Howmet Aerospace (HWM) Risk Factors

We derive a portion of our revenue from sales to U.S. and foreign governments and their respective agencies. Such contracts are subject to various procurement laws and regulations and contract provisions relating to their formation, administration and performance. New laws and regulations or changes to existing ones (including, but not limited to, those related to subcontracting, cybersecurity and specialty metals) can increase our risks and/or costs. Failure to comply with these laws, regulations or provisions in our government contracts could result in the imposition of various civil and criminal penalties, termination of contracts, forfeiture of profits, suspension of payments, increased pricing pressure or suspension from future government contracting. If our government contracts are terminated, if we are suspended from government work, or if our ability to compete for new contracts is adversely affected, our financial condition and results of operation could be adversely affected.

Howmet is also subject to a variety of global legal and regulatory compliance risks in connection with its business and products. These risks include, among other things, potential claims or compliance issues, including those relating to securities laws, intellectual property rights, insurance, commercial matters, antitrust and competition, human rights, third-party relationships, supply chain operations and the manufacture and sale of products. Howmet could be subject to fines, penalties, damages or suspension, or debarment from government contracts. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the Company cannot predict with certainty, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in a particular period, and could require substantial attention from management and result in significant legal expenses. For additional information regarding the legal proceedings involving the Company, see Note V to the Consolidated Financial Statements in Part II, Item 8.

A decline in the Company’s financial performance or outlook due to internal or external factors, such as macroeconomic conditions, a deterioration in the Company’s financial metrics or a contraction in the Company’s liquidity, could adversely affect the Company’s credit ratings and its access to the capital or credit markets on terms and conditions that the Company finds acceptable. A downgrade of Howmet’s credit ratings could result in negative consequences, including limiting its ability to obtain future financing on favorable terms, if at all, increasing borrowing costs and credit facility fees, triggering collateral postings, and adversely affecting the market price of Howmet securities. For information on our credit ratings, see "Liquidity and Capital Resources" in Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations). Limitations on Howmet’s ability to access global capital markets, a reduction in Howmet’s liquidity or an increase in borrowing costs could materially and adversely affect Howmet’s ability to maintain or grow its business, which in turn may adversely affect its financial condition, liquidity and results of operations.

Howmet may require substantial capital to invest in growth opportunities and to maintain and prolong the life and capacity of its existing facilities. Insufficient cash generation may negatively impact Howmet’s ability to fund its planned sustaining and return-seeking capital projects, which could adversely affect the long-term value of the Company’s business and its competitiveness.

In connection with the Arconic Inc. Separation Transaction and the Alcoa Inc. Separation Transaction, we entered into various agreements with Arconic Corporation and Alcoa Corporation, respectively, including separation and distribution agreements, tax matters agreements, employee matters agreements, intellectual property license agreements, and metal supply agreements. We rely on Arconic Corporation and Alcoa Corporation to satisfy their performance and payment obligations under these agreements. If either Arconic Corporation or Alcoa Corporation is unable or unwilling to satisfy its obligations under its applicable agreements, we could incur operational difficulties and/or material losses. Pursuant to the Separation and Distribution Agreement, dated as of October 31, 2016, and certain other agreements between us and Alcoa Corporation, Alcoa Corporation agreed to indemnify us for certain liabilities, and we agreed to indemnify Alcoa Corporation for certain liabilities. Pursuant to the Separation and Distribution Agreement, dated as of March 31, 2020, and certain other agreements between us and Arconic Corporation, Arconic Corporation agreed to indemnify us for certain liabilities, and we agreed to indemnify Arconic Corporation for certain liabilities. Indemnities that we may be required to provide Alcoa Corporation and Arconic Corporation are not subject to any cap, may be significant and could negatively impact our business. Third parties could also seek to hold us responsible for any of the liabilities that Alcoa Corporation or Arconic Corporation, as applicable, agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of the Company’s operations. Further, Alcoa Corporation or Arconic Corporation, as applicable, may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Alcoa Corporation or Arconic Corporation, as applicable, any amounts for which we are held liable, we may be temporarily required to bear such losses. Each of these risks could negatively affect our business, results of operations and financial condition.

As discussed in “Competitive Conditions” in Part I, Item 1 (Business) of this report, the markets for Howmet’s products are highly competitive. Howmet’s competitors include a variety of both U.S. and non-U.S. companies in our product markets, which could include existing customers. New entrants in our markets, new product offerings, new and/or emerging technologies in the marketplace, or new facilities may compete with or replace Howmet products. The willingness of customers to accept alternate solutions for the products sold by Howmet, the ability of large customers to exert leverage in the marketplace to affect the pricing for Howmet’s products, and technological advancements or other developments by or affecting Howmet’s competitors or customers could adversely affect Howmet’s business, financial condition or results of operations. In addition, Howmet may face increased competition due to industry consolidation. As companies attempt to strengthen or maintain their market positions, companies could be acquired or merged. Companies that are strategic partners in some areas of Howmet’s business may acquire or form alliances with Howmet’s competitors, thereby reducing their business with Howmet. Industry consolidation may result in stronger competitors who are better able to obtain favorable terms from suppliers or who are better able to compete as sole-source vendors for customers. Consolidation within Howmet’s customer base may result in customers who are better able to command increased leverage in negotiating prices and other terms of sale, which could adversely affect Howmet’s profitability. Consolidation within Howmet’s customer base may also lead to reduced demand for Howmet’s products if a combined entity replaces Howmet’s products with those of Howmet’s competitors with which it has prior relationships. The result of these developments could have a material adverse effect on Howmet’s business, operating results and financial condition. Howmet’s competitive position and future performance depends, in part, on the Company’s ability to develop and innovate products, deploy technology initiatives and implement advanced manufacturing technologies. While Howmet intends to continue to develop innovative new products and services, it may not be able to successfully differentiate its products or services from those of its competitors or achieve and maintain technological advantages.

Howmet owns important intellectual property, including patents, trademarks, copyrights and trade secrets. The Company’s intellectual property plays an important role in maintaining Howmet’s competitive position in a number of the markets that the Company serves. Howmet’s competitors may develop technologies that are similar or superior to Howmet’s proprietary technologies or design around the patents Howmet owns or licenses. Despite its controls and safeguards, Howmet’s technology may be misappropriated by its employees, its competitors or other third parties. The pursuit of remedies for any misappropriation of Howmet intellectual property is expensive and the ultimate remedies may be deemed insufficient. Further, in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of misappropriation of Howmet intellectual property increases, despite efforts the Company undertakes to protect it. Developments or assertions by or against Howmet relating to intellectual property rights, and any inability to protect or enforce Howmet’s rights sufficiently, could adversely affect Howmet’s business and competitive position.

Howmet’s information technology systems could be subject to damage or interruption from power outages; computer network and telecommunications failures; computer viruses; catastrophic events, such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism; and usage errors by employees. If Howmet’s information technology systems are damaged or cease to function properly, the Company may have to make a significant investment to fix or replace them, and Howmet may suffer loss of critical data and interruptions or delays in its operations. Any material disruption in the Company’s information technology systems, or delays or difficulties in implementing or integrating new systems or enhancing current systems, could have an adverse effect on Howmet’s business, financial condition or results of operations. Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyberattacks pose a risk to the security of our and our customers’, suppliers’ and third-party service providers’ products, systems and networks, and the confidentiality, availability and integrity of our data. The Company believes that it faces threats of cyberattacks due to the industries it serves, the locations of its operations, and its technological innovations. The Company has experienced cybersecurity attacks in the past, including breaches of its information technology systems in which information was taken, and may experience them in the future, potentially with more frequency or sophistication. Although past attacks have not resulted in known losses of any critical data or had a material impact on Howmet’s financial condition or results of operations, the scope and impact of any future incident cannot be predicted. While the Company continually works to safeguard its systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyberattacks or security breaches that manipulate or improperly use the Company’s systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, block access to its systems, or otherwise disrupt its operations. The occurrence of such events could negatively impact Howmet’s reputation and its competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on its financial condition and results of operations.

Howmet has operations or activities in numerous countries and regions outside the United States, including Europe, Canada, Mexico, China, and Japan. As a result, Howmet’s global operations are affected by economic, political, legal (such as laws regulating international trade), and other conditions in the United States and foreign countries in which Howmet does business, including (i) economic and commercial instability risks, including changes in local government laws, regulations and policies, such as those related to tariffs, sanctions and trade barriers, taxation, exchange controls, employment regulations and repatriation of assets or earnings; (ii) geopolitical risks such as political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions, and renegotiation or nullification of existing agreements; (iii) war, terrorist activities, kidnapping of personnel or other dangerous conditions; (iv) compliance with applicable U.S. and foreign laws, including antitrust and competition regulations, the Foreign Corrupt Practices Act and other anti-bribery and corruption laws, and laws concerning trade, including the International Traffic in Arms Regulations, the Export Administration Regulations, and the sanctions, regulations and embargoes administered by the U.S. Department of Treasury’s Office of Foreign Assets Control; (v) aggressive, selective or lax enforcement of laws and regulations by foreign governmental authorities; (vi) exposure to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, economic factors, and currency controls in the countries in which it operates; and (vii) imposition of currency controls. Howmet faces risks arising from the imposition of cash repatriation restrictions and exchange controls in certain countries in which it operates, including China. Cash repatriation restrictions and exchange controls may limit the Company’s ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by Howmet’s foreign subsidiaries or businesses located in or conducted within a country imposing restrictions or controls. Should the Company need to fund its operations using cash from countries where there are restrictions or controls in place, it may be unable to do so on a timely basis and/or without incurring substantial costs. Although the effect of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect Howmet’s business, financial condition, or results of operations.

The COVID-19 pandemic affecting the global community has had and may continue to have a material adverse effect on our business, results of operations, financial condition and/or cash flows, and the nature and extent of the impact over time remain highly uncertain. The impact over time will depend on future developments that are beyond our control, including the duration of the pandemic, the continued severity of the virus, resurgences and emergence of variants of the virus, the efficacy and availability or uptake of vaccines and related drugs, and the actions that may be taken in response to COVID-19, such as vaccine mandates, manufacturing restrictions, labor policies, and travel limitations. The longer the pandemic’s duration, the greater the potential impact on our business and the more heightened the risk of a continuing material adverse effect on our company, business strategies and initiatives. •Business and operations risks: We continue to monitor COVID-19 guidance and requirements, to determine whether we will need to modify our business practices or take actions as may be required by government authorities or that we determine are in the best interests of our stakeholders, including our continuing focus on the safety and protection of our workforce. If there are restrictions on or disruptions to our business practices, we may be unable to perform fully on our contracts and our operational costs may increase. The COVID-19 pandemic has resulted in increased operational challenges, which have included, and may in the future include, manufacturing site shutdowns and workplace disruptions. We may also face challenges in restoring our production levels if and when COVID-19 abates if we are unable to reinstate our workforce at the levels needed or if our suppliers experience disruptions that impact their ability to provide goods or services to us. As a result of COVID-19 and its negative impact on the aerospace and commercial transportation markets, the possibility exists that a corresponding sustained impact to our operations, financial results and market capitalization may require material impairments of our assets, including, but not limited to, goodwill and other intangible assets, long-lived assets, and right-of-use assets. •Customer risks: We have limited visibility into future demand due to the disruptions resulting from COVID-19. The significant decrease in air travel, resulting from the COVID-19 pandemic and the measures that governments and private organizations worldwide have implemented in an attempt to contain its spread, has adversely affected, and may continue to adversely affect, airlines and aircraft manufacturers and their respective demand for our and our customers’ products and services. Aircraft manufacturers have reduced, and may continue to reduce, production rates due to fewer expected aircraft deliveries and, as a result, demand for products in the OEM market has significantly decreased. Several of our aerospace customers previously suspended operations at certain production sites, reduced operations and production rates, and/or took cost-cutting actions, including, but not limited to, General Electric Company, Raytheon Technologies Corporation and The Boeing Company, which represented approximately 13%, 9%, and 5%, respectively, of our third-party sales in 2021. Due to reduced air traffic and flight cycles, spares and aftermarket demand has declined and could remain low until air travel levels return. The decrease in domestic and international air travel due to the pandemic has adversely affected demand for narrow-body and wide-body aircraft, respectively. While domestic air travel has increased during the second half of 2021, international travel has not yet begun to recover and the commercial wide-body aircraft market may take longer to recover. In addition, several of our commercial transportation customers have encountered, and may continue to encounter, challenges in their ability to increase production rates to meet demand due to supply chain constraints stemming from the pandemic. Due to the foregoing factors and other cost-cutting measures by our customers, we are experiencing, and expect to continue experiencing, lower demand and volume for our products. In addition, the ongoing COVID-19 pandemic may negatively impact customer contract negotiations, including the ability to negotiate acceptable terms in contract renewal negotiations and our ability to obtain new customers. Ultimately, the demand for our products is driven by the demand for transportation and travel within and between various countries. •Market, liquidity and credit risks: Financial market dynamics and volatility due to COVID-19 could pose heightened risks to our liquidity, including those discussed below in “—Risks Related to Liquidity and Capital Resources.” If the COVID-19 pandemic continues for a prolonged period, it could adversely affect our financial condition, including with respect to satisfying both required and voluntary pension funding requirements, could result in potential increases in net debt or reductions in EBITDA, and could otherwise negatively affect our ability to achieve our strategic objectives. If the foregoing or other factors negatively impact our ability to comply with the financial covenant in our Five-Year Revolving Credit Agreement (the “Credit Agreement”), our ability to draw under the Credit Agreement would be adversely affected. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding or our ability to refinance certain portions of our indebtedness. The COVID-19 pandemic may also exacerbate other risks disclosed herein, including, but not limited to, risks related to global economic conditions, competition, loss of customers, costs of supplies, supply chain disruptions, manufacturing difficulties and disruptions, investment returns, our credit profile, our credit ratings, and interest rates. We expect that the longer the period of disruption from COVID-19 continues, the more material the adverse impact will be on our business operations, financial performance, results of operations and/or cash flows.