ATI Inc. Form 10-Q Summary
Business Context and Reporting Period
Allegheny Technologies Incorporated (ATI) is a global manufacturer of technically advanced specialty materials and complex components. It operates through High Performance Materials & Components (HPMC) and Advanced Alloys & Solutions (AA&S), serving aerospace and defense, energy, automotive, electronics, construction/mining, food equipment, and medical markets. This unaudited report covers the quarter ended March 31, 2021, with comparisons to the quarter ended March 31, 2020.
Results remained affected by COVID-19-related weakness, particularly in commercial aerospace and portions of the energy market. Management reported a modest recovery in jet-engine production but expected weakened conditions to continue through at least the first half of 2021.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $692.5 million | $955.5 million | Down 27.5% |
| Gross profit | $85.8 million | $134.8 million | Down $49.0 million |
| Gross margin | 12.4% | 14.1% | Down 170 basis points |
| Operating income | $31.8 million | $68.4 million | Down $36.6 million |
| Income before taxes | $3.1 million | $34.4 million | Down $31.3 million |
| Net income attributable to ATI | $(7.9) million | $21.1 million | Decline of $29.0 million |
| Diluted EPS | $(0.06) | $0.16 | Decline of $0.22 |
| Adjusted EBITDA | $62.6 million | $99.1 million | Down 36.8% |
| Adjusted EBITDA margin | 9.0% | 10.4% | Down 140 basis points |
Segment EBITDA was $74.3 million, or 10.7% of sales, compared with $117.7 million, or 12.3% of sales, in the prior-year quarter. HPMC sales declined 43% to $240.9 million and segment EBITDA declined to $24.6 million from $76.6 million. AA&S sales declined 16% to $451.6 million, while segment EBITDA increased to $49.7 million from $41.1 million.
Aerospace and defense sales declined 48% to $254.2 million, including a 62% decline in commercial aerospace sales within HPMC. Defense sales increased, while commercial aerospace remained weak. Energy sales declined 13% to $149.1 million, primarily because of lower oil and gas activity. Automotive and electronics sales increased.
Cash used in operating activities was $68.1 million, compared with $115.4 million used in Q1 2020. The 2021 operating cash outflow primarily reflected an $84.2 million increase in managed working capital and a $17.5 million pension contribution. Capital expenditures were $26.4 million, and cash used in investing activities was $25.1 million.
Cash and cash equivalents totaled $541.7 million at March 31, 2021, down from $645.9 million at December 31, 2020. Total assets were $4.07 billion and total equity was $609.3 million. Inventories increased to $1.05 billion from $997.1 million at year-end 2020, while managed working capital increased to $1.15 billion, or 41.5% of annualized sales, from 40.5%.
Debt reported on the balance sheet totaled $1.61 billion, including $1.60 billion of long-term debt. Management's debt measure, which excludes debt issuance costs, was $1.63 billion. Cash-adjusted net debt was $1.09 billion, and trailing twelve-month debt to adjusted EBITDA increased to 10.20x from 8.30x at December 31, 2020.
Material Changes Versus the Prior Comparable Period
- Sales and profitability declined substantially because of COVID-19-related demand disruption, reduced aerospace production, lower facility utilization, and competitive pricing pressure.
- HPMC experienced the largest deterioration, with segment EBITDA margin falling to 10.2% from 18.2%.
- AA&S EBITDA improved despite lower sales, supported by $16.7 million of benefits from rising raw-material prices, cost reductions, lower retirement benefit expense, and record earnings at the STAL precision-rolled-strip joint venture.
- The prior-year period included an $8.0 million restructuring charge and a $2.5 million gain on the sale of oil and gas rights; neither item recurred in Q1 2021.
- Other income improved to $1.5 million from an expense of $0.9 million, primarily because the prior-year period included a $3.7 million net equity loss on joint ventures.
- ATI early adopted convertible-instrument accounting guidance effective January 1, 2021. Long-term debt increased by $45.4 million and equity decreased by the same amount, with no EPS impact.
- The U.S. Steelworkers collective bargaining agreement covering approximately 1,100 active full-time employees expired February 28, 2021. Employees began an ongoing strike on March 30, 2021; the strike had not materially affected Q1 results but could affect future operations.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide a specific full-year revenue or earnings forecast. It expected COVID-19-related weakness in aerospace, energy, and general industrial markets to continue through at least the first half of 2021, while noting a modest recovery in jet-engine production and significant long-term customer agreements expected to support AA&S revenue, profitability, and cash flow.
ATI plans to complete its exit from standard stainless products by the end of fiscal 2021. The company had $1.5 billion of confirmed backlog at March 31, 2021, approximately 75% of which was expected to be satisfied within 12 months.
Liquidity was approximately $900 million, consisting of $542 million of cash and approximately $360 million of additional ABL availability. However, ATI did not meet the ABL fixed-charge coverage ratio at March 31, 2021 and therefore could not access the remaining 12.5%, or $87.5 million, of revolving availability until the ratio is met. The ABL had no revolving borrowings outstanding and $42.8 million of letters of credit outstanding.
Debt maturities and refinancing remain important risks, including $84.2 million of 4.75% convertible notes due July 2022 and $500 million of 5.875% notes due 2023. The ABL also requires minimum liquidity before those maturities. ATI had suspended its quarterly dividend beginning in the fourth quarter of 2016.
ATI maintained valuation allowances on U.S. federal and state deferred tax assets and stated that it could not reliably estimate its annual effective tax rate. The Q1 tax provision was $5.5 million, primarily attributable to foreign operations.
Environmental remediation reserves were approximately $13 million, with reasonably possible costs exceeding recorded reserves by as much as $15 million. The company also faces various litigation matters, including the US Magnesium lawsuit, whose outcome cannot currently be predicted.
Other risks include raw-material and energy-price volatility, pension funding and asset performance, labor disruptions, equipment outages, international trade duties, foreign currency exposure, and continuing COVID-19 effects. Approximately 75% of forecasted domestic natural-gas requirements for the remainder of 2021 were hedged, while nickel hedges covered approximately 10% of one year's estimated requirements.
Most Important Facts for Investors to Verify
- Progress and eventual resolution of the ongoing USW strike and its effect on AA&S production, shipments, costs, and customer commitments.
- Commercial aerospace demand recovery, particularly next-generation jet-engine volumes and HPMC facility utilization.
- Compliance with the ABL fixed-charge coverage requirement and the amount of borrowing capacity actually available under the facility.
- Ability to refinance or repay the 2022 convertible notes and 2023 senior notes while maintaining adequate liquidity.
- Conversion of the $1.5 billion backlog into revenue and cash flow, including cancellation, delay, or variable-consideration risk.
- Execution of the standard-stainless-product exit and the expected restructuring, cash-flow, and margin effects.
- Future pension contributions, environmental expenditures, litigation outcomes, and potential additional remediation liabilities.
- Changes in U.S. deferred-tax-asset valuation allowances and the resulting effective tax rate.