Allegheny Technologies Incorporated (ATI) — Form 10-Q Summary
Business context and reporting period
ATI is a diversified specialty-metals producer serving aerospace and defense, oil and gas, chemical processing, electrical energy, medical, automotive, construction and mining, and other markets. The filing covers the quarter and six months ended June 30, 2013; interim financial statements are unaudited.
- Operations comprise High Performance Metals, Flat-Rolled Products, and Engineered Products.
- Key markets represented 69% of sales in both the second quarter and first half of 2013.
- High-value products represented 79% of sales. Direct international sales were 40% of second-quarter sales and approximately 39% of first-half sales.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $1,135.5 million | $1,357.4 million | $2,314.9 million | $2,709.9 million |
| Income before tax | $7.7 million | $89.7 million | $23.0 million | $173.8 million |
| Net income attributable to ATI | $4.4 million | $56.4 million | $14.4 million | $112.6 million |
| Diluted EPS | $0.04 | $0.50 | $0.13 | $1.00 |
| Segment operating profit | $71.7 million | $159.9 million | $150.0 million | $323.1 million |
| Segment operating margin | 6.3% | 11.8% | 6.5% | 11.9% |
| Cash provided by operations | Not separately provided | Not separately provided | $58.0 million | $59.8 million |
| Capital expenditures | Not separately provided | Not separately provided | $223.7 million | $165.7 million |
- Second-quarter sales declined 16%; first-half sales declined 15% year over year.
- Second-quarter income before tax margin was 0.7%, compared with 6.6% in the prior-year quarter. First-half income before tax margin was 1.0%, compared with 6.4%.
- Cash and cash equivalents were $74.1 million at June 30, 2013, down from $304.6 million at December 31, 2012. Operating cash flow was substantially offset by $223.2 million of investing cash outflows and $65.3 million of financing cash outflows.
- Debt totaled $1,473.9 million, compared with $1,480.1 million at year-end 2012. Net debt to ATI total capitalization increased to 36.0% from 32.2%; total debt to capitalization was 37.2% versus 37.4%.
- Current liabilities included $420.3 million of short-term debt and current maturities, including $402.5 million of convertible notes due in 2014.
- The amended $400 million revolving credit facility had no borrowings outstanding and approximately $4 million of letters of credit outstanding. ATI reported a leverage ratio of 3.29 and interest coverage ratio of 4.09, within required limits.
- The company declared dividends of $0.18 per share for the quarter and paid $38.4 million of common-stock dividends during the first half.
Material changes versus the prior comparable period
- All three segments experienced lower sales and operating profit. High Performance Metals sales decreased 14% and operating margin fell to 13.9% from 18.1%. Flat-Rolled Products sales decreased 16% and margin fell to 0.3% from 6.8%. Engineered Products sales decreased 26% and margin fell to 3.1% from 9.9%.
- Lower shipments, lower base-selling prices, declining raw-material surcharges and indices, and raw-material costs that remained elevated relative to selling-price adjustments pressured results.
- Cost-reduction actions generated $40.1 million of gross reductions in the second quarter and more than $79 million in the first half.
- Corporate expenses declined to $11.9 million from $15.8 million in the quarter, primarily because of lower performance-based incentive compensation. Net interest expense declined to $13.9 million from $18.6 million, partly because capitalized interest increased to $10.6 million from $5.6 million.
- Retirement benefit expense increased to $32.5 million from $30.6 million in the quarter and to $65.0 million from $61.2 million year to date, primarily due to a lower discount rate.
- The effective tax rate was 14.3% in the second quarter and 20.9% for the first half, aided by a $4.6 million discrete tax benefit. Excluding that benefit, management stated the 2013 annual effective tax rate was 41.1%.
Guidance, outlook, commentary, risks and unusual items
- Management expected the third quarter to be more challenging because it is seasonally weak in several end markets, particularly Europe, and reported no significant near-term improvement in market conditions.
- Management cited possible demand and selling-price stabilization beginning in the fourth quarter if nickel and titanium scrap prices remain stable. Customers were expected to remain cautious amid global economic uncertainty, short lead times, and volatile raw-material prices.
- The approximately $1.2 billion Hot-Rolling and Processing Facility was reported on schedule and on budget, with assets expected ready for service by year-end 2013 and formal commissioning in the first half of 2014. 2013 capital expenditures were expected to be approximately $575 million, about 90% related to the facility.
- On July 12, 2013, ATI issued $500 million of 5.875% senior notes due 2023 for general corporate purposes, including potential debt refinancing, capital expenditures, working capital, acquisitions, or strategic combinations.
- Environmental remediation reserves totaled approximately $15 million. Management stated active matters could exceed recorded reserves by as much as $1 million, while future developments could materially affect results or financial condition.
- Other risks include specialty-metals demand and pricing, raw-material and energy volatility, pension funding and asset performance, project execution and cost overruns, litigation, regulatory matters, and the ability to achieve expected cost savings.
- Natural-gas requirements were hedged approximately 65% for 2013, 50% for 2014, and 5% for 2015. Nickel hedges covered approximately 10% of estimated annual requirements and extended through 2016.
- Disclosure controls were deemed effective. One operating company implemented a new enterprise-resource-planning system that materially changed the nature and type of its internal controls during the quarter.
Most important facts for investors to verify
- Whether sales volumes, pricing, raw-material surcharges, and segment margins stabilized after the weak second quarter.
- Completion, commissioning, final cost, and expected productivity benefits of the HRPF.
- Liquidity after the 2023 notes issuance, including use of proceeds and the maturity or refinancing of the $402.5 million convertible notes due in 2014.
- Compliance with increasingly restrictive revolving-credit leverage limits, which decline to 3.75 in 2015 and 3.50 thereafter.
- Whether operating cash flow can fund the remaining capital program while maintaining dividends and managing working capital.
- Potential changes in environmental, litigation, pension, derivative, and other contingent liabilities beyond recorded amounts.