ATI Inc. Form 10-Q 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, and other markets. This unaudited Form 10-Q covers the three months ended March 31, 2011, with comparisons to the three months ended March 31, 2010. Key markets represented approximately 70% of first-quarter sales, and high-value products represented approximately 70% of sales.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales | $1,227.4 million | $899.4 million | +36% |
| Income before interest, other income and taxes | $116.7 million | $47.2 million | +147% |
| Income before taxes | $93.8 million | $33.0 million | +184% |
| Net income attributable to ATI | $56.3 million | $18.2 million | +209% |
| Diluted EPS | $0.54 | $0.18 | +$0.36 |
| Cash used in operating activities | $50.3 million | $72.0 million | Improved by $21.7 million |
| Capital expenditures | $42.2 million | $51.2 million | Down $9.0 million |
- Segment operating profit was $162.4 million, or 13.2% of sales, versus $88.2 million, or 9.8%, in the prior-year quarter. Income before taxes was 7.6% of sales versus 3.7%.
- Sales increased across all segments: High Performance Metals to $399.4 million, Flat-Rolled Products to $710.6 million, and Engineered Products to $117.4 million.
- Segment operating profit was $85.6 million for High Performance Metals, $63.4 million for Flat-Rolled Products, and $13.4 million for Engineered Products.
- Cash and cash equivalents were $816.3 million at March 31, 2011, compared with $432.3 million at December 31, 2010. Total assets were $5.19 billion and total equity was $2.20 billion.
- Managed working capital increased $245.9 million to $1.63 billion, primarily from higher receivables and inventories associated with increased activity and raw-material costs.
- Total debt was $1.56 billion, compared with $1.06 billion at year-end 2010. Net debt was $745.6 million. Net debt to total capitalization was 26.1%, and total debt to total capitalization was 42.5%.
- Interest expense increased to $23.0 million from $14.6 million, primarily following the January 2011 issuance of $500 million of 5.95% senior notes due 2021.
- The company paid a quarterly dividend of $0.18 per share. No shares were repurchased under the public repurchase program during the quarter.
Material changes versus the prior comparable period
- Sales growth reflected higher shipments and transaction prices across all three segments. High Performance Metals sales increased 32%, Flat-Rolled Products increased 38%, and Engineered Products increased 46% on a total-sales basis.
- Operating profitability improved through stronger demand, pricing, surcharges, productivity, and more than $26 million of gross cost reductions before inflation.
- Engineered Products operating profit increased substantially to $13.4 million from $1.8 million; Flat-Rolled Products margin increased to 8.9% from 6.1%; High Performance Metals margin increased to 21.4% from 18.2%.
- Net income attributable to ATI increased to $56.3 million from $18.2 million. Excluding 2011 special charges, management reported adjusted net income of $62.1 million, or $0.59 per share, versus $23.5 million, or $0.24 per share, excluding the 2010 tax charge.
- Operating cash flow remained negative because a $245.9 million investment in managed working capital more than offset increased profitability.
- Debt increased by $498.6 million due primarily to the $500 million senior-notes issuance. The net proceeds were intended largely to fund the planned Ladish acquisition.
Guidance, outlook, risks and unusual items
- Management continued to expect 2011 revenue growth of 15% to 20% versus 2010 and full-year segment operating profit of approximately 15% of sales.
- The outlook excluded the pending Ladish acquisition. The shareholder vote was planned for May 6, 2011, with closing expected shortly thereafter if approved. ATI expected approximately $8 million of pretax non-recurring transaction costs in the second quarter and no significant incremental second-quarter operating profit from Ladish because of acquisition accounting.
- Capital expenditures for 2011 were expected to be $300 million to $350 million. ATI continued development of a new advanced specialty-metals hot-rolling and processing facility estimated to cost approximately $1.1 billion and be completed by the end of 2013.
- Titanium sponge start-up and idle-facility costs reduced first-quarter 2011 results by approximately $9.8 million; management expected lower start-up costs in the second quarter and targeted a 20 million-pound annualized production rate at the Rowley facility during the second half of 2011.
- Other unusual items included a $3.9 million LIFO inventory valuation charge, a $4.8 million pretax charge for accelerated equity-compensation recognition related to executive retirements, and a $2.7 million discrete tax charge primarily related to foreign taxes.
- Environmental remediation reserves totaled approximately $15 million. Management did not believe reasonably possible losses above accrued amounts were material, but future developments could materially affect a period’s results.
- Material risks include cyclical and global demand, specialty-metals pricing, raw-material and energy volatility, supply availability, execution and cost overruns on strategic projects, Ladish integration and acquisition costs, pension asset performance and funding requirements, foreign currency exposure, litigation, environmental matters, and adverse market or economic conditions.
- Derivative positions hedged portions of nickel, natural gas, electricity, and foreign-currency exposure. Assuming market prices remained at March 31 levels, the company expected a $10.7 million loss to be recognized over the following 12 months on designated hedges.
- Liquidity appeared adequate under management’s assessment. The $400 million domestic credit facility had no borrowings, approximately $7 million supported letters of credit, and the company had $30 million of letters of credit outstanding under a separate facility. Covenant ratios remained within requirements.
Most important facts for investors to verify
- Whether the Ladish acquisition closed as planned, the final cash consideration, financing impact, and actual integration and transaction costs.
- Conversion of the large cash balance into acquisition funding and the resulting post-closing leverage and liquidity.
- Progress, costs, production yields, and timing for the Rowley titanium sponge facility and the approximately $1.1 billion Brackenridge project.
- Whether revenue growth, pricing, backlog, and cost reductions support the 2011 guidance of 15% to 20% revenue growth and approximately 15% segment operating margin.
- Working-capital requirements, inventory growth, and the company’s ability to return to positive operating cash flow.
- Exposure to nickel, ferrous scrap, natural gas, electricity, foreign currency, and LIFO valuation changes.
- Environmental, litigation, pension, and other contingent liabilities, including the potential for future charges beyond recorded reserves.
- The effect of higher interest expense and the 2021 senior notes on future earnings and debt-service capacity.