ATI INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview ATI is a global manufacturer of technically advanced specialty materials and complex components. Our largest markets are aerospace & defense, representing 45% of sales for the six months ended June 30, 2022, led by products for jet engines. Additionally, we have a strong presence in the energy markets, including oil & gas, downstream processing, and specialty energy, as well as the medical and electronics markets. In aggregate, these markets represent 75% of our 2022 revenue. ATI is a market leader in manufacturing differentiated products that require our materials science capabilities and unique process technologies, including our new product development competence. Our capabilities range from cast/wrought and powder alloy development to final production of highly engineered finished components, including those used in next-generation jet engines and 3D-printed aerospace products. Second quarter 2022 sales increased 56% to $959.5 million, compared to sales of $616.2 million for the second quarter of 2021. Our gross profit for the second quarter of 2022 was $175.3 million, or 18.3% of sales, a $132.6 million, or 1,140 basis point, increase, compared to the second quarter 2021, as our key end-markets continue to show sustained recovery, and prior year results included negative impacts from a labor strike. Second quarter 2021 results include $40.3 million of strike related costs, which are excluded from segment results and primarily consist of overhead costs recognized in the period due to below-normal operating rates, higher costs for outside conversion activities, and ongoing benefit costs for striking employees. Second quarter 2022 results include a $115.9 million loss on the May 12, 2022 sale of the Sheffield, UK operations, which is reported in loss on asset sales and sales of businesses, net and primarily relates to a UK defined benefit pension plan that transferred as part of the sale, and cumulative foreign currency translation losses. The Sheffield operations were part of the HPMC segment, and were not well-aligned with ATI’s strategic focus. In 2021, the Sheffield operations had external sales of $36 million, with over 80% of its sales to energy markets, primarily oil & gas, and had a net loss before tax of $9 million. Second quarter 2022 and 2021 results also include $1.3 million and $6.2 million, respectively, of net credits for restructuring charges, primarily related to lowered severance-related reserves based on changes in planned operating rates and revised workforce reduction estimates. Both the loss on sale and restructuring credits are excluded from segment results. Other nonoperating income (expense) for the second quarter of 2022 includes a $9.9 million benefit from the A&T Stainless joint venture’s settlement of Section 232 claims, which is included in AA&S segment results. Our pretax loss was $30.9 million in the second quarter of 2022, compared to a loss of $40.4 million in the prior year period. Income tax expense was $3.4 million and $4.0 million in the second quarters of 2022 and 2021, respectively, primarily related to our Asian precision rolled strip business. ATI continues to maintain a valuation allowance on its U.S. deferred tax assets. Net loss attributable to ATI was $38.0 million, or ($0.31) per share, in the second quarter of 2022, compared to a net loss attributable to ATI of $49.2 million, or ($0.39) per share, for the second quarter of 2021. Adjusted EBITDA was $143.1 million, or 14.9% of sales, for the second quarter 2022, and $53.7 million, or 8.7% of sales, for the prior year second quarter. EBITDA and Adjusted EBITDA are measures utilized by ATI that we believe are useful to investors because these measures are commonly used to analyze companies on the basis of operating performance, leverage and liquidity. Furthermore, analogous measures are used by industry analysts to evaluate operating performance. EBITDA and Adjusted EBITDA are non-GAAP measures and are not intended to represent, and should not be considered more meaningful than, or as alternatives to, a measure of operating performance as determined in accordance with U.S. generally accepted accounting principles (U.S. GAAP). We categorically define EBITDA as income from continuing operations before interest and income taxes, plus depreciation and amortization, goodwill impairment charges and debt extinguishment charges. We categorically define Adjusted EBITDA as EBITDA excluding significant non-recurring charges or credits, restructuring charges/credits, strike related costs, long-lived asset impairments and other postretirement/pension curtailment and settlement gains and losses. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and capital expenditures. See the Liquidity and Financial Condition section of Management’s Discussion and Analysis for a reconciliation of amounts reported under U.S. GAAP to these non-GAAP measures. Compared to the second quarter 2021, sales increased 32% in the HPMC business segment and 79% in the AA&S business segment. In aggregate, ATI’s aerospace & defense markets sales increased 55% to $436 million in the second quarter 2022, compared to $281 million the second quarter 2021. In HPMC, second quarter 2022 sales to the commercial jet engine market increased 90%. 26 Results for the first six months of 2022 were sales of $1.79 billion and income before tax of $9.2 million, compared to sales of $1.31 billion and loss before tax of $37.3 million for the first six months of 2021. Our results for the first half of 2022 reflect the ongoing recovery across many of our key end markets, most notably jet engine materials and components, compared to the prior year period. Our gross profit was $345 million, or 19.2% of sales, a $216 million or 940 basis point increase compared to the first six months of 2021. Results in the first six months of 2022 include $34.3 million of benefits from management actions to access available grants and other forms of COVID-19 relief available from previously-enacted U.S. legislation. These benefits included $16.8 million of a $22.4 million grant under the Aviation Manufacturing Jobs Protection (AMJP) program for our operations in the HPMC segment, which helps fund ongoing wage and benefit costs for a six-month period through May 2022, and $17.5 million in employee retention credits applicable across all of ATI’s domestic operations, largely for preserving jobs throughout the global pandemic-related economic downturn. Additionally, our strategic transformation efforts within the AA&S segment to eliminate production of lower-margin standard stainless sheet products in the SRP business is now complete. The 2021 results include the $40.3 million of strike related costs discussed above which are excluded from segment results. The six month 2022 results include a $141.0 million loss on the sale of the Sheffield, UK operations, of which $25.1 million was recorded in the first quarter of 2022 primarily for the impairment of long-lived assets. Loss on asset sales and sales of businesses, net, for the first six months of 2022 also included a $6.8 million gain from the sale of assets from our Pico Rivera, CA operations as part of the strategy to exit standard stainless products. Six month 2022 and 2021 results also include $2.4 million and $6.2 million, respectively, of net credits for restructuring charges. Both the gains/losses on sale and restructuring credits are excluded from segment results. Other nonoperating income (expense) for the first six months of 2022 includes a $9.9 million benefit from the A&T Stainless joint venture’s settlement of Section 232 claims, which is included in AA&S segment results, and $8.6 million of expense for a litigation reserve. Our pretax income was $9.2 million in the first six months of 2022, compared to a $37.3 million loss in the prior year period. Net loss attributable to ATI was $7.1 million, or ($0.06) per share, in the first six months of 2022, compared to a net loss attributable to ATI of $57.1 million, or ($0.45) per share, for the first six months of 2021. Compared to the first six months of 2021, sales increased 36% in the HPMC business segment and 38% in the AA&S business segment. Sales to the aerospace & defense markets in the HPMC segment were 44% higher than the first six months of 2021, due to improvements in the commercial aerospace market. AA&S sales reflect higher sales across all major markets, particularly a 68% increase in the aerospace & defense markets and 45% increase in the energy market. Prior year results included impacts from the USW labor strike, which predominantly affected the AA&S segment. Comparative information for our overall revenues (in millions) by end market and their respective percentages of total revenues for the three and six month periods ended June 30, 2022 and 2021 were as follows: Three months ended Three months ended Markets June 30, 2022 June 30, 2021 Aerospace & Defense: Jet Engines- Commercial $ 248.7 26 % $ 129.6 21 % Airframes- Commercial 106.1 11 % 54.4 9 % Defense 81.6 9 % 97.2 16 % Total Aerospace & Defense $ 436.4 46 % $ 281.2 46 % Energy: Oil & Gas 125.2 13 % 56.1 9 % Specialty Energy 75.1 8 % 62.2 10 % Total Energy 200.3 21 % 118.3 19 % Automotive 75.5 8 % 68.0 11 % Food Equipment & Appliances 62.7 6 % 20.7 3 % Electronics 49.4 5 % 43.3 7 % Construction/Mining 39.9 4 % 21.9 4 % Medical 39.5 4 % 32.0 5 % Other 55.8 6 % 30.8 5 % Total $ 959.5 100 % $ 616.2 100 % 27 Six months ended Six months ended Markets June 30, 2022 June 30, 2021 Aerospace & Defense: Jet Engines- Commercial $ 445.3 25 % $ 235.7 18 % Airframes- Commercial 199.8 11 % 112.6 9 % Defense 158.1 9 % 187.1 14 % Total Aerospace & Defense $ 803.2 45 % $ 535.4 41 % Energy: Oil & Gas 228.3 13 % 138.6 10 % Specialty Energy 131.7 7 % 128.8 10 % Total Energy 360.0 20 % 267.4 20 % Automotive 166.5 9 % 159.5 12 % Electronics 101.0 6 % 98.9 8 % Food Equipment & Appliances 96.7 5 % 56.1 4 % Construction/Mining 91.9 5 % 64.4 5 % Medical 75.7 4 % 61.0 5 % Other 98.6 6 % 66.0 5 % Total $ 1,793.6 100 % $ 1,308.7 100 % For the second quarter 2022, international sales of $391 million, or 41% of total sales, increased from $287 million in the second quarter 2021. ATI’s international sales are mostly to the aerospace, energy, electronics, automotive and medical markets. Comparative information for our major products based on their percentages of revenues are shown below. We no longer report standard stainless product sales as a separate product category. Prior period information includes these sales within the nickel-based alloys and specialty alloys category. HRPF conversion service sales in the AA&S segment are excluded from this presentation. Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Nickel-based alloys and specialty alloys 52 % 38 % 51 % 41 % Precision forgings, castings and components 15 % 18 % 15 % 17 % Precision rolled strip products 14 % 19 % 15 % 20 % Titanium and titanium-based alloys 11 % 13 % 10 % 12 % Zirconium and related alloys 8 % 12 % 9 % 10 % Total 100 % 100 % 100 % 100 % 28 Segment EBITDA for the second quarter 2022 was $164.9 million, or 17.2% of sales, compared to segment EBITDA of $73.2 million, or 11.9% of sales, for the second quarter of 2021. Segment EBITDA for the first six months of 2022 was $308.3 million, or 17.2% of sales, compared to segment EBITDA of $147.5 million, or 11.3% of sales, for the first six months of 2021. Our measure of segment EBITDA, which we use to analyze the performance and results of our business segments, categorically excludes income taxes, depreciation and amortization, corporate expenses, net interest expense, closed operations and other income (expense), charges for goodwill and asset impairments, restructuring and other credits/charges, strike related costs, debt extinguishment charges and gains or losses on asset sales and sales of businesses. Results on our management basis of reporting were as follows (in millions): Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Sales: High Performance Materials & Components $ 396.1 $ 300.6 $ 737.7 $ 541.5 Advanced Alloys & Solutions 563.4 315.6 1,055.9 767.2 Total external sales $ 959.5 $ 616.2 $ 1,793.6 $ 1,308.7 EBITDA: High Performance Materials & Components $ 60.3 $ 37.2 $ 128.4 $ 61.8 % of Sales 15.2 % 12.4 % 17.4 % 11.4 % Advanced Alloys & Solutions 104.6 36.0 179.9 85.7 % of Sales 18.6 % 11.4 % 17.0 % 11.2 % Total segment EBITDA $ 164.9 $ 73.2 $ 308.3 $ 147.5 % of Sales 17.2 % 11.9 % 17.2 % 11.3 % Corporate expenses (16.7) (15.9) (33.7) (28.1) Closed operations and other expense (5.1) (3.6) (6.5) (3.1) ATI Adjusted EBITDA 143.1 53.7 268.1 116.3 Depreciation & amortization (36.0) (36.3) (71.5) (72.4) Interest expense, net (23.4) (23.7) (47.0) (47.1) Restructuring and other credits (charges) 1.3 6.2 (6.2) 6.2 Strike related costs — (40.3) — (40.3) Loss on asset sales and sales of businesses, net (115.9) — (134.2) — Income (loss) before income taxes (30.9) (40.4) 9.2 (37.3) Income tax provision 3.4 4.0 8.3 9.5 Net income (loss) (34.3) (44.4) 0.9 (46.8) Less: Net income attributable to noncontrolling interests 3.7 4.8 8.0 10.3 Net loss attributable to ATI $ (38.0) $ (49.2) $ (7.1) $ (57.1) As part of managing the performance of our business, we focus on controlling Managed Working Capital, which we define as gross accounts receivable, short-term contract assets and gross inventories, less accounts payable and short-term contract liabilities. We exclude the effects of inventory valuation reserves and reserves for uncollectible accounts receivable when computing this non-GAAP performance measure, which is not intended to replace Working Capital or to be used as a measure of liquidity. We assess Managed Working Capital performance as a percentage of the prior three months annualized sales to evaluate the asset intensity of our business. At June 30, 2022, Managed Working Capital increased as a percentage of annualized total ATI sales to 38.5% compared to 37.5% at December 31, 2021, primarily due to higher accounts receivable and inventory balances. Days sales outstanding, which measures actual collection timing for accounts receivable, worsened by 18% as of June 30, 2022 compared to year end 2021, primarily due to increased foreign sales that generally have a longer collection cycle. Gross inventory turns remained consistent as of June 30, 2022 compared to year end 2021, as an improvement in the pace of inventory flow across our operations helped offset higher overall inventory levels due to both rising raw material values and management actions to secure adequate supplies of key raw materials in response to supply chain uncertainties. 29 The computations of Managed Working Capital at June 30, 2022 and December 31, 2021, reconciled to the financial statement line items as computed under U.S. GAAP, were as follows. June 30, December 31, (In millions) 2022 2021 Accounts receivable $ 627.1 $ 470.0 Short-term contract assets 54.3 53.9 Inventory 1,270.9 1,046.3 Accounts payable (421.9) (375.5) Short-term contract liabilities (125.7) (116.2) Subtotal 1,404.7 1,078.5 Allowance for doubtful accounts 3.9 3.8 Inventory valuation reserves 70.4 65.4 Managed working capital $ 1,479.0 $ 1,147.7 Annualized prior 3 months sales $ 3,838.0 $ 3,061.5 Managed working capital as a % of annualized sales 38.5 % 37.5 % Business Segment Results High Performance Materials & Components Segment Second quarter 2022 sales were $396.1 million, increasing 32% compared to the second quarter 2021, reflecting higher sales across nearly all end markets, led by commercial jet engines. Sales to the commercial aerospace market increased 76%, reflecting a 90% increase in commercial jet engines, while defense sales declined 35% based on the timing of orders for the next phase of several defense programs. Overall aerospace and defense market sales were 80% of total HPMC sales in the second quarter of 2022. Sales to the energy markets decreased 18%, with declines in materials for both oil & gas and specialty energy applications. Comparative information for our HPMC segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the three month periods ended June 30, 2022 and 2021 is as follows: Three months ended Three months ended Markets June 30, 2022 June 30, 2021 Aerospace & Defense: Jet Engines- Commercial $ 231.4 59 % $ 122.0 41 % Airframes- Commercial 43.9 11 % 34.1 11 % Defense 40.7 10 % 62.5 21 % Total Aerospace & Defense 316.0 80 % 218.6 73 % Energy: Oil & Gas 8.1 2 % 10.3 3 % Specialty Energy 31.5 8 % 38.3 13 % Total Energy 39.6 10 % 48.6 16 % Medical 16.8 4 % 14.6 5 % Construction/Mining 7.9 2 % 6.1 2 % Other 15.8 4 % 12.7 4 % Total $ 396.1 100 % $ 300.6 100 % 30 International sales represented 55% of total segment sales for the second quarter 2022, compared to 48% for the prior year period. Comparative information for the HPMC segment’s major product categories, based on their percentages of revenue for the three months ended June 30, 2022 and 2021, is as follows: Three months ended June 30, 2022 2021 Nickel-based alloys and specialty alloys 48 % 45 % Precision forgings, castings and components 35 % 36 % Titanium and titanium-based alloys 17 % 19 % Total 100 % 100 % Segment EBITDA in the second quarter 2022 increased to $60.3 million, or 15.2% of total sales, compared to $37.2 million, or 12.4% of total sales, for the second quarter 2021. Operating margins reflect higher sales of next-generation jet engine products and higher facility utilization levels. Results in the second quarter 2022 include $5.6 million of benefits from AMJP program grants, which ended in mid-May 2022. Sales for the first six months of 2022 were $737.7 million, increasing 36% compared to the first six months of 2021, reflecting higher sales across all end markets, led by commercial jet engines. Consistent with the trends in quarterly results, sales to the commercial aerospace market increased 77%, reflecting an 88% increase in commercial jet engines, while defense sales declined 31% based on the timing of orders for the next phase of several defense programs. Sales to the energy markets increased 10% with growth in materials for both oil & gas and specialty energy applications. Comparative information for our HPMC segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the six month periods ended June 30, 2022 and 2021 is as follows: Six months ended Six months ended Markets June 30, 2022 June 30, 2021 Aerospace & Defense: Jet Engines- Commercial $ 410.4 56 % $ 217.9 40 % Airframes- Commercial 81.1 11 % 60.6 11 % Defense 82.1 11 % 119.9 22 % Total Aerospace & Defense 573.6 78 % 398.4 73 % Energy: Oil & Gas 25.2 3 % 18.6 4 % Specialty Energy 61.6 9 % 60.5 11 % Total Energy 86.8 12 % 79.1 15 % Medical 30.0 4 % 25.8 5 % Construction/Mining 16.3 2 % 11.2 2 % Other 31.0 4 % 27.0 5 % Total $ 737.7 100 % $ 541.5 100 % International sales represented 54% of total segment sales for the first six months of 2022. Comparative information for the HPMC segment’s major product categories, based on their percentages of revenue for the six months ended June 30, 2022 and 2021, is as follows: Six months ended June 30, 2022 2021 Nickel-based alloys and specialty alloys 48 % 41 % Precision forgings, castings and components 35 % 39 % Titanium and titanium-based alloys 17 % 20 % Total 100 % 100 % Segment EBITDA in the first six months of 2022 increased to $128.4 million, or 17.4% of total sales, compared to $61.8 million, or 11.4% of total sales, for the first six months of 2021. Operating margins reflect higher sales of next-generation jet engine products and higher facility utilization levels. Results in the first half of 2022 include $27.5 million of benefits from the AMJP program and employee retention credits, partially offset by labor and other costs related to ramp readiness. 31 HPMC first half results reflect an ongoing recovery with improvements in many of our key end markets, most notably jet engine materials and components and specialty energy applications, as well as the continued benefits from our aggressive 2020 cost cutting actions and recent share gains. Looking ahead to the remainder of 2022, we anticipate continued revenue growth primarily driven by demand for commercial aerospace products, with stronger demand for both jet engine mill products and forgings, bolstered by our recent share gains. Demand for our commercial airframe long-form products in the HPMC segment is projected to increase over the longer-term due in part to the reordering of the commercial aerospace supply chain in response to the Russia/Ukraine conflict. While availability of raw material inputs for our melting processes remains adequate during the ongoing Russia/Ukraine conflict, changes in raw material prices may cause variability in profit margins based on the timing of index pricing mechanisms. Advanced Alloys & Solutions Segment Second quarter 2022 sales were $563.4 million, increasing 79% compared to the second quarter of 2021, which included impacts from a multi-month labor strike which reduced sales in the prior year period. Sales to the aerospace & defense markets increased 93%, due in part to a significant increase in commercial airframe demand for various flat-rolled product forms resulting from recent share gains. Sales to the energy markets were 130% higher than the prior year quarter, led by chemical and hydrocarbon industry applications increasing 173%. Increased sales prices, resulting from higher base prices and elevated raw material pass-through mechanisms, also drove revenue increases compared to the prior year period and help to offset inflationary impacts. Comparative information for our AA&S segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the three month periods ended June 30, 2022 and 2021 is as follows: Three months ended Three months ended Markets June 30, 2022 June 30, 2021 Energy: Oil & Gas $ 117.1 21 % $ 45.8 14 % Specialty Energy 43.6 8 % 23.9 8 % Total Energy 160.7 29 % 69.7 22 % Aerospace & Defense: Jet Engines- Commercial 17.3 3 % 7.6 2 % Airframes- Commercial 62.2 11 % 20.3 6 % Defense 40.9 7 % 34.7 11 % Total Aerospace & Defense 120.4 21 % 62.6 19 % Automotive 73.2 13 % 66.6 21 % Food Equipment & Appliances 62.7 11 % 20.6 7 % Electronics 48.7 8 % 43.1 14 % Construction/Mining 32.0 6 % 15.8 5 % Other 65.7 12 % 37.2 12 % Total $ 563.4 100 % $ 315.6 100 % International sales represented 31% of total segment sales for the second quarter 2022, compared to 46% in the prior year’s second quarter. Comparative information for the AA&S segment’s major product categories, based on their percentages of revenue for the three months ended June 30, 2022 and 2021, are presented in the following table. We no longer report standard stainless product sales as a separate product category. Prior period information includes these sales within the nickel-based alloys and specialty alloys category. HRPF conversion service sales are excluded from this presentation. Three months ended June 30, 2022 2021 Nickel-based alloys and specialty alloys 55 % 31 % Precision rolled strip products 24 % 39 % Zirconium and related alloys 15 % 24 % Titanium and titanium-based alloys 6 % 6 % Total 100 % 100 % 32 Segment EBITDA was $104.6 million, or 18.6% of sales, for the second quarter 2022, compared to segment EBITDA of $36.0 million, or 11.4% of sales, for the second quarter 2021. Compared to the prior year period, results reflect a stronger product mix of nickel-alloy mill products as our exit of standard stainless products was completed. Sales of exotic materials from our Specialty Alloys & Components business and improved operating performance also drove AA&S segment margin growth. Second quarter 2022 AA&S results included a $9.9 million benefit from the A&T Stainless joint venture’s settlement of Section 232 tariff claims. Sales for the first six months of 2022 were $1.06 billion, increasing 38% compared to the first six months of 2021, which included impacts from a multi-month labor strike which reduced sales in the prior year period. Sales to the aerospace & defense markets increased 68%, due in part to a significant increase in commercial airframe demand for various flat-rolled product forms resulting from recent share gains. Sales to the energy markets were 45% higher led by chemical and hydrocarbon industry applications increasing 79%. Increased sales prices, resulting from higher base prices and elevated raw material pass-through mechanisms, also drove revenue increases compared to the prior year period and help to offset inflationary impacts. Comparative information for our AA&S segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the six month periods ended June 30, 2022 and 2021 is as follows: Six months ended Six months ended Markets June 30, 2022 June 30, 2021 Energy: Oil & Gas 203.1 19 % 120.0 16 % Specialty Energy 70.1 7 % 68.3 9 % Total Energy 273.2 26 % 188.3 25 % Aerospace & Defense: Jet Engines- Commercial 34.9 4 % 17.8 2 % Airframes- Commercial 118.7 11 % 52.0 7 % Defense 76.0 7 % 67.2 9 % Total Aerospace & Defense 229.6 22 % 137.0 18 % Automotive 161.3 15 % 156.1 20 % Electronics 99.8 10 % 98.4 13 % Food Equipment & Appliances 96.7 9 % 56.0 7 % Construction/Mining 75.6 7 % 53.2 7 % Other 119.7 11 % 78.2 10 % Total $ 1,055.9 100 % $ 767.2 100 % International sales represented 33% of total segment sales for the first six months of 2022. Comparative information for the AA&S segment’s major product categories, based on their percentages of revenue for the six months ended June 30, 2022 and 2021, are presented in the following table. We no longer report standard stainless product sales as a separate product category. Prior period information includes these sales within the nickel-based alloys and specialty alloys category. HRPF conversion service sales are excluded from this presentation. Six months ended June 30, 2022 2021 Nickel-based alloys and specialty alloys 54 % 40 % Precision rolled strip products 26 % 35 % Zirconium and related alloys 14 % 19 % Titanium and titanium-based alloys 6 % 6 % Total 100 % 100 % Segment EBITDA was $179.9 million, or 17.0% of sales, for the first six months of 2022, compared to segment EBITDA of $85.7 million, or 11.2% of sales, for the first six months of 2021. Compared to the prior year period, results reflect a stronger product mix of nickel-alloy mill products as we completed our exit of standard stainless products. Sales of exotic materials from our Specialty Alloys & Components business and improved operating performance also drove AA&S segment margin growth. First half 2022 segment EBITDA includes a $9.9 million benefit from the A&T Stainless joint venture’s settlement of Section 232 tariff claims and $6.8 million of employee retention credits, partially offset by labor and other costs related to ramp readiness. 33 We expect AA&S sales to continue to increase in the second half of 2022 based on strong end-market demand. Demand for our commercial airframe flat-form products in the AA&S segment is projected to increase over the longer-term due in part to the reordering of the commercial aerospace supply chain in response to the Russia/Ukraine conflict. While availability of raw materials for our melting processes remains adequate during the ongoing Russia/Ukraine conflict, changes in raw material prices may cause variability in profit margins based on the timing of index pricing mechanisms. Corporate Items Corporate expenses for the second quarter of 2022 were $16.7 million, compared to $15.9 million for the second quarter 2021. For the six months ended June 30, 2022, corporate expenses were $33.7 million, compared to $28.1 million for the six months ended June 30, 2021. The current year increases reflect business transformation initiatives and higher incentive compensation costs compared to the prior year periods. Closed operations and other expense for the second quarter 2022 was $5.1 million, compared to $3.6 million for the second quarter 2021. For the six months ended June 30, 2022, closed operations and other expenses were $6.5 million, compared to $3.1 million for the six months ended June 30, 2021. Increases in closed operations and other expense in 2022 are largely due to changes in foreign currency remeasurement impacts primarily related to ATI’s European Treasury operation. The following is depreciation & amortization by each business segment: Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 High Performance Materials & Components $ 16.9 $ 19.2 $ 34.8 $ 38.8 Advanced Alloys & Solutions 16.7 16.1 32.9 31.6 Other 2.4 1.0 3.8 2.0 $ 36.0 $ 36.3 $ 71.5 $ 72.4 Interest expense, net of interest income, in the second quarter 2022 was $23.4 million, compared to $23.7 million for the second quarter 2021. On a year-to-date basis, net interest expense was $47.0 million for the first six months of 2022 compared to $47.1 million for the first six months of 2021. Capitalized interest reduced interest expense by $0.4 million in the second quarter 2022 and $1.2 million in the second quarter 2021. For the six months ended June 30, 2022 and 2021, capitalized interest was $0.6 million and $2.5 million, respectively. Restructuring charges for the second quarter ended June 30, 2022 were a credit of $1.3 million, for a reduction in severance-related reserves related to approximately 30 employees based on changes in planned operating rates and revised workforce reduction estimates. Restructuring and other charges for the six months ended June 30, 2022 were $6.2 million, as an $8.6 million charge for a litigation reserve relating to our indefinitely idled Rowley, UT titanium sponge production facility was partially offset by a $2.4 million restructuring credit for a reduction in severance-related reserves related to approximately 50 employees based on changes in planned operating rates and revised workforce reduction estimates. Restructuring charges for the second quarter and first six months of 2021 were a net credit of $6.2 million, primarily related to $6.9 million of lowered severance-related reserves for approximately 200 employees based on changes in planned operating rates and revised workforce reduction estimates. This was offset by $0.7 million of other costs related to facility idlings. These items were excluded from segment EBITDA. Cash payments associated with prior restructuring programs were $2.1 million in the first six months of 2022. The majority of the $13.2 million of remaining reserves associated with these restructuring actions as of June 30, 2022 are expected to be paid within the next year. Strike related costs were $40.3 million in the second quarter 2021, of which $38.2 million were excluded from AA&S segment EBITDA and $2.1 million were excluded from HPMC segment EBITDA. These items primarily consisted of overhead costs recognized in the period due to below-normal operating rates, higher costs for outside conversion activities, and ongoing benefit costs for striking employees. Loss on asset sales and sales of businesses, net, for the second quarter of 2022 was $115.9 million for the loss on the sale of the Company’s Sheffield, UK operation. Loss on asset sales and sales of businesses, net, for the first six months of 2022 was $134.2 million, including a $141.0 million loss on the sale of the Company’s Sheffield, UK operations, of which $25.1 million was recorded in the first quarter of 2022 primarily for the impairment of long-lived assets, and a $6.8 million gain from the sale of assets from our Pico Rivera, CA operations. These items are excluded from segment EBITDA. 34 Income Taxes The provision for income taxes for the second quarter and six months ended June 30, 2022 was $3.4 million and $8.3 million, respectively. The provision for income taxes for the second quarter and six months ended June 30, 2021 was $4.0 million and $9.5 million, respectively. Tax expense in all periods is mainly attributable to the Company’s foreign operations. The tax expense for the second quarter and six months ended June 30, 2022 was based on an estimated annual effective tax rate calculation which included foreign, non-valuation allowance, operations combined with the U.S. jurisdiction. The second quarter and six months ended June 30, 2021 utilized an annual effective tax rate calculation for its foreign, non-valuation allowance operations, combined with actual year-to-date tax expense related to its U.S. jurisdiction. In the second quarter 2020, the Company entered into a three-year cumulative loss within the United States, limiting the Company’s ability to utilize future projections when analyzing the need for a deferred tax asset valuation allowance, therefore limiting sources of income as part of the analysis. ATI continues to maintain valuation allowances on its U.S. federal and state deferred tax assets, as well as for certain foreign jurisdictions. Liquidity and Financial Condition We have an Asset Based Lending (ABL) Credit Facility, which is collateralized by the accounts receivable and inventory of our domestic operations. The ABL facility, which matures in September 2024, includes a $500 million revolving credit facility, a letter of credit sub-facility of up to $200 million, and a $200 million term loan (Term Loan). In addition, we have the right to request an increase of up to $200 million in the maximum amount available under the revolving credit facility for the duration of the ABL. The ABL facility contains a financial covenant whereby we must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the ABL revolving credit portion of the facility i s less than the greater of (i) $87.5 million, calculated as 12.5% of the then applicable maximum advance amount under the revolving credit portion of the ABL and the outstanding Term Loan balance, or (ii) $62.5 million. We were in compliance with the fixed charge coverage ratio as of June 30, 2022, and on that date, there were no outstanding borrowings under the revolving portion of the ABL facility, and $40.8 million was utilized to support the issuance of letters of credit. At June 30, 2022, we had $274 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximately $456 million. During the second quarter of 2022, $82.5 million of the 2022 Convertible Senior Notes were converted into 5.7 million shares of ATI common stock, with the remaining $1.7 million of outstanding principal balance paid in cash for notes that were not converted. The conversion rate for the 2022 Convertible Notes was 69.2042 shares of ATI common stock per $1,000 principal amount of the 2022 Convertible Notes, equivalent to a conversion price of $14.45 per share. On February 2, 2022, we announced that our Board of Directors authorized the repurchase of up to $150 million of ATI stock. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. Open market repurchases will be structured to occur within the pricing and volume requirements of SEC Rule 10b-18. The stock repurchase program does not obligate the Company to repurchase any specific number of shares and it may be modified, suspended, or terminated at any time by the Board of Directors without prior notice. We repurchased 3.5 million shares of ATI stock for $89.9 million, or an average of $25.57 per share, in the first quarter of 2022 under this program. We believe that internally generated funds, current cash on hand and available borrowings under the ABL facility will be adequate to meet our liquidity needs, including currently projected required contributions to our pension plans. We do not expect to pay any significant U.S. federal or state income taxes in the next several years due to net operating loss carryforwards. If we needed to obtain additional financing using the credit markets, the cost and the terms and conditions of such borrowings may be influenced by our credit rating. In addition, we regularly review our capital structure, various financing alternatives and conditions in the debt and equity markets in order to opportunistically enhance our capital structure. In connection therewith, we may seek to refinance or retire existing indebtedness, incur new or additional indebtedness or issue equity or equity-linked securities, in each case, depending on market and other conditions. We have no off-balance sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K. In managing our overall capital structure, we focus on the ratio of net debt to Adjusted EBITDA, which we use as a measure of our ability to repay our incurred debt. We define net debt as the total principal balance of our outstanding indebtedness excluding deferred financing costs, net of cash, at the balance sheet date. See the explanations above for our definitions of Adjusted EBITDA and EBITDA, which are non-GAAP measures and are not intended to represent, and should not be considered more meaningful than, or as alternatives to, a measure of operating performance as determined in accordance with U.S. GAAP. Our ratio of net debt to Adjusted EBITDA (Adjusted EBITDA Leverage Ratio) measures net debt at the balance sheet date to Adjusted EBITDA as calculated on the trailing twelve-month period from this balance sheet date. 35 Our Debt to Adjusted EBITDA Leverage Ratio improved in the second quarter of 2022 compared to year-end 2021, primarily as a result of higher earnings. Our Net Debt to Adjusted EBITDA Leverage ratio also improved in the second quarter of 2022 compared to year-end 2021, despite a decreased cash balance, primarily due to higher earnings. The reconciliations of our Adjusted EBITDA Leverage Ratios to the balance sheet and income statement amounts as reported under U.S. GAAP are as follows: Three months ended Latest 12 months ended Fiscal year ended June 30, 2022 June 30, 2021 June 30, 2022 December 31, 2021 Net income (loss) attributable to ATI $ (38.0) $ (49.2) $ 11.8 $ (38.2) Net income attributable to noncontrolling interests 3.7 4.8 19.7 22.0 Net income (loss) (34.3) (44.4) 31.5 (16.2) Interest expense 23.4 23.7 96.8 96.9 Depreciation and amortization 36.0 36.3 143.0 143.9 Income tax provision 3.4 4.0 25.6 26.8 Restructuring and other charges (credits) (1.3) (6.2) 1.9 (10.5) Strike related costs — 40.3 22.9 63.2 Retirement benefit settlement gain — — (64.9) (64.9) Debt extinguishment charge — — 65.5 65.5 Loss (gain) on asset sales and sale of businesses, net 115.9 — 120.4 (13.8) Adjusted EBITDA $ 143.1 $ 53.7 $ 442.7 $ 290.9 Debt $ 1,735.9 $ 1,842.9 Add: Debt issuance costs 18.9 20.8 Total debt 1,754.8 1,863.7 Less: Cash (274.0) (687.7) Net debt $ 1,480.8 $ 1,176.0 Total Debt to Adjusted EBITDA 3.96 6.41 Net Debt to Adjusted EBITDA 3.34 4.04 Cash Flow For the six months ended June 30, 2022, cash used in operations was $222.4 million, primarily related to higher accounts receivable and inventory balances, despite improved operating results. Increased operating levels, higher sales including longer collection cycles, increased raw material values and strategic inventory purchase actions to ensure adequate raw material availability all contributed to these operating cash flow uses. Other significant 2022 operating cash flow items included the payment of 2021 annual incentive compensation. For the six months ended June 30, 2021, cash used in operations was $102.6 million, primarily due to higher accounts receivable and inventory balances related to increased business activity. Other significant 2021 operating cash flow items included $17.5 million in contributions to a U.S. defined benefit pension plan and payment of 2020 annual incentive compensation, partially offset by receipt of advance payments as part of long-term supply agreements in 2021. Cash used in investing activities was $55.7 million in the first six months of 2022, reflecting $54.8 million in capital expenditures primarily related to AA&S transformation projects and various HPMC growth projects. We expect to fund our capital expenditures with cash on hand and cash flow generated from our operations and, if needed, by using a portion of the ABL facility. Cash used in financing activities was $135.6 million in the first six months of 2022 and consisted primarily of $89.9 million for the repurchase of 3.5 million shares of ATI stock under the $150 million repurchase program authorized by our Board of Directors on February 2, 2022, and a $16.0 million dividend payment to the 40% noncontrolling interest in our PRS joint venture in China. At June 30, 2022, cash and cash equivalents on hand totaled $274.0 million, a decrease of $413.7 million from year end 2021. Cash and cash equivalents held by our foreign subsidiaries was $91.2 million at June 30, 2022, of which $61.1 million was held by the STAL joint venture. 36 Critical Accounting Policies Asset Impairment We monitor the recoverability of the carrying value of our long-lived assets. An impairment charge is recognized when the expected net undiscounted future cash flows from an asset’s use (including any proceeds from disposition) are less than the asset’s carrying value, and the asset’s carrying value exceeds its fair value. Changes in the expected use of a long-lived asset group, and the financial performance of the long-lived asset group and its operating segment, are evaluated as indicators of possible impairment. Future cash flow value may include appraisals for property, plant and equipment, land and improvements, future cash flow estimates from operating the long-lived assets, and other operating considerations. In the fourth quarter of each year in conjunction with the annual business planning cycle, or more frequently if new material information is available, we evaluate the recoverability of idled facilities. As of March 31, 2022, our Sheffield, UK operations were classified as held for sale, and the terms of sale resulted in indicators of impairment in the long-lived assets of this disposal group. A $22.3 million long-lived asset impairment charge was recorded in the first quarter 2022, reported as part of the $141.0 million loss on sale of this business for the six months ended June 30, 2022. This long-lived asset impairment charge was determined using the held for sale framework and represents Level 1 information in the fair value hierarchy. Goodwill is reviewed annually in the fourth quarter of each year for impairment or more frequently if impairment indicators arise. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. At June 30, 2022, we had $227.2 million of goodwill on our consolidated balance sheet. All goodwill relates to reporting units in the HPMC segment. Management concluded that, other than the Sheffield, UK business, none of ATI’s reporting units or long-lived assets experienced any triggering event that would have required an interim impairment analysis at June 30, 2022. Income Taxes The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law. On a quarterly basis, we evaluate the realizability of our deferred tax assets. The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. In situations where a three-year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized. Since the second quarter of 2020, our results reflected a three year cumulative loss from U.S. operations. As a result, we established deferred tax asset valuation allowances in the second quarter of 2020 on our U.S. Federal and state deferred tax assets. In 2021 and 2022, ATI continues to maintain income tax valuation allowances on its U.S. Federal and state deferred tax assets. In addition, we have $22.4 million of valuation allowances on amounts recorded in other comprehensive loss as of June 30, 2022. While we remain in a cumulative loss condition, our ability to evaluate the realizability of deferred tax assets is generally limited to the ability to offset timing differences on taxable income associated with deferred tax liabilities. Therefore, a change in estimate of deferred tax asset valuation allowances for federal, state, or foreign jurisdictions during this cumulative loss condition period will primarily be affected by changes in estimates of the time periods that deferred tax assets and liabilities will be realized, or on a limited basis to tax planning strategies that may result in a change in the amount of taxable income realized. 37 Retirement Benefits In accordance with accounting standards, we determine the discount rate used to value pension plan liabilities as of the last day of each year. The discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we receive input from our actuaries regarding the rate of return on high quality, fixed income investments with maturities matched to the expected future retirement benefit payments. The estimated effect at the year-end 2021 valuation date of an increase in the discount rate by 0.50% would decrease pension liabilities by approximately $145 million. The effect on pension liabilities for changes to the discount rate, the difference between expected and actual plan asset returns, and the net effect of other changes in actuarial assumptions and experience are deferred and amortized over future periods in accordance with accounting standards. For ERISA (Employee Retirement Income Security Act of 1974, as amended) funding purposes, discount rates used to measure pension liabilities for U.S. qualified defined benefit plans are calculated on a different basis using an IRS-determined segmented yield curve, which currently results in a higher discount rate than the discount rate methodology required by accounting standards. Funding requirements are also affected by IRS-determined mortality assumptions, which may differ from those used under accounting standards. We have certain collective bargaining agreements that include participation in a multiemployer pension plan. Under current law, an employer that withdraws or partially withdraws from a multiemployer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. A subsidiary of the Company participates in the Steelworkers Western Independent Shops Pension Plan (WISPP) for union-represented employees of our primary titanium operations in Albany, OR, which is funded on an hours-worked basis. As of December 31, 2020, manufacturing operations at this facility were indefinitely idled, and a limited number of employees that participate in the WISPP remain active in maintenance and other functions. It is reasonably possible that a significant reduction or the elimination of hours-worked contributions due to changes in operating rates at this facility could result in a withdrawal liability assessment in a future period. A complete withdrawal liability is estimated to be approximately $35 million on an undiscounted basis. If this complete withdrawal liability was incurred, ATI estimates that payments of the obligation would be required on a straight-line basis over a 20-year period. Other Critical Accounting Policies A summary of other significant accounting policies is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2021. The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for derivatives, retirement plans, income taxes, environmental and other contingencies, as well as asset impairment, inventory valuation and collectability of accounts receivable. We use historical and other information that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements. Pending Accounting Pronouncements See Note 1 of the Notes to Consolidated Financial Statements for information on new and pending accounting pronouncements. Forward-Looking and Other Statements From time to time, we have made and may continue to make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this report relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. Forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (a) material adverse changes in economic or industry conditions generally, including global supply and demand conditions and prices for 38 our specialty metals and changes in international trade duties and other aspects of international trade policy; (b) material adverse changes in the markets we serve; (c) our inability to achieve the level of cost savings, productivity improvements, synergies, growth or other benefits anticipated by management, from strategic investments and the integration of acquired businesses; (d) volatility in the price and availability of the raw materials that are critical to the manufacture of our products; (e) declines in the value of our defined benefit pension plan assets or unfavorable changes in laws or regulations that govern pension plan funding; (f) labor disputes or work stoppages; (g) equipment outages; (h) the risks of business and economic disruption related to the currently ongoing COVID-19 pandemic and other health epidemics or outbreaks that may arise; and (i) other risk factors summarized in our Annual Report on Form 10-K for the year ended December 31, 2021, and in other reports filed with the Securities and Exchange Commission. We assume no duty to update our forward-looking statements.