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Allegheny Technologies Announces Fourth Quarter And Full Year 2012 Results

Stocks in this article: ATI

Fourth Quarter and Full Year 2012 Financial Results

  • Sales for the fourth quarter 2012 were $1.10 billion, compared to $1.25 billion in the fourth quarter 2011. Compared to the fourth quarter 2011, sales decreased 4% in the High Performance Metals segment resulting from lower shipments of specialty steel alloys and lower raw material surcharges due to declines in nickel raw material and titanium scrap costs. In the Flat-Rolled Products segment, sales declined 17% primarily due to 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. Sales decreased 21% in the Engineered Products segment due to reduced demand for tungsten-based products and from the electrical energy market.
  • Sales for the full year 2012 were $5.03 billion compared to $5.18 billion for 2011. Direct international sales were $1.80 billion and represented 36% of total sales, compared to 35% for 2011. Compared to the full year 2011, sales increased 12% in the High Performance Metals segment, but decreased 14% in the Flat-Rolled Products segment and 2% in the Engineered Products segment.
  • Fourth quarter 2012 segment operating profit was $95.3 million, or 8.7% of sales, compared to $114.4 million, or 9.1% of sales, for the comparable 2011 period. Results include a LIFO inventory valuation reserve benefit of $47.6 million and $5.9 million for the fourth quarter of 2012 and 2011, respectively.
  • Full year 2012 segment operating profit was $537.9 million, or 10.7% of sales, compared to $612.0 million, or 11.8% of sales, for 2011. Results included a LIFO inventory valuation reserve benefit of $76.8 million for 2012 and $9.3 million for the 2011 period.
  • Net income attributable to ATI for the fourth quarter 2012 was $10.5 million, or $0.10 per diluted share, compared to $31.7 million, or $0.29 per diluted share, in the fourth quarter 2011. Fourth quarter 2012 net income was impacted by a special charge for asset write-downs associated with consolidating operations in the Engineered Products segment, which reduced earnings by $8.8 million, or $0.08 per share. Net income for the fourth quarter 2011 was negatively affected by restructuring and Ladish acquisition expenses, which reduced earnings by $2.8 million, or $0.02 per share.
  • Full year 2012 net income attributable to ATI was $158.4 million, or $1.43 per diluted share, compared to $214.3 million, or $1.97 per diluted share, for 2011. Full year 2012 results included the $8.8 million, or $0.08 per share, special charge. Full year 2011 net income included $29.6 million, or $0.26 per share, of Ladish acquisition expenses and other charges, including Ladish acquisition-related expenses, accelerated recognition of equity-based compensation expense due to executive retirements, and restructuring charges for facility closure costs.
  • Cash flow provided by operations for 2012 was $427.5 million, including $181.7 million in the fourth quarter 2012.
  • Cash on hand at the end of 2012 was $304.6 million, an increase of $23.6 million from September 30, 2012 but a decrease of $76.0 million from year-end 2011.
  • Gross cost reductions, before the effects of inflation, totaled $26.8 million company-wide in the fourth quarter 2012. Gross cost reductions for the full year 2012 totaled $113.8 million.

High Performance Metals Segment Market Conditions

  • Mill product shipments of our nickel-based and specialty alloys declined 23% and shipments of our titanium and titanium alloys declined 13%, both compared to the third quarter 2012. Zirconium and related alloys shipments increased 35% compared to the third quarter 2012 primarily due to improved demand for our niobium-titanium alloy products from the medical market. Compared to the third quarter 2012, average selling prices were flat for nickel-based alloys and superalloys, and increased 14% for specialty alloys as a better shipment mix offset lower raw material surcharges. Average selling prices for titanium alloys increased 3% primarily due to product mix. Average selling prices for zirconium and related alloys decreased 12% due to product mix.
  • Sales of high performance forgings and castings were flat with the third quarter 2012 as improved demand from jet engine and airframe customers offset lower demand for construction and mining components.

Fourth quarter 2012 compared to fourth quarter 2011

  • Sales decreased by 4% to $503.8 million.
  • Mill product shipments of nickel-based alloys and specialty alloys decreased 6% primarily due to demand from the electrical energy market. Shipments of titanium and titanium alloy mill products were 1% higher primarily due to increased shipments to airframe customers which offset reduced demand from the jet engine aftermarket. Zirconium and related alloys shipments increased 9% primarily due to improved demand for our niobium-titanium alloy products from the medical equipment market. Average selling prices increased 1% for nickel-based and specialty alloys primarily due to a higher value-add product mix, partially offset by lower raw material surcharges. Average selling prices decreased 5% for titanium and titanium alloys due to raw material surcharges. Average selling prices decreased 1% for zirconium and related alloys primarily due to product mix.
  • Sales for high performance forgings and castings increased 3% due to better demand for airframe components, which was offset by lower demand from the jet engine aftermarket and for construction and mining equipment, and by lower material surcharges.
  • Segment operating profit decreased to $80.8 million, or 16.0% of total sales compared to $90.3 million, or 17.2% of total sales, for the fourth quarter 2011 primarily as a result of lower shipments. Fourth quarter 2012 segment operating profit included a LIFO inventory valuation reserve benefit of $27.5 million which was partially offset by higher costs for raw materials, primarily nickel, resulting from the misalignment of the raw material surcharge with raw material costs due to the long manufacturing cycle of certain products. The fourth quarter 2011 segment operating profit included a LIFO inventory valuation reserve benefit of $6.0 million.
  • Results benefited from $15.3 million of gross cost reductions in the fourth quarter 2012, bringing the full year 2012 gross cost reductions in this segment to $62.4 million.

Flat-Rolled Products Segment Market Conditions

  • Demand was soft from nearly all markets and base selling prices for most standard stainless products were at historically low levels. Compared to the third quarter 2012, shipments decreased 10% for high-value products, which includes titanium, nickel-based alloys, Precision Rolled Strip® products, and grain-oriented electrical steel. Shipments for standard stainless products (sheet and plate) decreased 3%. Direct international sales for the fourth quarter 2012 represented 30% of total segment sales. Fourth quarter 2012 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 3.2 million pounds, a 22% increase compared to the third quarter 2012 as shipments for previously-delayed projects began. Compared to the third quarter 2012, average selling prices for standard stainless products decreased 3%, and decreased 6% for high-value products, both primarily due to lower raw material surcharges and lower base prices.

Fourth quarter 2012 compared to fourth quarter 2011

  • Sales were $495.6 million, 17.2% lower than the prior year period, primarily due to lower raw material surcharges and reduced base prices for most products. Shipments of high-value products declined 12% compared to the fourth quarter 2011 as higher shipments of our Precision Rolled Strip® products were offset by reduced shipments of our other high-value products. Shipments of standard stainless products increased 28%. Average selling prices for standard stainless products declined 14% due to lower base prices and lower raw material surcharges. Average selling prices for high-value products decreased 20% primarily due to product mix and lower raw material surcharges.
  • Segment operating profit declined to $9.4 million, or 1.9% of total sales, including surcharges, compared to $17.5 million, or 2.9% of total sales, in the fourth quarter 2011 primarily due to lower base prices for standard stainless and grain-oriented electrical steel products and reduced shipments of certain high-value products due to delays of major project business. The fourth quarter 2012 included a LIFO inventory valuation reserve benefit of $20.0 million which was partially offset by higher costs for raw material, primarily nickel, which did not align with raw material surcharges. In the fourth quarter 2011, a LIFO inventory valuation reserve benefit of $5.0 million was recognized.
  • Results benefited from $9.1 million in gross cost reductions in the fourth quarter 2012, bringing the full year 2012 gross cost reductions in this segment to $42.9 million .

Engineered Products Segment Market Conditions

  • Demand was lower from the construction and mining, transportation, and oil and gas markets.

Fourth quarter 2012 compared to fourth quarter 2011

  • Sales were $101.7 million, a decrease of 20.7%, primarily as a result of weaker demand for tungsten-based products and industrial forgings.
  • Segment operating profit declined to $5.1 million from $6.6 million in the fourth quarter 2011 due to weaker demand. Results for the fourth quarter 2012 included a LIFO inventory valuation reserve benefit of $0.1 million compared to a $5.1 million LIFO inventory valuation reserve charge for the comparable 2011 period.
  • Results benefited from $2.4 million in gross cost reductions in the fourth quarter 2012, bringing the full year 2012 gross cost reductions in this segment to $8.5 million.

Other Expenses

  • Corporate expenses for the fourth quarter 2012 were $16.0 million, compared to $20.0 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.
  • Interest expense, net of interest income, for the fourth quarter 2012 was $15.9 million, compared to $22.2 million in the fourth 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 $7.8 million and $3.7 million for the 2012 and 2011 fourth quarters, respectively. Full year 2012 and 2011 capitalized interest was $24.5 million and $12.1 million, respectively.
  • Other expenses for the fourth quarter 2012 totaled $16.7 million, which include a pre-tax non-cash special charge of $13.0 million related to asset valuation charges associated with consolidating operations in our Engineered Products segment and $3.7 million related to closed operations, compared to $2.3 million in the year-ago period for closed operations.

Retirement Benefit Expense

  • Retirement benefit expense, which includes pension expense and other postretirement expense, increased to $30.6 million in the fourth quarter 2012, compared to $20.0 million in the fourth quarter 2011. This increase was primarily due to utilization of a lower discount rate to value retirement benefit obligations and lower than expected returns on plan assets.
  • For the fourth quarter 2012, retirement benefit expense of $22.6 million was included in cost of sales and $8.0 million was included in selling and administrative expenses. For the fourth quarter 2011, retirement benefit expense of $14.3 million was included in cost of sales and $5.7 million was included in selling and administrative expenses.
  • For the full year 2012, retirement benefit expense of $89.3 million was included in cost of sales, and $33.1 million was included in selling and administrative expenses, compared to full year 2011 retirement benefit expense of $55.1 million in cost of sales and $22.8 million in selling and administrative expenses.
  • We currently expect pre-tax retirement benefit expense to be approximately $8 million higher in 2013 than in 2012 due to the negative effects of having to utilize a lower discount rate to value retirement benefit obligations and lower expected returns on plan assets. Pension expense is expected to be approximately $106 million in 2013 compared to pension expense of $97.6 million in 2012. As a result, we expect 2013 pre-tax retirement benefit expense, which includes pension expense and other postretirement benefits expense, of approximately $130 million compared to $122.4 million in 2012. We expect nearly all of the 2013 pension expense to be non-cash. At December 31, 2012, our U.S. qualified defined benefit plan was approximately 77% funded, as measured for financial reporting purposes. We are not required to make any contribution to this plan for 2013.

Income Taxes

  • The fourth quarter 2012 provision for income taxes was $2.6 million, or 16.1% of income before tax, which included adjustments associated with prior years’ and foreign taxes, compared to the fourth quarter 2011 provision for income taxes of $15.7 million, or 31.5% of income before tax.

Cash Flow, Working Capital and Debt

  • Cash on hand was $304.6 million at year-end 2012, an increase of $23.6 million from September 30, 2012 but a decrease of $76.0 million from year-end 2011.
  • Cash flow provided by operations in the fourth quarter 2012 was $181.7 million. Cash flow provided by operations for 2012 was $427.5 million and included a reduction of $22.4 million in managed working capital. The $22.4 million reduction in managed working capital during 2012 resulted from a $97.3 million decrease in accounts receivable and a $7.7 million increase in accounts payable, partially offset by an $82.6 million increase in inventory as we staged inventory to meet 2013 demand. At December 31, 2012, managed working capital was 41.1% of annualized sales, compared to 37.8% of annualized fourth quarter 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 $378.7 million in 2012, including $382.0 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 $124.8 million in 2012 and included dividend payments of $76.5 million, $27.1 million of net debt retirements, and $21.2 million of tax payments on share-based compensation associated with performance-based plans.
  • Total debt to total capital decreased to 37.4% at December 31, 2012, compared to 37.9% at the end of 2011. Net debt as a percentage of total capitalization was 32.2% at the end of 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, January 23, 2013, 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, oil and gas/chemical process industry, 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, 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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