Allegheny (ATI) Q2 Loss Lower than Expected, Sales Beat

Allegheny Technologies Inc. ATI reported an adjusted loss of 21 cents per share in second-quarter 2016. The loss was narrower than the Zacks Consensus Estimate of a loss of 39 cents.

The results exclude post-tax charges of $8.4 million related to work stoppage in the Flat Rolled Products (“FRP”) segment, and $11.4 million of tax benefits.

Including these one-time items, the company reported a net loss (attributable to Allegheny) of $18.8 million or 18 cents per share for the quarter compared with a loss of $16.4 million or 15 cents a share a year ago. Results were positively affected by the return of operating levels in the FRP segment to normal and reduction of costs related to the recent work stoppage.

Revenues for the second quarter fell 21% year over year to $810.5 million but breezed past the Zacks Consensus Estimate of $761 million. The top line improved 7% from the sequentially prior quarter.

Segment Review

Revenues from the High Performance Metals and Components segment dropped 2% year over year to $498.4 million in the second quarter due to a large decline in sales to the oil & gas/chemical and hydrocarbon processing industry. Operating profit fell 12.6% year over year to $38.8 million.

The segment remains affected by lower operating rates owing to weak demand in the oil & gas/chemical and hydrocarbon processing industry, along with low operating rates at the company’s Rowley, UT sponge facility. A $9 million high production cost was charged at the Rowley, UT facility in the second quarter.

The FRP segment’s sales plunged 39% year over year to $312.1 million, hurt by lower shipments as well as lower average selling price of all products resulting from the idling of the GOES operations. Shipments of high-value products fell 33% year over year while those of standard stainless products declined 30%. Average selling prices also decreased 8% for high-value products and 15% for standard stainless products.

Segment operating loss was $31.8 million compared with an operating loss of $23.2 million in the year-ago quarter. The segment’s losses widened partly due to $22.4 million of expenses related to work stoppage.

Financial Position

Allegheny’s cash in hand as of Jun 30, 2016 was $322 million, up 28.3% year over year. Long-term debt increased to $1,870.1 million.

Cash flow used by operations for first-half 2016 was $33.6 million. Total debt to total capitalization was 48.7% at the end of the quarter, up from 42% a year ago.

Outlook

As expected by Allegheny, its High Performance Materials & Components (“HPMC”) segment has started benefiting from the growth phase of the commercial aerospace sector. The company expects the segment’s operating profit as a percentage of sales to reach double digits in second-half 2016.

Allegheny anticipates the ongoing rightsizing and restructuring activities to impact the FRP segment in the third quarter as well. The segment continues to be affected by low raw material prices, uncertain market demand and global overcapacity.

Although the operating performance of the segment is improving and losses are expected to narrow in the third quarter, the company will face certain maintenance charges at the segment in the quarter. However, Allegheny expects the shipments of products benefiting from HRPF capabilities to increase during the next few quarters. The segment is expected to be modestly profitable from the fourth quarter onward.

Allegheny anticipates capital expenditure in 2016 to be below $240 million, of which $145 million has already been spent. After 2016, the company expects an annual capital expenditure of less than $100 million for several years.

Zacks Rank

Allegheny currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the steel sector include ArcelorMittal MT, Olympic Steel Inc ZEUS and Ryerson Holding Corp. RYI, all currently sporting a Zacks Rank #1 (Strong Buy).

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