ATI Inc. Form 10-Q Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) is a global manufacturer of specialty materials and complex components, serving aerospace and defense, energy, automotive, electronics, medical, and other markets. The filing covers the quarter and nine months ended September 30, 2021. ATI operates through High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S).
- Aerospace and defense represented approximately 39% of third-quarter sales and 40% of nine-month sales.
- High-value products represented 92% of third-quarter sales and 91% of nine-month sales.
- Backlog was $1.7 billion at September 30, 2021, with approximately 80% expected to be fulfilled within 12 months.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $725.7 million | $598.0 million | $2,034.4 million | $2,323.8 million |
| Gross profit | $82.5 million | $38.1 million | $211.0 million | $247.6 million |
| Gross margin | 11.4% | 6.4% | 10.4% | 10.7% |
| Operating income (loss) | $29.9 million | $(9.6) million | $50.4 million | $(214.6) million |
| Income (loss) before taxes | $77.2 million | $(46.2) million | $39.9 million | $(339.1) million |
| Net income (loss) attributable to ATI | $48.7 million | $(50.1) million | $(8.4) million | $(451.6) million |
| Diluted EPS | $0.35 | $(0.40) | $(0.07) | $(3.57) |
| Adjusted EBITDA | $79.9 million | $16.6 million | $196.2 million | $173.3 million |
| Adjusted EBITDA margin | 11.0% | 2.8% | 9.6% | 7.5% |
- Third-quarter sales increased 21% year over year, driven by a 36% increase in HPMC and a 13% increase in AA&S. Nine-month sales declined 12%.
- Third-quarter segment EBITDA increased to $94.2 million from $27.8 million, while nine-month segment EBITDA increased to $241.7 million from $207.6 million.
- HPMC third-quarter sales were $300.0 million and segment EBITDA was $37.4 million. AA&S sales were $425.7 million and segment EBITDA was $56.8 million.
- Cash used in operating activities was $244.8 million for the first nine months of 2021, compared with $45.0 million of operating cash flow in the prior-year period. The decline primarily reflected a $242.5 million increase in managed working capital and $67.5 million of pension contributions.
- Capital expenditures were $104.2 million. Investing cash outflow was $48.5 million after $53.0 million of net proceeds from the Flowform Products sale.
- Cash and cash equivalents were $1.01 billion at September 30, 2021, compared with $645.9 million at December 31, 2020.
- Total debt was $2.29 billion on the balance sheet, or $2.31 billion excluding debt issuance costs for ATI’s leverage calculations. Net debt was $1.31 billion.
- Debt-to-adjusted-EBITDA was 10.55x and net debt-to-adjusted-EBITDA was 5.96x at September 30, 2021, compared with 8.30x and 5.01x, respectively, at December 31, 2020.
Material changes versus the prior comparable period
- Profitability improved substantially in the third quarter, reflecting higher volumes, cost reductions, favorable product mix, higher raw-material pass-through benefits, and recovery in aerospace and energy markets.
- Commercial jet-engine sales increased 51% in HPMC during the third quarter. AA&S benefited from automotive growth, a large offshore oil and gas project, and production returning toward pre-strike levels.
- The first nine months remained below 2020 sales levels because of the COVID-19-related commercial aerospace downturn and the USW strike. Nine-month aerospace and defense sales declined 26% overall, while automotive sales increased.
- ATI issued $325 million of 4.875% senior notes due 2029 and $350 million of 5.125% senior notes due 2031 on September 14, 2021. Net proceeds were primarily used to redeem the $500 million of 5.875% notes due 2023 on October 14, 2021.
- The refinancing is expected to reduce annual interest expense by approximately $6 million, but ATI expects to record a $65.5 million debt extinguishment charge in the fourth quarter of 2021.
- The USW strike involving approximately 1,100 employees ended after ratification of a four-year labor agreement on July 14, 2021. Strike-related costs were $22.9 million in the third quarter and $63.2 million year to date.
- ATI completed the sale of its Flowform Products business for $55 million and recognized a $13.7 million pretax gain.
- A $64.9 million pretax retirement benefit settlement gain resulted from terminating certain postretirement medical benefits under the new labor agreement. The related discrete tax expense was $15.5 million.
- ATI adopted new convertible-debt accounting guidance effective January 1, 2021, increasing debt by $45.4 million and reducing equity by the same amount, with no earnings-per-share impact.
Guidance, outlook, risks, contingencies, and unusual items
- Management anticipated sequential revenue and earnings growth in HPMC through the remainder of 2021, primarily from the commercial aerospace recovery.
- ATI expected to complete its exit from lower-margin standard stainless sheet products in the first half of 2022. Planned equipment outages and temporary production curtailments in AA&S were expected to create unfavorable cost absorption in the fourth quarter of 2021.
- Management expected strong fourth-quarter operating cash flow from significant reductions in managed working capital.
- ATI did not meet the ABL fixed-charge coverage ratio at September 30, 2021. Consequently, $87.5 million, or 12.5%, of revolving ABL availability was inaccessible until the ratio is met. There were no revolving borrowings, and $42.8 million supported letters of credit.
- Management stated that cash on hand, internally generated funds, and available ABL borrowings should be adequate for projected liquidity needs. ATI does not currently pay a quarterly dividend.
- ATI continued to maintain valuation allowances on U.S. federal and state deferred tax assets and stated that it could not reliably estimate its annual effective tax rate.
- Environmental remediation reserves were approximately $13 million, with reasonably possible costs exceeding recorded reserves by as much as $16 million.
- Other risks include aerospace and energy market volatility, raw-material and energy prices, supply-chain and COVID-19 disruption, labor disputes, equipment outages, pension funding and asset performance, trade duties, and litigation.
- The company reported no material change in disclosure controls and procedures; management concluded that controls were effective.
Most important facts for investors to verify
- Whether aerospace recovery and AA&S production normalization support continued sequential revenue and margin improvement.
- Whether managed working capital declines as expected and reverses the $244.8 million year-to-date operating cash outflow.
- The effect of the October 2021 debt redemption, the $65.5 million expected extinguishment charge, and the resulting interest savings on liquidity and leverage.
- Compliance with the ABL fixed-charge coverage and minimum-liquidity requirements, including the maturity of the remaining $84.2 million of 2022 convertible notes.
- The magnitude and timing of fourth-quarter cost-absorption impacts from planned AA&S outages and transformation activities.
- Progress toward ending standard stainless sheet production in the first half of 2022 and the related restructuring or impairment exposure.
- Future tax-rate variability, deferred tax asset realizability, pension funding requirements, environmental costs, and unresolved litigation outcomes.