10-QPeriod: Q3 FY2016

ATI INC Quarterly Report for Q3 Ended Sep 30, 2016

Filed November 2, 2016For Securities:ATI

Summary

Allegheny Technologies Incorporated (ATI) reported a significant net loss for the nine months ended September 30, 2016, largely driven by substantial restructuring and impairment charges, most notably related to the indefinite idling of its Rowley, Utah titanium sponge production facility. This resulted in a considerable impairment charge of $470.8 million and a related $173.1 million income tax valuation allowance charge. Despite these one-time charges, the company's operational performance showed some signs of resilience, particularly in the High Performance Materials & Components (HPMC) segment, which benefited from increased demand in the aerospace and defense sectors. The Flat Rolled Products (FRP) segment continued to face challenges due to market overcapacity and weak demand in key end markets, leading to a significant operating loss for the segment. ATI has taken steps to streamline its operations, including the permanent closure of its Midland, PA and Bagdad, PA facilities. The company also raised capital through the issuance of convertible senior notes and a term loan to support its restructuring efforts and meet pension funding requirements. Overall, while the reported net loss is substantial due to significant non-cash charges, the underlying operational performance in key segments and strategic actions indicate a focus on long-term profitability and efficiency.

Financial Highlights

48 data points
Beta

Revenue

$770.50M

6.5% Gross Margin

Net Income

-$530.80M

-68.9% Net Margin

EPS (Diluted)

$-4.95

Total Assets

$5.19B

Cash & Equivalents

$188.40M

Free Cash Flow

-$78.10M

Financial Statements
Beta
Revenue$770.50M
Cost of Revenue$720.30M
Gross Profit$50.20M
SG&A Expenses$60.50M
Operating Income-$498.90M
Net Income-$530.80M
EPS (Basic)$-4.95
EPS (Diluted)$-4.95
Shares Outstanding (Basic)108.90M
Shares Outstanding (Diluted)107.30M

Key Highlights

  • 1Significant net loss of $650.8 million for the first nine months of 2016, heavily impacted by $499.9 million in restructuring and other charges, including a $470.8 million impairment charge for the Rowley, UT titanium sponge facility.
  • 2The High Performance Materials & Components (HPMC) segment showed improved operating profit margin (7.9% YTD vs 8.9% prior year), driven by increased sales in the aerospace and defense market, which now represents 51% of total sales.
  • 3The Flat Rolled Products (FRP) segment experienced a significant decline in sales (-39% YTD) and a widening operating loss (-$162.2 million YTD) due to market overcapacity and idling of production facilities.
  • 4Total debt increased by $388.6 million to $1.9 billion as of September 30, 2016, primarily due to the issuance of $287.5 million in Convertible Senior Notes and a $100 million Term Loan.
  • 5Cash and cash equivalents increased by $38.6 million to $188.4 million, supported by new debt issuance and improved working capital management.
  • 6The company announced the permanent closure of its Midland, PA and Bagdad, PA facilities in October 2016, with expected charges in Q4 2016.
  • 7Management believes current cash on hand and ABL facility availability are sufficient to meet liquidity needs, including projected pension plan contributions.

Frequently Asked Questions

The primary reason for the significant net loss of $650.8 million is the substantial restructuring and impairment charges totaling $499.9 million. The largest component was a $470.8 million non-cash impairment charge related to the indefinite idling of the Rowley, UT titanium sponge production facility, along with a $173.1 million income tax valuation allowance charge.

The HPMC segment showed improved operational performance with a segment operating profit margin of 7.9% for the nine months ended September 30, 2016. This was driven by a 4% increase in sales to the aerospace and defense market, which now accounts for 51% of total company sales. Growth in next-generation jet engine platforms and increased demand for precision forgings, castings, and components were key contributors.

The FRP segment is facing significant challenges including market overcapacity, weak demand in various end markets, and lower selling prices. This resulted in a substantial operating loss of $162.2 million for the nine months ended September 30, 2016. In response, ATI has idled production facilities and announced the permanent closure of its Midland, PA and Bagdad, PA facilities in October 2016, aiming to streamline operations and improve profitability.

ATI increased its total debt to $1.9 billion by issuing $287.5 million in Convertible Senior Notes and a $100 million Term Loan in 2016, primarily to fund restructuring actions and pension obligations. Despite the increased debt, the company reported $188.4 million in cash and cash equivalents and adequate availability under its ABL credit facility. Management believes these resources, along with internally generated funds, are sufficient to meet liquidity needs, including projected pension plan contributions.