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Allegheny Technologies Inc. (ATI - Analyst Report) reported second-quarter 2013 earnings of 4 cents per share, down from 50 cents recorded a year ago. The results missed the Zacks Consensus Estimate of 10 cents. Profit plummeted 92 % year over year to $4.4 million on lower sales.

Revenues slipped 16% year over year to $1,135.5 million, missing the Zacks Consensus Estimate of $1,214 million. Revenues were hurt by lower demand across several end markets including oil and gas, jet engine aftermarket, electrical energy, and construction and mining. Allegheny also witnessed lower pricing for many of its products and a decline in raw materials surcharges.

Operating profit tumbled 55% year over year to $71.7 million in the quarter with operating margin contracting to 6.3% from 11.8% a year ago. Lower shipments related with high value products coupled with lower base prices resulted in the decrease in operating profit. The impact of higher raw material costs for products not aligned with lower raw material surcharges also contributed to the decline.

Segment Review

Revenues from the High Performance Metals segment fell 14% year over year to $484.5 million in the quarter due to lower mill product shipments of nickel-based and specialty steel alloys and zirconium. A decline in raw material surcharges, lower pricing as well as lower sales of precision forged and cast components due to lesser demand from the jet engine also impacted the revenues.

Flat-Rolled Products segment revenues were down 16% to $552.2 million on account of reduced raw material surcharges, lower base-selling pricing and  lower shipments of both standard stainless products and high-value products. Shipments of high-value products fell 7% while standard stainless products shipment slipped 8%. Average selling prices for standard stainless products remained at low levels.

Sales in the Engineered Products division tumbled 26% to $98.8 million, hurt by weak demand for tungsten-based products and carbon alloy steel forgings. The company witnessed marginal improvements in the demand for oil and gas and aerospace markets construction and mining versus the previous quarter, but was lower from the construction and mining and transportation markets.

Financial Position

Allegheny ended the quarter with cash and cash equivalents of $74.1 million, down 65% year over year. Long-term debt declined roughly 29% year over year to $1,053.6 million. Total debt-to-capital ratio was 37.2% as of Jun 30, 2013, up from 36.8% as of Jun 30, 2012.

Outlook

Allegheny, which is among the prominent players in the U.S. specialty steel industry along with Carpenter Technology (CRS - Snapshot Report), and Precision Castparts (PCP - Analyst Report), expects business conditions to remain challenging through second-half 2013 due to persistent global economic uncertainties, short lead time and volatile raw material prices.

Allegheny expects the third quarter to be the softest in many of its end markets. However, the company remains encouraged by stabilization in nickel and titanium scrap prices and anticipates that, if this trend continues, the fourth quarter will witness improvement in demand and stabilization of selling prices.

Allegheny is primarily focusing on cost optimization and is accelerating its cost reduction efforts. Allegheny, through this move, was successful in gross cost reductions of more than $79 million in during the first six months of 2013, a pace which is well ahead its 2013 target of $100 million in new cost reductions.

The cost reductions are expected to reap benefits for Allegheny in 2013 and beyond. The company also aims to reduce its managed working capital by implanting lean initiatives to improve inventory turns.

Allegheny currently retains a Zacks Rank #5 (Strong Sell). Another company in the specialty steel industry, RTI International Metals Inc. (RTI - Snapshot Report), maintains a Zacks Rank #1 (Strong Buy).

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