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Specialty metals company Allegheny Technologies Inc. (ATI - Analyst Report) reported third-quarter 2012 earnings of 32 cents per share, down from 56 cents (or 63 cents excluding acquisition related charges) recorded a year ago. The results missed the Zacks Consensus Estimate by 7 cents. Profit slid 43% year over year to $35.3 million on lower sales.

Revenues dipped 9.8% year over year to $1,220.5 million, also falling behind the Zacks Consensus Estimate of $1,297 million. Sales fell as lower revenues across Engineered Products and Flat-Rolled Products segments more than offset a modest growth in the High Performance Metals division.
 
Sluggish economic conditions led to lower demand for the company’s products across several end markets, including nuclear energy, chemical processing and jet engine, in the quarter.  
 
Operating profit slipped 26% year over year to $119.5 million with operating margin declining to 9.8% from 12% a year ago.
 
Segment Highlights
 
Sales in the High Performance Metals segment inched up 1% year over year to $539.3 million. Shipments of nickel-based and specialty alloys jumped 11% due to higher demand from the aerospace market while titanium and titanium alloys mill products shipments fell 2% given a weak jet engine market. 
 
Lower demand from nuclear energy and chemical processing markets affected the shipment of zirconium and related alloys in the quarter
 
Average selling prices for nickel-based and superalloys, specialty alloys, and titanium and titanium alloys fell 6%, 4% and 1%, respectively, mainly due to lower raw material surcharges. 
 
Flat-Rolled Products segment revenues tumbled 18.8% to $560.2 million on account of reduced raw material surcharges and lower pricing. Shipments of high-value products fell 3% year over year, while those of standard stainless products (sheet and plate) increased 10%. Average selling prices for standard stainless products and high-value products fell 19% and 21%, respectively.
 
Sales in the Engineered Products division fell 5.7% to $121 million, hurt by lower demand for tungsten-based products. The company witnessed weak demand from the oil and gas and cutting tool markets.
 
Financial Position
 
Allegheny ended the quarter with cash and cash equivalents of $281 million, down 35% year over year. Total debt of roughly $1.5 billion represents around 9% year over year decline. Net debt as a percentage of total capitalization rose to 31.2% from 30.3% a year ago. Total debt-to-capital ratio was 35.9% as of September 30, 2012, compared with 37.2% as of September 30, 2011.
 
Outlook and Recommendation
 
Factoring in the current soft macroeconomic scenario, sustained weak demand for its products and aggressive inventory managements by its customers, Allegheny has reduced its sales forecast for 2012 to a band of $5 billion to $5.1 billion from its earlier view of $5.3 billion to $5.4 billion. Segment operating margin is expected to be 10.5% for the full year. 
 
Allegheny anticipates the business environment to remain challenging in the fourth quarter and results are expected to be lower sequentially. 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 such as commercial aerospace and oil and gas over the long term. 
 
Allegheny, which competes with Carpenter Technology Corp. (CRS - Snapshot Report), 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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