ATI (ATI) Q3 2025: Aerospace & Defense Hits 70% of Revenue, Margin Expansion Accelerates
Aerospace and defense now drive 70% of ATI’s revenue, fueling margin expansion and multi-year visibility. Strategic mix optimization and operational improvements are compounding, with guidance raised for both earnings and cash flow. Investors should note the company’s sharpened focus on high-value alloys and customer-backed capacity bets as a durable competitive lever through 2026 and beyond.
Summary
- Mix Shift to Aerospace and Defense: ATI’s revenue base is now anchored in its most differentiated, high-margin markets.
- Operational Productivity Gains: Expanded capacity and yield improvements are driving record segment margins and cash flow.
- Guidance Lift and Multi-Year Visibility: Upward revisions reflect durable demand, especially in jet engines and defense, with momentum expected to extend into 2026.
Performance Analysis
ATI delivered a step-change in profitability, with adjusted EBITDA margins exceeding 20%—nearly double 2019 levels—on the back of a 7% year-over-year revenue gain. The company’s high-performance materials and components (HPMC) segment posted margins above 24%, while advanced alloys and solutions (AANS) surpassed 17%, both marking substantial sequential and annual improvement. Cash flow generation was a highlight: year-to-date operating cash hit $299 million, up $273 million from the prior year, enabled by both improved earnings and disciplined working capital management.
Management attributed the outperformance to robust aerospace and defense (A&D) demand, mix optimization, and productivity initiatives that are now flowing through to results. Jet engines now comprise 39% of total revenue and grew 19% year-over-year, with maintenance, repair, and overhaul (MRO) work surging to half of engine sales—a sharp increase from pre-pandemic levels. Defense revenue jumped 51% year-over-year, marking a third consecutive year of double-digit growth and outpacing broader defense spending trends.
- Defense Outpaces Expectations: Broad-based strength in naval, missile, and nuclear programs drove a 51% YoY defense revenue increase.
- Jet Engine Aftermarket Surge: MRO now 50% of engine sales, up from 20-25% pre-pandemic, reflecting extended aircraft life and next-gen engine upgrades.
- Cash Generation and Capital Returns: Operating cash flow and free cash flow both hit multi-year highs, supporting $150 million in share repurchases this quarter.
ATI’s Q3 performance underscores the leverage in its business model, with nearly 50% incremental margins year-to-date and ongoing working capital improvement, supported by both inventory discipline and accounts receivable securitization.
Executive Commentary
"With 70% of revenue now coming from aerospace and defense, ATI is firmly focused on our most differentiated, high-value materials and markets. Our nickel investment expands differentiated capacity at the top of the value chain. You'll recall we're the sole source producer for five of the seven most advanced super alloys in the jet engine."
Kim Fields, President and CEO
"Year to date, our sales are up 7% and adjusted EBITDA is up 19% over the prior year, excluding asset sales. This reflects improved mix, cost discipline, and incremental margins which remained near 50 percent, demonstrating the leverage of our business model."
Don Newman, Executive Vice President and CFO
Strategic Positioning
1. Aerospace and Defense as Core Economic Engine
ATI’s transformation is now visibly anchored in aerospace and defense, which comprise 70% of total revenue, up sharply from pre-pandemic levels. Long-term agreements (LTAs, multi-year customer supply contracts) and proprietary alloy positioning have secured ATI’s role as a priority supplier for next-gen jet engines and defense programs. The company’s order book now extends into mid-2027, providing rare multi-year visibility and pricing power.
2. Mix Optimization and Margin Expansion
Management is actively managing production and capital allocation toward highest-value, highest-margin products. For example, ATI is focusing melt capacity on differentiated, proprietary alloys used in jet engines and defense, rather than commodity grades. This mix optimization is driving both segment margin expansion and improved incremental returns, with customer co-funded investments that target internal rates of return above 30%.
3. Operational Leverage and Capacity Unlocks
Productivity initiatives are compounding: Uptime, yield, and throughput gains have expanded available capacity by 10% with minimal capital outlay, particularly in high-value forged disks and zirconium products. Specialty rolled product and powder atomization capacity have both set new records, supporting both near-term shipments and future margin growth as new qualifications come online in 2026.
4. Defense Diversification and Supply Chain Resilience
ATI’s defense business is diversified across missiles, naval nuclear, and armored vehicles, with new program qualifications and international expansion. The company has built up to two years of finished inventory and over a year of raw material stockpiles for zirconium, insulating against geopolitical supply disruptions and supporting its position as the leading Western supplier.
5. Disciplined Capital Deployment and Asset Monetization
ATI continues to monetize non-core assets, freeing up capital for reinvestment in high-return, customer-backed projects. Gross capital expenditures remain within plan, and proceeds from asset sales are partially funding growth investments, reinforcing the company’s focus on return discipline and strategic simplification.
Key Considerations
ATI’s Q3 demonstrates a business model now structurally stronger, with the following key themes for investors:
Key Considerations:
- Customer-Backed Growth: Multi-year LTAs and customer co-funding de-risk capacity investments and support pricing durability.
- Aftermarket Exposure: MRO now a much larger share of engine revenue, providing recurring, higher-margin business insulated from OEM build rate swings.
- Defense Outperformance: ATI is outgrowing overall defense spending, with missile and naval nuclear programs driving above-market momentum.
- Working Capital Efficiency: Accounts receivable securitization and inventory discipline are supporting robust free cash flow conversion.
- Leadership Transition: CFO Don Newman’s planned retirement introduces a near-term transition risk, but succession planning is underway with a focus on continuity.
Risks
ATI’s concentrated exposure to aerospace and defense, while a current strength, increases vulnerability to potential OEM production delays, defense program shifts, or geopolitical shocks. Supply chain stability—especially for specialty metals like zirconium—remains a watchpoint, though current stockpiles provide near-term insulation. Leadership transition risk is present with the CFO’s departure, but management signals continuity in financial strategy.
Forward Outlook
For Q4 2025, ATI guided to:
- Adjusted EBITDA of $221 to $231 million, a sequential increase excluding asset sales.
- Consolidated margins expected to exceed 19%, with HPMC margins rising further and AANS stable at 16 to 16.5%.
For full-year 2025, management raised guidance:
- Adjusted EBITDA of $848 to $858 million (up $28 million at midpoint).
- Free cash flow of $330 million to $370 million (up $40 million at midpoint).
Management highlighted several factors that frame the outlook:
- Jet engine and defense demand expected to remain strong through 2026, with order book visibility into 2027.
- Airframe growth to accelerate in 2026, aided by increased ATI content and new LTAs.
Takeaways
ATI’s business model is now structurally aligned with high-value, defensible markets, and operational execution is translating into sustained margin and cash flow gains.
- Margin Expansion Is Structural: Mix optimization, productivity, and customer-backed investment are compounding, not cyclical.
- Multi-Year Demand Visibility: Order book and LTAs provide rare predictability in aerospace and defense, supporting capital allocation discipline.
- Watch for Execution on Capacity and Mix: Investors should monitor how ATI manages selective melt expansion and customer co-investment to avoid margin dilution as demand ramps.
Conclusion
ATI’s Q3 marks a clear inflection in its transformation, with aerospace and defense now the economic engine driving record margins and cash flow. Strategic mix management and operational leverage are compounding, setting the stage for continued outperformance as demand visibility stretches into the next decade.
Industry Read-Through
ATI’s results reinforce a broader industry shift: Aerospace and defense suppliers with proprietary materials and deep customer integration are capturing outsized share and margin. The surge in jet engine aftermarket activity and defense program acceleration signal enduring sector tailwinds, while customer co-funding of capacity investments may become a new norm for critical supply chains. Competitors lacking differentiated alloys or long-term agreements will face increasing margin and share pressure as OEMs and governments prioritize reliability and supply assurance.