ATI's Q3 2025: Contradictions Emerge on Defense Sales, Jet Engine Growth, and MRO's Role in A&D

Date of Call: None provided

Financials Results

• Revenue: $1.1B+, up 7% year over year
• EPS: Adjusted EPS $0.85, $0.10 above the high end of guidance
• Operating Margin: Adjusted EBITDA margin >20% (19.1% excluding ~$10M oil & gas right sale)

Guidance:

• Raised 2025 adjusted EBITDA to $848M–$858M (midpoint +$28M)
• 2025 adjusted EPS $3.15–$3.21
• Adjusted free cash flow $330M–$370M (midpoint +$40M)
• Q4 adjusted EBITDA $221M–$231M (midpoint $226M); consolidated Q4 margins expected >19%; full-year ~18.5%
• CapEx $260M–$280M; HPMC Q4 margins to exceed Q3 (24.2%); AANS Q4 margins 16%–16.5%
• Q4 jet engine revenue growth expected high-single to low-double digits; full-year jet engine growth >20%

Business Commentary:

• Strategic Focus on Aerospace and Defense:
• ATI's revenue exceeded $1.1 billion in Q3, marking a 7% year-over-year increase, with A&D revenue rising 21%.

• The growth was driven by strong demand in aerospace and defense, particularly in jet engines and defense programs, highlighting the company's strategic focus on high-value materials.

• Operational Efficiency and Margin Expansion:

• The High Performance Materials & Components (HPMC) segment achieved margins above 24%, while the Advanced Alloys & Solutions (AANS) segment was above 17%.

• Improved productivity, higher uptime, improved first pass yield, and increased throughput drove significant margin expansion, particularly in jet engine and defense programs.

• Strong Performance in Defense Segment:

• Defense revenue increased by 51% year-over-year, contributing significantly to overall Q3 growth.

• This rise was attributed to broad-based strength across naval, nuclear, rotary, missile, and armored vehicle programs, reflecting both U.S. and allied spending growth.

• Improved Cash Flow and Shareholder Returns:

• Cash generated from operations year to date reached $299 million, a $273 million improvement from last year.
• The company returned $150 million to shareholders through share repurchases in Q3, with $120 million remaining under its current authorization.

Sentiment Analysis:

Overall Tone: Positive

• Management: "Q3 was another strong quarter" and results were "ahead of our projections." Revenue "was up 7% year over year," "Adjusted EPS was $0.85, $0.10 above the high end of our projected range," and the company is "raising our full year guidance across the board," citing record A&D performance and improving margins.

Q&A:

• Question from Richard Safran (Seaport Research Partners): What changed since Q2 to drive the revised outlook and guidance increase?
  Response: Stronger-than-expected aerospace & defense (especially defense) demand combined with operational productivity gains produced the upside that drove the raised guidance.

• Question from Richard Safran (Seaport Research Partners): How are you managing nickel melt capacity and what does being the number one flat-rolled titanium supplier to Airbus mean for P&L?
  Response: ATI is prioritizing high-margin proprietary nickel alloys via productivity improvements and selective purpose-built, customer-funded melt expansions under LTAs; Airbus share gains will double related revenue and expand margins starting next year.

• Question from Miles Walton (Wolfe Research): With MRO ~50% of engine sales, how much is next-gen vs out-of-production MRO, and is mid-teens OEM growth in line with your expectations?
  Response: Most MRO content is on next-gen engines (LEAP/GTF) where ATI has higher content; OEM mid-teens growth aligns with ATI's expectations and supports continued demand.

• Question from Phil Gibbs (KeyBank): The quarter was ~$10M ahead of midpoint excluding oil and gas—should we think half operational and half due to stronger defense sales?
  Response: Yes—outperformance resulted from both operational productivity and stronger defense shipments, with defense being a bright spot prioritized in Q3.

• Question from Phil Gibbs (KeyBank): Where did the working capital improvement in Q3 come from?
  Response: Primarily better accounts receivable management, including execution of a securitization/AR factoring facility, plus inventory efficiency gains.

• Question from Kotunkana (TD Cowen): Any preliminary color on 2026 (airframe, engines) and comments on incremental margins at HPMC?
  Response: Airframe revenue expected to grow high-single digits in 2026; company maintains incremental margin guidance of ~30%–40% (roughly 40% for HPMC, ~30% for AANS) when modeling.

• Question from Andre Madrid (BTIG): Status of zirconium supply chain and any exposure to China; how big are your stockpiles?
  Response: Supply is stable, supported by customer-funded equipment upgrades and built inventories (roughly ~2 years finished product and >1 year raw material), providing a cushioning buffer against disruptions.

• Question from Andre Madrid (BTIG): Pre-COVID what was MRO's percentage of engine sales versus today?
  Response: Pre-COVID MRO was ~20%–25%; today MRO contribution has risen to roughly 50% of engine sales.

• Question from Seth Seifman (JP Morgan): You converted a contract from materials+conversion to conversion-only—is this a broader trend and what is the impact?
  Response: It was an isolated customer-requested conversion that reduced recognized revenue (~$10M) but did not hurt margins; management does not view it as a company-wide trend.

• Question from Seth Seifman (JP Morgan): When will specialty energy show growth and what drives it (nuclear vs gas turbine)?
  Response: Specialty energy growth should begin next quarter and accelerate into 2026, driven by gas turbine demand (data centers) and nuclear (zirconium products), though it remains a smaller but profitable segment.

Contradiction Point 1

Defense Sales and Demand

It highlights inconsistencies in the expected sustained demand and growth in the defense sector, which is crucial for revenue projections and investor expectations.

Will defense sales remain at current levels in Q4? - Phil Gibbs (KeyBank)

2025Q3: Defense demand remains strong with continued growth expected into 2026, despite some Q3 shipment prioritization. - Kim Fields(CEO)

What are the current inventory levels for wide-body aircraft and how do they impact the airframe outlook for this year? - Seth Michael Seifman (JPMorgan)

2025Q2: Our defense segment revenue was relatively flat. The government's budget process, including continuing resolution spending, has led to some deferral in government purchasing. - Donald P. Newman(CFO)

Contradiction Point 2

Jet Engine Revenue Growth

It involves differing expectations regarding jet engine revenue growth, which directly impacts overall revenue projections and is critical for investor expectations.

Is mid-teens growth in the engine end market in line with your expectations? - Miles Walton (Wolfe Research)

2025Q3: Yes, the growth aligns with our expectations. We anticipate continued strong demand through the decade, supported by long-term agreements and partnerships. - Kim Fields(CEO)

Will jet engine revenue hit the high 20s given the strong first-half performance? - Scott Deuschle (Deutsche Bank)

2025Q2: We expect jet engine revenue to grow between 20% and 25% for the year. - Donald P. Newman(CFO)

Contradiction Point 3

Defense Sales Sustainability

It involves differing statements on the sustainability of defense sales, which could impact investor confidence in the company's future prospects.

Will defense sales remain at current levels in Q4? - Phil Gibbs (KeyBank)

2025Q3: Defense demand remains strong with continued growth expected into 2026, despite some Q3 shipment prioritization. - Kim Fields(CEO)

How do you assess titanium demand from AA&A and its impact on wide-body aircraft? - Seth Seifman (JPMorgan)

2025Q1: We expect strong demand to continue for several years with several new program awards and qualifications in 2025. - Kim Fields(CEO)

Contradiction Point 4

Specialty Energy Market Outlook

It involves contrasting views on the growth outlook for the specialty energy market, which impacts revenue projections and is crucial for investor expectations.

What is the outlook for the specialty energy market and what drives its growth? - Seth Seifman (JP Morgan)

2025Q3: Growth is expected to accelerate next quarter, driven by gas turbine demand from data centers. Our unique materials and capabilities are well-positioned for this, supported by nuclear demand as well. - Kim Fields(CEO)

What are your expectations for the industrial end markets in the second half? - David Egon Strauss (Barclays)

2025Q2: In energy, revenue was flat, with growth expected in specialty energy in the second half driven by gas turbine demand. - Donald P. Newman(CFO)

Contradiction Point 5

MRO Contribution to A&D Growth

It highlights differing perspectives on the impact and growth of MRO in the A&D sector, which could influence investor perceptions and expectations.

What portion of ATI's engine sales are for MRO versus production and out-of-production engines? - Miles Walton (Wolfe Research)

2025Q3: MRO and heavier shop visits are significant, driving demand for high-value proprietary alloys and advanced materials. - Kim Fields(CEO)

Can you provide specifics on the aftermarket/MRO contribution to A&D growth this quarter? - Andre Madrid (BTIG)

2025Q1: We continue to see strong demand from MRO, both on materials and forging sides. MRO demand accounts for 40% to 50% of our sales. - Kim Fields(CEO)