), which is a critical input for aerospace fasteners and structures. Sanctions and supply disruptions directly affect Howmet's cost base.

4. Commercial Transportation Weakness

The MD&A explicitly calls out "lower volumes in the commercial transportation market" as an offset to aerospace growth. Forged Wheels serves Class 8 commercial trucks, which is in a cyclical downturn. While this segment is not as large as Engine Products, the 2025 weakness bears watching.

5. Pension Obligation — Critical Audit Matter

PwC: "the Company's pension plan benefit obligation as of December 31, 2025 was $1,371 million, of which $1,346 million related to U.S. pension plans. The Company's pension plan benefit obligations are determined using actuarial methodologies and incorporate significant assumptions, including the discount rate and several assumptions relating to the employee workforce (rates of retirement, termination, and mortality by age). The principal considerations for our determination that performing procedures relating to the valuation of the U.S. pension plan benefit obligations is a critical audit matter are (i) the significant judgment by management when developing the estimate of the U.S. pension plan benefit obligations; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management's significant assumptions related to the discount rate and mortality by age; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge."

The $1.37B U.S. pension obligation is a legacy of the Alcoa-Arconic-Howmet history. A 100bp change in the discount rate can shift the obligation by $100M+, directly hitting comprehensive income.

6. UK Pension Charge and Legacy Obligations

Howmet disclosed an $89M UK pension charge in 2025 restructuring. Like most industrial legacy companies with decades of employee history, Howmet carries long-tail pension and OPEB obligations that continue to be actuarially remeasured.

7. Customer Concentration — Boeing and Airbus

While not called out specifically in the risk factor text extracted, Howmet's Engine Products segment sells primarily to GE Aerospace, Pratt & Whitney, and Rolls-Royce (the three main commercial engine makers), who in turn sell to Boeing and Airbus. A sustained production slowdown at either airframer directly affects Howmet volumes.

Summary

Grade: F. But this is one of the strongest operating stories in the screening set, and two of the three red flags are mechanical.

Howmet's 2025 financial results are genuinely exceptional: sales +11%, net income +31%, EPS +32%, COGS as % of sales down 310bp, CFFO +45%. The MD&A's statement that "product price increases are in excess of material and inflationary cost pass through" is the clearest expression of pricing power in the screening set. The business is structurally advantaged in commercial aerospace engine components where switching costs and qualification timelines are years long.

The F grade reflects:

Three things to watch:

Of the 10 tickers screened, Howmet has the strongest operating momentum and the cleanest qualitative story in its MD&A. An F grade understates the business quality; the grade reflects balance sheet legacy items rather than operating or accounting concerns. The B4 flag is the only one that deserves genuine scrutiny — and even there, the company's pricing-power narrative has enough corroboration (CFFO growth, margin trajectory, guidance) to deserve benefit of the doubt.

**Disclaimer**: This report is based on Howmet Aerospace's FY2025 10-K filed with SEC EDGAR on February 12, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K (Accession 0000004281-26-000012) + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP (Unqualified opinion, 1 critical audit matter — valuation of U.S. defined benefit pension plan obligations)

Fiscal year ended: December 31, 2025