Allegheny Rises on Tungsten Material Biz Sale

Allegheny decided to divest its tungsten materials business so that it can focus more on its core businesses – High Performance Metals and Flat-Rolled Products. The acquisition is also expected to increase Allegheny’s financial flexibility and simplify its capital allocation and deployment.

Allegheny’s tungsten materials business operates through roughly 1,175 employees across 14 operating facilities globally and consists of two market-leading divisions – ATI Firth Sterling and ATI Stellram. It produces tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. The business unit generated $338.6 million of total net revenues and $37.2 million of operating profit for the year ended Dec 31, 2012.

Kennametal paid for the acquisition partly by cash and partly by available borrowings under its existing revolving credit facility.

Allegheny’s sole financial advisor and legal counselor for this transaction were The Goldman Sachs Group, Inc. (GS) and K&L Gates LLP, respectively. J.P. Morgan Securities LLC, which operates as a subsidiary of JPMorgan Chase & Co. (JPM), acted as the financial advisor to Kennametal on the transaction.

Allegheny posted its third-quarter 2013 results on Oct 23. The company reported loss from continuing operations of $28.4 million (or 27 cents per share) compared with a profit of $31.3 million (or 29 cents per share) recorded a year ago. After excluding a loss of 4 cents per share due to the effects of income taxes reported in domestic and foreign jurisdictions, loss from continuing operations was 23 cents per share, narrower than the Zacks Consensus Estimate loss of 28 cents.

Allegheny recorded a loss of 5 cents per share in the reported quarter from discontinued operations that include the tungsten materials business and the iron castings and fabricated components businesses.

Revenues slipped 14% year over year to $972 million, missing the Zacks Consensus Estimate of $1,051 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.

Allegheny expects business conditions to remain challenging through the end of 2013 and potentially in 2014 due to the U.S. debt ceiling and other fiscal policy issues.

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 $123.4 million during the first nine months of 2013, a pace which is well ahead of its 2013 target of $100 million in new cost reductions. The company remains well positioned to align its production, and inventory levels to match the demands of its customers and end markets.


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