Allegheny Technologies Says Stainless and Electrical Steel Markets Remain Challenging
04/26/2013 - Allegheny Technologies Inc. saw continued sluggish demand from many of its major end market during the first quarter the year, the company said as it reported its first quarter earnings results.
Allegheny Technologies Inc. reported net income for the first quarter 2013 of US$10.0 million on sales of US$1.18 billion. For the first quarter 2012, ATI reported net income of US$56.2 million on sales of US$1.35 billion.
“We saw continued sluggish demand from many of our major end markets during the first quarter,” said Rich Harshman, chairman, president and chief executive officer. “While demand from aerospace OEMs in support of new builds improved, compared to the fourth quarter 2012, demand from the jet engine aftermarket remained low. The markets for flat-rolled stainless sheet and plate and grain-oriented electrical steel remained challenging due to lackluster demand, low base-selling prices, and high levels of imports. Demand for forgings from the construction and mining equipment markets was depressed as OEMs adjusted production and reduced inventories to match current global demand.”
ATI’s sales to the key global markets of aerospace and defense, oil and gas/chemical process industry, electrical energy, and medical represented 68% of ATI first quarter 2013 sales:
· Sales to the aerospace and defense market represented 34% of ATI sales.
· Sales to the oil and gas/chemical process industry represented 18% of ATI sales.
· Sales to the electrical energy market represented 11% of ATI sales.
· Sales to the medical market represented 5% of ATI sales.
· Direct international sales represented 38.2% of ATI first quarter 2013 sales.
High-value products sales were nearly 78% of ATI first quarter 2013 sales and increased about 5% compared to the fourth quarter 2012. Sales of nickel-based alloys and specialty alloys increased 12% compared to the fourth quarter 2012 and represented 24% of first quarter 2013 ATI sales. Sales of our titanium products, including Uniti joint venture conversion, increased nearly 22% compared to the fourth quarter 2012 and represented 16% of first quarter 2013 ATI sales. Titanium shipments improved to 10.3 million pounds, an increase of over 15% compared to the fourth quarter 2012. Sales of precision forgings and castings represented over 12% of first quarter 2013 sales and were at the same level as the fourth quarter 2012. Sales of Precision Rolled Strip® products and engineered strip products increased by more than 7% compared to the fourth quarter 2012 and represented over 11% of first quarter 2013 ATI sales, benefitting from solid demand from the automotive market. Demand was weak for zirconium and related alloys and grain-oriented electrical steel from the nuclear energy and chemical process industry, and electrical power generation markets, respectively. As a result, first quarter 2013 sales of these products declined by 23% compared to the fourth quarter 2012.
“Segment operating profit was approximately US$78 million, or 6.6% of sales,” Harshman continued. “Higher inventory costs resulting from higher unit conversion costs due to lower operating rates in the fourth quarter 2012, combined with the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with falling raw material indices/surcharges, reduced operating profit, especially in the High Performance Metals segment. Operating profit in the High Performance Metals segment was 14.5% of sales and, in addition to the issues noted above, was impacted by low demand from the jet engine aftermarket, weak demand for zirconium alloys, reduced demand for forgings from the construction and mining equipment market, and pricing pressures on transaction, or spot, business. Flat-Rolled Products segment operating profit was US$2.4 million, or 0.4% of sales, reflecting a weaker high-value product mix as well as record-low base-selling prices for standard stainless sheet. Operating profit in our Engineered Products segment was essentially break-even, as lower operating rates affected profit margins.
“Cost reduction remains a strategic focus and we have targeted a minimum of US$100 million in new gross cost reductions for 2013. Our operations achieved almost US$40 million in gross cost reductions during the first quarter 2013. These cost reductions will benefit ATI operations over the rest of 2013. In addition, managed working capital was reduced to 37.8% of annualized sales at the end of March 2013 from 41.1% at year-end 2012.
“Construction at our Flat-Rolled Products segment Hot-Rolling and Processing Facility (HRPF) is progressing on schedule and on budget. As previously stated, the HRPF is expected to be production-ready by the end of 2013, with commissioning occurring through the first half 2014. We believe this approximately US$1.2 billion strategic investment transforms our flat-rolled products business. It is designed to significantly expand our product offering capabilities, shorten manufacturing cycle times, reduce inventory requirements, and improve the cost structure of our flat-rolled products business. Including investments associated with this project, we currently expect 2013 capital expenditures to be approximately US$550 million.”
“Our balance sheet remains solid with cash on hand of US$138 million and net debt to total capitalization of 35% at the end of the first quarter 2013. There were no borrowings outstanding under ATI’s US$400 million unsecured domestic borrowing facility.”
Strategy and Outlook
“As we stated in January, we expected the first quarter and possibly the first half of 2013 to be challenging due to slow and inconsistent economic growth as a result of ongoing global macroeconomic and fiscal policy issues,” Harshman continued. “We certainly saw this in the first quarter. While we see some signs of improvement as we enter the second quarter and it appears the fourth quarter 2012 may have been the trough in demand, we expect challenging conditions to continue to impact many of our end markets throughout the second quarter. We believe our customers will continue to remain cautious as near-term global economic uncertainties remain, lead times remain short, and raw materials prices, especially for nickel and titanium scrap, remain under pressure. We remain cautiously optimistic that business conditions will gradually improve as we move through 2013. We expect some improvement in demand from our key global markets and moderate recovery in domestic economic growth from the expected improvement in the housing construction market.
“While the short-term is challenging, we continue to focus on taking actions to improve ATI’s financial performance while we continue to strengthen our position for long-term profitable growth. We are accelerating cost reduction actions, aggressively identifying and acting on market opportunities that provide important short-term business volume opportunities, and implementing actions to reduce managed working capital.
“Looking beyond the short-term challenges, we believe ATI remains well-positioned for profitable growth over the long-term as a result of our unmatched diversification in specialty metals products, technology leadership, and unsurpassed manufacturing capabilities. We continue to believe that market conditions remain favorable for long-term secular growth from our key markets of aerospace, oil & gas/chemical process industry, electrical energy, and medical.”
First Quarter 2013 Financial Results
· Sales for the first quarter 2013 decreased 12.8% to $1.18 billion compared to the first quarter 2012 as revenues were impacted by lower base prices for many of our products, falling raw material indices/surcharges, and decreased demand from the oil and gas, jet engine aftermarket, electrical energy, and construction and mining markets. Compared to the first quarter 2012, sales decreased 11% in the High Performance Metals segment, 12% in the Flat-Rolled Products segment, and 24% in the Engineered Products segment. Compared to the fourth quarter 2012, sales increased 3% in the High Performance Metals segment, 13% in the Flat-Rolled Products segment and 1% in the Engineered Products segment. Direct international sales in the first quarter 2013 were 38.2% of total sales.
· First quarter 2013 segment operating profit was $78.3 million, or 6.6% of sales, compared to $163.2 million, or 12.1% of sales, for the first quarter 2012. The decrease in operating profit was primarily due to lower shipments associated with many of our high-value products, lower base prices for many products, and the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with lower raw material indices/surcharges.
· Net income attributable to ATI for the first quarter 2013 was $10.0 million, or $0.09 per diluted share, compared to $56.2 million, or $0.50 per diluted share, in the first quarter 2012, and $10.5 million, or $0.10per diluted share, in the fourth quarter 2012. Results for the first quarter 2013 included a $2.0 milliondiscrete tax benefit, primarily relating to 2013 Federal tax law changes.
· Cash on hand at the end of the first quarter 2013 was $138.0 million. During the first quarter 2013, we invested $86.9 million in capital expenditures, primarily related to the Flat-Rolled Products segment’s HRPF. Improved business activity compared to the fourth quarter 2012 resulted in an $84.4 millionincrease in managed working capital associated with growth in accounts receivable.
· Gross cost reductions, before the effects of inflation, totaled $39.3 million Company-wide in the first quarter 2013.
High Performance Metals Segment
Market Conditions
· Demand improved in the first quarter 2013 for most of our products compared to the fourth quarter 2012. Mill product shipments in the first quarter 2013 of titanium and titanium alloys increased 25%, nickel-based and specialty alloys increased 7%, but shipments of zirconium and related alloys decreased 34%. Sales of precision forgings and castings increased 6% compared to the fourth quarter 2012. Sales in the first quarter 2013 to the aerospace market, the segment’s largest end market, increased 10% compared to the fourth quarter 2012. Shorter lead times and available capacity has resulted in lower base prices for certain transactional business. Demand from the nuclear energy market and chemical process industry was weak, which negatively affected sales of zirconium and related alloys. Direct international sales represented nearly 46% of total segment sales for the first quarter 2013.
First quarter 2013 compared to first quarter 2012
· Sales decreased to $518.4 million, or by 11%, compared to the first quarter 2012 primarily as a result of lower mill product shipments of nickel-based and specialty alloys and zirconium and related alloys, and a decrease in sales of precision forged and cast components due to lower demand from the jet engine, construction and mining, nuclear energy, and oil and gas markets. In addition, lower raw material indices and lower base-selling prices negatively affected revenues.
· Segment operating profit decreased to $75.3 million, or 14.5% of sales, compared to $104.1 million, or 17.9% of sales, for the first quarter 2012. The decrease in operating profit primarily resulted from lower shipment volumes, the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with falling raw material indices, and lower base-selling prices for some products.
· Results benefited from $26.5 million of gross cost reductions in the first quarter 2013.
Flat-Rolled Products Segment
Market Conditions
· Demand improved compared to the fourth quarter 2012 from the oil and gas/chemical process industry, aerospace, automotive, food equipment and appliances markets. Compared to the fourth quarter 2012, shipments increased 12% for standard stainless products and 5% for high-value products, which includes titanium, nickel-based alloys, Precision Rolled Strip® products, and grain-oriented electrical steel. Direct international sales represented 34% of total segment sales for the first quarter 2013. Shipments of our high-value flat-rolled products were 113 million pounds, compared to 120.5 million pounds in the first quarter 2012 and 107.6 million pounds in the fourth quarter 2012, respectively. First quarter 2013 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 3.1 million pounds, a 3% decrease compared to the fourth quarter 2012. Shipments of our standard products were 173.8 million pounds in the first quarter 2013, compared to 157.3 million pounds in the first quarter 2012 and 155.6 million pounds in the fourth quarter 2012, respectively.
First quarter 2013 compared to first quarter 2012
· Sales decreased 12% compared to the first quarter 2012 to $558.1 million, primarily due to lower base-selling prices, lower raw material surcharges, and a product mix that had a higher percentage of standard stainless products and a lower percentage of high-value products. Shipments of standard stainless products (sheet and plate) increased 10% while shipments of high-value products declined 6%. Average transaction prices for all products, which include surcharges, declined 15%. Average base selling prices remain at historically low levels for standard stainless products.
· Segment operating profit was $2.4 million, or 0.4% of sales, compared to $46.8 million, or 7.4% of sales, for the first quarter 2012, reflecting a sales mix of more standard stainless products, as well as lower selling prices for most products.
· Results benefited from $10.0 million in gross cost reductions in the first quarter 2013.
Engineered Products Segment
Market Conditions
· Compared to the fourth quarter 2012, demand was slightly improved from the construction and mining, cutting tools, transportation, aerospace, and automotive markets, but was lower from the oil and gas market.
First quarter 2013 compared to first quarter 2012
· Sales decreased 24% to $102.9 million, compared to the first quarter 2012, primarily as a result of lower overall demand for tungsten-based products and carbon alloy steel forgings.
· Segment operating profit was $0.6 million for the first quarter 2013 compared to $12.3 million in the first quarter 2012. Segment operating profit for the first quarter 2013 was negatively impacted by higher raw material inventory costs for tungsten-based products and lower business activity across most operating units in this segment.
· Results benefited from $2.8 million of gross cost reductions in the first quarter 2013.
Allegheny Technologies Incorporated is one of the largest and most diversified specialty metals producers in the world with revenues of approximately US$4.9 billion for the last twelve months. ATI has approximately 11,100 full-time employees world-wide who use innovative technologies to offer global markets a wide range of specialty metals solutions. Our major markets are aerospace and defense, oil and gas/chemical process industry, electrical energy, medical, automotive, food equipment and appliance, machine and cutting tools, and construction and mining. Our 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, forgings, castings and fabrication and machining capabilities.
