ATI Inc. 2018 Form 10-K Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) filed its Form 10-K for the fiscal year ended December 31, 2018. ATI manufactures specialty materials, engineered components, forgings, castings, machined parts and metallic powders. Its two segments are High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP).
- Aerospace and defense represented approximately 49% of consolidated sales and was the principal growth driver.
- HPMC represented 58% of sales and generated 76% of its segment revenue from aerospace and defense markets.
- FRP represented 42% of sales; oil and gas and automotive collectively accounted for more than 45% of FRP sales.
- International sales were $1.70 billion, or 42% of total sales. Confirmed backlog was approximately $2.2 billion at year-end, with approximately 85% expected to ship in 2019.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $4,046.6 million | $3,525.1 million | +15% |
| Gross profit | $630.3 million | $497.0 million | +27% |
| Gross margin | 15.6% | 14.1% | +150 bps |
| Operating income | $362.1 million | $134.6 million | +169% |
| Income before taxes | $247.7 million | $(86.5) million | Returned to profit |
| Net income attributable to ATI | $222.4 million | $(91.9) million | Returned to profit |
| Diluted EPS | $1.61 | $(0.83) | Improved $2.44 |
| Cash flow from operations | $392.8 million | $22.4 million | +$370.4 million |
| Capital expenditures | $139.2 million | $122.7 million | +$16.5 million |
| Cash and cash equivalents | $382.0 million | $141.6 million | +$240.4 million |
Segment operating profit increased to $413.2 million, or 10.2% of sales, from $283.4 million, or 8.0%, in 2017. HPMC operating profit rose 36% to $335.4 million, with margin expanding to 14.4% from 11.9%. FRP operating profit more than doubled to $77.8 million, with margin increasing to 4.5% from 2.5%.
- HPMC sales increased 13% to $2.33 billion. Commercial jet-engine sales increased 20%, and next-generation jet-engine products increased approximately 49% and represented 48% of HPMC jet-engine sales.
- FRP sales increased 17% to $1.71 billion, led by higher-value products and stronger oil and gas, aerospace and defense, and automotive demand.
- Managed working capital declined to 31.6% of annualized sales from 38.1%, producing a $74.1 million cash benefit.
- Debt-to-adjusted EBITDA improved to 3.07x from 4.32x. Net debt to ATI capitalization declined to 38.3% from 44.8%.
- The filing reports total debt of approximately $1.5 billion. The balance-sheet carrying amount was $1,542.1 million, while the MD&A leverage calculation used $1,552.5 million excluding debt issuance costs.
- No cash dividends were paid in 2018 or 2017; the quarterly dividend has been suspended since the fourth quarter of 2016.
Material changes versus the prior comparable period
- ATI returned to profitability after a 2017 loss and reported its highest sales since 2014.
- There were no restructuring charges in 2018, compared with $523.8 million in 2016; 2017 included a $114.4 million goodwill impairment and a $37.0 million debt-extinguishment charge.
- Interest expense declined to $101.0 million from $133.8 million, primarily because the company redeemed its $350 million 9.375% senior notes in late 2017.
- ATI completed the sale of a 50% interest in A&T Stainless and deconsolidated the joint venture, recognizing a $15.9 million pretax gain. ATI’s share of A&T Stainless’ 2018 results was a $3.9 million loss, partly reflecting Section 232 tariffs.
- ATI acquired Addaero Manufacturing for $10.0 million to expand additive-manufacturing capabilities.
- Capital investment continued in aerospace forging, titanium powder, and the STAL Precision Rolled Strip expansion in China.
- ATI adopted ASC 606 using the modified retrospective method, increasing retained earnings by $15.5 million at January 1, 2018. The adoption had no material impact on 2018 operating results.
Guidance, outlook, commentary and risks
Management did not provide a specific consolidated revenue or earnings forecast in the filing. Management expects sustained profitable growth in HPMC, supported by long-term aerospace agreements, next-generation aircraft and engine production, metallic powder demand, additive manufacturing, and expected commercial aerospace expansion. FRP is focused on improving asset utilization, including expanded A&T Stainless activity and carbon-steel hot-rolling conversion services expected to ramp through 2019.
- The company expects approximately $145 million of annual cash contributions to U.S. qualified defined-benefit pension plans in 2019 and 2020, compared with $40 million contributed in 2018. The plans were approximately 71% funded at year-end.
- Liquidity consisted of $382 million of cash and approximately $350 million of available borrowing capacity under the domestic ABL facility. Management stated that internally generated funds, cash and available borrowings should meet projected liquidity needs.
- Significant scheduled debt maturities include approximately $502 million in 2021, $389 million in 2022 and $500 million in 2023. The ABL requires minimum liquidity of $700 million beginning 91 days before the January 2021 maturity of the 5.95% Senior Notes and thereafter until repayment or refinancing.
- The A&T Stainless joint venture’s imported slabs remained subject to a 25% Section 232 tariff pending an exclusion decision.
- Key risks include commercial aerospace cyclicality and customer concentration, oil and gas volatility, global stainless overcapacity, tariffs and trade retaliation, raw-material and energy price volatility, execution of capital projects, substantial debt, pension funding requirements, environmental obligations, litigation, labor disruptions, cybersecurity and potential impairment of long-lived assets.
- Environmental reserves were approximately $20 million, with reasonably possible additional exposure of up to $16 million based on currently available information.
- The company adopted the new lease standard on January 1, 2019 and expected to recognize approximately $52 million of right-of-use assets and $56 million of lease liabilities, with no material effect on earnings or cash flow.
Most important facts for investors to verify
- Whether commercial aerospace production rates and ATI’s next-generation engine product share support the expected HPMC growth trajectory.
- FRP’s ability to sustain profitability and improve utilization of the Hot-Rolling and Processing Facility.
- The outcome and ongoing financial impact of the A&T Stainless Section 232 tariff exclusion request.
- Sources of funding for the 2021–2023 debt maturities and compliance with the ABL’s $700 million liquidity requirement.
- Actual pension investment performance and required contributions relative to the projected $145 million annual contributions.
- Realization of U.S. deferred tax assets, given the $194.8 million valuation allowance and the company’s cumulative-loss history.
- Potential changes in environmental remediation costs, litigation outcomes and other contingent liabilities.
- Whether reported improvement in earnings and leverage is sustained without relying on the $15.9 million joint-venture deconsolidation gain or other unusual items.