Allegheny Posts Loss, Misses on Sales

Zacks

Allegheny Technologies Inc. (ATI) reported third-quarter 2013 loss from continuing operations of $28.4 million (or 27 cents per share) compared with a profit of $31.3 million (or 29 cents per share) recorded a year ago. Consolidated net loss was $33.8 million (or 32 cents per share) versus a profit of $35.3 million (or 32 cents per share) registered in the year-ago quarter.

After excluding a loss of 4 cents per share due to the effects of income taxes reported in domestic and foreign jurisdictions, loss from continuing operations was 23 cents per share, narrower than the Zacks Consensus Estimate loss of 28 cents.

The company recorded a loss of 5 cents per share in the reported quarter from discontinued operations which include the tungsten materials business and the iron castings and fabricated components businesses, which are both part of its Engineered Products segment. Allegheny's sale of its tungsten materials business to Latrobe, Pa.-based wear-resistant products company Kennametal Inc. (KMT) for $605 million is expected to close in the fourth quarter.

Revenues slipped 14% year over year to $972 million, missing the Zacks Consensus Estimate of $1,051 million. Revenues were hurt by lower demand across several end markets including oil and gas, jet engine aftermarket, electrical energy, and construction and mining. Allegheny also witnessed lower pricing for many of its products and a decline in raw materials surcharges.

Operating profit tumbled roughly 76% year over year to $27.6 million in the quarter with operating margin contracting to 2.8% from 10% a year ago. Lower shipments related with high value products coupled with lower base prices resulted in the decrease in operating profit. The impact of higher raw material costs for products with longer manufacturing cycle times not aligned with lower raw material surcharges also contributed to the decline.

Segment Review

Revenues from the High Performance Metals segment fell 19% year over year to $463.9 million in the quarter due to lower mill product shipments of nickel-based and specialty steel alloys and titanium and titanium alloys. A decline in raw material surcharges, lower pricing as well as lower sales of precision forged and cast components due to lesser demand from the jet engine, construction and mining, nuclear energy, and oil and gas markets also impacted the revenues. Sales of zirconium and related alloys were flat compared with the year ago quarter.

Flat-Rolled Products segment revenues were down 9% to $508.5 million on account of reduced raw material surcharges, lower base-selling pricing and  lower shipments of both standard stainless products and high-value products. Shipments of both high-value products and standard stainless products slipped 1%. Average selling prices for standard stainless products remained at low levels.

Financial Position

Allegheny ended the quarter with cash and cash equivalents of $535.7 million, up 90.6% year over year. Long-term debt increased roughly 5.4% year over year to $1,542.2 million. Total debt-to-total capital ratio was 44.3% as of Sep 30, 2013, up from 35.9% as of Sep 30, 2012.

Outlook

Allegheny, which is among the prominent players in the U.S. specialty steel industry along with Carpenter Technology (CRS), and Precision Castparts (PCP), expects business conditions to remain challenging through the end of 2013 and potentially in 2014 due to U.S. debt ceiling and other fiscal policy issues.

Allegheny is primarily focusing on cost optimization and is accelerating its cost reduction efforts. Allegheny, through this move, was successful in gross cost reductions of $123.4 million in during the first nine months of 2013, a pace which is well ahead its 2013 target of $100 million in new cost reductions. The company remains well positioned to align its production, and inventory levels to match the demands of its customers and end markets.

Despite short term challenging conditions, Allegheny remains optimistic and expects strong profitable growth opportunities over the next 3 to 5 years. The company is taking a number of actions which include negotiating new and extending existing long-term agreements with strategic customers, positioning its titanium sponge facility in Rowley, Utah for the premium-grade (PQ) qualification program and completing construction of its Flat-Rolled Products segment Hot-Rolling and Processing Facility (:HRPF) to initiate and complete the cold- and hot-commissioning process in 2014. The company foresees strong market rends and fundamentals over the long term in the commercial aerospace, oil and gas, medical and automotive markets.

Allegheny has a solid liquidity position with no borrowings outstanding under its domestic borrowing facility, and none are expected in the fourth quarter of 2013. The company expects to considerably increase its liquidity and financial flexibility with the previously announced sale of its tungsten materials business.

Allegheny expects 2013 capital expenditures to be roughly $600 million, with 80% of this being associated with the HRPF. With the expected closing of the sale of the tungsten materials business in the fourth quarter, the company forecasts to end 2013 with roughly $1.4 billion of cash and available liquidity.

Allegheny currently retains a Zacks Rank #4 (Sell).

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