Howmet Aerospace Earns 34% Gross Margins. The 10-K Reveals Why ROIC Is Only Half That.

Most investors have never heard of Howmet Aerospace. But every jet engine that flies — every Pratt & Whitney geared turbofan, every GE LEAP engine, the F-35's powerplant — contains Howmet's titanium and nickel castings. So do the gas turbines powering AI data centers. The company earns 34% gross margins, expanded margins in all four business segments simultaneously, and generated $1.4 billion in free cash flow in FY2025.

The stock returned 80% in 2025. Yet Howmet's return on invested capital is 18.6%. Good — but not exceptional for a company with this kind of pricing power.

The FY2025 10-K, filed February 12, 2026, reveals why: 48.5% of Howmet's invested capital — $4.5 billion — is goodwill and intangibles inherited from the Alcoa-to-Arconic-to-Howmet spinoff chain. This legacy capital sits on the balance sheet generating zero incremental revenue. It is the single largest reason Howmet's GAAP returns understate the actual economics of its manufacturing operations.

Strip out the goodwill, and this is one of the best-returning manufacturers in the aerospace sector. Leave it in, and the return profile looks merely solid. This is the analytical question at the heart of Howmet: does the goodwill matter, or has the market already learned to see through it?

DuPont Decomposition: Both Components Are Improving

Howmet's 18.6% GAAP ROIC decomposes into a 20.3% NOPAT margin multiplied by 0.91x invested capital turnover. Both components are improving — and the quarterly trajectory matters more than the snapshot.

The 8-quarter trend lines tell the story. NOPAT margin's TREND8 is +2.4 percentage points — steady, organic margin expansion. Invested capital turnover's TREND8 is +0.05x — the company is generating incrementally more revenue per dollar of invested capital despite the goodwill anchor.

This dual improvement is uncommon. In most companies, margin expansion comes at the expense of capital efficiency (you invest more to earn more) or capital efficiency improves because margins are compressing (you're squeezing the same assets harder). Howmet is doing both simultaneously — pricing power is expanding margins while the manufacturing base generates progressively more throughput.

The median quarterly ROIC over the trailing 8 quarters (Q.MED8) is 16.5%, meaning the current 18.6% FY print represents outperformance relative to the company's own recent history.

There's one more metric that ties the DuPont story together: return on incremental invested capital (ROIIC). While ROIC tells you what the entire capital base earns, ROIIC measures whether each new dollar of investment creates value. Howmet's trailing twelve-month ROIIC is 77.7% — meaning each incremental dollar of invested capital over the past year generated $0.78 of incremental NOPAT. Even the most recent quarter's ROIIC of 16.5% comfortably exceeds the cost of capital. This is critical context for the CAM acquisition: Howmet has demonstrated it can deploy capital at rates well above its cost, which is the prerequisite for acquisitive growth to create shareholder value.

But why is the invested capital turnover so low? At 0.91x, Howmet generates only $0.91 in revenue for each dollar of capital deployed. By comparison, most high-quality manufacturers operate at 1.2-1.5x turnover. The answer is the $4.5 billion of goodwill sitting in the denominator.

The $4.5 Billion Goodwill Anchor

Howmet Aerospace didn't start as Howmet Aerospace. It started as Alcoa — the aluminum giant that in 2016 split into two companies: Alcoa Corporation (upstream aluminum) and Arconic (downstream engineered products). Arconic then split again in 2020, separating its rolled products business from its engineered structures and forgings. The latter became Howmet Aerospace.

Each separation carried legacy goodwill. The result: Howmet's balance sheet still reflects acquisition premiums paid decades ago for businesses that have since been restructured, spun off, or sold.

The 10-K's goodwill footnote reveals where the legacy capital sits:

Engine Products carries 53% of all goodwill — with $719 million already written off in past impairments. Fastening Systems carries another 40%. These are the legacies of the Alcoa conglomerate era, and they compress returns on capital that the underlying manufacturing operations genuinely earn.

Nearly half of Howmet's invested capital is goodwill and intangibles — assets that do not depreciate on the income statement (goodwill is tested annually for impairment, not amortized) and do not contribute to production capacity. They are a historical record of past acquisition premiums, not a reflection of current operational capability.

This creates a structural disconnect between Howmet's operating reality and its GAAP returns:

The tangible ROIC math: $1,723M NOPAT / ($9,242M invested capital - $4,479M goodwill and intangibles) = $1,723M / $4,763M = 36.2%. This tells you what the manufacturing operations actually earn. The GAAP ROIC of 18.6% tells you what they earn when burdened with $4.5 billion of non-productive historical capital. The market, pricing Howmet at approximately 55x trailing earnings (~48x forward), has apparently decided that the tangible economics matter more.

So the next question becomes: how does Howmet maintain this enormous gap between tangible and GAAP returns? What prevents competition from eroding the margins that make tangible ROIC so exceptional?

Sole-Source Pricing Power: Why Margins Keep Expanding

Howmet's 34.2% gross margin — up 310 basis points from 31.1% — is not the result of cost cutting or operating leverage alone. It is the result of pricing power that most manufacturers can only dream of.

The 10-K's cost structure tells the story directly:

And more explicitly:

This is the financial fingerprint of sole-source positioning. Howmet manufactures components that are FAA-certified for specific engine platforms. When a part is qualified for, say, a Pratt & Whitney PW1100G geared turbofan engine, switching to an alternative supplier requires years of testing, qualification, and regulatory approval. Airlines and engine OEMs don't switch suppliers to save 5% — the certification cost and program risk are prohibitive.

The result: Howmet doesn't just pass through cost inflation. It passes through costs and expands pricing beyond that. Margins expand even as raw material and labor costs rise. And with 1,020 granted patents and 180 pending applications, the intellectual property barriers compound the regulatory ones.

All four segments expanded EBITDA margins simultaneously in FY2025:

The mechanism behind this margin expansion is visible in the revenue mix. The Q4 2025 earnings call revealed that combined engine spares across commercial aerospace, defense, and gas turbines surged 33% to $1.7 billion — now representing 21% of total revenue, up from 17% in FY2024. Commercial aerospace engine spares alone grew 44% year-over-year.

This matters because aftermarket spares carry substantially higher margins than original equipment. Once an engine enters service, airlines and operators must source replacement parts from the qualified manufacturer — there is no aftermarket alternative for a certified turbine blade. As the global installed base of engines grows, spares revenue compounds with high incremental margins and near-zero customer churn. This is Howmet's most valuable revenue stream, and it's accelerating.

The Engine Products segment deserves particular attention. At $4.3 billion in revenue (52% of total), it is the company's engine — and the end-market breakdown reveals strategic depth:

The 10-K also reveals who Howmet's actual customers are — and it's not who most investors assume:

The key customers are the engine OEMs — Pratt & Whitney (owned by RTX) and GE Aerospace — not the airframers. Boeing is discussed extensively in risk factors but is not a disclosed 10%+ customer. This distinction matters: even if Boeing's production rates fluctuate, Howmet's revenue is tied to the engine makers, who ship to both Boeing and Airbus.

The gas turbines business — $944 million and growing — is particularly interesting in the context of the AI infrastructure buildout. Data centers need power. Gas turbines generate power. Howmet makes the castings for those turbines. This is an AI beneficiary that nobody talks about, buried inside a segment called "Engine Products."

If margins are this strong and expanding, the obvious next question is: where does the cash actually go? Does Howmet's cash generation match the profitability story — or does GAAP accounting obscure the picture?

Cash Generation vs. GAAP: Why Cash ROIC Tells a Different Story

If you only look at GAAP ROIC, Howmet's 18.6% is solid but unspectacular. The cash flow statement tells a dramatically different story.

Operating cash flow was $1,884 million in FY2025 — up 45% from $1,298 million in FY2024. The 10-K attributes the increase to "$409 million in higher operating results, $83 million in lower working capital, and $96 million in higher noncurrent liabilities including long-term deferred revenue."

Free cash flow was $1,431 million — up 46.5% year-over-year — on $453 million of capital expenditures (5.0% of revenue).

Cash conversion — operating cash flow divided by net income — was 1.25x. This means Howmet generates $1.25 in operating cash for every $1 of reported net income. The primary reason: non-cash charges (depreciation, amortization, pension settlements) reduce GAAP earnings without consuming cash.

The Q4 Cash ROIC of 28.0% is particularly revealing. In the fourth quarter, Howmet's cash-generating engine was running at nearly 10 percentage points above its GAAP return on invested capital. The gap reflects:

1. Depreciation and amortization that reduced GAAP earnings but didn't consume cash
2. Pension settlement charges — $89 million in non-cash pension settlements for a U.K. plan — that hit the P&L but don't represent ongoing operational costs
3. Working capital improvements that generated cash without appearing in operating income

The trend in Cash ROIC is worth watching: 11.3% in Q1 (typically low due to seasonal working capital), 19.4% in Q2, 22.7% in Q3, and 28.0% in Q4. The acceleration suggests Howmet's cash-generating capability is improving faster than its GAAP profitability — a hallmark of earnings quality.

The capital allocation picture is textbook disciplined. Of the $1,884 million in operating cash flow: $453 million went to capex (growth-oriented — capex/depreciation of 1.60x means Howmet is investing well above replacement), $700 million to buybacks, $98 million to dividends, and the remainder to debt reduction. The balance sheet is steadily deleveraging — net debt/EBITDA fell to 1.09x, and interest coverage expanded to 11.6x.

Where management puts its own capital is revealing. The $700 million in FY2025 buybacks were executed at an average price of approximately $161 per share — implying management saw value at roughly 41x the then-current earnings. In early January 2026, Howmet repurchased another $150 million at approximately $215 per share. The dividend increased 69% year-over-year to $0.44 per share annualized. Both signals suggest management believes the business can grow into its premium valuation. Stock-based compensation remains minimal at $73 million (0.88% of revenue) — confirming that dilution is not eroding the buyback signal. Share count declined approximately 1% year-over-year.

The cost of debt is 5.5%, meaning Howmet's ROIC-to-cost of debt spread is 13.0 percentage points on a GAAP basis. On a tangible basis, the spread is approximately 30 percentage points. This is a company generating returns vastly in excess of its cost of capital by any reasonable measure.

So if the cash story is this good — 1.25x conversion, accelerating free cash flow, returns well above cost of capital — why is management spending $1.8 billion to add more goodwill to an already goodwill-heavy balance sheet?

The $1.8 Billion CAM Question

On December 22, 2025, Howmet agreed to acquire CAM — the aerospace fastener business — from Stanley Black & Decker for approximately $1.8 billion in cash. The deal is expected to close in H1 2026.

The strategic logic is clear: CAM strengthens Howmet's fastener portfolio (alongside the Brunner Manufacturing acquisition completed February 6, 2026, for $120 million). The Fastening Systems segment already expanded EBITDA margins 460 basis points in FY2025.

The deal economics are more transparent than most acquisitions. Howmet expects CAM to generate FY2026 revenue of $485-495 million with an adjusted EBITDA margin in excess of 20% before synergies. Including anticipated synergies and favorable tax treatment, the effective transaction multiple is approximately 13x adjusted EBITDA — reasonable for a quality aerospace fastener business. At those economics, CAM's implied EBITDA would be approximately $97-99 million pre-synergy, potentially reaching $135-140 million as synergies and tax benefits are realized.

But the financial tension is real. The $1.8 billion purchase price will add significant goodwill to a balance sheet already carrying $4 billion of it. If CAM's purchase accounting adds $1.2-1.4 billion in goodwill (typical for an asset-light manufacturer at this multiple), total goodwill would approach $5.2-5.4 billion — potentially exceeding half of total invested capital.

The financing strategy matters too. The 10-K discloses Howmet "intends to finance the Proposed CAM Acquisition through utilizing a variety of financing sources, which may include borrowing under its commercial paper program or debt facilities." At current net debt/EBITDA of 1.09x, there's substantial capacity — the covenant ceiling is 3.75x (4.25x for material acquisitions) — but the leverage profile will shift meaningfully.

The CAM acquisition adds goodwill, but it's goodwill Howmet chose to create. There's another category of legacy obligation that Howmet inherited involuntarily — and that investors should understand before assessing the full balance sheet picture.

The Hidden Balance Sheet: Alcoa Guarantee and Pension Risk

Two items lurk below the headline numbers that investors should understand.

The Alcoa Guarantee: $1,141 Million

When Alcoa split in 2016, Howmet (then Arconic) inherited a guarantee obligation for Alcoa Corporation's long-term energy supply agreements. The estimated present value: $1,141 million. This is off-balance-sheet — it doesn't appear in invested capital or debt metrics — but it represents a real contingent liability that doesn't expire until 2047.

The 10-K considers the risk of default "remote" and notes that Alcoa has obtained an $80 million surety bond. The guarantee's carrying value on Howmet's balance sheet is only $5 million. But in a severe aluminum downturn — or an Alcoa-specific liquidity crisis — the exposure could reach $1,141 million (less the 50% Arconic indemnification, so roughly $571 million net). At the gross amount, it represents roughly 12% of Howmet's invested capital and 80% of annual free cash flow.

Pension Liabilities: $647M to $1,129M in One Quarter

Pension and retiree liabilities surged from $647 million to $1,129 million in Q4 2025 — a $482 million increase. The 10-K reveals this was actually a de-risking action: Howmet executed a U.K. pension plan annuity buyout and lump sum payments, triggering $89 million in non-cash settlement accounting charges but permanently transferring obligations off the books.

The settlements reduced the total benefit obligation by $130 million. The discount rate also decreased from 5.60% to 5.30%, adding $34 million in actuarial losses. The balance sheet reclassification from noncurrent to current liabilities accounts for much of the visual spike — the total pension benefit obligation actually decreased from $1,496 million to $1,371 million year-over-year. This is pension de-risking, not pension deterioration.

The maturity profile is exceptionally clean — nothing due in 2027 (the 5.9% Notes were redeemed early), nothing in 2030, and 61% of total debt extends beyond five years. S&P and Fitch both upgraded Howmet to BBB+ in 2025, citing "strong demand for commercial aerospace components, margin gains, and debt reduction." Moody's upgraded two notches to Baa1 in 2024.

Where the Growth Is: Gas Turbines and Data Center Power

Howmet's growth narrative extends beyond the aerospace cycle. The Engine Products segment includes a significant — and growing — gas turbine business that connects Howmet to one of the most powerful secular trends in the economy.

Gas turbine revenue was $944 million in FY2025, representing the third-largest end-market after commercial aerospace ($2,355M) and defense aerospace ($900M). The 10-K makes the connection to AI infrastructure explicit:

This is a direct SEC filing disclosure linking Howmet's revenue to AI infrastructure demand. Every natural gas-fired power plant built to feed a hyperscaler data center contains turbine components that Howmet manufactures.

On the Q4 earnings call, CEO John Plant went further, projecting that the gas turbine business — currently generating approximately $1 billion annually — "should double in revenue to $2 billion over the next 3 to 5 years," driven by natural gas demand for data center electricity generation. Gas turbine revenue grew 25% for the full year and accelerated to 32% growth in Q4 alone. If Plant's projection materializes, gas turbines would grow from 11% to roughly 15-18% of total company revenue — a meaningful shift in the revenue mix toward a secular growth market.

The Engine Products segment invested $319 million in capital expenditures in FY2025 — 70% of Howmet's total capex — and absorbed approximately 1,445 net new headcount. This is a company investing aggressively in capacity to capture demand it expects to materialize.

The defense aerospace business provides a natural countercyclical floor. At $900 million in revenue, growing 21% year-over-year, defense spending is insensitive to commercial aviation cycles. Key programs include the F-35, where Howmet supplies structural castings, and defense engine spares grew 32% in Q4. The Engineered Structures segment, which is heavily defense-oriented, expanded margins 560 basis points — the most of any segment.

The one weakness is commercial transportation. The Forged Wheels segment saw revenue decline 1% as truck and trailer volumes remained depressed. The 10-K projects recovery "beginning in the second half of 2026, given tariff-related, economic, and regulatory uncertainty in North America." At less than 13% of total revenue, this weakness is manageable but worth monitoring.

Q4 2025 Earnings and FY2026 Guidance

The Q4 2025 8-K (filed February 12, 2026) confirms the momentum:

• Q4 revenue: $2,168M (+14.7% YoY)
• Q4 Adjusted EBITDA margin: 30.1% (+330 bps YoY) — a record
• Q4 Adjusted EPS: $1.05 (+42% YoY)
• FY Adjusted Operating Margin ex special items: 25.8% (+380 bps YoY)

The FY2026 guidance is built on specific aircraft production rate assumptions disclosed on the earnings call:

These assumptions are conservative relative to OEM targets — Airbus has publicly stated a goal of 75 A320s per month by 2027, and Boeing's long-term 737 target exceeds 50/month. Upside to build rates represents upside to guidance. Conversely, if Boeing experiences further production disruptions, the 737 assumption is the primary risk.

FY2026 guidance points to continued acceleration:

The Valuation Question: 47x Forward Earnings in a 27x Industry

Howmet returned 80% in 2025 — more than tripling the S&P 500. At roughly $236 per share and 55x trailing earnings, the stock is the most expensive large-cap aerospace name by a wide margin.

The premium is striking — Howmet trades at roughly 2x the industry multiple and more than double RTX. This raises the question every investor asks: is HWM overvalued?

The honest answer is nuanced. The premium exists because the market is pricing Howmet on its tangible economics, not its GAAP returns. If you value the business on tangible ROIC (~35%) rather than GAAP ROIC (18.6%), the implied P/E on normalized tangible earnings drops to approximately 30-33x — still premium, but far more defensible for a company with sole-source pricing power, all-segment margin expansion, and a gas turbine business exposed to AI infrastructure spending.

What the premium also prices in: CEO John Plant's operational execution. Plant, 72, transformed the former Alcoa subsidiary into an aerospace compounder since taking over in 2019. Multiple analyst reports attribute a meaningful portion of the valuation premium to his management discipline. No successor has been publicly named — a governance risk that investors should weigh against the operational track record.

Forward Scenarios: What Determines Whether the Goodwill Matters

Key monitoring thresholds:

• Gross margin below 32%: Would signal pricing power erosion — the thesis breaks
• GAAP ROIC below 16%: Would suggest goodwill + CAM are creating a permanent drag
• Cash conversion below 1.0x: Would indicate the cash story is deteriorating
• Net debt/EBITDA above 2.5x: Would signal CAM financing strained the balance sheet
• Pension liabilities above $1.5B: Would warrant closer examination of actuarial assumptions
• CEO succession announcement: Would likely compress the management premium embedded in the multiple

So — does the goodwill matter?

The operating answer is no. The $4.5 billion in legacy capital from the Alcoa spinoff chain sits inert on the balance sheet — it doesn't impair manufacturing economics, suppress cash generation, or erode pricing power. Tangible ROIC is 35%. Cash ROIC hit 28%. ROIIC is 77.7% on a trailing twelve-month basis. Howmet is one of the best-returning manufacturers in the aerospace sector by any measure that strips out the historical artifacts.

The valuation answer is more nuanced. At 48x forward earnings — nearly double the industry average — the market has already priced through the goodwill illusion. It sees the tangible economics, the sole-source moat, and the CEO who built the margin story. That leaves no margin of safety for Boeing disruption, a CEO transition, titanium supply shocks, or CAM integration missteps. The total shareholder yield is 1.1%.

The goodwill matters only if Howmet adds more of it without earning above its cost of capital — and whether the $1.8 billion CAM acquisition passes that test is the single most important metric to watch over the next four quarters.

Methodology

Data Sources

Filing	Company	Form	Period	Filed	CIK
Howmet Aerospace FY 2025 10-K	Howmet Aerospace Inc.	10-K	FY 2025	Feb 12, 2026	0000004281
Howmet Aerospace Q4 2025 8-K	Howmet Aerospace Inc.	8-K	Q4 2025	Feb 12, 2026	0000004281

Filing viewer: SEC EDGAR full-text search for Howmet Aerospace

All financial metrics extracted via MetricDuck's SEC filing analysis pipeline. Quarterly metrics computed from 10-Q filings for Q1-Q3 2025 and the FY2025 10-K. 197 unique metrics tracked across 7 periods.

ROIC is calculated as NOPAT (Net Operating Profit After Tax) divided by Invested Capital, using Howmet's FY2025 effective tax rate of 18.0%. DuPont decomposition breaks ROIC into NOPAT Margin multiplied by Invested Capital Turnover. Tangible ROIC excludes goodwill and net intangible assets from invested capital. Cash ROIC substitutes operating cash flow for NOPAT. ROIIC (Return on Incremental Invested Capital) measures the change in NOPAT divided by the change in invested capital over the same period. TREND8 represents the linear regression slope over the trailing 8 quarters. MED8 is the median over the trailing 8 quarters.

Limitations

• This analysis is based on publicly available SEC filings and cannot assess non-public information, management intentions, or forward-looking outcomes.
• ROIC calculations use reported figures; actual economic returns may differ based on accounting estimates and policy choices.
• Tangible ROIC is an approximation — stripping goodwill assumes zero return on that capital, which may overstate the tangible return if intangible assets contribute to competitive positioning.
• Segment-level ROIC is not available; margin analysis is based on segment-level EBITDA disclosures.
• Boeing's specific revenue contribution is not separately disclosed, as Boeing is not a 10%+ customer. Boeing exposure is indirect, through engine OEM customers RTX and GE Aerospace.

Disclaimer: This analysis is for informational purposes only and does not constitute investment advice, a recommendation to buy or sell securities, or an offer or solicitation of any transaction. Past performance is not indicative of future results. Always conduct your own due diligence before making investment decisions.

MetricDuck Research does not hold positions in HWM. This analysis is based solely on publicly available SEC filings and is provided for educational purposes.