PITTSBURGH--(BUSINESS WIRE)--Allegheny Technologies Incorporated (NYSE: ATI) reported third quarter 2018 results, with sales of $1.02 billion and net income attributable to ATI of $50.5 million, or $0.37 per share. Prior year results were sales of $869 million and a net loss attributable to ATI of $121.2 million, or $(1.12) per share, which included a $113.6 million, or $(1.05) per share, goodwill impairment charge related to ATI’s titanium investment castings business, which was excluded from business segment results. Third quarter 2017 results excluding the goodwill charge were a net loss attributable to ATI of $7.6 million, or $(0.07) per share.

“ATI’s third quarter 2018 operating performance was solid and in line with our expectations, with business segment operating profit nearly doubling compared to the prior year period. These results built on strong first-half 2018 financial results,” said Rich Harshman, Chairman, President and Chief Executive Officer. “We expect ongoing year-over-year operating profit growth as we continue to focus on producing and delivering highly differentiated products while accelerating development of advanced production capabilities, such as additive manufacturing. Our strategy to generate sustainable profitable growth by leveraging ATI’s specialty materials capabilities to provide customers with technically advanced parts and components is on track,” Harshman concluded.

“The aerospace and defense markets continue to drive results in our High Performance Materials and Components, or HPMC, segment,” said Bob Wetherbee, President and CEO Designate, and current EVP, Flat Rolled Products Group. “Third quarter HPMC segment sales and operating profit increased significantly versus the prior year but declined sequentially due to normal business seasonality and a previously identified nickel powder billet supply issue. Within our aerospace market results, commercial airframe product sales were 21% higher compared to the prior year period. Sales of next-generation jet engine products remained strong, increasing by 42% versus the prior year and represented 48% of total third quarter 2018 HPMC jet engine product sales. Our customers continue to benefit from our on-time execution and relentless product innovation.

“Our Flat Rolled Products, or FRP, segment had another solid quarter, generating $30 million in segment operating profit, representing a margin of nearly 7% of sales. These results benefited from continued strong market demand, ongoing improvements in asset utilization, and a better matching of raw material costs and surcharges compared to the third quarter 2017. Our business transformation efforts are clearly visible in the 2018 year-to-date financial results, with segment operating profit of $67 million compared to $15 million for the prior year-to-date period.”

• ATI’s sales to key global markets represented 81% of total ATI sales for the first nine months of 2018:
  • Sales to the aerospace and defense markets were $1.44 billion and represented 48% of ATI sales: 28% commercial jet engine, 13% commercial airframe, 7% government aero/defense.
  • Sales to the oil & gas market were $414 million and represented 14% of ATI sales.
  • Sales to the automotive market were $244 million and represented 8% of ATI sales.
  • Sales to the electrical energy market were $180 million and represented 6% of ATI sales.
  • Sales to the medical market were $143 million and represented 5% of ATI sales.

• International sales represented 42% of ATI’s year-to-date 2018 sales.

“We continue to make progress toward our FRP segment goal of capital efficient asset utilization improvements as evidenced by our recently announced agreement to provide carbon steel hot-rolling conversion services for NLMK USA at our world-class Hot Rolling and Processing Facility, or HRPF. Slab shipments to ATI will begin in October 2018 and increase to anticipated levels in the first quarter of 2019. This agreement is a win-win for both NLMK USA and ATI and we look forward to working with NLMK on additional growth opportunities,” Wetherbee said. “Lastly, we continue to work within the U.S. Commerce Department’s Section 232 tariff exclusion request process to secure an exclusion on behalf of the A&T Stainless JV, which imports semi-finished stainless slab products from Indonesia. We believe that the facts underlying this request are compelling and justify an approval.”

As of September 30, 2018, cash on hand was $154 million and available additional liquidity under the asset-based lending (ABL) credit facility was approximately $360 million, with no borrowings under the revolving credit portion of the ABL. During the third quarter 2018, ATI generated $82 million of cash from operating activities, including a $28 million decrease in managed working capital, which improved to 36.4% of sales. Third quarter 2018 capital expenditures were $31 million, totaling $101 million year-to-date, including the initial down payments for the previously announced HPMC iso-thermal press and heat-treating expansions, as well as significant expenditures on the STAL expansion in China.

Strategy and Outlook

“In the HPMC segment, we expect continued year-over-year revenue and operating profit growth in the fourth quarter 2018 resulting from ongoing aerospace market demand growth and improved asset utilization. We reiterate our guidance for a full year 2018 segment operating profit margin improvement of approximately 300 basis points compared to 2017. We remain confident in our customers’ elevated order patterns due to increasing jet engine build rates over the next several years. Our focus is on strong operational execution and on meeting our aerospace customer’s production requirements regardless of aircraft build rate,” Wetherbee said.

“In the FRP segment, significant price declines in several key raw materials are expected to result in weaker fourth quarter 2018 results due to the short-term mismatch between input costs and the surcharge index pricing mechanism. We anticipate our U.S. Operations to remain profitable in the fourth quarter despite these higher input costs. Even with these short-term headwinds, we continue to expect a 2018 year-over-year operating margin improvement of 150 to 300 basis points driven by continued strong end-market demand, ongoing growth of our differentiated product sales, and the benefits from improved HRPF utilization.

“Year-over-year cost inflation in many raw materials used to manufacture our products is likely to represent a moderate LIFO expense headwind in the fourth quarter of 2018 which would be greater than and not fully offset by our remaining NRV inventory reserves,” Wetherbee continued.

“Cash generation from operations remains a key focus, and we intend to carefully balance our working capital and other cash needs with the pace of our capital expenditures. We expect strong fourth quarter 2018 cash generation and reiterate our goal to generate at least $150 million of free cash flow for the full year 2018, excluding $40 million in contributions to the ATI Pension Plan. Finally, we expect to end 2018 with zero borrowings under our ABL revolving credit facility,” Wetherbee concluded.

Third Quarter 2018 Financial Results

• Sales for the third quarter 2018 were $1.02 billion, a 17% increase compared to the third quarter 2017. HPMC sales in 2018 reflect stronger demand for nickel-based and specialty alloy products, forgings and components. FRP sales in 2018 include a stronger mix of high-value products, particularly nickel-based alloys.
• Gross profit in the third quarter 2018 at $160.4 million, or 15.7% of sales, increased more than 50% compared to gross profit of $105.3 million, or 12.1% of sales, in the prior year’s third quarter.
• Net income attributable to ATI for the third quarter 2018 was $50.5 million, or $0.37 per share. This compares to a third quarter 2017 net loss attributable to ATI of $121.2 million, or $(1.12) per share, and adjusted Q3 2017 net loss of $7.6 million, or $(0.07) per share, which excludes a $113.6 million goodwill impairment charge. Results in both periods include impacts from income taxes which differ from applicable standard tax rates, primarily related to impacts of income tax valuation allowances.
• Cash on hand at September 30, 2018 was $153.5 million. In the third quarter 2018, cash provided by operating activities was $81.6 million, including a $28.3 million reduction in managed working capital. Cash used in investing activities in the third quarter 2018 was $39.3 million, primarily for capital expenditures as well as $10.0 million for the Addaero acquisition. Cash used in financing activities in Q3 2018 was $11.2 million, primarily for $10.0 million of dividends to noncontrolling interests from our STAL joint venture.

High Performance Materials & Components Segment
Market Conditions

• Aerospace and defense sales in the third quarter 2018 were $446.5 million, 2% higher than the second quarter 2018, and represented 76% of total segment sales. Compared to the second quarter 2018, commercial airframe sales were 13% higher and government aero/defense sales were 1% higher, while commercial jet engine sales were 2% lower primarily due to seasonal factors. Total HPMC third quarter 2018 sales decreased 1% compared to the second quarter 2018, with sales to the electrical energy market down 23% across all types of power generation, and sales to the construction & mining market 3% lower. Direct international sales represented 46% of total segment sales for the third quarter 2018.

Third quarter 2018 compared to third quarter 2017

• Sales were $585.5 million, a $72.6 million, or 14%, increase compared to the third quarter 2017, primarily due to higher sales of next-generation jet engine products. Sales to the commercial aerospace market, which represented 65% of third quarter 2018 sales, were 18% higher than the prior year, including a 16% increase in sales to the commercial jet engine market. Construction and mining market sales were 36% higher, and medical market sales were 6% higher.
• Segment operating profit improved to $76.0 million, or 13.0% of sales, compared to $61.7 million, or 12.0% of sales for the third quarter 2017. This operating profit improvement reflects higher productivity from increasing aerospace and defense sales, and an improved product mix of next-generation nickel alloys and forgings for the aero engine market.

Flat Rolled Products Segment
Market Conditions

• Sales increased in the third quarter 2018 in most key end markets, including a 21% increase in sales to aerospace and defense markets, compared to the second quarter 2018. Sales to the automotive and electrical energy markets increased 7% and 4%, respectively, while project-based sales to the oil & gas market declined 4%, all compared to the second quarter 2018. Sales increased 6% for high-value products, primarily related to stronger demand for precision and engineered strip products, compared to the second quarter 2018. Sales declined 1% for standard products as lower shipment volumes more than offset increased selling prices which included higher raw material surcharges. Direct international sales were 33% of third quarter 2018 segment sales.

Third quarter 2018 compared to third quarter 2017

• Sales were $434.7 million, a $78.5 million, or 22%, increase compared to the prior year period. Sales of high-value products were 26% higher, primarily for nickel-based and specialty alloys, and sales of standard products were 13% higher, compared to the third quarter 2017.
• Segment operating profit was $29.5 million, or 6.8% of sales, compared to a segment operating loss of $7.3 million for the third quarter 2017. Compared to 2017, results in 2018 included a better matching of raw material surcharges with changes in prices for nickel, ferrochrome and other metallics, and improved cost absorption through higher operating rates.

Closed Operations and Other Expenses

• Closed operations and other expenses in the third quarter 2018 were $3.4 million, compared to $12.2 million in the prior year quarter. The third quarter 2018 benefited from lower carrying costs for closed facilities, mainly related to property taxes and insurance expenses for the Rowley, UT and Midland, PA locations, compared to the prior year period.

Income Taxes

• ATI continues to maintain income tax valuation allowances on its U.S. federal and state deferred tax assets, and we do not expect to pay any significant U.S. federal or state income taxes for the next few years due to net operating loss carryforwards. The third quarter 2018 11.0% tax rate primarily relates to income taxes on non-U.S. operations.

Allegheny Technologies will conduct a conference call with investors and analysts on Tuesday, October 23, 2018, at 8:15 a.m. ET to discuss the financial results. The conference call will be broadcast, and accompanying presentation slides will be available, at ATImetals.com. To access the broadcast, click on “Conference Call”. Replay of the conference call will be available on the Allegheny Technologies website.