Allegheny Technologies Inc. (ATI) earned $36.4 million or 36 cents per share, slightly below the Zacks Consensus Estimate of 37 cents, though significantly higher than last year’s $3.6 million or 3 cents per share. Quarterly revenues soared 48% year over year to $1.05 billion from $710 million in the year-ago quarter on higher shipments and rising average selling prices. Sales grew 17%, sequentially. Yet revenues fell short of the Zacks Consensus Estimate of $966 million.

Allegheny saw higher demand from global end markets, especially the aerospace and defense markets. Demand from oil and gas/chemical process industry, electrical energy and medical markets remained moderate. Sales in these markets constituted about 70% of Allegheny’s total revenue. Segment wise, revenue increases were distinct in Flat-Rolled Products segment (84%) and in the Engineered Products segment (75%), while sales in the Higher Performance Material segment increased modestly (7%).

Segment in Details

Flat-Rolled Products: The segment contributed largely to revenues and margins with rising volumes and prices. Sales jumped 84% year over year to $615.3 million on a 50% increase in stainless steel shipments and a 34% increase in high-value products shipments, coupled with a 32% rise in average prices for all products. Operating income climbed 47% to $42.1 million and produced 6.8% in operating margins.

Engineered Products: Higher demand from the oil and gas, cutting tools, transportation, aerospace electrical energy and automotive markets boosted sales by 75% to $94.9 million in this segment. The segment reported modest profits of $7.9 million, but reversed year-ago losses.

High-Performance Metals: Lower selling prices negated volume gains in the segment. Sales in the segment inched up 7% to $341.8 million despite a 20% and 16% increase in shipments of titanium & titanium alloys and nickel-based & specialty alloys, respectively. Shipments were driven by higher demand in the commercial aerospace markets, particularly for jet engines.

However, average prices for titanium and titanium alloys declined 13% while they increased by a mere 2% for nickel-based and specialty alloys. The segment’s operating income moved up 64% to $67.3 million and yielded 19.7% of total operating margins.

Margins

Allegheny’s operating profit improved by a whopping 118% to $117.3 million. It jumped 33% sequentially. Operating margins came in at 11.2%, higher than last year’s 7.6%. In the first six months of 2010, Allegheny saw gross cost reductions of $72 million. Although results topped prior-year levels, they were affected by idled facilities and their start-up costs, primarily in the High-Performance Metals segment.

Balance Sheet

We are wary of Allegheny’s liquidity position. The company recorded cash and cash equivalent of $378.7 million as of June 30, 2010, a decline of 47% from $708.8 million as of December 31, 2009. Total debt of $1.1 billion was much higher compared to the cash balance.

Outlook

Allegheny expects the rising demand in the aerospace market to drive sales going forward. Allegheny expects product innovation to drive results in the High-Performance Metals segment. The company has recently launched its new titanium product ATI 425@ alloy to be used in the aerospace market. Allegheny’s recently introduced ATI781Plus alloy has already gained popularity in the jet engine market.

Allegheny expects to achieve significant cost synergies on the start up of the Brackenridge, PA facility. The company targets gross cost reduction of $100 million in 2010. The company anticipates the segment’s results to improve by 7% – 8% in the upcoming quarter.

However, the company remains uncertain about its stainless steel business due to diminishing demand in the end markets. Declining nickel prices should negatively impact results in the Flat-Rolled Product segment.

Zacks Recommendation

Pittsburgh, PA-based 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. Allegheny achieved gross cost reductions of over $173 million in 2009, exceeding its cost reduction target of $150 million. The company plans to improve its cost structure further and targets cost savings of $100 million in 2010.

However, we believe that after a tough 2009, Allegheny is in for more of the same on the back of lower pricing. Overcapacity of competitive stainless steel and a saturated titanium supply chain should continue to weigh on Allegheny’s earnings into 2010.

Currently, Allegheny has a short-term (1 to 3 months) Zacks #2 Rank, but a long-term Neutral recommendation.
 
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