ATI Inc. (Allegheny Technologies Incorporated) — Q3 2011 Form 10-Q Summary
Business context and reporting period
ATI is a diversified specialty-metals producer serving aerospace and defense, oil and gas/chemical processing, electrical energy, medical, automotive, construction, mining and other markets. The filing covers the three and nine months ended September 30, 2011; interim financial statements are unaudited.
ATI operates through High Performance Metals, Flat-Rolled Products and Engineered Products. On May 9, 2011, ATI acquired Ladish Co., Inc. for $897.6 million, including $384 million of cash and 7.3 million ATI shares. Ladish results are included in High Performance Metals from the acquisition date.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Sales | $1,352.6 million | $1,058.8 million | $3,931.6 million | $3,010.2 million |
| Income before taxes | $95.4 million | $9.5 million | $289.5 million | $103.1 million |
| Net income attributable to ATI | $62.3 million | $1.0 million | $182.6 million | $55.6 million |
| Diluted EPS | $0.56 | $0.01 | $1.68 | $0.56 |
| Operating cash flow | Not separately provided | Not separately provided | $107.5 million | $(63.9) million |
Q3 sales increased 28%; nine-month sales increased 31%. Q3 income before tax margin improved to 7.1% from 0.9%, while the nine-month margin increased to 7.4% from 3.4%. Segment operating profit was $161.8 million, or 12.0% of sales, in Q3 2011 versus $63.0 million, or 6.0%, in Q3 2010. For nine months, segment operating profit was $497.6 million, or 12.7% of sales, versus $268.5 million, or 8.9%.
- High Performance Metals Q3 external sales rose 55% to $534.7 million; operating profit was $95.7 million, or 17.9% of sales.
- Flat-Rolled Products Q3 sales rose 11% to $689.6 million; operating profit improved to $58.8 million from a loss of $11.8 million.
- Engineered Products Q3 sales rose 35% to $128.3 million; operating profit increased to $7.3 million from $2.8 million.
Cash flow from operations for nine months was affected by a $390.3 million increase in managed working capital. Capital expenditures were $168.8 million, and cash used for acquisitions and investments was $349.2 million. Cash used in investing activities totaled $515.0 million, while financing activities provided $406.7 million. Cash and equivalents were $431.5 million at September 30, 2011, compared with $432.3 million at December 31, 2010.
Liquidity, debt and balance-sheet position
- Total debt was $1,628.3 million at September 30, 2011, up from $1,063.3 million at year-end 2010, primarily due to the $500 million issuance of 5.95% senior notes due 2021 and debt assumed in the Ladish acquisition.
- Net debt was $1,196.8 million, and net debt to total capitalization was 30.3%, versus 23.6% at year-end 2010. Total debt to capitalization was 37.2%, versus 34.3%.
- Long-term debt was $1,483.4 million; current debt and the current portion of long-term debt were $144.9 million.
- ATI had not borrowed under its $400 million domestic credit facility; approximately $7 million supported letters of credit. The company reported a leverage ratio of 2.05 against a maximum of 3.25 and an interest coverage ratio of 5.25 against a minimum of 2.0.
- Accounts receivable increased to $769.3 million and inventories to $1,434.5 million from $545.4 million and $1,024.5 million, respectively, at December 31, 2010.
Material changes versus the prior comparable period
- Profitability improved substantially from higher shipments, pricing, raw-material surcharges, product mix and cost reductions. ATI reported $28.9 million of gross cost reductions in Q3 and $87.5 million year to date.
- The Ladish acquisition expanded aerospace and defense capabilities and added approximately $533.3 million of goodwill and $166.0 million of intangible assets on a preliminary basis. The purchase-price allocation was expected to be finalized by year-end 2011.
- Q3 2011 included $12.5 million of Ladish inventory fair-value adjustments and $6.2 million of titanium sponge idle, start-up and qualification costs. Nine-month results included $25.7 million of Ladish-related inventory fair-value adjustments and approximately $25.5 million of titanium sponge idle and start-up costs.
- LIFO effects were favorable compared with 2010: Q3 2011 included a $12.5 million pretax net benefit, compared with a $35.2 million charge in Q3 2010; nine-month 2011 included a $3.4 million benefit versus a $40.7 million charge.
- Interest expense increased to $23.4 million in Q3 and $70.1 million for nine months, versus $16.4 million and $46.4 million, respectively, due to new and assumed debt.
- Retirement benefit expense declined to $19.2 million in Q3 and $57.9 million for nine months, from $22.5 million and $67.4 million, respectively.
Guidance, outlook, commentary and risks
Management reduced its 2011 revenue expectation to approximately $5.2 billion and expected segment operating profit as a percentage of revenue to remain within the nine-month year-to-date range. Management cited economic uncertainty in the United States and Europe, cautious customer purchasing and falling raw-material surcharges affecting standard stainless products. ATI nevertheless expected strong 2012 demand in aerospace, oil and gas/chemical processing, electrical energy and medical markets.
High Performance Metals backlog exceeded $1.4 billion at quarter-end, compared with $650 million at year-end 2010; total ATI backlog was approximately $2.2 billion. The company expected 2011 capital expenditures of $275 million to $300 million, including a strategic Brackenridge, Pennsylvania hot-rolling facility estimated at approximately $1.1 billion and targeted for completion by the end of 2013.
- Key exposures include specialty-metals demand, aerospace and defense production rates, global economic conditions, raw-material and energy prices, foreign exchange, pension assets and funding requirements, and the integration and anticipated synergies of Ladish.
- ATI uses surcharges, indexes and derivatives to manage raw-material, energy and currency exposure. At September 30, 2011, natural-gas hedges covered approximately 70% of forecast domestic requirements through 2011, 50% for 2012 and 10% for 2013.
- Environmental remediation reserves were approximately $15 million. Management did not believe currently identified environmental or legal matters were reasonably likely to exceed accrued amounts by a material amount, although future developments could materially affect a reporting period.
- Management concluded that disclosure controls were effective. Integration of Ladish internal controls was still in progress.
Important facts for investors to verify
- Whether 2011 revenue of approximately $5.2 billion and the stated operating-margin outlook were achieved.
- The final Ladish purchase-price allocation, goodwill and intangible-asset values, acquisition costs and realized operating synergies.
- Conversion of the substantial backlog into shipments and cash flow, particularly in aerospace and defense.
- Working-capital requirements, inventory levels and the effect of LIFO adjustments and raw-material surcharge changes on margins.
- Debt maturities, covenant compliance, interest expense and leverage following the acquisition and the 2021 note issuance.
- Progress and final cost of the $1.1 billion Brackenridge project and the qualification and ramp-up of the Rowley titanium sponge facility.
- Potential environmental, litigation, pension, tax and derivative-related liabilities not fully predictable from the interim filing.