10-QPeriod: Q2 FY2016

ATI INC Quarterly Report for Q2 Ended Jun 30, 2016

Filed August 3, 2016For Securities:ATI

Summary

Allegheny Technologies Incorporated (ATI) reported its second quarter and first half 2016 financial results, revealing a challenging operating environment characterized by declining sales and net losses. The company experienced a significant drop in sales, particularly within its Flat Rolled Products (FRP) segment, largely due to lower commodity stainless steel and grain-oriented electrical steel (GOES) sales, exacerbated by the idling of production facilities. While the High Performance Materials & Components (HPMC) segment showed resilience with growth in aerospace and defense, it was impacted by high production costs at its titanium sponge facility. Financially, ATI reported a net loss attributable to ATI of $18.8 million for the second quarter and $120.0 million for the first six months of 2016. The company successfully raised capital through the issuance of convertible senior notes and a term loan to support restructuring and operational needs, and made a significant contribution to its pension plan. Despite the ongoing challenges, ATI is focusing on streamlining operations, repositioning the FRP segment towards higher-value products, and expects improved performance in the latter half of 2016.

Financial Highlights

48 data points
Beta

Revenue

$810.50M

5.9% Gross Margin

Net Income

-$18.80M

-2.3% Net Margin

EPS (Diluted)

$-0.18

Total Assets

$5.86B

Cash & Equivalents

$322.30M

Free Cash Flow

$27.90M

Financial Statements
Beta
Revenue$810.50M
Cost of Revenue$762.30M
Gross Profit$48.20M
SG&A Expenses$59.30M
Operating Income-$12.10M
Net Income-$18.80M
EPS (Basic)$-0.18
EPS (Diluted)$-0.18
Shares Outstanding (Basic)108.90M
Shares Outstanding (Diluted)107.30M

Key Highlights

  • 1Net loss attributable to ATI was $18.8 million for Q2 2016 and $120.0 million for the first six months of 2016.
  • 2Total sales decreased by 21% in Q2 2016 and 32% in the first six months of 2016 compared to the prior year periods.
  • 3The Flat Rolled Products (FRP) segment experienced a significant sales decline of 39% in Q2 and 47% in the first six months, largely due to idling production facilities and decreased demand.
  • 4The High Performance Materials & Components (HPMC) segment saw a modest sales decrease of 2.5% in Q2 and 5.9% in the first six months, with Aerospace & Defense sales growing, offsetting weakness in other markets.
  • 5ATI issued $287.5 million in 4.75% Convertible Senior Notes due 2022 and a $100 million Term Loan in Q2 2016.
  • 6The company made a $115 million contribution to its U.S. defined benefit pension plan in July 2016.
  • 7ATI's sales mix shifted towards higher-value products, with Aerospace & Defense representing a larger portion of total sales (51% YTD 2016 vs. 37% YTD 2015).

Frequently Asked Questions

The significant sales decline in the FRP segment was primarily driven by lower shipments and lower selling prices across all flat-rolled product categories. This was largely due to the idling of production facilities for commodity stainless sheet and grain-oriented electrical steel (GOES) products, compounded by challenges such as import competition and inventory reductions by distributors. Declining raw material surcharges also contributed to lower average selling prices.

ATI is implementing several strategies, including streamlining operations within its High Performance Materials & Components (HPMC) segment and restructuring its Flat Rolled Products (FRP) segment. This involves repositioning FRP towards higher-value, more differentiated products and continuing rightsizing and restructuring activities. The company also completed a new four-year labor agreement, which included changes to retirement benefits, and secured additional financing through convertible notes and a term loan to support these efforts.

The HPMC segment is showing resilience, particularly benefiting from growth in the commercial aerospace market. While facing some headwinds such as high production costs at its titanium sponge facility, ATI expects operating levels to increase and segment operating profit as a percentage of sales to return to low double-digit levels in the second half of 2016. Demand from Aerospace & Defense remains a key driver for this segment.

As of June 30, 2016, ATI reported $322.3 million in cash and cash equivalents. The company also had approximately $325 million in available liquidity under its ABL facility. ATI believes these resources, combined with internally generated funds, will be adequate to meet its liquidity needs, including projected pension plan contributions. The issuance of convertible notes and a term loan in Q2 2016 also strengthened its financial position.