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04. May 2007

Allegheny Technologies recovers dramatically

Three years ago, shareholders of Allegheny Technologies Inc. were glum, as the company suffered through 10 consecutive money-losing quarters, from late 2001 to April 2004.

Since then, the Pittsburgh-based specialty metals manufacturer has been doing the opposite, setting sales and profit records, and CEO L. Patrick Hassey is expected to explain the company's turnaround at its annual shareholders meeting today, Downtown.

The parent of Allegheny Ludlum Steel has reinvigorated its profits dramatically, buoyed by a key acquisition of a rival steelmaker, the hiring of Hassey as chief executive in late 2003 -- and best of all, a prescient decision to invest in titanium, the linchpin of a resurgent specialty metals business.

Shareholders can see the results in Allegheny Technologies' stock. Since a low point of $18.03 a share on Jan. 11, 2005, its shares have skyrocketed more than $100 a share -- a 558 percent jump -- hitting a high of $118.78 on April 23. Since then, shares have settled back to $106.77, where they closed Tuesday.

"Every once in a while, I run into a company that falls into the four yards per carry category. Revenue, profitability, positive cash flow and liquidity ... they're all there, and it's hard to criticize them," said Brian Hamilton, senior analyst at Sageworks Inc., Raleigh, N.C.

Allegheny Technologies employs about 9,300, including about 3,000 in Western Pennsylvania.

"We're not your normal stainless steel company. We've taken a stainless steel company with some specialty metals, and turned it into a specialty metals company with some stainless steel. We will be a major factor in titanium mill products," Hassey said during a conference call with securities analysts last week after the company reported first-quarter profits that surged 86 percent.

Fueled by strong growth in shipments of titanium products, the company reported net income of $197.8 million, or $1.92 a share, up from $106.5 million, or $1.04 a share, one year ago.

Net income for the full year 2006 rose by 59 percent to $571.9 million, or $5.59 a share, on sales of $4.94 billion, compared to net income of $359.8 million, or $3.57 a share, on sales of $3.54 billion for 2005. Sales increased by almost 40 percent in 2006, the company said.

"They're holding overhead costs relatively flat, as revenue has climbed. That's a good prescription for profitability," said Sageworks' Hamilton.

Hassey, who spent 35 years with Alcoa Inc., took over as CEO in October 2003. During Hassey's watch, Allegheny Technologies snapped a streak of 10 consecutive money-losing quarters in July 2004.

"I like them, and I like Pat Hassey. They have a great leadership team. They're spending capital on growing titanium capacity. I think their valuation is a little high, due to the excitement over the earnings growth associated with future titanium capacity," said David S. MacGregor, senior research analyst at Longbow Research in Independence, Ohio.

The turning point came with the $67 million acquisition of J&L Specialty Steel LLC from Luxembourg-based Arcelor SA in June 2004. J&L Specialty, formerly based in Moon, operated a melting, casting and finishing plant in Midland in Beaver County. The company also operated a finishing plant in Louisville, Ohio. Hassey proceeded to combine J&L and Allegheny Ludlum.

"That's a real good example where a merger really works. There were a lot of synergies," said Hamilton.

Strong demand for titanium, a silver-gray metal half as light as steel but just as strong, is coming mainly from the commercial airline and military sectors. Titanium is used in fan and compressor components, cases, disks and blades in jet engines.

In June, Allegheny Technologies announced a long-term agreement with Boeing valued at about $2.5 billion, stretching from 2007 through 2015, to supply titanium for various commercial and aerospace applications, including Boeing's new Dreamliner 787 airplane.

Last week, Hassey said 30 percent of first-quarter sales were in aerospace, "and it could get stronger." He forecast long-term demand from aerospace, military markets and worldwide infrastructure build. "They don't need plastics, they need specialty metals," he said.

Hassey said the company's titanium sponge production facility in Albany, Ore., can produce about 13 million pounds of titanium sponge annually, and the company expects production capacity to reach about 22 million pounds annually by the first half of next year. He said the company's plant in Rowley, Utah, remains on track to produce premium grade titanium sponge by the end of next year.

In March, Allegheny Technologies reached an early contract agreement with the United Steelworkers union at Allegheny Ludlum operations. The four-year agreement covers about 3,128 steelworkers. Both sides wanted to take advantage of the solid market in the metals industry.

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