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ATI Provides 2012 Review and 2013 Outlook

01/23/2013 - Allegheny Technology Inc. said the fourth quarter 2012 was negatively impacted by headwinds resulting from uncertain global economic conditions but the company is cautiously optimistic  that business conditions will gradually improve as it moves through 2013.

Allegheny Technologies Inc. reported its fourth quarter and full year 2012 results and provided an outlook for 2013.
Fourth Quarter 2012 Results
  • Sales were US$1.10 billion
  • Segment operating profit of $95.3 million, or 8.7% of sales
  • Net income attributable to ATI before a special charge was $19.3 million, or $0.18 per share
  • Net income attributable to ATI was $10.5 million, or $0.10 per share, including the special charge of $8.8 million, or $0.08 per share
  • Gross cost reductions were $26.8 million
  • Cash on hand increased $23.6 million during the quarter to $304.6 million
Full Year 2012 Results
  • Sales were $5.03 billion
  • Segment operating profit of $537.9 million, or 10.7% of sales
  • Net income attributable to ATI before a special charge was $167.2 million, or $1.51 per share
  • Net income attributable to ATI including the special charge was $158.4 million, or $1.43 per share
  • Gross cost reductions were $113.8 million
  • Net debt to total capitalization was 32.2%
  • Total debt to total capitalization decreased to 37.4%
“The fourth quarter 2012 was negatively impacted by headwinds resulting from uncertain global economic conditions,” said Rich Harshman, chairman, president and CEO. “We saw continued conservative inventory management throughout the supply chains of most of our major end markets. These actions appear to have been driven by near-term concerns about the U.S. economy related to resolution of U.S. fiscal policy issues and challenging economic conditions in Europe, Japan, and to a lesser extent China. While these headwinds are creating challenging short-term conditions, we remain optimistic about the long-term growth opportunities in many of our global markets.”

ATI’s sales to the key global markets of aerospace and defense, oil and gas/chemical process industry, electrical energy, and medical represented 67% of ATI sales for 2012:

  • Sales to the aerospace and defense markets were $1.62 billion and represented 32% of ATI sales.
  • Sales to the oil and gas/chemical process industry were $956 million and represented 19% of ATI sales.
  • Sales to the electrical energy market were $600 million and represented 12% of ATI sales.
  • Sales to the medical market were $224 million and represented 4% of ATI sales.
Direct international sales were $1.8 billion and represented 36% of ATI 2012 sales.
“Our fourth quarter 2012 results were impacted by continued low demand and historically low base prices for our standard stainless products,” said Mr. Harshman. “In addition, demand for some of our high-value products in both the High Performance Metals and Flat-Rolled Products segments was impacted by short-term actions by our customers to keep inventories lean and by delays in projects.
“While 2012 presented challenging business conditions, we continued to enhance our competitive position by improving our cost structure, enhancing our manufacturing capabilities, and growing relationships with our customers. These actions are aimed at improving our future performance and positioning ATI to benefit from longer-term growth opportunities. Some examples of our strategic actions include:
  • Our continuing focus on reducing costs, which resulted in gross cost reductions before the effects of inflation of nearly $114 million in 2012.
  • In the first full year as part of ATI, the ATI Ladish high performance forgings and castings business recorded its best revenue year ever. Synergy opportunities continue to expand and are gaining momentum. We are internally sourcing more titanium alloy and nickel-based superalloy mill products and are achieving other cost reductions and technology improvements. It is clear that ATI’s vertically integrated capabilities in nickel, titanium, and specialty alloys provide opportunities for value creation for our customers and shareholders.
  • We further improved our position with both existing and new customers in the key end markets of aerospace, oil and gas/chemical process industry, electrical energy, and medical through strategic and long-term agreements for new alloys and new products.
  • Our Rowley titanium sponge facility completed the standard-grade qualification (SQ) process during the first half of 2012. We continue to improve the facility’s cost structure through process and productivity improvements and technology initiatives, and we expect to begin the premium-grade qualification (PQ) process in 2013.
  • We continued to enhance our capabilities as the world’s leader in titanium plasma arc melting (PAM) with the qualification during 2012 of our newest PAM furnace. This is our fourth PAM furnace and ATI remains the world’s leading PAM melter for the most critical and demanding jet engine applications.
  • Our Flat-Rolled Products segment Hot-Rolling and Processing Facility (HRPF) project is on schedule and on budget. Construction is expected to be completed by the end of 2013. While the HRPF is expected to be ready for service by the end of this year, commissioning is scheduled to occur during the first half of 2014. This game-changing investment is designed to significantly enhance ATI’s flat-rolled products capabilities, reduce manufacturing cycle times, and lower costs.
  • We took steps to size our primary zirconium operations to improve its cost structure in the post-Fukushima Daiichi nuclear electrical energy market.
  • To further improve our operating efficiency, we consolidated operations in our Engineered Products segment resulting in the closure of our iron casting facility in Alpena, MI, which resulted in a $8.8 million, after-tax, non-cash special charge in the fourth quarter 2012. In our Flat-Rolled Products segment, we are consolidating service center operations, which is on schedule to be completed by the end of the 2013 first quarter.
  • Our financial position remains solid with cash on hand of $305 million at the end of 2012. Cash provided by operations was $182 million in the fourth quarter and $428 million for the full year 2012.”
Strategy and Outlook
“Although near-term global economic and U.S. fiscal policy uncertainties remain, we are cautiously optimistic that business conditions will gradually improve as we move through 2013,” Mr. Harshman continued. “We believe conditions in the first quarter, and perhaps the first half, of 2013 are likely to remain challenging.
“Looking beyond these near-term headwinds, we believe market conditions remain favorable for strong secular growth over the next 3 to 5 years in many of our key global markets. Aerospace build rates are expected to continue to increase and OEM backlogs remain at record levels. Demand for ATI’s new products is expected to grow substantially as new technology airframe and jet engine deliveries increase. In addition, demand for jet engine spare parts is projected to begin to modestly improve, compared to the second half of 2012, as we move through 2013.
“Global oil and gas exploration and production forecasts project spending to set a new record and upstream capital spending, especially in the U.S., is expected to grow.
“We also expect continuing solid growth in demand for our high performance specialty metals from the medical market.
“In the short-term, demand from the electrical energy market is expected to remain flat for both power generation and power distribution because of tepid GDP growth in advanced economies and improving, but still weak, new housing construction in the U.S.
“In our High Performance Metals segment, we expect to benefit from growing demand from most of our key global markets, increasing demand for our new products, especially from the aerospace market, and lower costs at our titanium sponge facility. These benefits are expected to more than offset continued weakness in demand from the nuclear energy market, softer demand in the first half of 2013 from industrial markets for forged parts, and reduced demand from defense markets primarily due to reduced defense spending in the U.S. and Europe.
“In our Flat-Rolled Products segment, we see improved demand in 2013, compared to 2012, for our high-value products, particularly titanium, nickel-based alloys and specialty alloys, and our Precision Rolled Strip® products. Our backlog of project orders from the oil and gas/chemical process industry market, including seawater desalination, is beginning to rebuild. We are seeing modest signs of improvement in the first quarter for our standard stainless products. However, we remain cautious in the near-term about domestic GDP-sensitive markets as consumer and business confidence are both extraordinarily low and the political tone in the U.S. has created headwinds that are slowing sustainable domestic economic recovery.
“In our Engineered Products segment, we see continued solid demand for our tungsten-based products. After very strong demand for our industrial forgings in the first half of 2012, demand decreased in the second half due to slowing global growth, which impacted the heavy equipment market. We expect these conditions to continue in the first half of 2013, with improving demand in the second half.
“We expect 2013 pre-tax retirement benefit expense to be about $130 million, or approximately $8 million higher than 2012. Essentially all of the 2013 pension expense is expected to be non-cash.
“We currently expect 2013 capital expenditures to be approximately $550 million, which includes approximately $450 million relating to the HRPF project. We expect 2013 to be our peak year for capital expenditures. Depreciation expense in 2013 is forecasted to be approximately $195 million.
“In summary, we are very well-positioned to benefit from improving market conditions throughout 2013 and beyond. We believe demand from the aerospace, oil and gas, and medical global markets, and certain chemical processing industry markets, will improve for our products as we move through 2013. We expect most short-cycle GDP-sensitive markets will continue to be challenged in the first quarter of 2013 and perhaps the first half of 2013. Overall, these economic conditions should provide relatively stable raw material costs in 2013, compared to current levels. We continue to focus on improving our cost structure and financial performance and we have targeted a minimum of $100 million in new gross cost reductions for 2013. Based on these views, we expect moderate growth in revenue and improvement in segment operating profit in 2013, compared to 2012, with the first half of 2013 providing greater uncertainties.”