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Allegheny Technologies Announces Second Quarter 2012 Results

Stocks in this article: ATI

“As a result of the global economic environment and these market realities, we now expect 2012 sales to be approximately $5.3 billion to $5.4 billion with segment operating profit as a percent of sales to be similar to that achieved in the first half 2012.”

  Three Months Ended   Six Months Ended
June 30 June 30
In Millions
2012   2011 2012   2011
 
Sales $ 1,357.4 $ 1,351.6 $ 2,709.9 $ 2,579.0
 
Net income attributable to ATI $ 56.4 $ 64.0 $ 112.6 $ 120.3
 
Per Diluted Share
 
Net income attributable to ATI per common share

$

0.50

$

0.59

$

1.00

$

1.13

 

Second Quarter 2012 Financial Results Compared to Second Quarter 2011

  • Sales for the second quarter 2012 were $1.36 billion, compared to $1.35 billion in the second quarter 2011. Compared to the second quarter 2011, sales increased 14% in the High Performance Metals segment, primarily as a result of aerospace demand and the acquisition of ATI Ladish in May 2011, which more than offset lower raw material surcharges primarily due to lower nickel and titanium scrap costs. Sales increased 5% in the Engineered Products segment due to continued growth in demand from the oil and gas, and construction and mining markets. In the Flat-Rolled Products segment, sales declined 10% as increased shipment volumes for standard stainless sheet products were more than offset by lower raw material surcharges, lower base prices for standard stainless products, and reduced shipments of titanium products to the industrial markets due to project delays. For the first six months of 2012, direct international sales increased $126.3 million, or 15%, compared to the prior year period, and represented 35.9% of total sales.
  • Second quarter 2012 segment operating profit was $159.9 million, or 11.8% of sales, compared to $173.4 million, or 12.8% of sales, for the comparable 2011 period.
  • Net income attributable to ATI for the second quarter 2012 was $56.4 million, or $0.50 per diluted share, compared to $64.0 million, or $0.59 per diluted share in the second quarter 2011. Results for the second quarter 2011 included acquisition related expenses of $12.7 million, net of tax, primarily related to inventory fair value adjustments and transaction costs. Excluding these items, 2011 second quarter net income was $76.7 million, or $0.70 per share.
  • Cash flow provided by operations for the first six months of 2012 was $59.8 million and included an investment of $205.4 million in managed working capital due to a higher level of business activity.
  • Cash on hand at the end of the second quarter 2012 was $210.3 million.
  • Gross cost reductions, before the effects of inflation, totaled $32.8 million in the second quarter 2012, bringing gross cost reductions for the year to $61.6 million.

High Performance Metals Segment

Market Conditions

  • Demand remained good from the aerospace, medical, electrical energy, and oil and gas markets. Although total mill product shipments of our nickel-based and specialty alloys were flat with the first quarter 2012, the product mix improved both from an alloy and value-added product form standpoint. Specifically, shipments of our titanium alloy mill products declined 7% primarily due to reduced ingot sales, which more than offset an increase in higher value-added product shipments. Exotic alloy shipments increased 6%. Compared to the first quarter 2012, average selling prices were flat for nickel-based and specialty alloys as the benefits of an improved product mix were offset by lower raw material surcharges. Average selling prices for titanium and titanium alloys increased 8% due to favorable product mix, partially offset by lower raw material surcharges due to reduced titanium scrap prices.

Second quarter 2012 compared to second quarter 2011

  • Sales increased by 14% to $566.2 million primarily as a result of increased demand from the aerospace market and the acquisition of ATI Ladish in May 2011.
  • Mill product shipments increased 12% for nickel-based and specialty alloys primarily due to increased demand from the commercial aerospace market. Shipments of titanium and titanium alloys mill products were 10% lower primarily due to reduced ingot sales. Exotic alloys shipments were flat. Average selling prices decreased 3% for nickel-based and specialty alloys as the benefits of an improved product mix were more than offset by lower raw material surcharges. Average selling prices increased 13% for titanium and titanium alloys due primarily to a favorable product mix, partially offset by lower raw material surcharges. Average selling prices increased 6% for exotic alloys primarily due to product mix.
  • Segment operating profit increased to $102.2 million, or 18.1% of sales, compared to $92.9 million, or 18.7% of sales, for the second quarter 2011. Compared to the prior year second quarter, the second quarter 2012 benefitted from the absence of $13.2 million of inventory purchase accounting charges recorded in the second quarter 2011 resulting from the May 2011 acquisition of ATI Ladish, higher shipments of nickel-based and specialty alloys, and the impact of gross cost reductions. These items were offset by $3 million of higher costs for raw materials, primarily nickel and titanium scrap, resulting from the misalignment of the raw materials surcharges with raw material costs due to the long manufacturing cycle of certain products. In addition, second quarter 2012 segment operating profit included approximately $2 million of severance charges associated with a salaried workforce reduction in our exotic alloys operations as we aligned staffing needs with expected lower demand from nuclear markets. The second quarter 2012 segment operating profit included a LIFO inventory valuation reserve benefit of $0.5 million. The second quarter 2011 segment operating profit included a LIFO inventory valuation reserve charge of $4.2 million.
  • Gross cost reductions, before effects of inflation, during the first six months of 2012 were $32.7 million in the High Performance Metals segment.

Flat-Rolled Products Segment

Market Conditions

  • Demand was good for high-value products from the aerospace, chemical process industry, electrical energy, and automotive markets. Compared to the first quarter 2012, demand increased 7% for high-value products, which includes titanium, nickel-based alloys, Precision Rolled Strip® products, and grain-oriented electrical steel. Demand for standard stainless products (sheet and plate) increased 17%. Direct international sales for the second quarter 2012 represented 31% of total segment sales. Second quarter 2012 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 2.8 million pounds, a 6% decrease compared to the first quarter 2012 and a 43% decrease from the second quarter 2011, primarily due to timing delays in certain large projects and lower overall demand due to reduced global GDP growth. Compared to the first quarter 2012, average selling prices for standard products decreased 2%, and decreased 10% for high-value products, both primarily due to lower raw material surcharges.

Second quarter 2012 compared to second quarter 2011

  • Sales were $657.4 million, a 9.6% decrease, primarily due to lower raw material surcharges. Shipments of high-value products were comparable to the prior year as improved shipments of our nickel-based alloy, specialty alloy and Precision Rolled Strip® products were offset by reduced shipments of our grain-oriented electrical steel and titanium products. Shipments of standard stainless products increased 23%. Average selling prices, which include surcharges, for standard stainless products declined 21% due to lower base prices and lower raw material surcharges. Average selling prices for high-value products decreased 13% due to product mix and lower raw material surcharges.
  • Segment operating profit declined to $44.5 million, or 6.8% of sales, compared to $73.7 million, or 10.1% of sales, in the second quarter 2011 due primarily to lower base prices for standard stainless and grain-oriented electrical steel products; reduced shipments of titanium products due to project delays; and $8 million in higher costs for raw material, primarily nickel, which did not align with raw material surcharges due to rapid decline of nickel prices in the second quarter 2012. This was partially offset by a LIFO inventory valuation reserve benefit of $7.0 million in the second quarter 2012. In the second quarter 2011, a LIFO inventory valuation reserve benefit of $3.2 million was recognized.
  • Gross cost reductions, before effects of inflation, during the first six months of 2012 were $24.5 million in the Flat-Rolled Products segment.

Engineered Products Segment

Market Conditions

  • Demand was good from the oil and gas, cutting tool, transportation, construction and mining, and aerospace markets.

Second quarter 2012 compared to second quarter 2011

  • Sales increased to $133.8 million, an increase of 5.3%, primarily as a result of the improved demand for tungsten-based products and carbon alloy steel forgings.
  • Segment operating profit improved to $13.2 million, or 9.9% of sales, in the second quarter 2012, compared to $6.8 million, or 5.4% of sales, in the second quarter 2011. Results for the second quarter 2012 included a LIFO inventory valuation reserve charge of $0.4 million compared to a $4.2 million LIFO inventory valuation reserve charge for the comparable 2011 period.
  • Gross cost reductions, before effects of inflation, during the first six months of 2012 were $4.4 million in the Engineered Products segment.

Other Expenses

  • Corporate expenses for the second quarter 2012 were $15.8 million, compared to $25.8 million in the year-ago period. The decrease in corporate expenses was primarily related to lower incentive compensation expenses associated with long-term performance plans and the absence of ATI Ladish transaction costs incurred in the prior year.
  • Interest expense, net of interest income, was $18.6 million, compared to $23.7 million in the second quarter 2011. The decrease in interest expense was primarily due to lower debt levels and increased capitalized interest on major strategic capital projects.
  • Capitalized interest on major strategic capital projects reduced interest expense by $5.6 million for the second quarter 2012, compared to $2.8 million for the comparable 2011 period.
  • Other expenses, which include expenses related to closed operations, for the second quarter 2012 were $5.2 million, compared to $4.2 million in the year-ago period.

Retirement Benefit Expense

  • Retirement benefit expense, which includes pension expense and other postretirement expense, increased to $30.6 million in the second quarter 2012, compared to $19.4 million in the second quarter 2011. This increase was primarily due to the utilization of a lower discount rate to value retirement benefit obligations and lower than expected returns on plan assets.
  • For the second quarter 2012, retirement benefit expense of $22.3 million was included in cost of sales and $8.3 million was included in selling and administrative expenses. For the second quarter 2011, retirement benefit expense of $13.4 million was included in cost of sales and $6.0 million was included in selling and administrative expenses.

Income Taxes

  • The second quarter 2012 provision for income taxes was $31.0 million, or 34.6% of income before tax, compared to the second quarter 2011 provision for income taxes of $34.3 million, or 34.2% of income before tax.

Cash Flow, Working Capital and Debt

  • Cash on hand was $210.3 million at June 30, 2012, a decrease of $170.3 million from year-end 2011.
  • Cash flow provided by operations for the first six months of 2012 was $59.8 million and included an investment of $205.4 million in managed working capital primarily due to increased business activity. Cash flow provided by operations in the second quarter 2012 was $78.0 million.
  • The $205.4 million growth in managed working capital resulted from a $34.9 million increase in accounts receivable, a $127.3 million increase in inventory, and a $43.2 million decrease in accounts payable.
  • At June 30, 2012, managed working capital was 37.4% of annualized sales, compared to 37.8% of annualized sales at year-end 2011. We define managed working capital as accounts receivable plus gross inventories less accounts payable.
  • Cash used in investing activities was $164.8 million in the first half of 2012, including $165.7 million of capital expenditures, the majority of which was related to the construction of the new Flat-Rolled Products segment Hot-Rolling and Processing Facility (HRPF).
  • Cash used in financing activities was $65.3 million in the first half 2012, and included dividend payments of $38.2 million, $22.4 million of tax payments on share-based compensation associated with performance-based plans, and $5.5 million of net debt retirements.
  • Total debt to total capital was 36.8% at June 30, 2012, compared to 37.9% at the end of 2011. Net debt as a percentage of total capitalization was 33.4% at the end of the second quarter 2012 compared to 31.3% at the end of 2011.
  • There were no borrowings outstanding under ATI’s $400 million unsecured domestic borrowing facility, although a portion of the letters of credit capacity was utilized.

Allegheny Technologies will conduct a conference call with investors and analysts on Wednesday, July 25, 2012, at 1:00 p.m. ET to discuss the financial results. The conference call will be broadcast live on www.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 include those containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. Forward-looking statements 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, that may cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (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, including the aerospace and defense, electrical energy, chemical process industry, oil and gas, medical, automotive, construction and mining, and other markets; (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, whether due to significant increases in energy, raw materials or employee benefits costs, the possibility of project cost overruns or unanticipated costs and expenses, or other factors; (d) volatility of prices and availability of supply 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) significant legal proceedings or investigations adverse to us; and (g) other risk factors summarized in our Annual Report on Form 10-K for the year ended December 31, 2011, and in other reports filed with the Securities and Exchange Commission. We assume no duty to update our forward-looking statements.

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