ATI Inc. Form 10-K Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) is a global manufacturer of technically advanced specialty materials and complex components. Its two segments are High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP). Aerospace and defense represented approximately 49% of 2017 sales, while the five key markets— aerospace and defense, oil and gas, automotive, electrical energy, and medical—represented approximately 79%.
The filing covers the fiscal year ended December 31, 2017, with comparative information for 2016 and 2015. ATI filed the Form 10-K on February 20, 2018. The financial statements received an unqualified audit opinion, and management and the auditor concluded that internal control over financial reporting was effective.
Financial performance and condition
| Metric | 2017 | 2016 | Change or comment |
|---|---|---|---|
| Sales | $3,525.1 million | $3,134.6 million | Up 13% |
| Gross profit | $449.0 million | $162.5 million | Margin increased to 12.7% from 5.2% |
| Segment operating profit | $283.4 million | $5.7 million | Margin increased to 8.0% from 0.2% |
| Operating income (loss) | $80.3 million | $(612.4) million | Improved materially |
| Loss before taxes | $(86.5) million | $(734.0) million | Improved materially |
| Net loss attributable to ATI | $(91.9) million | $(640.9) million | $(0.83) per share versus $(5.97) |
| Cash flow from operations | $22.4 million | $(43.7) million | Returned to positive cash generation |
| Capital expenditures | $122.7 million | $202.2 million | Down 39% |
| Cash and equivalents | $141.6 million | $229.6 million | Down $88.0 million |
| Total debt | $1,553.8 million | $1,894.1 million | Down $340.3 million |
| Net debt to ATI capital | 44.8% | 55.1% | Improved leverage |
HPMC sales increased 7% to $2,067.4 million, and segment operating profit rose 46% to $246.4 million, or 11.9% of sales. Aerospace and defense represented 76% of HPMC sales; commercial jet engine sales increased 11%, and next-generation jet engine product sales increased 35%.
FRP sales increased 21% to $1,457.7 million, and the segment returned to profitability with $37.0 million of operating profit, compared with a $163.0 million loss in 2016. Improvement reflected higher volumes and prices, better product mix, cost reductions, restructuring benefits, and stronger oil and gas and automotive demand.
Liquidity at year-end included $142 million of cash and approximately $305 million of available borrowing capacity under the domestic asset-based lending facility. The ABL facility had no outstanding revolving borrowings, although $42.3 million supported letters of credit. Working capital increased, primarily because of higher inventory and accounts receivable supporting growth and project orders.
Material changes versus prior comparable period
- Revenue increased 13%, led by a 21% increase in FRP sales and a 7% increase in HPMC sales.
- Gross margin expanded to 12.7% from 5.2%, and total segment operating margin increased to 8.0% from 0.2%.
- ATI recorded no additional restructuring charges in 2017, compared with $527.2 million of restructuring charges in the consolidated statement of operations in 2016.
- A $114.4 million non-cash goodwill impairment charge was recorded for the ATI Cast Products titanium investment casting business. The charge was excluded from HPMC segment operating results.
- ATI issued 17 million common shares for net proceeds of $397.8 million and used the proceeds to redeem all $350 million of its 9.375% Senior Notes due 2019. The redemption generated a $37.0 million debt extinguishment charge.
- The company made a $135 million cash contribution to its U.S. pension plan in 2017, following a $115 million contribution in 2016.
- The quarterly common dividend remained suspended; no cash dividends were paid to ATI shareholders in 2017.
- Backlog increased to approximately $2.1 billion at December 31, 2017, from $1.7 billion at December 31, 2016. HPMC backlog increased to approximately $1.9 billion from $1.6 billion.
Guidance, outlook, risks and unusual items
Management expected 2018 HPMC sales to increase by a high-single-digit percentage, including double-digit growth in commercial jet engine sales, with continued operating-margin improvement. Management expected FRP margins to improve year over year, although quarterly performance could remain volatile. The planned Allegheny & Tsingshan Stainless joint venture was expected to benefit FRP results in the second half of 2018.
Management expected 2018 interest expense to be approximately $32 million lower than 2017 following the debt redemption and expected defined-benefit pension and postretirement expense to be approximately $19 million lower. Management did not expect significant U.S. federal or state cash taxes in 2018 because of net operating loss carryforwards. Capital expenditures were expected to remain below depreciation for the next several years.
- The ABL facility requires a fixed-charge coverage ratio of at least 1.00:1.00 in specified circumstances. ATI did not meet the ratio at December 31, 2017 and therefore could not access $50 million of revolving capacity until the requirement was met.
- ATI must demonstrate at least $700 million of liquidity beginning 91 days before the January 15, 2021 maturity of its $500 million Senior Notes due 2021 and thereafter until repayment or refinancing.
- Scheduled principal payments include approximately $500.5 million in 2021 and $387.7 million in 2022.
- The ATI Pension Plan was approximately 76% funded under U.S. GAAP. Expected contributions were approximately $40 million in 2018 and approximately $85 million annually for the following few years, subject to actuarial and asset-performance changes.
- Environmental remediation reserves were approximately $12 million; management stated that active matters could reasonably exceed recorded reserves by as much as $15 million. Litigation outcomes could materially affect results in a particular reporting period.
- Approximately 40% of employees were covered by collective bargaining agreements. Agreements covering approximately 600 employees expired in 2017 and remained under negotiation; agreements covering approximately 300 employees expire in 2018.
- ATI remains exposed to commercial aerospace and oil and gas cyclicality, stainless steel overcapacity, raw-material and energy price volatility, foreign sourcing, labor disruptions, impairment charges, cybersecurity threats, environmental liabilities, and government-contract compliance.
- Adoption of the new revenue-recognition standard in 2018 was expected to increase retained earnings by $15.5 million, increase total assets and liabilities by approximately $33 million, and reduce 2018 gross profit by approximately $5 million because of cumulative timing effects.
- Adoption of new pension-cost presentation guidance was expected to increase reported 2017 operating income by $54.3 million on a reclassified basis without changing pretax income, and to create an estimated $6 million unfavorable pretax impact in the first quarter of 2018 from capitalization changes.
Most important facts for investors to verify
- Whether HPMC’s aerospace backlog, long-term agreements, next-generation engine exposure, and powder-alloy investments convert into the projected 2018 growth and margin expansion.
- Whether FRP sustains profitability and whether the Allegheny & Tsingshan joint venture ramps as planned without adverse pricing or raw-material effects.
- Liquidity and covenant compliance, especially the $700 million liquidity requirement ahead of the 2021 debt maturity and the restricted $50 million of ABL capacity.
- The company’s ability to generate sufficient operating cash after working-capital investment, capital expenditures, interest, pension contributions, and debt maturities.
- The funded status and future contributions of the pension plan, including sensitivity to discount rates, mortality assumptions, and investment returns.
- Potential further impairment or restructuring charges, particularly in ATI Cast Products and other cyclical or underutilized operations.
- Unresolved labor negotiations, environmental remediation exposures, litigation, and the potential effect of raw-material, energy, currency, and trade-policy changes.
- The effect of 2018 accounting-standard adoptions on revenue timing, reported margins, operating income, balance-sheet classifications, and comparability with 2017.