ATI Inc. 2019 Q3 SEC Filing Summary
Business context and reporting period
Allegheny Technologies Incorporated, now ATI Inc., filed this Form 10-Q for the quarter and nine months ended September 30, 2019. ATI manufactures specialty materials and complex components through two segments: High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP). Aerospace and defense represented approximately 49% of third-quarter sales and 52% of nine-month sales.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Sales | $1,018.7 million | $1,020.2 million | $3,103.9 million | $3,008.7 million |
| Gross profit | $159.7 million | $160.4 million | $468.5 million | $482.7 million |
| Gross margin | 15.7% | 15.7% | 15.1% | 16.0% |
| Operating income | $94.5 million | $94.9 million | $267.6 million | $287.4 million |
| Income before taxes | $119.0 million | $62.5 million | $220.4 million | $208.5 million |
| Net income attributable to ATI | $111.0 million | $50.5 million | $201.1 million | $181.3 million |
| Diluted EPS | $0.78 | $0.37 | $1.44 | $1.31 |
- Q3 segment operating profit was $99.2 million, or 9.7% of sales, versus $105.5 million, or 10.3%, in the prior-year quarter. HPMC operating profit increased to $78.8 million, while FRP declined to $20.4 million.
- For the first nine months, segment operating profit declined to $275.4 million, or 8.9% of sales, from $325.9 million, or 10.8%.
- Operating cash flow was negative $10.0 million for the first nine months, compared with $116.6 million of cash provided in the prior-year period. The change primarily reflected $117.1 million of pension contributions, working-capital investment, incentive compensation payments, and advances to A&T Stainless.
- Investing activities provided $149.4 million, including $247.7 million of net proceeds from non-core asset sales; capital expenditures were $98.1 million.
- Cash and cash equivalents were $511.3 million at September 30, 2019, compared with $382.0 million at December 31, 2018. Management reported approximately $460 million of additional ABL availability.
- Total debt, excluding debt issuance costs for management leverage calculations, was $1,562.1 million. Debt-to-EBITDA was 3.04x versus 3.07x at year-end 2018; net debt to ATI total capitalization improved to 32.6% from 38.3%.
- ATI suspended its quarterly dividend beginning in the fourth quarter of 2016; no reinstatement was announced in this filing.
Material changes versus the prior comparable period
- Third-quarter sales were essentially flat, but nine-month sales increased 3.2%. Growth was concentrated in FRP and aerospace-related high-value products, while HPMC quarterly sales declined because of divestitures.
- HPMC sales decreased 5.8% in the quarter, primarily due to divested businesses, but segment margin improved to 14.3% from 13.0%. FRP sales increased 7.4%, while its margin fell to 4.4% from 6.8% because of weaker standard stainless demand, higher retirement expense, and losses at A&T Stainless.
- Nine-month gross profit decreased $14.2 million, reflecting raw-material and operating headwinds and near-term effects of a major jet-engine customer’s cash-management efforts.
- Retirement benefit expense increased by approximately $26 million year to date, contributing to lower operating performance.
- ATI completed the sale of Cast Products for $127 million and two non-core forging facilities for $37 million. It also sold oil and gas rights, generating approximately $92 million of cash proceeds. These transactions produced $89.8 million of net pretax gains in the first nine months, including a $10.2 million impairment charge related to retained Salem assets.
- Other income included $67.2 million in the quarter and $82.9 million year to date, compared with $0.8 million and $22.4 million, respectively, in the prior periods. The increase was primarily due to asset-sale gains.
Guidance, outlook, commentary, risks and unusual items
- Management expected to exit the three-year cumulative U.S. tax-loss condition at year-end 2019 and indicated a potential fourth-quarter income-tax benefit of approximately $25 million to $35 million from releasing valuation allowances. This benefit was not included in the stated 2019 effective tax rate and remained subject to analysis.
- Management expected pension funding of approximately $145 million in both 2019 and 2020; $117 million had been contributed during the first nine months of 2019. Longer-term annual funding was estimated at approximately $100 million, subject to asset values and discount rates.
- Backlog was $2.34 billion at September 30, 2019, up from $2.17 billion a year earlier; approximately 75% was expected to be fulfilled within 12 months.
- The amended ABL facility extends to September 2024, provides a $500 million revolving facility, a $100 million term loan, and potential delayed-draw term borrowing of up to $100 million. No revolving borrowings were outstanding at quarter-end, and $35.3 million supported letters of credit. ATI was in compliance with its fixed-charge coverage covenant.
- A&T Stainless remained subject to a 25% Section 232 tariff on imported Indonesian stainless slab after its exclusion request was denied. A new exclusion request was filed in October 2019; the joint venture continued to incur losses and ATI had provided $36.7 million of working-capital advances.
- Key risks include commercial aerospace cyclicality and production-rate changes, raw-material and energy-price volatility, international trade restrictions, pension funding requirements, labor or equipment disruptions, environmental liabilities, and litigation. Environmental reserves were approximately $19 million, with reasonably possible costs exceeding recorded reserves by as much as $15 million.
- The US Magnesium litigation involving ATI Titanium and ATI was in early discovery, and management could not predict the outcome.
Facts investors should verify
- Separate recurring operating performance from the $89.8 million of year-to-date non-core asset-sale gains and the expected $25 million to $35 million tax benefit.
- Assess whether FRP profitability can recover as standard stainless demand and A&T Stainless tariff exposure evolve.
- Monitor pension contributions, discount rates, plan-asset performance, and their effect on cash flow and liabilities.
- Review the sustainability of aerospace demand, customer production schedules, and the effect of divested businesses on year-over-year comparisons.
- Confirm ABL availability, covenant compliance, debt maturities in 2021–2025, and the absence of any dividend reinstatement.
- Evaluate environmental, litigation, tariff, raw-material, and inventory LIFO/NRV exposures, including management’s estimated potential fourth-quarter LIFO expense of $0 million to $5 million.