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ATI > SEC Filings for ATI > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for ALLEGHENY TECHNOLOGIES INC

Form 10-Q for ALLEGHENY TECHNOLOGIES INC


5-Aug-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 and related alloys, 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 second quarter 2013 were $1.14 billion, compared to $1.36 billion in the second quarter 2012. Compared to the second quarter 2012, sales decreased 14% in the High Performance Metals segment, 16% in the Flat-Rolled Products segment and 26% in the Engineered Products segment. For the first six months of 2013, total sales were $2.31 billion, 15% less 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 69% of our sales for the three and six month periods ended June 30, 2013. 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, 2013 and 2012 were as follows:

                                         Three Months Ended           Three Months Ended
 Market                                     June 30, 2013                June 30, 2012
 Aerospace & Defense                   $      373.5         33 %    $      414.3         31 %
 Oil & Gas/Chemical Process Industry          228.9         20 %           261.8         19 %
 Electrical Energy                            128.0         11 %           168.9         12 %
 Medical                                       55.0          5 %            56.2          4 %

 Subtotal - Key Markets                       785.4         69 %           901.2         66 %
 Automotive                                    96.8          9 %           109.4          8 %
 Construction/Mining                           67.5          6 %           110.4          8 %
 Food Equipment & Appliances                   63.7          6 %            58.0          4 %
 Transportation                                39.7          3 %            65.6          5 %
 Electronics/Computers/Communication           35.2          3 %            40.7          3 %
 Machine & Cutting Tools                       24.4          2 %            34.6          3 %
 Conversion Services & Other                   22.8          2 %            37.5          3 %

 Total                                 $    1,135.5        100 %    $    1,357.4        100 %


Table of Contents
                                           Six Months Ended           Six Months Ended
   Market                                    June 30, 2013              June 30, 2012
   Aerospace & Defense                   $     775.5        34 %    $     850.8        31 %
   Oil & Gas/Chemical Process Industry         446.7        19 %          539.2        20 %
   Electrical Energy                           257.0        11 %          315.8        12 %
   Medical                                     114.2         5 %          113.9         4 %

   Subtotal - Key Markets                    1,593.4        69 %        1,819.7        67 %
   Automotive                                  188.4         8 %          215.2         8 %
   Construction/Mining                         147.1         6 %          213.9         8 %
   Food Equipment & Appliances                 129.0         6 %          113.1         4 %
   Transportation                               91.7         4 %          119.7         4 %
   Electronics/Computers/Communication          71.5         3 %           85.9         3 %
   Machine & Cutting Tools                      50.4         2 %           70.9         3 %
   Conversion Services & Other                  43.4         2 %           71.5         3 %

   Total                                 $   2,314.9       100 %    $   2,709.9       100 %

For the second quarter 2013, direct international sales were $452.3 million and represented 40% of total sales, compared to $465.3 million or 34% for the second quarter 2012. 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 for the three months ended June 30, 2013. Comparative information for our major high-value and standard products based on their percentages of our total sales is as follows:

                                                      Three Months Ended
                                                           June 30,
                                                      2013            2012
         High-Value Products
         Nickel-based alloys and specialty alloys         24 %           25 %
         Titanium and titanium alloys                     14 %           13 %
         Precision forgings and castings                  13 %           12 %
         Precision and engineered strip                   12 %           11 %
         Tungsten-based materials                          7 %            6 %
         Zirconium and related alloys                      5 %            5 %
         Grain-oriented electrical steel                   4 %            5 %

         Total High-Value Products                        79 %           77 %
         Standard Products
         Specialty stainless sheet                         9 %           10 %
         Stainless steel sheet                             8 %            9 %
         Stainless steel plate                             2 %            2 %
         Iron castings and other                           2 %            2 %

         Total Standard Products                          21 %           23 %

Grand Total 100 % 100 %

For the first six months of 2013, direct international sales were $902.8 and represented nearly 39% of total sales, compared to $973.6 million or 36% for the first six months of 2012. Sales of our high value (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 for the six months ended June 30, 2013. Comparative information for our major high-value and standard products based on their percentages of our total sales is as follows:


Table of Contents
                                                       Six Months Ended
                                                           June 30,
                                                       2013          2012
          High-Value Products
          Nickel-based alloys and specialty alloys         24 %         26 %
          Titanium and titanium alloys                     15 %         13 %
          Precision forgings and castings                  13 %         13 %
          Precision and engineered strip                   12 %         11 %
          Tungsten-based materials                          7 %          6 %
          Zirconium and related alloys                      5 %          5 %
          Grain-oriented electrical steel                   3 %          4 %

          Total High-Value Products                        79 %         78 %
          Standard Products
          Specialty stainless sheet                         9 %          9 %
          Stainless steel sheet                             8 %          8 %
          Stainless steel plate                             2 %          2 %
          Iron castings and other                           2 %          3 %

          Total Standard Products                          21 %         22 %

Grand Total 100 % 100 %

Total titanium mill product shipments, including flat-rolled titanium products, were 9.3 million pounds in the second quarter 2013 bringing the first half total to 19.6 million pounds. These volumes represent a 3% increase compared to the second quarter 2012 and a 1% increase compared to the first half of 2012.

Segment operating profit for the second quarter 2013 was $71.7 million, or 6.3% of sales, compared to $159.9 million, or 11.8% of sales for the second quarter 2012. The decrease in operating profit was primarily due to lower shipments associated with most of our high-value and standard products, lower base-selling prices for many products, and the impact of higher raw material costs for products with longer manufacturing cycle times not aligned with lower raw material indices/surcharges. Segment operating profit for the second quarter 2013 in the High Performance Metals segment was $67.2 million or 13.9% of sales compared to $102.2 or 18.1% of sales for the second quarter 2012. Flat-Rolled Products segment operating profit was $1.4 million or 0.3% of sales compared to $44.5 million or 6.8% of sales for the second quarter 2012. Operating profit in our Engineered Products segment was $3.1 million or 3.1% of sales for the second quarter 2013 compared to $13.2 million or 9.9% of sales for the second quarter 2012. Segment operating profit benefited from $40.1 million in costs reductions during the quarter ended June 30, 2013. Segment operating profit for the six months ended June 30, 2013 was $150.0 million.

Segment operating profit as a percentage of sales for the three and six month periods ended June 30, 2013 and 2012 was:

                                    Three Months Ended           Six Months Ended
                                         June 30,                    June 30,
                                    2013            2012         2013          2012
        High Performance Metals        13.9 %        18.1 %        14.2 %       18.0 %
        Flat-Rolled Products            0.3 %         6.8 %         0.3 %        7.1 %
        Engineered Products             3.1 %         9.9 %         1.8 %        9.5 %

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 second quarter 2013 was $7.7 million, or 0.7% of sales, compared to $89.7 million, or 6.6% of sales for the second quarter 2012. The quarter benefited from lower corporate expenses, primarily the result of reduced annual and long-term performance-based incentive compensation expenses and lower interest expense. Income before tax for the first six months of 2013 was $23.0 million, or 1.0% of sales, compared to $173.8 million, or 6.4% of sales for the comparable 2012 period. The six months ended June 30, 2013 also benefited from lower corporate expenses, primarily the result of reduced annual and long-term performance-based incentive compensation expenses and lower interest expense.


Table of Contents

Net income attributable to ATI for the second quarter 2013 was $4.4 million, or $0.04 per share, compared to $56.4 million, or $0.50 per share for the second quarter 2012. For the first six months of 2013, net income attributable to ATI was $14.4 million, or $0.13 per share, compared $112.6 million, or $1.00 per share for the first six months of 2012.

At June 30, 2013, we had cash on hand of $74.1 million, a decrease of $230.5 million from year-end 2012. Cash flow provided by operations for the first six months of 2013 was $58.0 million and included an investment of $36.1 million in managed working capital. Additionally, in the first six months of 2013, we invested $223.7 million in capital expenditures, primarily related to the Flat-Rolled Products segment's HRPF. Net debt to total capitalization was 36.0% and total debt to total capitalization was 37.2% at June 30, 2013. At December 31, 2012, net debt to total capitalization was 32.2% and total debt to total capitalization was 37.4%.

We continue to focus on taking actions within our control that are designed to improve ATI's financial performance and financial flexibility in the short-term and keep ATI well-positioned for profitable growth over the long-term as economic and market conditions improve. Specifically, we continued to accelerate our cost reduction efforts. In the first six months of 2013 we have achieved more than $79 million in gross cost reductions. Recently, we took actions to improve ATI's liquidity and financial flexibility.

As we look ahead to the second half of 2013, we are not seeing any significant signs of changes in market conditions. The third quarter may prove to be even more challenging, as it is traditionally the softest quarter of the year in many of our end markets, especially in Europe.

We are encouraged by recent signs of stabilization in nickel and titanium scrap prices. If this continues, we may begin to see an improvement in demand and stabilization of selling prices beginning in the fourth quarter 2013. We believe many of our customers will continue to be cautious as near-term global economic uncertainties remain, lead times remain short, and raw materials prices, especially for nickel and titanium scrap, remain volatile.

Looking beyond the short-term challenges, our strategy is to continue to ensure that ATI remains well-positioned for profitable growth over the next 3 to 5 years and beyond. Our unmatched diversification in specialty metals products, technology leadership, unsurpassed manufacturing capabilities, customer responsiveness, and increasingly competitive cost structure are key elements of our growth strategy. 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 six
months of 2013 and 2012:



                                         2013                           2012
                                              Operating                      Operating
                                Revenue         Profit         Revenue         Profit
     High Performance Metals          43 %            95 %           42 %            64 %

     Flat-Rolled Products             48 %             3 %           48 %            28 %

     Engineered Products               9 %             2 %           10 %             8 %

High Performance Metals Segment

Second quarter 2013 sales decreased 14% to $484.5 million compared to the second quarter 2012, primarily as a result of lower mill product shipments of nickel-based and specialty alloys and titanium and titanium 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.


Table of Contents

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, 2013 and 2012 is as follows:

                                         Three Months Ended           Three Months Ended
 Market                                     June 30, 2013                June 30, 2012
 Aerospace:
 Jet Engines                           $     161.4          33 %    $     182.7          32 %
 Airframes                                    90.0          19 %           97.7          17 %
 Government                                   52.3          11 %           48.9           9 %

 Total Aerospace                             303.7          63 %          329.3          58 %
 Medical                                      45.5           9 %           46.5           8 %
 Oil & Gas/Chemical Process Industry          38.8           8 %           57.8          10 %
 Electrical Energy                            39.6           8 %           45.9           8 %
 Defense                                      24.0           5 %           28.8           5 %
 Construction/Mining                           7.1           2 %           19.9           4 %
 Other                                        25.8           5 %           38.0           7 %

 Total                                 $     484.5         100 %    $     566.2         100 %

Direct international sales represented nearly 47% of total segment sales for the second quarter 2013 compared to 41% of total segment sales for the second quarter 2012. Comparative information for the High Performance Metals segment's major product categories, based on their percentages of sales for the three months ended June 30, 2013 and 2012, is as follows:

                                                      Three Months Ended
                                                           June 30,
                                                      2013            2012
         High-Value Products
         Nickel-based alloys and specialty alloys         32 %           36 %
         Titanium and titanium alloys                     28 %           27 %
         Precision forgings and castings                  27 %           24 %
         Zirconium and related alloys                     13 %           13 %

Total High-Value Products 100 % 100 %

Segment operating profit in the second quarter 2013 decreased to $67.2 million, or 13.9% of total sales, compared to $102.2 million, or 18.1% of total sales, for the second 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 $23.0 million in gross cost reductions in the second quarter 2013.

For the six months ended June 30, 2013, segment sales decreased 13% to $1.00 billion, 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.


Table of Contents

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, 2013 and 2012 is as follows:

                                           Six Months Ended           Six Months Ended
   Market                                    June 30, 2013              June 30, 2012
   Aerospace:
   Jet Engines                           $     331.8        33 %    $     384.6        34 %
   Airframes                                   193.4        19 %          203.6        18 %
   Government                                  104.7        10 %          102.1         9 %

   Total Aerospace                             629.9        62 %          690.3        61 %
   Medical                                      94.8        10 %           96.1         8 %
   Oil & Gas/Chemical Process Industry          83.0         8 %          112.2        10 %
   Electrical Energy                            78.0         8 %           82.8         7 %
   Defense                                      47.0         5 %           50.0         4 %
   Construction/Mining                          14.8         1 %           39.7         3 %
   Other                                        55.4         6 %           76.4         7 %

   Total                                 $   1,002.9       100 %    $   1,147.5       100 %

Direct international sales represented nearly 46% of total segment sales for the six months ended June 30, 2013 compared to 43% of total segment sales for the six months ended June 30, 2012. Comparative information for the High Performance Metals segment's major product categories, based on their percentages of sales for the six months ended June 30, 2013 and 2012, is as follows:

                                                       Six Months Ended
                                                           June 30,
                                                       2013          2012
          High-Value Products
          Nickel-based alloys and specialty alloys         32 %         36 %
          Titanium and titanium alloys                     30 %         27 %
          Precision forgings and castings                  26 %         25 %
          Zirconium and related alloys                     12 %         12 %

Total High-Value Products 100 % 100 %

Segment operating profit for the first six months of 2013 decreased to $142.5 million, or 14.2% of sales, compared to $206.3 million, or 18.0% of sales, for the comparable 2012 period. 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 $49.5 million in gross cost reductions for the six months ended June 30, 2013.

The High Performance Metals segment operating profit was negatively impacted by continued declines in raw material surcharges due to continued falling raw material prices not being aligned with higher raw material costs due to long manufacturing cycles for many of our products. Further declines in raw material prices could negatively impact short-term demand and the High Performance Metals segment operating profit.

Flat-Rolled Products Segment

Second quarter 2013 sales decreased 16% compared to the second quarter 2012, to $552.2 million, primarily due to lower shipments of both high-value and standard products, lower base-selling prices and lower raw material surcharges. Shipments of standard stainless products (sheet and plate) decreased 8% while shipments of high-value products declined 7%. Average transaction prices for all products, which include surcharges, declined 9%. Second quarter 2013 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 3.0 million pounds, a 7% increase compared to the second quarter 2012. Average selling prices, which include surcharges, declined 13% for standard products due to lower base prices and lower raw material surcharges. Average selling prices for high-value products decreased 7% due to product mix and lower material surcharges.


Table of Contents

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, 2013 and 2012 is as follows:

                                         Three Months Ended           Three Months Ended
 Market                                     June 30, 2013                June 30, 2012
 Oil & Gas/Chemical Process Industry   $     160.0          29 %    $     163.9          25 %
 Automotive                                   87.9          16 %           99.7          15 %
 Electrical Energy                            82.2          15 %          115.6          18 %
 Food Equipment & Appliances                  63.4          12 %           56.4           8 %
 Construction/Mining                          51.2           9 %           67.8          10 %
 Aerospace & Defense                          34.4           6 %           45.6           7 %
 Electronics/Computers/Communication          34.3           6 %           38.6           6 %
 Transportation                               23.2           4 %           38.6           6 %
 Medical                                       7.0           1 %            6.7           1 %
 Other                                         8.6           2 %           24.5           4 %

 Total                                 $     552.2         100 %    $     657.4         100 %

Direct international sales represented 37% of total segment sales for the second quarter 2013 compared to 31% of total segment sales for the second quarter 2012. Comparative information for the Flat-Rolled Products segment's major product categories, based on their percentages of sales for the three months ended June 30, 2013 and 2012, is as follows:

                                                      Three Months Ended
                                                           June 30,
                                                      2013            2012
         High-Value Products
         Precision and engineered strip                   24 %           22 %
         Nickel-based alloys and specialty alloys         22 %           21 %
         Grain-oriented electrical steel                   8 %           10 %
         Titanium and titanium alloys                      5 %            4 %

         Total High-Value Products                        59 %           57 %
         Standard Products
         Specialty stainless sheet                        20 %           21 %
         Stainless steel sheet                            17 %           18 %
         Stainless steel plate                             4 %            4 %

         Total Standard Products                          41 %           43 %

. . .

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