ATI Inc. (Allegheny Technologies Incorporated) — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also provides unaudited quarterly data, including fourth-quarter 2010 results; it is not a standalone Q4 filing. ATI produces specialty metals through High Performance Metals, Flat-Rolled Products, and Engineered Products segments for aerospace and defense, oil and gas, chemical processing, electrical energy, medical, and industrial markets.
Financial performance and position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Sales | $4,047.8 million | $3,054.9 million | +33% |
| Operating profit | $356.5 million | $282.2 million | +26% |
| Operating margin | 8.8% | 9.2% | Down modestly |
| Income before taxes | $125.7 million | $64.9 million | +94% |
| Net income attributable to ATI | $70.7 million | $31.7 million | +123% |
| Diluted EPS | $0.72 | $0.32 | +125% |
| Cash flow from operations | $27.1 million | $218.5 million | Down $191.4 million |
| Capital expenditures | $219.1 million | $415.4 million | Down $196.3 million |
| Cash and equivalents | $432.3 million | $708.8 million | Down $276.5 million |
| Total debt | $1,063.3 million | $1,071.1 million | Down $7.8 million |
Gross profit was approximately $490.3 million, or 12.1% of sales. Working capital was $1,324.1 million and total stockholders’ equity was $2,129.4 million at year-end. Net debt was $631.0 million, and net debt to ATI capitalization was 23.6%, compared with 15.3% in 2009.
- High Performance Metals: Sales of $1,337.5 million, up 3%; operating profit of $257.8 million, up 10%; operating margin of 19.3%.
- Flat-Rolled Products: Sales of $2,338.5 million, up 54%; operating profit of $85.9 million, up 20%; operating margin of 3.7%.
- Engineered Products: Sales of $371.8 million, up 56%; operating profit of $12.8 million, compared with a $23.8 million loss in 2009; operating margin of 3.4%.
Fourth-quarter 2010 sales were $1,037.6 million and net income attributable to ATI was $15.1 million, or $0.15 diluted EPS, compared with fourth-quarter 2009 sales of $815.7 million and net income attributable to ATI of $37.8 million, or $0.36 diluted EPS.
Material changes versus the prior comparable period
- Sales improved substantially as global demand recovered from the 2009 recession, particularly for stainless products, aerospace materials, oil and gas products, and engineered products.
- Flat-Rolled Products shipments increased 30%; High Performance Metals titanium and nickel-based alloy volumes increased 8% and 14%, respectively.
- Engineered Products returned to profitability as demand and pricing improved across oil and gas, transportation, aerospace, electrical energy, automotive, and other industrial markets.
- Profitability was constrained by higher raw-material costs and the LIFO method. The 2010 LIFO effect increased cost of sales by $60.2 million, compared with benefits of $102.8 million in 2009 and $169.0 million in 2008 under declining-cost conditions.
- Interest expense increased to $62.7 million from $19.3 million, reflecting the full-year cost of debt issued in 2009 and lower capitalization of interest as projects were completed.
- Operating cash flow declined sharply because ATI invested $318.5 million in managed working capital to support higher activity and raw-material costs.
- Direct international sales increased to $1,283.8 million, or 32% of total sales, from $950.4 million, or 31%, in 2009.
Outlook, unusual items, and risks
- Management expected strong commercial aerospace demand, increased aircraft production, and higher aftermarket jet-engine activity. Aerospace demand for ATI materials generally leads aircraft deliveries by six to twelve months.
- Management expected continued strength in global oil and gas, chemical processing, desalination, and offshore projects. Electrical-energy demand was expected to be broadly flat, while medical demand was expected to remain strong.
- Management targeted 2011 capital expenditures of $300 million to $350 million and at least $100 million of additional gross cost reductions, compared with $135 million achieved in 2010.
- Backlog was approximately $1.5 billion at December 31, 2010, with approximately 82% expected to ship in 2011.
- ATI was pursuing the acquisition of Ladish Co. for approximately $778 million, including approximately $389 million in cash and ATI shares. In January 2011, ATI issued $500 million of 5.95% senior notes due 2021 to help fund the transaction.
- Unusual 2010 items included $55.8 million of titanium-sponge start-up and idle-facility costs, a $70.7 million LIFO charge in Flat-Rolled Products, a $5.3 million tax charge related to health-care legislation, and a $3.9 million tax charge associated primarily with the Small Business Jobs and Credit Act.
- Key risks include cyclical aerospace and industrial demand, pricing pressure, raw-material and energy volatility, foreign-supply dependence, execution and cost risks on strategic projects, environmental liabilities, labor negotiations, litigation, and completion and integration of the Ladish acquisition.
- Environmental reserves were approximately $16 million. ATI was involved at approximately 39 Superfund or similar sites; management did not consider probable exposure beyond accrued amounts material based on information then available.
- The U.S. qualified defined-benefit pension plan was fully funded at year-end, and no required contribution was expected for 2011, although future funding needs depend on investment performance, obligations, and regulatory changes.
Investor verification checklist
- Reconcile annual and fourth-quarter results, particularly the fourth-quarter decline in EPS despite higher sales.
- Assess whether operating cash flow normalizes after the $318.5 million working-capital investment.
- Monitor the impact of LIFO accounting and raw-material surcharges on margins as nickel, scrap, chromium, and molybdenum prices change.
- Verify execution, cost, commissioning, and demand assumptions for the approximately $1.1 billion Brackenridge hot-rolling project and the Utah titanium-sponge facility.
- Review funding, dilution, closing conditions, and integration risks related to the Ladish acquisition and the additional 2021 debt.
- Track debt maturities, including approximately $141.4 million due in 2011 and $403.6 million due in 2014, as well as compliance with credit-facility covenants.
- Review environmental proceedings, labor agreements expiring in 2011, litigation developments, and pension and postretirement benefit assumptions.