ATI Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed February 28, 2013. ATI is a diversified specialty-metals producer operating through High Performance Metals, Flat-Rolled Products, and Engineered Products. Its principal markets include aerospace and defense, oil and gas, chemical processing, electrical energy, medical, automotive, and industrial applications.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Sales | $5,031.5 million | $5,183.0 million | Down 3% |
| Operating profit | $537.9 million | $612.0 million | Down 12% |
| Income before taxes | $244.0 million | $339.4 million | Down 28% |
| Net income attributable to ATI | $158.4 million | $214.3 million | Down 26% |
| Diluted EPS | $1.43 | $1.97 | Down 27% |
| Cash flow from operations | $427.5 million | $296.8 million | Up 44% |
| Capital expenditures | $382.0 million | $278.2 million | Up 37% |
| Cash and equivalents | $304.6 million | $380.6 million | Down $76.0 million |
| Total debt | $1,480.1 million | $1,509.3 million | Down $29.2 million |
Sales to aerospace and defense increased 9% to $1.62 billion and represented 32% of total sales. Direct international sales were $1.80 billion, or 36% of total sales. The company paid $76.5 million in common-stock dividends, equivalent to $0.72 per share for the year.
Net margins declined to approximately 3.2% from 4.1% in 2011; operating margin declined to approximately 10.7% from 11.8%. Working capital was $1.64 billion at year-end, while managed working capital was $1.80 billion, or 41.1% of annualized sales.
- High Performance Metals: Sales increased 12% to $2.19 billion; operating profit increased 2% to $371.6 million, with a 17.0% operating margin. Aerospace represented 60% of segment revenue.
- Flat-Rolled Products: Sales decreased 14% to $2.35 billion; operating profit decreased 41% to $126.9 million, with a 5.4% operating margin. Lower base prices, lower surcharges, weaker product mix, and inventory effects pressured results.
- Engineered Products: Sales decreased 2% to $491.7 million; operating profit increased 16% to $39.4 million, with an 8.0% operating margin.
Material Changes Versus 2011
- Global economic uncertainty and customer inventory-management actions reduced second-half demand, sales, and profitability.
- High Performance Metals benefited from a full year of ATI Ladish results, higher nickel-based alloy shipments, lower titanium-sponge start-up costs, and cost reductions.
- Flat-Rolled Products experienced historically low standard-stainless base prices and a 17% decline in average transaction prices, despite a 4% increase in product shipments.
- Retirement benefit expense increased to $122.4 million from $77.9 million, primarily because of lower discount rates and lower expected asset returns.
- Corporate expenses declined to $68.4 million from $92.5 million, primarily because 2011 included acquisition-related costs and accelerated equity compensation.
- Fourth-quarter 2012 included an $8.8 million after-tax, non-cash impairment charge related to closing the Alpena, Michigan iron-casting facility. The related pre-tax charge was $13.0 million.
- Comprehensive income attributable to ATI was $70.6 million, compared with a $62.2 million comprehensive loss in 2011, although accumulated other comprehensive loss remained substantial because of pension and postretirement obligations.
Cash Flow, Debt, Liquidity, and Commitments
- Operating cash flow of $427.5 million funded most of the $382.0 million of capital expenditures. Cash used in financing activities was $124.8 million, mainly reflecting dividends and debt repayments.
- Net debt was $1.18 billion, and net debt to ATI capital was 32.2%, compared with 31.3% in 2011. Total debt to ATI capital was 37.4%.
- The $400 million unsecured revolving credit facility expires in April 2017. No borrowings were outstanding at year-end, although approximately $4 million supported letters of credit. ATI was in compliance with leverage and interest-coverage covenants.
- Scheduled principal payments include $17.1 million in 2013 and $419.6 million in 2014, including the $402.5 million 4.25% convertible senior notes due 2014.
- ATI expects 2013 capital expenditures of approximately $550 million, including approximately $450 million for the Hot-Rolling and Processing Facility. Management expects 2013 to be the peak capital-spending year and intends to fund spending through cash flow, cash on hand, and, if needed, the revolving facility.
- The U.S. qualified defined-benefit pension plan was approximately 77% funded under GAAP. No required contribution was expected for 2013, although future contributions may depend on asset performance, obligations, and regulatory changes.
Outlook, Commentary, Risks, and Unusual Items
Management expects favorable secular growth over the next three to five years in aerospace, oil and gas, chemical processing, electrical energy, and medical markets. Aerospace build rates and OEM backlogs were viewed as supportive, with ATI demand generally preceding aircraft production changes by six to twelve months. Management also expected modest improvement in jet-engine spare-parts demand during 2013.
Confirmed backlog was approximately $1.6 billion at December 31, 2012, down from $2.1 billion at December 31, 2011; approximately 80% was expected to ship in 2013. High Performance Metals backlog was $1.3 billion, and Flat-Rolled Products backlog was $0.3 billion.
- The approximately $1.16 billion HRPF project was reported on schedule and on budget, with assets expected to be ready for service by the end of 2013 and formal commissioning expected in the first half of 2014.
- Management targeted at least $100 million of additional gross cost reductions in 2013 after achieving more than $114 million in 2012.
- Raw-material exposure remains significant: a $1.00-per-pound change in nickel prices could affect annual costs by approximately $100 million, while a $0.01-per-pound change in ferrous scrap could affect costs by approximately $8 million.
- Key risks include cyclical aerospace and industrial demand, pricing pressure and imports, raw-material and energy volatility, foreign-source supply disruptions, execution and returns from major capital projects, pension underfunding, environmental remediation, litigation, labor negotiations, foreign-market exposure, and government-contract compliance.
- Environmental reserves totaled approximately $16 million. ATI was involved in investigations and remediation at multiple sites and identified as a potentially responsible party at approximately 43 Superfund or similar sites, although management did not believe reasonably possible losses beyond recorded reserves would be material based on available information.
- The collective bargaining agreement covering approximately 500 ATI Wah Chang employees was scheduled to expire April 1, 2013, creating potential strike and operating-disruption risk.
Investor Verification Checklist
- Verify the timing, final cost, commissioning, capacity, and expected returns of the HRPF project and the level of 2013 capital spending.
- Assess the 2014 maturity and potential conversion or refinancing of the $402.5 million convertible senior notes.
- Monitor Flat-Rolled Products pricing, raw-material surcharges, imports, inventory levels, and product mix.
- Evaluate aerospace customer backlogs, production-rate assumptions, aftermarket demand, and ATI’s customer concentration.
- Track pension funded status, discount-rate assumptions, retirement expense, and potential future cash contributions.
- Review environmental, litigation, labor, and government-contract contingencies for developments beyond recorded reserves.
- Reconcile reported earnings with cash generation, LIFO benefits, non-cash impairment charges, and other unusual items.