ATI Inc. (Allegheny Technologies Incorporated) — Q1 2013 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2013. Allegheny Technologies is a diversified specialty-metals producer serving aerospace and defense, oil and gas and chemical processing, electrical energy, medical, automotive, construction and mining, and other markets. Its operating segments are High Performance Metals, Flat-Rolled Products, and Engineered Products.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $1,179.4 million | $1,352.5 million |
| Income before interest, other income and taxes | $28.6 million | $103.6 million |
| Income before income taxes | $15.3 million | $84.1 million |
| Net income attributable to ATI | $10.0 million | $56.2 million |
| Diluted earnings per share | $0.09 | $0.50 |
| Segment operating profit | $78.3 million; 6.6% margin | $163.2 million; 12.1% margin |
| Cash used in operating activities | $57.4 million | $18.2 million |
| Capital expenditures | $86.9 million | $69.9 million |
| Cash and cash equivalents at period end | $138.0 million | $250.3 million |
- Sales declined 12.8% year over year. Management cited lower base prices, falling raw-material surcharges and weaker demand in oil and gas, jet-engine aftermarket, electrical energy, construction and mining.
- Gross margin, calculated from reported sales less cost of sales, was approximately 9.7%, compared with approximately 15.3% in Q1 2012. Income before tax was 1.3% of sales versus 6.2%.
- The effective tax rate was 24.2%, including a $2.0 million discrete tax benefit. Excluding that benefit, the effective tax rate was 37.6%.
- Total debt was $1,479.1 million, including $1,462.0 million of long-term debt. Net debt was $1,341.1 million. Net debt to total capitalization increased to 35.0% from 32.2% at December 31, 2012.
- Working capital consumed $84.4 million of cash. Managed working capital increased to $1,885.2 million from $1,800.8 million at year-end 2012.
- The quarterly dividend remained $0.18 per common share; $19.2 million was paid during the quarter.
Material changes versus the prior comparable period
- High Performance Metals sales fell 11% to $518.4 million and operating profit fell to $75.3 million from $104.1 million; margin declined to 14.5% from 17.9%.
- Flat-Rolled Products sales fell 12% to $558.1 million and operating profit fell to $2.4 million from $46.8 million; margin declined to 0.4% from 7.4%. Standard-product shipments increased 10%, but average prices declined 15% and product mix weakened.
- Engineered Products sales fell 24% to $102.9 million and operating profit fell to $0.6 million from $12.3 million, primarily because of lower demand for tungsten-based products and carbon-alloy-steel forgings.
- Corporate expenses decreased to $12.4 million from $21.7 million, primarily because of lower performance-based incentive compensation. Net interest expense decreased to $14.4 million from $19.9 million, partly because more interest was capitalized on strategic projects.
- Retirement benefit expense increased to $32.5 million from $30.6 million, primarily because of a lower discount rate used to value benefit obligations.
- Cash declined $166.6 million from December 31, 2012, primarily due to operating cash use, capital expenditures and dividends.
Guidance, outlook, commentary, risks and unusual items
- Management expected challenging conditions to continue through the second quarter, while expressing cautious optimism for gradual improvement during 2013. Customers remained cautious, lead times were short, and nickel and titanium-scrap prices were under pressure.
- ATI was accelerating cost reductions, pursuing short-term market opportunities and reducing managed working capital. Reported gross cost reductions were $26.5 million in High Performance Metals, $10.0 million in Flat-Rolled Products and $2.8 million in Engineered Products.
- 2013 capital expenditures were expected to be approximately $550 million, including approximately $450 million for the approximately $1.2 billion Hot-Rolling and Processing Facility. Construction was reported on schedule and on budget, with assets expected to be ready for service by year-end 2013 and formal commissioning in the first half of 2014.
- Management stated that available cash, internally generated funds and existing credit capacity should meet foreseeable liquidity needs. No borrowings were made under the $400 million domestic unsecured credit facility; approximately $4 million supported letters of credit. The leverage ratio was 2.65 versus a maximum of 3.25, and interest coverage was 5.06 versus a minimum of 2.0.
- Environmental remediation reserves were approximately $14 million. Management indicated that active matters could exceed recorded reserves by as much as $2 million, although future discoveries or regulatory developments could produce materially higher costs.
- Pending litigation was not expected by management to materially affect financial condition or liquidity, but one or more matters could materially affect results in a particular reporting period. A collective bargaining agreement covering approximately 500 ATI Wah Chang employees had expired April 1, 2013 and remained extended during negotiations.
- The U.S. qualified pension plan was approximately 77% funded at December 31, 2012. No 2013 cash contribution was required under current regulations and actuarial studies, although voluntary contributions remained possible.
- Key market exposures include specialty-metals demand, raw-material and energy prices, foreign exchange, pension funding, environmental obligations, litigation, labor actions and execution of major capital projects.
Important facts for investors to verify
- Confirm the sustainability of demand recovery and pricing, particularly in Flat-Rolled Products and Engineered Products.
- Track cash conversion, accounts receivable, inventory, accounts payable and the planned reduction in managed working capital.
- Verify funding of the HRPF project, expected 2013 capital spending and the timing and cost of commissioning.
- Monitor liquidity, covenant compliance and the maturity of the $402.5 million of 4.25% convertible notes due 2014.
- Assess the effect of LIFO accounting and falling raw-material prices on reported cost of sales and comparability with competitors.
- Review environmental reserves, potential additional remediation costs, litigation and labor negotiations.
- Evaluate pension and postretirement obligations, including the potential for voluntary pension contributions and changes in benefit assumptions.