Allegheny Technologies Incorporated (ATI) — Q1 2015 Form 10-Q Summary
Business context and reporting period
ATI is a diversified specialty materials and components producer serving aerospace and defense, oil and gas, chemical processing, electrical energy, automotive, medical, and other markets. The filing covers the three months ended March 31, 2015; interim financial statements are unaudited.
- Operations comprise High Performance Materials & Components and Flat Rolled Products.
- Key markets represented 78% of sales; international sales were $454 million, or 40% of total sales.
- High-value products represented 79% of total sales.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $1,125.5 million | $987.3 million | +14.0% |
| Income before interest, other income and taxes | $46.4 million | $2.5 million | Improved |
| Income from continuing operations before taxes | $20.6 million | $(26.0) million | Improved |
| Net income attributable to ATI | $10.0 million | $(20.0) million | Returned to profitability |
| Diluted EPS | $0.09 | $(0.19) | Improved |
| Segment operating profit | $83.8 million | $43.5 million | +92.6% |
| Segment operating margin | 7.4% | 4.4% | +3.0 percentage points |
| Operating margin before interest and taxes | 4.1% | 0.3% | Improved |
| Income tax provision (benefit) | $8.0 million | $(10.0) million | Effective rates of 38.8% and 38.5% |
| Cash provided by operating activities | $12.0 million | $(56.9) million | Improved |
| Capital expenditures | $22.6 million | $39.6 million | Lower |
Sales growth reflected higher shipment volumes that more than offset lower selling prices, including raw-material surcharges and index pricing effects. Net income attributable to ATI represented approximately 0.9% of sales.
- High Performance Materials & Components sales were $542.8 million, up 12.1%; operating profit was $75.9 million, compared with $69.1 million.
- Flat Rolled Products sales were $582.7 million, up 16.0%; operating profit was $7.9 million, compared with a $25.6 million operating loss.
- Cost reductions totaled $24.6 million, including $15.1 million in High Performance Materials & Components and $9.5 million in Flat Rolled Products.
- Retirement benefit expense declined to $19.3 million from $23.9 million; net interest expense declined to $26.7 million from $29.1 million.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents were $238.0 million at March 31, 2015, down $31.5 million from December 31, 2014. Foreign subsidiaries held $84.7 million of cash.
- Operating cash flow of $12.0 million included a $59.9 million federal tax refund and $37.9 million of proceeds from settled foreign-currency contracts. Working capital consumed $79.4 million as business activity increased.
- Managed working capital increased to $1.674 billion from $1.595 billion, while managed working capital as a percentage of annualized sales improved to 35.6% from 38.5%.
- Total debt was $1.527 billion, essentially unchanged from year-end. Net debt was $1.289 billion, and net debt to ATI total capital was 33.2%, compared with 32.6% at year-end.
- No borrowings were outstanding under the $400 million domestic credit facility at quarter-end; approximately $4.7 million supported letters of credit. Average first-quarter borrowings were $73.7 million at a 1.9% average rate.
- The company remained in compliance with credit-facility covenants: leverage ratio was 3.73 versus a maximum of 5.00, and interest coverage was 3.26 versus a minimum of 2.50.
- Management expected approximately $290 million of 2015 capital expenditures, about half related to completing payments for the Hot-Rolling and Processing Facility, funded through cash flow, cash on hand and, if needed, the credit facility.
Material changes versus the prior comparable period
- Revenue increased 14%, driven primarily by higher volumes; reported prices were lower in several product areas.
- ATI returned to profitability, with attributable net income of $10.0 million versus a $20.0 million loss.
- Flat Rolled Products improved materially from a $25.6 million operating loss to $7.9 million of operating profit, aided by volume, pricing, lower inventory charges and cost reductions.
- High Performance Materials & Components profit increased, although its margin declined modestly to 14.0% from 14.3% because of operating pressures at the Rowley titanium sponge facility and other costs.
- Q1 2015 included $12.4 million of HRPF start-up and Rowley titanium sponge qualification costs. Q1 2014 included $8.3 million of inventory valuation charges related to industrial titanium products.
- S&P downgraded ATI one notch to BB+ from BBB-, increasing the coupon on the 2023 notes from 6.125% to 6.375% beginning February 15, 2015. The downgrade also activated a springing lien on specified receivables and inventory under the domestic credit facility.
- The company adopted revised discontinued-operations guidance without an impact on the consolidated financial statements. Q1 2014 included $1.9 million of discontinued-operation losses; Q1 2015 had none.
Guidance, outlook, risks and unusual items
- Management expected High Performance Materials & Components demand for mill products, forgings and investment castings to grow through 2015 and beyond, supported by aerospace. Oil and gas exploration demand was expected to remain soft.
- The Rowley titanium sponge qualification program remained on schedule for completion in mid-2015, but low operating rates were expected to pressure results throughout 2015.
- Flat Rolled Products was expected to achieve improved volume and mix in Q2 2015. Approximately $3 million of additional HRPF start-up costs were expected in Q2.
- Management continued to expect Q4 2015 operating profit to benefit at an annualized rate of approximately $150 million versus 2014, including elimination of start-up costs.
- Principal risks include cyclical and volatile end markets, aerospace and oil-and-gas demand changes, raw-material and energy-price volatility, competitive imports, execution of HRPF and Rowley projects, pension funding, credit-rating deterioration, litigation and environmental obligations.
- Environmental remediation reserves were approximately $17 million, with reasonably possible costs exceeding recorded reserves by as much as $19 million. The company stated that additional developments could materially affect results.
- Natural-gas and raw-material hedges had net unrealized pre-tax losses of $23.9 million and $19.3 million, respectively, while foreign-currency forwards had a net unrealized pre-tax gain of $68.7 million.
- Management stated that cash, internally generated funds and available credit were adequate for foreseeable liquidity needs and that no significant debt maturities were expected until June 2019.
Important facts for investors to verify
- Whether HRPF productivity, product mix and cost reductions support the projected Q4 annualized improvement.
- The timing and cost of Rowley titanium sponge qualification and the effect of continued low utilization.
- Compliance with tightening leverage and interest-coverage covenant thresholds later in 2015.
- Effects of the below-investment-grade credit ratings, springing lien and potential additional interest-rate increases.
- Conversion of the $290 million capital-spending plan into operating cash flow and its effect on liquidity.
- Exposure to aerospace, oil and gas, standard stainless imports, raw-material prices, energy costs and foreign exchange.
- Potential environmental costs above the $17 million recorded reserve and the disclosed possible excess of up to $19 million.