U.S. Markets closed

Lower-than-Expected Loss at Allegheny

Zacks Equity Research

Allegheny Technologies Inc. (ATI) posted loss from continuing operations of $83.8 million or 79 cents per share for fourth-quarter 2013 compared with a profit of $16 million or 15 cents per share recorded a year ago.

On a consolidated basis, the Pennsylvania-based specialty steel company raked in net income of $173.4 million or $1.62 per share in the quarter, up manifold from a profit of $10.5 million or 10 cents per share registered in the year-ago quarter.

Consolidated net income includes gain (of $261.4 million, post tax) on sale of the company’s tungsten materials business to Latrobe, PA-based wear-resistant products company Kennametal Inc. (KMT).

Barring charges associated with restructuring measures and inventory valuation adjustments of $75.1 million (post-tax), loss from continuing operations was 8 cents per share, narrower than the Zacks Consensus Estimate of a loss of 19 cents.

For 2013, loss from continuing operations was $98.8 million, or 93 cents per share compared with an income of $150.5 million or $1.36 per share recorded a year ago. Excluding one-time items, loss from continuing operations was 22 cents, also lower than the Zacks Consensus Estimate of a loss of 33 cents.

Revenues for the fourth quarter slipped 10% year over year to $915.3 million, missing the Zacks Consensus Estimate of $1,031 million. Revenues were hurt by soft demand across several end markets. Allegheny also witnessed lower pricing for many of its products and a decline in raw materials surcharges in the quarter.

For the full year, revenues fell roughly 13% year over year to $4,043.5 million, also falling short of the Zacks Consensus Estimate of $4,324 million.

Operating profit slid roughly 51% year over year to $44.6 million in the quarter with operating margin contracting to 4.9% from 8.9% a year ago. Lower shipments of high value and standard products coupled with lower base prices led to the decline 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 17% year over year to $436.7 million in the quarter due to lower mill product shipments and a decline in sales of precision forged and cast components, hurt by weaker demand from the jet engine, construction and mining, nuclear energy, and oil and gas markets. Lower pricing also affected sales.

Flat-Rolled Products segment sales went down 4% to $478.6 million on account of reduced raw material surcharges and lower base-selling pricing. The company saw lower demand on a sequential basis across oil and gas/chemical process industry and electrical energy markets.

Shipments of high-value products rose 10% on higher shipments of Precision Rolled Strip products, nickel-based alloys and titanium. Shipments of standard stainless products rose 6%. Average selling prices for high-value and standard stainless products fell 8% and 13%, respectively.

Financial Position

Allegheny ended 2013 with cash and cash equivalents of $1,026.8 million, a more than three-fold year over year rise. Long-term debt increased roughly 4% year over year to $1,527.4 million. Total debt-to-total capital ratio was 40.2% as of Dec 31, 2013, up from 37.4% as of Dec 31, 2012. Operating cash flow for the full year was $368.4 million, including $141 million for the fourth quarter.


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 gradually improve through 2014. However, it sees modest recovery in global economic conditions.

Allegheny anticipates market conditions to remain favorable across many of its major markets over the next 2-5 years. It expects continued increase in aerospace build rates. The company also sees modest growth in demand for jet engine spare parts through 2014.

Allegheny expects capital spending on global oil and gas exploration and production forecasts project to remain strong and sees modest growth in demand for its high performance specialty materials from the medical market. Moreover, demand from the electrical energy market is expected to remain flat for both power generation and power distribution in the short-term.

Allegheny expects its High Performance Metals unit to benefit from growing demand from many of its major global markets and higher demand for its new products, notably from the aerospace market. This will be partly offset by sustained weakness in demand from the nuclear energy market.

For the Flat-Rolled Products division, the company expects improving demand in 2014 for its high-value products, in particular, nickel-based alloys and specialty alloys and Precision Rolled Strip products. The new Hot-Rolling and Processing Facility (:HRPF) is expected to cut costs, lower cycle time and incite revenue gains staring in 2015. The commissioning of the facility will take most of this year and is expected to result in start-up costs of roughly $30 million to $35 million (pre-tax) in 2014.

Allegheny anticipates capital expenditures for 2014 to be roughly $300 million, down $313 million from 2013. The company remains focused on cost optimization and is accelerating its cost reduction efforts. Allegheny, through this move, was successful in gross cost reductions of $141.2 million in 2013. The company is targeting $100 million in new gross cost reductions this year.   

Allegheny currently retains a Zacks Rank #5 (Strong Sell).

Read the Full Research Report on ATI
Read the Full Research Report on PCP
Read the Full Research Report on CRS
Read the Full Research Report on KMT

Zacks Investment Research