ATI Inc. 2023 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
ATI Inc. is a global manufacturer of technically advanced specialty materials and complex components. Its two segments are High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). The filing covers the quarter and six months ended June 30, 2023; comparative figures are for the periods ended June 30, 2022.
Aerospace and defense represented 58% of second-quarter sales and 57% of first-half sales. Management cited recovering commercial aerospace demand, particularly for jet-engine materials and airframe products, as the primary growth driver.
Financial Performance and Key Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Sales | $1,046.0 million | $959.5 million | $2,084.1 million | $1,793.6 million |
| Gross profit | $209.1 million | $175.3 million | $402.3 million | $344.7 million |
| Gross margin | 20.0% | 18.3% | 19.3% | 19.2% |
| Operating income (loss) | $120.3 million | $(11.6) million | $232.9 million | $65.4 million |
| Net income (loss) attributable to ATI | $76.0 million | $(38.0) million | $146.1 million | $(7.1) million |
| Diluted EPS | $0.52 | $(0.31) | $1.01 | $(0.06) |
| Adjusted EBITDA | $149.8 million | $143.1 million | $282.5 million | $268.1 million |
| Adjusted EBITDA margin | 14.3% | 14.9% | Not clearly provided | Not clearly provided |
HPMC second-quarter sales increased 33% to $527.1 million, while segment EBITDA increased to $108.1 million from $60.3 million. AA&S sales decreased 8% to $518.9 million, and segment EBITDA declined to $63.2 million from $104.6 million. First-half HPMC sales rose 35% and AA&S sales rose 3%.
Six-month cash flow from operations was an outflow of $217.1 million, compared with an outflow of $222.4 million in 2022. Investing cash outflow increased to $100.8 million from $55.7 million, primarily due to $103.3 million of capital expenditures. Financing activities provided $1.0 million, compared with a $135.6 million outflow in the prior-year period.
Cash and cash equivalents were $267.1 million at June 30, 2023, down from $584.0 million at December 31, 2022. Total debt was $1,773.8 million before debt issuance costs, and net debt was $1,522.2 million. The reported total debt-to-adjusted-EBITDA ratio was 3.17x, compared with 3.21x at year-end 2022; net debt-to-adjusted-EBITDA increased to 2.70x from 2.15x.
Material Changes Versus the Prior Comparable Period
- Sales increased 9% in the second quarter and 16% in the first six months, led by commercial aerospace recovery.
- Operating results improved substantially because the prior-year periods included a $115.9 million second-quarter loss and a $141.0 million first-half loss on the sale of the Sheffield, UK operations.
- HPMC benefited from higher aerospace volumes and operating leverage. Its second-quarter EBITDA margin increased to 20.5% from 15.2%.
- AA&S performance weakened because of softness in general industrial markets, lower precision rolled-strip demand, lingering COVID-related impacts in Asia, higher retirement costs, and the absence of a $9.9 million 2022 benefit from an A&T Stainless tariff settlement.
- Nonoperating retirement benefit expense increased to $16.9 million in the second quarter and $33.7 million for the first half, versus $6.6 million and $12.4 million, respectively.
- Managed working capital increased to $1,632.5 million, or 39.0% of annualized sales, from $1,215.2 million, or 30.1%, at December 31, 2022. The increase primarily reflected higher inventories, production levels, and a strategic nickel purchase.
- Capital expenditures increased materially as ATI funded AA&S transformation projects and HPMC growth projects.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued aerospace growth, plans for the Albany, Oregon titanium melt shop to be fully operational in the third quarter of 2023, and is investing in additional capacity, including an expansion in Richland, Washington.
- Backlog was $3.5 billion at June 30, 2023, compared with $2.6 billion a year earlier; approximately 70% was expected to be fulfilled within 12 months.
- Second-quarter gross profit included $4.5 million of start-up costs and approximately $2.8 million of charges related primarily to the Robinson, Pennsylvania closure. First-half results also included $1.2 million of Albany start-up costs.
- ATI recorded $2.7 million of restructuring charges in the second quarter and first half, principally severance for approximately 40 employees. Remaining restructuring reserves were $11.7 million, of which $7.2 million was expected to be paid within one year.
- The company had $50 million outstanding under the ABL revolving facility, approximately $500 million of additional ABL liquidity, and was in compliance with its fixed-charge coverage covenant.
- ATI believes cash, internally generated funds, and available ABL borrowings will meet projected liquidity needs. The company has $291.4 million of convertible notes due in 2025 and $150.0 million of debentures due in 2025.
- Environmental remediation reserves were approximately $14 million, with reasonably possible costs exceeding recorded reserves by as much as $16 million. Management stated that litigation is not currently 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 duties, supply availability, pension funding and asset performance, labor disruptions, equipment outages, geopolitical conflict, public-health events, and natural disasters.
- Natural-gas hedges covered approximately 80% of forecast domestic requirements for the remainder of 2023, 50% for 2024, and 15% for 2025. The company hedged approximately 8 million pounds of nickel through 2024, or about 10% of estimated annual nickel requirements.
- The company maintains valuation allowances on U.S. federal and state deferred tax assets. No interim impairment-triggering event was identified at June 30, 2023.
Important Facts for Investors to Verify
- Whether commercial aerospace volume growth and HPMC margin gains continue as production ramps.
- Whether AA&S demand weakness, particularly in precision rolled products and general industrial markets, stabilizes.
- The pace of working-capital normalization and conversion of inventory and receivables into operating cash flow.
- Funding plans for the 2025 convertible notes and debentures, including the effect of potential conversion or refinancing.
- Actual spending, timing, and returns from the Albany, Richland, and other capacity-expansion projects.
- Potential exposure from environmental remediation, pension obligations, multiemployer pension withdrawal liability, litigation, and trade-policy changes.
- The effect of non-GAAP adjustments on reported Adjusted EBITDA and leverage measures.