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 61% of sale s for the year-to-date period ended June 30, 2024, led by products for jet engines and airframes. Additionally, we have a strong presence in the energy markets, including specialty energy and conventional energy, as well as the medical and electronics markets. In aggregate, these markets represented 85 % of our year-to-date period ended June 30, 2024 sales. 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 latest generation jet engines and 3D-printed aerospace products. ATI follows a 4-4-5 or 5-4-4 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into two four-week months and one five-week month, and its fiscal year ends on the Sunday closest to December 31. Unless otherwise stated, references to years and quarters in this Quarterly Report on Form 10-Q relate to fiscal years and quarters, rather than calendar years and quarters. Second quarter 2024 sales increased 4.7% to $1.10 billion, compared to $1.05 billion of sales for the second quarter 2023, as increases in sales to the aerospace & defense, medical, automotive, and specialty energy markets were offset by continued softness in certain industrial markets, particularly conventional energy. Total aerospace & defense sales were 62% of total sales for the second quarter 2024 compared to 58% for the second quarter 2023. Gross profit for the second quarter of 2024 was $227.4 million, or 20.8% of sales, an increase compared to $209.1 million, or 20.0% of sales for the second quarter 2023. Second quarter 2024 gross profit includes a benefit of $8.6 million related to the recognition of previously deferred employee retention tax credits. The Company previously deferred recognition of a portion of these tax credits pending the completion of any potential audit or examination, or the expiration of the related statute of limitations. The benefit of $8.6 million recognized in the second quarter 2024 was due to the expiration of the statute of limitations for a portion of those credits. The Company recognized $3.5 million of the benefit in the HPMC segment and $5.1 million in the AA&S segment. Second quarter 2024 and 2023 gross profit also includes $1.8 million and $4.5 million, respectively, of start-up related costs, and $5.5 million and $2.8 million, respectively, of charges primarily related to inventory write-downs and asset write-offs, all of which are excluded from segment EBITDA. The charges in 2024 were associated with the ongoing restructuring of the Company’s European operations and the 2023 charges related to the closure of our Robinson, PA operations. Restructuring charges were a credit for the second quarter of 2024 of $1.9 million, primarily related to lowered severance-related reserves based on changes in planned operating rates and revised workforce reduction estimates, compared to charges of $2.7 million for the second quarter of 2023 for severance-related restructuring charges for involuntary reductions across ATI’s domestic operations. Second quarter 2024 results include a $2.3 million gain on the sale of assets for our idled Houston, PA facility and second quarter 2023 results include a $0.6 million loss on the sale of our Northbrook, IL operations, both of which are reported in gain/loss on asset sales and sales of businesses, net. In addition, interest expense increased to $28.4 million in the second quarter of 2024 compared to $21.3 million in the second quarter of 2023 as a result of the issuance in August 2023 of $425 million aggregate principal amount of 7.25% Senior Notes due 2030 (2030 Notes). Our pre-tax income was $110.9 million in the second quarter of 2024, compared to $97.2 million in the prior year period. Our effective tax rate was 22.8%, resulting in an income tax provision of $25.3 million for the quarter ended June 30, 2024. Our effective tax rate was 3.8%, resulting in an income tax provision of $3.7 million for the quarter ended July 2, 2023. The effective tax rate for the quarter ended June 30, 2024 includes discrete tax benefits of $1.6 million, which includes the recognition of a stranded deferred tax valuation allowance in accumulated other comprehensive loss due to the maturity of our interest rate swap. The effective tax rate for the second quarter of 2023 was impacted by the net valuation allowance position in the U.S. and our foreign earnings. Net income attributable to ATI was $81.9 million, or $0.58 per share, in the second quarter of 2024, compared to $90.4 million, or $0.62 per share, for the second quarter of 2023. Adjusted EBITDA was $182.6 million, or 16.7% of sales, for the second quarter 2024, and $164.2 million, or 15.7% of sales, for the prior year second quarter. EBITDA and Adjusted EBITDA are measures utilized by ATI to analyze the performance and results of our business. Further, we believe these measures are useful to investors and industry analysts because these measures are commonly used to analyze companies on the basis of operating performance, leverage and liquidity. 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 define EBITDA as income from continuing operations before interest and 26 income taxes, plus depreciation and amortization, goodwill impairment charges and debt extinguishment charges. We define Adjusted EBITDA as EBITDA excluding significant non-recurring charges or credits, restructuring and other charges/credits, strike related costs, long-lived asset impairments, pension remeasurement gains and losses, and other postretirement/pension curtailment and settlement gains and losses. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and capital expenditures. See the Liquidity and Financial Condition section of Management’s Discussion and Analysis for a reconciliation of amounts reported under U.S. GAAP to these non-GAAP measures. Compared to the second quarter 2023, sales increased 7% in the HPMC business segment and increased 3% in the AA&S business segment in the second quarter 2024. In aggregate, ATI’s aerospace & defense markets sales incre ased 13% to $684 million, or 62% of sales, i n the second quarter 2024, compared to $607 million, or 58% of sales th e second quarter 2023, reflecting increases in sales of commercial aerospace airframe and jet engine products as well as defense products. In the HPMC segment, second quarter 2024 sales of aerospace & defense products increased 9% and sales to the medical market increased 36% c ompared to the prior year period. The increase in the AA&S segment reflects a 21% increase in sales of aerospace & defense products, a 43% increase in automotive sales, and a 63% increase in medical market sales, partially offset by declines in conventional energy sales. Results for the year-to-date period ended June 30, 2024 were sales of $2.14 billion and income before tax of $196.2 million, compared to sales of $2.08 billion and income before tax of $188.1 million for the comparable 2023 period. Our results for the first half of 2024 reflect increased sales to the aerospace & defense, medical and electronics markets partially offset by softness in the energy market. Our gross profit was $424.8 million, or 19.9% of sales, for the year-to-date period ended June 30, 2024, a $22.5 million or 5.6% increase compared to 2023, despite outages and weather impacts in the first quarter of 2024. Year-to-date 2024 gross profit includes a benefit of $8.6 million related to the recognition of previously deferred employee retention tax credits due to the expiration of the statute of limitations. The Company recognized $3.5 million of the benefit in the HPMC segment and $5.1 million in the AA&S segment. Year-to-date 2024 and 2023 gross profit also includes $4.7 million and $5.7 million, respectively, of start-up related costs, and $5.5 million and $2.8 million, respectively, of charges primarily related to inventory write-downs and asset write-offs, all of which are excluded from segment EBITDA. The charges in 2024 were associated with the ongoing restructuring of the Company’s European operations and the charges for 2023 related to the closure of our Robinson, PA operations. Restructuring charges were a credit for the year-to-date period ended June 30, 2024 of $1.7 million, primarily related to lowered severance-related reserves based on changes in planned operating rates and revised workforce reduction estimates, compared to charges of $2.7 million for the year-to-date period ended July 2, 2023 related to severance for the involuntary reductions across ATI’s domestic operations. Year-to-date 2024 results include a $2.3 million gain on the sale of assets for our idled Houston, PA facility and year-to-date 2023 results include a $0.6 million loss on the sale of our Northbrook, IL operations, both of which are reported in gain/loss on asset sales and sales of businesses, net. In addition, interest expense increased to $55.0 million in the year-to-date period ended June 30, 2024 compared to $41.2 million in the year-to-date period ended July 2, 2023 as a result of the issuance in August 2023 of the 2030 Notes. Our pre-tax income was $196.2 million in the year-to-date period ended June 30, 2024, compared to $188.1 million in the prior year period. Our effective tax rate was 21.5%, resulting in an income tax provision of $42.2 million for the year-to-date period ended June 30, 2024. Our effective tax rate was 4.3%, resulting in an income tax provision of $8.0 million for the year-to-date period ended July 2, 2023. The effective tax rate for the year-to-date period ended June 30, 2024 includes discrete tax benefits of $4.7 million inclusive of $3.2 million for share-based compensation as well as the impact from the recognition of a stranded deferred tax valuation allowance in accumulated other comprehensive loss due to the maturity of our interest rate swap. The effective tax rate for the year-to-date period ended July 2, 2023 was impacted by the net valuation allowance position in the U.S. and our foreign earnings. Net income attributable to ATI was $148.0 million, or $1.04 per share, in the year-to-date period ended June 30, 2024, compared to a net income attributable to ATI of $174.9 million, or $1.20 per share, for the prior year period. Compared to the first half of 2023, sales increased 9% in the HPMC business segment and decreased 4% in the AA&S business segment. In aggregate, ATI’s aerospace & defense markets sales increased 10% in the first half of 2024 compared to 2023, reflecting increases in sales of commercial aerospace airframe and jet engine products as well as defense products. Sales to the aerospace & defense markets in the HPMC segment were 11% higher than the first half of 2023, reflecting increases in commercial aerospace airframe and jet engine products as well as defense products. The decline in the AA&S segment reflects continued softness in certain general industrial end markets, particularly conventional energy, which were partially offset by an 8% increase in aerospace & defense sales and a 47% increase in medical market sales. 27 Comparative information regarding our overall revenues (in millions) by end market and their respective percentages of total revenues for the quarters and year-to-date periods ended June 30, 2024 and July 2, 2023 is shown below. Quarter ended Quarter ended Markets June 30, 2024 July 2, 2023 Aerospace & Defense: Jet Engines- Commercial $ 352.8 32 % $ 340.9 32 % Airframes- Commercial 210.8 19 % 164.2 16 % Defense 120.3 11 % 101.7 10 % Total Aerospace & Defense $ 683.9 62 % $ 606.8 58 % Energy: Conventional Energy 66.1 6 % 111.3 11 % Specialty Energy 76.6 7 % 68.2 6 % Total Energy 142.7 13 % 179.5 17 % Automotive 70.8 7 % 52.8 5 % Medical 61.7 6 % 41.9 4 % Construction/Mining 44.2 4 % 48.4 5 % Electronics 40.8 4 % 36.0 3 % Food Equipment & Appliances 16.2 1 % 20.9 2 % Other 35.0 3 % 59.7 6 % Total $ 1,095.3 100 % $ 1,046.0 100 % Year-to-date period ended Year-to-date period ended Markets June 30, 2024 July 2, 2023 Aerospace & Defense: Jet Engines- Commercial $ 664.0 31 % $ 651.8 31 % Airframes- Commercial 400.9 19 % 334.1 16 % Defense 234.7 11 % 196.6 10 % Total Aerospace & Defense $ 1,299.6 61 % $ 1,182.5 57 % Energy: Conventional Energy 168.6 8 % 238.8 12 % Specialty Energy 132.7 6 % 150.9 7 % Total Energy 301.3 14 % 389.7 19 % Automotive 126.8 6 % 112.2 5 % Medical 120.8 6 % 76.9 4 % Electronics 93.7 4 % 70.4 3 % Construction/Mining 71.4 3 % 88.8 4 % Food Equipment & Appliances 28.1 1 % 42.4 2 % Other 96.5 5 % 121.2 6 % Total $ 2,138.2 100 % $ 2,084.1 100 % For the second quarter 2024, international sales decreased to $457 million, or 42% of total sales, from $478 million, or 46% of total sales, in the second quarter 2023. ATI’s international sales are mostly to the aerospace, energy, electronics, automotive and medical markets. 28 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. Quarter ended Year-to-date period ended June 30, 2024 July 2, 2023 June 30, 2024 July 2, 2023 Nickel-based alloys and specialty alloys 44 % 52 % 44 % 52 % Titanium and titanium-based alloys 20 % 14 % 19 % 14 % Precision forgings, castings and components 19 % 17 % 19 % 16 % Precision rolled strip products 9 % 9 % 9 % 10 % Zirconium and related alloys 8 % 8 % 9 % 8 % Total 100 % 100 % 100 % 100 % Segment EBITDA for the second quarter 2024 was $201.3 million, or 18.4% of sales, compared to segment EBITDA of $183.8 million, or 17.6% of sales, for the second quarter of 2023. Segment EBITDA for the first half of 2024 was $370.7 million, or 17.3% of sales, compared to segment EBITDA of $349.1 million, or 16.8% of sales, for the first half of 2023. Our measure of segment EBITDA, which we use to analyze the performance and results of our business segments, 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, pension remeasurement gains/losses, 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): Quarter ended Year-to-date period ended June 30, 2024 July 2, 2023 June 30, 2024 July 2, 2023 Sales: High Performance Materials & Components $ 562.0 $ 527.1 $ 1,091.9 $ 998.2 Advanced Alloys & Solutions 533.3 518.9 1,046.3 1,085.9 Total external sales $ 1,095.3 $ 1,046.0 $ 2,138.2 $ 2,084.1 EBITDA: High Performance Materials & Components $ 113.8 $ 109.7 $ 211.4 $ 191.3 % of Sales 20.2 % 20.8 % 19.4 % 19.2 % Advanced Alloys & Solutions 87.5 74.1 159.3 157.8 % of Sales 16.4 % 14.3 % 15.2 % 14.5 % Total segment EBITDA $ 201.3 $ 183.8 $ 370.7 $ 349.1 % of Sales 18.4 % 17.6 % 17.3 % 16.8 % Corporate expenses (19.4) (17.7) (36.5) (34.6) Closed operations and other income (expense) 0.7 (1.9) (0.6) (3.2) ATI Adjusted EBITDA 182.6 164.2 333.6 311.3 Depreciation & amortization (37.9) (35.9) (73.9) (71.0) Interest expense, net (28.4) (21.3) (55.0) (41.2) Restructuring and other charges (5.4) (9.2) (8.5) (10.4) Loss on asset sales and sales of businesses, net — (0.6) — (0.6) Income before income taxes 110.9 97.2 196.2 188.1 Income tax provision 25.3 3.7 42.2 8.0 Net income 85.6 93.5 154.0 180.1 Less: Net income attributable to noncontrolling interests 3.7 3.1 6.0 5.2 Net income attributable to ATI $ 81.9 $ 90.4 $ 148.0 $ 174.9 As part of managing the performance of our business, we focus on 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. 29 We employ several strategies to actively manage our Managed Working Capital, seeking to effectively balance the need to maintain appropriate levels of Managed Working Capital to support our growth and operations, while deploying our cash efficiently. Our strategies to actively manage our Managed Working Capital include, but are not limited to, taking advantage of favorable customer and supplier payment terms, participating in customer and supplier financing programs, managing the timing of purchases of raw materials, and leveling manufacturing process throughput and shipping to limit periodic increases in Managed Working Capital. We assess Managed Working Capital performance as a percentage of the prior three months annualized sales to evaluate the asset intensity of our business. At June 30, 2024, Managed Working Capital increased as a percentage of annualized sales to 35.5% compared to 31.1% at December 31, 2023. The increase in Managed Working Capital as a percentage of annualized sales was due in part to seasonal and strategic inventory builds and timing of shipments in the second quarter of 2024. Days sales outstanding, which measures actual collection timing for accounts receivable, worsened by 13% as of June 30, 2024 compared to year end 2023. Gross inventory turns, which measures how many times we turn over our inventory relative to cost of sales in a year, worsened by 11% as of June 30, 2024 compared to year end 2023. We continue efforts to focus on operational improvements to positively impact the inventory intensity of our business and alleviate the required investment of Managed Working Capital in our growing business, however, the first half of the fiscal year historically sees an increase in Managed Working Capital to support operations in the second half of the fiscal year. The computations of Managed Working Capital at June 30, 2024 and December 31, 2023, reconciled to the financial statement line items as computed under U.S. GAAP, were as follows. The June 30, 2024 amounts include management working capital balances that are classified as held for sale. June 30, December 31, (In millions) 2024 2023 Accounts receivable $ 719.8 $ 625.0 Short-term contract assets 87.6 59.1 Inventory 1,317.5 1,247.5 Accounts payable (524.5) (524.8) Short-term contract liabilities (160.9) (163.6) Subtotal 1,439.5 1,243.2 Allowance for doubtful accounts 2.7 3.2 Inventory valuation reserves 71.6 75.5 Net managed working capital held for sale 39.8 — Managed working capital $ 1,553.6 $ 1,321.9 Annualized prior 3 months sales $ 4,381.1 $ 4,255.8 Managed working capital as a % of annualized sales 35.5 % 31.1 % Business Segment Results High Performance Materials & Components Segment Second quarter 2024 sales were $562.0 million, an increase of 7% compared to the second quarter 2023, primarily due to continued strong demand in aerospace & defense markets, with sales increasing 9%, as well as increased medical market sales, which increased 36% compared to the second quarter of 2023. The increase in aerospace & defense sales was primarily due to higher commercial airframe sales of 40% and commercial jet engine sales of 4%. Overall aerospace & defense market sales were 85% of total HPMC sales in the second quarter of 2024. 30 Comparative information for our HPMC segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the quarters ended June 30, 2024 and July 2, 2023 is as follows: Quarter ended Quarter ended Markets June 30, 2024 July 2, 2023 Aerospace & Defense: Jet Engines- Commercial $ 331.8 59 % $ 319.2 61 % Airframes- Commercial 93.7 17 % 67.0 13 % Defense 52.0 9 % 50.0 9 % Total Aerospace & Defense 477.5 85 % 436.2 83 % Medical 33.0 6 % 24.3 5 % Energy: Conventional Energy 2.4 — % 3.7 1 % Specialty Energy 22.5 4 % 29.9 5 % Total Energy 24.9 4 % 33.6 6 % Construction/Mining 8.3 2 % 11.0 2 % Other 18.3 3 % 22.0 4 % Total $ 562.0 100 % $ 527.1 100 % International sales represented 52% of total segment sales for the second quarter 2024, compared to 58% in the prior year period. Comparative information for the HPMC segment’s major product categories, based on their percentages of revenue for the quarters ended June 30, 2024 and July 2, 2023, is as follows: Quarter ended June 30, 2024 July 2, 2023 Nickel-based alloys and specialty alloys 39 % 49 % Precision forgings, castings and components 37 % 33 % Titanium and titanium-based alloys 24 % 17 % Precision rolled strip products — % 1 % Total 100 % 100 % Segment EBITDA in the second quarter 2024 was $113.8 million, or 20.2% of total sales, compared to $109.7 million, or 20.8% of total sales, for the second quarter 2023. Results in the second quarter of 2024 included $3.5 million of benefits related to the recognition of previously deferred employee retention tax credits for government enacted relief packages in response to the COVID-19 pandemic that had statute of limitations that expired, which were mostly offset by higher incentive compensation costs. The margin decline quarter over quarter was primarily due to an unfavorable sales mix. Sales for the year-to-date period ended June 30, 2024 were $1.09 billion, an increase of 9% compared to the year-to-date period ended July 2, 2023, primarily due to continued strong demand in aerospace & defense markets as well as increased medical market sales, which were up 65% compared to the 2023 comparable period. Sales to the commercial aerospace market increased 9%, as airframe sales increased 30% and commercial jet engine sales increased 5%, and sales to the defense market increased 22%. Sales to the energy markets decreased 24%, mainly due to lower specialty energy sales. 31 Comparative information for our HPMC segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the year-to-date periods ended June 30, 2024 and July 2, 2023 is as follows: Year-to-date period ended Year-to-date period ended Markets June 30, 2024 July 2, 2023 Aerospace & Defense: Jet Engines- Commercial $ 628.7 58 % $ 601.7 60 % Airframes- Commercial 179.4 16 % 138.0 14 % Defense 112.0 10 % 91.9 9 % Total Aerospace & Defense 920.1 84 % 831.6 83 % Medical 68.9 6 % 41.8 4 % Energy: Conventional Energy 5.9 1 % 6.1 1 % Specialty Energy 40.7 4 % 54.8 5 % Total Energy 46.6 5 % 60.9 6 % Construction/Mining 15.0 1 % 19.2 2 % Other 41.3 4 % 44.7 5 % Total $ 1,091.9 100 % $ 998.2 100 % International sales represented 53% of total segment sales for the first half of 2024. Comparative information for the HPMC segment’s major product categories, based on their percentages of revenue for the year-to-date periods ended June 30, 2024 and July 2, 2023 , is as follows: Year-to-date period ended June 30, 2024 July 2, 2023 Nickel-based alloys and specialty alloys 39 % 47 % Precision forgings, castings and components 36 % 33 % Titanium and titanium-based alloys 24 % 19 % Precision rolled strip products 1 % 1 % Total 100 % 100 % Segment EBITDA in the first half of 2024 increased to $211.4 million, or 19.4% of total sales, compared to $191.3 million, or 19.2% of total sales, for the first half of 2023. HPMC segment results continue to be driven by content on next-generation commercial aerospace platforms. Results in the first half of 2024 included $3.5 million of benefits related to the recognition of previously deferred employee retention tax credits for government enacted relief packages in response to the COVID-19 pandemic that had statute of limitations that expired, which were mostly offset by higher incentive compensation costs. Despite fourth quarter 2023 melt-related challenges that impacted first half 2024 sales, HPMC results for the first half of 2024 reflected year-over-year improved operating leverage as we continue to experience increasing demand from the aerospace & defense markets. To meet increased demand and capitalize on market opportunities, we continue to invest, including hiring new employees within the segment in 2024 as well as the continuation of our titanium melt expansion in Richland, Washington. Furthermore, our commitment to continuous improvement is resulting in adjustments to our work-flow processes to de-bottleneck our critical operations. We believe that these investments, strong backlog and our LTAs with aerospace market OEMs for our specialty materials, including powders, parts and components, position the HPMC segment for profitable growth for the next several years. Although the aerospace market OEMs have experienced some near-term challenges and delays in their estimated production ramps, we believe the backlog of commercial aircraft, increasing requirements for maintenance, repair, and operations, and the current OEM production forecasts support our growth expectations in this end market. Advanced Alloys & Solutions Segment Second quarter 2024 sales were $533.3 million, an increase of 3% compared to the second quarter of 2023, primarily due a 21% increase in aerospace & defense products, 41% increase in specialty energy, and 63% increase in medical market sales, partially offset by continued softness in certain general industrial end markets, particularly conventional energy. Further, sales to the automotive market increased 43% compared to the prior year quarter. 32 Comparative information regarding our AA&S segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the quarters ended June 30, 2024 and July 2, 2023 is shown below. Quarter ended Quarter ended Markets June 30, 2024 July 2, 2023 Aerospace & Defense: Jet Engines- Commercial $ 21.0 4 % $ 21.7 4 % Airframes- Commercial 117.1 22 % 97.2 19 % Defense 68.3 13 % 51.7 10 % Total Aerospace & Defense 206.4 39 % 170.6 33 % Energy: Conventional Energy 63.7 12 % 107.6 21 % Specialty Energy 54.1 10 % 38.3 7 % Total Energy 117.8 22 % 145.9 28 % Automotive 67.0 13 % 46.8 9 % Electronics 38.8 7 % 35.3 7 % Construction/Mining 35.9 7 % 37.4 7 % Medical 28.7 5 % 17.6 3 % Food Equipment & Appliances 16.2 3 % 20.9 4 % Other 22.5 4 % 44.4 9 % Total $ 533.3 100 % $ 518.9 100 % International sales represented 31% of total segment sales for the second quarter of 2024, compared to 33% 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 quarters ended June 30, 2024 and July 2, 2023, are presented in the following table. HRPF conversion service sales are excluded from this presentation. Quarter ended June 30, 2024 July 2, 2023 Nickel-based alloys and specialty alloys 49 % 55 % Zirconium and related alloys 18 % 16 % Precision rolled strip products 18 % 18 % Titanium and titanium-based alloys 15 % 11 % Total 100 % 100 % Segment EBITDA was $87.5 million, or 16.4% of sales, for the second quarter 2024, compared to segment EBITDA of $74.1 million, or 14.3% of sales, for the second quarter 2023. The margin increase compared to the prior year was primarily due to a favorable sales mix as growth in titanium mill products and exotic alloys offset weaker demand for nickel-based alloys. Results in the second quarter of 2024 included $5.1 million of benefits related to the recognition of previously deferred employee retention tax credits for government enacted relief packages in response to the COVID-19 pandemic that had statute of limitations that expired, the majority of which were offset by higher incentive compensation costs. Sales for the first half of 2024 were $1.05 billion, a decrease of 4% compared to the first half of 2023, as continued softness in certain general industrial end markets, especially conventional energy, was partially offset by an 8% increase in aerospace & defense products, 31% increase in electronics sales, and 47% increase in medical market sales. Further, sales to the automotive market increased 18% compared to prior year. 33 Comparative information regarding our AA&S segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the year-to-date periods ended June 30, 2024 and July 2, 2023 is shown below. Year-to-date period ended Year-to-date period ended Markets June 30, 2024 July 2, 2023 Aerospace & Defense: Jet Engines- Commercial $ 35.3 3 % $ 50.1 5 % Airframes- Commercial 221.5 21 % 196.1 18 % Defense 122.7 12 % 104.7 10 % Total Aerospace & Defense 379.5 36 % 350.9 33 % Energy: Conventional Energy 162.7 16 % 232.7 21 % Specialty Energy 92.0 9 % 96.1 9 % Total Energy 254.7 25 % 328.8 30 % Automotive 118.0 11 % 99.9 9 % Electronics 90.7 9 % 69.2 6 % Construction/Mining 56.4 5 % 69.6 6 % Medical 51.9 5 % 35.1 3 % Food Equipment & Appliances 28.1 3 % 42.4 4 % Other 67.0 6 % 90.0 9 % Total $ 1,046.3 100 % $ 1,085.9 100 % International sales represented 33% of total segment sales for the first half of 2024. Comparative information regarding the AA&S segment’s major product categories, based on their percentages of revenue for the year-to-date periods ended June 30, 2024 and July 2, 2023, are presented in the following table. HRPF conversion service sales are excluded from this presentation. Year-to-date period ended June 30, 2024 July 2, 2023 Nickel-based alloys and specialty alloys 50 % 57 % Zirconium and related alloys 19 % 15 % Precision rolled strip products 18 % 18 % Titanium and titanium-based alloys 13 % 10 % Total 100 % 100 % Segment EBITDA was $159.3 million, or 15.2% of sales, for the first half of 2024, compared to segment EBITDA of $157.8 million, or 14.5% of sales, for the first half of 2023. The margin increase compared to the prior year was primarily due to a favorable sales mix as growth in titanium mill products and exotic alloys offset weaker demand for nickel-based alloys. Results in the first half of 2024 included $5.1 million of benefits related to the recognition of previously deferred employee retention tax credits for government enacted relief packages in response to the COVID-19 pandemic that had statute of limitations that expired, the majority of which were offset by higher incentive compensation costs. We continue to expect margin expansion within this segment through 2024 with improved sales mix and improving operating performance. Additionally, early signs of improving industrial demand would benefit overall operating leverage. We have increased capacity at our titanium melt shop in Albany, Oregon in the first half of fiscal year 2024, and expect to reach full production capacity at that facility in the second half of fiscal year 2024. While availability of raw materials for our melting processes remains adequate, changes in raw material prices may cause variability in profit margins based on the timing of index pricing mechanisms. 34 Corporate Items Corporate expenses for the second quarter of 2024 were $19.4 million, compared to $17.7 million for the second quarter 2023. For the year-to-date period ended June 30, 2024, corporate expenses were $36.5 million, compared to $34.6 million for the year-to-date period ended July 2, 2023. The current year increases reflect higher incentive compensation costs compared to the prior year periods. Closed operations and other income for the second quarter 2024 was $0.7 million, compared to expense of $1.9 million for the second quarter 2023. For the year-to-date period ended June 30, 2024, closed operations and other expense was $0.6 million, compared to $3.2 million for the year-to-date period ended July 2, 2023. Closed operations and other income (expense) for the quarter and year-to-date period ended June 30, 2024 includes a $2.3 million gain on the sale of assets for our idled Houston, PA facility included within gain on asset sales and sales of businesses, net, on the consolidated statement of operations, for which $3.5 million of proceeds were received and reported as an investing activity on the consolidated statement of cash flows. The following table shows depreciation & amortization for the relevant periods by each business segment. Depreciation expense in the second quarter and year-to-date period ended July 2, 2023 includes $0.8 million of accelerated depreciation on fixed assets for the closure of our Robinson, PA operations. Quarter ended Year-to-date period ended June 30, 2024 July 2, 2023 June 30, 2024 July 2, 2023 High Performance Materials & Components $ 17.9 $ 17.9 $ 34.2 $ 35.3 Advanced Alloys & Solutions 18.3 16.2 36.3 32.3 Other 1.7 1.8 3.4 3.4 $ 37.9 $ 35.9 $ 73.9 $ 71.0 Interest expense, net of interest income, in the second quarter 2024 increased to $28.4 million, compared to $21.3 million for the second quarter 2023. Interest expense, net of interest income, for the year-to-date period ended June 30, 2024 was $55.0 million, compared to $41.2 million for the year-to-date period ended July 2, 2023. These increases reflect the issuance of the 2030 Notes during the third quarter 2023. Capitalized interest reduced interest expense by $1.9 million in the second quarter 2024 and $3.3 million in the second quarter 2023. For the year-to-date periods ended June 30, 2024 and July 2, 2023, capitalized interest was $5.9 million and $6.7 million, respectively. Restructuring and other charges of $5.4 million for the second quarter of 2024 include $5.5 million of inventory write-downs related to our ongoing European restructuring and $1.8 million of start-up costs, both of which are included within cost of sales on the consolidated statements of operations. These charges were partially offset by credits of $1.9 million primarily for lowered severance-related reserves based on changes in planned operating rates and revised workforce reduction estimates. Restructuring and other charges of $8.5 million for the year-to-date period ended June 30, 2024 include $5.5 million of inventory write-downs related to our ongoing European restructuring and $4.7 million of start-up costs, both of which are included within cost of sales on the consolidated statements of operations. These charges were partially offset by credits of $1.7 million primarily for lowered severance-related reserves based on changes in planned operating rates and revised workforce reduction estimates. Restructuring and other charges of $9.2 million for the second quarter of 2023 include $2.7 million of severance-related restructuring charges 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 year-to-date period ended July 2, 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. These restructuring and other charges were excluded from segment EBITDA. Cash payments associated with prior restructuring programs were $4.1 million in the first half of 2024. Of the $9.4 million of remaining reserves associated with these restructuring actions as of June 30, 2024, all are expected to be paid within the next year. Loss on asset sales and sales of businesses, net, for the second quarter and year-to-date period ended July 2, 2023 is related to a $0.6 million loss on the sale of the Company’s Northbrook, IL operations. 35 Income Taxes For the quarter and year-to-date period ended June 30, 2024, our effective tax rate was 22.8% and 21.5%, respectively, resulting in an income tax provision of $25.3 million and $42.2 million, respectively. For the quarter and year-to-date period ended July 2, 2023, our effective tax rate was 3.8% and 4.3%, respectively, resulting in an income tax provision of $3.7 million and $8.0 million, respectively. The effective tax rate for the quarter ended June 30, 2024 includes discrete tax benefits of $1.6 million, which includes the recognition of a stranded deferred tax valuation allowance in accumulated other comprehensive loss that was associated with our interest rate swap due to its maturity. Discrete tax benefits for the year-to-date period ended June 30, 2024 were $4.7 million, which also includes $3.2 million for share-based compensation. The effective tax rates for the quarter and year-to-date period ended July 2, 2023 were impacted by the net valuation allowance position in the U.S. and our foreign earnings. 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 June 30, 2024. 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 June 30, 2024, there were no outstanding borrowings under the revolving portion of the ABL facility, and $31.7 million was utilized to support the issuance of letters of credit. At June 30, 2024, we had $426 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximately $556 million. We have no significant debt maturities until the second quarter 2025. Periodically, our Board of Directors authorizes the repurchase of ATI common stock (the “Share Repurchase Program”), the most recent of which was $150 million in November 2023. Repurchases under these programs are 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. In the year-to-date period ended June 30, 2024, ATI used $150.0 million to repurchase 3.4 million shares of its common stock under the Share Repurchase Program. At June 30, 2024, we have utilized the full amount currently authorized under the Share Repurchase Program. In the year-to-date period ended July 2, 2023, ATI used $10.1 million to repurchase 0.2 million shares of its common stock under the Share Repurchase Program. We believe that internally generated funds, current cash on hand and available borrowings under the ABL facility will be adequate to meet our liquidity needs. Based on current actuarial assumptions, we are not required to make any contributions to our pension plan during year 2024. Also, we do not expect to pay any significant U.S. federal or state income taxes in year 2024 due to net operating loss and tax attribute carryovers. 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 36 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 improved in the second quarter of 2024 compared to year end 2023, resulting from higher earnings, while our Net Debt to Adjusted EBITDA Leverage ratio worsened in the second quarter of 2024 compared to year end 2023, largely a 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: Quarter ended Trailing 12-month period ended Year ended June 30, 2024 July 2, 2023 June 30, 2024 December 31, 2023 Net income attributable to ATI $ 81.9 $ 90.4 $ 383.9 $ 410.8 Net income attributable to noncontrolling interests 3.7 3.1 13.4 12.6 Net income 85.6 93.5 397.3 423.4 Interest expense 28.4 21.3 106.6 92.8 Depreciation and amortization 37.9 35.9 149.0 146.1 Income tax provision (benefit) 25.3 3.7 (94.0) (128.2) Pension remeasurement loss — — 26.8 26.8 Pension settlement loss — — 41.7 41.7 Restructuring and other charges 5.4 9.2 29.5 31.4 Loss on asset sales and sale of businesses, net — 0.6 — 0.6 Adjusted EBITDA $ 182.6 $ 164.2 $ 656.9 $ 634.6 Debt $ 2,170.8 $ 2,179.6 Add: Debt issuance costs 17.4 19.6 Total debt 2,188.2 2,199.2 Less: Cash (425.6) (743.9) Net debt $ 1,762.6 $ 1,455.3 Total Debt to Adjusted EBITDA 3.33 3.47 Net Debt to Adjusted EBITDA 2.68 2.29 Cash Flow Cash provided by operations was $2.3 million in the year-to-date period ended June 30, 2024, compared to cash used in operations of $217.1 million in the year-to-date period ended July 2, 2023. Both periods reflect higher accounts receivable and higher inventory balances due to increased operating levels, but these conditions impacted 2024 to a much lesser extent than 2023. 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 allow for the required flexibility to meet our strategic objectives. Other significant first half 2024 operating cash flow items included payment of 2023 annual incentive compensation. Other significant first half 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. Cash used in investing activities was $117.1 million in the year-to-date period ended June 30, 2024, reflecting $126.0 million in capital expenditures primarily related to various growth projects to support the aerospace & defense and aero-like markets. Proceeds from disposals of property, plant and equipment in the year-to-date period ended June 30, 2024 of $5.9 million largely relate to $3.5 million of proceeds received for the sale of assets for our idled Houston, PA facility. For the year-to-date period ended July 2, 2023, cash used in investing activities was $100.8 million, reflecting $103.3 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. 37 Cash used in financing activities was $193.9 million in the year-to-date period ended June 30, 2024, which included $150.0 million to repurchase 3.4 million shares of ATI stock under our Share Repurchase Program authorized by our Board of Directors. For the year-to-date period ended July 2, 2023, cash provided by financing activities was $1.0 million, 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. At June 30, 2024, cash and cash equivalents on hand totaled $425.6 million, a decrease of $318.3 million from year end 2023. Cash and cash equivalents held by our foreign subsidiaries, excluding the $9.6 million of cash held for sale, was $154.8 million at June 30, 2024, of which $93.9 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. Goodwill is reviewed annually in the fourth quarter of each year for impairment or more frequently if impairment indicators arise. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. At June 30, 2024, 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 June 30, 2024. 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 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. 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 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 immediately recognized in earnings through net periodic pension benefit cost within nonoperating retirement benefit expense on the consolidated statements of operations when pension plans are remeasured annually in the fourth quarter or on an interim basis as triggering events require remeasurement. This immediate recognition is in accordance with the accounting standards. 38 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. 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, 2023. The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for derivatives, retirement plans, income taxes, environmental and other contingencies, as well as asset impairment, inventory valuation and collectability of accounts receivable. We use historical and other information that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements. Pending Accounting Pronouncements See Note 1 of the Notes to Consolidated Financial Statements for information on new and pending accounting pronouncements. Forward-Looking and Other Statements From time to time, we have made and may continue to make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this report relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. Forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (a) material adverse changes in economic or industry conditions generally, including global supply and demand conditions and prices for 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; (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 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, 2023, and in other reports filed with the Securities and Exchange Commission. We assume no duty to update our forward-looking statements.