ATI Inc. — Q1 2023 Form 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 unaudited quarter ended March 31, 2023, compared primarily with the quarter ended March 31, 2022. Aerospace and defense represented 56% of sales, with energy representing another 20%.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $1,038.1 million | $834.1 million | +25% |
| Gross profit / margin | $193.2 million / 18.6% | $169.4 million / 20.3% | Margin down 170 bps |
| Operating income | $112.6 million | $77.0 million | +$35.6 million |
| Net income attributable to ATI | $70.1 million | $30.9 million | +127% |
| Diluted EPS | $0.48 | $0.23 | +$0.25 |
| Adjusted EBITDA | $132.7 million | $125.0 million | +6%; margin 12.8% vs. 15.0% |
| Cash used in operations | $285.2 million | $217.2 million | Use increased $68.0 million |
| Capital expenditures | $60.4 million | $26.0 million | +132% |
Commercial aerospace drove growth: aerospace and defense sales increased 57% to $575.7 million. HPMC sales rose 38% to $471.1 million and segment EBITDA rose to $80.1 million, while AA&S sales rose 15% to $567.0 million but segment EBITDA declined to $72.7 million. Segment EBITDA margin decreased to 14.7% from 17.2%.
Cash and cash equivalents were $196.2 million at March 31, 2023, down from $584.0 million at year-end 2022. The decline primarily reflected working-capital investment, a $50 million pension contribution, capital expenditures and other cash uses. Accounts receivable increased to $725.6 million and inventories to $1,293.8 million. Managed working capital rose to 37.6% of annualized sales from 30.1% at year-end.
Total debt was $1,727.0 million before debt issuance costs, or $1,743.3 million including those costs. Net debt was $1,547.1 million. The total debt-to-adjusted-EBITDA ratio was 3.13x and net debt-to-adjusted-EBITDA was 2.78x, compared with 2.15x at year-end. ATI had no borrowings under the revolving ABL facility, approximately $550 million of additional ABL liquidity, and $39.8 million of letters of credit outstanding. The company was in compliance with its fixed-charge coverage covenant.
Material changes versus the prior comparable period
- Sales growth reflected recovery in commercial aerospace, particularly commercial jet engines and airframes. Commercial aerospace sales increased 64% in HPMC and 72% in AA&S.
- Q1 2022 included approximately $28.7 million of COVID-related government relief, including $21.9 million in HPMC and $6.8 million in AA&S, which did not recur in 2023.
- Q1 2023 included $1.2 million of costs to restart titanium operations in Albany, Oregon. Q1 2022 included an $18.3 million net loss on asset and business sales and an $8.6 million litigation reserve.
- Nonoperating retirement benefit expense increased to $16.8 million from $5.8 million, contributing to lower segment and adjusted margins.
- Interest expense declined to $19.9 million from $23.6 million, partly because $3.4 million of interest was capitalized in Q1 2023.
- ATI repurchased $10.1 million of stock, or approximately 0.2 million shares, compared with $89.9 million and 3.5 million shares in Q1 2022. The prior authorization was fully utilized during Q1; the board authorized an additional $75 million on April 28, 2023.
Guidance, outlook, risks and unusual items
The filing does not provide a clear numerical full-year revenue or earnings guidance range. Management described continued commercial aerospace recovery, strong demand for jet-engine materials and components, share gains in jet-engine forgings and specialty materials, and longer-term growth in commercial airframe products. Backlog was $3.3 billion at March 31, 2023, with approximately 80% expected to be fulfilled within 12 months.
Management expects available cash, internally generated funds and ABL capacity to meet projected liquidity needs. Based on current actuarial assumptions, no further mandatory contributions to U.S. qualified pension plans were expected during 2023, although additional voluntary contributions remained possible.
- Working-capital expansion and increased operating levels pressured operating cash flow; inventory turns declined 8% and days sales outstanding worsened 10% versus year-end 2022.
- Exposure remains to aerospace and industrial demand, recessionary softness in general industrial markets, raw-material and energy prices, supply availability, labor disruptions, equipment outages, trade policy and geopolitical developments.
- ATI hedged approximately 75% of forecast domestic natural-gas requirements for the remainder of 2023, 50% for 2024 and 10% for 2025. Nickel hedges covered approximately 3 million pounds, or about 5% of one year’s estimated requirements.
- Environmental remediation reserves were approximately $13 million, with reasonably possible costs exceeding recorded reserves by as much as $15 million. The company also disclosed potential multiemployer pension withdrawal liability of approximately $27 million on an undiscounted basis.
- The 3.5% convertible notes and Allegheny Ludlum debentures mature in 2025, with aggregate principal amounts of approximately $291.4 million and $150 million, respectively.
- The Uniti joint venture was expected to be dissolved in Q2 2023. No impairment was recorded in connection with the planned dissolution.
Most important facts for investors to verify
- Whether commercial aerospace recovery and the $3.3 billion backlog convert into sustained shipment and margin growth.
- Whether working-capital intensity normalizes and operating cash flow improves after the significant Q1 cash use.
- Liquidity and refinancing plans for the 2025 convertible notes and debentures, including compliance with ABL minimum-liquidity requirements.
- The sustainability of margins without the Q1 2022 COVID-relief benefits and after higher retirement-benefit costs.
- Potential effects of environmental matters, pension obligations, raw-material and energy-price volatility, tariffs, geopolitical conditions and labor or operational disruptions.
- Progress and cash requirements associated with titanium restart activities, AA&S transformation projects and HPMC growth investments.