ATI Seeing Sustainable Improvement, Demand Growth from Most of Its End Markets
04/23/2014 - Allegheny Technologies Inc. reported first quarter 2014 sales of US$987.3 million and a loss from continuing operations attributable to ATI of US$18.1 million, or US$(0.17) per share.
First Quarter 2014 Results, Continuing Operations
For the first quarter 2013, net income from continuing operations attributable to ATI was US$9.7 million, or US$0.09 per share, on sales of US$1,099.0 million. “As we began 2014, we were cautiously optimistic that business conditions would gradually improve as we move through the year,” said Rich Harshman, chairman, president and chief executive officer. “Our first quarter results and our near-term outlook are consistent with that view. While the first quarter was challenging, business conditions improved as the quarter progressed. As we enter the second quarter, we are seeing meaningful signs of continued improvement. Our backlog at US$1.8 billion is at its highest point in the last two years. Demand from the jet engine market is beginning to improve for both new builds and aftermarket spares. The oil & gas supply chain appears to be in better balance. The markets for flat-rolled stainless sheet and plate and grain-oriented electrical steel are improving and base price increases are being realized. In addition, demand from long-stalled project business is beginning to reappear.” ATI’s sales to the key global markets of aerospace and defense, oil & gas/chemical process industry, electrical energy, and medical represented 67% of ATI first quarter 2014 sales, as follows:
High-value products sales were over 78% of ATI first quarter 2014 sales and increased almost 9% compared to the fourth quarter 2013. Sales of nickel-based alloys and specialty alloys increased 16% compared to the fourth quarter 2013 and represented 25% of first quarter 2014 ATI sales. Sales of our titanium mill products, including Uniti joint venture conversion, increased 3% compared to the fourth quarter 2013 and represented 15% of first quarter 2014 ATI sales, with shipments of these titanium mill products improving to 8.7 million pounds, a 9% increase compared to the fourth quarter 2013. Sales of precision forgings and castings increased 15% compared to the fourth quarter 2013 and represented 14% of first quarter 2014 sales. Sales of Precision Rolled Strip® products and engineered strip products were flat compared to the fourth quarter 2013 and represented 14% of first quarter 2014 ATI sales. Demand was flat for zirconium and related alloys and grain-oriented electrical steel from the nuclear energy and chemical process industry, and electrical power generation markets, respectively. “Segment operating profit was nearly US$44 million, or 4.4% of sales,” Mr. Harshman continued. “This represents an increase of US$54 million compared to the fourth quarter 2013. While demand for many of our products improved throughout the first quarter, higher inventory costs resulting from higher unit conversion costs due to lower operating rates in the fourth quarter 2013, combined with the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with lagging raw material indices/ surcharges, continued to impact operating profit, particularly in the Flat Rolled Products segment. Operating profit in the High Performance Materials & Components segment was US$69.1 million, or 14.3% of sales. This was US$52 million higher than the fourth quarter 2013, as demand began to improve from the jet engine and airframe markets, and from the oil & gas market. Flat Rolled Products segment operating results were a loss of US$25.6 million, or (5.1)% of sales. This represented a modest improvement of US$2 million compared to the fourth quarter 2013. While demand improved from the oil & gas, chemical process industry and automotive markets, operating margins remain at low levels due to the higher unit conversion costs and raw material inventory costs previously mentioned. “High Performance Materials & Components segment first quarter 2014 results continued to be negatively impacted by low operating rates at our Rowley, UT titanium sponge facility and by our strategic decision to use ATI-produced titanium sponge rather than lower cost titanium scrap to manufacture certain titanium products. This is expected to continue throughout 2014. The Premium Qualification (PQ) program at Rowley remains on schedule. We have produced all of the sponge required as part of the qualification process and this sponge is now being melted into mill products for further processing. The Rowley facility is an important part of our long-term titanium products growth strategy. The facility is expected to provide ATI with a reliable, safe, and secure supply of high quality, competitive titanium sponge. “Flat Rolled Products segment first quarter results include start-up costs of US$2.3 million related to the Hot-Rolling and Processing Facility (HRPF). Cold commissioning of the HRPF was completed in the first quarter 2014. We have begun the hot commissioning of the HRPF, which is on schedule to be completed in October 2014. We expect start-up costs of approximately US$5 million in the second quarter 2014 as part of the commissioning process. The HRPF is a critical part of our strategy to transform our flat rolled products business into a more competitive and profitable growth 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. We expect to begin to realize these benefits in 2015. “Cost reduction remains a strategic focus and we have targeted a minimum of US$100 million in new gross cost reductions for 2014. Our operations achieved US$30 million in gross cost reductions during the first quarter 2014. These cost reductions will benefit ATI operations over the rest of 2014. In addition, managed working capital was reduced to 35.6% of annualized sales at the end of March 2014 from 39.4% at year-end 2013 due to higher business activity in the first quarter 2014. “Our balance sheet remains solid with cash on hand of US$838 million and net debt to total capitalization of 27.9% at the end of the first quarter 2014. There were no borrowings outstanding under ATI’s US$400 million unsecured domestic credit facility. Including ongoing investments associated with the HRPF project, we currently expect 2014 capital expenditures to be approximately US$300 million, of which US$40 million was spent in the first quarter. “We acquired Dynamic Flowform Corp. in February 2014, which has been renamed ATI Flowform Products, adding precision flowforming process technologies to ATI’s capabilities to produce specialty materials and components. We expect ATI Flowform Products to improve our market position in the aerospace and defense, oil & gas and chemical process industry markets.” “In April 2014, we decided to close our LaPorte, Ind., iron castings facility, which was held for sale as part of discontinued operations. After an extensive process, we concluded that we could not complete a sale transaction on commercially acceptable terms. We expect to record approximately US$2 million in closure costs, primarily severance, in the second quarter 2014 as a result of this decision.” Strategy and Outlook “For the first time in several years we are beginning to see early signs of what appears to be sustainable improvement and demand growth from most of our end markets. Lead times are beginning to extend for many of our products, modest base-selling price increases are being realized, and raw material surcharges are moving in a positive direction. While these are early signs, they support our view that business conditions will continue to improve as we move through 2014. “As a result of these trends, we expect to achieve at or near break-even results from continuing operations in the second quarter 2014, excluding HRPF start-up costs. “In addition, we maintain our focus on taking actions to improve ATI’s near-term financial performance while we continue to strengthen our position for long-term sustainable profitable growth. As we look at the short-term, we are continuing our 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. As we look at the next 3 to 5 years, we are focused on maximizing value creation from the investments in new products, strategic capital projects, and strategic acquisitions we have made over the past several years. The headwinds that have made business conditions challenging appear to be dissipating. Global market conditions are beginning to show signs of sustainable improvement. We are negotiating a number of new long-term agreements and extension of existing agreements with strategic customers that are expected to continue to enhance ATI’s competitive market position, not only in mill products but also for parts and components. “We continue to believe that market conditions remain favorable for long-term secular growth from our key markets of aerospace & defense, oil & gas/chemical process industry, electrical energy, and medical. And we remain focused on keeping ATI well-positioned for profitable growth over the long-term by building on our unmatched diversification in specialty materials products; technology leadership; and unsurpassed manufacturing capabilities.” First Quarter 2014 Financial Results
High Performance Materials & Components Segment Market Conditions
First quarter 2014 compared to first quarter 2013
Flat Rolled Products Segment Market Conditions
First quarter 2014 compared to first quarter 2013
Other Expenses
Retirement Benefit Expense
Income Taxes
Cash Flow, Working Capital and Debt
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