Allegheny Technologies Incurs Loss in Q1 - Analyst Blog

Allegheny Technologies Inc. ATI posted loss from continuing operations of $18.1 million or 17 cents per share in first-quarter 2014 compared with a profit of $9.7 million or 9 cents per share recorded a year ago. The loss was wider than the Zacks Consensus Estimate of a loss of 6 cents per share.

On a consolidated basis, the Pennsylvania-based specialty steel company posted a net loss of $20 million or 19 cents per share in the quarter versus a profit of $10 million or 9 cents per share registered in the year-ago quarter.

Revenues for the first quarter slipped 10% year over year to $987 million, missing the Zacks Consensus Estimate of $1,070 million. However, sales increased 8% from the sequential quarter due to higher shipments of titanium and nickel-based alloys in the High Performance Materials & Components segment. Higher shipments of high-value products and moderately improved selling prices for standard products led to increased sales in the Flat Rolled Products segment.

Operating profit slid roughly 43.9% year over year to $43.5 million in the quarter with operating margin contracting to 4.4% from 7.1% a year ago. The results included $8.3 million in inventory valuation charges related to the Flat Rolled Products segment.

Segment Review

Revenues from the High Performance Metals and Components segment fell 10% year over year to $484.4 million in the quarter due to lower mill product shipments, declined base-selling prices for most products, and reduced raw material surcharges. Revenues were hurt by lower sales of nickel-based and specialty alloys, titanium and titanium alloys and lower sales for forged and cast products.

Flat-Rolled Products segment sales went down 10% to $502.9 million on account of reduced raw material surcharges and lower base-selling pricing. Shipments of high-value products increased 9% year over year on higher shipments of Precision Rolled Strip products, engineered strip products, nickel-based alloys and grain-oriented electrical steel.

Financial Position

Allegheny's cash and cash equivalents at the end of Mar 31, 2014, stood at $837.7 million compared with $138 million as of Mar 31, 2013. Long-term debt increased roughly 4.4% year over year to $1,526.8 million.

Total debt-to-total capital ratio was 40.4% as of Mar 31, 2014, up from 37.3% as of Mar 31, 2013. Cash flow used in operations in the quarter was $56.9 million, including a $68.5 million investment in managed working capital associated with increased business activity compared with cash flow used in operations of $57.4 million for the first quarter of 2013, resulting from an investment of $84.4 million in managed working capital.


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 gradually improve through 2014. The company expects sustainable improvement and demand growth from most of its end markets.

Over the next 3 to 5 years, the company aims on maximizing value creation from the investments in new products, strategic capital projects, and strategic acquisitions that it has made over the past several years. The company is negotiating a number of new long-term agreements and extending its existing agreements with strategic customers that are expected to continue to enhance Allegheny's competitive market position, not only in mill products but also for parts and components.

Allegheny completed the commissioning of the Hot-Rolling and Processing Facility (HRPF) in the first quarter of 2014 and began the hot commissioning of the HRPF, which is scheduled to be completed in Oct 2014. The HRPF is a critical part of the company's strategy to transform its flat rolled products business into a more competitive and profitable growth business. Allegheny expects to begin to realize these benefits in 2015.

The company acquired Dynamic Flowform Corp. in Feb 2014, which has been renamed ATI Flowform Products. Allegheny expects ATI Flowform Products to improve its market position in the aerospace and defense, oil & gas and chemical process industry markets.

In Apr 2014, the company decided to shut its LaPorte, IN iron castings facility, which was held for sale as part of discontinued operations. However, it could not complete a sale transaction due to which it expects to record roughly $2 million in closure costs, primarily severance in the second quarter of 2014.

Allegheny anticipates capital expenditures for 2014 to be roughly $300 million. 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 $30 million in the first quarter. The company is targeting $100 million in new gross cost reductions in 2014.   
Allegheny currently retains a Zacks Rank #2 (Buy).

Another specialty steel company CITIC Pacific Ltd. (CTPCY) retains a Zacks Rank #2 (Buy).