What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-04 · 222 added, 109 removed, 249 unchanged (57% of the section changed)

1 unchanged sentence

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.

Our largest markets are aerospace & defense, representing 57% of sale s for the six months ended June 30, 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.

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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.

Second quarter 2023 sales increased 9% to $1.05 billion, compared to sales of $959.5 million for the second quarter of 2022, primarily due to a significant recovery in demand for commercial aerospace products.

Total aerospace and defense sales were 58% of total sales for the second quarter 2023.

Our gross profit for the second quarter of 2023 was $209.1 million, or 20.0% of sales, compared to $175.3 million, or 18.3% of sales, for the second quarter 2022.

This $33.8 million increase in gross profit, reflects strong results for our HPMC segment as well as the benefits of our ongoing transformation focused on the key growth markets of aerospace and defense, and our streamlined value-add production capabilities.

Second quarter 2023 gross profit includes $4.5 million of start-up related costs and $2.8 million of other charges primarily related to asset write-offs for the closure of our Robinson, PA operations.

Second quarter 2023 results include a $0.6 million loss on the sale of our Northbrook, IL operations and second quarter 2022 results include a $115.9 million loss on the sale of the Sheffield, UK operations, both of which are reported in loss on asset sales and sales of businesses, net.

Restructuring charges were $2.7 million for the second quarter of 2023 primarily related to severance for involuntary reductions across ATI’s domestic operations in conjunction with our continued transformation, while the second quarter of 2022 included $1.3 million of restructuring-related credits primarily related to lowered severance-related reserves based on changes in planned operating rates and revised workforce reduction estimates.

Both the losses on sales and restructuring charges/credits are excluded from segment results.

Also, nonoperating income for the second quarter of 2022 included 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.

In addition, nonoperating retirement benefit expense increased to $16.9 million in the second quarter of 2023 compared to $6.6 million in the second quarter of 2022.

Our pre-tax income was $82.8 million in the second quarter of 2023, compared to a loss of $30.9 million in the prior year period.

Income tax expense for the second quarters of 2023 and 2022 was $3.7 million and $3.4 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

Net income attributable to ATI was $76.0 million, or $0.52 per share, in the second quarter of 2023, compared to a loss of $38.0 million, or ($0.31) per share, for the second quarter of 2022.

Adjusted EBITDA was $149.8 million, or 14.3% of sales, for the second quarter 2023, and $143.1 million, or 14.9% of sales, for the prior year second quarter.

Furthermore, analogous measures are used by industry analysts to evaluate operating performance.

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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.

Compared to the second quarter 2022, sales increased 33% in the HPMC business segment and decreased 8% in the AA&S business segment.

In aggregate, ATI’s aerospace & defense markets sales incre ased 39% to $607 million i n the second quarter 2023, compared to $436 million th e second quarter 2022, reflecting increasing demand for commercial aerospace jet engine and airframe products.

In the HPMC segment, second quarter 2023 sales of aerospace and defense products increased 38% c ompared to the prior year period.

The decline in the AA&S segment reflects recessionary softness in general industrial end markets and lingering COVID impacts associated with our Asian precision rolled strip business.

In the AA&S segment, second quarter 2023 sales of commercial aerospace products increased 49% compared to the prior year period.

Results for the first six months of 2023 were sales of $2.08 billion and income before tax of $159.3 million, compared to sales of $1.79 billion and income before tax of $9.2 million for the first six months of 2022.

Our results for the first half of 2023 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 $402 million, or 19.3% of sales, a $58 million or 16.7% increase compared to the first six months of 2022.

Second quarter 2023 gross profit includes $5.7 million of start-up related costs and $2.8 million of other charges primarily related to asset write-offs for the closure of our Robinson, PA operations.

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.

These benefits included a $16.8 million grant under the Aviation Manufacturing Jobs Protection (AMJP) program for our operations in the HPMC segment, 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.

The six month 2023 results include a $0.6 million loss on the sale of our Northbrook, IL operations.

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.

Restructuring charges were $2.7 million for the six months of 2023 primarily related to severance for the involuntary reductions across ATI’s domestic operations in conjunction with our continued transformation, while the six months of 2022 included $2.4 million of restructuring-related credits primarily related to lowered severance-related reserves based on changes in planned operating rates and revised workforce reduction estimates.

Both the losses on sales and restructuring charges/credits are excluded from segment results.

Other nonoperating income 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.

In addition, nonoperating retirement benefit expense increased to $33.7 million in the six months of 2023 compared to $12.4 million in the prior year period.

Our pre-tax income was $159.3 million in the first six months of 2023, compared to $9.2 million in the prior year period.

Net income attributable to ATI was $146.1 million, or $1.01 per share, in the first six months of 2023, compared to a net loss attributable to ATI of $7.1 million, or ($0.06) per share, for the first six months of 2022.

Compared to the first six months of 2022, sales increased 35% in the HPMC business segment and 3% in the AA&S business segment.

Sales to the aerospace & defense markets in the HPMC segment were 45% higher than the first six months of 2022, due to improvements in the commercial aerospace market.

AA&S sales reflect a 53% increase in the aerospace & defense markets and 20% increase in the energy market, 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 overall revenues (in millions) by end market and their respective percentages of total revenues for the three and six month periods ended June 30, 2023 and 2022 is shown below.

Three months ended Three months ended

Markets March 31, 2023 March 31, 2022

Markets June 30, 2023 June 30, 2022

Aerospace & Defense:

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Total $ 1,046.0 100 % $ 959.5 100 %

For the first quarter 2023, international sales of $456 million, or 44% of total sales, increased from $356 million in the first quarter 2022.

Six months ended Six months ended

Markets June 30, 2023 June 30, 2022

Aerospace & Defense:

Jet Engines- Commercial $ 651.8 31 % $ 445.3 25 %

Airframes- Commercial 334.1 16 % 199.8 11 %

Defense 196.6 10 % 158.1 9 %

Total Aerospace & Defense $ 1,182.5 57 % $ 803.2 45 %

Oil & Gas 238.8 12 % 228.3 13 %

Specialty Energy 150.9 7 % 131.7 7 %

Total Energy 389.7 19 % 360.0 20 %

Automotive 112.2 5 % 166.5 9 %

Construction/Mining 88.8 4 % 91.9 5 %

Medical 76.9 4 % 75.7 4 %

Electronics 70.4 3 % 101.0 6 %

Food Equipment & Appliances 42.4 2 % 96.7 5 %

Other 121.2 6 % 98.6 6 %

Total $ 2,084.1 100 % $ 1,793.6 100 %

For the second quarter 2023, international sales of $478 million, or 46% of total sales, increased from $391 million in the second quarter 2022.

ATI’s international sales are mostly to the aerospace, energy, electronics, automotive and medical markets.

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HRPF conversion service sales in the AA&S segment are excluded from this presentation.

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2023 2022 2023 2022

Nickel-based alloys and specialty alloys 52 % 52 % 52 % 51 %

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Total 100 % 100 % 100 % 100 %

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.

Segment EBITDA for the second quarter 2023 was $171.3 million, or 16.4% of sales, compared to segment EBITDA of $164.9 million, or 17.2% of sales, for the second quarter of 2022.

Segment EBITDA for the first six months of 2023 was $324.1 million, or 15.6% of sales, compared to segment EBITDA of $308.3 million, or 17.2% of sales, for the first six months 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,

Three months ended June 30, Six months ended June 30,

2023 2022 2023 2022

High Performance Materials & Components $ 527.1 $ 396.1 $ 998.2 $ 737.7

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Interest expense, net (21.3) (23.4) (41.2) (47.0)

Restructuring and other charges (1.2) (7.5)

Restructuring and other credits (charges) (9.2) 1.3 (10.4) (6.2)

Loss on asset sales and sales of businesses, net (0.6) (115.9) (0.6) (134.2)

Income before income taxes 76.5 40.1

Income (loss) before income taxes 82.8 (30.9) 159.3 9.2

Income tax provision 3.7 3.4 8.0 8.3

Net income 72.2 35.2

Net (loss) income 79.1 (34.3) 151.3 0.9

Net income attributable to noncontrolling interests 3.1 3.7 5.2 8.0

Net income attributable to ATI $ 70.1 $ 30.9

Net income (loss) attributable to ATI $ 76.0 $ (38.0) $ 146.1 $ (7.1)

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 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.

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.

At June 30, 2023, Managed Working Capital increased as a percentage of annualized total ATI sales to 39.0% compared to 30.1% at December 31, 2022.

The Managed Working Capital increase was impacted by increased inventory levels in the second quarter of 2023 as a result of additional melt capacity coming on line, increased production levels, and a strategic nickel purchase to ensure continuity of supply, which was funded by a $50 million draw on our ABL credit facility.

Days sales outstanding, which measures actual collection timing for accounts receivable, worsened by 2% as of June 30, 2023 compared to year end 2022.

Gross inventory turns decreased 12% as of June 30, 2023 compared to year end 2022.

The computations of Managed Working Capital at June 30, 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,

June 30, December 31,

(In millions) 2023 2022

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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.

Second quarter 2023 sales were $527.1 million, increasing 33% compared to the second quarter 2022, reflecting increasing commercial aerospace demand.

Sales to the commercial aerospace market increased 40%, reflecting a 38% 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:

Overall aerospace and defense market sales were 83% of total HPMC sales in the second quarter of 2023.

Three months ended Three months ended

Markets March 31, 2023 March 31, 2022

Markets June 30, 2023 June 30, 2022

Aerospace & Defense:

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Total $ 527.1 100 % $ 396.1 100 %

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,

International sales represented 58% of total segment sales for the second quarter 2023, compared to 55% 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 June 30, 2023 and 2022, is as follows:

Three months ended June 30,

Nickel-based alloys and specialty alloys 49 % 48 %

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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.

Segment EBITDA in the second quarter 2023 increased to $108.1 million, or 20.5% of total sales, compared to $60.3 million, or 15.2% of total sales, for the second 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.

Results in the second quarter 2022 included $5.6 million of benefits from AMJP program grants.

Sales for the first six months of 2023 were $998.2 million, increasing 35% compared to the first six months of 2022, reflecting increasing commercial aerospace demand.

Sales to the commercial aerospace market increased 51%, reflecting a 47% increase in commercial jet engines.

Sales to the energy markets decreased 30%, mainly due to lower oil and gas sales.

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, 2023 and 2022 is as follows:

Six months ended Six months ended

Markets June 30, 2023 June 30, 2022

Aerospace & Defense:

Jet Engines- Commercial $ 601.7 60 % $ 410.4 56 %

Airframes- Commercial 138.0 14 % 81.1 11 %

Defense 91.9 9 % 82.1 11 %

Total Aerospace & Defense 831.6 83 % 573.6 78 %

Oil & Gas 6.1 1 % 25.2 3 %

Specialty Energy 54.8 5 % 61.6 9 %

Total Energy 60.9 6 % 86.8 12 %

Medical 41.8 4 % 30.0 4 %

Construction/Mining 19.2 2 % 16.3 2 %

Other 44.7 5 % 31.0 4 %

Total $ 998.2 100 % $ 737.7 100 %

International sales represented 58% of total segment sales for the first six months of 2023.

Comparative information for the HPMC segment’s major product categories, based on their percentages of revenue for the six months ended June 30, 2023 and 2022, is as follows:

Six months ended June 30,

Nickel-based alloys and specialty alloys 47 % 48 %

Precision forgings, castings and components 33 % 35 %

Titanium and titanium-based alloys 19 % 17 %

Precision rolled strip products 1 % — %

Total 100 % 100 %

Segment EBITDA in the first six months of 2023 increased to $188.2 million, or 18.9% of total sales, compared to $128.4 million, or 17.4% of total sales, for the first six months of 2022.

Strength in the HPMC segment continues to be driven by content on next-generation commercial aerospace platforms.

Results in the first half of 2022 included $27.5 million of benefits from the AMJP program and employee retention credits.

HPMC results for the first half of 2023, which include the highest quarterly EBITDA margins for the second quarter of 2023 since prior to the COVID-19 pandemic, reflect improving operating leverage from higher production volumes as the aerospace and defense markets continue to grow.

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 benefits ATI, and we believe we are well positioned to capture this growth in the future.

We are investing in additional capacity to meet growing demand, including our recently announced expansion in Richland, Washington, so that we are well-positioned to capitalize on market opportunities.

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.

Second quarter 2023 sales were $518.9 million, decreasing 8% compared to the second quarter of 2022, primarily due to recessionary softness in general industrial end markets and lingering COVID impacts associated with our Asian precision rolled strip business.

Sales of commercial aerospace products increased by nearly 50% compared to the prior year period, due in part to a significant increase in commercial airframe demand for various flat-rolled product forms.

Three months ended Three months ended

Markets March 31, 2023 March 31, 2022

Markets June 30, 2023 June 30, 2022

Aerospace & Defense:

Jet Engines- Commercial $ 21.7 4 % $ 17.3 3 %

Airframes- Commercial 97.2 19 % 62.2 11 %

Defense 51.7 10 % 40.9 7 %

Total Aerospace & Defense 170.6 33 % 120.4 21 %

Oil & Gas 107.6 21 % 117.1 21 %

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Total Energy 145.9 28 % 160.7 29 %

Automotive 46.8 9 % 73.2 13 %

Construction/Mining 37.4 7 % 32.0 6 %

Electronics 35.3 7 % 48.7 8 %

Food Equipment & Appliances 20.9 4 % 62.7 11 %

Other 62.0 12 % 65.7 12 %

Total $ 518.9 100 % $ 563.4 100 %

International sales represented 33% of total segment sales for the second quarter 2023, compared to 31% in the prior year’s second quarter.

Comparative information regarding the AA&S segment’s major product categories, based on their percentages of revenue for the three months ended June 30, 2023 and 2022, are presented in the following table.

HRPF conversion service sales are excluded from this presentation.

Three months ended June 30,

Nickel-based alloys and specialty alloys 55 % 55 %

Precision rolled strip products 18 % 24 %

Zirconium and related alloys 16 % 15 %

Titanium and titanium-based alloys 11 % 6 %

Total 100 % 100 %

Segment EBITDA was $63.2 million, or 12.2% of sales, for the second quarter 2023, compared to segment EBITDA of $104.6 million, or 18.6% of sales, for the second quarter 2022.

Reduced deliveries of nickel based alloys and precision rolled strip products in the second quarter 2023 were only partially offset by increases in titanium plate deliveries.

Higher retirement benefit costs negatively impacted 2023 operating margins compared to 2022.

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 2023 were $1.09 billion, increasing 3% compared to the first six months of 2022.

Sales to the aerospace & defense markets increased 53%, with a 60% 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 20% higher than the prior year period, 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 six month periods ended June 30, 2023 and 2022 is shown below.

Six months ended Six months ended

Markets June 30, 2023 June 30, 2022

Aerospace & Defense:

3 unchanged sentences

Total Aerospace & Defense 350.9 33 % 229.6 22 %

Oil & Gas 232.7 21 % 203.1 19 %

Specialty Energy 96.1 9 % 70.1 7 %

Total Energy 328.8 30 % 273.2 26 %

Automotive 99.9 9 % 161.3 15 %

Electronics 33.9 6 % 51.1 10 %

Construction/Mining 69.6 6 % 75.6 7 %

Electronics 69.2 6 % 99.8 10 %

Food Equipment & Appliances 42.4 4 % 96.7 9 %

1 unchanged sentence

Total $ 1,085.9 100 % $ 1,055.9 100 %

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.

International sales represented 32% of total segment sales for the first six months of 2023.

Comparative information regarding the AA&S segment’s major product categories, based on their percentages of revenue for the six months ended June 30, 2023 and 2022, are presented in the following table.

HRPF conversion service sales are excluded from this presentation.

Three months ended March 31,

Six months ended June 30,

Nickel-based alloys and specialty alloys 57 % 54 %

3 unchanged sentences

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.

Segment EBITDA was $135.9 million, or 12.5% of sales, for the first six months of 2023, compared to segment EBITDA of $179.9 million, or 17.0% of sales, for the first six months of 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.

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.

With the AA&S business transformation and footprint consolidation nearly complete, we believe we are well positioned for continued future growth.

With our titanium melt shop in Albany, Oregon planning to be fully operational in the third quarter of 2023, we are well positioned to capitalize on the aerospace ramp.

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.

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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.

Corporate expenses for the second quarter of 2023 were $18.1 million, compared to $16.7 million for the second quarter 2022.

For the six months ended June 30, 2023, corporate expenses were $35.4 million, compared to $33.7 million for the six months ended June 30, 2022.

Closed operations and other expense for the second quarter 2023 was $3.4 million, compared to $5.1 million for the second quarter 2022.

For the six months ended June 30, 2023, closed operations and other expense was $6.2 million, compared to $6.5 million for the six months ended June 30, 2022.

These decreases reflect changes in foreign currency remeasurement impacts primarily related to ATI’s European Treasury operation partially offset by higher costs in 2023 associated with insurance matters at closed operations and increased retirement benefit expense.

The following table shows depreciation & amortization for the relevant periods by each business segment.

Three months ended March 31,

Depreciation expense in the second quarter and six months ended June 30, 2023 includes $0.8 million of accelerated depreciation on fixed assets for the closure of our Robinson, PA operations.

Three months ended June 30, Six months ended June 30,

2023 2022 2023 2022

High Performance Materials & Components $ 17.9 $ 16.9 $ 35.3 $ 34.8

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$ 35.9 $ 36.0 $ 71.0 $ 71.5

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.

Interest expense, net of interest income, in the second quarter 2023 was $21.3 million, compared to $23.4 million for the second quarter 2022.

On a year-to-date basis, net interest expense was $41.2 million for the first six months of 2023 compared to $47.0 million for the first six months of 2022.

Capitalized interest reduced interest expense by $3.3 million in the second quarter 2023 and $0.4 million in the second quarter 2022.

For the six months ended June 30, 2023 and 2022, capitalized interest was $6.7 million and $0.6 million, respectively.

Restructuring and other charges of $9.2 million for the second quarter ended June 30, 2023 include $2.7 million of severance-related restructuring charges for the involuntary reduction of approximately 40 employees across ATI’s domestic operations in conjunction with our continued transformation, as well as $4.5 million of start up costs and $2.0 million primarily for asset write-offs for the closure of our Robinson, PA operations, both of which are included within cost of sales on the consolidated statements of operations.

Restructuring and other charges of $10.4 million for the six months ended June 30, 2023 also include $1.2 million of additional start-up costs related to the Company’s titanium operations in Albany, OR, which are included within cost of sales on the consolidated statements of operations.

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.

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

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.

Cash payments associated with prior restructuring programs were $0.8 million in the first six months of 2023.

Of the $11.7 million of remaining reserves associated with these restructuring actions as of June 30, 2023, $7.2 million are expected to be paid within the next year.

Loss on asset sales and sales of businesses, net, for the second quarter and six months ended June 30, 2023 is related to a $0.6 million loss on the sale of the Company’s Northbrook, IL operations for which no proceeds were received but $0.3 million of transaction costs were paid and reported as an investing activity on the consolidated statement of cash flows.

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.

The provision for income taxes for the quarters ended March 31, 2023 and 2022 was $4.3 million and $4.9 million, respectively.

The provision for income taxes for the second quarter and six months ended June 30, 2023 was $3.7 million and $8.0 million, respectively.

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.

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.

The 2022 calculation excluded the results related to our Sheffield, UK operations, which was sold in the second quarter of 2022.

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.

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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.

We were in compliance with the fixed charge coverage ratio as of June 30, 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.

As of June 30, 2023, there were $50 million of outstanding borrowings under the revolving portion of the ABL facility, and $39.4 million was utilized to support the issuance of letters of credit.

At June 30, 2023, we had $267 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximat ely $500 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.

In the first quarter 2023, the Company made $50 million in voluntary cash contributions to its U.S.

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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.

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

the repurchase of an additional $75 million of ATI stock.

In the six months ended June 30, 2023 and 2022, we used $10.1 million and $89.9 million, respectively, to repurchase 0.2 million and 3.5 million shares, respectively, of our common stock under the $150 million program.

In addition, on April 28, 2023, our Board of Directors authorized 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.

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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.

Our Debt to Adjusted EBITDA Leverage Ratio in the second quarter of 2023 remained fairly comparable to year end 2022.

Our Net Debt to Adjusted EBITDA Leverage ratio worsened in the second 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.

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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

June 30, 2023 June 30, 2022 June 30, 2023 December 31, 2022

Net income (loss) attributable to ATI $ 76.0 $ (38.0) $ 284.1 $ 130.9

Net income attributable to noncontrolling interests 3.1 3.7 12.8 15.6

Net income 72.2 35.2 183.5 146.5

Net income (loss) 79.1 (34.3) 296.9 146.5

Interest expense 21.3 23.4 81.6 87.4

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Income tax provision 3.7 3.4 15.2 15.5

Restructuring and other charges 1.2 7.5 17.4 23.7

Restructuring and other charges (credits) 9.2 (1.3) 27.9 23.7

Joint venture restructuring credit — — (0.9) (0.9)

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Net Debt to Adjusted EBITDA 2.70 2.15

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.

For the six months ended June 30, 2023, cash used in operations was $217.1 million, primarily related to higher accounts receivable and inventory balances due to increased operating levels and input costs and a strategic nickel purchase in 2023 to ensure continuity of supply.

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.

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defined benefit pension plans and the payment of 2022 annual incentive compensation.

For the three months ended March

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.

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, 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.

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.

Cash used in investing activities was $100.8 million in the first six months of 2023, reflecting $103.3 million in capital expenditures primarily related to AA&S transformation projects and various HPMC growth projects.

For the six months ended June 30, 2022, cash used in investing activities was $55.7 million, reflecting $54.8 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.

Cash provided by financing activities was $1.0 million in the first six months of 2023 and included $50 million of borrowings under the Company’s ABL Credit Facility and $10.1 million of payments 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 six months ended June 30, 2022, cash used in financing activities was $135.6 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 June 30, 2023, cash and cash equivalents on hand totaled $267.1 million, a decrease of $316.9 million from year end 2022.

Cash and cash equivalents held by our foreign subsidiaries was $110.7 million at June 30, 2023, of which $70.5 million was held by the STAL joint venture.

Critical Accounting Policies

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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.

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.

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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.

At June 30, 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.

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 June 30, 2023.

The provision for income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method.

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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.

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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.

In addition, we have $70.4 million of valuation allowances on amounts recorded in other comprehensive loss as of June 30, 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.

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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.

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.

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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;

(a) material adverse changes in economic or industry conditions generally, including global supply and demand conditions and prices for our specialty materials and changes in international trade duties and other aspects of international trade policy;

(b) material adverse changes in the markets we serve;

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(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;

(h) the risks of business and economic disruption associated with extraordinary events beyond our control, such as war, terrorism, international conflicts, public health issues, such as epidemics or pandemics, natural disasters and climate-related events that may arise in the future;

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis