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ATI > SEC Filings for ATI > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for ALLEGHENY TECHNOLOGIES INC


6-May-2013

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 first quarter 2013 decreased 12.8% to $1.18 billion, compared to $1.35 billion in the first quarter 2012 as revenues were impacted by lower base prices for many of our products, falling raw material indices/ surcharges, and decreased demand from the oil and gas, jet engine aftermarket, electrical energy, and construction and mining markets. Compared to the first quarter 2012, sales decreased 11% in the High Performance Metals segment, 12% in the Flat-Rolled Products segment, and 24% in the Engineered Products segment. Compared to the fourth quarter 2012, sales increased 3% in the High Performance Metals segment, 13% in the Flat-Rolled Products segment, and 1% in the Engineered Products segment.

Demand from the global aerospace and defense, oil and gas/chemical process industry, electrical energy, and medical markets represented 68% of our sales for the first three months of 2013 and 2012. Comparative information for our overall revenues (in millions) by market and their respective percentages of total revenues for the three month periods ended March 31, 2013 and 2012 were as follows:

                                         Three Months Ended           Three Months Ended
 Market                                    March 31, 2013               March 31, 2012
 Aerospace & Defense                   $      401.8         34 %    $      436.5         32 %
 Oil & Gas/Chemical Process Industry          217.8         18 %           277.4         21 %
 Electrical Energy                            129.0         11 %           146.9         11 %
 Medical                                       59.2          5 %            57.8          4 %

 Subtotal-Key Markets                         807.8         68 %           918.6         68 %
 Automotive                                    91.6          8 %           105.9          8 %
 Construction/Mining                           79.5          7 %           103.4          8 %
 Food Equipment & Appliances                   65.4          6 %            55.2          4 %
 Transportation                                51.9          4 %            54.1          4 %
 Electronics/Computers/Communication           36.3          3 %            45.3          3 %
 Machine & Cutting Tools                       26.0          2 %            36.2          3 %
 Conversion Services & Other                   20.9          2 %            33.8          2 %

 Total                                 $    1,179.4        100 %    $    1,352.5        100 %

For the first quarter 2013, direct international sales were $450.5 million and represented over 38% 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 78% of total sales. Comparative information for our major high-value and standard products based on their percentages of our total sales is as follows:


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                                                      Three Months Ended
                                                           March 31,
                                                      2013            2012
         High-Value Products
         Nickel-based alloys and specialty alloys         24 %           27 %
         Titanium and titanium alloys                     16 %           13 %
         Precision forgings and castings                  12 %           13 %
         Precision and engineered strip                   11 %           11 %
         Tungsten-based materials                          7 %            7 %
         Zirconium and related alloys                      5 %            5 %
         Grain-oriented electrical steel                   3 %            4 %

         Total High-Value Products                        78 %           80 %
         Standard Products
         Specialty stainless sheet                         9 %            9 %
         Stainless steel sheet                             9 %            7 %
         Stainless steel plate                             2 %            2 %
         Iron castings and other                           2 %            2 %

         Total Standard Products                          22 %           20 %

Grand Total 100 % 100 %

Total titanium mill product shipments for the first three months of 2013, including ATI-produced products for our Uniti titanium joint venture, were 10.3 million pounds, a 15% increase compared to the fourth quarter 2012 and a 3% increase compared to the first quarter 2012, reflecting increased demand from the commercial aerospace market in the High Performance Metals segment and ongoing shipments for certain large projects, primarily affecting our Flat-Rolled Products business segment.

Segment operating profit for the first quarter 2013 was $78.3 million, or 6.6% of sales, compared to $163.2 million, or 12.1% of sales for the first quarter 2012. Higher inventory costs resulting from higher unit conversion costs due to lower operating rates in the fourth quarter 2012, combined with the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with falling raw material indices/surcharges, reduced operating profit, especially in the High Performance Metals segment. Segment operating profit for the first quarter 2013 in the High Performance Metals segment was $75.3 million or 14.5% of sales and was also impacted by low demand from the jet engine aftermarket, weak demand for zirconium alloys, reduced demand for forgings from the construction and mining market, and pricing pressures on transaction, or spot, business. Flat-Rolled Products segment operating profit was $2.4 million, or 0.4% of sales, reflecting a weaker high-value product mix as well as record-low base-selling prices for standard stainless sheet. Operating profit in our Engineered Products segment was essentially break-even, as lower operating rates affected profit margins.

Segment operating profit as a percentage of sales for the three month periods ended March 31, 2013 and 2012 was:

                                              Three Months Ended
                                                   March 31,
                                              2013            2012
                  High Performance Metals        14.5 %        17.9 %
                  Flat-Rolled Products            0.4 %         7.4 %
                  Engineered Products             0.6 %         9.1 %

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 expense, retirement benefit expense, closed company expenses and restructuring costs, if any. 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 first quarter 2013 was $15.3 million, or 1.3% of sales, compared to $84.1 million, or 6.2% of sales for the first quarter 2012. The first quarter 2013 benefited from lower corporate expenses, primarily the result of reduced annual and long-term performance-based incentive compensation expenses, and lower interest expense.


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Net income attributable to ATI for the first quarter 2013 was $10.0 million, or $0.09 per share, compared to $56.2 million, or $0.53 per share for the first quarter 2012.

At March 31, 2013, we had cash on hand of $138.0 million, a decrease of $166.6 million from year-end 2012. Cash flow used in operations for the first quarter 2013 was $57.4 million and included an investment of $84.4 million in managed working capital. Additionally, we invested $86.9 million in capital expenditures, primarily related to the Flat-Rolled Products segment's Hot-Rolling and Processing Facility (HRPF). Net debt to total capitalization was 35.0% and total debt to total capitalization was 37.3% at March 31, 2013. At December 31, 2012, net debt to total capitalization was 32.2% and total debt to total capitalization was 37.4%.

While we see some signs of improvement as we enter the second quarter and it appears the fourth quarter 2012 may have been the trough in demand, we expect challenging conditions to continue to impact many of our end markets throughout the second quarter. We believe our customers will continue to remain cautious as near-term global economic uncertainties remain, lead times remain short, and raw materials prices, especially for nickel and titanium scrap, remain under pressure. We remain cautiously optimistic that business conditions will gradually improve as we move through 2013. We expect some improvement in demand from our key global markets and moderate recovery in domestic economic growth from the expected improvement in the housing construction market.

While the short-term is challenging, we continue to focus on taking actions to improve ATI's financial performance while we continue to strengthen our position for long-term profitable growth. We are accelerating 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.

Looking beyond the short-term challenges, we believe ATI remains well-positioned for profitable growth over the long-term as a result of our unmatched diversification in specialty metals products, technology leadership, and unsurpassed manufacturing capabilities. We continue to believe that market conditions remain favorable for long-term secular growth from our key markets of aerospace, oil and gas/chemical process industry, electrical energy, and medical.

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
three months of 2013 and 2012:



                                         2013                           2012
                                              Operating                      Operating
                                Revenue         Profit         Revenue         Profit
     High Performance Metals          44 %            96 %           43 %            64 %

     Flat-Rolled Products             47 %             3 %           47 %            29 %

     Engineered Products               9 %             1 %           10 %             7 %

High Performance Metals Segment

First quarter 2013 sales decreased 11% to $518.4 million compared to the first quarter 2012, primarily as a result of lower mill product shipments of nickel-based and specialty alloys and zirconium and related alloys, and a decrease in sales of precision forged and cast components due to lower demand from the jet engine, construction and mining, nuclear energy, and oil and gas markets. In addition, lower raw material indices and lower base-selling prices negatively affected sales.


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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 March 31, 2013 and 2012 is as follows:

                                         Three Months Ended           Three Months Ended
 Market                                    March 31, 2013               March 31, 2012
 Aerospace:
 Jet Engines                           $     170.5          33 %    $     201.9          35 %
 Airframes                                   103.4          20 %          105.9          18 %
 Government                                   52.4          10 %           53.2           9 %

 Total Aerospace                             326.3          63 %          361.0          62 %
 Medical                                      49.4          10 %           49.7           9 %
 Oil & Gas/Chemical Process Industry          44.2           9 %           54.4           9 %
 Electrical Energy                            38.4           7 %           36.9           6 %
 Defense                                      23.0           4 %           21.2           4 %
 Construction/Mining                           7.7           1 %           19.8           3 %
 Other                                        29.4           6 %           38.3           7 %

 Total                                 $     518.4         100 %    $     581.3         100 %

Direct international sales represented nearly 46% of total segment sales. Comparative information for the High Performance Metals segments' major product categories, based on their percentages of sales for the three months ended March 31, 2013 and 2012, is as follows:

                                                      Three Months Ended
                                                           March 31,
                                                      2013            2012
         High-Value Products
         Nickel-based alloys and specialty alloys         32 %           37 %
         Titanium and titanium alloys                     31 %           26 %
         Precision forgings and castings                  25 %           25 %
         Zirconium and related alloys                     12 %           12 %

Total High-Value Products 100 % 100 %

Segment operating profit in the first quarter 2013 decreased to $75.3 million, or 14.5% of total sales, including surcharges, compared to $104.1 million, or 17.9% of total sales, for the first quarter 2012. The decrease in operating profit primarily resulted from lower shipment volumes for most products, the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with falling raw material indices, and lower base-selling prices for some products. Results benefited from $26.5 million in gross cost reductions in the first quarter 2013.

Flat-Rolled Products Segment

First quarter 2013 sales decreased 12% compared to the first quarter 2012, to $558.1 million, primarily due to lower base-selling prices, lower raw material surcharges, and a product mix that had a higher percentage of standard stainless products and a lower percentage of high-value products. Shipments of standard stainless products (sheet and plate) increased 10%, to 173.8 million pounds. High-value products shipments declined 6% compared to the first quarter 2012, to 113 million pounds, as higher shipments of our Precision Rolled Strip® and titanium products were more than offset by reduced shipments of our nickel-based and specialty steel alloys and grain-oriented electrical steel products. First quarter 2013 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 3.1 million pounds, a 3% decrease compared to the fourth quarter 2012 but a 3% increase compared to the first quarter. Titanium shipments on projects in the chemical process industry are expected to favorably impact the second and third quarters of 2013. Average selling prices for all products, which include surcharges, declined 15%. Average base selling prices remain at historically low levels for standard stainless products.


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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 March 31, 2013 and 2012 is as follows:

                                         Three Months Ended           Three Months Ended
 Market                                    March 31, 2013               March 31, 2012
 Oil & Gas/Chemical Process Industry   $     145.1          26 %    $     185.3          29 %
 Electrical Energy                            84.4          15 %          102.0          16 %
 Automotive                                   83.4          15 %           96.2          15 %
 Food Equipment & Appliances                  64.9          12 %           54.6           8 %
 Construction/Mining                          57.0          10 %           63.5          10 %
 Aerospace & Defense                          41.9           8 %           42.3           7 %
 Electronics/Computers/Communication          36.0           6 %           41.8           7 %
 Transportation                               29.7           5 %           23.2           4 %
 Medical                                       7.1           1 %            5.4           1 %
 Other                                         8.6           2 %           21.7           3 %

 Total                                 $     558.1         100 %    $     636.0         100 %

Direct international sales represented 34% of total segment sales for the first quarter 2013. Comparative information for the Flat-Rolled Products segments' major product categories, based on their percentages of sales for the three months ended March 31, 2013 and 2012, is as follows:

                                                      Three Months Ended
                                                           March 31,
                                                      2013            2012
         High-Value Products
         Precision and engineered strip                   24 %           22 %
         Nickel-based alloys and specialty alloys         21 %           26 %
         Grain-oriented electrical steel                   7 %            9 %
         Titanium and titanium alloys                      5 %            4 %

         Total High-Value Products                        57 %           61 %
         Standard Products
         Specialty stainless sheet                        20 %           19 %
         Stainless steel sheet                            19 %           16 %
         Stainless steel plate                             4 %            4 %

         Total Standard Products                          43 %           39 %

Grand Total 100 % 100 %

Segment operating profit for the first quarter 2013 was $2.4 million, or 0.4% of sales, compared to $46.8 million, or 7.4% of sales, for the first quarter 2012, reflecting a sales mix of more standard stainless products, as well as lower selling prices for most products. The first quarter 2013 benefited from $10.0 million in gross cost reductions. Comparative information on the segment's products for the three months ended March 31, 2013 and 2012 is provided in the following table:

                                          Three Months Ended
                                               March 31,               %
                                          2013          2012         Change
            Volume (000's pounds):
            High value                    113,023       120,504           (6 )%
            Standard                      173,818       157,320           10 %

            Total                         286,841       277,824            3 %
            Average prices (per lb.):
            High value                  $    2.80     $    3.21          (13 )%
            Standard                    $    1.38     $    1.56          (12 )%
            Combined Average            $    1.94     $    2.28          (15 )%


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Engineered Products Segment

Sales for the first quarter 2013 were $102.9 million, a 24% decrease compared to the first quarter 2012, primarily as a result of lower overall demand for tungsten-based products and carbon alloy steel forgings.

Comparative information for our Engineered Products revenues (in millions) by market and their respective percentages of the segment's overall revenues for the three month periods ended March 31, 2013 and 2012 is as follows:

                                         Three Months Ended           Three Months Ended
 Market                                    March 31, 2013               March 31, 2012
 Oil & Gas/Chemical Process Industry   $      28.6          28 %    $      37.7          28 %
 Machine & Cutting Tools                      16.9          16 %           23.2          17 %
 Transportation                               15.8          15 %           22.9          17 %
 Construction/Mining                          14.9          14 %           20.1          15 %
 Aerospace & Defense                          10.8          11 %           11.9           9 %
 Electrical Energy                             6.2           6 %            7.9           6 %
 Automotive                                    6.0           6 %            7.4           5 %
 Medical                                       2.8           3 %            2.7           2 %
 Other                                         0.9           1 %            1.4           1 %

 Total                                 $     102.9         100 %    $     135.2         100 %

Direct international sales represented 23% of total segment sales for the first quarter 2013. Comparative information for the Flat-Rolled Products segments' major product categories, based on their percentages of sales for the three months ended March 31, 2013 and 2012, is as follows:

                                               Three Months Ended
                                                    March 31,
                                               2013            2012
                 High-Value Products
                 Tungsten-based materials          73 %           66 %
                 Precision forgings                21 %           26 %

                 Total High-Value Products         94 %           92 %
                 Standard Products
                 Iron castings and other            6 %            8 %

                 Total Standard Products            6 %            8 %

Grand Total 100 % 100 %

Segment operating profit for the first quarter 2013 was $0.6 million, compared to $12.3 million in the first quarter 2012. Segment operating profit for the first quarter 2013 was negatively impacted by higher raw material inventory costs for tungsten-based products and lower business activity levels across most operating units in this segment. Segment operating profit benefited from $2.8 million in gross cost reductions in the first quarter 2013.

Corporate Items

Corporate expenses for the first quarter 2013 were $12.4 million, compared to $21.7 million in the first quarter 2012. The decrease in 2013 was primarily the result of reduced annual and long-term performance-based incentive compensation expenses.

Interest expense, net of interest income, in the first quarter 2013 was $14.4 million, compared to net interest expense of $19.9 million in the first quarter 2012. The decrease in interest expense was primarily due to increased capitalized interest on major strategic projects. Capitalized interest on major strategic capital projects reduced interest expense by $9.6 million for the first quarter 2013 compared to a reduction of $4.5 million for the first quarter 2012. The interest costs capitalized in both periods were primarily related to the HRPF project.


Table of Contents

Closed company and other expenses primarily includes charges incurred in connection with closed operations and other non-operating income or expense. These items are presented primarily in selling and administrative expenses and in other expense in the statement of operations. These items resulted in net charges of $3.7 million for the first quarter 2013 and $6.9 million for the first quarter 2012. The decrease over the prior year quarter was primarily related to a decrease in environmental and legal expenses associated with closed operations.

Retirement benefit expense, which includes pension expense and other postretirement expense, increased to $32.5 million in the first quarter 2013, compared to $30.6 million in the first quarter 2012. This increase was primarily due to the utilization of a lower discount rate to value retirement benefit obligations. For the first quarter 2013, retirement benefit expense of $25.3 million was included in cost of sales and $7.2 million was included in selling and administrative expenses. For the first quarter 2012, the amount of retirement benefit expense included in cost of sales was $22.0 million, and the amount included in selling and administrative expenses was $8.6 million.

Income Taxes

The first quarter 2013 provision for income taxes was $3.7 million, or 24.2% of income before tax, compared to the 2012 provision for income taxes of $25.8 million, or 30.7% of income before tax. The first quarter 2013 included discrete tax benefits of $2.0 million, primarily related to 2013 Federal tax law changes. Excluding these items, the effective tax rate was 37.6%. The first quarter 2012 included discrete tax benefits of $3.7 million primarily related to state income taxes.

Financial Condition and Liquidity

We believe that internally generated funds, current cash on hand, and available borrowings under existing credit lines will be adequate to meet foreseeable liquidity needs, including a substantial expansion of our production capabilities over the next few years. Changes in our credit rating do not impact our access to, or the cost of, our existing credit facilities.

We did not borrow funds under our senior unsecured domestic credit facility during the first three months of 2013. However, as of March 31, 2013, approximately $4 million of this facility was utilized to support letters of credit. This credit facility requires that we maintain a leverage ratio . . .

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