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Allegheny Technologies Reports Third Quarter Results
10/23/2008 - Allegheny Technologies Inc. reported net income of $144.1 million on sales of $1.39 billion for the third quarter, and net income of $455.0 million on sales of $4.20 billion for the nine months ended September 30, 2008.
Allegheny Technologies Inc. reported net income of $144.1 million on sales of $1.39 billion for the third quarter, and net income of $455.0 million on sales of $4.20 billion for the nine months ended September 30, 2008.
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The company’s Flat-Rolled Products Segment experienced strong demand for its grain-oriented electrical steel, industrial titanium sheet, and nickel-based and specialty alloy products, while shipments of standard stainless products were weak, with competitive pricing. Service center inventories of standard stainless products remained low and direct customer shipments to the oil and gas market were solid.
The Segment’s sales increased to $764.6 million in the third quarter, 8% higher than the third quarter 2007. The company said the increase is due primarily to increased shipments for most products, including higher foreign sales, partially offset by lower raw material surcharges and lower base prices.
Direct international sales increased $41.0 million to 26.9% of total 2008 segment sales. Shipments of standard stainless products increased 16% while total high-value products shipments increased 10%. Within high-value products, shipments of substantially all products (industrial titanium sheet, grain-oriented electrical steel, nickel-based alloys, and Precision Rolled Strip® products) exceeded year-ago levels. Average transaction prices for all products were 4% lower, primarily due to lower raw material surcharges, product mix, and more competitive base prices for standard stainless sheet and plate.
Segment operating profit was $102.7 million (13.4% of sales), a decrease of $20.3 million compared to the third quarter 2007, primarily as a result of lower average base selling prices for standard stainless products and timing difference between raw material surcharges and costs.
The Sector’s third-quarter operating profit was negatively impacted by lower base prices for standard stainless sheet and plate products. Operating profit also was compressed by a rapid decline in raw material costs, primarily nickel and nickel bearing scrap. This resulted in higher-cost material purchased earlier in the year flowing through cost of sales and not matching raw-material surcharges included in the selling prices due to the long manufacturing cycle times of some of the Sector’s products. This compression was partially offset by increased shipments and higher selling prices for grain-oriented electrical steel, increased shipments of flat-rolled titanium products, increased shipments of standard0grade sheet products, and the benefits of gross cost reductions. Declining raw material costs (primarily for nickel and nickel scrap), resulted in a $25.1-million LIFO inventory valuation reserve benefit. The third quarter 2007 included an $18.2-million LIFO inventory valuation benefit.
Results benefited from $14.3 million in gross cost reductions, bringing 2008 first-nine-months gross cost reductions in this segment to $47.5 million.
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Sales of $1.39 billion represent a 4.3% increase compared to sales of $1.33 billion in the year-ago quarter. Direct international sales, which increased to a quarterly record of $402.1 million, represented 29% of total sales. Compared to the third quarter 2007, sales increased 8% in the Flat-Rolled Products segment, and 12% in the Engineered Products segment, but declined 2% in the High Performance Metals segment.
Segment operating profit was $248.4 million (17.8% of sales), which compares to segment operating profit of $324.5 million (24.3% of sales) for the third quarter 2007. Results included a $41.0-million LIFO inventory valuation reserve benefit, which compares to a $61.2-million LIFO inventory valuation reserve benefit for the 2007 period.
“During this time of great economic uncertainty, our solid third quarter performance reflects ATI’s transformation into a globally-focused, diversified high-value specialty metals company with strong cash flow and a quality balance sheet,” said L. Patrick Hassey, Chairman, President and CEO. “We continue to move our metallic units to meet the demands of changing global markets.”
Managed working capital was reduced by $86.1 million in the third quarter, as compared to the second quarter of 2008.
Nine Month Results—Net income of $455.0 million ($4.51 per share) compares to net income of $598.2 million ($5.81 per share) for the comparable year-ago period. Sales of $4.20 billion compare to sales of $4.18 billion for the nine months ended September 30, 2007.
Cash flow from operations was $344.6 million as operating earnings more than offset a further investment of $185.2 million in managed working capital. Gross cost reductions, before the effects of inflation, totaled $103.8 million company-wide in the first nine months. Cash on hand was $272.6 million at the end of the third quarter.
Management Comments—“Key financial metrics were strong,” said Patrick Hassey. “Return on capital employed was 22%. Return on stockholders’ equity was over 27%. Gross cost reductions for the first nine months 2008 were nearly $104 million, which already exceed our full year goal, as we remained focused on reducing costs through operating efficiencies.
“ATI is well-positioned during this period of economic uncertainty,” noted Hassey. “At the end of the third quarter 2008 we had nearly $273 million of cash, no borrowings under our $400-million domestic credit facility, net debt to capitalization of 9.3%, and no significant near-term debt maturities. This strong financial position is after our self-funded investments during the first nine months of 2008 of $185 million in managed working capital, $365 million in capital expenditures, and nearly $242 million in share repurchases. We repurchased 3.4 million ATI shares in the third quarter.
“Our leadership team has been and continues to be cautious in our financial and enterprise risk management. ATI has grown and been transformed without the use of leverage. As a result, our strong balance sheet enables us to continue to focus on long-term profitable growth opportunities. We deploy our strong cash flow with a balanced approach to create long-term value for our shareholders. We are committed to this philosophy and can adjust the timing of our self-funded capital projects accordingly.
“Although ATI is much more resilient to economic downturns than at any time in the past, we are not immune to the economic fallout from the global credit crisis. Demand and pricing for some of our major products are clearly being impacted by the growing uncertainties in the U.S. and global economies, the impact from the strike at Boeing and the delay in its 787 program, and rapidly falling prices of certain raw materials. Prices of many of the raw materials we use have fallen significantly due to reduced global demand and deleveraging of certain traded commodities. As a result, some orders have slowed and we believe that a number of our customers are adjusting the timing of their projects until these raw material prices adjust and stabilize. We are responding to all of these uncertainties by adjusting the production levels of some of our products and ratcheting up our cost reduction goals for 2009.
“We are focused on delivering solid financial results during this period of uncertainty. We now expect our fourth quarter 2008 results to be in the range of $1.00 to $1.10 per share, resulting in full year 2008 earnings of $5.51 to $5.61 per share. We expect strong cash flow in the fourth quarter, including a significant reduction in managed working capital.
“We believe the long-term growth opportunities of our major global end markets remain strong. We intend to continue to enhance our leadership position in specialty metals with a focus on near-term and long-term opportunities in the aerospace and defense, chemical processing industry, oil and gas, electrical energy generation and distribution, and medical markets.”
Third-Quarter Expenses—The company’s retirement benefit expense decreased to $2.5 million in the third quarter, compared to an expense of $7.6 million in the third quarter 2007. The company said the decrease is primarily a result of higher-than-expected returns on plan assets in 2007 and the positive benefits of the voluntary pension contributions over the last several years.
For the third quarter, retirement benefit expense included in cost of sales was $1.6 million and in selling and administrative expenses was $0.9 million. This compares to $4.8 million of retirement benefit expense included in cost of sales, and $2.8 million included in selling and administrative expenses.
The company’s U.S. defined benefit pension plan was approximately 92% funded as of September 30, 2008, which represents a decline in the funding level for this plan from the beginning of the year. The decline resulted primarily from a significant decline in the value of equity investments held by the pension fund. If the value of pension plan investments remains at this level at year-end, the company would recognize a significant increase in pension expense in 2009 compared to 2008.
Corporate expenses for the third quarter were $13.4 million, compared to $18.5 million in the year-ago period. This decrease was primarily due to lower expenses associated with annual and long-term performance-based cash incentive compensation programs.
Third quarter interest expense, net of interest income, was $1.7 million compared to $0.1 million in the year-ago period. The increase in net interest expense was primarily due to less interest income.
Third quarter results included an $83.9-million provision for income taxes (36.8% of income before tax), for U.S. Federal, foreign and state income taxes. The third quarter 2007 included a provision of $100.1 million, or 34.0% of income before tax.
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’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.
