ATI Inc. 2015 Form 10-K Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) is a diversified producer of specialty materials and components, including titanium and nickel-based alloys, specialty steels, zirconium alloys, precision forgings, castings and machined components. The company operates through High Performance Materials & Components and Flat Rolled Products. This filing covers the fiscal year ended December 31, 2015, with quarterly data highlighting fourth-quarter deterioration and restructuring charges.
- Key end markets represented 79% of 2015 sales; aerospace and defense represented 41%.
- High Performance Materials & Components contributed 53% of sales; Flat Rolled Products contributed 47%.
- Direct international sales were $1.58 billion, or 42% of total sales.
- Backlog was approximately $1.5 billion at year-end, down from $1.7 billion in 2014; approximately 85% was expected to ship in 2016.
Financial performance and liquidity
| Metric, $ millions except per-share data | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $3,719.6 | $4,223.4 | Down 12% |
| Gross profit | $60.3 | $378.6 | Down $318.3 |
| Segment operating profit (loss) | $(84.8) | $187.8 | Down $272.6 |
| Income (loss) from continuing operations | $(365.9) | $10.2 | Declined |
| Net income (loss) attributable to ATI | $(377.9) | $(2.6) | Declined |
| Diluted EPS from continuing operations | $(3.53) | $(0.02) | Declined |
| Cash flow from operations | $131.4 | $55.9 | Up $75.5 |
| Capital expenditures | $144.5 | $225.7 | Down $81.2 |
| Cash and cash equivalents | $149.8 | $269.5 | Down $119.7 |
| Total debt | $1,495.7 | $1,516.0 | Down $20.3 |
- Gross margin was approximately 1.6% of sales, compared with approximately 9.0% in 2014. Results were pressured by lower operating rates, weak oil and gas demand, excess stainless-steel capacity, imports and falling raw-material prices.
- High Performance Materials & Components sales were $1.99 billion, down 1%, and operating profit was $157.1 million, or 7.9% of sales, versus $234.8 million, or 11.7%, in 2014.
- Flat Rolled Products sales were $1.73 billion, down 22%, and the operating loss widened to $241.9 million, or 14.0% of sales, from $47.0 million in 2014.
- Operating cash flow benefited from a $229.0 million reduction in managed working capital, including lower inventory and receivables associated with reduced activity.
- Net debt to ATI capital increased to 39.4% from 32.6%; total debt to total capitalization increased to 42.0% from 37.0%.
- The company paid $66.5 million of dividends to ATI stockholders, or $0.62 per share, compared with $0.72 per share in 2014.
Material changes versus the prior comparable period
- Oil and gas, chemical and hydrocarbon processing sales fell sharply; total company sales to these markets declined to $538.0 million from $752.3 million.
- Aerospace and defense sales increased 8% to $1.51 billion, supported by higher commercial jet-engine demand and long-term agreements.
- Flat Rolled Products was adversely affected by a surge of low-priced imports, global overcapacity, historic lows in commodity stainless-steel pricing and lower shipments. Segment volume declined 19% and standard-product volume declined 24%.
- ATI recorded a $126.6 million goodwill impairment charge, all attributable to Flat Rolled Products.
- Restructuring charges were $64.3 million, including $54.5 million of long-lived-asset impairments, $3.5 million of idling costs and $6.3 million of severance.
- A $131.5 million non-cash net realizable value inventory charge offset a $131.6 million LIFO benefit caused by falling raw-material prices. ATI also recorded a $25.4 million charge to revalue non-premium-quality titanium sponge inventory.
- A $68.4 million valuation allowance was recorded against deferred tax assets because of cumulative U.S. operating losses.
- Fourth-quarter sales fell to $738.9 million from $1.05 billion in the fourth quarter of 2014; fourth-quarter loss attributable to ATI was $226.9 million, or $(2.12) per share.
- ATI completed integration of its Hot-Rolling and Processing Facility and completed premium-quality qualification of its Rowley, Utah titanium sponge facility.
Guidance, outlook, commentary and risks
Management expected High Performance Materials & Components to enter a period of sustained profitable growth driven primarily by commercial aerospace long-term agreements. It expected segment operating margins to return to double-digit levels by the second half of 2016. Management expected Flat Rolled Products to remain pressured during the first half of 2016 but to become modestly profitable in the second half after rightsizing and product-mix initiatives.
- Expected 2016 capital expenditures were approximately $240 million, including $70 million of final HRPF payments, $45 million for nickel-alloy powder expansion, $10 million for titanium investment castings and $35 million for the STAL joint venture.
- Management expected 2016 depreciation and amortization of approximately $180 million and no U.S. federal cash taxes because of net operating loss carryforwards.
- ATI idled the Midland, Pennsylvania standard stainless melt shop and sheet finishing operations in January 2016 and expected to complete idling of GOES operations by April 2016. Restart depends on market conditions and acceptable returns.
- More than 2,000 union-represented employees were locked out beginning August 15, 2015. A tentative USW agreement was reached on February 22, 2016, subject to ratification. The NLRB had issued a complaint alleging labor-law violations; the proposed agreement provided for withdrawal of the complaint.
- The $400 million ABL facility was undrawn for borrowings at year-end, although $4.6 million supported letters of credit. Because ATI did not meet the required fixed-charge coverage ratio, the final 10% or $40 million of availability was inaccessible until compliance was restored.
- Significant debt maturities include approximately $350.2 million in 2019, including the 9.375% senior notes. The 2023 notes carried a 7.625% interest rate after credit-rating downgrades, versus the original 5.875% rate.
- The U.S. qualified pension plan was approximately 71% funded. No significant contribution was required for 2016 based on current regulations and actuarial studies, but future contributions remain sensitive to asset performance and assumptions.
- Principal risks include cyclical aerospace and industrial demand, commodity overcapacity and import competition, raw-material and energy volatility, reliance on foreign suppliers, execution and returns from strategic capital projects, labor disputes, environmental liabilities, pension obligations, litigation, cybersecurity and access to liquidity.
Most important facts for investors to verify
- Whether High Performance Materials & Components achieves the projected double-digit operating margin by the second half of 2016.
- Whether Flat Rolled Products reaches modest profitability after the Midland and GOES idlings, and the cash and restructuring costs required.
- Available borrowing capacity under the ABL facility and compliance with its fixed-charge coverage and 2019 liquidity requirements.
- Cash generation relative to approximately $240 million of planned 2016 capital expenditures and remaining HRPF payments.
- The sustainability of the dividend given the 2015 loss, reduced cash balance, debt service and ABL restrictions.
- Demand, pricing and backlog conversion under aerospace long-term agreements, particularly Boeing, GE Aviation, Rolls-Royce and Safran programs.
- Potential changes in environmental, labor, litigation, pension, derivative and tax obligations, including the $15 million environmental reserve and possible additional environmental exposure of up to $16 million identified for active matters.