ATI Inc. (Allegheny Technologies Incorporated) — 2010 First-Quarter 10-Q Summary
Business context and reporting period
The filing is Allegheny Technologies Incorporated’s unaudited Form 10-Q for the three months ended March 31, 2010, filed May 7, 2010. ATI is a diversified specialty-metals producer operating through High Performance Metals, Flat-Rolled Products, and Engineered Products. The company serves aerospace and defense, electrical energy, chemical processing, oil and gas, medical, automotive, and other markets.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Sales | $899.4 million | $831.6 million | 8.2% increase |
| Income before tax | $33.0 million | $0.3 million | Significant improvement |
| Net income | $19.8 million | $5.3 million | Increase |
| Net income attributable to ATI | $18.2 million | $5.9 million | Increase |
| Diluted EPS | $0.18 | $0.06 | Increase |
| Segment operating profit | $88.2 million | $55.9 million | Increase |
| Segment operating margin | 9.8% | 6.7% | 310 basis-point increase |
| Net margin attributable to ATI | Approximately 2.0% | Approximately 0.7% | Improved |
| Cash flow from operations | $(72.0) million | $168.9 million | Decline |
| Capital expenditures | $51.2 million | $108.6 million | Decrease |
Cash and cash equivalents were $563.5 million at March 31, 2010, compared with $708.8 million at December 31, 2009. Total debt was $1.064 billion, compared with $1.071 billion at year-end. Net debt was $500.9 million, and net debt to ATI capital was 19.9%, compared with 15.3% at December 31, 2009. Total debt to capitalization was 34.5%, compared with 34.7% at year-end.
Operating cash flow was reduced by a $130.2 million increase in managed working capital, primarily reflecting higher accounts receivable and inventories associated with improving activity and higher raw-material costs. The company paid $17.7 million in dividends and used $22.7 million in financing activities. A $400 million domestic unsecured credit facility had no borrowings, although approximately $10 million supported letters of credit. The facility’s reported leverage ratio was 1.70 versus a maximum of 3.25, and interest coverage was 5.59 versus a minimum of 2.0.
Material changes versus the prior comparable period
- Sales increased 8.2%, driven primarily by stronger Flat-Rolled Products and Engineered Products shipments, higher raw-material surcharges, and improved base prices. High Performance Metals sales declined 22% year over year.
- Flat-Rolled Products sales increased 37% to $516.6 million and operating profit increased to $31.4 million from $7.7 million.
- Engineered Products sales increased 23% to $80.5 million, while operating profit improved to $1.8 million from a $6.1 million loss.
- High Performance Metals operating profit increased modestly to $55.0 million from $54.3 million despite lower shipments and prices, aided by better surcharge matching and cost reductions.
- Operating performance benefited from the absence of approximately $65 million of unfavorable surcharge timing effects and a $27.5 million LIFO valuation benefit recorded in Q1 2009. Q1 2010 had no LIFO reserve change.
- Retirement benefit expense declined to $22.5 million from $37.3 million, while net interest expense increased to $14.6 million from net interest income of $0.1 million, primarily because of debt issued in Q2 2009 and lower capitalized interest.
- Income taxes changed from a $5.0 million benefit in Q1 2009 to a $13.2 million provision, including a $5.3 million non-recurring charge related to the Patient Protection and Affordable Care Act. Excluding that charge, management reported ATI net income of $23.5 million, or $0.24 per share.
Guidance, outlook, risks, and unusual items
Management did not provide formal earnings guidance in the filing but expected steady quarter-over-quarter improvement during 2010. Management anticipated improving orders for premium titanium and nickel-based alloys, stable airframe demand, improving exotic-alloy shipments in the second half of 2010, and continued demand improvement in Flat-Rolled Products.
Management expected 2010 capital expenditures, including business purchases, of approximately $375 million. Major strategic projects included a new advanced specialty-metals hot-rolling facility estimated at approximately $1.16 billion, consolidation of a grain-oriented electrical-steel melt shop, and expanded zirconium capacity. The company expected to ramp its Rowley, Utah titanium sponge facility during 2010.
- Q1 operating results included $11.5 million of idle-facility, start-up, and workforce-reduction costs, primarily affecting High Performance Metals; approximately $9.9 million affected that segment.
- Commercial aerospace remained pressured by aircraft build-schedule pushouts and reduced aeroengine aftermarket demand. Demand in exotic alloys was affected by project timing.
- Raw-material, energy, and foreign-currency volatility remain significant risks. The company uses surcharges, indices, and derivatives, but timing and competitive conditions may prevent full cost recovery.
- Environmental remediation reserves totaled approximately $18 million. Management did not believe currently identified environmental exposures were reasonably likely to exceed accrued amounts materially, but future developments could adversely affect results.
- Pending litigation and claims include product liability, intellectual property, commercial, employment, tax, environmental, health and safety, and other matters. Management did not expect a material adverse effect on financial condition or liquidity, although individual-period results could be materially affected.
- The U.S. qualified pension plan was essentially fully funded at December 31, 2009, and no required cash contribution was expected for 2010, subject to investment performance and other factors.
- The company had no off-balance-sheet arrangements as defined by SEC Regulation S-K. Disclosure controls were evaluated as effective, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether the improvement in segment margins is sustainable after the favorable year-over-year comparison from 2009 surcharge timing and LIFO effects.
- Whether aerospace demand, titanium and nickel-alloy orders, and exotic-alloy shipments recover as management projected.
- Whether working-capital investment and planned capital expenditures reduce liquidity or require additional financing.
- Progress, cost, timing, and expected returns from the approximately $1.16 billion Brackenridge facility and other capacity expansions.
- Exposure to raw-material and energy-price changes, including the reported unrealized losses on natural-gas and electricity hedges and gains on raw-material hedges.
- Future pension, environmental, litigation, and tax exposures, including the effect of the non-recurring $5.3 million health-care-related tax charge.
- Availability under credit facilities and compliance with leverage and interest-coverage covenants as operating conditions change.