ATI Inc. 2022 Second-Quarter 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 quarter and six months ended June 30, 2022. Results benefited from recovery in commercial aerospace and energy markets, improved operating performance, and comparisons against a 2021 period affected by a labor strike.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Sales | $959.5 million vs. $616.2 million | $1,793.6 million vs. $1,308.7 million |
| Gross profit | $175.3 million; 18.3% margin | $344.7 million; 19.2% margin |
| Operating income (loss) | $(11.6) million vs. $(11.3) million | $65.4 million vs. $20.5 million |
| Income (loss) before taxes | $(30.9) million vs. $(40.4) million | $9.2 million vs. $(37.3) million |
| Net loss attributable to ATI | $(38.0) million, or $(0.31) per share | $(7.1) million, or $(0.06) per share |
| Adjusted EBITDA | $143.1 million; 14.9% of sales | $268.1 million |
| Segment EBITDA | $164.9 million; 17.2% of sales | $308.3 million; 17.2% of sales |
- Second-quarter sales increased 56%; HPMC sales increased 32% and AA&S sales increased 79%.
- Six-month sales increased 37%; HPMC sales increased 36% and AA&S sales increased 38%.
- Aerospace and defense represented 46% of second-quarter sales and 45% of six-month sales. Commercial jet-engine sales were $248.7 million in the quarter, up from $129.6 million.
- Cash used in operating activities was $222.4 million for the six months, compared with $102.6 million used in the prior-year period. Working-capital usage included increases in receivables and inventories.
- Capital expenditures were $54.8 million, and cash used in investing activities was $55.7 million.
- Cash used in financing activities was $135.6 million, including $89.9 million for repurchases of 3.5 million shares and $16.0 million of dividends to noncontrolling interests.
- Cash and cash equivalents declined to $274.0 million at June 30, 2022, from $687.7 million at December 31, 2021.
- Total debt, excluding debt issuance costs, was $1,735.9 million; long-term debt was $1,703.3 million. Net debt was $1,480.8 million, and net debt to adjusted EBITDA was 3.34x versus 4.04x at year-end 2021.
- There were no borrowings under the revolving ABL facility; $40.8 million supported letters of credit. Management reported approximately $456 million of additional ABL liquidity and compliance with the applicable fixed-charge coverage covenant.
- Backlog was $2.6 billion at June 30, 2022, with approximately 80% expected to be satisfied within 12 months.
Material Changes Versus the Prior Comparable Period
- Gross profit increased by $132.6 million in the second quarter and $216.2 million in the first six months, reflecting higher volumes, improved utilization, product mix, and the absence of the prior-year strike impact.
- The second quarter of 2021 included $40.3 million of strike-related costs; no comparable strike costs were recorded in the 2022 quarter.
- ATI completed the sale of its Sheffield, UK operations on May 12, 2022 and recorded a $115.9 million second-quarter loss, bringing the six-month loss on the sale to $141.0 million. The loss included pension-related and cumulative foreign-currency translation amounts.
- The six-month 2022 results included $34.3 million of COVID-related government relief, including aviation manufacturing grants and employee retention credits.
- ATI recognized a $9.9 million benefit from its share of an A&T Stainless Section 232 tariff refund and accrued interest.
- The 2022 convertible notes were substantially converted: $82.5 million of principal converted into 5.7 million shares, with $1.7 million paid in cash. The remaining 2022 notes were eliminated from the balance sheet.
- Inventory increased to $1,270.9 million from $1,046.3 million at year-end, while accounts receivable increased to $627.1 million from $470.0 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected continued revenue growth in the second half of 2022, led primarily by commercial aerospace demand, including jet-engine materials, forgings, and airframe products. AA&S was also expected to benefit from strong end-market demand.
- Management stated that raw-material availability remained adequate, but raw-material price changes and timing differences in index pricing could cause margin variability.
- ATI expects longer-term commercial aerospace demand to benefit from supply-chain reordering related in part to the Russia-Ukraine conflict.
- Key risks include the Russia-Ukraine conflict, sanctions and trade restrictions, potential disruption to nickel and chromium supplies, commodity and energy-price volatility, supply-chain interruptions, commercial aerospace and oil-and-gas demand uncertainty, labor disputes, equipment outages, COVID-19 effects, pension funding and asset performance, and foreign-currency exposure.
- Environmental remediation reserves were approximately $13 million, with possible costs exceeding recorded reserves by as much as $16 million based on currently available information.
- ATI recorded an $8.6 million litigation reserve related to the US Magnesium dispute. A trial was scheduled for October 11, 2022, and the outcome remained uncertain.
- A potential withdrawal liability under a multiemployer pension plan was estimated at approximately $35 million on an undiscounted basis if a complete withdrawal occurred.
- ATI maintained valuation allowances on U.S. federal and state deferred tax assets because of cumulative U.S. losses and expected limited U.S. cash taxes in the next several years.
Most Important Facts for Investors to Verify
- Whether commercial aerospace recovery and the $2.6 billion backlog convert into sustained revenue and cash-flow growth.
- Whether working-capital investment, particularly inventory and receivables, normalizes after consuming $222.4 million of operating cash in the first half.
- The sustainability of reported margins after excluding $34.3 million of COVID-related relief, the $9.9 million tariff-related joint-venture benefit, and other unusual items.
- Liquidity and leverage trends, including the $274.0 million cash balance, $1.48 billion of net debt, ABL availability, and upcoming debt maturities.
- Exposure to nickel, chromium, natural gas, sanctions, trade duties, and Russia-Ukraine-related supply-chain disruptions.
- Potential cash impacts from environmental obligations, the US Magnesium litigation, pension funding, and the estimated multiemployer pension withdrawal liability.
- Execution of the strategic exit from standard stainless products and the financial effects of the Sheffield divestiture and Uniti joint-venture termination.