Allegheny Technologies Inc.: A Tarnished Outlook?

Soft steel market shrinks profits for Pittsburgh metals producer.

The health of the steel industry always seems to be in question. Even as things have started to look up recently, companies still seem to be followed by a black cloud, evoking tales of gloom and doom at every turn. For the time being, specialty metals producer Allegheny Technologies Inc. probably falls into the same category. But the final few months of 2007 did have at least a few bright spots.

When the IW 50 Best Manufacturer reported its third-quarter earnings back in October, the company said profits jumped 21% on strong demand for its high-performance metal products from its aerospace and energy markets. The company reported earnings of $193.9 million, or $1.88 a share, from $160.2 million, or $1.56 a share, compared to the year before. Revenue rose to $1.34 billion from $1.29 billion. Chairman and CEO Patrick Hassey said the company's third-quarter results were the result of "two divergent story lines."

"Strong demand trends continued in our high performance metals segment and for our high-value flat-rolled products," Hassey explained in the release. "On the other hand, shipments of our standard stainless products were extraordinarily weak."

However, by its fourth-quarter earnings report on Jan. 23, the Pittsburgh-based manufacturer seemed to only have one story to tell. Allegheny reported that profit shrank 9% in the quarter, as shipments of stainless steel were "extraordinarily weak." Shipments were tallied at 66,400 tons of standard-grade stainless steel, which is "well below our target needed to operate efficiently," according to a company official.

Allegheny earned $148.9 million in the quarter, compared with profit of $163.1 million a year ago. Overall, sales slipped 9%, while sales in the high-performance metals segment grew 5% and were roughly flat in the engineered products segment. The flat-rolled products segment, which includes the stainless steel business, reported an 18% decline in sales. The company attributed the decline to a softening of stainless steel sales, as customers tried to clear inventory.

In between earnings reports, Allegheny Technologies was yet another steel company rumored to be the target of a takeover. Steel industry analyst Charles Bradford of Bradford/Soleil Securities of New York said the rumor was that Russian steelmaker Severstal was interested in acquiring the company. Severstal is owned by Russian oligarch Alexi Mordashov, who has repeatedly expressed his desire to expand his company's global presence. As yet, the rumors have not materialized.

Allegheny Technologies Inc.
At A Glance

Allegheny Technologies Inc.
Pittsburgh, Pa.
Primary Industry: Primary Metals
Number of Employees: 9,500
2006 In Review
Revenue: $4.94 billion
Profit Margin: 11.58%
Sales Turnover: 1.5
Inventory Turnover: 5.33
Revenue Growth: 39.46%
Return On Assets: 20.94%
Return On Equity: 71.5

What did materialize, however, was one of the potentially bright spots of the last few months. Allegheny Technologies announced Jan. 22 that it had signed a long-term sourcing deal with General Electric Co.'s GE Aviation unit. The agreement involves supplying premium titanium, nickel-based super-alloy and vacuum-melted specialty alloy products for commercial and military jet engine applications. According to Reuters, the company said the agreement's total revenue plus direct sales from Allegheny's ATI Allvac unit to GE Aviation for 2007 through 2011 may top $2 billion.

In personnel moves, Allegheny Technologies recently named Hunter Dalton president of ATI Allvac, its largest operating company within its specialty metals business effective April 1. Dalton, 53, has been ATI Allvac's senior vice president of sales and marketing since November 2003. Back in December, Allegheny also announced that J. Brett Harvey was elected to its board of directors. Harvey, 57, is president and CEO of CONSOL Energy Inc., a high-Btu bituminous coal and coal bed methane company.

While Wall Street hasn't been particularly kind to many companies over the last few months, Allegheny Technologies certainly has been taking its share of hits. After topping out around $115 per share back in early October, the stock plunged 40% before its fourth-quarter earnings were announced. In response to the company's "weak" report, shares fell more than 12% the day of the release, briefly trading below $60 for the first time in over a year.


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