Detailed narrative
Strong Q2 Performance and Raised Outlook
ATI delivered a strong second quarter, with adjusted EBITDA of $284 million, exceeding the high end of prior guidance by $29 million. This performance, coupled with a record backlog of $4.4 billion, led to a significant raise in the full-year outlook. The adjusted EBITDA midpoint is now $1.16 billion (up 35% YoY), adjusted EPS midpoint $5.04 (up 56% YoY), and adjusted free cash flow midpoint $575 million (up 51% YoY), reflecting increased confidence in the business's earnings power.
AA&S Segment Transformation and Margin Expansion
The AA&S segment was a key driver of Q2 success, generating an underlying EBITDA margin of approximately 22% (excluding an asset sale gain), up from 14% a year ago. This transformation is attributed to portfolio optimization, shifting towards higher-value aerospace, defense, and specialty energy applications, leveraging unique technical capabilities in high-purity hafnium and zirconium, and translating scarcity into stronger commercial performance. Aerospace and Defense now accounts for 44% of AA&S revenue, more than double its share five years ago.
HPMC Performance and Growth Trajectory
HPMC performance in Q2 was within expectations, despite qualification timing shifts at the new Mexico facility and EV2 titanium furnace delaying some shipments. These timing effects, representing $30 million to $40 million in revenue with 40%-50% margins, are expected to convert in the second half. The company maintains confidence in HPMC's long-term growth trajectory, supported by improving commercial terms, operational productivity, and targeted investments, positioning it for stronger performance through 2027.
Strategic Capacity Investments and Elevation Operating Model
ATI's operating model, 'Elevation,' focuses on increasing asset productivity and making targeted investments. Throughput improvements include 30% in ultrasonic inspection and 15% in isothermal forgings and primary nickel melt. Key capacity investments, such as the Chihuahua, Mexico facility for aerospace engine testing/inspection and the EV2 furnace for titanium, are on schedule. A new VIM furnace, coming online by end of 2027, is expected to increase nickel capacity by 15%-20% by early 2028, contributing $350 million in incremental annual revenue.
End Market Dynamics and Growth Drivers
Across all end markets, ATI sees strong demand for qualified capacity, differentiated technology, and supply certainty. Jet engine revenue grew 13% YoY, with high-teens growth expected for the full year, driven by next-generation engine platforms where ATI has double the content. Defense revenue surged 36% YoY, reaching an all-time high, with full-year growth now expected in the high teens, boosted by naval nuclear and missile programs. Airframe revenue is expected to see mid- to high single-digit growth, weighted towards the second half⚖️, as inventories normalize.
Naval Nuclear Agreement and Defense Momentum
The recently renewed naval nuclear agreement extends through 2030, more than doubling annual revenue compared to the prior contract due to improved pricing and product mix. This $1 billion, five-year contract is a significant driver for the AA&S segment. Defense demand is accelerating across naval nuclear, missile, and missile defense applications, with new orders supporting programs like Tomahawk, FAD, and PAC-3, contributing to the increased full-year defense growth outlook.