ATI Inc. 2009 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, mining and other markets. The filing covers the fiscal year ended December 31, 2009; quarterly data indicates fourth-quarter 2009 sales of $815.7 million and net income attributable to ATI of $37.8 million.
ATI operated through High Performance Metals, Flat-Rolled Products and Engineered Products. Its products include titanium, nickel-based alloys, superalloys, stainless and specialty steels, zirconium, hafnium, niobium, powder metals, tungsten products, forgings and castings.
Key financial metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Sales | $3,054.9 million | $5,309.7 million |
| Operating profit | $282.2 million | $944.9 million |
| Operating margin | 9.2% | 17.8% |
| Income before taxes | $64.9 million | $867.7 million |
| Net income attributable to ATI | $31.7 million | $565.9 million |
| Diluted earnings per share | $0.32 | $5.67 |
| Cash flow from operations | $218.5 million | $754.5 million |
| Cash flow from operations excluding voluntary pension contribution | Approximately $460 million | Not clearly provided |
| Capital expenditures and business acquisitions | $454.3 million | $515.7 million |
| Cash and cash equivalents | $708.8 million | $469.9 million |
| Total debt | $1,071.1 million | $509.8 million |
| Net debt | $362.3 million | $39.9 million |
| Working capital | $1,373.0 million | $1,235.5 million |
Segment external sales were $1.30 billion for High Performance Metals, $1.52 billion for Flat-Rolled Products and $238.8 million for Engineered Products. Segment operating profit was $234.7 million, $71.3 million and a loss of $23.8 million, respectively.
ATI paid quarterly dividends of $0.18 per share, or $0.72 for the year. No repurchases were made under the public share-repurchase program during 2009.
Material changes versus the prior comparable period
- Sales declined 42.4% from 2008, reflecting the global recession, lower shipments, reduced raw-material surcharges and lower base selling prices.
- Operating profit declined 70.1%, and the operating margin fell to 9.2% from 17.8%.
- High Performance Metals sales declined 33% and operating profit declined 56%, primarily due to aerospace production delays, weaker aeroengine aftermarket demand, lower prices and $31.2 million of idle-facility, workforce-reduction and start-up costs.
- Flat-Rolled Products sales declined 48%, shipments declined 22%, and operating profit declined 81% to $71.3 million. Idle-facility and workforce-reduction costs totaled $19.3 million.
- Engineered Products sales declined 48% and the segment moved from a $20.9 million operating profit to a $23.8 million operating loss, including $5.7 million of idle-facility and workforce-reduction costs.
- Net income attributable to ATI fell to $31.7 million from $565.9 million. Results included $17.0 million of after-tax charges associated with debt retirement and the tax effects of the pension contribution.
- Retirement benefit expense increased substantially to $121.9 million from $8.4 million, although the U.S. qualified pension plan was approximately 99.6% funded at year-end.
- Debt increased primarily because ATI issued $402.5 million of 4.25% convertible notes due 2014 and $350 million of 9.375% senior notes due 2019. Proceeds funded a $350 million voluntary pension contribution, retired $183.3 million of 2011 notes and supported general corporate purposes.
- Cash increased by $238.9 million despite lower operating cash flow, primarily because of debt financing and a $350.5 million reduction in managed working capital.
Guidance, outlook, management commentary and unusual items
- Management expected gradual and steady improvement in most global markets during 2010, with stronger aerospace growth expected beginning in 2011. The outlook depended on aircraft production schedules, customer backlogs and economic recovery.
- Year-end confirmed backlog was approximately $1.4 billion, up from $1.3 billion in 2008. ATI expected approximately 67% of the backlog to be filled in 2010.
- Management planned approximately $375 million of 2010 capital expenditures and targeted at least $100 million of additional gross cost reductions.
- ATI invested approximately $454 million in 2009 and approximately $1.8 billion over the preceding five years in strategic capacity and technology projects, including titanium sponge, forging, specialty-metal rolling, zirconium and Chinese precision-strip capacity.
- The Rowley, Utah premium-grade titanium sponge facility began initial production in December 2009 and was expected to ramp during 2010. The Albany, Oregon titanium sponge facility was temporarily idled in July 2009 to align production and inventories with demand.
- ATI acquired the assets of Crucible Compaction Metals and Crucible Research for approximately $38.9 million in October 2009. The acquisition added advanced powder-metal capabilities and $12.4 million of goodwill; its operating results were not material to periods presented.
- Management reported $173 million of gross cost reductions in 2009, including workforce reductions and procurement and operating-efficiency savings.
- Environmental reserves totaled approximately $18 million. ATI was involved in remediation activities and identified as a potentially responsible party at approximately 37 Superfund or similar sites, although management did not believe currently estimated exposures were material.
- Key risks include cyclical aerospace and industrial demand, pricing pressure and excess capacity, volatile nickel and other raw-material costs, energy costs, foreign sourcing and currency exposure, strategic-project execution, environmental liabilities, litigation, labor negotiations and pension assumptions.
- Natural-gas hedges covered approximately 50% of forecast requirements through 2011 and produced a $17.1 million unrealized pretax loss at year-end. Raw-material hedges had a $15.4 million unrealized pretax gain.
Most important facts for an investor to verify
- Whether aerospace and other end-market recovery assumptions support utilization of ATI’s expanded titanium, forging and specialty-metals capacity.
- Whether the $375 million 2010 capital-spending plan and major Brackenridge project remain financially justified under actual demand and pricing conditions.
- The effect of lower or higher nickel, scrap, titanium, energy and other raw-material prices, including timing mismatches under surcharge mechanisms and LIFO accounting.
- Debt maturities and refinancing needs, particularly the approximately $128 million of 2011 maturities and $403.6 million of 2014 maturities disclosed in the filing.
- Potential dilution or cash-repurchase exposure from the $402.5 million convertible notes, which had an initial conversion price of approximately $41.795 per share.
- The sustainability of cash generation after excluding working-capital releases, debt proceeds and the effects of the voluntary pension contribution.
- Changes in pension and postretirement obligations, asset returns, discount rates and future benefit expense; management estimated 2010 retirement benefit expense of approximately $90 million.
- Developments in environmental proceedings, including the South El Monte Superfund matter and the Natrona, Pennsylvania Clean Air Act notice.
- ATI’s ability to maintain credit-facility covenants and liquidity while funding strategic projects, dividends, debt service and contractual raw-material commitments.