ATI Inc. (Allegheny Technologies Incorporated) — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020, with comparative results for 2019 and 2018. ATI manufactures specialty materials and complex components, primarily serving aerospace and defense, energy, automotive, electronics, medical, and industrial markets. Aerospace and defense represented approximately 46% of 2020 sales, while energy represented approximately 21%.
ATI operated under two revised segments beginning January 1, 2020: High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S). The company changed its segment performance measure to EBITDA during the fourth quarter and recast prior periods accordingly.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Sales | $2,982.1 million | $4,122.5 million |
| Gross profit | $292.8 million | $637.8 million |
| Gross margin | 9.8% | 15.5% |
| Income (loss) before taxes | $(1,481.9) million | $241.6 million |
| Net income (loss) attributable to ATI | $(1,572.6) million | $257.6 million |
| Diluted EPS | $(12.43) | $1.85 |
| Adjusted EBITDA | $196.3 million | $439.4 million |
| Adjusted EBITDA margin | 6.6% | 10.7% |
| Cash flow from operations | $166.9 million | $230.1 million |
| Capital expenditures | $136.5 million | $168.2 million |
| Cash and equivalents at year-end | $645.9 million | $490.8 million |
| Total debt, excluding debt issuance costs | $1,629.1 million | $1,411.2 million |
Segment EBITDA was $244.6 million, or 8.2% of sales, compared with $528.8 million, or 12.8% of sales, in 2019. HPMC generated $129.6 million of segment EBITDA on $1,164.6 million of sales; AA&S generated $115.0 million on $1,817.5 million of sales.
Operating cash flow included a $156.6 million reduction in managed working capital and approximately $130 million of contributions to U.S. qualified defined benefit pension plans. Total liquidity was reported at more than $950 million, consisting of cash and approximately $310 million of additional ABL availability.
Material changes versus the prior comparable period
- Sales declined 28%, primarily because of COVID-19-related disruptions. Aerospace and defense revenue decreased 36% to $1,360.0 million.
- HPMC sales decreased 41% and segment EBITDA decreased 64%; commercial aerospace demand was particularly weak.
- AA&S sales decreased 15% and segment EBITDA decreased 33%, reflecting lower energy, commercial aerospace, automotive, and industrial demand.
- ATI recorded $1,041.5 million of non-cash long-lived asset impairment charges, principally related to the Brackenridge, Pennsylvania operations and Hot-Rolling and Processing Facility, following the planned exit from standard stainless sheet products.
- ATI recorded a $287.0 million goodwill impairment charge for the Forged Products reporting unit in the second quarter, reflecting lower projected commercial aerospace demand.
- Total restructuring and other charges were $1,132.1 million, including $60.5 million of employee benefit costs and $17.4 million of pension and postretirement termination benefits. The company reduced employment by approximately 1,400 people, or about 17% of its workforce.
- ATI issued $291.4 million of 3.5% convertible notes due 2025, repurchased $203.2 million of 2022 convertible notes, and borrowed an additional $100 million under the ABL term loan.
- ATI’s U.S. qualified pension plans were approximately 76% funded at year-end. The company completed an $86 million pension annuity risk transfer and reduced its net pension liability by nearly $60 million.
Guidance, outlook, risks, contingencies, and unusual items
Management expected commercial aerospace conditions to remain weak through at least the first half of 2021, with improvement anticipated in the second half as narrow-body engine production and air travel recover. Management also stated that long-term aerospace fundamentals remain favorable because of next-generation aircraft, engine platforms, powder materials, and additive manufacturing opportunities.
Management expects approximately $90 million of annual cost savings in 2021 and $100 million when fully implemented in 2023, with approximately $150 million of total annual structural cost reductions when including other actions. The company expects AA&S revenue to decline by approximately $450 million from a 2019 baseline after completing the exit from standard stainless products.
- The ABL facility matures in September 2024. ATI did not meet the required fixed charge coverage ratio at December 31, 2020 and therefore could not access the remaining 12.5%, or $87.5 million, of revolving availability until compliance is restored.
- Debt maturities include approximately $511.0 million in 2023, $208.1 million in 2024, and $446.1 million in 2025, based on scheduled principal payments disclosed in the filing.
- ATI expects approximately $87 million of cash contributions to U.S. qualified defined benefit pension plans in 2021 and average annual contributions of approximately $50 million thereafter for several years.
- The A&T Stainless joint venture was idled because of repeated denials of exemptions from the 25% Section 232 tariff on imported Indonesian stainless slab.
- Environmental remediation reserves were approximately $14 million. The company stated that reasonably possible costs could exceed recorded reserves by as much as $15 million.
- ATI disclosed a possible future withdrawal liability of approximately $38 million related to the Steelworkers Western Independent Shops Pension Plan following the idling of the Albany, Oregon titanium operations.
- ATI is involved in litigation with US Magnesium concerning a supply and operating agreement; the filing states that the outcome cannot presently be predicted.
- Key continuing risks include COVID-19 effects, commercial aerospace and oil and gas cyclicality, raw-material and energy price volatility, supply-chain disruption, tariffs and trade policy, pension funding, environmental obligations, leverage, labor negotiations, cybersecurity, and potential future impairments.
The financial statements received an unqualified audit opinion from Ernst & Young LLP, and management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2020.
Important facts for investors to verify
- Whether aerospace demand and HPMC utilization recover as projected, particularly in the second half of 2021.
- Progress, timing, cash costs, and realized savings from the standard stainless sheet exit and facility closures.
- Compliance with ABL liquidity and fixed charge requirements and the company’s ability to address 2023–2025 debt maturities.
- Actual operating cash flow after working-capital benefits, pension contributions, restructuring payments, and capital expenditures.
- Remaining downside risk in the Forged Products goodwill balance, where year-end fair value exceeded carrying value by approximately 2%.
- Required pension contributions, plan asset performance, discount-rate sensitivity, and any potential multiemployer withdrawal liability.
- Exposure to environmental claims, the US Magnesium litigation, labor negotiations, tariff-related joint venture losses, and other contingencies.
- The distinction between GAAP results and management’s non-GAAP Adjusted EBITDA, including the substantial impairment and restructuring charges excluded from that measure.