ATI Announces Full Year and Fourth Quarter 2018 Results
PITTSBURGH--(BUSINESS WIRE)--Jan 22, 2019--Allegheny Technologies Incorporated (NYSE: ATI) reported 2018 results. For the full year 2018, sales increased 15%, to $4.05 billion, and segment operating profit increased by 46%, to $413.2 million, or 10.2% of sales. Net income attributable to ATI for 2018 was $222.4 million, or $1.61 per share, compared to a full year 2017 net loss attributable to ATI of $91.9 million, or $(0.83) per share. On an adjusted basis, full year 2018 net income was $207.7 million, or $1.51 per share, excluding a $14.7 million, or $0.10 per share, gain on the sale of a 50% interest and subsequent deconsolidation of the A&T Stainless joint venture in March 2018, compared to adjusted 2017 net income attributable to ATI of $54.6 million, or $0.48 per share, excluding a $37.0 million debt extinguishment charge, tax legislation impacts and a $113.6 million net-of-tax charge for goodwill impairment.
For the fourth quarter 2018, sales were $1.04 billion and net income attributable to ATI was $41.1 million, or $0.30 per share. Prior year Q4 sales were $909.9 million and net income attributable to ATI was $1.7 million, or $0.01 per share, which included a $37.0 million debt extinguishment charge. Excluding this debt charge and certain tax legislation impacts, prior year Q4 adjusted net income was $34.6 million, or $0.27 per share.
“We delivered our highest revenues since 2014,” said President and CEO Bob Wetherbee. “Revenues grew in nearly all of our major markets, a testament to our ability to meet customers’ increasing demand for ATI’s unique design and production capabilities. Our commitment to relentless innovation and disciplined operational performance led both of our business segments to achieve double-digit sales growth in aerospace and defense.”
“Our HPMC segment finished the year with solid fundamentals as sales increased 15% in the fourth quarter and 13% for the full year compared to the prior year periods. These results exceeded the upper-end of our full year revenue growth guidance range of 10% to 12%,” said Wetherbee. Full year segment operating profit of $335 million, or 14.4% of sales, represented a 250-basis point improvement over 2017. Sales to the aerospace and defense markets grew by 15% versus the prior year quarter and were 77% of total HPMC fourth quarter 2018 sales. Next-generation jet engine product sales growth remained strong, increasing by over 50% versus the fourth quarter 2017, and represented 48% of total fourth quarter 2018 HPMC jet engine product sales. Fourth quarter 2018 HPMC segment operating profit was $76 million, or 12.7% of sales. Q4 results reflect higher operating costs (approximately $7 million) including major maintenance activities, which will enable continued strong operational execution into 2019, as well as ongoing impacts of a previously identified nickel powder billet supply issue and higher energy costs at our facilities in the Pacific Northwest due to supply disruptions following a natural gas pipeline explosion. “While we finished the year slightly below our increased HPMC operating profit margin expectations, I am proud of our teams’ efforts to satisfy our customers’ increased demand levels while performing important maintenance activities that help to position us for future profitable growth,” said Wetherbee.
The FRP segment reported fourth quarter 2018 sales of $442 million and operating profit of $11 million, or 2.6% of sales. FRP’s U.S. operations remained profitable in the fourth quarter 2018 despite the predicted significant declines in prices for several key raw materials, which reduced profit margins due to a mismatch between higher input costs for these materials and raw material surcharges based on falling raw material indices that are included in selling prices. “These results demonstrate the benefits of improved product mix and our business transformation efforts,” said Wetherbee. FRP segment results in the fourth quarter 2018 include a $4 million loss for ATI’s share of the A&T Stainless joint venture operations, which is currently unable to fully overcome the negative impact of the Section 232 import tariffs. For the full year 2018, FRP segment operating profit was $78 million, more than double the 2017 result, with significant growth in key end markets. 2018 sales to the differentiated oil & gas and aerospace & defense markets were each up approximately 30% versus the prior year.
“Within the FRP segment, we continue to make progress toward our goal of increasing asset utilization in a capital-efficient manner. Carbon steel hot-rolling conversion services for NLMK USA continue to ramp-up at our world-class Hot Rolling and Processing Facility, or HRPF. We expect ongoing production increases in line with expectations in 2019,” Wetherbee said. “Regarding our efforts to secure a Section 232 tariff exclusion on behalf of the A&T Stainless JV, we continue to engage the U.S. Commerce Department in dialogue and work within their tariff exclusion framework. We firmly believe the facts underlying this request are compelling and justify a tariff exclusion,” said Wetherbee.
As of December 31, 2018, cash on hand was $382 million and available additional liquidity under the asset-based lending (ABL) credit facility was approximately $350 million, with no borrowings under the revolving credit portion of the ABL. During the fourth quarter 2018, ATI generated $276 million of cash from operating activities, including a $173 million decrease in managed working capital, which improved to 31.6% of sales, representing a 650-basis point reduction compared to the prior year-end. Capital expenditures were $139 million for 2018, including $38 million in the fourth quarter primarily related to HPMC growth projects including the new iso-thermal press and heat-treating capacity expansion at our Iso-Thermal Forging Center of Excellence in Cudahy, WI.
Strategy and Outlook
In the HPMC segment, ATI expects continued year-over-year revenue and operating profit expansion in 2019 through focused growth in highly-differentiated materials and technologies, primarily for the jet engine market. The Company is leveraging the scale and capabilities required for its jet engine customers into other highly-demanding materials and components markets, targeting high-single-digit revenue growth, and year-over-year segment operating profit margin improvement of 150 basis points in 2019, including the negative impact of approximately $8 million of higher retirement benefit expense. “We remain focused on operational execution and continuous improvement initiatives to continue to meet our increasing aerospace production rate requirements,” said Wetherbee.
In the FRP segment, significant price declines in several key raw materials are expected to negatively affect first quarter 2019 results due to the mismatch between input costs and the surcharge index pricing mechanism. ATI expects FRP segment results for the full year 2019 to be in line with 2018, with ongoing high-value product sales growth and the continued benefits from higher HRPF utilization rates to be offset by the short-term raw material costs headwinds and approximately $23 million of higher retirement benefit expense in the segment.
In total for ATI, 2019 defined benefit pension and postretirement benefit plan expenses are expected to be approximately $35 million higher compared to 2018, mainly due to lower-than-expected returns on pension trust assets primarily resulting from the December 2018 equity market decline. Contributions to ATI’s U.S. defined benefit pension plan are now expected to be approximately $145 million in 2019. We continued to make progress on our defined benefit pension strategy in 2018. In the fourth quarter 2018, as part of its liability management strategy, ATI completed a $97 million risk transfer of a portion of the U.S. pension obligations through the purchase of an annuity contract with a nationally recognized insurance company. As a reminder, the ATI U.S. defined benefit pension plan is now closed to new entrants.
ATI expects strong cash flow generation from operations in 2019, with free cash flow, excluding pension plan contributions, of at least $290 million. Capital expenditures are projected to be at or below our expected 2019 depreciation levels, or between $165 million and $170 million, including the previously announced HPMC growth projects for ATI’s Iso-Thermal Forging Center of Excellence in Cudahy, WI, as well as other strategic growth projects. “We will be disciplined in our capital deployment as we invest for future growth opportunities while continuing to strengthen the balance sheet,” Wetherbee concluded.
Fourth Quarter and Full Year 2018 Financial ResultsSales for the fourth quarter 2018 were $1.04 billion, a 14% increase compared to the fourth quarter 2017. Sales for the full year 2018 increased 15% to $4.05 billion, compared to $3.53 billion in 2017. HPMC sales in 2018 reflect stronger demand for forgings and components for the aerospace and defense markets as well as nickel-based and specialty alloy products. FRP sales for the full year 2018 include a stronger mix of high-value products, particularly nickel-based alloys. Gross profit in the fourth quarter 2018 at $147.6 million, or 14.2% of sales, was $5.0 million higher than the prior year’s fourth quarter. For the full year 2018, gross profit increased more than $130 million over 2017, to $630.3 million, or 15.6% of sales. Net income attributable to ATI for the fourth quarter 2018 was $41.1 million, or $0.30 per share. This compares to fourth quarter 2017 net income attributable to ATI of $1.7 million, or $0.01 per share. For the full year 2018, net income attributable to ATI was $222.4 million, or $1.61 per share, compared to a net loss of $91.9 million, or $(0.83) per share for the 2017 fiscal year. Results in all periods include impacts from income taxes which differ from applicable standard tax rates, primarily related to impacts of income tax valuation allowances. Cash on hand at December 31, 2018 was $382.0 million. For the full year 2018, cash provided by operating activities was $392.8 million, including a $74.1 million reduction in managed working capital. Cash used in investing activities in 2018 was $145.1 million, including $139.2 million for capital expenditures and $10.0 million for the acquisition of an additive manufacturing business, partially offset by proceeds from equipment disposals and other items. Cash used in financing activities was $7.3 million, including a $5.9 million reduction in foreign credit facility borrowings.
High Performance Materials & Components Segment
Market ConditionsAerospace and defense sales in the fourth quarter 2018 were $459.6 million, 3% higher than the third quarter 2018, and represented 77% of total segment sales. Compared to the third quarter 2018, commercial jet engine sales were 7% higher and government aero/defense sales were 6% higher, while commercial airframe sales were 7% lower. Total HPMC fourth quarter 2018 sales increased 2% compared to the third quarter 2018. Sales to the oil & gas market were 32% higher, while sales to other HPMC end markets including medical and electrical energy were lower. Direct international sales represented 47% of total segment sales for the fourth quarter 2018.
Fourth quarter 2018 compared to fourth quarter 2017Sales were $596.1 million, a $78.4 million, or 15% increase compared to the fourth quarter 2017, primarily due to higher sales of next-generation jet engine products. Sales to the commercial aerospace market, which represented 66% of fourth quarter 2018 sales, were 21% higher than the prior year, including a 26% increase in sales to the commercial jet engine market. Sales to the oil & gas market were 67% higher from a weak prior year period, and construction and mining market sales were 30% higher. Segment operating profit increased to $76.0 million from $65.8 million for the fourth quarter 2017. Segment operating profit margins were 12.7% for both periods. An improved product mix related to next-generation forgings, components and nickel-based alloys for the aero engine market was partially offset by about $7 million for the combined impact from higher operating costs including major maintenance, higher energy costs at certain facilities, and the negative impact of an ongoing nickel powder billet supply issue.
Flat Rolled Products Segment
Market ConditionsSales increased by 2% in the fourth quarter 2018 compared to the third quarter 2018, led by an 18% increase in sales to the aerospace and defense markets, including products for titanium armor applications. Sales to most other key end markets were lower compared to the third quarter 2018, including sales to the oil & gas market which declined 1%, and sales to the automotive and electrical energy markets which declined 7% and 15%, respectively. Shipments increased 2% for high-value products, primarily related to stronger demand for nickel-alloy and titanium products, compared to the third quarter 2018. Shipments declined 6% for standard stainless products as falling raw material values and year-end inventory management actions affected customer order patterns in the distribution channel. Direct international sales were 33% of fourth quarter 2018 segment sales.
Fourth quarter 2018 compared to fourth quarter 2017Sales were $441.8 million, a $49.6 million, or 13%, increase compared to the prior year period. Sales to the aerospace and defense and automotive markets were 62% and 18% higher, respectively, compared to the fourth quarter 2017. These increases more than offset a nearly 5% decrease in sales to FRP’s largest end market, oil & gas, which experienced higher 2017 demand levels due to the timing of international projects. Segment operating profit was $11.3 million, or 2.6% of sales, compared to $22.4 million, or 5.7% of sales, for the fourth quarter 2017. Fourth quarter 2018 results were negatively impacted by significant price declines in several key raw materials, most notably ferrochrome and nickel, which reduced profit margins due to a mismatch between the higher input costs for these materials and raw material surcharges based on falling raw material indices that are included in selling prices, compared to the prior year period. In addition, the FRP segment results include a $4 million loss for ATI’s share of the A&T Stainless joint venture operations, primarily due to Section 232 tariffs.
Corporate Expenses, Closed Operations and Other ExpensesBoth fourth quarter and full year 2018 Corporate Expenses include higher incentive compensation related to improved company performance versus 2017. Closed Operations and Other Expenses in the fourth quarter 2018 were $5.0 million, compared to $5.6 million in the prior year fourth quarter. For the full year 2018, Closed Operations and Other Expenses were $21.6 million, compared to $34.0 million for 2017. Changes between periods were primarily the result of foreign currency remeasurement gains in 2018 compared to remeasurement losses in 2017, along with lower carrying costs for closed facilities in 2018, mainly related to the Rowley, UT and Midland, PA locations, compared to the prior year.
Income TaxesThe fourth quarter 2018 included a tax benefit of $5.8 million primarily related to income taxes on non-U.S. operations, including the full year benefit in the quarter of a reduced annual tax rate for our STAL joint venture in China. For the full year 2018, ATI’s tax expense was $11.0 million, or 4.4% of pretax income. ATI continues to maintain income tax valuation allowances on its U.S. federal and state deferred tax assets, and we do not expect to pay any significant U.S federal or state income taxes for the next few years due to net operating loss carryforwards. Based on currently proposed regulations related to the 2017 Tax Cuts and Jobs Act and the current 2019 outlook, we expect our consolidated income tax expense for 2019 to be approximately 5% to 7% of pretax income.
Allegheny Technologies will conduct a conference call with investors and analysts on Tuesday, January 22, 2019, at 8:15 a.m. ET to discuss the financial results. The conference call will be broadcast, and accompanying presentation slides will be available, at ATImetals.com. To access the broadcast, click on “Conference Call.” Replay of the conference call will be available on the Allegheny Technologies website.
This news release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this news release relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements, which may contain such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions, are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control. Our performance or achievements may differ materially from those expressed or implied in any forward-looking statements due to the following factors, among others: (a) material adverse changes in economic or industry conditions generally, including global supply and demand conditions and prices for our specialty metals; (b) material adverse changes in the markets we serve; (c) our inability to achieve the level of cost savings, productivity improvements, synergies, growth or other benefits anticipated by management from strategic investments and the integration of acquired businesses; (d) volatility in the price and availability of the raw materials that are critical to the manufacture of our products; (e) declines in the value of our defined benefit pension plan assets or unfavorable changes in laws or regulations that govern pension plan funding; (f) labor disputes or work stoppages; (g) equipment outages and (h) other risk factors summarized in our Annual Report on Form 10-K for the year ended December 31, 2017, and in other reports filed with the Securities and Exchange Commission. We assume no duty to update our forward-looking statements.
Creating Value Thru Relentless Innovation™
ATI is a global manufacturer of technically advanced specialty materials and complex components. ATI revenue was $4.0 billion for the twelve-month period ended December 31, 2018. Our largest markets are aerospace & defense, particularly jet engines. We also have a strong presence in the oil & gas, electrical energy, medical, automotive, and other industrial markets. ATI is a market leader in manufacturing differentiated specialty alloys and forgings that require our unique manufacturing and precision machining capabilities and our innovative new product development competence. We are a leader in producing powders for use in next-generation jet engine forgings and 3D-printed aerospace products. See more at our website ATIMetals.com.
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CONTACT: Investor Contact:
Scott A. Minder
KEYWORD: UNITED STATES NORTH AMERICA PENNSYLVANIA
INDUSTRY KEYWORD: MANUFACTURING AEROSPACE STEEL NATURAL RESOURCES MINING/MINERALS DEFENSE OTHER DEFENSE
SOURCE: Allegheny Technologies Incorporated
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