ATI Inc. (Allegheny Technologies Incorporated) — 2021 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. ATI manufactures technically advanced specialty materials and complex components through High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). The filing was signed August 3, 2021.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $616.2 million | $770.3 million | $1,308.7 million | $1,725.8 million |
| Gross profit | $42.7 million | $74.7 million | $128.5 million | $209.5 million |
| Gross margin | 6.9% | 9.7% | 9.8% | 12.1% |
| Operating income (loss) | $(11.3) million | $(273.4) million | $20.5 million | $(205.0) million |
| Net loss attributable to ATI | $(49.2) million | $(422.6) million | $(57.1) million | $(401.5) million |
| Diluted loss per share | $(0.39) | $(3.34) | $(0.45) | $(3.18) |
| Adjusted EBITDA | $53.7 million | $57.6 million | $116.3 million | $156.7 million |
Second-quarter segment EBITDA was $73.2 million, or 11.9% of sales, compared with $62.1 million, or 8.1%, in the prior-year quarter. HPMC sales were essentially flat at $300.6 million, while AA&S sales declined 33% to $315.6 million. High-value products represented 95% of second-quarter sales, compared with 87% in the prior-year period.
For the six months, cash used in operating activities was $102.6 million, compared with $14.4 million used in the prior-year period. Cash used in investing activities was $58.8 million, including $61.4 million of capital expenditures. Cash used in financing activities was $12.0 million. Cash and cash equivalents declined to $472.5 million from $645.9 million at December 31, 2020.
At June 30, 2021, total debt was approximately $1.64 billion, including $1.60 billion of long-term debt. Net debt was $1.16 billion. Debt to adjusted EBITDA was 10.49x, compared with 8.30x at December 31, 2020, and net debt to adjusted EBITDA was 7.46x, compared with 5.01x.
Total liquidity exceeded $800 million, consisting of $472.5 million of cash and approximately $350 million of additional ABL availability. The company had no borrowings under the ABL revolving facility, although $42.8 million supported letters of credit.
Material changes versus the prior comparable period
- Sales decreased 20% in the second quarter and 24% year to date, primarily reflecting COVID-19-related weakness, commercial aerospace demand declines, the USW strike, and the exit from standard stainless sheet products.
- Gross margin declined 280 basis points in the second quarter and 230 basis points year to date.
- The second quarter included $40.3 million of strike-related costs, primarily for below-normal operating rates, outside conversion activities, and benefits for striking employees.
- Second-quarter 2020 included $327.6 million of pretax unusual charges, including a $287.0 million goodwill impairment, a $21.5 million debt extinguishment charge, $16.7 million of restructuring charges, and $2.4 million of joint-venture severance charges. These items largely explain the improvement in reported net loss in 2021.
- ATI recorded a $6.2 million restructuring credit in the second quarter of 2021, principally from reduced severance reserves.
- The company early adopted new convertible-debt accounting guidance on January 1, 2021. Long-term debt increased by $45.4 million and stockholders’ equity decreased by the same amount, with no EPS impact.
- Managed working capital increased $115.0 million from year-end 2020 to $1.18 billion, or 47.9% of annualized sales versus 40.5% at year-end.
Guidance, outlook, risks and unusual items
- Management reported ongoing improvement in several end markets, particularly jet-engine materials and components, but expects a volatile recovery. Narrow-body engine demand is improving, while wide-body and commercial airframe demand remains weak.
- Management expects lingering effects from the USW strike to negatively affect third-quarter 2021 results as employees return and production ramps up.
- The USW strike ended after ratification of a new four-year labor agreement announced July 14, 2021. ATI expects an approximately $65 million pretax third-quarter gain from the elimination of certain postretirement medical liabilities, offset by approximately $15 million of discrete tax expense.
- ATI expects to cease production of standard stainless sheet products by the end of fiscal 2021 and is pursuing a strategic transformation of the SRP business. A long-term carbon-steel conversion agreement is expected to improve utilization at the Hot-Rolling and Processing Facility.
- The company did not meet the ABL fixed-charge coverage ratio at June 30, 2021. Consequently, $87.5 million, or 12.5%, of the ABL facility was unavailable until compliance is restored. The ABL also includes liquidity requirements related to the 2022 Convertible Notes and 2023 Notes.
- The $84.2 million of 4.75% Convertible Notes mature July 1, 2022; the $500 million 5.875% Notes mature in 2023. The 2025 Convertible Notes have a $291.4 million carrying amount and a 3.5% cash coupon.
- U.S. deferred tax asset valuation allowances remain in place. Management stated that it cannot reliably estimate the annual effective tax rate because projected U.S. results could materially change.
- Environmental remediation reserves were approximately $13 million, with reasonably possible costs exceeding recorded reserves by as much as $15 million. ATI also faces litigation, including the US Magnesium contract dispute, whose outcome cannot currently be predicted.
- Other principal risks include COVID-19 and economic disruption, commercial aerospace weakness, raw-material and energy-price volatility, labor disputes, equipment outages, pension funding and asset performance, trade duties, and potential impairment of assets or goodwill.
Important facts for investors to verify
- Whether production normalization after the USW strike proceeds as planned and whether additional strike-related or ramp-up costs arise in the third quarter.
- The timing and amount of the expected $65 million postretirement-benefit gain and approximately $15 million tax expense.
- Compliance with the ABL fixed-charge coverage and liquidity provisions, including availability ahead of the 2022 and 2023 maturities.
- ATI’s ability to generate positive operating cash flow while managed working capital remains elevated.
- Commercial aerospace recovery, especially wide-body aircraft demand and next-generation jet-engine volumes.
- Progress in exiting standard stainless sheet products and improving SRP and HRPF utilization.
- Refinancing or repayment plans for the 2022 Convertible Notes and 2023 Notes.
- Potential changes in pension funding requirements, environmental liabilities, litigation exposure, and U.S. tax valuation allowances.