Allegheny Technologies Reports 1st Quarter 2010 Results
04/29/2010 - Allegheny Technologies reported net income of $18.2 million on sales of $899.4 million for the first quarter of 2010.
Allegheny Technologies Inc. reported net income of $18.2 million on sales of $899.4 million for the first quarter of 2010.
The $18.2 million ($0.18 per share) net income compares to net income of net income of $5.9 million ($0.06 per share) for the year-ago first quarter. Results included a $5.3 million non-recurring tax charge related to the recently-enacted Patient Protection and Affordable Care Act. Excluding this non-recurring tax charge, net income was $23.5 million ($0.24 per share).
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ATI’s Flat-Rolled Products Segment
Market Conditions — Demand for standard stainless products increased 22% vs. the previous quarter, while demand increased 12% for high-value products, which includes titanium, nickel-based alloys, Precision Rolled Strip® products and grain-oriented electrical steel. Direct international sales represented 35% of total first quarter segment sales. Titanium shipments were approximately 3.1 million pounds, an increase of over 98% vs. the previous quarter, while average selling prices for all products, which include surcharges, were essentially flat vs. the previous quarter.
First Quarter Results — Sales of $516.6 million were a 37% increase vs. the year-ago first quarter, primarily due to higher shipments and raw material surcharges, and improved base-selling prices for stainless products. Shipments of standard stainless products (sheet and plate) increased 54% and high-value products shipments increased 18%. Average transaction prices for all products were 1% higher due to increased raw material surcharges and improved base prices for stainless products.
Segment operating profit improved to $31.4 million (6.1% of sales), which compares to $7.7 million (2% of sales) for the year-ago first quarter, due primarily to increased shipments and higher base prices for stainless products plus a better matching of surcharges with raw material costs. There was no change in LIFO inventory valuation reserve in the first quarter, while the 2009 first quarter included a LIFO inventory valuation benefit of $26.2 million.
Results for the current quarter benefited from $14.1 million in gross cost reductions.
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By segment, year-over-year sales increased 37% in the Flat-Rolled Products segment and by 23% in the Engineered Products segment but decreased 22% in the High Performance Metals segment. Direct international sales increased to 33.5% of total sales, compared to 29.4% for the comparable 2009 period.
Management Comments — “We have turned the corner. Most of our markets are improving,” said L. Patrick Hassey, Chairman, President and CEO. “We are seeing signs of recovery in our business: production schedules are filling, lead times are extending, and scrap is in short supply. With steady quarter-on-quarter improvement, we see 2010 as a transition year to the resumption of secular growth in our key markets.
“Our safety performance continued to be world class,” added Hassey. “We made further improvements to our cost structure in the first quarter 2010 with $37 million in gross cost reductions. Our 2010 target is at least $100 million of new gross cost reductions.
“We continue to expect considerable cost savings and production efficiencies from our Brackenridge, Pa., melt-shop consolidation project beginning in late 2010,” continued Hassey. “Our 2010 capital investment plan is approximately $375 million.
First Quarter Operating Results — The company’s segment operating profit increased to $88.2 million (9.8% of sales) in the first quarter, which compares to segment operating profit of $55.9 million (6.7% of sales) for the comparable 2009 period. While operating profit improved across all three business segments, first-quarter results were adversely affected by idle facility, workforce reduction, and start-up costs of $11.5 million.
There was no change in the company’s LIFO inventory valuation reserve in the first quarter 2010, which compares to a LIFO reserve benefit of $27.5 million in the year-ago first quarter.
Net income attributable to ATI was $18.2 million ($0.18 per diluted share), which compares to $5.9 million ($0.06 per diluted share) in the year-ago first quarter. Results included a $5.3 million ($0.05 per share) non-recurring tax charge related to the recently-enacted Patient Protection and Affordable Care Act. Excluding this special tax charge, results for the first quarter 2010 were net income of $23.5 million ($0.24 per share).
Cash flow used in operations was $72 million as investment in managed working capital of $130.2 million due to improving business activity and higher raw material costs offset increased profitability. Cash on hand at the end of the quarter was $563.5 million. Gross cost reductions, before the effects of inflation, totaled $37 million company-wide.
Retirement Benefit Expense — Retirement benefit expense decreased to $22.5 million in the first quarter, which compares to retirement benefit expense of $37.3 million in the year-ago first quarter. The decrease was primarily due to higher-than-expected returns on pension plan assets in 2009 and benefits resulting from voluntary pension contributions made over the last several years.
Retirement benefit expense of $15.8 million was included in cost of sales and $6.7 million was included in selling and administrative expenses. For the year-ago first quarter, the amount of retirement benefit expense included in cost of sales was $27.7 million, and the amount included in selling and administrative expenses was $9.6 million.
Income Taxes — The provision for income taxes was $13.2 million, or 40% of income before tax. The quarter included a non-recurring tax charge of $5.3 million associated with the impact of the recently-enacted Patient Protection and Affordable Care Act, which was partially offset by discrete net tax benefits of $3.7 million associated with adjustment of taxes paid in prior years and other changes. The year-ago first quarter included a $5.0 million income tax benefit due primarily to $5.1 million of discrete adjustments associated with prior years’ taxes.
Cash Flow, Working Capital and Debt — Cash on hand was $563.5 million at March 31, 2010, a decrease of $145.3 million from year-end 2009.
For the first quarter, cash flow used in operations was $72.0 million as an investment of $130.2 million in managed working capital, primarily due to improving business activity and higher raw material costs, offset increased profitability.
The $130.2-million growth in managed working capital resulted from a $78.8-million increase in accounts receivable and a $141.7-million increase in inventory partially offset by a $90.3-million increase in accounts payable.
At March 31, 2010, managed working capital (defined as accounts receivable plus gross inventories less accounts payable) was 32.9% of annualized sales, compared to 34.5% of annualized sales at year-end 2009.
Cash used in investing activities in the first quarter was $50.6 million, consisting primarily of capital expenditures. Cash used in financing activities was $22.7 million, primarily due to dividend payments of $17.7 million and debt retirements of $6.2 million.
Net debt as a percentage of total capitalization was 19.9% at the end of the first quarter 2010, which compares to 15.3% at the end of 2009. Total debt to total capital was 34.5% at March 31, 2010, compared to 34.7% at the end of 2009.
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.
Outlook — Looking ahead, Hassey said, “We continue to believe 2010 will be a year of steady quarter-on-quarter improvement. We believe 2010 is the transition year from the global contraction of 2009 to the resumption of the secular growth trends in our key global markets. We expect to recover and grow faster than our key markets as a result of new customers and LTAs, the growing use of our innovative new products, our new technically advanced manufacturing capabilities, and a global focus on our key markets.”
Allegheny Technologies, one of the largest and most diversified specialty metals producers in the world, reported revenues of $3.1 billion during 2009. ATI’s products include titanium and titanium alloys, nickel-based alloys and superalloys, grain-oriented electrical steel, stainless and specialty steels, zirconium, hafnium, and niobium, tungsten materials, and forgings and castings.
