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 56% of sale s for the three months ended March 31, 2023, 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 more t han 80% of our 2023 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. First quarter 2023 sales increased 25% to $1.04 billion, compared to sales of $834.1 million for the first quarter of 2022, primarily due to a significant recovery in demand for commercial aerospace products, which is our largest end market. Our gross profit for the first quarter of 2023 was $193.2 million, or 18.6% of sales, compared to $169.4 million, or 20.3% of sales, for the first quarter 2022. This $23.8 million increase in gross profit, reflects the benefits of our ongoing transformation focused on the key growth markets of aerospace and defense, and our streamlined value-add production capabilities. Results for the first quarter 2022 include $28.7 million of benefits related to U.S. government-sponsored COVID-19 relief, including the Aviation Manufacturing Jobs Protection (AMJP) Program and employee retention credits. First quarter 2023 results include a $1.2 million charge for costs to restart our titanium operations in Albany, OR. First quarter 2022 results include an $18.3 million loss on asset sales and sale of businesses, net, representing a partial loss on the sale of the Sheffield, UK operations, which was finalized in the second quarter of 2022, partially offset by a gain from the sale of assets from our Pico Rivera, CA operations. Also, other nonoperating income (expense) for the first quarter of 2022 included an $8.6 million charge for a litigation reserve. All of these previously discussed items are excluded from segment EBITDA. In addition, nonoperating retirement benefit expense increased to $16.8 million in the first quarter of 2023 compared to $5.8 million in the first quarter of 2022. Our pretax income was $76.5 million in the first quarter of 2023, compared to $40.1 million in the prior year period. Income tax expense for the first quarters of 2023 and 2022 was $4.3 million and $4.9 million, 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 income attributable to ATI was $70.1 million, or $0.48 per share, in the first quarter of 2023, compared to $30.9 million, or $0.23 per share, for the first quarter of 2022. Adjusted EBITDA was $132.7 million, or 12.8% of sales, for the first quarter 2023, and $125.0 million, or 15.0% of sales, for the prior year first 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 22 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 first quarter 2022, sales increased 38% in the HPMC business segment and 15% in the AA&S business segment. In aggregate, ATI’s aerospace & defense markets sales incre ased 57% to $576 million i n the first quarter 2023, compared to $367 million th e first quarter 2022, reflecting increasing demand for commercial aerospace jet engine and airframe products. In the HPMC segment, first quarter 2023 sales of commercial aerospace products increased 64% c ompared to the prior year period. In the AA&S segment, first quarter 2023 sales of commercial aerospace products increased 72% compared to the prior year period. Comparative information regarding our overall revenues (in millions) by end market and their respective percentages of total revenues for the three month periods ended March 31, 2023 and 2022 is shown below. Three months ended Three months ended Markets March 31, 2023 March 31, 2022 Aerospace & Defense: Jet Engines- Commercial $ 310.9 30 % $ 196.6 24 % Airframes- Commercial 169.9 17 % 93.7 11 % Defense 94.9 9 % 76.5 9 % Total Aerospace & Defense $ 575.7 56 % $ 366.8 44 % Energy: Oil & Gas 127.5 12 % 103.1 12 % Specialty Energy 82.7 8 % 56.6 7 % Total Energy 210.2 20 % 159.7 19 % Automotive 59.4 6 % 91.0 11 % Construction/Mining 40.4 4 % 52.0 6 % Medical 35.0 3 % 36.2 5 % Electronics 34.4 3 % 51.6 6 % Food Equipment & Appliances 21.5 2 % 34.0 4 % Other 61.5 6 % 42.8 5 % Total $ 1,038.1 100 % $ 834.1 100 % For the first quarter 2023, international sales of $456 million, or 44% of total sales, increased from $356 million in the first quarter 2022. ATI’s international sales are mostly to the aerospace, energy, electronics, automotive and medical markets. Comparative information regarding our major products based on their percentages of revenues are shown below. HRPF conversion service sales in the AA&S segment are excluded from this presentation. Three months ended March 31, 2023 2022 Nickel-based alloys and specialty alloys 53 % 50 % Precision forgings, castings and components 16 % 15 % Titanium and titanium-based alloys 14 % 10 % Precision rolled strip products 10 % 17 % Zirconium and related alloys 7 % 8 % Total 100 % 100 % 23 Segment EBITDA for the first quarter 2023 was $152.8 million, or 14.7% of sales, compared to segment EBITDA of $143.4 million, or 17.2% of sales, for the first quarter of 2022. 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 March 31, 2023 2022 Sales: High Performance Materials & Components $ 471.1 $ 341.6 Advanced Alloys & Solutions 567.0 492.5 Total external sales $ 1,038.1 $ 834.1 EBITDA: High Performance Materials & Components $ 80.1 $ 68.1 % of Sales 17.0 % 19.9 % Advanced Alloys & Solutions 72.7 75.3 % of Sales 12.8 % 15.3 % Total segment EBITDA $ 152.8 $ 143.4 % of Sales 14.7 % 17.2 % Corporate expenses (17.3) (17.0) Closed operations and other expense (2.8) (1.4) ATI Adjusted EBITDA 132.7 125.0 Depreciation & amortization (35.1) (35.5) Interest expense, net (19.9) (23.6) Restructuring and other charges (1.2) (7.5) Loss on asset sales and sales of businesses, net — (18.3) Income before income taxes 76.5 40.1 Income tax provision 4.3 4.9 Net income 72.2 35.2 Less: Net income attributable to noncontrolling interests 2.1 4.3 Net income attributable to ATI $ 70.1 $ 30.9 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 March 31, 2023, Managed Working Capital increased as a percentage of annualized total ATI sales to 37.6% compared to 30.1% at December 31, 2022. The timing of sales within the first quarter of 2023 and increasing operating levels contributed to the increase in Managed Working Capital as a percentage of sales. Days sales outstanding, which measures actual collection timing for accounts receivable, worsened by 10% as of March 31, 2023 compared to year end 2022, primarily due to the timing of first quarter sales. Gross inventory turns decreased 8% as of March 31, 2023 compared to year end 2022. 24 The computations of Managed Working Capital at March 31, 2023 and December 31, 2022, reconciled to the financial statement line items as computed under U.S. GAAP, were as follows. March 31, December 31, (In millions) 2023 2022 Accounts receivable $ 725.6 $ 579.2 Short-term contract assets 52.7 64.1 Inventory 1,293.8 1,195.7 Accounts payable (447.5) (553.3) Short-term contract liabilities (149.7) (149.1) Subtotal 1,474.9 1,136.6 Allowance for doubtful accounts 7.4 7.7 Inventory valuation reserves 79.8 70.9 Managed working capital $ 1,562.1 $ 1,215.2 Annualized prior 3 months sales $ 4,152.6 $ 4,041.9 Managed working capital as a % of annualized sales 37.6 % 30.1 % Business Segment Results High Performance Materials & Components Segment First quarter 2023 sales were $471.1 million, increasing 38% compared to the first quarter 2022, reflecting increasing commercial aerospace demand. Sales to the commercial aerospace market increased 64%, reflecting a 58% increase in commercial jet engines. Overall aerospace and defense market sales were 84% of total HPMC sales in the first quarter of 2023. Sales to the energy markets decreased 42%, mainly due to lower specialty energy sales to Asian markets. 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 March 31, 2023 and 2022 is as follows: Three months ended Three months ended Markets March 31, 2023 March 31, 2022 Aerospace & Defense: Jet Engines- Commercial $ 282.5 60 % $ 179.0 52 % Airframes- Commercial 71.0 15 % 37.2 11 % Defense 41.9 9 % 41.4 12 % Total Aerospace & Defense 395.4 84 % 257.6 75 % Energy: Oil & Gas 2.4 1 % 17.1 5 % Specialty Energy 24.9 5 % 30.1 9 % Total Energy 27.3 6 % 47.2 14 % Medical 17.5 4 % 13.2 4 % Construction/Mining 8.2 2 % 8.4 3 % Other 22.7 4 % 15.2 4 % Total $ 471.1 100 % $ 341.6 100 % 25 International sales represented 59% of total segment sales for the first quarter 2023, compared to 54% in 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 March 31, 2023 and 2022, is as follows: Three months ended March 31, 2023 2022 Nickel-based alloys and specialty alloys 45 % 48 % Precision forgings, castings and components 34 % 36 % Titanium and titanium-based alloys 20 % 16 % Precision rolled strip products 1 % — % Total 100 % 100 % Segment EBITDA in the first quarter 2023 increased to $80.1 million, or 17.0% of total sales, compared to $68.1 million, or 19.9% of total sales, for the first quarter 2022. Strength in the HPMC segment continues to be driven by content on next-generation commercial aerospace platforms. Results in the first quarter 2022 include $21.9 million of benefits from the Aviation Manufacturing Jobs Protection program and employee retention credits, partially offset by labor and other costs related to ramp readiness. HPMC first quarter 2023 results reflect continued momentum in our business and the ongoing commercial aerospace recovery. The aerospace market continues to recover, and we are seeing an ongoing improvement in demand in many of our key end markets, most notably jet engine materials and components. Increasing demand for travel and efficient energy benefits ATI, and we believe we are well positioned to capture this growth in the future. Jet engine forgings and specialty materials demand remains strong, bolstered by share gains. Advanced Alloys & Solutions Segment First quarter 2023 sales were $567.0 million, increasing 15% compared to the first quarter of 2022. Sales to the aerospace & defense markets increased 65%, with a 72% increase in sales of commercial aerospace products, due in part to a significant increase in commercial airframe demand for various flat-rolled product forms. Sales to the energy markets were 62% higher than the prior year quarter, with both oil & gas and specialty energy markets seeing stronger demand. These favorable trends were partially offset by recessionary softness in general industrial end markets and lingering COVID impacts associated with our Asian precision rolled strip business. Comparative information regarding 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 March 31, 2023 and 2022 is shown below. Three months ended Three months ended Markets March 31, 2023 March 31, 2022 Energy: Oil & Gas $ 125.1 22 % $ 86.0 18 % Specialty Energy 57.8 10 % 26.5 5 % Total Energy 182.9 32 % 112.5 23 % Aerospace & Defense: Jet Engines- Commercial 28.4 5 % 17.6 4 % Airframes- Commercial 98.9 17 % 56.5 11 % Defense 53.0 10 % 35.1 7 % Total Aerospace & Defense 180.3 32 % 109.2 22 % Automotive 53.1 9 % 88.1 18 % Electronics 33.9 6 % 51.1 10 % Construction/Mining 32.2 6 % 43.6 9 % Food Equipment & Appliances 21.5 4 % 34.0 7 % Other 63.1 11 % 54.0 11 % Total $ 567.0 100 % $ 492.5 100 % 26 International sales represented 32% of total segment sales for the first quarter 2023, compared to 35% in the prior year’s first quarter. Comparative information regarding the AA&S segment’s major product categories, based on their percentages of revenue for the three months ended March 31, 2023 and 2022, are presented in the following table. HRPF conversion service sales are excluded from this presentation. Three months ended March 31, 2023 2022 Nickel-based alloys and specialty alloys 60 % 52 % Precision rolled strip products 19 % 29 % Zirconium and related alloys 13 % 14 % Titanium and titanium-based alloys 8 % 5 % Total 100 % 100 % Segment EBITDA was $72.7 million, or 12.8% of sales, for the first quarter 2023, compared to segment EBITDA of $75.3 million, or 15.3% of sales, for the first quarter 2022. A stronger mix of nickel and titanium mill products was offset by weaker demand for precision rolled strip products and higher retirement benefit expense, which contributed to the margin decline year over year. First quarter 2022 segment EBITDA includes $6.8 million of employee retention credits, partially offset by labor and other costs related to ramp readiness. With the AA&S business transformation and footprint consolidation nearly complete, we believe we are well positioned for continued future growth. Sales of commercial airframe flat-form products in the AA&S segment are projected to increase over the longer term due in part to the repositioning 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 first quarter of 2023 were $17.3 million, compared to $17.0 million for the first quarter 2022. Closed operations and other expense for the first quarter 2023 was $2.8 million, compared to $1.4 million for the first quarter 2022 reflecting higher costs in the first quarter 2023 associated with environmental remediation project costs at closed operations and retirement benefit expense. The following table shows depreciation & amortization for the relevant periods by each business segment: Three months ended March 31, 2023 2022 High Performance Materials & Components $ 17.4 $ 17.9 Advanced Alloys & Solutions 16.1 16.2 Other 1.6 1.4 $ 35.1 $ 35.5 Interest expense, net of interest income, in the first quarter 2023 was $19.9 million, compared to $23.6 million for the first quarter 2022. Capitalized interest reduced interest expense by $3.4 million in the first quarter 2023 and $0.2 million in the first quarter 2022. Restructuring and other charges were $1.2 million for the first quarter of 2023 and related to costs to restart the Company’s titanium operations in Albany, OR. These costs were included within cost of sales in the consolidated statements of operations. Restructuring and other charges for the first quarter of 2022 were $7.5 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 $1.1 million restructuring credit for a reduction in severance-related reserves related to approximately 20 employees based on changes in planned operating rates and revised workforce reduction estimates. These items were excluded from segment EBITDA. Cash payments associated with prior restructuring programs were $0.2 million in the first quarter of 2023. Of the $9.6 million of 27 remaining reserves associated with these restructuring actions as of March 31, 2023, $5.2 million are expected to be paid within the next year. Loss on asset sales and sales of businesses, net, for the first quarter of 2022 were $18.3 million, including a $25.1 million partial loss on the sale of the Company’s Sheffield, UK operations, which was completed in the second quarter of 2022, and a $6.8 million gain from the sale of assets from our Pico Rivera, CA operations. These items are excluded from segment EBITDA. Income Taxes The provision for income taxes for the quarters ended March 31, 2023 and 2022 was $4.3 million and $4.9 million, respectively. Tax expense in both periods is mainly attributable to our foreign operations and was based on an estimated annual effective tax rate calculation which included foreign, non-valuation allowance, operations combined with the U.S. jurisdiction. The first quarter of 2022 calculation excluded the results related to our Sheffield, UK operations. In the second quarter 2020, we entered into a three-year cumulative loss within the United States, limiting our 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. We continue to maintain valuation allowances on our 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 operations. The ABL facility also provides us with the option of including certain machinery and equipment as additional collateral for purposes of determining availability under the facility. The ABL facility, which matures in September 2027, includes a $600 million revolving credit facility, a letter of credit sub-facility of up to $200 million, a $200 million term loan (Term Loan), and a swing loan facility of up to $60 million. The Term Loan has an interest rate of 2.0% above adjusted Secured Overnight Financing Rate (SOFR) and can be prepaid in increments of $25 million if certain minimum liquidity conditions are satisfied. In addition, we have the right to request an increase of up to $300 million in the maximum amount available under the revolving credit facility for the duration of the ABL. The applicable interest rate for revolving credit borrowings under the ABL facility includes interest rate spreads based on available borrowing capacity that range between 1.25% and 1.75% for SOFR-based borrowings and between 0.25% and 0.75% for base rate borrowings. 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 is less than the greater of (i) 10% of the then applicable maximum loan amount under the revolving credit portion of the ABL and the outstanding Term Loan balance, or (ii) $60.0 million. We were in compliance with the fixed charge coverage ratio as of March 31, 2023. Additionally, we must demonstrate minimum liquidity specified by the facility during the 90-day period immediately preceding the stated maturity date of our 3.5% Convertible Senior Notes due 2025 and the 6.95% Debentures due 2025 issued by our wholly owned subsidiary, Allegheny Ludlum LLC. The ABL also contains customary affirmative and negative covenants for credit facilities of this type, including limitations on our ability to incur additional indebtedness or liens or to enter into investments, mergers and acquisitions, dispositions of assets and transactions with affiliates, some of which are more restrictive, at any time during the term of the ABL when our fixed charge coverage ratio is less than 1.00:1.00 and our undrawn availability under the revolving portion of the ABL is less than the greater of (a) $120 million or (b) 20% of the sum of the maximum loan amount under the revolving credit portion of the ABL and the outstanding Term Loan balance. As of March 31, 2023, there were no outstanding borrowings under the revolving portion of the ABL facility, and $39.8 million was utilized to support the issuance of letters of credit. At March 31, 2023, we had $196 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximately $550 million. In the first quarter 2023, the Company made $50 million in voluntary cash contributions to its U.S. qualified defined benefit pension plans to improve the plans’ funded position. Based on current actuarial assumptions, we are not required to make any further contributions to these pension plans during fiscal year 2023, and our prior contributions have generated a credit balance that may be utilized to offset future minimum required contributions. We may elect to contribute additional amounts to these pension plans to improve their funded position, or we may elect to use a portion of our credit balance in lieu of cash contributions based on other capital allocation priorities. On February 2, 2022, we announced that our Board of Directors authorized the repurchase of up to $150 million of ATI stock. In the three months ended March 31, 2023, we used $10.1 million remaining under this authorization to repurchase 0.2 million shares of our common stock under the $150 million progra m. In addition, on April 28, 2023, our Board of Directors authorized 28 the repurchase of an additional $75 million of ATI stock. Repurchases under these programs were or 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 are structured to occur within the pricing and volume requirements of SEC Rule 10b-18. Our ongoing stock repurchase programs do not obligate the Company to repurchase any specific number of shares and may be modified, suspended, or terminated at any time by the Board of Directors without prior notice. 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 2023. 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. Our Debt to Adjusted EBITDA Leverage Ratio in the first quarter of 2023 remained fairly comparable to year end 2022. Our Net Debt to Adjusted EBITDA Leverage ratio worsened in the first quarter of 2023 compared to year end 2022, largely due to a decreased cash balance. 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 March 31, 2023 March 31, 2022 March 31, 2023 December 31, 2022 Net income attributable to ATI $ 70.1 $ 30.9 $ 170.1 $ 130.9 Net income attributable to noncontrolling interests 2.1 4.3 13.4 15.6 Net income 72.2 35.2 183.5 146.5 Interest expense 19.9 23.6 83.7 87.4 Depreciation and amortization 35.1 35.5 142.5 142.9 Income tax provision 4.3 4.9 14.9 15.5 Restructuring and other charges 1.2 7.5 17.4 23.7 Joint venture restructuring credit — — (0.9) (0.9) Loss on asset sales and sale of businesses, net — 18.3 115.9 134.2 Adjusted EBITDA $ 132.7 $ 125.0 $ 557.0 $ 549.3 Debt $ 1,727.0 $ 1,748.0 Add: Debt issuance costs 16.3 17.2 Total debt 1,743.3 1,765.2 Less: Cash (196.2) (584.0) Net debt $ 1,547.1 $ 1,181.2 Total Debt to Adjusted EBITDA 3.13 3.21 Net Debt to Adjusted EBITDA 2.78 2.15 Cash Flow For the three months ended March 31, 2023, cash used in operations was $285.2 million, primarily related to higher accounts receivable and inventory balances due to increased operating levels and input costs. Working capital balances, and consequently cash from operations, can fluctuate throughout any operating period based upon the timing of receipts from customers and payments to vendors. However, we actively manage our working capital to ensure the required flexibility to meet our strategic objectives. Other significant 2023 operating cash flow items included $50 million in contributions to the U.S. defined benefit pension plans and the payment of 2022 annual incentive compensation. For the three months ended March 29 31, 2022, cash used in operations was $217.2 million, primarily related to higher accounts receivable and inventory balances related to increased operating levels, higher sales including longer collection cycles, increased raw material values and strategic inventory purchase actions to ensure adequate raw material availability. Other significant 2022 operating cash flow items included the payment of 2021 annual incentive compensation. Cash used in investing activities was $59.3 million in the first quarter of 2023, reflecting $60.4 million in capital expenditures primarily related to AA&S transformation projects and various HPMC growth projects. For the three months ended March 31, 2022, cash used in investing activities was $24.2 million, reflecting $26.0 million in capital expenditures. 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 $43.3 million in the first quarter of 2023 and included $10.1 million for the repurchase of 0.2 million shares of ATI stock under the $150 million repurchase program authorized by our Board of Directors on February 2, 2022. For the three months ended March 31, 2022, cash used in financing activities was $129.6 million and included $89.9 million for repurchase of 3.5 million shares of ATI stock and a $16 million dividend payment to the 40% noncontrolling interest in our PRS joint venture in China. At March 31, 2023, cash and cash equivalents on hand totaled $196.2 million, a decrease of $387.8 million from year end 2022. Cash and cash equivalents held by our foreign subsidiaries was $83.5 million at March 31, 2023, of which $52.9 million was held by the STAL joint venture. 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 $25.1 million loss on sale of this business for the three months ended March 31, 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 March 31, 2023, 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 none of ATI’s reporting units or long-lived assets experienced any triggering event that would have required an interim impairment analysis at March 31, 2023. Income Taxes The provision for 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 30 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 2023 and 2022, ATI continues to maintain income tax valuation allowances on its U.S. Federal and state deferred tax assets. In addition, we have $66.3 million of valuation allowances on amounts recorded in other comprehensive loss as of March 31, 2023. 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. 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 2022 valuation date of an increase in the discount rate by 0.50% would decrease pension liabilities by approximately $90 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. Manufacturing operations at this fac ility were idled throughout 2021 and most of 2022, wi th a limited number of employees that participate in the WISPP remaining 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 facili ty could result in a withdrawal liability assessment in a future period. A complete withdrawal liability is estimated to be approximately $27 million on an undiscounted basis, based on information for the plan year ended September 30, 2021, which is the most recent information available from the Plan Administrator. If this complete withdrawal liability was incurred, ATI estimates that payments of the obligation would be required on a straight-line basis over a 15-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, 2022. 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 31 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 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, 2022, and in other reports filed with the Securities and Exchange Commission. We assume no duty to update our forward-looking statements.