ATI(US:ATI)2022-08-04 18:57PART I Financial Statements Presents ATI Inc.'s unaudited consolidated financial statements, including Balance Sheets, Statements of Operations, Cash Flows, and accompanying notes Consolidated Balance Sheets ATI's total assets decreased to $4.23 billion as of June 30, 2022, driven by reduced cash, while equity increased to $893.9 million | Balance Sheet Items (In millions) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $2,311.7 | $2,306.7 | | Cash and cash equivalents | $274.0 | $687.7 | | Inventories, net | $1,270.9 | $1,046.3 | | Total Assets | $4,229.4 | $4,285.2 | | Total Current Liabilities | $799.9 | $856.4 | | Long-term debt | $1,703.3 | $1,711.6 | | Total Liabilities | $3,335.5 | $3,452.5 | | Total Equity | $893.9 | $832.7 | Consolidated Statements of Operations Q2 2022 sales increased 55.7% to $959.5 million, but a $115.9 million loss on asset sales led to a $38.0 million net loss | Operating Results (In millions, except EPS) | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Sales | $959.5 | $616.2 | $1,793.6 | $1,308.7 | | Gross Profit | $175.3 | $42.7 | $344.7 | $128.5 | | Operating Income (Loss) | $(11.6) | $(11.3) | $65.4 | $20.5 | | Net Loss Attributable to ATI | $(38.0) | $(49.2) | $(7.1) | $(57.1) | | Diluted Net Loss per Share | $(0.31) | $(0.39) | $(0.06) | $(0.45) | Consolidated Statements of Cash Flows Cash used in operating activities significantly increased to $222.4 million for the six months ended June 30, 2022, resulting in a $413.7 million decrease in cash | Cash Flow Summary (In millions) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Cash used in operating activities | $(222.4) | $(102.6) | | Cash used in investing activities | $(55.7) | $(58.8) | | Cash used in financing activities | $(135.6) | $(12.0) | | Decrease in cash and cash equivalents | $(413.7) | $(173.4) | | Cash and cash equivalents at end of period | $274.0 | $472.5 | Notes to Consolidated Financial Statements Detailed notes explain revenue by segment, the $141.0 million loss from the Sheffield divestiture, joint venture benefits, debt conversions, and share repurchases - Total revenue for Q2 2022 was $959.5 million, with the HPMC segment contributing $396.1 million and the AA&S segment contributing $563.4 million. Aerospace & Defense remains the largest market, accounting for $436.4 million in sales25 - The company's order backlog increased to $2.6 billion at June 30, 2022, up from $1.6 billion at June 30, 202131 - A total loss of $141.0 million was recognized on the sale of the Sheffield, UK operations, which included a $55.6 million loss related to the UK defined benefit pension plan and $20.0 million of cumulative translation adjustment losses41 - The A&T Stainless joint venture recognized approximately $19.7 million in income from a Section 232 tariff refund settlement, of which ATI's share was $9.9 million47 - During Q2 2022, $82.5 million of the 2022 Convertible Senior Notes were converted into 5.7 million shares of ATI common stock64 - In the first six months of 2022, ATI repurchased 3.5 million shares of its common stock for $89.9 million under its authorized repurchase program103 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q2 2022 sales growth driven by market recovery, segment performance, liquidity, and critical accounting policies including asset impairment and deferred tax assets Overview Q2 2022 sales increased 56% to $959.5 million with an 18.3% gross margin, despite a $115.9 million loss on the Sheffield divestiture | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Sales | $959.5M | $616.2M | | Gross Profit | $175.3M | $42.7M | | Gross Margin | 18.3% | 6.9% | | Net Loss Attributable to ATI | $(38.0)M | $(49.2)M | | Adjusted EBITDA | $143.1M | $53.7M | - Q2 2022 results include a $115.9 million loss on the sale of the Sheffield, UK operations, while Q2 2021 results included $40.3 million of costs related to a labor strike122123 Business Segment Results Both HPMC and AA&S segments achieved strong Q2 2022 growth, with HPMC sales up 32% and AA&S sales up 79%, driven by market recovery and strategic benefits | Segment Performance (Q2 2022 vs Q2 2021) | Sales | % Change | EBITDA | EBITDA Margin | | :--- | :--- | :--- | :--- | :--- | | HPMC | $396.1M | +32% | $60.3M | 15.2% | | AA&S | $563.4M | +79% | $104.6M | 18.6% | - HPMC's growth was led by a 90% increase in commercial jet engine sales, with aerospace and defense markets comprising 80% of the segment's total sales140 - AA&S performance was boosted by a stronger product mix following the exit from standard stainless products, improved operating performance, and a $9.9 million benefit from the A&T Stainless joint venture's settlement of Section 232 tariff claims151 Liquidity and Financial Condition ATI maintains strong liquidity with $274 million cash and $456 million ABL availability, improving its Net Debt to Adjusted EBITDA ratio to 3.34x - Total liquidity includes $274 million of cash and cash equivalents and approximately $456 million available under the ABL facility as of June 30, 2022162 - In Q1 2022, the company repurchased 3.5 million shares for $89.9 million under its $150 million stock repurchase program164 | Leverage Ratio | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Net Debt to Adjusted EBITDA | 3.34x | 4.04x | Critical Accounting Policies Key accounting policies include asset impairment, with a $22.3 million charge for Sheffield operations, and income taxes, maintaining a valuation allowance on U.S. deferred tax assets - A $22.3 million long-lived asset impairment charge was recorded in Q1 2022 related to the Sheffield, UK operations, which were classified as held for sale173 - ATI continues to maintain valuation allowances on its U.S. federal and state deferred tax assets due to a three-year cumulative loss from U.S. operations, which limits the ability to realize these assets177 - A potential complete withdrawal from the Steelworkers Western Independent Shops Pension Plan (WISPP) could result in a liability estimated at approximately $35 million, payable over 20 years181 Quantitative and Qualitative Disclosures About Market Risk ATI manages market risks through derivative instruments, hedging interest rates with a $50 million swap, energy prices, and raw material volatility, particularly for nickel - The company has a $50 million floating-for-fixed interest rate swap, converting a portion of its Term Loan to a 4.21% fixed rate, maturing in June 2024188 - As of June 30, 2022, ATI has hedged approximately 75% of its forecasted domestic natural gas requirements for the remainder of 2022, 50% for 2023, and 15% for 2024190 - The company has financial hedging arrangements for approximately 9 million pounds of nickel through 2024, representing about 15% of a single year's estimated purchase requirements, primarily at customer request193 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022195 - There were no material changes to the company's internal control over financial reporting during the second quarter of 2022195 PART II Legal Proceedings ATI is involved in legal proceedings, notably a lawsuit with US Magnesium, LLC, for which an $8.6 million litigation reserve was recorded in Q1 2022 - ATI Titanium LLC is in a lawsuit with US Magnesium, LLC, with a trial date set for October 11, 2022197198 - An $8.6 million litigation reserve was recorded in Q1 2022 for the US Magnesium matter following a failed mediation198 Risk Factors Key risks include the Russia-Ukraine conflict impacting raw material supply and prices, and the COVID-19 pandemic affecting end-market demand and operations - The Russia-Ukraine conflict creates risks of significant volatility in commodity prices and potential disruption to the supply of raw materials sourced from Russia, such as nickel and chromium200201 - In response to the conflict, ATI announced the termination of its Uniti, LLC joint venture with the Russian-based company VSMPO-AVISMA201 - The COVID-19 pandemic continues to impact end markets, with commercial aerospace demand still recovering. Operational risks persist, as demonstrated by the near-term impact of lockdowns in China on the STAL joint venture204206 Unregistered Sales of Equity Securities and Use of Proceeds Details Q2 2022 stock repurchases of 21,255 shares at an average price of $27.13, primarily for tax satisfaction on share-based compensation | Period (2022) | Total Shares Purchased | Average Price Paid | Approx. Value Remaining in Program | | :--- | :--- | :--- | :--- | | April 1-30 | 7,866 | $26.87 | $60,076,705 | | May 1-31 | 2,639 | $26.39 | $60,076,705 | | June 1-30 | 10,750 | $27.50 | $60,076,705 | | Total Q2 | 21,255 | $27.13 | $60,076,705 | - The shares repurchased during the quarter were from employees to satisfy taxes on share-based compensation and were not part of the publicly announced repurchase plan207208 Exhibits Lists exhibits filed with the Form 10-Q, including corporate governance documents, the 2022 Incentive Plan, and required CEO/CFO certifications - Filed exhibits include CEO and CFO certifications (Rule 13a-14(a) and Section 1350), corporate governance documents, and Inline XBRL data files210