ATI Inc. 2011 Form 10-K Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) is a diversified specialty-metals producer serving aerospace and defense, oil and gas, chemical processing, electrical energy, medical, automotive, construction, transportation and industrial markets. The filing covers the fiscal year ended December 31, 2011, with comparative results for 2010 and 2009. The filing also provides unaudited fourth-quarter data.
- Operations comprise High Performance Metals, Flat-Rolled Products and Engineered Products.
- ATI completed its $897.6 million acquisition of Ladish Co., Inc. on May 9, 2011; Ladish results are included in High Performance Metals from the acquisition date.
- 2011 revenue mix was 38% High Performance Metals, 52% Flat-Rolled Products and 10% Engineered Products.
- Approximately 70% of sales came from aerospace and defense, oil and gas/chemical processing, electrical energy and medical markets.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $5,183.0 million | $4,047.8 million | +28% |
| Operating profit before corporate and other items | $612.0 million | $356.5 million | +72% |
| Income before income taxes | $339.4 million | $125.7 million | +170% |
| Net income attributable to ATI | $214.3 million | $70.7 million | +203% |
| Diluted earnings per share | $1.97 | $0.72 | +174% |
| Cash flow from operations | $296.8 million | $27.1 million | +269.7 million |
| Capital expenditures | $278.2 million | $219.1 million | +$59.1 million |
| Cash and cash equivalents | $380.6 million | $432.3 million | -$51.7 million |
| Total debt | $1,509.3 million | $1,063.3 million | +$446.0 million |
- Consolidated operating margin, based on income before interest, other income and taxes, was approximately 8.3% in 2011 versus 4.6% in 2010.
- Net income attributable to ATI margin was approximately 4.1% in 2011 versus 1.7% in 2010.
- Segment operating margin was approximately 11.8% in 2011 versus 8.8% in 2010.
- Working capital was $1,707.7 million at year-end, while managed working capital was $1,823.2 million, or 37.8% of annualized sales.
- Net debt was $1,128.7 million. Net debt to ATI capital was 31.3%, compared with 23.6% in 2010; total debt to ATI capital was 37.9%, compared with 34.3%.
- The $400 million revolving credit facility had no borrowings outstanding, although approximately $7 million supported letters of credit. ATI reported a 1.78 leverage ratio and 5.31 interest coverage ratio, within required covenants.
- The company paid $74.7 million in dividends in 2011 and declared quarterly dividends of $0.18 per share.
Material changes versus the prior comparable period
- High Performance Metals sales increased 46% to $1,955.9 million and operating profit increased 41% to $364.5 million. Growth reflected the Ladish acquisition, stronger commercial aerospace demand, improved pricing and product mix.
- Flat-Rolled Products sales increased 17% to $2,726.0 million and operating profit increased 148% to $213.4 million. High-value shipments increased 9%, while standard-product shipments declined 9%.
- Engineered Products sales increased 35% to $501.1 million, and operating profit increased to $34.1 million from $12.8 million.
- Direct international sales rose to $1,814.1 million, or 35% of total sales, from $1,283.8 million, or 32%, in 2010.
- Cash flow benefited from higher profitability but was reduced by a $273.3 million investment in managed working capital, primarily higher inventories and receivables.
- ATI issued $500 million of 5.95% senior notes due 2021, assumed $84.3 million of Ladish debt and retired $117 million of 8.375% notes due 2011.
- Results included $29.6 million of after-tax acquisition, restructuring, start-up and other charges. Segment results also reflected a $34.7 million LIFO valuation benefit, compared with a $70.7 million charge in 2010.
- The company’s U.S. defined benefit pension plan was approximately 84% funded. Pension and postretirement liabilities increased materially, and accumulated other comprehensive loss attributable to ATI increased to $941.6 million from $665.1 million.
Guidance, outlook, risks and unusual items
- Management expressed a bullish outlook for commercial aerospace, citing higher aircraft and engine production, aftermarket spare-parts demand and development of future-generation engines. Specialty-metals demand generally leads aircraft production schedules by six to twelve months.
- Management expected strong demand from oil and gas, chemical processing, electrical energy and medical markets.
- 2012 capital expenditures were expected to be approximately $485 million, funded from operating cash flow and available cash. ATI also targeted at least $100 million of additional gross cost reductions in 2012.
- Total retirement benefit expense was expected to increase to approximately $122 million in 2012 from $77.9 million in 2011, primarily because of lower discount rates and weaker 2011 pension-asset returns.
- The Rowley, Utah titanium sponge facility was expected to complete standard-grade qualification by the end of the first quarter of 2012, with additional qualification and ramp-up required thereafter.
- Construction of the approximately $1.1 billion Brackenridge, Pennsylvania hot-rolling and processing facility was expected to finish by the end of 2013, with commissioning in the first half of 2014.
- Key risks include cyclical aerospace and industrial demand, pricing pressure, volatile nickel and other raw-material costs, energy costs, foreign-sourced materials, project execution, environmental liabilities, litigation, labor disruptions, pension funding and international market exposure.
- A hypothetical $1.00-per-pound increase in nickel prices would increase annual costs by approximately $95 million before offsets; a $1.00-per-MMBtu increase in natural-gas prices would increase annual costs by approximately $8 million to $10 million.
- Environmental reserves were approximately $15 million. ATI was identified as a potentially responsible party at approximately 36 Superfund or similar sites, although management did not consider potential losses exceeding recorded reserves reasonably possible based on information available at filing.
- Fourth-quarter 2011 included approximately $1.7 million of after-tax restructuring charges. Ladish acquisition-related expenses were $1.1 million after tax in the fourth quarter.
Important facts for investors to verify
- Assess how much of 2011 revenue and profit growth was contributed by the Ladish acquisition versus organic demand, pricing and mix.
- Monitor conversion of the $2.1 billion year-end backlog into 2012 revenue and cash flow, including the concentration in aerospace.
- Verify progress, qualification timing, costs and expected returns for the Utah titanium sponge project and Brackenridge rolling mill.
- Evaluate the effect of the $402.5 million 4.25% convertible notes due 2014 and other scheduled debt maturities on liquidity and potential share dilution.
- Track working-capital intensity, particularly inventory growth and the 37.8% managed-working-capital-to-sales ratio.
- Review the expected $122 million 2012 retirement-benefit expense and the sensitivity of pension liabilities to discount rates and asset returns.
- Test the sustainability of earnings after excluding LIFO benefits, acquisition-related charges, start-up and idle-facility costs, and other unusual items.
- Review raw-material surcharge mechanisms and hedge coverage for nickel, natural gas, electricity and foreign currency.
- Confirm environmental, legal, tax and labor contingencies, including the $15 million environmental reserve and $29.7 million liability for unrecognized tax benefits.
- Note that management and the auditors concluded internal controls were effective, but both excluded Ladish from the 2011 internal-control assessment because integration was not complete.