ATI Inc. 2021 Form 10-K Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) manufactures specialty materials and complex components for aerospace and defense, energy, medical, automotive, electronics and other markets. The filing covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019. ATI operates through High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S).
- Aerospace and defense represented 41% of 2021 sales; energy represented 21%.
- HPMC accounted for 41% of external sales and AA&S for 59%.
- International sales were $1.26 billion, or 45% of total sales.
- Confirmed backlog was approximately $2.1 billion at year-end, up from $1.4 billion in 2020; management expected approximately 80% to be filled in 2022.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change or comment |
|---|---|---|---|
| Sales | $2,799.8 million | $2,982.1 million | Down 6% |
| Gross profit | $333.2 million | $292.8 million | Up 14% |
| Gross margin | 11.9% | 9.8% | Improved 210 basis points |
| Operating income (loss) | $117.6 million | $(1,302.7) million | Returned to operating profitability |
| Income (loss) before tax | $10.6 million | $(1,481.9) million | Material improvement |
| Net loss attributable to ATI | $38.2 million | $1,572.6 million | Loss narrowed substantially |
| Diluted loss per share | $0.30 | $12.43 | Loss per share improved |
| Adjusted EBITDA | $290.9 million | $196.3 million | Margin increased to 10.4% from 6.6% |
| Cash from operations | $16.1 million | $166.9 million | Reduced by working-capital investment and pension funding |
| Capital expenditures | $152.6 million | $136.5 million | Focused on transformation and aerospace capacity |
| Cash and equivalents | $687.7 million | $645.9 million | Up $41.8 million |
| Total debt | $1,863.7 million | $1,629.1 million | Up $234.6 million |
Segment EBITDA increased to $351.6 million from $244.6 million. HPMC EBITDA rose 23% to $159.9 million, with margin of 13.8%. AA&S EBITDA rose 67% to $191.7 million, with margin of 11.7%, helped by product mix and the exit from lower-margin standard stainless sheet products.
ATI reported more than $1 billion of total liquidity, consisting of $687.7 million of cash and approximately $360 million of additional ABL availability. The company had no borrowings under the ABL revolving facility, although $48.3 million supported letters of credit. Debt-to-adjusted-EBITDA improved to 6.41 from 8.30, and net debt-to-adjusted-EBITDA improved to 4.04 from 5.01.
Material changes versus the prior comparable period
- Sales declined because aerospace demand remained below pre-pandemic levels and AA&S exited standard stainless sheet products; however, margins and adjusted EBITDA improved through cost reductions, product mix and recovering demand.
- Commercial aerospace sales remained weak, but fourth-quarter 2021 revenue and margins were the highest of the year. HPMC fourth-quarter sales increased 41% year over year.
- AA&S increased its high-value product mix to 93% of sales from 86% in 2020 and stopped producing new standard stainless sheet products. The exit was expected to be completed in the first half of 2022.
- ATI issued $675 million of senior notes due 2029 and 2031 and used proceeds primarily to redeem $500 million of higher-cost notes due 2023. The refinancing extended maturities and reduced annual interest expense by approximately $6 million, but generated a $65.5 million debt extinguishment charge.
- A three-and-a-half-month USW strike ended in July 2021 after ratification of a four-year agreement. Strike-related costs were $63.2 million, primarily affecting AA&S.
- ATI recorded a $64.9 million postretirement benefit settlement gain and a $13.8 million gain on the sale of Flowform Products for $55 million in cash.
- The company changed inventory accounting from LIFO to current-cost methods. The change increased 2021 net income by $92.6 million versus the LIFO method and was retrospectively applied where required.
Guidance, outlook, risks and unusual items
Management anticipated strong year-over-year revenue and earnings growth in 2022, primarily driven by continued commercial aerospace recovery, advanced powder materials, additive manufacturing and next-generation jet-engine demand. Management also expected ongoing benefits from 2020 cost reductions and completion of the SRP transformation.
- Material risks include uneven or slower-than-expected commercial aerospace recovery, COVID-19 impacts, cyclical energy demand, raw-material and energy price volatility, supply-chain disruption, labor negotiations, tariffs and geopolitical developments.
- ATI sources certain critical materials, including nickel and chromium, from foreign suppliers, including Russian sources identified as potentially exposed to geopolitical events and sanctions.
- The ABL fixed-charge coverage ratio was not met at December 31, 2021. Consequently, $87.5 million of otherwise available ABL capacity was inaccessible until the required ratio is met.
- Approximately $84.2 million of convertible notes was scheduled to mature on July 1, 2022, subject to possible settlement in ATI shares under the note terms. Approximately 800 employees were covered by collective bargaining agreements expiring in 2022.
- Defined benefit pension plans were approximately 84% funded. No required U.S. qualified-plan contribution was expected in 2022 under current assumptions, although ATI expected to make approximately $50 million of voluntary contributions.
- Environmental reserves were approximately $13 million, with reasonably possible additional costs of up to $15 million for active matters. ATI was identified as a potentially responsible party at approximately 40 Superfund or similar sites.
- A US Magnesium lawsuit involving ATI Titanium remained pending, although the parent company obtained summary judgment in August 2021. A trial was scheduled for October 2022.
- Goodwill totaled $227.9 million at year-end. No 2021 impairment was recorded, but the Forged Products reporting unit remains sensitive to aerospace forecasts, profitability and discount-rate assumptions.
Investor verification checklist
- Verify the pace and durability of commercial aerospace recovery, including customer production rates, inventory levels and next-generation engine demand.
- Track completion and financial benefits of the SRP restructuring and the planned exit from standard stainless sheet products.
- Monitor compliance with the ABL fixed-charge coverage covenant and the refinancing or settlement of the 2022 convertible notes.
- Reconcile adjusted EBITDA and other non-GAAP measures to GAAP results, particularly the effects of strike costs, debt extinguishment, pension gains and restructuring credits.
- Assess cash conversion, working-capital requirements and capital spending relative to the company’s high debt balance.
- Review pension funding assumptions, environmental liabilities, labor negotiations and the US Magnesium litigation for potential cash or earnings impacts.
- Consider the sensitivity of results to nickel, titanium, energy prices, foreign supply availability and geopolitical or trade restrictions.