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| ATI > SEC Filings for ATI > Form 10-Q on 3-Aug-2012 | All Recent SEC Filings |
3-Aug-2012
Quarterly Report
Overview
Allegheny Technologies is one of the largest and most diversified specialty metals producers in the world. We use innovative technologies to offer global markets a wide range of specialty metals solutions. Our products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium, and niobium, advanced powder alloys, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, forgings, castings, and fabrication and machining capabilities. Our specialty metals are produced in a wide range of alloys and product forms and are selected for use in applications that demand metals having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. ATI is a fully integrated supplier, from raw material (for titanium) and melt (for other specialty alloy systems) through highly engineered finished components.
Sales for the second quarter 2012 were $1.36 billion, compared to $1.35 billion in the second quarter 2011. Compared to the second quarter 2011, sales increased 14% in the High Performance Metals segment, primarily as a result of aerospace demand and the acquisition of ATI Ladish in May 2011, which more than offset lower raw material surcharges primarily due to lower nickel and titanium scrap costs. Sales increased 5% in the Engineered Products segment due to continued growth in demand from the oil and gas, and construction and mining markets. In the Flat-Rolled Products segment, sales declined 10% as increased shipment volumes for standard sheet products were more than offset by lower raw material surcharges, lower base prices for standard stainless products, and reduced shipments of titanium products to the industrial markets due to project delays. For the first six months of 2012, total sales were $2.71 billion, 5% higher than the comparable period of the prior year.
Demand from the global aerospace and defense, electrical energy, oil and gas, chemical process industry, and medical markets represented 67% of our sales for the first six months of 2012. Comparative information for our overall revenues (in millions) by market and their respective percentages of total revenues for the three and six month periods ended June 30, 2012 and 2011 were as follows:
Three Months Ended Three Months Ended
Market June 30, 2012 June 30, 2011
Aerospace & Defense $ 414.3 31 % $ 390.0 29 %
Oil & Gas/Chemical Process Industry 261.8 19 % 298.8 22 %
Electrical Energy 168.9 12 % 191.3 14 %
Medical 56.2 4 % 69.8 5 %
Subtotal - Key Markets 901.2 66 % 949.9 70 %
Automotive 109.4 8 % 109.4 8 %
Construction/Mining 110.4 8 % 85.9 6 %
Food Equipment & Appliances 58.0 4 % 51.0 4 %
Transportation 65.6 5 % 57.4 4 %
Electronics/Computers/Communication 40.7 3 % 41.2 3 %
Machine & Cutting Tools 34.6 3 % 35.6 3 %
Conversion Services & Other 37.6 3 % 21.2 2 %
Total $ 1,357.5 100 % $ 1,351.6 100 %
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Six Months Ended Six Months Ended
Market June 30, 2012 June 30, 2011
Aerospace & Defense $ 850.8 31 % $ 693.5 27 %
Oil & Gas/Chemical Process Industry 539.2 20 % 580.6 23 %
Electrical Energy 315.8 12 % 389.0 15 %
Medical 113.9 4 % 138.5 5 %
Subtotal - Key Markets 1,819.7 67 % 1,801.6 70 %
Automotive 215.2 8 % 222.6 9 %
Construction/Mining 213.9 8 % 157.1 6 %
Transportation 119.7 4 % 103.2 4 %
Food Equipment & Appliances 113.1 4 % 115.7 4 %
Electronics/Computers/Communication 85.9 3 % 78.2 3 %
Machine & Cutting Tools 70.9 3 % 62.9 3 %
Conversion Services & Other 71.5 3 % 37.7 1 %
Total $ 2,709.9 100 % $ 2,579.0 100 %
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For the first six months of 2012, direct international sales increased $126.3 million, or 15%, compared to the first six months of 2011, and represented nearly 36% of total sales. Sales of our high-value products (titanium and titanium alloys, nickel-based alloys and specialty alloys, exotic alloys, precision forgings and castings, grain-oriented electrical steel, precision and engineered strip, and tungsten materials) represented 78% of total sales.
Total titanium mill product shipments for the first half 2012, including ATI-produced products for our Uniti titanium joint venture, were 16.9 million pounds, a 19% decrease compared to the first half of 2011, due to timing delays in certain large projects, primarily affecting our Flat-Rolled Products business segment, and lower overall demand due to reduced global GDP growth.
Segment operating profit for the second quarter 2012 was $159.9 million, or 11.8% of sales, compared to $173.4 million, or 12.8% of sales for the second quarter 2011. Segment operating profit for the second quarter 2012 increased 10% to $102.2 million in the High Performance Metals segment and increased 94% to $13.2 million in the Engineered Products segment, but declined 40% to $44.5 million in the Flat-Rolled Products segment compared to the same period of the prior year. High Performance Metals segment operating profit for the second quarter 2011 included $13.2 million of purchase inventory accounting charges from the acquisition of ATI Ladish. Segment operating profit in the second quarter 2012 was impacted by lower base prices for certain products and by approximately $11 million in higher raw material costs, primarily nickel, which did not align with raw material surcharges due to the rapid decline of nickel prices in the second quarter 2012. The second quarter 2012 included a LIFO inventory valuation reserve benefit of $7.1 million due primarily to lower nickel costs. The second quarter 2011 included a LIFO inventory valuation reserve charge of $5.2 million.
Segment operating profit for the six months ended June 30, 2012 was $323.1 million, or 11.9% of sales, compared to $335.8 million, or 13.0% of sales for the six months ended June 30, 2011.
Segment operating profit as a percentage of sales for the three and six month periods ended June 30, 2012 and 2011 was:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
High Performance Metals 18.1 % 18.7 % 18.0 % 19.9 %
Flat-Rolled Products 6.8 % 10.1 % 7.1 % 9.5 %
Engineered Products 9.9 % 5.4 % 9.5 % 8.2 %
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Our measure of segment operating profit, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest income or expense, retirement benefit expense,
and closed company and other expenses. We believe segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.
Income before tax for the second quarter 2012 was $89.7 million, or 6.6% of sales, compared to $100.3 million, or 7.4% of sales for the second quarter 2011. Higher retirement benefit expense, primarily due to the utilization of a lower discount rate to value retirement benefit obligations and lower than expected returns on plan assets, more than offset lower corporate expenses and lower interest expense. The second quarter 2011 also included Ladish acquisition costs of $18.8 million, including inventory fair value adjustments and transaction costs. Income before tax for the first half 2012 was $173.8 million, or 6.4% of sales, compared to $194.1 million, or 7.5% of sales for the comparable 2011 period. Results for the first six months of 2011 included a charge of $4.8 million related to the accelerated recognition of equity-based compensation due to executive retirements in addition to ATI Ladish acquisition costs.
Net income attributable to ATI for the second quarter 2012 was $56.4 million, or $0.50 per share, compared to $64.0 million, or $0.59 per share for the second quarter 2011. Results for the second quarter 2012 were impacted by higher retirement benefit expense of $7.3 million, net of tax, or $0.06 per share, compared to the same period of 2011. Results for the second quarter 2011 included $12.7 million, net of tax, or $0.11 per share of ATI Ladish acquisition-related expenses. For the six months ended June 30, 2012, net income attributable to ATI was $112.6 million, or $1.00 per share, compared $120.3 million, or $1.13 per share for the first six months of 2011. Results for 2012 included $14.7 million, net of tax, or $0.13 per share, of higher retirement benefit expense. The prior year-to-date period included non-recurring charges of $18.5 million, or $0.16 per share, primarily related to ATI Ladish acquisition-related items.
At June 30, 2012, we had cash on hand of $210.3 million, a decrease of $170.3 million from year-end 2011. Cash flow provided by operations for the first six months of 2012 was $59.8 million and included an investment of $205.4 million in managed working capital primarily due to increased business activity. Additionally, we invested $165.7 million in capital expenditures, primarily related to the Flat-Rolled Products segment's Hot-Rolling and Processing Facility. Net debt to total capitalization was 33.4% and total debt to total capitalization was 36.8% at June 30, 2012. At December 31, 2011, net debt to total capitalization was 31.3% and total debt to total capitalization was 37.9%.
We remain focused on long-term value creation for our stockholders while delivering superior value for our customers. ATI's diversification and focus on high-value global markets with strong secular growth gives us continued expectation of long-term revenue growth and improved profitability. Our industry-leading specialty metals technologies, diversified alloy systems and product forms, global and diversified market focus, unsurpassed manufacturing capabilities, and integrated capabilities from alloy development, to raw materials (titanium sponge), to melting and hot-working, to finished value-added components and parts are unique in the world. This strategy has ATI well-positioned to achieve significant revenue and earnings growth over the next three to five years. We expect strong secular growth in our key global markets of aerospace, oil and gas/chemical process industry, electrical energy, and medical. We have identified and targeted nearly $2 billion in potential new annual revenue growth within the next five years from our new manufacturing capabilities and innovative new products.
As we look at the second half of 2012, slower than expected economic growth in the U.S. and China, fiscal and economic uncertainties in Europe, fiscal and regulatory uncertainties in the U.S., and falling raw material costs create near-term headwinds for demand growth. Businesses and consumers are being cautious and inventories are being managed aggressively. In addition, we expect third quarter 2012 revenue and volume to be impacted by normal seasonal summer slowdowns in many supply chains. As a result, we expect sales and earnings to trough in the third quarter 2012.
While there is caution in the aerospace supply chain, the fundamentals of the build rate ramp and the need for energy- and cost-efficient airplanes remain in place. We expect our backlog of infrastructure project work to begin to grow again through third quarter orders for our titanium, nickel-based alloy, and specialty alloy flat-rolled products. We are well positioned to benefit from a number of large projects expected from the oil and gas market and chemical process industry, including desalination, with shipments expected to begin in the fourth quarter 2012.
As a result of the global economic environment and the market realities, we now expect 2012 sales to be approximately $5.3 billion to $5.4 billion, with segment operating profit as a percent of sales to be similar to that achieved in the first half 2012.
Business Segment Results
We operate in three business segments: High Performance Metals, Flat-Rolled
Products, and Engineered Products. These segments represented the following
percentages of our total revenues and segment operating profit for the first six
months of 2012 and 2011:
2012 2011
Operating Operating
Revenue Profit Revenue Profit
High Performance Metals 42 % 64 % 35 % 53 %
Flat-Rolled Products 48 % 28 % 56 % 41 %
Engineered Products 10 % 8 % 9 % 6 %
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High Performance Metals Segment
Second quarter 2012 sales increased 14% to $566.2 million compared to the second quarter 2011, primarily as a result of increased demand from the aerospace market and the acquisition of ATI Ladish in May 2011. Mill product shipments increased 12% for nickel-based and specialty alloys primarily due to increased demand from the commercial aerospace market. Shipments of titanium and titanium alloys mill products were 10% lower due primarily to reduced ingot sales. Exotic alloys shipments were flat. Average mill products selling prices decreased 3% for nickel-based and specialty alloys primarily as the benefits of an improved product mix were more than offset by lower raw material surcharges. Average selling prices increased 13% for titanium and titanium alloys due primarily to a favorable product mix, partially offset by lower raw material surcharges. Average selling prices increased 6% for exotic alloys primarily due to product mix.
Comparative information for our High Performance Metals segment revenues (in millions) by market and their respective percentages of the segment's overall revenues for the three month periods ended June 30, 2012 and 2011 is as follows:
Three Months Ended Three Months Ended
Market June 30, 2012 June 30, 2011
Aerospace:
Jet Engines $ 182.7 32 % $ 172.0 35 %
Airframes 97.7 17 % 79.8 16 %
Government 48.9 9 % 46.5 9 %
Total Aerospace 329.3 58 % 298.3 60 %
Defense 28.8 5 % 24.0 5 %
Oil & Gas/Chemical Process Industry 57.8 10 % 47.9 10 %
Medical 46.5 8 % 49.2 10 %
Electrical Energy 45.9 8 % 38.8 8 %
Construction/Mining 19.9 4 % 8.8 2 %
Other 38.0 7 % 30.2 5 %
Total $ 566.2 100 % $ 497.2 100 %
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Segment operating profit in the second quarter 2012 increased to $102.2 million, or 18.1% of sales, compared to $92.9 million, or 18.7% of sales, for the second quarter 2011. Compared to the prior year second quarter, the second quarter 2012 benefited from the absence of $13.2 million of inventory purchase accounting charges recorded in the second quarter 2011 resulting from the May 2011 acquisition of ATI Ladish, higher shipments of nickel-based and specialty alloys, and the impact of gross cost reductions. These items were offset by $3 million of higher raw material costs, primarily for nickel, nickel scrap and titanium scrap, resulting from the misalignment of raw materials surcharges with raw material costs due to the long manufacturing cycle of certain products. In addition, second quarter 2012 segment operating profit included approximately $2 million of severance charges associated with a salaried workforce reduction in our exotic alloys operations as we aligned staffing needs with expected lower demand from nuclear markets. The second quarter 2012 segment operating profit included a LIFO inventory valuation reserve benefit of $0.5 million. The second quarter 2011 segment operating profit included a LIFO inventory valuation reserve charge of $4.2 million. Results benefited from $18.8 million in gross cost reductions in
the second quarter 2012.
Certain comparative information on the segment's mill products for the three months ended June 30, 2012 and 2011 is provided in the following table. Mill products volume and average price information includes shipments to ATI Ladish for all periods presented.
Three Months Ended
June 30,
2012 2011 Change
Mill Products Volume (000's pounds):
Titanium 6,554 7,304 (10 %)
Nickel-based and specialty alloys 14,367 12,789 12 %
Exotic alloys 987 991 0 %
Mill Products Average Prices (per pound):
Titanium $ 23.79 $ 21.13 13 %
Nickel-based and specialty alloys $ 15.17 $ 15.67 (3 %)
Exotic alloys $ 70.93 $ 66.72 6 %
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For the six months ended June 30, 2012, segment sales increased 28% to $1.15 billion, primarily as a result of increased demand from the commercial aerospace market and the acquisition of ATI Ladish. Mill products shipments increased 17% for nickel-based and specialty alloys primarily due to higher demand from the commercial aerospace market. Shipments for titanium and titanium alloys declined 3%, although product mix improved, and shipments of exotic alloys decreased 7% primarily due to the timing of projects for the chemical process industry. Average mill products selling prices decreased 1% for nickel-based and specialty alloys primarily due to lower raw material indices. Average selling prices increased 8% for titanium and titanium alloys and 10% for exotic alloys due to a favorable product mix.
Comparative information for our High Performance Metals revenues (in millions) by market and their respective percentages of the segment's overall revenues for the six month periods ended June 30, 2012 and 2011 is as follows:
Six Months Ended Six Months Ended
Market June 30, 2012 June 30, 2011
Aerospace:
Jet Engines $ 384.6 34 % $ 300.0 33 %
Airframes 203.6 18 % 148.2 18 %
Government 102.1 9 % 76.2 8 %
Total Aerospace 690.3 61 % 524.4 59 %
Defense 50.0 4 % 47.3 5 %
Oil & Gas/Chemical Process Industry 112.2 10 % 95.1 11 %
Medical 96.1 8 % 93.9 10 %
Electrical Energy 82.8 7 % 75.2 8 %
Construction/Mining 39.7 3 % 9.1 1 %
Other 76.4 7 % 51.6 6 %
Total $ 1,147.5 100 % $ 896.6 100 %
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Segment operating profit for the first six months of 2012 increased to $206.3 million, or 18.0% of sales, compared to $178.5 million, or 19.9% of sales, for the comparable 2011 period. The increase in operating profit primarily resulted from higher shipment volumes for nickel-based and specialty alloys, the absence of $13.2 million of ATI Ladish acquisition-related inventory charges, and the benefits of gross cost reductions. Year to date 2012 segment results were unfavorably impacted by approximately $9 million of higher cost raw materials, primarily nickel, that did not align with declining raw material indices due to the length of the production cycle for certain products, and $2 million of workforce reduction charges. Operating profit for the first six months of 2012 included a LIFO inventory valuation reserve benefit of $0.5 million, compared to an $8.4 million LIFO inventory valuation reserve charge in the first six months of 2011.
Certain comparative information on the segment's mill products for the six months ended June 30, 2012 and 2011 is provided in the following table. Mill products volume and average price information includes shipments to ATI Ladish for all periods presented.
Six Months Ended
June 30,
2012 2011 Change
Mill Products Volume (000's pounds):
Titanium 13,581 14,057 (3 %)
Nickel-based and specialty alloys 28,777 24,613 17 %
Exotic alloys 1,916 2,070 (7 %)
Mill Products Average Prices (per pound):
Titanium $ 22.83 $ 21.19 8 %
Nickel-based and specialty alloys $ 15.18 $ 15.28 (1 %)
Exotic alloys $ 70.49 $ 63.83 10 %
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Flat-Rolled Products Segment
Second quarter 2012 sales decreased 10% compared to the second quarter 2011, to $657.4 million, primarily due to lower raw material surcharges. Shipments of high-value products were comparable to the prior year as improved shipments of our nickel-based alloy and specialty alloy and Precision Rolled Strip®products were offset by reduced shipments of our grain-oriented electrical steel and titanium products. Shipments of standard stainless products (sheet and plate) increased 23%. Second quarter 2012 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 2.8 million pounds, a 6% decrease compared to the first quarter 2012 and a 43% decrease compared to the second quarter 2011, due to timing delays in certain large projects and lower overall demand due to reduced global GDP growth. Average selling prices, which include surcharges, declined 21% for standard products due to lower base prices and lower raw material surcharges. Average selling prices for high-value products decreased 13% due to product mix and lower material surcharges.
Comparative information for our Flat-Rolled Products revenues (in millions) by market and their respective percentages of the segment's overall revenues for the three month periods ended June 30, 2012 and 2011 is as follows:
Three Months Ended Three Months Ended
Market June 30, 2012 June 30, 2011
Oil & Gas/Chemical Process Industry $ 163.9 25 % $ 217.8 30 %
Electrical Energy 115.6 18 % 141.9 20 %
Automotive 99.7 15 % 97.4 13 %
Construction/Mining 67.8 10 % 59.7 8 %
Food Equipment & Appliances 56.4 8 % 49.1 7 %
Aerospace & Defense 45.6 7 % 58.0 8 %
Electronics/Computers/Communication 38.6 6 % 39.2 5 %
Transportation 38.6 6 % 32.7 4 %
Medical 6.7 1 % 18.4 3 %
Other 24.5 4 % 13.1 2 %
Total $ 657.4 100 % $ 727.3 100 %
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Segment operating profit for the second quarter 2012 was $44.5 million, or 6.8% of sales, compared to $73.7 million, or 10.1% of sales, for the second quarter 2011 primarily due primarily to lower base prices for standard stainless and grain-oriented electrical steel products, reduced shipments of titanium products due to project delays, and $8 million in higher raw material costs, primarily nickel, which did not align with raw material surcharges due to the rapid decline of nickel prices in the second quarter 2012. This was partially offset by a LIFO inventory valuation reserve benefit of $7.0 million in the second quarter 2012. In the second quarter 2011, a LIFO inventory
valuation reserve benefit of $3.2 million was recognized. The second quarter 2012 benefited from $12.2 million in gross cost reductions.
Comparative information on the segment's products for the three months ended June 30, 2012 and 2011 is provided in the following table:
Three Months Ended
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