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Tickers in this Article: ATI, CRS
Specialty metals company Allegheny Technologies Inc. (ATI) reported second-quarter 2012 earnings of 50 cents per share, down from 59 cents recorded a year ago. The results missed the Zacks Consensus Estimate by 4 cents. Profit fell 11.9% year over year to $56.4 million. Excluding acquisition related charges, earnings in the year-ago quarter were 70 cents a share.

Revenues inched up 0.4% year over year to $1,357.4 million, also missing the Zacks Consensus Estimate of $1,371 million. The company witnessed growth across its High Performance Metals and Engineered Products segments while sales fell in its Flat-Rolled Products division in the quarter. Slow economic growth across the U.S. and China coupled with weak conditions in Europe hurt demand for the company's products in the quarter.  

Operating profit fell 7.8% year over year to $159.9 million with operating margin declining to 11.8% from 12.8% a year ago.

Segment Highlights

Sales in the High Performance Metals segment climbed 14% year over year to $566.2 million, buoyed by higher demand from commercial aerospace market and contributions from ATI Ladish acquisition. Shipments of nickel-based and specialty alloys jumped 12% while titanium and titanium alloys mill products shipments fell 10%.

Flat-Rolled Products segment revenues dipped 9.6% to $657.4 million on account of reduced raw material surcharges. Shipments of high-value products remained flat compared with the year-ago quarter, while those of standard stainless products (sheet and plate) increased 23%.

Sales in the Engineered Products division rose 5.3% to $133.8 million, driven by higher demand for tungsten-based products and carbon alloy steel forgings. The company witnessed healthy demand from the oil and gas, cutting tool, transportation, construction and mining and aerospace end markets.

Financials

Allegheny ended the quarter with cash and cash equivalents of $210.3 million, down 43% year over year. Net debt as a percentage of total capitalization was 33.4% at the end of the quarter compared with 32.3% a year ago. Total debt to total capital was 36.8% as of June 30, 2012, compared with 38% as of June 30, 2011.

Outlook

Factoring in the current macroeconomic scenario, Allegheny now expects revenues to be in the band of $5.3 billion to $5.4 billion for 2012. Segment operating margin is now expected to be similar to that achieved in the first half. Earlier, the company expected revenue growth to be at least 10% year over year and segment operating profit in the range of 13% to 14% of sales in 2012.

Allegheny anticipates its third quarter sales and volume to be impacted by seasonal slowdowns. Nevertheless, the company expects to continue to benefit from its new alloys and products, diversified global growth markets and differentiated product mix. It envisions strong growth in its key end markets including aerospace, oil and gas and electrical energy. Allegheny sees roughly $2 billion in potential annual sales from its new manufacturing capabilities and new products over the next five years.
 
Allegheny also said that shipments for its upcoming large projects in the oil and gas/chemical process industry market, including desalination, will begin in the fourth quarter of 2012.

Allegheny, which competes with Carpenter Technology Corp. (CRS), currently retains a Zacks #5 Rank, reflecting a short-term (1 to 3 months) Strong Sell rating. We have a long-term (more than 6 months) Underpeform recommendation on the stock.

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