ATI Inc. Fiscal 2023 Form 10-K Summary
Business context and reporting period
ATI Inc. manufactures specialty materials, engineered components and advanced alloy products for aerospace and defense, energy, medical, electronics and other industrial markets. The company operates through High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). Fiscal 2023 covered 52 weeks and ended December 31, 2023; comparative fiscal 2022 ended January 1, 2023.
Aerospace and defense represented 59% of fiscal 2023 sales, up from 49% in fiscal 2022. International sales were $1.9 billion, or 46% of total sales. Confirmed backlog increased to approximately $3.8 billion from $2.9 billion, with approximately 70% expected to be fulfilled in fiscal 2024.
Financial performance and liquidity
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Sales | $4,173.7 million | $3,836.0 million | Up 9% |
| Gross profit | $802.6 million | $714.2 million | Up 12% |
| Gross margin | 19.2% | 18.6% | Up 60 basis points |
| Operating income | $466.4 million | $316.1 million | Up 48% |
| Income before taxes | $295.2 million | $354.6 million | Down 17% |
| Net income attributable to ATI | $410.8 million | $323.5 million | Up 27% |
| Diluted EPS | $2.81 | $2.23 | Up 26% |
| Adjusted EBITDA | $634.6 million | $612.8 million | Up 4% |
| Adjusted EBITDA margin | 15.2% | 16.0% | Down 80 basis points |
HPMC sales rose 29% to $2.12 billion, while segment EBITDA increased 43% to $433.6 million and margin improved to 20.5%. AA&S sales declined 6% to $2.05 billion, and segment EBITDA declined 26% to $276.6 million, reducing margin to 13.5%.
Cash flow from operations was $85.9 million, compared with $224.9 million in fiscal 2022. The decline primarily reflected $272 million of pension contributions and higher accounts receivable and inventory balances. Capital expenditures were $200.7 million, resulting in cash used in investing activities of $193.2 million. Cash and cash equivalents increased to $743.9 million from $584.0 million.
Total debt was $2.20 billion, compared with $1.77 billion at the prior year-end. Net debt was $1.46 billion, and net debt to Adjusted EBITDA increased to 2.29x from 1.93x. ATI had approximately $530 million of undrawn ABL availability, providing total liquidity of approximately $1.3 billion. The company was in compliance with its ABL financial covenant.
Material changes versus the prior comparable period
- Commercial aerospace demand drove a $601 million, or 32%, increase in aerospace and defense revenue.
- HPMC benefited from higher commercial jet-engine and airframe volumes, including a 90% increase in commercial airframe product sales.
- AA&S was pressured by weaker general industrial, automotive, electronics and food equipment markets, partially offset by a 24% increase in aerospace and defense sales.
- ATI issued $425 million of 7.25% senior notes due 2030. Net proceeds were used partly to fund pension de-risking and otherwise for liquidity and general corporate purposes.
- ATI completed an annuity buyout covering approximately 85% of its U.S. qualified defined benefit pension obligations. The transaction reduced pension obligations and assets by approximately $1.35 billion and improved the consolidated pension funded position to approximately 97%.
- ATI repurchased approximately 2.0 million shares for $85.2 million during fiscal 2023 and authorized an additional $150 million repurchase program in November 2023.
- The company voluntarily changed its pension accounting method and applied the change retrospectively. The change resulted in a cumulative $1.07 billion reduction to retained earnings and materially affected reported historical pension gains and losses.
Fourth-quarter results and unusual items
| Metric | Q4 FY 2023 | Q4 FY 2022 |
|---|---|---|
| Sales | $1,064.0 million | $1,010.4 million |
| Operating income | $108.3 million | $108.7 million |
| Net income attributable to ATI | $145.7 million | $193.0 million |
| Diluted EPS | $0.99 | $1.30 |
Fourth-quarter fiscal 2023 results included $88.3 million of net pretax charges, including a $26.8 million pension remeasurement loss, a $41.7 million pension settlement loss, restructuring and asset write-off costs, and start-up costs. These charges were substantially offset at the net-income level by a $140.3 million discrete tax benefit from releasing part of the U.S. deferred tax valuation allowance after ATI exited its three-year cumulative loss position.
Fiscal 2023 also included $31.4 million of restructuring and other charges, including $11.5 million of start-up costs, $10.3 million of asset write-offs, $7.7 million of severance, and $1.9 million related to a Lockport facility outage. No goodwill impairment was recorded.
Outlook, management commentary and risks
Management expects commercial aerospace growth, long-term customer agreements and higher titanium demand to support continued HPMC growth. ATI is expanding titanium melting capacity in Albany, Oregon, expects a fourth Albany furnace to reach full run-rate in the second half of fiscal 2024, and expects the first melt from its Richland, Washington expansion in the fourth quarter of fiscal 2024. At full production in late fiscal 2025, total titanium melt capacity is expected to be 80% above fiscal 2022 capacity.
Management expects AA&S margin expansion in fiscal 2024 from a richer product mix, recovery in industrial demand and improved operating performance. The filing does not provide formal consolidated earnings or revenue guidance.
- Key risks include commercial aerospace cyclicality, customer concentration within a limited number of aerospace OEMs, execution of capacity expansions and manufacturing projects, and product quality or delivery failures.
- Raw material, energy and supply-chain volatility may pressure margins. A hypothetical $1 per pound change in nickel prices would affect annual costs by approximately $70 million before surcharges or hedging.
- ATI relies on international sources for several critical materials and faces geopolitical, sanctions, trade and Russia-Ukraine conflict risks.
- Debt increased materially, including $465.3 million of scheduled principal payments in fiscal 2025 and $565.3 million in fiscal 2027.
- Environmental remediation reserves were approximately $13 million; management stated that active matters could exceed recorded reserves by as much as $17 million.
- Cybersecurity threats, labor availability, collective bargaining, litigation, pension assumptions and climate-related regulation may affect future results.
Important facts investors should verify
- Whether aerospace production ramps and the $3.8 billion backlog convert into revenue and cash flow as planned.
- The timing, cost and customer commitments supporting Albany, Richland, Fort Lauderdale additive manufacturing and other capacity projects.
- AA&S recovery assumptions, particularly in industrial, automotive, electronics and food equipment markets.
- The sustainability of reported earnings excluding the $140.3 million discrete tax benefit and the effects of pension accounting and pension de-risking items.
- Future cash generation after capital expenditures, working-capital investment, interest costs, share repurchases and 2025 debt maturities.
- Exposure to nickel, titanium, energy prices, foreign supply sources, tariffs and geopolitical disruptions.
- Potential environmental, litigation, labor and pension obligations beyond currently recorded reserves and estimates.