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Allegheny Technologies: Ati Third Quarter 2015 Results In Line With Prior Guidance

The following excerpt is from the company's SEC filing.

Third Quarter 2015 Results

Sales were $833 million

High Performance Materials and Components sales were $475 million

Flat Rolled Products sales were $358 million

Business segment results were a loss of $73 million

Net loss attributable to ATI was $145 million, or $(1.35) per share, including a $76 million pretax non-cash charge for Net Realizable Value (NRV) inventory reserves and a $64 million net of tax, non-cash charge for income tax valuation allowances

Net loss attributable to ATI ex cluding the NRV and income tax charges was $31 million, or $(0.29) per share

HRPF fully operational, with Rotary Crop Shear repairs completed

Cash on hand was $198 million with total liquidity of approximately $590 million

PITTSBURGH--(BUSINESS WIRE)--October 20, 2015--Allegheny Technologies Incorporated (NYSE: ATI) reported third quarter 2015 sales of $833 million and a net loss attributable to ATI of $145 million, or $(1.35) per share, in line with prior guidance provided on October 6, 2015. Excluding the non-cash charges for NRV inventory reserves and income tax valuation allowances, the net loss attributable to ATI was $31 million, or $(0.29) per share.

Sales declined 19% compared to the second quarter 2015, when ATI reported a net loss of $16 million, or $(0.15) per share.

“This was a very challenging quarter due to difficult business conditions, especially in the Flat Rolled Products segment, further weakening in demand from the oil & gas markets, and continued weak demand for forged products from the construction and mining market,” said Rich Harshman, Chairman, President and CEO. “Sales to the oil & gas market in the High Performance Materials and Components segment were down 34% compared to the second quarter 2015, and Flat Rolled Products segment sales to the oil & gas market were 60% lower as we completed shipments of a large oil & gas pipeline project early in the third quarter.”

Total segment operating results were a loss of $73 million. As previously announced, in the 2015 third quarter ATI changed the method of determining segment operating results to better reflect performance. Comparative results for prior periods also reflect this reporting change. Segment results now exclude all effects of LIFO inventory accounting and any related changes in NRV reserves currently required to offset ATI’s aggregate net debit LIFO valuation balance. This unusual situation of a LIFO balance that increases inventory value over replacement cost has developed over the past several years due to significant declines in most raw material values.

In addition, segment results now include all applicable retirement benefit expense for pension and other postretirement benefit plans, which were $18 million in both the third quarter and second quarter 2015, and $21 million in the third quarter 2014. Prior to this change most applicable retirement benefit expenses were not included in segment operating results. ATI has made significant progress in standardizing and modernizing its retirement benefit programs. At the end of 2014 ATI froze the U.S. defined benefit pension plan for all non-represented employees, and implemented a market competitive defined contribution retirement plan to replace the frozen defined benefit plan.

ATI sales to the aerospace market were $335 million in the third quarter 2015. Sales declined compared to the second quarter 2015 due to seasonal demand, primarily in Europe, as well as the rapid decline in raw material prices, particularly nickel, which reduced raw material surcharges.

“In the Flat Rolled Products segment, very challenging market conditions for commodity stainless products and temporary operational disruptions from the shutdown and restart of operations resulting from the August 15 lockout of United Steelworkers -represented (USW) employees resulted in 25% lower shipment volume in the third quarter 2015 compared to the second quarter 2015,” Harshman continued. “In addition, near record low base-selling prices for commodity stainless steel products and near decade low nickel LME prices negatively impacted results.”

ATI’s sales to key global markets represented 79% of ATI sales for the nine months ended September 2015:

Sales to the aerospace and defense markets were $1.16 billion and represented 39% of ATI sales: 19% jet engine, 13% airframe, 7% defense.

Sales to the oil & gas/chemical & hydrocarbon processing industry market were $479 million and represented 16% of ATI sales: 10% oil & gas, 6% chemical & hydrocarbon processing industry.

Sales to the electrical energy market were $295 million and represented 10% of ATI sales.

Sales to the automotive market were $239 million and represented 8% of ATI sales.

Sales to the medical market were $167 million and represented 6% of ATI sales.

Direct international sales were $1.26 billion and represented 42% of ATI’s nine months ended September 2015 sales.

Sales of high-value products were 81% of ATI year-to-date 2015 sales.

“Sales in the High Performance Materials and Components segment were $475 million, a 7% decline compared to the second quarter 2015, and segment operating profit was $19 million, or 4.0% of sales,” Harshman said. “Segment results in the third quarter 2015 include $3 million of expense associated with defined benefit pension and postretirement medical plans. Results reflect further weakening in demand for our products from the oil & gas market, very weak demand for forged products from the construction and mining market, and a decline in sales to the aerospace market, compared to the second quarter, due to seasonal factors and customer order profiles. Also, segment operating profit continued to be negatively impacted by lower operating rates at our Rowley, UT titanium sponge facility.

“Flat Rolled Products segment sales were $358 million, a 30% decline compared to the second quarter 2015, and the segment operating loss was $92 million, including $15 million of expense from defined benefit pension and postretirement medical plans. Stainless steel demand was significantly depressed mainly due to unusually high domestic inventory levels that resulted from the first-half 2015 surge of low-priced imports, primarily from China, and generally weak demand influenced by falling raw material surcharges. Demand from the oil & gas market continued to deteriorate during the quarter.

“ATI Flat Rolled Products issued a lockout notice, effective August 15, 2015, to more than 2,000 employees at various locations, due to lack of progress in ongoing contract negotiations with the USW. The facilities are being operated by ATI salaried employees and temporary workers. After an initial drop in asset utilization due to the work stoppage, production rates have improved significantly over the last 4 to 5 weeks. These facilities are meeting and in many cases exceeding output, quality, and safety expectations.

“Cost reduction remains a strategic focus across ATI and we have targeted a minimum of $100 million in new gross cost reductions for 2015. Our operations achieved $77 million in gross cost reductions during the nine months ended September 2015. Managed working capital as a percentage of annualized sales increased to 46.0% at the end of September 2015 compared to 38.5% at year-end 2014 primarily due to lower sales volume in the third quarter 2015.

“Our balance sheet remains solid, with cash on hand of $198 million at the end of the third quarter 2015, and no borrowings outstanding on our new five-year Asset Based Lending (ABL) revolving credit facility. Total debt to total capitalization was 38.5% at the end of the third quarter 2015 compared to 37.0% at year-end 2014.

“During the third quarter, we completed a $400 million ABL with our bank group. Compared to ATI’s previous revolving credit facility, the ABL facility contains no leverage or interest coverage ratios, and the borrowing costs are expected to be lower.

“Including payments associated with the HRPF project, we now expect 2015 capital expenditures to be approximately $190 million, of which $100 million has been spent in the nine months ended September 30, 2015.”

Strategy and Outlook

“Our operating results reflect the very difficult, yet different, economic realities of our two business segments,” said Rich Harshman, Chairman, President and CEO. “At this point we see no significant improvement in our major end markets until 2016.

“We remain confident that our High Performance Materials and Components segment operating performance will significantly improve in 2016. Our production schedules from our aerospace customers show demand improvement for our next-generation nickel-based alloys and titanium-based alloys, and our precision forgings, castings, and components.

“Intense global competition across the end markets we serve combined with rapidly changing customer needs and expectations have a profound impact on our industry. During the third quarter, we announced that we are consolidating and integrating multiple business units within our High Performance Materials and Components (HPMC) segment under a single Executive Vice President, which we...


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