Allegheny Technologies Inc. (ATI) earned $56.3 million, or 54 cents per share, in the first quarter of 2011, surpassing the Zacks Consensus Estimate of 49 cents and last year's $18.2 million, or 18 cents per share. First-quarter results were impacted by $5.8 million, or $0.05 per share, for previously announced executive retirements and a discrete tax item.
Quarterly revenues soared 36.5% year over year to $1.23 billion from $899.4 million on higher shipments and rising raw material prices. Revenues were above the Zacks Consensus Estimate of $1.12 billion.
Segment wise, revenue increases were distinct in the Engineered Products segment (46%) and in the Flat-Rolled Products segment (38%), while sales in the Higher Performance Material segment increased (32%).
Segment in Details
High-Performance Metals: Sales in the segment accelerated 32% to $399.4 million due to an increase of 11% and 40% in shipments of titanium & titanium alloys and nickel-based & specialty alloys, respectively. Shipments were driven by higher demand in the commercial aerospace jet engine, oil and gas and biomedical markets.
Average prices for titanium and titanium alloys increased 13% due to higher raw materials indices and moved up by 10% for exotic alloys resulting from improved product mix. The segment’s operating income increased to $85.6 million from $55.0 million in the year ago quarter.
Flat-Rolled Products: This segment contributed to revenues with rising volumes and prices. Sales jumped 37.6% year over year to $710.6 million on a 10% increase in stainless steel shipments and a 9% increase in high-value products shipments, coupled with a 26% surge in average prices for all products. Operating income improved to $63.4 million from $31.4 million in the year-ago quarter.
Engineered Products: Higher demand from the oil and gas, transportation, aerospace, electrical energy and automotive markets boosted sales by 45.8% to $117.4 million in this segment. Operating profit in the quarter was impacted by a LIFO inventory valuation reserve charge of $2.2 million, due to higher raw material costs. Operating income improved to $13.4 million from $1.8 million in the year-ago quarter.
Margins
Allegheny’s operating profit increased to $162.4 million, or 13.2% of sales compared with $88.2 million, or 9.8% of sales, in the prior-year quarter. While operating profit improved across all three business segments, results for the first quarter 2011 were impacted by idle facility and start-up costs associated with titanium sponge operations of $9.8 million, or 0.8% of sales, in the High Performance Metals segment.
In addition, the first-quarter 2011 included a LIFO inventory valuation reserve charge of $3.9 million primarily due to higher titanium and tungsten raw material costs.
Balance Sheet
Total debt to total capital was 26.1% as of December 31, 2010 compared with 34.3% as of December 31, 2010.
Cash flow used in operations in the first quarter of 2011 was $50.3 million. Cash on hand at the end of the first quarter 2011 was $816.3 million, which includes the proceeds from the January 2011 issuance of $500 million of 5.95% Notes due 2021.
Pending Ladish Acquisition
Closing of the acquisition of Ladish is pending approval by from Ladish shareholders at a shareholders meeting scheduled to be held on May 6, 2011. Merger consideration comprised $389 million in cash and approximately 7.4 million shares of ATI common stock. With closing of the acquisition, ATI will recognize non-recurring transaction costs of approximately $8 million, pretax.
Outlook
Allegheny continues to expect 2011 revenue growth to be in the range of 15% to 20% compared with 2010, and expects segment operating profit to be approximately 15% of sales. The company targets a minimum of $100 million in new gross cost reductions. Capital expenditures are forecasted at $300 to $350 million.
During the second quarter of 2011, management anticipates utilizing approximately $395 million of cash on hand to fund the cash portion of the merger consideration for the previously announced acquisition of Ladish and to pay related fees and expenses.
Rowley facility is expected to be at a 20 million pound annualized production rate during the second half of 2011.
Allegheny expects rising demand in the aerospace market to drive sales going forward. The company expects the global oil and gas/chemical process industry to remain strong due to increased demand from offshore oil and gas projects, large sour gas pipelines, desalination projects and increasing orders for chemical processing projects from several parts of the world.
In the electrical energy market, Allegheny expects demand for grain-oriented electrical steel for power distribution to remain essentially flat. The company also expects demand from the nuclear electrical energy market to remain flat in 2011, although growth opportunities exist for new nuclear plants under construction over the next several years.
The medical market reached a record of nearly 6% of 2010 sales and Allegheny remains optimistic and expects demand to continue in 2011.
Zacks Recommendation
Based in Pittsburgh, PA, Allegheny Technologies Inc. is one of the largest and most diversified specialty materials producers in the world. The aerospace market has started recovering, which boosts the demand for Allegheny’s products.
Separately, Allegheny has been arresting cost-pressures associated with high raw material costs by implementing price hikes through surcharges. The High Performance Metals segment internally sources sponge, which is processed for use in titanium and titanium alloys, and zirconium and hafnium alloy products. The Engineered Products segment is also similarly integrated. Allegheny’s integrated business model provides a competitive advantage.
The company’s competitors include Carpenter Technology Corp. (CRS) and Sutor Technology Group Limited (SUTR).
Currently, Allegheny has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term Neutral recommendation.
ALLEGHENY TECH (ATI): Free Stock Analysis Report
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