“We announced the acquisition of Addaero Manufacturing (Addaero) on July 16. This strategic acquisition brings together ATI’s deep knowledge and experience in commercial aerospace and our industry-leading powder metal manufacturing capabilities, including our new aerospace-qualified Bakers Powder Operations, and Addaero’s technical expertise to produce aerospace quality parts using various additive manufacturing technologies. Addaero’s competencies are a natural extension of ATI’s metallic powder expertise and expand our capabilities to provide comprehensive customer solutions ranging from the design of parts for additive manufacturing to the production of ready-to-install components. The acquisition of Addaero is another building block in our strategy to enhance ATI’s full specialty materials capabilities to provide end customers with finished products,” Harshman continued.
As of June 30, 2018, cash on hand was $122 million and available additional liquidity under the asset-based lending (ABL) credit facility was approximately $355 million, with no borrowings under the revolving credit portion of the ABL. During Q2 2018, ATI generated $82 million of cash from operating activities despite a $65 million increase in managed working capital, which represented 37.5% of sales in the second quarter 2018. The increase in managed working capital supports higher demand and temporary inventory builds in anticipation of Q3 planned summer maintenance in several of our businesses. Capital expenditures for the second quarter 2018 were $29 million, and were $71 million year-to-date, including the initial down payments for the previously announced HPMC iso-thermal press and heat treating expansions, as well as significant expenditures on the STAL expansion in China, which is being placed into service in the third quarter 2018.
Strategy and Outlook
“In the HPMC segment, we expect continued year-over-year revenue and operating profit growth in the second half of 2018 resulting from ongoing aerospace market demand growth and improved asset utilization. We remain confident in our customers’ continued elevated order patterns due to increasing jet engine build rates over the next several years. Our focus continues to be on strong operational execution, continuous improvement initiatives, and on meeting the aerospace production ramp requirements,” Harshman said.
“In the FRP segment, we see continued strong end-market demand and the benefits from ongoing operational improvements, growth in our differentiated products, and benefits from the A&T Stainless joint venture.
“Cost inflation in many raw materials used to manufacture our products, primarily related to nickel, cobalt and molybdenum is likely to represent a moderate LIFO expense headwind in the second half of 2018 which would be greater than and not fully offset by our remaining NRV inventory reserves.
“Cash generation from operations remains a key focus, and we intend to carefully balance our working capital and other cash needs with the pace of our capital expenditure requirements. We expect strong second half 2018 cash generation, with at least $150 million of free cash flow for the full year 2018, excluding about $40 million in contributions to the ATI Pension Plan. We expect to end 2018 with zero borrowings under our ABL revolving credit facility. Finally, we do not expect to pay any significant U.S. federal or state income taxes in 2018 due to net operating loss carryforwards,” Harshman concluded.
Second Quarter 2018 Financial Results
- Sales for the second quarter 2018 were $1.01 billion, a 3% increase compared to the first quarter 2018 and a 15% increase compared to the prior year’s second quarter. HPMC sales in 2018 reflect stronger demand for nickel-based and specialty alloy products, forgings and components. FRP sales in 2018 include a stronger mix of high-value products, particularly nickel-based alloys.
- Gross profit in the second quarter 2018 was $173.7 million, or 17.2% of sales, compared to $148.6 million, or 15.2% of sales, in the first quarter of 2018 and $124.3 million, or 14.1% of sales in the prior year’s second quarter.
- Net income attributable to ATI for the second quarter 2018 was $72.8 million, or $0.52 per share. This compares to net income attributable to ATI of $58.0 million, or $0.42 per share for the first quarter 2018, and adjusted Q1 2018 net income of $43.3 million, or $0.32 per share, excluding the A&T Stainless gain. For the second quarter 2017, net income attributable to ATI was $10.1 million, or $0.09 per share. 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 June 30, 2018 was $122.4 million. In the second quarter 2018, cash provided by operating activities was $82.1 million, including $64.7 million invested in managed working capital. Capital expenditures in the second quarter 2018 were $29.0 million, and cash used in financing activities was $41.3 million, primarily related to repayments of $50.0 million of revolving credit borrowings under the ABL.
