ATI Inc. 2013 Form 10-K Summary
Business context and reporting period
Allegheny Technologies Incorporated (ATI) is a diversified producer of specialty materials and engineered components, including titanium and nickel-based alloys, specialty steels, forgings, castings, machined components, zirconium alloys, precision strip and grain-oriented electrical steel. The filing covers the fiscal year ended December 31, 2013, with comparative information for 2012 and 2011. ATI operates through High Performance Metals and Flat-Rolled Products.
In 2013, ATI sold its tungsten materials business and exited or classified its iron castings and fabricated components businesses as discontinued operations. Continuing-operation results were recast for these changes.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Sales | $4,043.5 million | $4,666.9 million | Down 13% |
| Segment operating profit | $164.4 million | $513.2 million | Down 68% |
| Income (loss) from continuing operations attributable to ATI | $(98.8) million | $150.5 million | Turned to loss |
| Diluted EPS from continuing operations | $(0.93) | $1.36 | Down $2.29 |
| Net income attributable to ATI | $154.0 million | $158.4 million | Down 3% |
| Diluted EPS | $1.44 | $1.43 | Approximately flat |
| Cash flow from operations | $368.4 million | $427.5 million | Down 14% |
| Capital expenditures | $612.7 million | $382.0 million | Up 60% |
| Cash and equivalents | $1,026.8 million | $304.6 million | Up $722.2 million |
| Total debt | $1,947.3 million | $1,480.1 million | Up $467.2 million |
High Performance Metals sales declined 16% to $1.94 billion, while operating profit fell 46% to $209.1 million; operating margin decreased to 10.8% from 16.7%. Flat-Rolled Products sales declined 11% to $2.10 billion and reported a $44.7 million operating loss versus $127.8 million of profit in 2012; margin declined to negative 2.1% from 5.4%.
ATI reported working capital of $1.74 billion and total stockholders’ equity of $2.99 billion at year-end. Net debt to ATI capital improved to 24.1% from 32.2%, primarily because cash proceeds from the tungsten sale and new debt issuance increased liquidity. The company reported approximately $1.4 billion of available liquidity, including its undrawn $400 million revolving credit facility.
Material changes versus the prior comparable period
- Weak demand, lower base-selling prices, falling raw-material surcharges and supply-chain destocking reduced sales and profitability.
- ATI recorded $67.5 million of continuing-operation restructuring charges, including $55.1 million of long-lived asset impairments, $4.2 million of facility closure costs and $8.2 million of severance and termination benefits.
- Inventory valuation charges included a $35.0 million net-realizable-value reserve in High Performance Metals and a $20.5 million lower-of-cost-or-market reserve for industrial titanium in Flat-Rolled Products.
- The tungsten materials sale generated $600.9 million of net cash proceeds and a $428.3 million pretax gain, or $261.4 million after tax, reported in discontinued operations. This gain largely explains why total net income and EPS remained near 2012 levels despite a continuing-operations loss.
- ATI issued $500 million of 5.875% senior notes due 2023. Total debt increased, while the $402.5 million of 4.25% convertible notes became current and were scheduled to mature on June 1, 2014.
- The Hot-Rolling and Processing Facility was placed into service at the end of 2013. Cold commissioning had begun, with hot commissioning expected by the end of the third quarter of 2014.
- ATI began premium-quality qualification at its Rowley, Utah titanium sponge facility and permanently closed the older Albany, Oregon standard-grade sponge facility.
Cash flow, liquidity and debt
Operating cash flow was supported by a $242.0 million reduction in managed working capital, excluding the working capital divested with the tungsten business. Investing cash flow was a net outflow of $11.0 million because $612.7 million of capital expenditures was substantially offset by $600.9 million of sale proceeds. Financing cash flow was a $364.8 million inflow, including $494.8 million of net proceeds from the 2023 notes and $76.9 million of dividends paid to ATI stockholders.
Management stated that cash on hand, internally generated funds and available credit were expected to be sufficient for foreseeable needs, including HRPF commissioning and near-term debt maturities. The company expected 2014 capital expenditures of approximately $300 million and approximately $30 million to $35 million of pretax HRPF start-up costs.
Guidance, outlook, commentary and risks
Management was cautiously optimistic that economic conditions would gradually improve during 2014. It expected aerospace build rates and OEM backlogs to support demand for high-performance materials, while oil and gas and chemical-processing demand was expected to benefit from deepwater, horizontal drilling and corrosive-environment projects. Electrical-energy demand was expected to remain flat in the near term, and medical demand was expected to grow moderately.
ATI targeted $100 million of new gross cost reductions for 2014. Management expected 2014 net interest expense to be approximately $42 million higher than in 2013 because of lower interest capitalization, while retirement benefit expense was expected to decline to approximately $96 million from $129.3 million.
- Demand is cyclical and ATI has significant exposure to commercial aerospace, oil and gas, electrical energy and other industrial markets.
- Raw-material prices and availability are volatile. A $1.00-per-pound change in nickel prices was estimated to affect annual costs by approximately $100 million; a $0.01-per-pound change in ferrous scrap was estimated to affect costs by approximately $8 million.
- The HRPF and Rowley projects require successful commissioning, qualification, operational execution and demand recovery. HRPF commissioning was expected to generate material start-up costs.
- The U.S. qualified defined-benefit pension plan was approximately 88% funded. No required contribution was expected for 2014, but future contributions could be required depending on plan performance and regulatory requirements.
- Environmental remediation reserves were approximately $14 million, with reasonably possible additional costs of up to $8 million for active matters. The filing states that future developments could nevertheless materially affect results.
- Approximately 50% of employees were covered by collective bargaining agreements, creating strike and renegotiation risk.
- ATI was subject to foreign-exchange, energy, raw-material, litigation, government-contracting, environmental and import-competition risks.
Most important facts for investors to verify
- Separate continuing operations from discontinued operations; the $261.4 million after-tax tungsten-sale gain materially affected 2013 net income and EPS.
- Reconcile the $98.8 million continuing-operations loss with restructuring charges, inventory reserves, raw-material pricing effects and lower shipment volumes.
- Monitor repayment or conversion of the $402.5 million convertible notes due June 1, 2014 and compliance with revolving-credit covenants.
- Verify HRPF commissioning progress, start-up costs, production ramp and expected cost and working-capital benefits.
- Assess whether Rowley titanium sponge qualification is completed and whether planned facility closures produce the expected savings.
- Evaluate recovery in aerospace, oil and gas, chemical processing and electrical-energy demand against ATI’s backlog of approximately $1.6 billion.
- Review exposure to nickel, scrap and other raw-material prices, including the effect of LIFO accounting and inventory valuation reserves.
- Track pension funding, environmental remediation, litigation and collective-bargaining obligations.