Allegheny Technologies (ATI) Q2 Earnings and Revs Beat Ests.

Allegheny Technologies Inc. (ATI) posted loss from continuing operations of $3.8 million or 3 cents per share in second-quarter 2014 compared with a profit of $3.7 million or 4 cents per share recorded a year ago.

The results include $4 million pre-tax (or $2.8 million post-tax) of Hot-Rolling and Processing Facility (HRPF) start-up costs, and $11.4 million pre-tax (or $8.1 million post-tax) of costs related to the Rowley titanium sponge facility Premium Quality (PQ) qualification process.

Excluding those impacts, earnings for the quarter were 7 cents per share, ahead of the Zacks Consensus Estimate of 2 cents.

On a consolidated basis, the Pennsylvania-based specialty steel company posted a net loss of $4 million or 3 cents per share in the quarter versus a profit of $4.4 million or 4 cents per share registered in the year-ago quarter.

Revenues for the second quarter rose 5.9% year over year to $1,119 million, exceeding the Zacks Consensus Estimate of $1,091 million. Sales also increased 13% from the sequentially prior quarter due to higher shipments of titanium and nickel-based alloys in the High Performance Materials & Components segment. Higher shipments and improved selling prices for high-value and standard products led to increased sales in the Flat Rolled Products segment.

Operating profit fell roughly 7.1% year over year to $65.2 million in the quarter but rose 49.8% sequentially. Segment operating profit was negatively impacted by $15.4 million of start-up and qualification costs associated with two strategic growth projects, the HRPF and the Rowley titanium sponge facility. The second quarter results also included $28.9 million in LIFO inventory valuation reserve charges related to the Flat Rolled Products segment, which were primarily offset by the reversal of the remaining $26 million of net realizable value inventory valuation reserves.

Segment Review

Revenues from the High Performance Metals and Components segment increased 2% year over year to $514.1 million in the quarter due to higher mill product shipments, and higher sale of nickel-based and specialty alloys. Sales for zirconium and related alloys were 6% higher in the reported quarter. Revenues were affected by lower sales of titanium and titanium alloys and lower sales for forged and cast products.

Flat-Rolled Products segment sales went up 9% to $604.9 million on account of higher shipments of both high-value and standard products. Shipments of high-value products increased 11% year over year on higher shipments of Precision Rolled Strip products, engineered strip products, and nickel-based alloys. Shipments of standard stainless products increased 15%. The segment benefited from $18.1 million gross cost reductions in the quarter.

Financial Position

Allegheny’s cash and cash equivalents, as of Jun 30, 2014, stood at $355.1 million compared with $74.1 million as of Jun 30, 2013. Long-term debt increased roughly 44.3% year over year to $1,520.7 million.

Total debt-to-total capital ratio was 34.8% as of Jun 30, 2014, down from 37.2% as of Jun 30, 2013. Cash flow used in operations, as of Jun 30, 2014, was $37.5 million, including a $127.6 million investment in managed working capital associated with increased business activity compared with cash used in operations of $58 million including an investment of $36.1 million in managed working capital, in the year-ago period.

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 sustainable improvement and demand growth from most of its end markets. The company expects improvement in business conditions to continue through the third quarter of 2014.

However, the company expects third quarter results to be negatively impacted by start-up and qualification costs related to its two strategic growth projects, HRPF and Rowley. HRPF start-up costs, in the third quarter, are expected to increase to roughly $12 million, pre-tax, as the company speeds up the commissioning process. Allegheny forecasts that third-quarter will be impacted by about $6 million of costs as it continues Rowley titanium sponge facility PQ program.

Based on current year-end projected raw material costs, the company expects net LIFO/NRV inventory valuation reserve charges of about $19 million, pre-tax, in the third quarter.

Excluding these costs and inventory valuation charges, the company expects pre-tax operating results from continuing operations to improve $15 million to $20 million in the third quarter, compared with the second quarter of 2014.

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.

Allegheny anticipates capital expenditures for 2014 to be roughly $300 million of which $98 million was spent in the first half of 2014. 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 $41 million in the second quarter. The company is targeting $100 million in new gross cost reductions in 2014.

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 realizing these benefits in 2015 upon the completion of the commissioning process.

Allegheny currently holds a Zacks Rank #2 (Buy).

Another specialty steel company RTI International Metals Inc. (RTI) carries a Zacks Rank #1 (Strong Buy).