ATI Inc. — First-Quarter 2022 Form 10-Q Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) is a global manufacturer of specialty materials and complex components. Its two segments are High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S), serving primarily aerospace and defense, energy, automotive, electronics, medical, and construction/mining markets. The filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Aerospace and defense represented 44% of revenue, while international sales represented 43%.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $834.1 million | $692.5 million | Up 20% |
| Gross profit | $169.4 million | $85.8 million | Up $83.6 million |
| Gross margin | 20.3% | 12.4% | Up 790 basis points |
| Operating income | $77.0 million | $31.8 million | More than doubled |
| Operating margin | 9.2% | 4.6% | Up 460 basis points |
| Income before taxes | $40.1 million | $3.1 million | Up $37.0 million |
| Net income attributable to ATI | $30.9 million | $(7.9) million | Returned to profit |
| Diluted EPS | $0.23 | $(0.06) | Improved |
| Adjusted EBITDA | $125.0 million | $62.6 million | Up 100% |
| Adjusted EBITDA margin | 15.0% | 9.0% | Up 600 basis points |
HPMC external sales increased 42% to $341.6 million, and segment EBITDA increased to $68.1 million from $24.6 million. AA&S sales increased 9% to $492.5 million, and segment EBITDA increased to $75.3 million from $49.7 million. Segment EBITDA margin improved to 17.2% from 10.7%.
Cash used in operating activities was $217.2 million, compared with $68.1 million in the prior-year quarter. The use primarily reflected increases in inventories and accounts receivable. Capital expenditures were $26.0 million, and cash used in investing activities was $24.2 million. Cash used in financing activities was $129.6 million, including $89.9 million of share repurchases and a $16.0 million dividend to a noncontrolling interest. Cash declined to $316.7 million from $687.7 million at December 31, 2021.
At March 31, 2022, total debt was $1.824 billion, excluding $19.9 million of debt issuance costs, and total debt including those costs was $1.844 billion. Long-term debt was $1.707 billion. Net debt was $1.527 billion, and net debt to trailing-twelve-month Adjusted EBITDA was 4.32x, compared with 4.04x at year-end 2021. The company had no borrowings under the revolving ABL facility, although $40.8 million supported letters of credit. Management reported approximately $370 million of additional ABL liquidity.
Material changes versus the prior comparable period
- Revenue growth was led by recovery in commercial aerospace, particularly commercial jet-engine materials and components. Aerospace and defense revenue increased 44% to $366.8 million.
- HPMC commercial jet-engine sales increased 77%; HPMC energy sales increased 54%. AA&S aerospace and defense sales increased nearly 50%.
- First-quarter 2022 results included $28.7 million of U.S. government-sponsored COVID-19 relief, including $11.2 million from the Aviation Manufacturing Jobs Protection Program and $17.5 million of employee retention credits.
- ATI recorded an $8.6 million litigation reserve related to the US Magnesium dispute, partially offset by a $1.1 million restructuring credit.
- ATI recorded a $25.1 million partial loss on the pending sale of the Sheffield, UK operations, including a $22.3 million long-lived asset impairment charge. It recognized a $6.8 million gain on the sale of Pico Rivera, California assets.
- ATI repurchased 3.5 million shares for $89.9 million under a newly authorized $150 million program. Approximately $60.1 million remained available at March 31, 2022.
- Managed working capital increased to $1.377 billion, or 41.3% of annualized sales, from $1.148 billion, or 37.5%, at December 31, 2021, driven mainly by higher receivables and inventory.
Guidance, outlook, risks and unusual items
Management expected sequential revenue growth during the remainder of 2022, primarily from the commercial aerospace recovery, and expected AA&S sales to increase throughout the year. Management cited strong demand, recent aerospace share gains, and the ongoing exit from lower-margin standard stainless products. The filing does not provide formal full-year revenue or earnings guidance.
The Sheffield sale was subject to UK government approval and was projected to close in the second quarter of 2022. ATI expected an additional pretax loss of approximately $110 million upon completion, including approximately $55 million related to the UK defined-benefit pension plan, $30 million of accumulated other comprehensive loss, and approximately $15 million of cumulative foreign-currency translation losses.
ATI did not meet the fixed-charge coverage ratio under its ABL facility at March 31, 2022, limiting access to $87.5 million of the facility until the ratio is met. The $84.2 million of convertible notes due July 1, 2022 represented a near-term refinancing, repayment, or conversion consideration. Management stated that cash, internally generated funds, and available ABL borrowings were expected to meet liquidity needs.
Key risks include the Russia-Ukraine conflict, sanctions and possible disruption of nickel and chromium supplies, commodity and energy price volatility, supply-chain constraints, commercial aerospace recovery risk, COVID-19 effects, pension funding requirements, litigation, environmental obligations, and execution of the Sheffield divestiture. Environmental reserves were approximately $13 million, with reasonably possible costs exceeding reserves by as much as $15 million. A potential withdrawal liability for a multiemployer pension plan was estimated at approximately $35 million on an undiscounted basis.
ATI hedged approximately 75% of forecast domestic natural-gas requirements for the remainder of 2022, 50% for 2023, and 15% for 2024. The company noted that a $1.00 per pound change in nickel prices could affect annual costs by approximately $60 million before mitigation.
Most important facts for investors to verify
- Completion timing and final loss associated with the Sheffield, UK divestiture.
- How ATI will address the July 2022 maturity of the $84.2 million convertible notes.
- Restoration of ABL covenant compliance and the amount of borrowing capacity actually available.
- Sustainability of earnings excluding $28.7 million of COVID-related government relief and other unusual items.
- Conversion of improved aerospace demand into operating cash flow, given the significant first-quarter working-capital use.
- Exposure to raw-material, energy, Russia-Ukraine, supply-chain, pension, environmental, and litigation-related costs.
- Remaining authorization and rationale for share repurchases while cash declined substantially and net debt leverage increased.