ATI Inc. (Allegheny Technologies Incorporated) — 2009 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. The filing was signed November 5, 2009. Financial statements are unaudited and presented under U.S. GAAP. ATI operates through High Performance Metals, Flat-Rolled Products, and Engineered Products.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Sales | $697.6 million | $1,392.4 million | $2,239.2 million | $4,197.0 million |
| Income before taxes | $2.6 million | $231.0 million | $2.9 million | $705.0 million |
| Net income attributable to ATI | $1.4 million | $144.1 million | $(6.1) million | $455.0 million |
| Diluted EPS | $0.01 | $1.45 | $(0.06) | $4.51 |
| Segment operating profit | $54.0 million | $251.4 million | $163.8 million | $766.8 million |
| Segment operating margin | 7.7% | 18.1% | 7.3% | 18.3% |
| Cash flow from operations | Not separately provided | Not separately provided | $149.4 million | $344.6 million |
- Q3 gross margin, calculated from reported sales and cost of sales, was approximately 13.5%; nine-month gross margin was approximately 11.2%. The filing does not present a separate reported gross-margin measure.
- At September 30, 2009, cash and cash equivalents were $826.3 million, compared with $469.9 million at December 31, 2008.
- Total debt was $1,070.6 million, versus $509.8 million at year-end 2008. Net debt was $244.3 million; net debt to ATI capitalization was 10.5%, and total debt to total capitalization was 34.0%.
- Current assets were $2,047.1 million and current liabilities were $582.1 million. The reported current ratio was approximately 3.5x.
- Net inventories declined to $737.3 million from $887.6 million, and accounts receivable declined to $415.8 million from $530.5 million.
- Capital expenditures were $308.1 million during the first nine months. Management expected approximately $475 million of 2009 capital expenditures, including business purchases.
- Operating cash flow included a $350 million voluntary pension contribution and a $108.5 million federal tax refund. Excluding the net pension cash contribution, management reported operating cash flow of approximately $390.9 million.
Material changes versus the prior comparable period
- Sales declined 50% in the third quarter and 47% for the first nine months, reflecting the global recession, lower shipments, weaker raw-material surcharges and indices, and lower base selling prices.
- High Performance Metals sales fell 45% in Q3 and 34% year to date; operating margin declined to 18.4% from 27.4% in Q3 2008.
- Flat-Rolled Products sales fell 52% in Q3 and 54% year to date; operating margin declined to 3.1% from 13.8% in Q3 2008.
- Engineered Products sales fell 54% in Q3 and 51% year to date. The segment reported an operating loss of $8.6 million in Q3 and $24.1 million year to date, compared with profits in the prior-year periods.
- Retirement benefit expense increased to $25.5 million in Q3 and $96.2 million year to date, compared with $2.5 million and $5.8 million, respectively, in the prior-year periods. The increase primarily reflected lower 2008 plan-asset returns.
- Interest expense increased to $8.1 million in Q3 and $9.3 million year to date, principally because of the 2009 debt issuances.
- ATI recognized $18.9 million of idle-facility, workforce-reduction, and start-up costs in Q3 and $43.1 million year to date. It also recognized approximately $83 million of unfavorable out-of-phase raw-material surcharges and indices during the first nine months, primarily in the first half.
- Gross cost reductions totaled $47.2 million in Q3 and $121.4 million year to date, partially offsetting volume and pricing pressure.
Debt, liquidity, outlook, and risks
- In June 2009, ATI issued $402.5 million of 4.25% convertible senior notes due 2014 and $350 million of 9.375% senior notes due 2019. Proceeds supported a $350 million pension contribution, the retirement of $183.3 million of 2011 notes, retiree medical trusts, and general corporate purposes.
- The company had no borrowings under its $400 million domestic credit facility, although approximately $10 million supported letters of credit. An additional letter-of-credit facility had $30 million outstanding. Management reported no significant near-term debt maturities.
- The domestic facility was amended to provide covenant flexibility. At September 30, 2009, the leverage ratio was 0.90 versus a maximum of 3.25, and the interest-coverage ratio was 18.49 versus a minimum of 2.0.
- Management expected fourth-quarter 2009 earnings performance to be similar to Q3 because customers remained cautious, inventories were low, raw-material prices were volatile, and new-facility start-up costs were expected. Management expected operating earnings to improve throughout 2010, viewing 2010 as a transition year toward a new growth cycle.
- Key demand risks included commercial aerospace schedule pushouts, weak oil and gas drilling activity, delayed wind-energy projects, weak consumer markets, and uncertainty in the global economy. Aerospace and defense, electrical energy, chemical process, and oil and gas markets represented 75% of first-nine-month sales.
- Raw-material and energy volatility remained material. A hypothetical $1 per pound change in nickel prices was estimated to affect annual costs by approximately $80 million; a $1 per MMBtu natural-gas price change was estimated to affect annual costs by approximately $10 million to $12 million.
- Environmental remediation reserves were approximately $17 million. ATI stated that future adjustments, litigation, environmental matters, pension funding, market conditions, and project costs could materially affect results, although management did not expect currently identified litigation or environmental matters to materially affect financial condition or liquidity.
- On October 23, 2009, after the reporting date, ATI acquired Crucible Compaction Metals and Crucible Research for $40.95 million; the business became ATI Powder Metals within High Performance Metals.
Important facts for investors to verify
- Reconcile the sharp year-over-year revenue and margin declines with shipment volumes, pricing, raw-material surcharges, and LIFO effects.
- Assess whether the higher debt load and related interest expense are adequately supported by cash, credit availability, and projected operating recovery.
- Evaluate pension funding, retirement-benefit expense, plan-asset performance, and the effect of future pension contributions on cash flow and taxes.
- Review the $475 million expected 2009 capital program, major expansion projects, start-up costs, and the company’s ability to self-fund planned investments.
- Monitor aerospace, oil and gas, electrical energy, wind energy, and chemical-process demand, as well as customer inventory behavior and raw-material price volatility.
- Consider potential dilution from the 2014 convertible notes, which had an initial conversion price of approximately $41.795 per share and could represent approximately 9.6 million shares.
- Review environmental, litigation, derivative-hedging, and other contingencies, including the $17 million environmental reserve and approximately $20.1 million of derivative liabilities at September 30, 2009.