XNYS:ATI Allegheny Technologies Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to                     

Commission File Number 1-12001

 

 

ALLEGHENY TECHNOLOGIES INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   25-1792394

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1000 Six PPG Place

Pittsburgh, Pennsylvania

  15222-5479
(Address of Principal Executive Offices)   (Zip Code)

(412) 394-2800

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At July 25, 2012, the registrant had outstanding 107,174,134 shares of its Common Stock.

 

 

 


Table of Contents

ALLEGHENY TECHNOLOGIES INCORPORATED

SEC FORM 10-Q

Quarter Ended June 30, 2012

INDEX

 

     Page No.  

PART I. - FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Balance Sheets

     1   

Consolidated Statements of Income

     2   

Consolidated Statements of Comprehensive Income

     3   

Consolidated Statements of Cash Flows

     4   

Statements of Changes in Consolidated Equity

     5   

Notes to Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 4. Controls and Procedures

     34   

PART II. - OTHER INFORMATION

  

Item 1. Legal Proceedings

     34   

Item 1A. Risk Factors

     35   

Item 6. Exhibits

     35   

SIGNATURES

     36   

EXHIBIT INDEX

     37   

 


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Balance Sheets

(In millions, except share and per share amounts)

(Current period unaudited)

 

     June 30,     December 31,  
     2012     2011  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 210.3     $ 380.6  

Accounts receivable, net of allowances for doubtful accounts of $5.6 and $5.9 as of June 30, 2012 and December 31, 2011

     744.3       709.1  

Inventories, net

     1,512.5       1,384.3  

Prepaid expenses and other current assets

     60.4       95.5  
  

 

 

   

 

 

 

Total Current Assets

     2,527.5       2,569.5  

Property, plant and equipment, net

     2,444.0       2,368.8  

Cost in excess of net assets acquired

     737.7       737.7  

Other assets

     370.8       370.9  
  

 

 

   

 

 

 

Total Assets

   $ 6,080.0     $ 6,046.9  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 451.7     $ 490.7  

Accrued liabilities

     327.9       320.3  

Deferred income taxes

     16.6       23.5  

Short term debt and current portion of long-term debt

     27.3       27.3  
  

 

 

   

 

 

 

Total Current Liabilities

     823.5       861.8  

Long-term debt

     1,474.1       1,482.0  

Accrued postretirement benefits

     473.3       488.1  

Pension liabilities

     496.1       508.9  

Deferred income taxes

     20.0       9.8  

Other long-term liabilities

     117.5       124.7  
  

 

 

   

 

 

 

Total Liabilities

     3,404.5       3,475.3  
  

 

 

   

 

 

 

Equity:

    

ATI Stockholders’ Equity:

    

Preferred stock, par value $0.10: authorized-50,000,000 shares; issued-none

     —          —     

Common stock, par value $0.10: authorized-500,000,000 shares; issued-109,695,171 shares at June 30, 2012 and December 31, 2011; outstanding- 107,163,790 shares at June 30, 2012 and 106,354,612 shares at December 31, 2011

     11.0       11.0  

Additional paid-in capital

     1,169.7       1,207.1  

Retained earnings

     2,429.8       2,361.5  

Treasury stock: 2,531,381 shares at June 30, 2012 and 3,340,559 shares at December 31, 2011

     (122.6     (162.7

Accumulated other comprehensive loss, net of tax

     (912.4     (941.6
  

 

 

   

 

 

 

Total ATI stockholders’ equity

     2,575.5       2,475.3  

Noncontrolling interests

     100.0       96.3  
  

 

 

   

 

 

 

Total Equity

     2,675.5       2,571.6  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 6,080.0     $ 6,046.9  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

1


Table of Contents

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Income

(In millions, except per share amounts)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Sales

   $ 1,357.4     $ 1,351.6     $ 2,709.9     $ 2,579.0  

Costs and expenses:

        

Cost of sales

     1,158.5       1,128.6       2,304.0       2,150.6  

Selling and administrative expenses

     90.7       99.3       194.1       188.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before interest, other income and income taxes

     108.2       123.7       211.8       240.4  

Interest expense, net

     (18.6     (23.7     (38.5     (46.7

Other income, net

     0.1       0.3       0.5       0.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     89.7       100.3       173.8       194.1  

Income tax provision

     31.0       34.3       56.8       69.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     58.7       66.0       117.0       124.7  

Less: Net income attributable to noncontrolling interests

     2.3       2.0       4.4       4.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ATI

   $ 56.4     $ 64.0     $ 112.6     $ 120.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income attributable to ATI per common share

   $ 0.53     $ 0.63     $ 1.06     $ 1.20  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income attributable to ATI per common share

   $ 0.50     $ 0.59     $ 1.00     $ 1.13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.18     $ 0.18     $ 0.36     $ 0.36  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

2


Table of Contents

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)

 

                 Noncontrolling               
     ATI     Interests      Total  
     Three Months Ended     Three Months Ended      Three Months Ended  
     June 30,     June 30,      June 30,  
     2012     2011     2012     2011      2012     2011  

Net Income

   $ 56.4     $ 64.0     $ 2.3     $ 2.0      $ 58.7     $ 66.0  

Other comprehensive income (loss), net of tax:

             

Foreign currency translation adjustments

     (13.4     1.3       (1.2     1.6        (14.6     2.9  

Pension plans and other postretirement benefits

     16.6       11.4       —          —           16.6       11.4  

Change in unrealized gains on available-for-sale securities

     —          —          —          —           —          —     

Unrecognized gains (losses) on derivatives

     10.1       (3.3     —          —           10.1       (3.3
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     13.3       9.4       (1.2     1.6        12.1       11.0  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 69.7     $ 73.4     $ 1.1     $ 3.6      $ 70.8     $ 77.0  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     Six Months Ended     Six Months Ended      Six Months Ended  
     June 30,     June 30,      June 30,  
     2012     2011     2012     2011      2012     2011  

Net Income

   $ 112.6     $ 120.3     $ 4.4     $ 4.4      $ 117.0     $ 124.7  

Other comprehensive income (loss), net of tax:

             

Foreign currency translation adjustments

     (4.6     15.3       (0.6     3.2        (5.2     18.5  

Pension plans and other postretirement benefits

     33.3       22.8       —          —           33.3       22.8  

Change in unrealized gains on available-for-sale securities

     0.1       —          —          —           0.1       —     

Unrecognized gains (losses) on derivatives

     0.4       (12.6     —          —           0.4       (12.6
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     29.2       25.5       (0.6     3.2        28.6       28.7  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 141.8     $ 145.8     $ 3.8     $ 7.6      $ 145.6     $ 153.4  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

Allegheny Technologies Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

     Six Months Ended  
     June 30,  
     2012     2011  

Operating Activities:

    

Net income

   $ 117.0     $ 124.7  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     96.2       80.6  

Deferred taxes

     (17.6     (13.1

Changes in operating asset and liabilities:

    

Inventories

     (128.3     (307.8

Accounts receivable

     (35.1     (177.7

Accounts payable

     (39.0     62.5  

Retirement benefits

     26.8       6.5  

Accrued income taxes

     12.2       74.5  

Accrued liabilities and other

     27.6       77.8  
  

 

 

   

 

 

 

Cash provided by (used in) operating activities

     59.8       (72.0
  

 

 

   

 

 

 

Investing Activities:

    

Purchases of property, plant and equipment

     (165.7     (97.7

Purchases of businesses and investments in ventures, net of cash acquired

     —          (349.2

Asset disposals and other

     0.9       2.6  
  

 

 

   

 

 

 

Cash used in investing activities

     (164.8     (444.3
  

 

 

   

 

 

 

Financing Activities:

    

Issuances of long-term debt

     —          500.0  

Payments on long-term debt and capital leases

     (5.8     (11.0

Net borrowings under credit facilities

     0.3       2.3  

Debt issuance costs

     —          (5.0

Dividends paid to shareholders

     (38.2     (36.7

Purchase of subsidiary shares from noncontrolling interest

     (0.1     (0.2

Taxes on share-based compensation

     1.0       2.6  

Exercises of stock options and other

     0.8       1.1  

Shares repurchased for income tax withholding on share-based compensation

     (23.3     (1.3
  

 

 

   

 

 

 

Cash provided by (used in) financing activities

     (65.3     451.8  
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (170.3     (64.5

Cash and cash equivalents at beginning of period

     380.6       432.3  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 210.3     $ 367.8  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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Table of Contents

Allegheny Technologies Incorporated and Subsidiaries

Statements of Changes in Consolidated Equity

(In millions, except per share amounts)

(Unaudited)

 

     ATI Stockholders              
                              Accumulated              
            Additional                 Other     Non-        
     Common      Paid-In     Retained     Treasury     Comprehensive     controlling     Total  
     Stock      Capital     Earnings     Stock     Income (Loss)     Interests     Equity  

Balance, December 31, 2010

   $ 10.2      $ 658.9     $ 2,224.8     $ (188.0   $ (665.1   $ 88.6     $ 2,129.4  

Net income

     —           —          120.3       —          —          4.4       124.7  

Other comprehensive income

     —           —          —          —          25.5       3.2       28.7  

Issuance of common stock

     0.8        512.8       —          —          —          —          513.6  

Cash dividends on common stock ($0.36 per share)

     —           —          (36.7     —          —          —          (36.7

Noncontrolling interest acquired

     —           —          —          —          —          0.6       0.6  

Purchase of subsidiary shares from noncontrolling interest

     —           0.1       —          —          —          (0.3     (0.2

Dividends declared to noncontrolling interest

     —           —          —          —          —          (7.2     (7.2

Employee stock plans

     —           4.4       (1.1     23.8       —          —          27.1  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 11.0      $ 1,176.2     $ 2,307.3     $ (164.2   $ (639.6   $ 89.3     $ 2,780.0  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 11.0      $ 1,207.1     $ 2,361.5     $ (162.7   $ (941.6   $ 96.3     $ 2,571.6  

Net income

     —           —          112.6       —          —          4.4       117.0  

Other comprehensive income

     —           —          —          —          29.2       (0.6     28.6  

Cash dividends on common stock ($0.36 per share)

     —           —          (38.2     —          —          —          (38.2

Purchase of subsidiary shares from noncontrolling interest

     —           —          —          —          —          (0.1     (0.1

Employee stock plans

     —           (37.4     (6.1     40.1       —          —          (3.4
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 11.0      $ 1,169.7     $ 2,429.8     $ (122.6   $ (912.4   $ 100.0     $ 2,675.5  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

Note 1. Accounting Policies

The interim consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries. Unless the context requires otherwise, “Allegheny Technologies”, “ATI” and “the Company” refer to Allegheny Technologies Incorporated and its subsidiaries.

These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. In management’s opinion, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2011 Annual Report on Form 10-K. The results of operations for these interim periods are not necessarily indicative of the operating results for any future period. The December 31, 2011 financial information has been derived from the Company’s audited financial statements.

New Accounting Pronouncements Adopted

In June 2011, the Financial Accounting Standards Board (FASB) issued amendments to financial accounting standards related to the presentation of comprehensive income which requires entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, these amendments require an entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB deferred the requirement for presenting the reclassification adjustments from comprehensive income to net income by component within the face of the financial statements. Finally, no changes were made to the calculation and presentation of earnings per share. These amendments, with retrospective application, are effective for interim and annual periods in fiscal year 2012. A separate consolidated statement of comprehensive income is included in these consolidated financial statements. Other than the change in presentation, these changes did not have an impact on the consolidated financial statements.

Note 2. Inventories

Inventories at June 30, 2012 and December 31, 2011 were as follows (in millions):

 

     June 30,     December 31,  
     2012     2011  

Raw materials and supplies

   $ 274.7     $ 205.7  

Work-in-process

     1,174.0       1,150.0  

Finished goods

     226.6       199.9  
  

 

 

   

 

 

 

Total inventories at current cost

     1,675.3       1,555.6  

Less allowances to reduce current cost values to LIFO basis

     (146.6     (153.7

Progress payments

     (16.2     (17.6
  

 

 

   

 

 

 

Total inventories, net

   $ 1,512.5     $ 1,384.3  
  

 

 

   

 

 

 

Inventories are stated at the lower of cost (last-in, first-out (“LIFO”), first-in, first-out (“FIFO”), and average cost methods) or market, less progress payments. Most of the Company’s inventory is valued utilizing the LIFO costing methodology. Inventory of the Company’s non-U.S. operations is valued using average cost or FIFO methods. The effect of using the LIFO methodology to value inventory, rather than FIFO, decreased cost of sales by $7.1 million for the first six months of 2012 compared to an increase of $9.1 million for the first six months of 2011.

 

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Table of Contents

Note 3. Property, Plant and Equipment

Property, plant and equipment at June 30, 2012 and December 31, 2011 was as follows (in millions):

 

     June 30,     December 31,  
     2012     2011  

Land

   $ 34.0     $ 34.0  

Buildings

     830.4       757.0  

Equipment and leasehold improvements

     3,222.9       3,146.2  
  

 

 

   

 

 

 
     4,087.3       3,937.2  

Accumulated depreciation and amortization

     (1,643.3     (1,568.4
  

 

 

   

 

 

 

Total property, plant and equipment, net

   $ 2,444.0     $ 2,368.8  
  

 

 

   

 

 

 

The construction in progress portion of property, plant and equipment at June 30, 2012 was $447.8 million.

Note 4. Debt

Debt at June 30, 2012 and December 31, 2011 was as follows (in millions):

 

     June 30,      December 31,  
     2012      2011  

Allegheny Technologies 5.95% Notes due 2021

   $ 500.0      $ 500.0  

Allegheny Technologies 4.25% Convertible Notes due 2014

     402.5        402.5  

Allegheny Technologies 9.375% Notes due 2019

     350.0        350.0  

Allegheny Ludlum 6.95% debentures due 2025

     150.0        150.0  

ATI Ladish Series B 6.14% Notes due 2016 (a)

     25.4        31.8  

ATI Ladish Series C 6.41% Notes due 2015 (b)

     43.5        44.6  

Domestic Bank Group $400 million unsecured credit facility

     —           —     

Foreign credit facilities

     24.2        24.5  

Industrial revenue bonds, due through 2020, and other

     5.8        5.9  
  

 

 

    

 

 

 

Total short-term and long-term debt

     1,501.4        1,509.3  

Short-term debt and current portion of long-term debt

     27.3        27.3  
  

 

 

    

 

 

 

Total long-term debt

   $ 1,474.1      $ 1,482.0  
  

 

 

    

 

 

 

 

(a) Includes fair value adjustments of $2.5 million at June 30, 2012 and $3.2 million at December 31, 2011.
(b) Includes fair value adjustments of $3.5 million at June 30, 2012 and $4.6 million at December 31, 2011.

The Company did not borrow funds under its $400 million senior unsecured domestic credit facility during the first six months of 2012, although approximately $7 million has been utilized to support the issuance of letters of credit. This credit facility requires the Company to maintain a leverage ratio (consolidated total indebtedness net of cash on hand in excess of $50 million, divided by consolidated earnings before interest, taxes, depreciation and amortization, and non-cash pension expense) of not greater than 3.25, and maintain an interest coverage ratio (consolidated earnings before interest, taxes, and non-cash pension expense divided by interest expense) of not less than 2.0. For the three months ended June 30, 2012, the leverage ratio was 2.05, and the interest coverage ratio was 5.58.

The Company has an additional separate credit facility for the issuance of letters of credit. As of June 30, 2012, $32 million in letters of credit were outstanding under this facility.

In addition, Shanghai STAL Precision Stainless Steel Company Limited (STAL), the Company’s Chinese joint venture company in which ATI has a 60% interest, has a 205 million renminbi (approximately $32 million at June 30, 2012 exchange rates) revolving credit facility with a group of banks, which expires in August 2014. This credit facility is supported solely by STAL’s financial capability without any guarantees from the joint venture partners. As of June 30, 2012, there were no borrowings under this credit facility.

 

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The ATI Ladish Series B and Series C Notes are guaranteed by ATI and are equally ranked with all of ATI’s existing and future senior unsecured debt.

Note 5. Derivative Financial Instruments and Hedging

As part of its risk management strategy, the Company, from time-to-time, utilizes derivative financial instruments to manage its exposure to changes in raw material prices, energy costs, foreign currencies, and interest rates. In accordance with applicable accounting standards, the Company accounts for most of these contracts as hedges. In general, hedge effectiveness is determined by examining the relationship between offsetting changes in fair value or cash flows attributable to the item being hedged, and the financial instrument being used for the hedge. Effectiveness is measured utilizing regression analysis and other techniques to determine whether the change in the fair market value or cash flows of the derivative exceeds the change in fair value or cash flow of the hedged item. Calculated ineffectiveness, if any, is immediately recognized on the statement of income.

The Company sometimes uses futures and swap contracts to manage exposure to changes in prices for forecasted purchases of raw materials, such as nickel and natural gas. Under these contracts, which are generally accounted for as cash flow hedges, the price of the item being hedged is fixed at the time that the contract is entered into and the Company is obligated to make or receive a payment equal to the net change between this fixed price and the market price at the date the contract matures.

The majority of ATI’s products are sold utilizing raw material surcharges and index mechanisms. However, as of June 30, 2012, the Company had entered into financial hedging arrangements primarily at the request of its customers, related to firm orders, representing approximately 13% of its annual nickel requirements. These nickel hedges extend to 2016.

At June 30, 2012, the outstanding financial derivatives used to hedge the Company’s exposure to energy cost volatility included natural gas cost hedges for approximately 75% of its annual forecasted domestic requirements for 2012, approximately 50% for 2013, and approximately 30% for 2014, and electricity hedges for Western Pennsylvania operations of approximately 30% of its forecasted on-peak and off-peak requirements for 2012 and approximately 10% for 2014.

While the majority of the Company’s direct export sales are transacted in U.S. dollars, foreign currency exchange contracts are used, from time-to-time, to limit transactional exposure to changes in currency exchange rates for those transactions denominated in a non-U.S. currency. The Company sometimes purchases foreign currency forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts are designated as hedges of the variability in cash flows of a portion of the forecasted future export sales transactions which otherwise would expose the Company to foreign currency risk. The Company may also enter into foreign currency forward contracts that are not designated as hedges, which are denominated in the same foreign currency in which export sales are denominated. At June 30, 2012, the outstanding financial derivatives, including both hedges and undesignated derivatives, that are used to manage the Company’s exposure to foreign currency, primarily euros, represented approximately 10% of its forecasted total international sales through 2014. In addition, the Company may also designate cash balances held in foreign currencies as hedges of forecasted foreign currency transactions.

The Company may enter into derivative interest rate contracts to maintain a reasonable balance between fixed- and floating-rate debt. There were no unsettled derivative financial instruments related to debt balances for the periods presented.

The fair values of the Company’s derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy, which includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs derived principally from or corroborated by observable market data.

 

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(in millions):

Asset derivatives

  

Balance sheet location

   June 30,
2012
     December 31,
2011
 

Derivatives designated as hedging instruments:

     

Foreign exchange contracts

   Prepaid expenses and other current assets    $ 11.6      $ 9.5  

Nickel and other raw material contracts

   Prepaid expenses and other current assets      —           0.7  

Natural gas contracts

   Prepaid expenses and other current assets      0.2        —     

Foreign exchange contracts

   Other assets      8.1        5.9  

Nickel and other raw material contracts

   Other assets      0.1        1.1  

Natural gas contracts

   Other assets      0.3        —     
     

 

 

    

 

 

 

Total derivatives designated as hedging instruments:

     20.3        17.2  

Derivatives not designated as hedging instruments:

     

Foreign exchange contracts

   Prepaid expenses and other current assets      4.1        3.5  
     

 

 

    

 

 

 

Total derivatives not designated as hedging instruments:

     4.1        3.5  
     

 

 

    

 

 

 

Total asset derivatives

      $ 24.4      $ 20.7  
     

 

 

    

 

 

 

Liability derivatives

  

Balance sheet location

             

Derivatives designated as hedging instruments:

     

Natural gas contracts

   Accrued liabilities    $ 8.1      $ 10.1  

Nickel and other raw material contracts

   Accrued liabilities      4.9        1.6  

Foreign exchange contracts

   Accrued liabilities      0.1        —     

Electricity contracts

   Accrued liabilities      1.6        2.0  

Natural gas contracts

   Other long-term liabilities      2.9        3.3  

Electricity contracts

   Other long-term liabilities      0.4        —     

Nickel and other raw material contracts

   Other long-term liabilities      1.5        0.1  
     

 

 

    

 

 

 

Total liability derivatives

      $ 19.5      $ 17.1  
     

 

 

    

 

 

 

For derivative financial instruments that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period results. The Company did not use fair value or net investment hedges for the periods presented. The effects of derivative instruments in the tables below are presented net of related income taxes.

Activity with regard to derivatives designated as cash flow hedges for the three and six month periods ended June 30, 2012 and 2011 was as follows (in millions):

 

     Amount of Gain (Loss)
Recognized in OCI on
Derivatives
(Effective Portion)
    Amount of Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (a)
    Amount of Gain (Loss)
Recognized in Income
on Derivatives  (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing) (b)
 
     Three months ended     Three months ended     Three months ended  

Derivatives in Cash Flow

Hedging Relationships

   June 30,     June 30,     June 30,  
   2012     2011     2012     2011     2012      2011  

Nickel and other raw material contracts

   $ (3.1   $ (3.2   $ (0.7   $ 0.2     $ —         $ —     

Natural gas contracts

     1.2       (0.6     (2.4     (2.7     —           —     

Electricity contracts

     (0.1     0.1       (0.4     —          —           —     

Foreign exchange contracts

     11.8       (3.7     3.2       (1.6     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 9.8     $ (7.4   $ (0.3   $ (4.1   $ —         $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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     Amount of Gain (Loss)
Recognized in OCI on
Derivatives
(Effective Portion)
    Amount of Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (a)
    Amount of Gain (Loss)
Recognized in Income
on Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing) (b)
 
     Six Months Ended     Six Months Ended     Six Months Ended  

Derivatives in Cash Flow

Hedging Relationships

   June 30,     June 30,     June 30,  
   2012     2011     2012     2011     2012      2011  

Nickel and other raw material contracts

   $ (4.7   $ (3.0   $ (0.8   $ 2.0     $ —         $ —     

Natural gas contracts

     (3.3     (1.4     (5.0     (6.2     —           —     

Electricity contracts

     (1.1     —          (1.1     —          —           —     

Foreign exchange contracts

     7.7       (13.5     5.1       (1.1     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ (1.4   $ (17.9   $ (1.8   $ (5.3   $ —         $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) The gains (losses) reclassified from accumulated OCI into income related to the effective portion of the derivatives are presented in cost of sales.
(b) The gains (losses) recognized in income on derivatives related to the ineffective portion and the amount excluded from effectiveness testing are presented in selling and administrative expenses.

Assuming market prices remain constant with those at June 30, 2012, a loss of $1.9 million is expected to be recognized over the next 12 months.

The disclosures of gains or losses presented above for nickel and other raw material contracts and foreign currency contracts do not take into account the anticipated underlying transactions. Since these derivative contracts represent hedges, the net effect of any gain or loss on results of operations may be fully or partially offset.

Derivatives that are not designated as hedging instruments were as follows:

In millions

 

     Amount of Gain (Loss) Recognized  
     in Income on Derivatives  
     Three Months Ended     Six Months Ended  

Derivatives Not Designated

as Hedging Instruments

   June 30,     June 30,  
   2012      2011     2012     2011  

Foreign exchange contracts

   $ 1.3      $ (3.1   $ (0.1   $ (3.5
  

 

 

    

 

 

   

 

 

   

 

 

 

Changes in the fair value of foreign exchange contract derivatives not designated as hedging instruments are recorded in cost of sales.

There are no credit risk-related contingent features in the Company’s derivative contracts, and the contracts contained no provisions under which the Company has posted, or would be required to post, collateral. The counterparties to the Company’s derivative contracts were substantial and creditworthy commercial banks that are recognized market makers. The Company controls its credit exposure by diversifying across multiple counterparties and by monitoring credit ratings and credit default swap spreads of its counterparties. The Company also enters into master netting agreements with counterparties when possible.

 

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Note 6. Fair Value of Financial Instruments

The estimated fair value of financial instruments at June 30, 2012 was as follows:

 

            Fair Value Measurements at Reporting Date Using  
                   Quoted Prices in      Significant  
     Total      Total      Active Markets for      Observable  
     Carrying      Estimated      Identical Assets      Inputs  

(In millions)

   Amount      Fair Value      (Level 1)      (Level 2)  

Cash and cash equivalents

   $ 210.3      $ 210.3      $ 210.3      $ —     

Derivative financial instruments:

           

Assets

     24.4        24.4        —           24.4  

Liabilities

     19.5        19.5        —           19.5  

Debt

     1,501.4        1,745.3        1,646.4        98.9  

The estimated fair value of financial instruments at December 31, 2011 was as follows:

 

            Fair Value Measurements at Reporting Date Using  
                   Quoted Prices in      Significant  
     Total      Total      Active Markets for      Observable  
     Carrying      Estimated      Identical Assets      Inputs  

(In millions)

   Amount      Fair Value      (Level 1)      (Level 2)  

Cash and cash equivalents

   $ 380.6      $ 380.6      $ 380.6      $ —     

Derivative financial instruments:

           

Assets

     20.7        20.7        —           20.7  

Liabilities

     17.1        17.1        —           17.1  

Debt

     1,509.3        1,791.3        1,684.5        106.8  

In accordance with accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards established three levels of a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and cash equivalents: Fair value was determined using Level 1 information.

Derivative financial instruments: Fair values for derivatives were measured using exchange-traded prices for the hedged items. The fair value was determined using Level 2 information, including consideration of counterparty risk and the Company’s credit risk.

Short-term and long-term debt: The fair values of the Company’s publicly traded debt were based on Level 1 information. The fair values of the other short-term and long-term debt were determined using Level 2 information.

 

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Note 7. Pension Plans and Other Postretirement Benefits

The Company has defined benefit pension plans and defined contribution plans covering substantially all employees. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay. The Company funds the U.S. pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code.

The Company also sponsors several postretirement plans covering certain salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In most plans, Company contributions towards premiums are capped based on the cost as of a certain date, thereby creating a defined contribution. For the non-collectively bargained plans, the Company maintains the right to amend or terminate the plans at its discretion.

For the three month periods ended June 30, 2012 and 2011, the components of pension expense and components of other postretirement benefit expense for the Company’s defined benefit plans included the following (in millions):

 

     Pension Benefits     Other Postretirement Benefits  
     Three Months Ended     Three Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Service cost - benefits earned during the year

   $ 8.7     $ 7.6     $ 0.8     $ 0.7  

Interest cost on benefits earned in prior years

     33.1       33.8       6.5       7.1  

Expected return on plan assets

     (45.3     (48.1     (0.2     (0.3

Amortization of prior service cost (credit)

     1.6       2.8       (4.6     (4.6

Amortization of net actuarial loss

     26.3       17.9       3.7       2.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total retirement benefit expense

   $ 24.4     $ 14.0     $ 6.2     $ 5.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

For the six month periods ended June 30, 2012 and 2011, the components of pension expense and components of other postretirement benefit expense for the Company’s defined benefit plans included the following (in millions):

 

     Pension Benefits     Other Postretirement Benefits  
     Six Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Service cost - benefits earned during the year

   $ 17.5     $ 14.9     $ 1.6     $ 1.4  

Interest cost on benefits earned in prior years

     66.2       65.8       13.0       13.9  

Expected return on plan assets

     (90.7     (93.8     (0.4     (0.6

Amortization of prior service cost (credit)

     3.2       5.6       (9.1     (9.2

Amortization of net actuarial loss

     52.6       35.7       7.3       5.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total retirement benefit expense

   $ 48.8     $ 28.2     $ 12.4     $ 10.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 8. Income Taxes

Second quarter 2012 results included a provision for income taxes of $31.0 million, or 34.6% of income before tax, compared to $34.3 million, or 34.2% of income before tax, for the comparable period.

For the first half of 2012, the provision for income taxes was $56.8 million or 32.7% of income before tax, compared to $69.4 million or 35.8% of income before tax, for the first half of 2011. The first six months of 2012 included a discrete tax benefit of $3.4 million primarily related to state income taxes. The first six months of 2011 included a discrete tax charge of $2.7 million primarily related to foreign income taxes.

 

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Note 9. Business Segments

Following is certain financial information with respect to the Company’s business segments for the periods indicated (in millions):

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Total sales:

        

High Performance Metals

   $ 587.6     $ 524.6     $ 1,195.4     $ 957.7  

Flat-Rolled Products

     665.5       735.8       1,308.8       1,454.8  

Engineered Products

     143.2       137.9       287.0       267.1  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,396.3       1,398.3       2,791.2       2,679.6  

Intersegment sales:

        

High Performance Metals

     21.4       27.4       47.9       61.1  

Flat-Rolled Products

     8.1       8.5       15.4       16.9  

Engineered Products

     9.4       10.8       18.0       22.6  
  

 

 

   

 

 

   

 

 

   

 

 

 
     38.9       46.7       81.3       100.6  

Sales to external customers:

        

High Performance Metals

     566.2       497.2       1,147.5       896.6  

Flat-Rolled Products

     657.4       727.3       1,293.4       1,437.9  

Engineered Products

     133.8       127.1       269.0       244.5  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,357.4     $ 1,351.6     $ 2,709.9     $ 2,579.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit:

        

High Performance Metals

   $ 102.2     $ 92.9     $ 206.3     $ 178.5  

Flat-Rolled Products

     44.5       73.7       91.3       137.1  

Engineered Products

     13.2       6.8       25.5       20.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating profit

     159.9       173.4       323.1       335.8  

Corporate expenses

     (15.8     (25.8     (37.5     (51.6

Interest expense, net

     (18.6     (23.7     (38.5     (46.7

Closed company and other expenses

     (5.2     (4.2     (12.1     (4.7

Retirement benefit expense

     (30.6     (19.4     (61.2     (38.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 89.7     $ 100.3     $ 173.8     $ 194.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement benefit expense represents defined benefit plan pension expense, and other postretirement benefit expense for both defined benefit and defined contribution plans. Operating profit with respect to the Company’s business segments excludes any retirement benefit expense. The increase in the current period, when compared to the prior year, was primarily due to the utilization of a lower discount rate to value the retirement benefit obligations and lower than expected returns on plan assets.

Corporate expenses for the three months ended June 30, 2012 were $15.8 million compared to $25.8 million for the three months ended June 30, 2011. The decrease in corporate expenses was primarily related to lower incentive compensation expenses associated with long-term performance plans, and Ladish transaction costs incurred in the prior year.

Closed company and other expenses primarily include charges incurred in connection with closed operations and other non-operating income or expense. These items are presented primarily in selling and administrative expenses and in other expense in the consolidated statement of operations. These items resulted in net charges of $5.2 million for the three months ended June 30, 2012 and $4.2 million for the three months ended June 30, 2011. The increase over the prior year quarter was primarily related to an increase in legal expenses associated with closed operations.

 

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Note 10. Per Share Information

The following table sets forth the computation of basic and diluted net income per common share:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
(in millions, except per share amounts):    2012      2011      2012      2011  

Numerator for basic net income per common share -
Net income attributable to ATI

   $ 56.4      $ 64.0      $ 112.6      $ 120.3  

Effect of dilutive securities:

           

4.25% Convertible Notes due 2014

     2.1        2.5        4.4        5.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for diluted net income per common share -
Net income available to ATI after assumed conversions

   $ 58.5      $ 66.5      $ 117.0      $ 125.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for basic net income per common share-weighted average shares

     106.1        102.1        106.0        99.8  

Effect of dilutive securities:

           

Share-based compensation

     0.9        1.8        0.9        1.8  

4.25% Convertible Notes due 2014

     9.6        9.6        9.6        9.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted net income per common share – adjusted weighted average shares assuming conversions

     116.6        113.5        116.5        111.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income attributable to ATI per common share

   $ 0.53      $ 0.63      $ 1.06      $ 1.20  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income attributable to ATI per common share

   $ 0.50      $ 0.59      $ 1.00      $ 1.13  
  

 

 

    

 

 

    

 

 

    

 

 

 

Common stock that would be issuable upon the assumed conversion of the 2014 Convertible Notes and other option equivalents and contingently issuable shares are excluded from the computation of contingently issuable shares, and therefore, from the denominator for diluted earnings per share, if the effect of inclusion is anti-dilutive. There were no anti-dilutive shares for the periods presented.

Note 11. Financial Information for Subsidiary and Guarantor Parent

The payment obligations under the $150 million 6.95% debentures due 2025 issued by Allegheny Ludlum, LLC (formerly known as Allegheny Ludlum Corporation) (the “Subsidiary”) are fully and unconditionally guaranteed by Allegheny Technologies Incorporated (the “Guarantor Parent”). In accordance with positions established by the Securities and Exchange Commission, the following financial information sets forth separately financial information with respect to the Subsidiary, the non-guarantor subsidiaries and the Guarantor Parent. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. Investments in subsidiaries, which are eliminated in consolidation, are included in other assets on the consolidated balance sheets.

Allegheny Technologies is the plan sponsor for the U.S. qualified defined benefit pension plan (the “Plan”) which covers certain current and former employees of the Subsidiary and the non-guarantor subsidiaries. As a result, the balance sheets presented for the Subsidiary and the non-guarantor subsidiaries do not include any Plan assets or liabilities, or the related deferred taxes. The Plan assets, liabilities and related deferred taxes and pension income or expense are recognized by the Guarantor Parent. Management and royalty fees charged to the Subsidiary and to the non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for purposes of this presentation.

Cash flows related to intercompany activity between the Guarantor Parent, the Subsidiary, and the non-guarantor subsidiaries are presented as financing activities on the condensed statements of cash flows.

 

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Allegheny Technologies Incorporated

Financial Information for Subsidiary and Guarantor Parent

Balance Sheets

June 30, 2012

 

(In millions)

   Guarantor
Parent
     Subsidiary      Non-guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets:

             

Cash and cash equivalents

   $ 4.5      $ 10.3      $ 195.5      $ —        $ 210.3  

Accounts receivable, net

     0.1        257.6        486.6        —          744.3  

Inventories, net

     —           284.6        1,227.9        —          1,512.5  

Prepaid expenses and other current assets

     2.6        13.1        44.7        —          60.4  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     7.2        565.6        1,954.7        —          2,527.5  

Property, plant and equipment, net

     2.6        722.6        1,718.8        —          2,444.0  

Cost in excess of net assets acquired

     —           112.1        625.6        —          737.7  

Investments in subsidiaries and other assets

     5,497.1        210.0        762.9        (6,099.2     370.8  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,506.9      $ 1,610.3      $ 5,062.0      $ (6,099.2   $ 6,080.0  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and stockholders’ equity:

             

Accounts payable

   $ 5.7      $ 213.0      $ 233.0      $ —        $ 451.7  

Accrued liabilities

     1,081.7        337.4        625.2        (1,716.4     327.9  

Deferred income taxes

     16.6        —           —           —          16.6  

Short-term debt and current portion of long-term debt

     —           0.1        27.2        —          27.3  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,104.0        550.5        885.4        (1,716.4     823.5  

Long-term debt

     1,252.5        350.6        71.0        (200.0     1,474.1  

Accrued postretirement benefits

     —           204.3        269.0        —          473.3  

Pension liabilities

     430.1        5.4        60.6        —          496.1  

Deferred income taxes

     20.0        —           —           —          20.0  

Other long-term liabilities

     24.8        19.2        73.5        —          117.5  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     2,831.4        1,130.0        1,359.5        (1,916.4     3,404.5  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     2,675.5        480.3        3,702.5        (4,182.8     2,675.5  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,506.9      $ 1,610.3      $ 5,062.0      $ (6,099.2   $ 6,080.0  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

15


Table of Contents

Allegheny Technologies Incorporated

Financial Information for Subsidiary and Guarantor Parent

Statements of Income and Comprehensive Income

For the three months ended June 30, 2012

 

(In millions)

   Guarantor
Parent
    Subsidiary     Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Sales

   $ —        $ 573.6     $ 783.8     $ —        $ 1,357.4  

Cost of sales

     13.4       526.4       618.7       —          1,158.5  

Selling and administrative expenses

     34.9       11.9       43.9       —          90.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before interest, other income and income taxes

     (48.3     35.3       121.2       —          108.2  

Interest expense, net

     (15.6     (2.6     (0.4     —          (18.6

Other income including equity in income of unconsolidated subsidiaries

     153.6       (12.5     15.0       (156.0     0.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     89.7       20.2       135.8       (156.0     89.7  

Income tax provision

     31.0       8.3       48.3       (56.6     31.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     58.7       11.9       87.5       (99.4     58.7  

Less: Net income attributable to noncontrolling interests

     2.3       —          2.3       (2.3     2.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ATI

   $ 56.4     $ 11.9     $ 85.2     $ (97.1   $ 56.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ATI

   $ 69.7     $ 11.6     $ 72.3     $ (83.9   $ 69.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allegheny Technologies Incorporated

Financial Information for Subsidiary and Guarantor Parent

Statements of Income and Comprehensive Income

For the six months ended June 30, 2012

 

(In millions)

   Guarantor
Parent
    Subsidiary     Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Sales

   $ —        $ 1,130.6     $ 1,579.3     $ —        $ 2,709.9  

Cost of sales

     26.7       1,034.9       1,242.4       —          2,304.0  

Selling and administrative expenses

     78.0       22.4       93.7       —          194.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before interest, other income and income taxes

     (104.7     73.3       243.2       —          211.8  

Interest expense, net

     (32.6     (5.2     (0.7     —          (38.5

Other income including equity in income of unconsolidated subsidiaries

     311.1       (10.9     16.5       (316.2     0.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     173.8       57.2       259.0       (316.2     173.8  

Income tax provision

     56.8       22.3       89.1       (111.4     56.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     117.0       34.9       169.9       (204.8     117.0  

Less: Net income attributable to noncontrolling interests

     4.4       —          4.4       (4.4     4.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ATI

   $ 112.6     $ 34.9     $ 165.5     $ (200.4   $ 112.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ATI

   $ 141.8     $ 34.3     $ 161.9     $ (196.2   $ 141.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Statements of Cash Flows

  

For the six months ended June 30, 2012

  

     Guarantor           Non-guarantor               

(In millions)

   Parent     Subsidiary     Subsidiaries     Eliminations      Consolidated  

Cash flows provided by (used in) operating activities

   $ (25.9   $ 2.6     $ 83.1     $ —         $ 59.8  

Cash flows used in investing activities

     (0.8     (127.7     (36.3     —           (164.8

Cash flows provided by (used in) financing activities

     30.4       5.7       (101.4     —           (65.3
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 3.7     $ (119.4   $ (54.6   $ —         $ (170.3
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

Allegheny Technologies Incorporated

  

Financial Information for Subsidiary and Guarantor Parent

  

Balance Sheets

  

December 31, 2011

  

     Guarantor             Non-guarantor               

(In millions)

   Parent      Subsidiary      Subsidiaries      Eliminations     Consolidated  

Assets:

             

Cash and cash equivalents

   $ 0.8      $ 129.7      $ 250.1      $ —        $ 380.6  

Accounts receivable, net

     0.1        220.6        488.4        —          709.1  

Inventories, net

     —           299.0        1,085.3        —          1,384.3  

Prepaid expenses and other current assets

     10.5        20.0        65.0        —          95.5  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     11.4        669.3        1,888.8        —          2,569.5  

Property, plant and equipment, net

     3.0        614.9        1,750.9        —          2,368.8  

Cost in excess of net assets acquired

     —           112.1        625.6        —          737.7  

Investments in subsidiaries and other assets

     5,287.3        1,579.0        996.6        (7,492.0     370.9  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,301.7      $ 2,975.3      $ 5,261.9      $ (7,492.0   $ 6,046.9  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and stockholders’ equity:

             

Accounts payable

   $ 4.1      $ 222.5      $ 264.1      $ —        $ 490.7  

Accrued liabilities

     961.8        66.7        736.2        (1,444.4     320.3  

Deferred income taxes

     23.5        —           —           —          23.5  

Short-term debt and current portion of long-term debt

     —           0.1        27.2        —          27.3  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     989.4        289.3        1,027.5        (1,444.4     861.8  

Long-term debt

     1,252.5        350.7        78.8        (200.0     1,482.0  

Accrued postretirement benefits

     —           215.5        272.6        —          488.1  

Pension liabilities

     441.6        5.7        61.6        —          508.9  

Deferred income taxes

     9.8        —           —           —          9.8  

Other long-term liabilities

     36.8        17.2        70.7        —          124.7  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     2,730.1        878.4        1,511.2        (1,644.4     3,475.3  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     2,571.6        2,096.9        3,750.7        (5,847.6     2,571.6  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,301.7      $ 2,975.3      $ 5,261.9      $ (7,492.0   $ 6,046.9  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Allegheny Technologies Incorporated

  

Financial Information for Subsidiary and Guarantor Parent

  

Statements of Income and Comprehensive Income

  

For the three months ended June 30, 2011

  

     Guarantor           Non-guarantor              

(In millions)

   Parent     Subsidiary     Subsidiaries     Eliminations     Consolidated  

Sales

   $ —        $ 635.9     $ 715.7     $ —        $ 1,351.6  

Cost of sales

     6.8       558.3       563.5       —          1,128.6  

Selling and administrative expenses

     47.4       11.1       40.8       —          99.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before interest, other income and income taxes

     (54.2     66.5       111.4       —          123.7  

Interest income (expense), net

     (21.0     (2.9     0.2       —          (23.7

Other income including equity in income of unconsolidated subsidiaries

     175.5       1.0       (0.4     (175.8     0.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     100.3       64.6       111.2       (175.8     100.3  

Income tax provision

     34.3       24.4       41.4       (65.8     34.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     66.0       40.2       69.8       (110.0     66.0  

Less: Net income attributable to noncontrolling interests

     2.0       —          2.0       (2.0     2.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ATI

   $ 64.0     $ 40.2     $ 67.8     $ (108.0   $ 64.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ATI

   $ 73.4     $ 39.4     $ 69.3     $ (108.7   $ 73.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Allegheny Technologies Incorporated

  

Financial Information for Subsidiary and Guarantor Parent

  

Statements of Income and Comprehensive Income

  

For the six months ended June 30, 2011

  

     Guarantor           Non-guarantor              

(In millions)

   Parent     Subsidiary     Subsidiaries     Eliminations     Consolidated  

Sales

   $ —        $ 1,255.0     $ 1,324.0     $ —        $ 2,579.0  

Cost of sales

     15.4       1,115.7       1,019.5       —          2,150.6  

Selling and administrative expenses

     90.3       19.6       78.1       —          188.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before interest, other income and income taxes

     (105.7     119.7       226.4       —          240.4  

Interest expense, net

     (41.5     (5.1     (0.1     —          (46.7

Other income including equity in income of unconsolidated subsidiaries

     341.3       1.8       0.1       (342.8     0.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     194.1       116.4       226.4       (342.8     194.1  

Income tax provision

     69.4       44.1       81.5       (125.6     69.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     124.7       72.3       144.9       (217.2     124.7  

Less: Net income attributable to noncontrolling interests

     4.4       —          4.4       (4.4     4.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ATI

   $ 120.3     $ 72.3     $ 140.5     $ (212.8   $ 120.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ATI

   $ 145.8     $ 70.7     $ 156.1     $ (226.8   $ 145.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Statements of Cash Flows

For the six months ended June 30, 2011

 

     Guarantor           Non-guarantor              

(In millions)

   Parent     Subsidiary     Subsidiaries     Eliminations     Consolidated  

Cash flows provided by (used in) operating activities

   $ 39.3     $ (75.2   $ (25.7   $ (10.4   $ (72.0

Cash flows used in investing activities

     (384.1     (48.0     (12.2     —          (444.3

Cash flows provided by (used in) financing activities

     349.3       90.3       1.8       10.4       451.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

   $ 4.5     $ (32.9   $ (36.1   $ —        $ (64.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 12. Commitments and Contingencies

The Company is subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants and disposal of wastes, and which may require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. The Company could incur substantial cleanup costs, fines, and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or noncompliance with environmental permits required at its facilities. The Company is currently involved in the investigation and remediation of a number of its current and former sites, as well as third party sites.

Environmental liabilities are recorded when the Company’s liability is probable and the costs are reasonably estimable. In many cases, however, the Company is not able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss. Estimates of the Company’s liability remain subject to additional uncertainties, including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the number, participation, and financial condition of other potentially responsible parties (“PRPs”). The Company adjusts its accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on the Company’s results of operations in a given period, but the Company cannot reliably predict the amounts of such future adjustments.

At June 30, 2012, the Company’s reserves for environmental remediation obligations totaled approximately $16 million, of which $9 million was included in other current liabilities. The reserve includes estimated probable future costs of $6 million for federal Superfund and comparable state-managed sites; $7 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $2 million for owned or controlled sites at which Company operations have been discontinued; and $1 million for sites utilized by the Company in its ongoing operations. The Company continues to evaluate whether it may be able to recover a portion of past and future costs for environmental liabilities from third parties and to pursue such recoveries where appropriate.

Based on currently available information, it is reasonably possible that costs for active matters may exceed the Company’s recorded reserves by as much as $2 million. However, future investigation or remediation activities may result in the discovery of additional hazardous materials, potentially higher levels of contamination than discovered during prior investigation, and the impact on costs of the success or lack thereof in remedial solutions. Therefore, future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on the Company’s financial condition or results of operations.

The timing of expenditures depends on a number of factors that vary by site. The Company expects that it will expend present accruals over many years and that remediation of all sites with which it has been identified will be completed within thirty years.

See Note 17. Commitments and Contingencies to the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2011 for a discussion of legal proceedings affecting the Company.

 

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Table of Contents

A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its currently and formerly owned businesses, including those pertaining to product liability, patent infringement, commercial, government contract work, employment, employee and retiree benefits, taxes, environmental, health and safety, occupational disease, and stockholder matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company’s financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company’s results of operations for that period.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Allegheny Technologies is one of the largest and most diversified specialty metals producers in the world. We use innovative technologies to offer global markets a wide range of specialty metals solutions. Our products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium, and niobium, advanced powder alloys, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, forgings, castings, and fabrication and machining capabilities. Our specialty metals are produced in a wide range of alloys and product forms and are selected for use in applications that demand metals having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. ATI is a fully integrated supplier, from raw material (for titanium) and melt (for other specialty alloy systems) through highly engineered finished components.

Sales for the second quarter 2012 were $1.36 billion, compared to $1.35 billion in the second quarter 2011. Compared to the second quarter 2011, sales increased 14% in the High Performance Metals segment, primarily as a result of aerospace demand and the acquisition of ATI Ladish in May 2011, which more than offset lower raw material surcharges primarily due to lower nickel and titanium scrap costs. Sales increased 5% in the Engineered Products segment due to continued growth in demand from the oil and gas, and construction and mining markets. In the Flat-Rolled Products segment, sales declined 10% as increased shipment volumes for standard sheet products were more than offset by lower raw material surcharges, lower base prices for standard stainless products, and reduced shipments of titanium products to the industrial markets due to project delays. For the first six months of 2012, total sales were $2.71 billion, 5% higher than the comparable period of the prior year.

Demand from the global aerospace and defense, electrical energy, oil and gas, chemical process industry, and medical markets represented 67% of our sales for the first six months of 2012. Comparative information for our overall revenues (in millions) by market and their respective percentages of total revenues for the three and six month periods ended June 30, 2012 and 2011 were as follows:

 

     Three Months Ended     Three Months Ended  

Market

   June 30, 2012     June 30, 2011  

Aerospace & Defense

   $ 414.3        31   $ 390.0        29

Oil & Gas/Chemical Process Industry

     261.8        19     298.8        22

Electrical Energy

     168.9        12     191.3        14

Medical

     56.2        4     69.8        5
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal - Key Markets

     901.2        66     949.9        70

Automotive

     109.4        8     109.4        8

Construction/Mining

     110.4        8     85.9        6

Food Equipment & Appliances

     58.0        4     51.0        4

Transportation

     65.6        5     57.4        4

Electronics/Computers/Communication

     40.7        3     41.2        3

Machine & Cutting Tools

     34.6        3     35.6        3

Conversion Services & Other

     37.6        3     21.2        2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,357.5        100   $ 1,351.6        100

 

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Table of Contents
     Six Months Ended     Six Months Ended  

Market

   June 30, 2012     June 30, 2011  

Aerospace & Defense

   $ 850.8        31   $ 693.5        27

Oil & Gas/Chemical Process Industry

     539.2        20     580.6        23

Electrical Energy

     315.8        12     389.0        15

Medical

     113.9        4     138.5        5
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal - Key Markets

     1,819.7        67     1,801.6        70

Automotive

     215.2        8     222.6        9

Construction/Mining

     213.9        8     157.1        6

Transportation

     119.7        4     103.2        4

Food Equipment & Appliances

     113.1        4     115.7        4

Electronics/Computers/Communication

     85.9        3     78.2        3

Machine & Cutting Tools

     70.9        3     62.9        3

Conversion Services & Other

     71.5        3     37.7        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,709.9        100   $ 2,579.0        100

For the first six months of 2012, direct international sales increased $126.3 million, or 15%, compared to the first six months of 2011, and represented nearly 36% of total sales. Sales of our high-value products (titanium and titanium alloys, nickel-based alloys and specialty alloys, exotic alloys, precision forgings and castings, grain-oriented electrical steel, precision and engineered strip, and tungsten materials) represented 78% of total sales.

Total titanium mill product shipments for the first half 2012, including ATI-produced products for our Uniti titanium joint venture, were 16.9 million pounds, a 19% decrease compared to the first half of 2011, due to timing delays in certain large projects, primarily affecting our Flat-Rolled Products business segment, and lower overall demand due to reduced global GDP growth.

Segment operating profit for the second quarter 2012 was $159.9 million, or 11.8% of sales, compared to $173.4 million, or 12.8% of sales for the second quarter 2011. Segment operating profit for the second quarter 2012 increased 10% to $102.2 million in the High Performance Metals segment and increased 94% to $13.2 million in the Engineered Products segment, but declined 40% to $44.5 million in the Flat-Rolled Products segment compared to the same period of the prior year. High Performance Metals segment operating profit for the second quarter 2011 included $13.2 million of purchase inventory accounting charges from the acquisition of ATI Ladish. Segment operating profit in the second quarter 2012 was impacted by lower base prices for certain products and by approximately $11 million in higher raw material costs, primarily nickel, which did not align with raw material surcharges due to the rapid decline of nickel prices in the second quarter 2012. The second quarter 2012 included a LIFO inventory valuation reserve benefit of $7.1 million due primarily to lower nickel costs. The second quarter 2011 included a LIFO inventory valuation reserve charge of $5.2 million.

Segment operating profit for the six months ended June 30, 2012 was $323.1 million, or 11.9% of sales, compared to $335.8 million, or 13.0% of sales for the six months ended June 30, 2011.

Segment operating profit as a percentage of sales for the three and six month periods ended June 30, 2012 and 2011 was:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

High Performance Metals

     18.1     18.7     18.0     19.9

Flat-Rolled Products

     6.8     10.1     7.1     9.5

Engineered Products

     9.9     5.4     9.5     8.2

Our measure of segment operating profit, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest income or expense, retirement benefit expense,

 

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and closed company and other expenses. We believe segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.

Income before tax for the second quarter 2012 was $89.7 million, or 6.6% of sales, compared to $100.3 million, or 7.4% of sales for the second quarter 2011. Higher retirement benefit expense, primarily due to the utilization of a lower discount rate to value retirement benefit obligations and lower than expected returns on plan assets, more than offset lower corporate expenses and lower interest expense. The second quarter 2011 also included Ladish acquisition costs of $18.8 million, including inventory fair value adjustments and transaction costs. Income before tax for the first half 2012 was $173.8 million, or 6.4% of sales, compared to $194.1 million, or 7.5% of sales for the comparable 2011 period. Results for the first six months of 2011 included a charge of $4.8 million related to the accelerated recognition of equity-based compensation due to executive retirements in addition to ATI Ladish acquisition costs.

Net income attributable to ATI for the second quarter 2012 was $56.4 million, or $0.50 per share, compared to $64.0 million, or $0.59 per share for the second quarter 2011. Results for the second quarter 2012 were impacted by higher retirement benefit expense of $7.3 million, net of tax, or $0.06 per share, compared to the same period of 2011. Results for the second quarter 2011 included $12.7 million, net of tax, or $0.11 per share of ATI Ladish acquisition-related expenses. For the six months ended June 30, 2012, net income attributable to ATI was $112.6 million, or $1.00 per share, compared $120.3 million, or $1.13 per share for the first six months of 2011. Results for 2012 included $14.7 million, net of tax, or $0.13 per share, of higher retirement benefit expense. The prior year-to-date period included non-recurring charges of $18.5 million, or $0.16 per share, primarily related to ATI Ladish acquisition-related items.

At June 30, 2012, we had cash on hand of $210.3 million, a decrease of $170.3 million from year-end 2011. Cash flow provided by operations for the first six months of 2012 was $59.8 million and included an investment of $205.4 million in managed working capital primarily due to increased business activity. Additionally, we invested $165.7 million in capital expenditures, primarily related to the Flat-Rolled Products segment’s Hot-Rolling and Processing Facility. Net debt to total capitalization was 33.4% and total debt to total capitalization was 36.8% at June 30, 2012. At December 31, 2011, net debt to total capitalization was 31.3% and total debt to total capitalization was 37.9%.

We remain focused on long-term value creation for our stockholders while delivering superior value for our customers. ATI’s diversification and focus on high-value global markets with strong secular growth gives us continued expectation of long-term revenue growth and improved profitability. Our industry-leading specialty metals technologies, diversified alloy systems and product forms, global and diversified market focus, unsurpassed manufacturing capabilities, and integrated capabilities from alloy development, to raw materials (titanium sponge), to melting and hot-working, to finished value-added components and parts are unique in the world. This strategy has ATI well-positioned to achieve significant revenue and earnings growth over the next three to five years. We expect strong secular growth in our key global markets of aerospace, oil and gas/chemical process industry, electrical energy, and medical. We have identified and targeted nearly $2 billion in potential new annual revenue growth within the next five years from our new manufacturing capabilities and innovative new products.

As we look at the second half of 2012, slower than expected economic growth in the U.S. and China, fiscal and economic uncertainties in Europe, fiscal and regulatory uncertainties in the U.S., and falling raw material costs create near-term headwinds for demand growth. Businesses and consumers are being cautious and inventories are being managed aggressively. In addition, we expect third quarter 2012 revenue and volume to be impacted by normal seasonal summer slowdowns in many supply chains. As a result, we expect sales and earnings to trough in the third quarter 2012.

While there is caution in the aerospace supply chain, the fundamentals of the build rate ramp and the need for energy- and cost-efficient airplanes remain in place. We expect our backlog of infrastructure project work to begin to grow again through third quarter orders for our titanium, nickel-based alloy, and specialty alloy flat-rolled products. We are well positioned to benefit from a number of large projects expected from the oil and gas market and chemical process industry, including desalination, with shipments expected to begin in the fourth quarter 2012.

As a result of the global economic environment and the market realities, we now expect 2012 sales to be approximately $5.3 billion to $5.4 billion, with segment operating profit as a percent of sales to be similar to that achieved in the first half 2012.

 

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Business Segment Results

We operate in three business segments: High Performance Metals, Flat-Rolled Products, and Engineered Products. These segments represented the following percentages of our total revenues and segment operating profit for the first six months of 2012 and 2011:

 

     2012     2011  
           Operating           Operating  
     Revenue     Profit     Revenue     Profit  

High Performance Metals

     42     64     35     53
  

 

 

   

 

 

   

 

 

   

 

 

 

Flat-Rolled Products

     48     28     56     41
  

 

 

   

 

 

   

 

 

   

 

 

 

Engineered Products

     10     8     9     6
  

 

 

   

 

 

   

 

 

   

 

 

 

High Performance Metals Segment

Second quarter 2012 sales increased 14% to $566.2 million compared to the second quarter 2011, primarily as a result of increased demand from the aerospace market and the acquisition of ATI Ladish in May 2011. Mill product shipments increased 12% for nickel-based and specialty alloys primarily due to increased demand from the commercial aerospace market. Shipments of titanium and titanium alloys mill products were 10% lower due primarily to reduced ingot sales. Exotic alloys shipments were flat. Average mill products selling prices decreased 3% for nickel-based and specialty alloys primarily as the benefits of an improved product mix were more than offset by lower raw material surcharges. Average selling prices increased 13% for titanium and titanium alloys due primarily to a favorable product mix, partially offset by lower raw material surcharges. Average selling prices increased 6% for exotic alloys primarily due to product mix.

Comparative information for our High Performance Metals segment revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the three month periods ended June 30, 2012 and 2011 is as follows:

 

     Three Months Ended     Three Months Ended  

Market

   June 30, 2012     June 30, 2011  

Aerospace:

          

Jet Engines

   $ 182.7        32   $ 172.0        35

Airframes

     97.7        17     79.8        16

Government

     48.9        9     46.5        9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Aerospace

     329.3        58     298.3        60

Defense

     28.8        5     24.0        5

Oil & Gas/Chemical Process Industry

     57.8        10     47.9        10

Medical

     46.5        8     49.2        10

Electrical Energy

     45.9        8     38.8        8

Construction/Mining

     19.9        4     8.8        2

Other

     38.0        7     30.2        5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 566.2        100   $ 497.2        100

Segment operating profit in the second quarter 2012 increased to $102.2 million, or 18.1% of sales, compared to $92.9 million, or 18.7% of sales, for the second quarter 2011. Compared to the prior year second quarter, the second quarter 2012 benefited from the absence of $13.2 million of inventory purchase accounting charges recorded in the second quarter 2011 resulting from the May 2011 acquisition of ATI Ladish, higher shipments of nickel-based and specialty alloys, and the impact of gross cost reductions. These items were offset by $3 million of higher raw material costs, primarily for nickel, nickel scrap and titanium scrap, resulting from the misalignment of raw materials surcharges with raw material costs due to the long manufacturing cycle of certain products. In addition, second quarter 2012 segment operating profit included approximately $2 million of severance charges associated with a salaried workforce reduction in our exotic alloys operations as we aligned staffing needs with expected lower demand from nuclear markets. The second quarter 2012 segment operating profit included a LIFO inventory valuation reserve benefit of $0.5 million. The second quarter 2011 segment operating profit included a LIFO inventory valuation reserve charge of $4.2 million. Results benefited from $18.8 million in gross cost reductions in

 

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the second quarter 2012.

Certain comparative information on the segment’s mill products for the three months ended June 30, 2012 and 2011 is provided in the following table. Mill products volume and average price information includes shipments to ATI Ladish for all periods presented.

 

     Three Months Ended         
     June 30,         
     2012      2011      Change  

Mill Products Volume (000’s pounds):

        

Titanium

     6,554        7,304        (10 %) 

Nickel-based and specialty alloys

     14,367        12,789        12

Exotic alloys

     987        991        0

Mill Products Average Prices (per pound):

        

Titanium

   $ 23.79      $ 21.13        13

Nickel-based and specialty alloys

   $ 15.17      $ 15.67        (3 %) 

Exotic alloys

   $ 70.93      $ 66.72        6

For the six months ended June 30, 2012, segment sales increased 28% to $1.15 billion, primarily as a result of increased demand from the commercial aerospace market and the acquisition of ATI Ladish. Mill products shipments increased 17% for nickel-based and specialty alloys primarily due to higher demand from the commercial aerospace market. Shipments for titanium and titanium alloys declined 3%, although product mix improved, and shipments of exotic alloys decreased 7% primarily due to the timing of projects for the chemical process industry. Average mill products selling prices decreased 1% for nickel-based and specialty alloys primarily due to lower raw material indices. Average selling prices increased 8% for titanium and titanium alloys and 10% for exotic alloys due to a favorable product mix.

Comparative information for our High Performance Metals revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the six month periods ended June 30, 2012 and 2011 is as follows:

 

     Six Months Ended     Six Months Ended  

Market

   June 30, 2012     June 30, 2011  

Aerospace:

          

Jet Engines

   $ 384.6        34   $ 300.0        33

Airframes

     203.6        18     148.2        18

Government

     102.1        9     76.2        8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Aerospace

     690.3        61     524.4        59

Defense

     50.0        4     47.3        5

Oil & Gas/Chemical Process Industry

     112.2        10     95.1        11

Medical

     96.1        8     93.9        10

Electrical Energy

     82.8        7     75.2        8

Construction/Mining

     39.7        3     9.1        1

Other

     76.4        7     51.6        6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,147.5        100   $ 896.6        100

Segment operating profit for the first six months of 2012 increased to $206.3 million, or 18.0% of sales, compared to $178.5 million, or 19.9% of sales, for the comparable 2011 period. The increase in operating profit primarily resulted from higher shipment volumes for nickel-based and specialty alloys, the absence of $13.2 million of ATI Ladish acquisition-related inventory charges, and the benefits of gross cost reductions. Year to date 2012 segment results were unfavorably impacted by approximately $9 million of higher cost raw materials, primarily nickel, that did not align with declining raw material indices due to the length of the production cycle for certain products, and $2 million of workforce reduction charges. Operating profit for the first six months of 2012 included a LIFO inventory valuation reserve benefit of $0.5 million, compared to an $8.4 million LIFO inventory valuation reserve charge in the first six months of 2011.

 

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Certain comparative information on the segment’s mill products for the six months ended June 30, 2012 and 2011 is provided in the following table. Mill products volume and average price information includes shipments to ATI Ladish for all periods presented.

 

     Six Months Ended         
     June 30,         
     2012      2011      Change  

Mill Products Volume (000’s pounds):

        

Titanium

     13,581        14,057        (3 %) 

Nickel-based and specialty alloys

     28,777        24,613        17

Exotic alloys

     1,916        2,070        (7 %) 

Mill Products Average Prices (per pound):

        

Titanium

   $ 22.83      $ 21.19        8

Nickel-based and specialty alloys

   $ 15.18      $ 15.28        (1 %) 

Exotic alloys

   $ 70.49      $ 63.83        10

Flat-Rolled Products Segment

Second quarter 2012 sales decreased 10% compared to the second quarter 2011, to $657.4 million, primarily due to lower raw material surcharges. Shipments of high-value products were comparable to the prior year as improved shipments of our nickel-based alloy and specialty alloy and Precision Rolled Strip® products were offset by reduced shipments of our grain-oriented electrical steel and titanium products. Shipments of standard stainless products (sheet and plate) increased 23%. Second quarter 2012 Flat-Rolled Products segment titanium shipments, including Uniti joint venture conversion, were 2.8 million pounds, a 6% decrease compared to the first quarter 2012 and a 43% decrease compared to the second quarter 2011, due to timing delays in certain large projects and lower overall demand due to reduced global GDP growth. Average selling prices, which include surcharges, declined 21% for standard products due to lower base prices and lower raw material surcharges. Average selling prices for high-value products decreased 13% due to product mix and lower material surcharges.

Comparative information for our Flat-Rolled Products revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the three month periods ended June 30, 2012 and 2011 is as follows:

 

     Three Months Ended     Three Months Ended  

Market

   June 30, 2012     June 30, 2011  

Oil & Gas/Chemical Process Industry

   $ 163.9        25   $ 217.8        30

Electrical Energy

     115.6        18     141.9        20

Automotive

     99.7        15     97.4        13

Construction/Mining

     67.8        10     59.7        8

Food Equipment & Appliances

     56.4        8     49.1        7

Aerospace & Defense

     45.6        7     58.0        8

Electronics/Computers/Communication

     38.6        6     39.2        5

Transportation

     38.6        6     32.7        4

Medical

     6.7        1     18.4        3

Other

     24.5        4     13.1        2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 657.4        100   $ 727.3        100

Segment operating profit for the second quarter 2012 was $44.5 million, or 6.8% of sales, compared to $73.7 million, or 10.1% of sales, for the second quarter 2011 primarily due primarily to lower base prices for standard stainless and grain-oriented electrical steel products, reduced shipments of titanium products due to project delays, and $8 million in higher raw material costs, primarily nickel, which did not align with raw material surcharges due to the rapid decline of nickel prices in the second quarter 2012. This was partially offset by a LIFO inventory valuation reserve benefit of $7.0 million in the second quarter 2012. In the second quarter 2011, a LIFO inventory

 

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valuation reserve benefit of $3.2 million was recognized. The second quarter 2012 benefited from $12.2 million in gross cost reductions.

Comparative information on the segment’s products for the three months ended June 30, 2012 and 2011 is provided in the following table:

 

     Three Months Ended         
     June 30,         
     2012      2011      Change  

Volume (000’s pounds):

        

High value

     128,793        129,785        (1 %) 

Standard

     183,555        149,726        23
  

 

 

    

 

 

    

Total

     312,348        279,511        12

Average prices (per lb.):

        

High value

   $ 2.90      $ 3.35        (13 %) 

Standard

   $ 1.52      $ 1.93        (21 %) 

Combined Average

   $ 2.09      $ 2.59        (19 %) 

For the six months ended June 30, 2012, sales were $1.29 billion, a 10% decrease from the comparable 2011 period, primarily due to lower raw material surcharges and base prices. Shipments of standard stainless sheet products increased 7% while high-value products shipments were 1% lower. Average transaction prices for all products, which include surcharges, were 13% lower due to lower raw material surcharges and lower base prices primarily for standard stainless products.

Comparative information for our Flat-Rolled Products revenues (in millions) by market and their respective percentages of the segment’s overall revenues for the six month periods ended June 30, 2012 and 2011 is as follows:

 

     Six Months Ended     Six Months Ended  

Market

   June 30, 2012     June 30, 2011  

Oil & Gas/Chemical Process Industry

   $ 349.2        27   $ 417.8        29

Electrical Energy

     217.6        17     293.1        20

Automotive

     195.9        15     200.1        14

Construction/Mining

     131.3        10     115.8        8

Food Equipment & Appliances

     111.0        9     111.6        8

Aerospace & Defense

     87.9        7     103.5        7

Electronics/Computers/Communication

     80.4        6     74.0        5

Transportation

     61.9        5     57.3        4

Medical

     12.1        1     39.9        3

Other

     46.1        3     24.8        2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,293.4        100   $ 1,437.9        100

Segment operating profit for the six months ended June 30, 2012 declined to $91.3 million, or 7.1% of sales, compared to $137.1 million, or 9.5% of sales, for the comparable 2011 period due to a higher mix of standard stainless products and higher raw material costs, primarily nickel, which did not align with declining raw material surcharges. Results for the first six months of 2012 included a $7.0 million LIFO inventory valuation reserve benefit, compared to a LIFO inventory valuation reserve benefit of $5.7 million in the comparable 2011 period. Results for the six months ended June 30, 2012 benefited from $24.5 million of gross cost reductions.

Comparative information on the segment’s products for the six months ended June 30, 2012 and 2011 is provided in the following table:

 

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     Six Months Ended         
     June 30,         
     2012      2011      Change  

Volume (000’s pounds):

        

High value

     249,297        251,812        (1 %) 

Standard

     340,875        320,054        7
  

 

 

    

 

 

    

Total

     590,172        571,866        3

Average prices (per lb.):

        

High value

   $ 3.05      $ 3.27        (7 %)