Allegheny Technologies (ATI) Misses Q1 EPS by 4c

Allegheny Technologies (NYSE: ATI) reported Q1 EPS of $0.12, $0.04 worse than the analyst estimate of $0.16. Revenue for the quarter came in at $1 billion versus the consensus estimate of $1 billion.

• Sales were $1.0 billion, 3% higher than Q1 2018
  • High Performance Materials & Components (HPMC) sales of $601 million, increased 7% versus Q1 2018
  • Flat Rolled Products (FRP) sales of $404 million, down 4% versus Q1 2018
• Business segment operating profit was $61.7 million, or 6.1% of sales
  • HPMC segment operating profit was $72.6 million, or 12.1% of sales
  • FRP segment operating loss was $10.9 million, or (2.7)% of sales
  • Both segments impacted by unexpected short-term operational headwinds
• Net income attributable to ATI was $15.0 million, or $0.12 per share

“While our first quarter sales increased to $1 billion, our financial results were below our expectations as we faced unexpected operational headwinds in both of our business segments,” said Robert S. Wetherbee, ATI President and Chief Executive Officer. “We are working proactively to address challenges we faced in the form of short-term powder billet shortages and higher operating costs by ramping up our own production to offset future uncertainty. The company holds strong positions in high-value, growing markets, and the overall fundamentals of our businesses are solid. We are on track to deliver improved results in the second quarter and throughout the balance of 2019, and progress toward our longer-term objectives remains on pace.”

HPMC sales increased 7.2% in the first quarter 2019 compared to prior year primarily due to higher aerospace & defense market sales, led by growth in airframes and government and defense. Next-generation jet engine products sales increased by 8.9% and represented 52% of total first quarter 2019 HPMC jet engine product sales. Despite the increase in these sales, HPMC operating profit declined versus prior year to $72.6 million, or 12.1% of sales, due to the greater than anticipated operational and cost headwinds. “HPMC segment results were negatively impacted by the ongoing disruption in third party nickel powder billet supply, as well as the related operating costs to qualify materials and quickly ramp nickel powder production to help alleviate the shortage of incoming third-party powder billet. Segment results were also adversely impacted by the temporary margin compression caused by a recent steep and rapid drop in cobalt prices,” said Mr. Wetherbee.

Strategy and Outlook

“We continue to work proactively with our customers to jointly address current supply constraints related to the ongoing aerospace production ramp, and as previously announced, we expect to maintain our current production and delivery schedules related to the 737 MAX aircraft,” said Mr. Wetherbee. “We have full confidence in Boeing’s ability to address current narrow-body model issues.”

In the HPMC segment, the Company is aligned and focused on overcoming first quarter headwinds and anticipates sequential improvement in segment financial results. However, operating margins will likely be below initial expectations for the second quarter while the Company works aggressively to offset operational challenges and prepare the Bakers Powder facility for additional profitable growth. Segment operating margins in the second half of 2019 are expected to be much improved over the first half of the year. The Company believes that the supply chain issues are temporary and the benefits from increased share of high value commercial jet engine materials and components will provide a financial tailwind. “We are dedicated to strong operational execution and to meeting our aerospace production ramp requirements,” said Mr. Wetherbee.

In the FRP segment, the Company expects higher sequential revenue and a solid return to profitability in the second quarter of 2019 due to improved customer demand for high-value products, both in the U.S. and for the STAL JV, and favorable raw material surcharge values. Continued improvements in the second half of 2019 are expected due to further increases in high-value nickel and titanium product sales. “Our focus for the FRP segment remains on improving product mix and increasing volumes related to our HRPF conversion agreements while ensuring a strong cost discipline as the business changes over time.

“Cash generation from operations remains a key focus, and we intend to carefully balance our working capital and other cash needs with the pace of our capital expenditure requirements and financing obligations. We expect to generate significant positive free cash flow over the balance of 2019, excluding pension plan contributions,” Wetherbee concluded.

For earnings history and earnings-related data on Allegheny Technologies (ATI) click here.

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