ATI Inc. 10-Q Summary
Business Context and Reporting Period
ATI Inc. is a global manufacturer of specialty materials and complex components, operating through High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). The filing covers the quarter and nine months ended September 30, 2023. Aerospace and defense represented 61% of third-quarter sales and 58% of nine-month sales.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Sales | $1,025.6 million | $1,032.0 million | $3,109.7 million | $2,825.6 million |
| Gross profit | $194.6 million | $183.8 million | $596.9 million | $528.5 million |
| Gross margin | 19.0% | 17.8% | 19.2% | 18.7% |
| Operating income | $125.2 million | $113.2 million | $358.1 million | $178.6 million |
| Net income attributable to ATI | $75.7 million | $61.1 million | $221.8 million | $54.0 million |
| Diluted EPS | $0.52 | $0.42 | $1.53 | $0.42 |
| Adjusted EBITDA | $148.1 million | $141.1 million | $430.6 million | $409.2 million |
| Cash used in operating activities | Not separately provided | Not separately provided | $(331.3) million | $(99.4) million |
At September 30, 2023, cash and cash equivalents were $432.9 million, compared with $584.0 million at December 31, 2022. Total debt was $2,185.2 million excluding debt issuance costs, versus $1,748.0 million at year-end 2022. Net debt was $1,773.0 million, and the trailing-twelve-month net debt-to-adjusted EBITDA ratio was 3.11x, compared with 2.15x at December 31, 2022.
Capital expenditures were $147.3 million for the first nine months, compared with $100.5 million in the prior-year period. Available additional liquidity under the ABL facility was approximately $550 million, with no borrowings outstanding under its revolving portion at September 30, 2023; $31.7 million supported letters of credit.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 1%, but gross profit increased 6% and gross margin expanded to 19.0%.
- Nine-month sales increased 10%, while operating income more than doubled, primarily reflecting stronger aerospace demand and the absence of the $141.0 million loss on the 2022 sale of the Sheffield, UK operations.
- HPMC third-quarter sales increased 18% and segment EBITDA increased to $115.7 million from $85.8 million. Nine-month HPMC sales increased 29% and segment EBITDA increased 42%.
- AA&S third-quarter sales decreased 15% and segment EBITDA decreased to $50.4 million from $75.8 million, reflecting recessionary softness in general industrial markets, lower nickel-alloy and precision rolled-strip deliveries, and higher retirement benefit costs. Nine-month AA&S sales decreased 4% and segment EBITDA decreased 27%.
- Commercial aerospace sales increased substantially, while energy, automotive, electronics, construction/mining, and food equipment and appliance markets generally weakened.
- The company issued $425 million of 7.25% senior notes due 2030 in August 2023. Net proceeds were $418.8 million, including $222 million contributed to the U.S. qualified defined benefit pension plan.
- Operating cash flow was significantly negative because of the $272 million of pension contributions, higher receivables and inventories, and a strategic nickel purchase. Inventory increased to $1,353.9 million from $1,195.7 million at year-end.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects continuing growth in commercial aerospace and believes ATI is positioned to benefit from increasing travel demand and aerospace supply-chain expansion.
- The Albany, Oregon titanium melt shop became fully operational in the third quarter. A fourth furnace is expected to ramp in the first half of 2024 and reach full run-rate in the second half of 2024.
- Backlog was $3.6 billion at September 30, 2023, up from $2.7 billion a year earlier; approximately 70% was expected to be performed within 12 months.
- Third-quarter results included $2.8 million of start-up costs and $1.9 million related to an unplanned Lockport, New York facility outage. Nine-month results included $8.5 million of start-up costs, $2.0 million primarily for Robinson, Pennsylvania closure asset write-offs, and $2.2 million of severance-related restructuring charges.
- In October 2023, ATI transferred approximately 85% of its U.S. qualified defined benefit pension obligations to an insurer through group annuity contracts. Management expects a non-cash, non-operating pension settlement gain in the fourth quarter; the amount was not yet finalized.
- Environmental remediation reserves were approximately $13 million, with reasonably possible future costs potentially exceeding recorded reserves by as much as $16 million. Management stated that pending litigation is not expected to materially affect financial condition or liquidity, although individual matters could materially affect results in a reporting period.
- Key risks include aerospace and industrial demand volatility, raw-material and energy prices, international trade policy, equipment outages, labor disruptions, geopolitical events including the Russia-Ukraine conflict, pension funding and asset performance, and environmental or litigation exposures.
- Natural gas was hedged for approximately 80% of forecast domestic requirements for the remainder of 2023, 55% for 2024, and 15% for 2025. Approximately 6 million pounds of nickel were hedged through 2024.
- ATI continues to maintain valuation allowances on U.S. federal and state deferred tax assets. Management expects to exit the three-year cumulative U.S. loss condition at year-end 2023, which could result in a future release of some valuation allowances, but no such benefit was included in the 2023 effective tax rate.
Important Facts for Investors to Verify
- Whether commercial aerospace growth and the HPMC margin improvement offset continued weakness in AA&S industrial markets.
- The timing and magnitude of the expected fourth-quarter 2023 pension settlement gain and any related accounting policy change for actuarial gains and losses.
- Liquidity, refinancing plans, and covenant compliance as the $291.4 million of 3.5% convertible notes and $150.0 million of debentures approach their 2025 maturities.
- Progress, capital requirements, and production ramp for the Albany titanium expansion and other growth projects.
- Inventory normalization, working-capital conversion, and recovery of operating cash flow after substantial pension funding and strategic raw-material purchases.
- Potential environmental, litigation, pension, raw-material, energy, currency, and geopolitical exposures beyond recorded reserves and hedges.
- Remaining share-repurchase authorization of approximately $30 million and its effect on cash resources and share count.