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ATI > SEC Filings for ATI > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for ALLEGHENY TECHNOLOGIES INC

Form 10-Q for ALLEGHENY TECHNOLOGIES INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 alloy development, to raw materials (for titanium sponge) to melting and hot-working (for other specialty alloy systems), through highly engineered finished components.

Sales for the third quarter 2012 were $1.22 billion, compared to $1.35 billion in the third quarter 2011. Compared to the third quarter 2011, sales increased 1% in the High Performance Metals segment. Raw material surcharges were lower due to declines in nickel raw material and titanium scrap costs. In the Flat-Rolled Products segment, sales declined 19% primarily due to 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. Sales decreased 6% in the Engineered Products segment due to reduced demand for tungsten-based products and from the electrical energy market. For the first nine months of 2012, total sales were $3.93 billion, comparable to the same period of 2011.

Demand from the global aerospace and defense, electrical energy, oil and gas, chemical process industry, and medical markets represented 68% of our sales for the first nine months of 2012. Comparative information for our overall revenues (in millions) by market and their respective percentages of total revenues for the three and nine month periods ended September 30, 2012 and 2011 were as follows:

                                         Three Months Ended           Three Months Ended
 Market                                  September 30, 2012           September 30, 2011
 Aerospace & Defense                   $      395.1         32 %    $      415.2         31 %
 Oil & Gas/Chemical Process Industry          229.9         19 %           284.0         21 %
 Electrical Energy                            148.0         12 %           205.9         15 %
 Medical                                       51.7          4 %            64.7          5 %

 Subtotal - Key Markets                       824.7         67 %           969.8         72 %

 Construction/Mining                          100.4          8 %            84.1          6 %
 Automotive                                    91.5          7 %            80.0          6 %
 Food Equipment & Appliances                   56.1          5 %            56.4          4 %
 Transportation                                54.0          4 %            58.5          4 %
 Electronics/Computers/Communication           42.9          4 %            42.3          3 %
 Machine & Cutting Tools                       30.7          3 %            43.9          3 %
 Conversion Services & Other                   20.2          2 %            17.6          2 %

 Total                                 $    1,220.5        100 %    $    1,352.6        100 %


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                                          Nine Months Ended            Nine Months Ended
 Market                                  September 30, 2012           September 30, 2011
 Aerospace & Defense                   $    1,246.0         32 %    $    1,108.8         28 %
 Oil & Gas/Chemical Process Industry          769.1         20 %           864.5         22 %
 Electrical Energy                            463.8         12 %           594.9         15 %
 Medical                                      165.6          4 %           203.2          5 %

 Subtotal - Key Markets                     2,644.5         68 %         2,771.4         70 %

 Construction/Mining                          314.2          8 %           241.2          6 %
 Automotive                                   306.7          8 %           302.6          8 %
 Transportation                               173.6          4 %           161.7          4 %
 Food Equipment & Appliances                  169.2          4 %           172.1          4 %
 Electronics/Computers/Communication          128.8          3 %           120.6          3 %
 Machine & Cutting Tools                      101.5          3 %           106.8          3 %
 Conversion Services & Other                   91.9          2 %            55.2          2 %

 Total                                 $    3,930.4        100 %    $    3,931.6        100 %

For the first nine months of 2012, direct international sales were $1.4 billion and represented nearly 36% of total sales. Sales of our high-value products (titanium and titanium alloys, nickel-based alloys and specialty alloys, zirconium and related alloys, precision forgings and castings, grain-oriented electrical steel, precision and engineered strip, and tungsten materials) represented 79% of total sales.

Total titanium mill product shipments for the first nine months of 2012, including ATI-produced products for our Uniti titanium joint venture, were 28.7 million pounds, a 20% decrease compared to the first nine months of 2011, due to timing delays of 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 third quarter 2012 was $119.5 million, or 9.8% of sales, compared to $161.8 million, or 12.0% of sales for the third quarter 2011. Segment operating profit for the third quarter 2012 decreased 12% to $84.5 million in the High Performance Metals segment, and 55% to $26.2 million in the Flat-Rolled Products segment, while improving 21% to $8.8 million in the Engineered Products segment compared to the same period of the prior year. The third quarter 2012 segment operating profit was negatively affected by a less favorable product mix and lower bases prices. Results for the third quarter 2012 included a LIFO inventory valuation reserve benefit of $22.1 million which was partially offset by higher costs for raw material, primarily nickel, resulting from a misalignment of the raw material surcharge with raw material costs due to the long manufacturing cycle of certain products. The third quarter 2011 included a LIFO inventory valuation reserve benefit of $12.5 million.

Segment operating profit for the nine months ended September 30, 2012 was $442.6 million, or 11.3% of sales, compared to $497.6 million, or 12.7% of sales for the nine months ended September 30, 2011.

Segment operating profit as a percentage of sales for the three and nine month periods ended September 30, 2012 and 2011 was:

                                    Three Months Ended           Nine Months Ended
                                       September 30,               September 30,
                                    2012            2011         2012           2011
        High Performance Metals        15.7 %        17.9 %         17.2 %       19.2 %
        Flat-Rolled Products            4.7 %         8.5 %          6.3 %        9.2 %
        Engineered Products             7.3 %         5.7 %          8.8 %        7.4 %

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.


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Income before tax for the third quarter 2012 was $54.1 million, or 4.4% of sales, compared to $95.4 million, or 7.1% of sales for the third 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 third quarter 2011 included Ladish acquisition costs of $12.6 million primarily related to inventory fair value adjustments. Income before tax for the first nine months of 2012 was $227.9 million, or 5.8% of sales, compared to $289.5 million, or 7.4% of sales for the comparable 2011 period.

Net income attributable to ATI for the third quarter 2012 was $35.3 million, or $0.32 per share, compared to $62.3 million, or $0.56 per share for the third quarter 2011. Results for the third quarter 2012 were impacted by higher retirement benefit expense of $7.5 million, net of tax, or $0.07 per share, compared to the same period of 2011. Results for the third quarter 2011 included $8.3 million, net of tax, or $0.07 per share of ATI Ladish acquisition-related expenses. For the nine months ended September 30, 2012, net income attributable to ATI was $147.9 million, or $1.32 per share, compared $182.6 million, or $1.68 per share for the first nine months of 2011. Results for 2012 included $22.3 million, net of tax, or $0.19 per share, of higher retirement benefit expense. The prior year-to-date period included non-recurring charges of $26.8 million primarily related to ATI Ladish acquisition costs, accelerated recognition of equity-based compensation due to executive retirements, and a discrete tax charge primarily related to foreign taxes.

At September 30, 2012, we had cash on hand of $281.0 million, an increase of $70.1 million from June 30, 2012 but a decrease of $99.6 million from year-end 2011. Cash flow provided by operations for the first nine months of 2012 was $245.8 million and included an investment of $112.4 million in managed working capital. Additionally, in the first nine months of 2012, we invested $245.6 million in capital expenditures, primarily related to the Flat-Rolled Products segment's Hot-Rolling and Processing Facility. Net debt to total capitalization was 31.2% and total debt to total capitalization was 35.9% at September 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, through the business cycles, 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, as global economic conditions improve. During that time, 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.

We expect business conditions in the fourth quarter 2012 to remain challenging. Except for the U.S. election, meaningful progress on the main reasons for the current global economic uncertainty - the U.S. 'fiscal cliff', the euro-zone debt crisis, and slower growth in China - is not expected until the first half of 2013. Therefore, we expect continued soft demand and aggressive inventory management by most of our customers to continue through the fourth quarter 2012. As a result, we now expect fourth quarter results to be lower than the 2012 third quarter. For the full year, we expect sales in the range of $5.0 to $5.1 billion and full-year segment operating profit as a percent of sales of approximately 10.5%.

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
nine months of 2012 and 2011:



                                         2012                           2011
                                              Operating                      Operating
                                Revenue         Profit         Revenue         Profit
     High Performance Metals          43 %            66 %           36 %            55 %

     Flat-Rolled Products             47 %            26 %           54 %            39 %

     Engineered Products              10 %             8 %           10 %             6 %


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High Performance Metals Segment

Third quarter 2012 sales increased 1% to $539.3 million compared to the third quarter 2011. Mill product shipments of nickel-based alloys and superalloys increased 11% due to demand from the aerospace market. Mill product shipments of specialty alloys increased 66% due to strong demand from the oil and gas market. Shipments of titanium and titanium alloys mill products were 2% lower due primarily to reduced demand from the jet engine aftermarket. Zirconium and related alloys shipments declined 14%, primarily due to reduced demand from the nuclear energy market and the chemical process industry. Average mill products selling prices decreased 6% for nickel-based and specialty alloys, primarily due to lower raw material surcharges, partially offset by a higher value-added product mix. Average selling prices decreased 4% for specialty alloys due to lower raw material surcharges and a less favorable product mix. Average selling prices decreased 1% for titanium and titanium alloys due to lower raw material surcharges. Average selling prices increased 7% for zirconium and related alloys primarily due to product mix. Sales for high performance castings and forgings were flat, primarily due to better demand for airframe and construction and mining components, which was offset by lower raw material surcharges and lower demand from the jet engine aftermarket.

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 September 30, 2012 and 2011 is as follows:

                                         Three Months Ended           Three Months Ended
 Market                                  September 30, 2012           September 30, 2011
 Aerospace:
 Jet Engines                           $     172.7          32 %    $     186.1          35 %
 Airframes                                    95.7          18 %           80.8          15 %
 Government                                   51.8           9 %           61.9          12 %

 Total Aerospace                             320.2          59 %          328.8          62 %

 Defense                                      26.4           5 %           26.3           5 %
 Oil & Gas/Chemical Process Industry          56.9          11 %           35.5           7 %
 Medical                                      43.6           8 %           47.3           9 %
 Electrical Energy                            42.4           8 %           47.0           9 %
 Construction/Mining                          16.1           3 %           12.7           2 %
 Other                                        33.7           6 %           37.1           6 %

 Total                                 $     539.3         100 %    $     534.7         100 %

Segment operating profit in the third quarter 2012 decreased to $84.5 million, or 15.7% of total sales, including surcharges, compared to $95.7 million, or 17.9% of total sales, for the third quarter 2011. Compared to the prior year third quarter, the third quarter 2012 benefited from the absence of $12.5 million of inventory purchase accounting charges recorded in the third quarter 2011 resulting from the May 2011 acquisition of ATI Ladish. Segment operating profit in the third quarter of 2012 was negatively affected by a less favorable product mix and approximately $6 million of costs associated with adjusting production levels with expected lower demand from nuclear energy market. Third quarter 2012 segment operating profit included a LIFO inventory valuation reserve benefit of $12.1 million which was partially offset by higher costs for raw materials, primarily nickel, resulting from the misalignment of the raw material surcharge with raw material costs due to the long manufacturing cycle of certain products. The third quarter 2011 segment operating profit included a LIFO inventory valuation reserve charge of $4.2 million. Results benefited from $16.0 million in gross cost reductions in the third quarter 2012.

Certain comparative information on the segment's mill products for the three months ended September 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.


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                                                  Three Months Ended
                                                     September 30,
                                                   2012          2011        Change
    Mill Products Volume (000's pounds):
    Titanium                                         6,614        6,773           (2 %)
    Nickel-based and specialty alloys               14,434       11,448           26 %
    Zirconium and related alloys                       843          976          (14 %)

    Mill Products Average Prices (per pound):
    Titanium                                    $    21.95     $  22.13           (1 %)
    Nickel-based and specialty alloys           $    14.68     $  16.40          (10 %)
    Zirconium and related alloys                $    75.86     $  70.77            7 %

For the nine months ended September 30, 2012, segment sales increased 18% to $1.69 billion, primarily as a result of increased demand from the aerospace and oil and gas markets plus sales associated with the acquisition of ATI Ladish in May 2011. Compared to the same period from the prior year, mill products shipments of nickel-based and superalloys increased 9% due to demand from the jet engine market. Mill products of specialty alloys increased 46% due to strong demand from the oil and gas market. Shipments for titanium and titanium alloys declined 3%, although product mix improved, and shipments of zirconium and related alloys decreased 9% primarily due to reduced demand from the nuclear energy market and the timing of projects for the chemical process industry. Average mill products selling prices overall for nickel-based and specialty alloys decreased 4%, due to a less favorable product mix and lower raw material surcharges. Mill products average selling prices decreased 1% for nickel-based alloys and superalloys, while average selling prices increased 1% for specialty alloys. Average selling prices increased 5% for titanium and titanium alloys and 9% for zirconium and related 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 nine month periods ended September 30, 2012 and 2011 is as follows:

                                          Nine Months Ended            Nine Months Ended
 Market                                  September 30, 2012           September 30, 2011
 Aerospace:
 Jet Engines                           $      557.2         33 %    $      486.1         34 %
 Airframes                                    299.2         18 %           229.0         16 %
 Government                                   154.0          9 %           138.1         10 %

 Total Aerospace                            1,010.4         60 %           853.2         60 %

 Defense                                       76.4          5 %            73.6          5 %
 Oil & Gas/Chemical Process Industry          169.0         10 %           130.6          9 %
 Medical                                      139.7          8 %           122.4          9 %
 Electrical Energy                            125.2          7 %           140.9         10 %
 Construction/Mining                           55.8          3 %            21.8          1 %
 Other                                        110.3          7 %            88.8          6 %

 Total                                 $    1,686.8        100 %    $    1,431.3        100 %

Segment operating profit for the first nine months of 2012 increased to $290.8 million, or 17.2% of sales, compared to $274.2 million, or 19.2% 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 $25.7 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 $10 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, $2 million of workforce reduction charges, and $6 million of costs associated with adjusting production levels to expected lower demand from the nuclear energy market. Operating profit for the first nine months of 2012 included a $12.6 million LIFO inventory valuation reserve benefit, compared to a $12.6 million LIFO inventory valuation reserve charge in the first nine months of 2011.


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Certain comparative information on the segment's mill products for the nine months ended September 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.

                                                   Nine Months Ended
                                                     September 30,
                                                   2012          2011       Change
     Mill Products Volume (000's pounds):
     Titanium                                       20,195       20,830          (3 %)
     Nickel-based and specialty alloys              43,211       36,061          20 %
     Zirconium and related alloys                    2,759        3,046          (9 %)

     Mill Products Average Prices (per pound):
     Titanium                                    $   22.54     $  21.49           5 %
     Nickel-based and specialty alloys           $   15.01     $  15.64          (4 %)
     Zirconium and related alloys                $   72.13     $  66.06           9 %

Flat-Rolled Products Segment

Third quarter 2012 sales decreased 19% compared to the third quarter 2011, to $560.2 million, primarily due to lower raw material surcharges and reduced base prices for most products. Shipments of high-value products declined 3% compared to the third quarter 2011 as higher shipments of our nickel-based alloys, specialty alloys 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 10%. Third quarter 2012 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 2.6 million pounds, a 7% decrease compared to the second quarter 2012 and a 50% decrease compared to the third quarter 2011, primarily due to timing delays of certain large projects and lower overall demand from global industrial markets. Average selling prices, which include surcharges, declined 21% for standard stainless products due to lower base prices and lower raw material surcharges. Average selling prices for high-value products decreased 19% 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 September 30, 2012 and 2011 is as follows:

                                         Three Months Ended           Three Months Ended
 Market                                  September 30, 2012           September 30, 2011
 Oil & Gas/Chemical Process Industry   $     139.0          25 %    $     214.4          31 %
 Electrical Energy                            99.0          18 %          149.7          22 %
 Automotive                                   82.3          15 %           68.4          10 %
 Construction/Mining                          62.6          11 %           52.3           8 %
 Food Equipment & Appliances                  55.8          10 %           53.4           8 %
 Aerospace & Defense                          38.3           7 %           49.4           7 %
 Electronics/Computers/Communication          39.9           7 %           40.0           6 %
 Transportation                               30.0           5 %           31.8           5 %
 Medical                                       4.9           1 %           15.4           2 %
 Other                                         8.4           1 %           14.8           1 %

 Total                                 $     560.2         100 %    $     689.6         100 %

Segment operating profit for the third quarter 2012 was $26.2 million, or 4.7% of sales, compared to $58.8 million, or 8.5% of sales, for the third quarter 2011 primarily due primarily to lower base prices for standard stainless and grain-oriented electrical steel products, and reduced shipments of certain high-value products due to delays of major project business. The third quarter 2012 include a LIFO inventory valuation reserve benefit of $8.8 million, which was partially offset by higher costs for raw materials, primarily nickel, that did not align with raw material surcharges. In the third quarter 2011, a LIFO inventory valuation reserve benefit of $24.0 million was recognized. The third quarter 2012 benefited from $9.3 million in gross cost reductions.


Table of Contents

Comparative information on the segment's products for the three months ended September 30, 2012 and 2011 is provided in the following table:

                                          Three Months Ended
                                             September 30,
. . .
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