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