ATI Inc. Fiscal 2022 Form 10-K Summary
Business context and reporting period
ATI Inc. is a specialty materials and components manufacturer serving aerospace and defense, energy, medical, automotive, electronics, and other industrial markets. The filing covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021. ATI operates through High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). Aerospace and defense represented 49% of 2022 sales, while international sales represented 42%.
Commercial aerospace recovery was the principal growth driver. ATI substantially completed its strategic repositioning of the Specialty Rolled Products business, including the exit from lower-margin standard stainless sheet products.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Sales | $3,836.0 million | $2,799.8 million | +37% |
| Gross profit | $714.2 million | $333.2 million | +114% |
| Gross margin | 18.6% | 11.9% | +670 basis points |
| Operating income | $287.3 million | $117.6 million | +144% |
| Income before taxes | $162.0 million | $10.6 million | Significant increase |
| Net income attributable to ATI | $130.9 million | $(38.2) million | Returned to profitability |
| Diluted earnings per share | $0.96 | $(0.30) | Improved |
| Adjusted EBITDA | $549.3 million | $290.9 million | +89% |
| Adjusted EBITDA margin | 14.3% | 10.4% | +390 basis points |
| Cash flow from operations | $224.9 million | $16.1 million | Improved |
Fourth-quarter 2022 sales exceeded $1 billion and net income was approximately $77 million, according to management commentary.
- HPMC: External sales were $1,641.2 million, up 42%; segment EBITDA was $296.0 million, up 85%, with margin increasing to 18.0% from 13.8%.
- AA&S: External sales were $2,194.8 million, up 33%; segment EBITDA was $327.8 million, up 71%, with margin increasing to 14.9% from 11.7%.
- Aerospace and defense: Revenue increased 65% to $1,873.6 million. Commercial jet-engine revenue increased 106% to $1,063.5 million.
- Backlog: Confirmed orders were approximately $2.9 billion at year-end, versus $2.1 billion at year-end 2021. ATI expected approximately 80% of total backlog to be fulfilled in 2023.
- Liquidity: Cash and cash equivalents were $584.0 million. Additional undrawn ABL capacity was approximately $538 million, resulting in total liquidity exceeding $1.1 billion.
- Debt: Total debt, including finance leases and net of debt issuance costs, was $1,748.0 million; debt including issuance costs was $1,765.2 million. Net debt was $1,181.2 million, and net debt to Adjusted EBITDA improved to 2.15x from 4.04x.
- Capital expenditures: $130.9 million in 2022, primarily related to AA&S transformation projects.
- Share repurchases: ATI spent $139.9 million to repurchase 5.2 million shares under its $150 million authorization.
- Pensions: Defined benefit plans were approximately 88% funded at year-end, with a net pension liability of approximately $219 million. ATI made a voluntary $50 million contribution in 2022 and another $50 million contribution in early 2023.
Material changes versus the prior comparable period
- ATI returned to profitability as aerospace demand recovered, particularly for commercial jet-engine products.
- HPMC benefited from higher aerospace volumes, increased next-generation jet-engine sales, improved facility utilization, and product mix.
- AA&S benefited from stronger aerospace, defense, energy, and nickel-alloy sales, as well as the continued exit from standard stainless products.
- 2021 results included $63.2 million of strike-related costs and a $65.5 million debt extinguishment charge; these items did not recur in 2022.
- 2022 results included $157.0 million of net pre-tax charges, including a $141.0 million loss on the sale of the Sheffield, UK operations and a $28.5 million litigation settlement charge, partly offset by other credits and gains.
- ATI completed the sale of Sheffield, UK operations and small Pico Rivera, California operations, and announced termination of the Uniti titanium joint venture, expected to be dissolved in early 2023.
- The ABL facility was amended and extended through September 2027, with revolving capacity increased to $600 million. No revolving borrowings were outstanding at year-end, although $39.8 million supported letters of credit.
- Managed working capital increased by $67.5 million in absolute terms but declined to 30.1% of annualized sales from 37.5%, reflecting improved working-capital efficiency.
Guidance, outlook, risks, contingencies, and unusual items
Management anticipated strong year-over-year revenue and segment EBITDA growth in 2023, primarily driven by continued commercial aerospace recovery. The filing does not provide a consolidated numerical earnings or revenue forecast.
- ATI’s outlook depends materially on commercial aerospace production rates, aircraft flight activity, engine refurbishment, customer demand, and execution under long-term supply agreements.
- Key risks include cyclical demand, commercial aerospace concentration, oil and gas volatility, pricing pressure, excess industry capacity, inflation, and shortages or price volatility for nickel, titanium sponge, cobalt, chromium, molybdenum, energy, graphite electrodes, and industrial gases.
- The Russia-Ukraine conflict could affect raw-material availability, commodity prices, energy costs, sanctions compliance, supply chains, cybersecurity, and the Uniti joint venture wind-down. ATI specifically identified Russian sources for nickel and chromium.
- Environmental remediation reserves were approximately $13 million. Management stated that active matters could reasonably exceed recorded reserves by as much as $15 million, although it did not believe the excess would currently be material to the consolidated financial condition.
- ATI was involved in various litigation, environmental, product liability, occupational disease, government-contracting, employment, and other proceedings. Management did not believe pending matters were likely to materially affect financial condition or liquidity, but individual-period earnings could be affected.
- A potential multiemployer pension withdrawal liability of approximately $27 million was identified for the Steelworkers Western Independent Shops Pension Plan if ATI’s obligations were substantially reduced or eliminated.
- The company maintains substantial U.S. federal and state tax-loss carryforwards and valuation allowances on deferred tax assets. The 2022 tax provision was $15.5 million, primarily related to foreign and state taxes and the tax treatment of the Sheffield divestiture loss.
- Goodwill was $227.2 million at year-end. No goodwill impairment was recorded in 2022, but the Forged Products reporting unit valuation remains sensitive to revenue growth, profitability, discount rates, and commercial aerospace assumptions.
- Government assistance benefited 2022 results by approximately $34 million, including the AMJP grant and employee retention credits. These benefits may not recur at the same level.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter concerned goodwill impairment testing for the Forged Products reporting unit.
Important facts for investors to verify
- Reconcile GAAP earnings and cash flow with management’s non-GAAP Adjusted EBITDA and segment EBITDA measures, including the impact of the $157 million of 2022 pre-tax unusual charges and $34 million of government assistance.
- Assess whether commercial aerospace recovery, next-generation engine programs, backlog conversion, and long-term supply agreements support the projected 2023 growth.
- Review debt maturities, especially approximately $457.8 million scheduled in 2025 and $557.4 million in 2027, alongside ABL covenant and minimum-liquidity requirements.
- Monitor raw-material and energy price exposure, including the sensitivity that a $1.00-per-pound nickel price change could affect annual costs by approximately $70 million and a $1.00-per-MMBtu natural-gas increase could add approximately $6 million to $8 million of annual costs.
- Evaluate the sustainability of working-capital improvements as sales and inventory levels continue to grow.
- Track the Uniti dissolution, the Sheffield divestiture consequences, environmental matters, potential pension withdrawal liability, and other litigation or remediation exposures.
- Review the dilution and cash-settlement implications of the $291.4 million 3.5% convertible notes due 2025, which had an initial conversion price of approximately $15.49 per share.