ATI INC. Overview
ATI is a global manufacturer of technically advanced specialty materials and complex components. Our largest markets are aerospace & defense, representing over 40% of total sales, led by products for jet engines. Additionally, we have a strong presence in the energy markets, including oil & gas, downstream processing, and specialty energy, as well as the medical and electronics markets. In aggregate, these markets represent nearly 75% of our 2022 revenue. ATI is a market leader in manufacturing differentiated products that require our materials science capabilities and unique process technologies, including our new product development competence. Our capabilities range from cast/wrought and powder alloy development to final production of highly engineered finished components, including those used in next-generation jet engines and 3D-printed aerospace products. First quarter 2022 sales increased 20% to$834.1 million , compared to sales of$692.5 million for the first quarter of 2021. Our gross profit for the first quarter of 2022 was$169.4 million , or 20.3% of sales, a$83.6 million , or 790 basis point, increase, compared to the first quarter 2021, as our key end-markets continue to show sustained recovery. Operating income of$77.0 million for the first quarter of 2022 more than doubled compared to the first quarter of 2021, at 9.2% of sales. Results for the first quarter 2022 include$28.7 million of benefits related toU.S. government-sponsored COVID-19 relief, including the Aviation Manufacturing Jobs Protection (AMJP) Program and employee retention credits. 22 -------------------------------------------------------------------------------- First quarter 2022 results include a$25.1 million partial loss on the pending sale of theSheffield, UK operations, primarily related to its long-lived assets, as required underU.S. GAAP. As previously announced onMarch 3, 2022 , ATI's Board of Directors approved the sale of this business, subject to customary closing conditions and regulatory approvals, which remain in process. We expect to recognize an additional loss of approximately$110 million when the sale process is completed, primarily relating to aUK defined benefit pension plan and cumulative foreign currency translation losses. The remaining assets and liabilities of this business are classified as held-for-sale as ofMarch 31, 2022 , and the loss is reported in loss (gain) on asset sales and sales of businesses, net. Loss (gain) on asset sales and sales of businesses, net also included a$6.8 million gain from the sale of assets from ourPico Rivera, CA operations as part of the strategy to exit standard stainless products. Other nonoperating income (expense) includes an$8.6 million charge for a litigation reserve. Our pretax income was$40.1 million in the first quarter of 2022, compared to$3.1 million in the prior year period. Income tax expense was$4.9 million and$5.5 million in the first quarters of 2022 and 2021, respectively, primarily related to our Asian precision rolled strip business. ATI continues to maintain a valuation allowance on itsU.S. deferred tax assets. Net income attributable to ATI was$30.9 million , or$0.23 per share, in the first quarter of 2022, compared to a net loss attributable to ATI of$7.9 million , or ($0.06 ) per share, for the first quarter of 2021. Adjusted EBITDA was$125.0 million , or 15.0% of sales, for the first quarter 2022, and$62.6 million , or 9.0% 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 liquidity. Furthermore, analogous measures are used by industry analysts to evaluate operating performance. EBITDA and Adjusted EBITDA are non-GAAP measures and are not intended to represent, and should not be considered more meaningful than, or as alternatives to, a measure of operating performance as determined in accordance withU.S. generally accepted accounting principles (U.S. GAAP). We categorically define EBITDA as income from continuing operations before interest and income taxes, plus depreciation and amortization, goodwill impairment charges and debt extinguishment charges. We categorically define Adjusted EBITDA as EBITDA excluding significant non-recurring charges or credits, restructuring charges/credits, strike related costs, long-lived asset impairments and other postretirement/pension curtailment and settlement gains and losses. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management's discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and capital expenditures. See the Liquidity and Financial Condition section of Management's Discussion and Analysis for a reconciliation of amounts reported underU.S. GAAP to these non-GAAP measures. Our first quarter 2022 results reflect the ongoing recovery across many of our key end markets, most notably jet engine materials and components, compared to the prior year period. Results in the first quarter 2022 include$28.7 million of benefits from management actions to access available grants and other forms of COVID-19 relief available from previously-enactedU.S. legislation. These benefits included$11.2 million of a$22.4 million grant under the AMJP for our operations in the HPMC segment, which helps fund ongoing wage and benefit costs for a six-month period throughMay 2022 , and$17.5 million in employee retention credits applicable across all of ATI's domestic operations, largely for preserving jobs throughout the global pandemic-related economic downturn. Additionally, our strategic transformation efforts within the AA&S segment to eliminate production of lower-margin standard stainless sheet products in the SRP business is nearly complete. Compared to the first quarter 2021, sales increased 42% in the HPMC business segment and 9% in the AA&S business segment. In aggregate, ATI's aerospace & defense markets sales increased 44% to$367 million in the first quarter 2022, compared to$254 million the first quarter 2021. In HPMC, first quarter 2022 sales to the commercial jet engine market increased 77% and energy market sales increased 54%. 23
-------------------------------------------------------------------------------- Comparative information for our overall revenues (in millions) by end market and their respective percentages of total revenues for the three month periods endedMarch 31, 2022 and 2021 were as follows: Three months ended Three months ended Markets March 31, 2022 March 31, 2021 Aerospace & Defense: Jet Engines- Commercial $ 196.6 24 % $ 106.1 15 % Airframes- Commercial 93.7 11 % 58.2 9 % Defense 76.5 9 % 89.9 13 % Total Aerospace & Defense $ 366.8 44 % $ 254.2 37 % Energy: Oil & Gas 103.1 12 % 82.5 12 % Specialty Energy 56.6 7 % 66.6 10 % Total Energy 159.7 19 % 149.1 22 % Automotive 91.0 11 % 91.5 13 % Construction/Mining 52.0 6 % 42.5 6 % Electronics 51.6 6 % 55.6 8 % Medical 36.2 5 % 29.0 4 % Food Equipment & Appliances 34.0 4 % 35.4 5 % Other 42.8 5 % 35.2 5 % Total $ 834.1 100 % $ 692.5 100 % For the first quarter 2022, international sales of$356 million , or 43% of total sales, increased from$293 million , or 42% of total sales, in the first quarter 2021. ATI's international sales are mostly to the aerospace, energy, electronics, automotive and medical markets. Comparative information for our major products based on their percentages of revenues are shown below. We have nearly completed our previously-announced exit from standard stainless products, and therefore no longer present these sales as a separate product category. Prior period information includes these sales within the nickel-based alloys and specialty alloys category. HRPF conversion service sales in the AA&S segment are excluded from this presentation. Three months ended
2021 2020
Nickel-based alloys and specialty alloys 50 % 43 %
Precision rolled strip products 17 % 20 %
Precision forgings, castings and components 15 % 15 %
Titanium and titanium-based alloys 10 % 12 %
Zirconium and related alloys 8 % 10 %
Total 100 % 100 %
24-------------------------------------------------------------------------------- Segment EBITDA for the first quarter 2022 was$143.4 million , or 17.2% of sales, compared to segment EBITDA of$74.3 million , or 10.7% of sales, for the first quarter of 2021. Our measure of segment EBITDA, which we use to analyze the performance and results of our business segments, categorically excludes income taxes, depreciation and amortization, corporate expenses, net interest expense, closed operations and other income (expense), charges for goodwill and asset impairments, restructuring and other credits/charges, strike related costs, debt extinguishment charges and gains or losses on asset sales and sales of businesses. Results on our management basis of reporting were as follows (in millions): Three months ended March 31, 2022 2021 Sales: High Performance Materials & Components$ 341.6 $ 240.9 Advanced Alloys & Solutions 492.5 451.6 Total external sales$ 834.1 $ 692.5 EBITDA: High Performance Materials & Components$ 68.1 $ 24.6 % of Sales 19.9 % 10.2 % Advanced Alloys & Solutions 75.3 49.7 % of Sales 15.3 % 11.0 % Total segment EBITDA$ 143.4 $ 74.3 % of Sales 17.2 % 10.7 % Corporate expenses (17.0) (12.2) Closed operations and other income (expense) (1.4) 0.5 ATI Adjusted EBITDA 125.0 62.6 Depreciation & amortization (35.5) (36.1) Interest expense, net (23.6) (23.4) Restructuring and other credits (charges) (7.5) - Gain (loss) on asset sales and sales of businesses, net (18.3) - Income before income taxes 40.1 3.1 Income tax provision 4.9 5.5 Net income (loss) 35.2 (2.4) Less: Net income attributable to noncontrolling interests 4.3 5.5 Net income (loss) attributable to ATI$ 30.9 $ (7.9) As part of managing the performance of our business, we focus on controllingManaged 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 assessManaged Working Capital performance as a percentage of the prior three months annualized sales to evaluate the asset intensity of our business. AtMarch 31, 2022 ,Managed Working Capital increased as a percentage of annualized total ATI sales to 41.3% compared to 37.5% atDecember 31, 2021 , primarily due to higher accounts receivable and inventory balances. Days sales outstanding, which measures actual collection timing for accounts receivable, worsened by 10% as ofMarch 31, 2022 compared to year end 2021, primarily due to increased foreign sales that generally have a longer collection cycle. Gross inventory turns improved by 9% as ofMarch 31, 2022 compared to year end 2021, as an improvement in the pace of inventory flow across our operations helped offset higher overall inventory levels due to both rising raw material values and management actions to secure adequate supplies of key raw materials in response to supply chain uncertainties. 25 -------------------------------------------------------------------------------- The computations ofManaged Working Capital atMarch 31, 2022 andDecember 31, 2021 , reconciled to the financial statement line items as computed underU.S. GAAP, were as follows. TheMarch 31, 2022 amounts included managed working capital balances held for sale for ourSheffield, UK operations. March 31, December 31, (In millions) 2022 2021 Accounts receivable$ 558.0 $ 470.0 Short-term contract assets 50.8 53.9 Inventory 1,189.0 1,046.3 Accounts payable (396.1) (375.5) Short-term contract liabilities (133.3)
(116.2)
Subtotal 1,268.4
1,078.5
Allowance for doubtful accounts 4.0
3.8
Inventory valuation reserves 63.0
65.4
Net managed working capital held for sale 41.9
-
Managed working capital$ 1,377.3 $
1,147.7
Annualized prior 3 months sales$ 3,336.4 $
3,061.5
Managed working capital as a % of annualized sales 41.3 %
37.5 % Business Segment Results
High Performance Materials & Components Segment
First quarter 2022 sales were$341.6 million , increasing 42% compared to the first quarter 2021, reflecting higher sales across nearly all end markets, led by commercial jet engines. Sales to the commercial aerospace market increased 77%, reflecting an 87% increase in commercial jet engines, while defense sales declined 28% based on the timing of orders for the next phase of several defense programs. Sales to the energy markets increased 54% with growth in materials for both oil & gas and specialty energy applications. Comparative information for our HPMC segment revenues (in millions) by market and their respective percentages of the segment's overall revenues for the three month periods endedMarch 31, 2022 and 2021 is as follows: Three months ended Three months ended Markets March 31, 2022 March 31, 2021 Aerospace & Defense: Jet Engines- Commercial $ 179.0 52 % $ 95.9 40 % Airframes- Commercial 37.2 11 % 26.5 11 % Defense 41.4 12 % 57.4 24 % Total Aerospace & Defense 257.6 75 % 179.8 75 % Energy: Oil & Gas 17.1 5 % 8.3 3 % Specialty Energy 30.1 9 % 22.2 9 % Total Energy 47.2 14 % 30.5 12 % Medical 13.2 4 % 11.2 5 % Construction/Mining 8.4 3 % 5.1 2 % Other 15.2 4 % 14.3 6 % Total $ 341.6 100 % $ 240.9 100 % 26
-------------------------------------------------------------------------------- International sales represented 54% of total segment sales for the first quarter 2022, compared to 47% for the prior year period. Comparative information for the HPMC segment's major product categories, based on their percentages of revenue for the three months endedMarch 31, 2022 and 2021, is as follows: Three months ended
2022 2021
Nickel-based alloys and specialty alloys 48
% 36 %
Precision forgings, castings and components 36
% 43 %
Titanium and titanium-based alloys 16 % 21 % Total 100 % 100 % Segment EBITDA in the first quarter 2022 increased to$68.1 million , or 19.9% of total sales, compared to$24.6 million , or 10.2% of total sales, for the first quarter 2021. 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. Rapidly rising raw material costs outpaced index pricing mechanisms for mill products in the first quarter of 2022, resulting in margin compression compared to the prior year period. HPMC first quarter results reflect an ongoing recovery with improvements in many of our key end markets, most notably jet engine materials and components and specialty energy applications, as well as the continued benefits from our aggressive 2020 cost cutting actions and recent share gains. Looking ahead to the remainder of 2022, we anticipate sequential revenue growth primarily driven by the ongoing commercial aerospace rebound. Worldwide economic recovery is increasing the demand for travel and efficient energy, which benefits ATI, and we are well positioned to capture this growth in the future. Commercial aerospace continues to expand across our product portfolio, with stronger demand for both jet engine mill products and forgings, bolstered by our recent share gains. Demand for our commercial airframe long-form products in the HPMC segment is projected to increase over the longer-term due in part to the reordering of the commercial aerospace supply chain in response to theRussia /Ukraine conflict. While availability of raw material inputs for our melting processes remains adequate during the ongoingRussia /Ukraine conflict, changes in raw material prices may cause variability in profit margins based on the timing of index pricing mechanisms.
Advanced Alloys & Solutions Segment
First quarter 2022 sales were$492.5 million , increasing 9% compared to the first quarter of 2021. Sales to the aerospace & defense markets increased nearly 50% due to a significant increase in commercial airframe demand for various flat-rolled product forms resulting from recent share gains. Sales to the energy markets were 5% below the prior year quarter due to lower demand for specialty energy applications. Increased sales prices, resulting from higher base prices and elevated raw material pass-through mechanisms, also drove revenue increases compared to the prior year period and help to offset inflationary impacts. Comparative information for our AA&S segment revenues (in millions) by market and their respective percentages of the segment's overall revenues for the three month periods endedMarch 31, 2022 and 2021 is as follows: Three months ended Three months ended Markets March 31, 2022 March 31, 2021 Energy: Oil & Gas $ 86.0 18 % $ 74.2 16 % Specialty Energy 26.5 5 % 44.4 10 % Total Energy 112.5 23 % 118.6 26 % Aerospace & Defense: Jet Engines- Commercial 17.6 4 % 10.2 3 % Airframes- Commercial 56.5 11 % 31.7 7 % Defense 35.1 7 % 32.5 7 % Total Aerospace & Defense 109.2 22 % 74.4 17 % Automotive 88.1 18 % 89.5 20 % Electronics 51.1 10 % 55.3 12 % Construction/Mining 43.6 9 % 37.4 8 % Food Equipment & Appliances 34.0 7 % 35.4 8 % Other 54.0 11 % 41.0 9 % Total $ 492.5 100 % $ 451.6 100 % 27
-------------------------------------------------------------------------------- International sales represented 35% of total segment sales for the first quarter 2022, compared to 40% in the prior year's first quarter. Comparative information for the AA&S segment's major product categories, based on their percentages of revenue for the three months endedMarch 31, 2022 and 2021, are presented in the following table. We have nearly completed our previously-announced exit from standard stainless products, and therefore no longer present these sales as a separate product category. Prior period information includes these sales within the nickel-based alloys and specialty alloys category. HRPF conversion service sales are excluded from this presentation. Three months ended March
31,
2022 2021
Nickel-based alloys and specialty alloys 52 % 47 % Precision rolled strip products 29 % 31 % Zirconium and related alloys 14 % 15 % Titanium and titanium-based alloys 5 % 7 % Total 100 % 100 % Segment EBITDA was$75.3 million , or 15.3% of sales, for the first quarter 2022, compared to segment EBITDA of$49.7 million , or 11.0% of sales, for the first quarter 2021. Compared to the prior year period, results reflect a stronger product mix of nickel-alloy mill products as our exit of standard stainless products nears completion. Sales of exotic materials from our Specialty Alloys & Components business also drove AA&S segment margin growth. First quarter 2022 segment EBITDA includes$6.8 million of employee retention credits, partially offset by labor and other costs related to ramp readiness. We expect AA&S sales to increase throughout the year based on strong end-market demand. Demand for our commercial airframe flat-form products in the AA&S segment is projected to increase over the longer-term due in part to the reordering of the commercial aerospace supply chain in response to theRussia /Ukraine conflict. While availability of raw materials for our melting processes remains adequate during the ongoingRussia /Ukraine conflict, changes in raw material prices may cause variability in profit margins based on the timing of index pricing mechanisms.
Corporate Items
Corporate expenses for the first quarter of 2022 were
Closed operations and other expense for the first quarter 2022 was$1.4 million , compared to income of$0.5 million for the first quarter 2021. Closed operations and other expense in the first quarter of 2022 is largely due to costs at closed facilities, including insurance costs and real estate and other facility costs, partially offset by changes in foreign currency remeasurement impacts primarily related to ATI's European Treasury operation.
The following is depreciation & amortization by each business segment:
Three months ended March 31,
2022 2021
High Performance Materials & Components $ 17.9 $ 19.6
Advanced Alloys & Solutions 16.2 15.5
Other 1.4 1.0
$ 35.5 $ 36.1
Interest expense, net of interest income, in the first quarter 2022 was $23.6
million , consistent with the first quarter 2021. Capitalized interest reduced
interest expense by $0.2 million in the first quarter 2022 and $1.3 million in
the first quarter 2021.
Restructuring and other charges for the quarter ended March 31, 2022 were $7.5
million , as an $8.6 million charge for a litigation reserve relating to our
indefinitely idled Rowley, UT titanium sponge production facility was partially
offset by a $1.1 million restructuring credit for a reduction in
severance-related reserves related to approximately 20 employees based on
changes in planned operating rates and revised workforce reduction estimates.
These items were excluded from segment EBITDA. Cash payments associated with
prior restructuring programs were $1.2 million in the first quarter of 2022. The
28
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majority of the
Loss on asset sales and sales of businesses, net, for the first quarter of 2022 was$18.3 million , including a$25.1 million partial loss on the sale of the Company'sSheffield, UK operations and a$6.8 million gain from the sale of assets from ourPico Rivera, CA operations. These items are excluded from segment EBITDA.
Income Taxes
The provision for income taxes for the first quarters endedMarch 31, 2022 and 2021 was$4.9 million and$5.5 million , respectively. Tax expense in both periods is mainly attributable to the Company's foreign operations. The tax expense for the first quarter of 2022 was based on an estimated annual effective tax rate calculation which included foreign, non-valuation allowance, operations combined with theU.S. jurisdiction. The first quarter of 2021 utilized an annual effective tax rate calculation for its foreign, non-valuation allowance operations, combined with actual year-to-date tax expense related to itsU.S. jurisdiction. Both calculations excluded the results related to the Company'sSheffield, UK operations. In the second quarter 2020, the Company entered into a three-year cumulative loss withinthe United States , limiting the Company's ability to utilize future projections when analyzing the need for a valuation allowance, therefore limiting sources of income as part of the analysis. ATI continues to maintain valuation allowances on itsU.S. federal and state deferred tax assets, as well as for certain foreign jurisdictions.
Liquidity and Financial Condition
We have an Asset Based Lending (ABL) Credit Facility, which is collateralized by the accounts receivable and inventory of our domestic operations. The ABL facility, which matures inSeptember 2024 , includes a$500 million revolving credit facility, a letter of credit sub-facility of up to$200 million , and a$200 million term loan (Term Loan). In addition, we have the right to request an increase of up to$200 million in the maximum amount available under the revolving credit facility for the duration of the ABL. The ABL facility contains a financial covenant whereby we must maintain a fixed charge coverage ratio of not less than 1.00:1.00 after an event of default has occurred and is continuing or if the undrawn availability under the ABL revolving credit portion of the facility is less than the greater of (i)$87.5 million , calculated as 12.5% of the then applicable maximum advance amount under the revolving credit portion of the ABL and the outstanding Term Loan balance, or (ii)$62.5 million . We did not meet this fixed charge coverage ratio atMarch 31, 2022 . As a result, we are unable to access 12.5%, or$87.5 million , of the ABL facility until we meet the ratio. Additionally, we must demonstrate minimum liquidity, as calculated in accordance with the terms of the ABL facility, during the 90-day period immediately preceding the stated maturity date of the 2022 Convertible Notes. As ofMarch 31, 2022 , there were no outstanding borrowings under the revolving portion of the ABL facility, and$40.8 million was utilized to support the issuance of letters of credit. AtMarch 31, 2022 , we had$317 million of cash and cash equivalents, and available additional liquidity under the ABL facility of approximately$370 million . We have outstanding$84.2 million in aggregate principal amount of our 4.75% Convertible Senior Notes due 2022 (2022 Convertible Notes), which mature onJuly 1, 2022 . The Company does not have the right to redeem the 2022 Convertible Notes prior to their stated maturity date. Holders of the 2022 Convertible Notes have the option to convert their notes into shares of ATI's common stock, at any time prior to the close of business on the business day immediately preceding the stated maturity date, at a conversion rate equal to$14.45 per share, which is subject to adjustment in certain events. Other than receiving cash in lieu of fractional shares, holders do not have the right to receive cash instead of common stock upon settlement of a conversion. OnFebruary 2, 2022 , we announced that our Board of Directors authorized the repurchase of up to$150 million of ATI stock. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. Open market repurchases will be structured to occur within the pricing and volume requirements of SEC Rule 10b-18. The stock repurchase program does not obligate the Company to repurchase any specific number of shares and it may be modified, suspended, or terminated at any time by the Board of Directors without prior notice. We repurchased 3.5 million shares of ATI stock for$89.9 million , or an average of$25.57 per share, in the first quarter of 2022 under this program. Among other impacts, the Company's repurchases are expected to help mitigate dilution from the expected conversion to ATI stock of the 2022 Convertible Notes. We believe that internally generated funds, current cash on hand and available borrowings under the ABL facility will be adequate to meet our liquidity needs, including currently projected required contributions to our pension plans. We do not expect to pay any significantU.S. federal or state income taxes in the next several years due to net operating loss carryforwards. If we needed to obtain additional financing using the credit markets, the cost and the terms and conditions of such borrowings may be influenced by our credit rating. In addition, we regularly review our capital structure, various financing alternatives and 29 -------------------------------------------------------------------------------- conditions in the debt and equity markets in order to opportunistically enhance our capital structure. In connection therewith, we may seek to refinance or retire existing indebtedness, incur new or additional indebtedness or issue equity or equity-linked securities, in each case, depending on market and other conditions. We have no off-balance sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K. In managing our overall capital structure, we focus on the ratio of net debt to Adjusted EBITDA, which we use as a measure of our ability to repay our incurred debt. We define net debt as the total principal balance of our outstanding indebtedness excluding deferred financing costs, net of cash, at the balance sheet date. See the explanations above for our definitions of Adjusted EBITDA and EBITDA, which are non-GAAP measures and are not intended to represent, and should not be considered more meaningful than, or as alternatives to, a measure of operating performance as determined in accordance withU.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 first quarter of 2022 compared to year-end 2021, primarily as a result of higher earnings. Our Net Debt to Adjusted EBITDA Leverage ratio worsened in the first quarter of 2022 compared to year-end 2021, despite these higher earnings, due to the decreased cash balance. The reconciliations of our Adjusted EBITDA Leverage Ratios to the balance sheet and income statement amounts as reported underU.S. GAAP are as follows: Latest 12 months Fiscal year Three months ended ended ended December 31, March 31, 2022 March 31, 2021 March 31, 2022 2021 Net income (loss) attributable to ATI$ 30.9 $
(7.9) $ 0.6
4.3 5.5 20.8 22.0
Net income (loss) 35.2 (2.4) 21.4 (16.2)
Interest expense 23.6 23.4 97.1 96.9
Depreciation and amortization 35.5 36.1 143.3 143.9
Income tax provision 4.9 5.5 26.2 26.8
Restructuring and other charges
(credits) 7.5 - (3.0) (10.5)
Strike related costs - - 63.2 63.2
Retirement benefit settlement gain - - (64.9) (64.9)
Debt extinguishment charge - - 65.5 65.5
Loss (gain) on asset sales and sale
of businesses, net 18.3 - 4.5 (13.8)
Adjusted EBITDA $ 125.0 $ 62.6 $ 353.3 $ 290.9
Debt $ 1,824.1 $ 1,842.9
Add: Debt issuance costs 19.9 20.8
Total debt 1,844.0 1,863.7
Less: Cash (316.7) (687.7)
Net debt $ 1,527.3 $ 1,176.0
Total Debt to Adjusted EBITDA 5.22 6.41
Net Debt to Adjusted EBITDA 4.32 4.04
Cash Flow
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.
Increased operating levels, higher sales including longer collection cycles,
increased raw material values and strategic inventory purchase actions to ensure
adequate raw material availability all contributed to these operating cash flow
uses. Other significant 2022 operating cash flow items included the payment of
2021 annual incentive compensation. For the three months ended March 31, 2021 ,
cash used in operations was $68.1 million , primarily due to higher accounts
receivable and inventory balances related to increased business activity. Other
significant 2021 operating cash flow items included $17.5 million in
contributions to a U.S. defined benefit pension plan and the payment of 2020
annual incentive compensation, partially offset by receipt of an advance payment
as part of a long-term supply agreement.
Cash used in investing activities was $24.2 million in the first three months of
2022, reflecting $26.0 million in capital expenditures primarily related to AA&S
transformation projects and various HPMC growth projects. We expect to fund our
capital expenditures with cash on hand and cash flow generated from our
operations and, if needed, by using a portion of the ABL facility.
30
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Cash used in financing activities was $129.6 million in the first quarter of
2022 and consisted primarily of $89.9 million for the repurchase of 3.5 million
shares of ATI stock under the $150 million repurchase program authorized by our
Board of Directors on February 2, 2022 , and a $16.0 million dividend payment to
the 40% noncontrolling interest in our PRS joint venture in China .
At March 31, 2022 , cash and cash equivalents on hand totaled $316.7 million , a
decrease of $371.0 million from year end 2021. Cash and cash equivalents held by
our foreign subsidiaries was $74.0 million at March 31, 2022 , of which $45.6
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. OurSheffield, UK operations are held for sale atMarch 31, 2022 , 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 partial loss on sale of this business, which remains subject toUK government approval under the National Security and Investment Act 2021. This long-lived asset impairment charge was determined using the held for sale framework and represents Level 1 information in the fair value hierarchy.Goodwill is reviewed annually in the fourth quarter of each year for impairment or more frequently if impairment indicators arise. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. AtMarch 31, 2022 , we had$227.2 million of goodwill on our consolidated balance sheet. All goodwill relates to reporting units in the HPMC segment. Management concluded that, other than theSheffield, UK business which is held for sale, none of ATI's reporting units or long-lived assets experienced any triggering event that would have required an interim impairment analysis atMarch 31, 2022 .
Income Taxes
The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law. On a quarterly basis, we evaluate the realizability of our deferred tax assets. The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. In situations where a three-year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized. Since the second quarter of 2020, our results reflected a three year cumulative loss fromU.S. operations. As a result, we established deferred tax asset valuation allowances in the second quarter of 2020 on ourU.S. Federal and state deferred tax assets. In 2021 and 2022, ATI continues to maintain income tax valuation allowances on itsU.S. Federal and state deferred tax assets. In addition, we have$25.1 million of valuation allowances on amounts recorded in other comprehensive loss as ofMarch 31, 2022 . 31 -------------------------------------------------------------------------------- While we remain in a cumulative loss condition, our ability to evaluate the realizability of deferred tax assets is generally limited to the ability to offset timing differences on taxable income associated with deferred tax liabilities. Therefore, a change in estimate of deferred tax asset valuation allowances for federal, state, or foreign jurisdictions during this cumulative loss condition period will primarily be affected by changes in estimates of the time periods that deferred tax assets and liabilities will be realized, or on a limited basis to tax planning strategies that may result in a change in the amount of taxable income realized.
Retirement Benefits
In accordance with accounting standards, we determine the discount rate used to value pension plan liabilities as of the last day of each year. The discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we receive input from our actuaries regarding the rate of return on high quality, fixed income investments with maturities matched to the expected future retirement benefit payments. The estimated effect at the year-end 2021 valuation date of an increase in the discount rate by 0.50% would decrease pension liabilities by approximately$145 million . The effect on pension liabilities for changes to the discount rate, the difference between expected and actual plan asset returns, and the net effect of other changes in actuarial assumptions and experience are deferred and amortized over future periods in accordance with accounting standards. For ERISA (Employee Retirement Income Security Act of 1974, as amended) funding purposes, discount rates used to measure pension liabilities forU.S. qualified defined benefit plans are calculated on a different basis using anIRS -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 byIRS -determined mortality assumptions, which may differ from those used under accounting standards. We have certain collective bargaining agreements that include participation in a multiemployer pension plan. Under current law, an employer that withdraws or partially withdraws from a multiemployer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan's underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. A subsidiary of the Company participates in the Steelworkers Western Independent Shops Pension Plan (WISPP) for union-represented employees of our primary titanium operations inAlbany, OR , which is funded on an hours-worked basis. As ofDecember 31, 2020 , manufacturing operations at this facility were indefinitely idled, and a limited number of employees that participate in the WISPP remain active in maintenance and other functions. It is reasonably possible that a significant reduction or the elimination of hours-worked contributions due to changes in operating rates at this facility could result in a withdrawal liability assessment in a future period. A complete withdrawal liability is estimated to be approximately$35 million on an undiscounted basis. If this complete withdrawal liability was incurred, ATI estimates that payments of the obligation would be required on a straight-line basis over a 20-year period.
Other Critical Accounting Policies
A summary of other significant accounting policies is discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The preparation of the financial statements in accordance withU.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.
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--------------------------------------------------------------------------------Forward-Looking and Other Statements
From time to time, we have made and may continue to make "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this report relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as "anticipates," "believes," "estimates," "expects," "would," "should," "will," "will likely result," "forecast," "outlook," "projects," and similar expressions. Forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (a) material adverse changes in economic or industry conditions generally, including global supply and demand conditions and prices for our specialty metals and changes in international trade duties and other aspects of international trade policy; (b) material adverse changes in the markets we serve; (c) our inability to achieve the level of cost savings, productivity improvements, synergies, growth or other benefits anticipated by management, from strategic investments and the integration of acquired businesses; (d) volatility in the price and availability of the raw materials that are critical to the manufacture of our products; (e) declines in the value of our defined benefit pension plan assets or unfavorable changes in laws or regulations that govern pension plan funding; (f) labor disputes or work stoppages; (g) equipment outages; (h) the risks of business and economic disruption related to the currently ongoing COVID-19 pandemic and other health epidemics or outbreaks that may arise; and (i) other risk factors summarized in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and in other reports filed with theSecurities and Exchange Commission . We assume no duty to update our forward-looking statements.
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