Allegheny Technologies Announces Strong Profitable Growth in Third Quarter 2006.PITTSBURGH -- Allegheny Technologies Allegheny Technologies, Inc. NYSE: ATI is a specialty metals company headquartered in Pittsburgh, Pennsylvania, USA. It is the 17th largest employer in Allegheny County and one of the last "steel" companies with its headquarters in "The Steel City" and major manufacturing Incorporated (NYSE NYSE See: New York Stock Exchange :ATI (ATI Technologies Inc., Markham Ontario, http://ati.amd.com) A leading manufacturer of graphics chips and display adapters. Founded in 1985 by K. Y. Ho, Benny Lau and Lee Lau, ATI chips and boards are widely used by OEMs. ): -- Sales increased 50% to $1.29 billion -- Net income increased 83% to $161.9 million, or $1.58 per share -- Segment operating profit increased 117% to $290.8 million, or 22.6% of sales: -- High Performance Metals: 38.0% of sales -- Flat-Rolled Products: 14.5% of sales -- Engineered Products: 11.8% of sales -- Results include LIFO inventory valuation reserve charge of $54 million and one-time $4 million tax benefit -- Year-to-date gross cost reductions of $96.0 million -- Annualized return on capital employed of 35% -- Annualized return on stockholders' equity of 53% -- Net debt to total capitalization improved to 10.8% -- Cash on hand was $406 million Allegheny Technologies Incorporated (NYSE:ATI) reported net income for the third quarter 2006 of $161.9 million, or $1.58 per share, on sales of $1.29 billion. Income before tax for the third quarter 2006 was $246.4 million. In the third quarter 2005, ATI reported net income of $88.3 million, or $0.87 per share, on sales of $861.7 million. Income before tax in the third quarter 2005 was $87.0 million. For the nine months ended September 30, 2006, income before tax was $610.1 million, and net income was $404.8 million, or $3.96 per share, on sales of $3.54 billion. For the nine months ended September 30, 2005, income before tax was $245.0 million, and net income was $241.0 million, or $2.40 per share, on sales of $2.65 billion. "The velocity of change was apparent in the third quarter as ATI continued to demonstrate strong profitable growth results and future earnings power," said L. Patrick Hassey, Chairman, President and Chief Executive Officer. "Most of our major markets remained strong and total operating margins Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: continued to expand. "Sales grew by 50% compared to the third quarter 2005 and were 6% higher than the second quarter 2006. Net income was $161.9 million, or $1.58 per share. "Segment operating profit Operating profit (or loss) Revenue from a firm's regular activities less costs and expenses and before income deductions. operating profit See operating income. reached 22.6% of sales as operational execution continued to improve. Operating profit in our High Performance Metals segment was 38% of sales. In our Flat-Rolled Products segment, operating profit improved to 14.5% of sales. Operating profit in our Engineered Products segment was nearly 12% of sales. These outstanding results were accomplished notwithstanding a LIFO (Last In-First Out) A queueing method in which the next item to be retrieved is the item most recently placed in the queue. Contrast with FIFO. LIFO - stack inventory valuation reserve charge of $54 million. Volatility in the cost of certain raw materials, particularly nickel nickel, metallic chemical element; symbol Ni; at. no. 28; at. wt. 58.69; m.p. about 1,453°C;; b.p. about 2,732°C;; sp. gr. 8.902 at 25°C;; valence 0, +1, +2, +3, or +4. , nickel-bearing scrap, and titanium alloy Titanium alloys are metallic materials which contain a mixture of titanium and other chemical elements. Such alloys have very high tensile strength and toughness (even at extreme temperatures), light weight, extraordinary corrosion resistance, and ability to withstand extreme scrap, has the potential to drive LIFO charges in the fourth quarter 2006 to a similar level as in the third quarter. "Our key growth markets, namely aerospace and defense, chemical process industry, oil and gas, electrical energy, and medical, remain strong, representing 63% of ATI's year-to-date 2006 sales. Aerospace and defense was the largest of our markets at 30% of year-to-date 2006 sales. "Cash on hand at the end of the third quarter was $406 million. Cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses for the first nine months was $179 million even as we invested $488 million in managed working capital due to significantly higher levels of sales. As a result of our focus on operational execution and lean manufacturing Lean manufacturing is the production of goods using less of everything compared to mass production: less human effort, less manufacturing space, less investment in tools, and less engineering time to develop a new product. , managed working capital improved to 29% of annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. sales, compared to over 30% at year end 2005. "Our self-funded growth strategy continued on track. Capital investments for the first nine months of 2006 totaled $160 million, 78% of which were directed towards increasing our high-value products capabilities. "Key financial ratios remained very strong. Annualized return on capital employed Return on capital employed (ROCE) Indicator of profitability of the firm's capital investments. Determined by dividing Earnings Before Interest and Taxes by (capital employed plus short-term loans minus intangible assets). was 35%, annualized return on stockholders' equity Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets minus liabilities, preferred stock and intangible assets. was 53%, and net debt to total capitalization Total capitalization The total long-term debt and all types of equity of a company that constitutes its capital structure. total capitalization See capitalization. improved to less than 11%. "We remain focused on reducing costs and achieved gross cost reductions of $33.7 million in the third quarter 2006, bringing year-to-date cost reductions to $96.0 million. ATI will again exceed its yearly cost reduction goal, which was originally set at $100 million for 2006. "In summary, during the third quarter 2006 our major markets remained strong and total operating margins continued to improve. We are in the process of securing additional long-term supply agreements for our titanium titanium (tītā`nēəm, tĭ–) [from Titan], metallic chemical element; symbol Ti; at. no. 22; at. wt. 47.88; m.p. 1,675°C;; b.p. 3,260°C;; sp. gr. 4.54 at 20°C;; valence +2, +3, or +4. and nickel-based superalloy su·per·al·loy n. Any of several complex temperature-resistant alloys. products to profitably grow ATI's participation in the robust jet engine and airframe markets, and the strong defense and medical markets. "Looking ahead, our business remains strong with significant opportunities for profitable growth. We expect to see continued strong growth opportunities for our specialty metals from our key markets, namely aerospace and defense, chemical process industry, oil and gas, electrical energy, and medical. Our strategic capital investments and strong financial position have ATI well-positioned to achieve continued profitable growth in 2007 and beyond." [TABLE OMITTED] Third Quarter 2006 Financial Highlights * Sales were $1.29 billion, 50% higher than the third quarter 2005. Compared to the third quarter 2005, sales increased 40% in the High Performance Metals segment, 66% in the Flat-Rolled Products segment, and 7% in the Engineered Products segment. * Segment operating profit was $290.8 million, an increase of $156.8 million, or 117%, compared to the third quarter 2005, and 15% higher than the second quarter 2006, as a result of improved performance across our High Performance Metals and Flat-Rolled Products business segments. Third quarter 2006 results included a LIFO inventory valuation reserve charge of $54.0 million, due primarily to higher nickel, nickel-bearing scrap, and titanium scrap raw material costs. The LIFO inventory valuation reserve charge was $12.1 million in the third quarter 2005 and $45.5 million in the second quarter 2006. * Net income was $161.9 million, or $1.58 per share, compared to $88.3 million, or $0.87 per share, in the third quarter 2005. Results for the third quarter 2006 included a provision for income taxes of $84.5 million, or 34.3% of income before tax, which included a $4.2 million one-time benefit associated with adjustments to prior years' tax accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. . The third quarter 2005 benefit for income taxes was $1.3 million, principally related to an audit settlement of prior years' taxes and a benefit from a reduction in the valuation allowance associated with deferred tax assets. * Cash flow from operations for the 2006 first nine months was $179.1 million as improved operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before more than offset a further investment of $488.4 million in managed working capital. * Cash on hand was $405.9 million at the end of the third quarter 2006. * Gross cost reductions, before the effects of inflation, totaled $96.0 million company-wide for the first nine months of 2006. High Performance Metals Segment Market Conditions * Demand for our titanium alloys, nickel-based alloys This is a list of alloys for which an article exists in Wikipedia (or is proposed but not yet written). They are grouped by base metal, in order of increasing atomic number. Within these headings they are in no particular order. and superalloys, and vacuum-melted specialty alloys was robust from the aerospace and defense market and strong from the medical, and oil and gas markets. Demand was strong for our exotic alloys from the global chemical process industry, aerospace and defense, and electrical energy markets. Third quarter 2006 compared to third quarter 2005 * Sales increased 40% to $455.0 million. Shipments increased 7% for titanium and titanium alloys, 9% for nickel-based and specialty alloys, and 11% for exotic alloys. Average selling prices The average sales price of goods or commodities. Especially used in the retail sector and technology distribution. increased 42% for titanium and titanium alloys and 26% for nickel-based and specialty alloys, but declined 5% for exotic alloys primarily due to product mix. * Segment operating profit reached $173.0 million, or 38.0% of sales, a $85.1 million increase compared to the third quarter 2005. The significant increase in operating profit primarily resulted from increased shipments, higher selling prices for most products, and the benefits of gross cost reductions. In addition, raw material cost inflation and higher inventory levels resulted in a LIFO inventory valuation reserve charge of $11.6 million in the third quarter 2006, compared to a $12.9 million charge in the third quarter 2005, and a $18.5 million charge in the second quarter 2006. * Results benefited from $7.2 million of gross cost reductions. Flat-Rolled Products Segment Market Conditions * Demand was strong for our stainless products from the chemical process industry, oil and gas, and electrical energy markets and from service center customers. Demand was also strong for our specialty stainless, grain-oriented silicon, and nickel-based alloy alloy (ăl`oi, əloi`) [O. Fr.,=combine], substance with metallic properties that consists of a metal fused with one or more metals or nonmetals. products from the chemical process industry, oil and gas, electrical energy, and aerospace and defense markets. Third quarter 2006 compared to third quarter 2005 * Sales were $728.7 million, 66% higher than the third quarter 2005, as a result of a 42% increase in pounds shipped, higher base-selling prices for many products and improved product mix. Average transaction prices, which include surcharges, were 17% higher. * Segment operating profit increased to $105.4 million, or 14.5% of sales, primarily as a result of increased shipments, improved product mix, higher selling prices, and the benefits of gross cost reductions. This was accomplished in spite of a significantly higher LIFO inventory valuation reserve charge due primarily to higher nickel and nickel-bearing scrap raw material costs. Third quarter 2006 results included a LIFO inventory valuation reserve charge of $42.2 million, compared to income of $3.2 million in the third quarter 2005, and a $27.0 million charge in the second quarter 2006. * Results benefited from $24.8 million in gross cost reductions. Engineered Products Segment Market Conditions * Demand for our tungsten tungsten (tŭng`stən) [Swed.,=heavy stone], metallic chemical element; symbol W; at. no. 74; at. wt. 183.85; m.p. about 3,410°C;; b.p. 5,660°C;; sp. gr. 19.3 at 20°C;; valence +2, +3, +4, +5, or +6. and tungsten carbide tungsten carbide n. An extremely hard, fine gray powder whose composition is WC, used in tools, dies, wear-resistant machine parts, and abrasives. products was strong from the oil and gas, mining, and power generation markets, while demand was seasonally lower from the automotive market. Demand was strong for our forged products from the Class 8 truck, construction and mining, and oil and gas markets. Demand for our cast products was strong from the wind energy, and oil and gas markets. Demand remained very strong for our titanium precision metal processing conversion services. Third quarter 2006 compared to third quarter 2005 * Sales increased to $104.7 million, 7% higher than the third quarter 2005, due to increased volume and higher selling prices. * Segment operating profit was $12.4 million, or 11.8% of sales, which was comparable to the same period of 2005 as higher raw material costs offset the benefit of increased sales. Raw material cost inflation resulted in a LIFO inventory valuation reserve charge of $0.2 million in the third quarter 2006, compared to a $2.4 million charge in the third quarter 2005. There was no LIFO inventory reserve valuation change in the second quarter 2006. * Results benefited from $1.7 million of gross cost reductions. Retirement Benefit Expense * Retirement benefit expense was $20.5 million in the third quarter 2006, compared to $19.9 million in the third quarter 2005. * For the third quarter 2006, retirement benefit expense included in cost of sales was $13.9 million and in selling and administrative expenses was $6.6 million. For the third quarter 2005, the amount of retirement benefit expense included in cost of sales was $14.1 million, and the amount included in selling and administrative expenses was $5.8 million. * ATI is not required to make cash contributions to its U.S. defined benefit pension plan for 2006. However in order to improve the plan's funded position, we are considering making a voluntary cash contribution to this defined benefit pension plan of approximately $100 million in the fourth quarter 2006. Other Expenses * Selling and administrative expenses as a percentage of sales declined to 5.7% in the 2006 third quarter from 7.5% in the same period of 2005. * Corporate expenses for the third quarter 2006 were $15.1 million, compared to $13.8 million in the year-ago period. This increase was due to expenses associated with annual and long-term performance-based incentive compensation programs. * Third quarter 2006 interest expense, net of interest income, decreased to $4.3 million from $9.9 million in the year-ago period primarily due to increased interest income resulting from higher cash balances and capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. of interest costs on strategic capital projects, partially offset by higher interest rates on floating rate debt. Income Taxes Results for the third quarter 2006 included a provision for income taxes of $84.5 million, or 34.3% of income before tax, for U.S. Federal, foreign and state income taxes. The third quarter 2006 benefited from a favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. $4.2 million adjustment of prior years' taxes. The third quarter 2005 included a tax benefit of $1.3 million, which principally related to a $4.0 million favorable adjustment to prior years' taxes resulting from settlement of open audit years, partially offset by foreign and state income taxes. Prior to the fourth quarter 2005, we maintained a valuation allowance for a major portion of our U.S. Federal deferred tax assets and certain state deferred tax assets in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System No. 109, "Accounting for Income Taxes", due to uncertainty regarding full utilization of our net deferred tax asset, including the 2003 and 2004 unutilized net operating losses Net operating losses Losses that a firm can take advantage of to reduce taxes. . In 2005, we generated taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. which exceeded the 2003 and 2004 net operating losses, allowing us to fully realize these U.S. Federal tax benefits. This realization of tax benefits, together with our improved profitability, required us to eliminate the remaining valuation allowance for U.S. Federal income taxes in the fourth quarter 2005 in accordance with SFAS No. 109. Cash Flow, Working Capital and Debt * Cash on hand was $405.9 million at the end of the third quarter 2006, an increase of $43.2 million from year end 2005, and a $92.7 million increase from the second quarter 2006. * Cash flow from operations during the 2006 first nine months was $179.1 million as significantly improved operating earnings were partially offset by a further investment of $488.4 million in managed working capital and payment of previously accrued ac·crue v. ac·crued, ac·cru·ing, ac·crues v.intr. 1. To come to one as a gain, addition, or increment: interest accruing in my savings account. 2. litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. costs of $37.5 million. * The investment in managed working capital resulted from a $188.7 million increase in accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying , which reflects the significantly higher level of sales in the third quarter 2006 compared to the fourth quarter 2005, and a $564.7 million increase in inventory mostly as a result of increased operating volumes and higher raw material costs, partially offset by a $265.0 million increase in accounts payable. Most of the increase in raw material costs is expected to be recovered through surcharge An overcharge or additional cost. A surcharge is an added liability imposed on something that is already due, such as a tax on tax. It also refers to the penalty a court can impose on a fiduciary for breaching a duty. and index pricing mechanisms. * At September 30, 2006, managed working capital improved to 29.0% of annualized sales, compared to 30.3% of annualized sales at year-end 2005. We define managed working capital as accounts receivable plus gross inventories less accounts payable. * Cash used in investing activities was $157.9 million in the 2006 first nine months and consisted primarily of capital expenditures. * Cash provided by financing activities was $22.0 million in the 2006 first nine months as $28.2 million of proceeds received from the exercise of stock options and tax benefits on share-based compensation of $30.0 million more than offset dividend payments of $30.0 million and a reduction in borrowings of $6.2 million. * Net debt as a percentage of total capitalization improved to 10.8% at the end of the third quarter 2006, compared to 19.8% at the end of 2005. * There were no borrowings outstanding during the 2006 first nine months or all of 2005 under ATI's $325 million secured domestic borrowing facility, although a portion of the letters of credit capacity was utilized during both periods. Allegheny Technologies will conduct a conference call with investors and analysts on October 25, 2006, at 1 p.m. ET to discuss the financial results. The conference call will be broadcast live on www.alleghenytechnologies.com. To access the broadcast, click on "Conference Call". In addition, the conference call will be available through the CCBN CCBN Central Coast Bancorp CCBN Charles County Business Network website, located at www.ccbn.com. This news release contains "forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. " within the meaning of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. Certain statements in this news release relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as "anticipates," "believes," "estimates," "expects," "would," "should," "will," "will likely result," "forecast," "outlook," "projects," and similar expressions. Forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results, performance or achievements to materially differ from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (a) material adverse changes in economic or industry conditions generally, including global supply and demand conditions and prices for our specialty metals; (b) material adverse changes in the markets we serve, including the aerospace and defense, construction and mining, automotive, electrical energy, chemical process industry, oil and gas, and other markets; (c) our inability to achieve the level of cost savings, productivity improvements, synergies, growth or other benefits anticipated by management, including those anticipated from strategic investments and the integration of acquired businesses, whether due to significant increases in energy, raw materials or employee benefits costs, or other factors; (d) volatility of prices and availability of supply of the raw materials that are critical to the manufacture of our products; (e) declines in the value of our defined benefit pension plan assets or unfavorable changes in laws or regulations that govern pension plan funding; (f) significant legal proceedings All actions that are authorized or sanctioned by law and instituted in a court or a tribunal for the acquisition of rights or the enforcement of remedies. or investigations adverse to us; and (g) other risk factors summarized in our Annual Report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended December 31, 2005, and in other reports filed with the Securities and Exchange Commission. We assume no duty to update our forward-looking statements. Building the World's Best Specialty Metals Company[TM] Allegheny Technologies Incorporated is one of the largest and most diversified diversified (di·verˑ·s specialty metals producers in the world with revenues of $4.4 billion during the most recent four quarters ending September 30, 2006. ATI has approximately 9,300 full-time employees world-wide who use innovative technologies to offer growing global markets a wide range of specialty metals solutions. Our major markets are aerospace and defense, chemical process industry/oil and gas, electrical energy, medical, automotive, food equipment and appliance, machine and cutting tools, and construction and mining. Our products include titanium and titanium alloys, nickel-based alloys and superalloys, stainless and specialty steels, zirconium zirconium (zərkō`nēəm), metallic chemical element; symbol Zr; at. no. 40; at. wt. 91.22; m.p. about 1,852°C;; b.p. 4,377°C;; sp. gr. 6.5 at 20°C;; valence +2, +3, or +4. , hafnium hafnium (hăf`nēəm), metallic chemical element; symbol Hf; at. no. 72; at. wt. 178.49; m.p. about 2,227°C;; b.p. 4,602°C;; sp. gr. 13.31 at 20°C;; valence +4. , and niobium niobium (nīō`bēəm), metallic chemical element; symbol Nb; at. no. 41; at. wt. 92.9064; m.p. about 2,468°C;; b.p. 4,742°C;; sp. gr. 8.57 at 20°C;; valence +2, +3, +4, or +5. , tungsten materials, grain-oriented silicon electrical steel Electrical steel, also called lamination steel, silicon electrical steel, silicon steel or transformer steel, is specialty steel tailored to produce certain magnetic properties, such as a small hysteresis area (small energy dissipation per cycle, or low and tool steels, and forgings and castings. The Allegheny Technologies website is www.alleghenytechnologies.com. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] Volume and Average Price data for Flat-Rolled Products includes the classification of grain-oriented silicon electrical steel and tool steel as high-value products for all periods presented. [TABLE OMITTED] As part of managing the liquidity in our business, we focus on controlling managed working capital, which is defined as gross accounts receivable and gross inventories, less accounts payable. In measuring performance in controlling this managed working capital, we exclude the effects of LIFO inventory valuation reserves, excess and obsolete inventory Obsolete Inventory Term that refers to inventory that is at the end of its product life cycle and has not seen any sales or usage for a set period of time usually determined by the industry. This type of inventory has to be written down and can cause large losses for a company. reserves, and reserves for uncollectible accounts Uncollectible account An account which cannot be collected by a company because the customer is not able to pay or is unwilling to pay. receivable which, due to their nature, are managed separately. [TABLE OMITTED] In managing the overall capital structure of the Company, one of the measures on which we focus is net debt to total capitalization, which is the percentage of debt to the total invested and borrowed capital of the Company. In determining this measure, debt and total capitalization are net of cash on hand which may be available to reduce borrowings. |
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