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Allegheny Technologies Announces Second Quarter 2011 Results
07/28/2011 - Allegheny Technologies reported net income of $64.0 million on sales of $1.35 billion for the second quarter, and net income of $120.3 million on sales of $2.58 billion for the first six months of 2011.
Allegheny Technologies Inc. reported net income of $64.0 million on sales of $1.35 billion for the second quarter, and net income of $120.3 million on sales of $2.58 billion for the first six months of 2011.
Second Quarter Results — The $64.0 million ($0.59 per share) net income compares to net income of $36.4 million ($0.36 per share) for the year-ago second quarter, while sales of $1.35 billion reflect a 28.5% increase compared to sales of $1.05 billion in last year year’s second quarter. Results included acquisition-related expenses of $12.7 million, net of tax, primarily related to inventory fair value adjustments and transaction costs. Excluding these items, net income was $76.7 million, or $0.70 per share, on sales of $1.35 billion and 113.5 million diluted shares.
The company attributes the increase in sales to higher shipments for most high-value products, higher raw material surcharges and increases in average base selling prices for many products. Compared to the second quarter 2010, sales increased 45% in the High Performance Metals segment, 18% in the Flat-Rolled Products segment and 34% in the Engineered Products segment.
Segment operating profit increased to $173.4 million (12.8% of sales) compared to $117.3 million (11.2% of sales) for the year-ago second quarter. While operating profit improved in the High Performance Metals and Flat-Rolled Products segments, results in the High Performance Metals segment were impacted by $13.2 million of purchase inventory accounting charges from the acquisition of ATI Ladish and $9.7 million of idle facility, start-up, and qualification costs associated with the company’s titanium sponge operations. In addition, the quarter included a LIFO inventory valuation reserve charge of $5.2 million due primarily to higher titanium and tungsten raw material costs. The second quarter 2010 included a LIFO inventory valuation reserve charge of $5.5 million.
On May 9, 2011, ATI completed the acquisition of Ladish Co., Inc. for $897.6 million, comprising the issuance of 7.3 million shares of ATI common stock and payment of $24.00 per Ladish share in cash.
Six-Month Results — Net income of $120.3 million ($1.13 per share) compares to net income (including special charges) of $54.6 million ($0.54 per share), while sales of $2.58 billion compare to sales of $1.95 billion last year.
YTD 2011 results included $18.5 million of special items ($0.16 per share), including $3.1 million, net of tax, related to the accelerated recognition of equity-based compensation expense due to executive retirements, a discrete tax charge of $2.7 million primarily related to foreign income taxes, and $12.7 million, net of tax, in Ladish acquisition related items. Excluding these special items, YTD 2011 net income was $138.8 million ($1.29 per share).
YTD 2010 results included a non-recurring tax charge of $5.3 million related to the Patient Protection and Affordable Care Act. Excluding this non-recurring tax charge, YTD 2010 net income was $59.9 million ($0.60 per share).
Direct international sales increased $173.9 million (26%) and represented 32.8% of total sales.
“We continue to see strong secular growth in our key global markets,” said Rich Harshman, Chairman, President and CEO. “In the second quarter 2011, sales increased 28% compared to the same period in 2010, and increased 10% compared to the first quarter 2011.”
Management Comments — “Second quarter 2011 segment operating profit, excluding inventory fair value adjustments associated with the Ladish transaction, increased 59% to almost $187 million, or nearly 14% of ATI sales,” said Harshman. “Operating profit improved significantly in our High Performance Metals and Flat-Rolled Products segments. Flat-Rolled Products segment operating profit was over 10% of sales, reflecting a strong high-value product mix, which offset soft demand and low base prices for our standard stainless sheet and plate products. The supply chain for our standard stainless products reduced their inventories as surcharges declined and U.S. GDP weakened in the second quarter.
“Results were impacted by idle facility, start-up and qualification costs of $9.7 million associated with our titanium sponge operations, including $6.7 million associated with start-up and qualification costs at our Rowley, Utah, facility. Segment operating profit for the quarter was also impacted by LIFO charges of $5.2 million, which was $1.3 million higher than the first quarter, primarily due to higher titanium and tungsten raw material costs.
“We have made good progress integrating ATI Ladish since completing the transaction on May 9,” continued Harshman. “We are pleased with customer reaction to the combination of ATI Ladish’s operations with ATI’s High Performance Metals businesses. ATI is now a fully integrated supplier, from raw material (for titanium) and melt (for other specialty alloy systems) through highly engineered finished components. This provides enhanced value to our customers and expands ATI’s profitable growth opportunities.
“We continued to improve our cost structure with over $32 million in gross cost reductions in the second quarter, bringing our total gross cost reductions for the year to $59 million. Our gross cost reduction goal for 2011 is at least $100 million. Our balance sheet remains strong with cash on-hand of $368 million at the end of June.
“High Performance Metals segment backlog, including ATI Ladish, was over $1.38 billion at the end of the second quarter 2011. In addition, demand for our nickel-based alloys and specialty alloys continued to be strong in our Flat-Rolled Products segment as we received additional large project orders in the oil and gas market extending that segment’s solid backlog for these products through 2011 and into 2012.
“Our Rowley, Utah, premium-titanium sponge facility has produced over 5 million pounds of sponge so far this year,” said Harshman. “This sponge is being used to produce industrial titanium products. Our primary focus is to continue the orderly production ramp and begin the program to achieve standard-grade qualification for Rowley sponge. We expect to complete this qualification by early 2012. We will then begin the premium-grade qualification program. Our new PAM (Plasma Arc Melt) premium-titanium melt furnace in Bakers, N.C., has begun melt trials. These new investments are important to ATI as we expect strong demand growth to continue for our titanium mill products and titanium forgings and castings.
“We expect to begin construction of our Flat-Rolled Products segment Hot-Rolling and Processing Facility later this summer. Site preparation is essentially complete and final engineering drawings are nearing completion. We currently expect 2011 capital expenditures to be approximately $275 to $300 million, of which $98 million has been spent to date. We expect cash on-hand to increase in the third quarter as investment in managed working capital declines.
Outlook — “The on-going debate about the U.S. budget deficits and debt ceiling, combined with the European debt crisis, is having a negative impact on consumer confidence,” noted Harshman. “In spite of these challenges, we remain optimistic about the current demand and the secular growth opportunities over the next several years in our key diversified global markets.
“In our High Performance Metals segment, we expect demand to continue to be strong for our mill products and component products, and anticipate better demand for our exotic alloys in the second half 2011. We expect additional pre-tax charges in the third quarter 2011 of approximately $8 to $9 million relating to the inventory fair-value adjustments from the acquisition of ATI Ladish. We do not expect any significant similar charges beyond the third quarter. In our Flat-Rolled Products segment, we expect the third quarter results to be impacted by seasonal factors, soft demand, and low base prices for standard stainless sheet and plate products. Also, this segment’s operating results are expected to be negatively impacted by approximately $6 million of major maintenance charges as we take advantage of the seasonally lower demand for our standard stainless products.
“With the Ladish acquisition now complete, we expect 2011 revenues of $5.4 to $5.5 billion, compared to our previous expectations of $4.6 to $4.8 billion, and segment operating profit of 13% to 14% of revenues, excluding the impact of purchase inventory accounting charges. These expectations are based on the strength in our key global markets, improving shipments and higher base prices for many of our high-value products, the expectation of improved demand in the fourth quarter for our standard stainless products, and the view that certain raw material costs will moderate slightly or at least remain at current levels.
“Over the next 3 to 5 years we expect ATI to continue to benefit from our new alloys and products, diversified global growth markets, and differentiated product mix,” continued Harshman. “Demand is expected to be strong for our mill products and highly engineered forged and cast components from the aerospace market. Strong growth is also expected from the oil and gas/chemical process industry for our titanium-based alloys, nickel-based alloys and specialty alloys, and tungsten products. Global demand is expected to grow considerably from the electrical energy market driven by increased need for natural gas-fired turbines, nuclear applications, and alternative energy applications such as solar and wind, and from the rebuilding of transmission infrastructure. In addition, medical market demand for our titanium, zirconium, specialty, and niobium alloys is expected to grow significantly above global GDP growth rates.”
Financial Results— Cash flow used in operations for the first six months of 2011 was $72.0 million. Increased profitability was offset by an investment of $455.1 million in managed working capital, due to a higher level of business activity, higher raw material costs, and additional inventory on-hand to address operational maintenance outages scheduled in early third quarter.
Cash on hand at the end of the second quarter 2011 was $367.8 million. Gross cost reductions, before the effects of inflation, totaled $32 million in the second quarter 2011, bringing gross cost reductions for the year to $59 million.
Allegheny Technologies Inc. is one of the largest and most diversified specialty metals producers in the world with revenues of approximately $4.7 billion for the last twelve months. ATI’s products include titanium and titanium alloys, nickel-based alloys and superalloys, grain-oriented electrical steel, stainless and specialty steels, zirconium, hafnium, niobium, tungsten materials, forgings, castings, and fabrication and machining capabilities.
