Allegheny Technologies Reports 1st Quarter Results
04/24/2008 - Allegheny Technologies Inc. reported net income of $142.0 million on sales of $1.34 billion for the first quarter of 2008
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ATI’s Flat-Rolled Products Segment
Market Conditions—The company said that demand for its standard stainless products had improved primarily due to better inventory balance at its U.S. service center customers and improved international shipments. Demand for CP titanium sheet and grain-oriented electrical steel products had been strong from the chemical process industry, oil and gas, and electrical energy markets, while demand was lower for nickel-based and specialty alloys due primarily to the timing of shipments associated with project business. The company said demand was lower from consumer durables markets for engineered strip and Precision Rolled Strip® products.
First Quarter Results—Segment sales were $746.9 million, 5% lower than the first quarter 2007, due primarily to lower average base selling prices for standard stainless products. Shipments of standard stainless products increased 6% while total high-value products shipments declined 6%. Within high-value products, shipments of CP titanium sheet and grain-oriented electrical steel continued to improve, offsetting lower shipments of nickel-based and specialty alloys, engineered strip, and Precision Rolled Strip products. Average transaction prices for all products, which include surcharges, were 6% lower.
Segment operating profit decreased to $101.2 million (13.5% of sales), primarily as a result of lower average base selling prices for standard stainless products, a less favorable mix of high-value products, and the negative impact of raw material costs (primarily nickel and nickel-based scrap) being higher than the raw material surcharges included in selling prices. These negative impacts were partially offset by increased shipments and higher selling prices for grain-oriented electrical steel, increased shipments of flat-rolled titanium products, and the benefits of gross cost reductions. There was no change in the segment’s LIFO inventory valuation reserve, which compares to a $14.0 million LIFO inventory valuation reserve charge for the first quarter of 2007.
Segment results benefited from $16.2 million in gross cost reductions.
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The $142.0 million net income ($1.40 per share) compares to net income of $197.8 million ($1.92 per share) for the year-ago first quarter. Sales of $1.34 billion are 2.1% lower than to sales of $1.37 billion in the year-ago first quarter.
Direct international sales increased 11% to $370.6 million and represented 28% of total sales. Compared to the first quarter 2007, sales increased 1% in the High Performance Metals segment and 4% in the Engineered Products segment, but declined 5% in the Flat-Rolled Products segment.
Segment operating profit was $238.3 million (17.7% of sales), compared to $340.3 million (24.8% of sales) for the year-ago first quarter. Results included a $1.3-million LIFO inventory valuation reserve charge, while the first quarter 2007 included a $20.9-million LIFO inventory valuation reserve charge.
Cash flow from operations was $66 million, as operating earnings more than offset a further investment of $148.9 million in managed working capital.
Management Comments—“Our key growth markets were solid in the first quarter. Demand from the global aerospace and defense, chemical process industry, oil and gas, electrical energy, and medical markets accounted for nearly 70% of sales,” said L. Patrick Hassey, Chairman, President and CEO.
“We derived 28% of our sales dollars in the first quarter from direct international sales. We believe that more than 50% of our sales are driven by demand from non-U.S. markets. ATI is benefiting from global infrastructure growth, our diverse product mix, the value of the dollar, and the strategy of several key customers to purchase more products with U.S. dollars.
“ATI titanium product shipments reached 12.2 million pounds in the first quarter 2008, a 26% increase over the same period last year,” continued Hassey. “Shipments of our exotic alloys and grain-oriented electrical steel grew by 38% and 15%, respectively. Shipments of our High Performance Metals segment nickel-based and specialty alloys decreased 8% compared to last year’s first quarter due primarily to inventory management actions at some distributor customers.
“First-quarter 2008 earnings were similar to those achieved in the fourth quarter 2007. As previously stated, we had expected the first quarter to be negatively impacted by certain raw material costs being higher than the raw material indices/surcharges included in our selling prices for certain products. While this mismatch was largely offset by a LIFO reserve benefit of approximately $74 million in the fourth quarter 2007, there was no such offset in the first quarter 2008.
“Cash flow from operations was $66 million in the first quarter and included an investment of $149 million in managed working capital to support the higher business volumes, primarily in our Flat Rolled Products segment. Cash on hand at the end of the quarter was $468 million after the managed working capital investment, $112 million in capital investments, and $62 million of share repurchases.
Hassey noted that the last reduction furnace at the company’s Albany, Ore., titanium sponge facility went into operation— ahead of schedule—at the end of the first quarter, bringing that facility’s production to an annualized rate of 22 million pounds. He said that construction was on schedule for the company’s new greenfield premium grade titanium sponge facility in Rowley, Utah, “and we expect to begin initial production in the fourth quarter 2008.” Hassey said that the company’s new casting facility in Alpena, Mich., is coming on line. “We began producing wind-energy components there in early April, and we are now in the quality approval process with our major customers.
“Our business continues to be driven by long-term growth in the global aerospace, defense, and infrastructure markets,” continued Hassey. “Overall demand from these markets remains at a high level. For example, first-quarter orders from our Asian markets significantly exceeded last year’s rate, which was a record year. Our airframe and jet engine customers report record backlogs and good order rates so far in 2008, resulting in improving build rates for existing models. Boeing’s recently revised schedule for its 787 Dreamliner brings near-term uncertainty to the supply chain. Boeing has told us that they intend to honor our supply agreement, and as production increases so will our supply to this breakthrough aircraft. In the meantime, we intend to continue to navigate through this period and focus our mill products capabilities on the diversified global markets that we serve.
Gross cost reductions, before the effects of inflation, totaled $32.3 million for the first three months of 2008. Cash on hand was $468 million at the end of the quarter.
Outlook—“ATI is positioned to continue to benefit from the current and long-term global growth opportunities of our major end markets,” said Hassey. “We continue our investments to give us unsurpassed manufacturing capabilities, which enable profitable growth. We are not only focused on product diversification but also on global market diversification. We are committed to maintaining a strong balance sheet.
“Although the condition of the U.S. economy, the impact of Boeing’s 787 schedule delay, and continuing raw material cost volatility create near-term impacts, we believe the first quarter 2008 earnings represent the bottom,” continued Hassey. “Generally, base selling prices are flat to higher; volumes continue to improve; and raw material indices/surcharges are in better balance. As a result, we expect second quarter earnings to be somewhat higher than first quarter results.”
Allegheny Technologies is one of the largest and most diversified specialty metals producers in the world with revenues of $5.5 billion during 2007. ATI has approximately 9700 full-time employees world-wide who use innovative technologies to offer growing global markets a wide range of specialty metals solutions. The company’s major markets are aerospace and defense, chemical process industry/oil and gas, electrical energy, medical, automotive, food equipment and appliance, machine and cutting tools, and construction and mining. 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.
