ATI Inc. Form 10-Q Summary
Business Context and Reporting Period
Allegheny Technologies Incorporated (ATI) is a specialty materials and components producer serving aerospace and defense, oil and gas/chemical processing, electrical energy, medical, automotive, and other markets. The filing covers the quarter and nine months ended September 30, 2014. ATI operated through High Performance Materials & Components and Flat Rolled Products.
Key Financial Metrics
| Metric | Three Months 2014 | Three Months 2013 | Nine Months 2014 | Nine Months 2013 |
|---|---|---|---|---|
| Sales | $1,069.6 million | $972.4 million | $3,175.9 million | $3,128.2 million |
| Income before interest, other income and taxes | $28.3 million | $(17.5) million | $54.6 million | $31.2 million |
| Income (loss) from continuing operations attributable to ATI | Breakeven | $(28.4) million | $(21.9) million | $(15.0) million |
| Net income (loss) attributable to ATI | $(0.7) million | $(33.8) million | $(24.7) million | $(19.4) million |
| Net loss per share attributable to ATI | $(0.01) | $(0.32) | $(0.23) | $(0.18) |
| Segment operating profit | $70.6 million | $27.6 million | $179.3 million | $175.3 million |
- Segment operating margin was 6.6% in the third quarter and 5.6% for the first nine months, compared with 2.8% and 5.6%, respectively, in the comparable periods.
- High Performance Materials & Components generated operating profit of $62.0 million in the quarter and $216.2 million year to date. Flat Rolled Products generated $8.6 million in the quarter but a $(36.9) million year-to-date operating loss.
- Cash used in operating activities was $38.2 million for the first nine months, compared with $227.4 million of cash provided in the prior-year period. Working capital investment was $195.9 million.
- Capital expenditures were $157.5 million and business acquisitions used $92.5 million during the first nine months.
- Cash and cash equivalents were $264.2 million at September 30, 2014, compared with $1,026.8 million at December 31, 2013.
- Total debt was $1,526.6 million, down from $1,947.3 million at year-end 2013. ATI repaid $397.5 million of convertible notes in June 2014; $5.0 million was converted into common stock.
- Net debt to ATI total capital increased to 30.5% from 24.1%, primarily because cash declined substantially despite lower gross debt. Total debt to total capital decreased to 34.7% from 40.2%.
- ATI paid $57.8 million in common dividends during the first nine months, or $0.54 per share.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 10.0% year over year; sales increased 1.5% for the first nine months. Higher shipment volumes generally offset lower selling prices and surcharges.
- Third-quarter profitability improved materially, with continuing-operations income before tax of $4.1 million versus a $(35.3) million loss. However, year-to-date pretax loss increased to $(25.3) million from $(14.0) million.
- High Performance Materials & Components benefited from stronger nickel-alloy and titanium shipments, cost reductions, and improved operating leverage. Aerospace remained its largest market.
- Flat Rolled Products returned to quarterly profitability but remained unprofitable year to date. Results were affected by higher inventory costs, LIFO charges, titanium valuation charges, and Hot-Rolling and Processing Facility start-up costs.
- Third-quarter results included $10.0 million of LIFO inventory valuation charges, $6.2 million of HRPF start-up costs, and $6.7 million of Rowley titanium sponge qualification-related costs. Year-to-date results included $32.9 million of Rowley-related costs and $12.5 million of HRPF start-up costs.
- Retirement benefit expense declined to $23.8 million in the quarter and $71.8 million year to date, compared with $34.5 million and $99.5 million, respectively, primarily because of a higher discount rate.
- Interest expense increased to $25.2 million in the quarter and $82.8 million year to date, partly because substantially less project interest was capitalized.
- ATI acquired 85% of Dynamic Flowform for $72.9 million and acquired Hanard Machine for $20.5 million. Both acquisitions were reported in High Performance Materials & Components.
- Discontinued operations generated losses of $0.7 million in the quarter and $2.8 million year to date. The iron castings business was wound down by the end of the third quarter, with $1.7 million of 2014 cash exit costs.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $10 million of HRPF start-up costs in the fourth quarter and total HRPF start-up costs at the low end of the original $30 million to $35 million range. Commissioning was targeted for completion by year-end 2014, with final acceptance testing expected in the first quarter of 2015.
- Management expected approximately $7 million of additional Rowley titanium sponge qualification costs in the fourth quarter and approximately $16 million of fourth-quarter LIFO inventory valuation charges.
- Management cited positive long-term aerospace, oil and gas, and medical demand, new long-term aerospace agreements, and a large oil and gas order scheduled to begin shipping in late fourth quarter 2014. Short-cycle markets were subject to global uncertainty and cautious inventory management.
- ATI stated that internally generated funds, cash on hand, and available credit were expected to meet foreseeable liquidity needs, including HRPF completion. The 2014 capital expenditure estimate was approximately $250 million.
- The $400 million unsecured credit facility had no outstanding borrowings at September 30, although $5.1 million supported letters of credit. ATI reported a 2.13 leverage ratio and 4.62 interest coverage ratio and was in compliance with then-current covenants.
- In October 2014, the credit facility was amended to modify covenant thresholds and add a springing lien on certain receivables and inventory if both major credit ratings fell below investment grade. The revised covenants become progressively more restrictive through 2015.
- Environmental remediation reserves were approximately $17 million, with reasonably possible costs exceeding recorded reserves by as much as $11 million. Future environmental developments could materially affect results.
- Approximately 50% of the workforce was covered by collective bargaining agreements; agreements covering approximately 2,400 employees were scheduled to expire June 30, 2015, creating potential strike or work-stoppage risk.
- Other principal risks included raw material and energy price volatility, pension funding and asset performance, customer and industry conditions, execution of strategic projects and acquisitions, litigation, and cybersecurity threats.
Most Important Facts for Investors to Verify
- Whether HRPF commissioning and final acceptance proceeded on schedule and delivered the expected cost, capacity, and margin benefits.
- Whether Rowley titanium qualification costs and LIFO inventory charges declined as projected after 2014.
- Flat Rolled Products’ ability to convert quarterly profitability into sustainable year-round profitability.
- Cash flow conversion, working-capital requirements, and liquidity after significant capital expenditures and debt repayment.
- Compliance with the amended credit-facility covenants and any impact from credit-rating changes or the potential springing lien.
- Progress in integrating Dynamic Flowform and Hanard and the economic value of their aerospace and specialty-component capabilities.
- Potential environmental liabilities above the $17 million recorded reserve and the outcome of labor negotiations before June 30, 2015.