10-QPeriod: Q1 FY2007

ATI INC Quarterly Report for Q1 Ended Mar 31, 2007

Filed May 3, 2007For Securities:ATI

Summary

Allegheny Technologies Incorporated (ATI) reported a strong first quarter for 2007, demonstrating significant year-over-year growth in sales and net income. Sales increased by 32% to $1.37 billion, driven by robust demand in key markets such as aerospace and defense, chemical process industry, oil and gas, and electrical energy. The company's operating profit also saw a substantial increase of 59% to $340.3 million, reflecting higher selling prices, improved product mix, and cost reduction initiatives. The company is actively investing in significant capital expenditure projects to expand its production capabilities, particularly in titanium and specialty alloy products, to meet growing market demand. Despite a notable increase in managed working capital primarily due to higher inventory costs, ATI maintains a strong liquidity position with ample cash on hand and available credit facilities. The company also announced a positive credit rating outlook from major agencies, indicating financial strength and stability.

Key Highlights

  • 1Sales surged by 32% to $1.37 billion in Q1 2007 compared to Q1 2006, driven by strong performance in High Performance Metals and Flat-Rolled Products segments.
  • 2Net income more than doubled to $197.8 million ($1.92 diluted EPS) from $106.5 million ($1.04 diluted EPS) in the prior year's quarter.
  • 3Operating profit increased significantly by 59% to $340.3 million, with strong margins in High Performance Metals (35.1%) and a substantial improvement in Flat-Rolled Products (20.4%).
  • 4The company is executing a substantial capital expenditure plan, investing in capacity expansions for titanium and specialty alloys, with projected full-year 2007 capital expenditures between $450-$500 million.
  • 5ATI's liquidity remains strong, with $518.0 million in cash and cash equivalents at the end of the quarter, and a healthy net debt to total capitalization ratio of 1.4%.
  • 6The company adopted new accounting standards FIN 48 and FSP PMMA, with FIN 48 resulting in a $5.6 million reduction to retained earnings and FSP PMMA requiring restatement of prior periods.
  • 7Credit ratings agencies provided positive outlooks, with Moody's upgrading its corporate family rating to Ba1 and S&P placing the company's credit rating on CreditWatch with positive implications.

Frequently Asked Questions

The significant increase in sales and net income was primarily driven by strong demand in key end markets, including aerospace and defense, chemical process industry, oil and gas, and electrical energy. This was coupled with higher selling prices for many products, improved product mix, and benefits from cost reduction initiatives across the company's segments, particularly in Flat-Rolled Products and High Performance Metals.

ATI is closely managing its working capital, defined as accounts receivable and inventories minus accounts payable. While inventory levels increased by $175.3 million in Q1 2007 due to higher raw material costs, this increase is largely expected to be recovered through surcharges and index pricing. The company also noted that increased managed working capital represents a potential future source of cash if business activity declines.

ATI is making substantial investments in expanding its manufacturing capabilities, particularly for titanium and specialty alloys, to meet projected demand growth. Key projects include expanding titanium sponge production in Oregon and Utah, increasing melting capabilities for critical alloys, and enhancing mill products processing. The company anticipates continued revenue and operating profit growth in the High Performance Metals segment and sustained good performance from Flat-Rolled Products and improving performance from Engineered Products throughout the remainder of 2007.

The adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, resulted in a $5.6 million reduction to retained earnings and established new liabilities for unrecognized tax benefits. The adoption of FSP PMMA (Accounting for Planned Major Maintenance Activities) also required restatement of prior periods, impacting reported net income for the three months ended March 31, 2006.