ATI Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. ATI is a diversified specialty materials and components producer operating through High Performance Materials & Components and Flat Rolled Products. The interim financial statements are unaudited and should be read with the 2014 Form 10-K.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $1,022.5 million, down 8.6% | $2,148.0 million, up 2.0% |
| Income before interest, other income and taxes | $4.6 million; approximately 0.5% margin | $51.0 million; approximately 2.4% margin |
| Loss from continuing operations before tax | $21.6 million | $1.0 million |
| Net loss attributable to ATI | $16.4 million, or $0.15 per diluted share | $6.4 million, or $0.06 per diluted share |
| Dividends declared per share | $0.18 | $0.36 |
| Segment operating profit | $39.2 million; 3.8% of sales | $123.0 million; 5.7% of sales |
| Operating cash flow | Not separately provided | $91.5 million |
| Capital expenditures | Not separately provided | $63.3 million |
- High Performance Materials & Components generated second-quarter sales of $511.1 million and operating profit of $42.6 million, versus $85.1 million in the prior-year quarter. Six-month sales were $1,053.9 million and operating profit was $118.5 million.
- Flat Rolled Products generated second-quarter sales of $511.4 million and an operating loss of $3.4 million, versus a $19.9 million loss in the prior-year quarter. Six-month operating profit improved to $4.5 million from a $45.5 million loss.
- Cash and cash equivalents were $250.9 million at June 30, 2015, compared with $269.5 million at December 31, 2014. Managed working capital increased to $1.65 billion from $1.59 billion.
- Total debt was $1.521 billion, compared with $1.527 billion at year-end. Net debt to ATI total capital increased to 33.0% from 32.6%; total debt to total ATI capital remained 37.0%.
- Defined benefit pension liabilities were $722.1 million and accrued postretirement benefits were $397.1 million at June 30, 2015.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined primarily because Flat Rolled Products experienced lower shipments and selling prices, including a 23% decline in standard-product shipments and a 9% decline in average standard-product prices.
- High Performance Materials & Components sales were essentially flat in the quarter, as stronger aerospace demand was offset by a 34% decline in oil and gas/chemical process sales. Six-month segment sales increased 5.5%, led by aerospace.
- Quarterly segment operating profit declined because of lower demand, less favorable product mix, low Rowley titanium sponge facility utilization, and inventory valuation effects. Cost reductions provided $27.9 million of benefit in the quarter and $52.5 million for the first six months.
- Flat Rolled Products improved year to date largely because 2015 inventory charges were substantially lower than in 2014 and cost reductions were realized, although market conditions remained weak.
- Interest expense declined to $26.8 million in the quarter and $53.5 million year to date, primarily because of lower debt levels. Retirement benefit expense also declined to $19.3 million in the quarter and $38.6 million year to date.
- Operating cash flow improved from a use of $37.5 million in the first six months of 2014 to $91.5 million in 2015. The 2015 amount included a $59.9 million federal tax refund and proceeds from settling foreign currency hedges.
Liquidity, Debt and Financing
- The $400 million revolving credit facility had no outstanding borrowings at June 30, 2015, although $4.6 million supported letters of credit. A separate letter-of-credit facility had $32 million outstanding.
- Following an S&P downgrade to BB+ from BBB-, ATI's 2023 Notes interest rate increased to 6.375% effective February 15, 2015. The downgrade also triggered a springing lien on certain receivables and inventory.
- ATI was compliant with its credit-facility leverage ratio of 3.93 and interest coverage ratio of 3.13 at June 30, 2015, but management expected not to meet the required ratios at September 30, 2015. ATI expected to replace the revolving facility with a $400 million asset-based lending facility during the third quarter.
- Management stated that cash on hand, internally generated funds and available borrowing capacity were expected to meet foreseeable liquidity needs. There were no significant debt maturities until June 2019.
Outlook, Commentary and Risks
- Management expected aerospace mill products, forgings and investment castings to benefit from strong OEM demand and record backlogs over the next several years.
- Oil and gas exploration demand was expected to remain depressed through the end of 2015 and potentially longer. Rowley facility operating rates were expected to continue pressuring results during 2015.
- Flat Rolled Products selling prices and demand for standard stainless products were expected to remain under pressure until raw material prices recovered and imports normalized. High-value product sales were expected to weaken in the second half of 2015 as a large oil and gas pipeline project rolled off.
- A defective rotary crop shear component at the Hot-Rolling and Processing Facility was discovered in May 2015. Replacement was expected by the end of September, with related operating benefits shifted into 2016. Management continued to expect the project to generate $150 million to $250 million of annual operating profit benefits over the long term.
- ATI expected 2015 capital expenditures of approximately $250 million, about half related to completing HRPF payments.
- Collective bargaining agreements covering many Flat Rolled Products facilities and two High Performance Materials & Components facilities expired June 30, 2015. Employees continued working while negotiations proceeded.
- Environmental remediation reserves were approximately $17 million, with reasonably possible costs exceeding recorded reserves by as much as $18 million. Management did not believe pending litigation was likely to materially affect financial condition or liquidity, although individual matters could materially affect results in a reporting period.
- Key exposures include cyclical end markets, aerospace and oil and gas demand, imports, raw material and energy prices, pension funding, foreign currency movements, labor disputes, credit-rating changes and execution of strategic capital projects.
Important Facts for Investors to Verify
- Whether ATI successfully replaced the revolving credit facility before the September 30 covenant measurement date and avoided a covenant breach.
- The timing, cost and operating impact of the HRPF rotary crop shear replacement and whether the projected $150 million to $250 million annual benefit remains achievable.
- Second-half demand, pricing and import trends in Flat Rolled Products, particularly after the oil and gas pipeline project ended.
- The pace of recovery in aerospace versus continued weakness in oil and gas markets.
- Cash generation relative to the approximately $250 million 2015 capital-expenditure plan and the ongoing quarterly dividend.
- Potential effects of inventory valuation, LIFO accounting, energy and raw-material prices, environmental obligations and labor negotiations on future earnings and liquidity.