01—Abstract
Summary
Summary of the 10-Q filed August 2, 2017. Cited figures are marked; the original filing is the authoritative source.
Allegheny Technologies Incorporated (ATI) reported improved financial results for the second quarter and first six months of 2017 compared to the prior year, marked by a significant increase in gross profit and a return to net income.
Sales increased across both of ATI's segments, High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP), driven by demand in aerospace & defense, oil & gas, and automotive markets. The HPMC segment showed strong performance, particularly in commercial jet engines, while the FRP segment benefited from higher operating levels and restructuring actions. Despite a cash outflow from operations due to a significant pension contribution, the company maintained a healthy liquidity position with substantial cash on hand and available credit facilities.
Key areas of focus for investors include the continued recovery in segment operating profit, the successful integration of restructuring actions, and management's strategy to enhance technology leadership and balance sheet strength. Investors should also note the ongoing efforts to remediate a material weakness in internal controls related to deferred tax asset valuation allowances, with a target completion date of December 31, 2017.
02—Key points
Key Highlights
- Net income attributable to ATI was $10.1 million ($0.09 per diluted share) for Q2 2017, a significant improvement from a net loss of $18.8 million ($(0.18) per diluted share) in Q2 2016. For the six months ended June 30, 2017, net income was $27.6 million ($0.25 per diluted share) compared to a net loss of $120.0 million ($(1.12) per diluted share) in the prior year period.
- Total sales increased to $880.2 million in Q2 2017 and $1,746.1 million for the first six months of 2017, up from $810.5 million and $1,568.0 million in the respective prior year periods.
- Gross profit significantly improved, reaching $112.3 million in Q2 2017 (12.8% of sales) and $225.1 million for the first six months (12.9% of sales), compared to $48.2 million (6.0% of sales) and $15.0 million (1.0% of sales) in the respective prior year periods.
- The High Performance Materials & Components (HPMC) segment reported operating profit of $68.0 million in Q2 2017 (12.9% of sales), up from $38.8 million (7.8% of sales) in Q2 2016. For the first six months, HPMC operating profit was $118.9 million (11.5% of sales), up from $67.9 million (6.8% of sales).
- The Flat Rolled Products (FRP) segment shifted from an operating loss of $31.8 million ($(10.2)% of sales) in Q2 2016 to an operating profit of $2.9 million (0.8% of sales) in Q2 2017. For the first six months, FRP moved from a loss of $141.4 million ($(24.5)% of sales) to a profit of $21.9 million (3.1% of sales).
- Cash used in operating activities for the first six months of 2017 was $85.5 million, impacted by a $135 million contribution to the ATI Pension Plan. However, the company maintained a strong liquidity position with $154.6 million in cash and cash equivalents and approximately $250 million in available liquidity under its ABL facility as of June 30, 2017.
- The company is actively working to remediate a material weakness in internal control over financial reporting related to the calculation and review of deferred tax asset valuation allowances, with an expected completion by December 31, 2017.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2017, ATI Inc kept $0.01.
- Revenue$880.2M100.0%
- Cost of revenue−$755.9M85.9%
- Gross profit$124.3M14.1%
- Operating costs−$65.0M7.4%
- Operating income$59.3M6.7%
- Interest, other & tax−$49.2M5.6%
- Net income$10.1M1.1%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2017filed August 2, 2017Financial Statements
Q2 FY2017 against Q2 FY2016
| Line item | Q2 FY2017Q2 FY2016 | Change |
|---|---|---|
| Revenue | $880.20M$810.50M | +8.6% |
| Cost of Revenue | $755.90M$762.30M | −0.8% |
| Gross Profit | $124.30M$48.20M | +157.9% |
| SG&A Expenses | $65.00M$59.30M | +9.6% |
| Operating Income | $59.30M-$12.10M | +590.1% |
| Net Income | $10.10M-$18.80M | +153.7% |
| EPS (Basic) | $0.09$-0.18 | +150.0% |
| EPS (Diluted) | $0.09$-0.18 | +150.0% |
| Shares Outstanding (Basic) | 108.90M108.90M | 0.0% |
| Shares Outstanding (Diluted) | 128.30M107.30M | +19.6% |
05—Questions
Frequently Asked Questions
What were the primary drivers for the improved financial performance in Q2 and the first six months of 2017 compared to 2016?
The improved financial performance was driven by increased sales in both the High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP) segments. This was supported by strong demand in key markets like aerospace & defense and oil & gas. Additionally, the company benefited from the positive impact of restructuring actions taken in 2016, leading to higher gross profit and operating profit across both segments.
How is the company's liquidity position?
As of June 30, 2017, ATI had $154.6 million in cash and cash equivalents. The company also has an Asset Based Lending (ABL) Credit Facility with approximately $250 million in available liquidity. The company believes these resources, along with internally generated funds, are adequate to meet its liquidity needs, including projected pension plan contributions.
What is the status of the company's efforts to remediate the material weakness in internal controls?
ATI has implemented changes to its income tax process, including augmenting the internal tax team and enhancing review procedures with external consultation. Controls have also been modified to specifically address the calculation and review of deferred tax asset valuation allowances. The company expects to complete the remediation of this material weakness by December 31, 2017.
How are the company's two main business segments performing?
The High Performance Materials & Components (HPMC) segment showed significant improvement, with operating profit increasing substantially due to higher aerospace & defense sales and improved product mix. The Flat Rolled Products (FRP) segment also transitioned from a loss to a profit, driven by higher operating levels, cost reductions, and restructuring benefits, despite headwinds from declining raw material prices impacting profit margins in the short term.
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