Allegheny Technologies
Strong Quarter, Full-Year Despite ‘Velocity of Change’
Allegheny Technologies Inc., Pittsburgh, reported that 2006 was a record year for sales, segment operating profit and earnings per share. Sales increased nearly 40 percent to $4.9 billion. Segment operating profit reached over $1 billion, or 21.4 percent of sales, and earnings per share was $5.59.

ATI’s sales and profitability accelerated throughout 2006, as the fourth was the best quarter of the year, with sales of $1.4 billion.

ATI reported net income for full-year 2006 of $571.9 million on sales of $4.94 billion, compared to net income of $359.8 million on sales of $3.54 billion in 2005.

Net income for fourth-quarter 2006 was $167.1 million on sales of $1.40 billion, up from a net of $118.8 million on sales of $894.4 million in 2005.

“Our strategic goal for 2006 was profitable growth, and we delivered on that goal for our shareholders,” said Patrick Hassey, chairman, president and chief executive officer. “The velocity of change was apparent during the year, but ATI demonstrated strong results and future earnings power.”

For commodity stainless sheet, the record high cost of nickel and the resulting record raw material surcharge is causing some domestic service center customers to be conservative with their inventories, Hassey said. The company expects to offset much of the domestic service center inventory management actions through increased sales of high-value flat-rolled products and other sales efforts.

ATI expects continued growth driven by increasing demand from the aerospace and defense markets, among others. It plans $400 million to $450 million of self-funded capital investments in 2007.

 “Overall, we like what we see in our major markets and believe ATI is positioned and on track for another revenue and earnings growth year in 2007. We have new production capabilities, long-term commitments from customers, and the strong financial position to achieve sustained profitable growth,” Hassey concluded.

AK Steel
‘A Defining Year’ Ends in the Black
A fourth-quarter loss brought on by an obligation to the company’s retiree health plan was not enough to dampen a “defining year” for AK Steel.

The Middletown, Ohio-based steel producer recorded a net loss of $49.3 million in the fourth quarter, the result of a $133.2 million “corridor” charge related to retiree benefits. The fourth-quarter loss was slightly behind the same period in 2005, when the company posted losses of $41.5 million in the final three months.

For the year, AK Steel posted net income of $12.0 million, reversing the results of 2005 when the company posted net losses of $2.3 million.

AK Steel President and CEO James L. Wainscott told investors and analysts at the company’s year-end conference call that “2006 was AK Steel’s defining year. We had to significantly improve our competitiveness, and that is what we did. We took major steps forward to position the company to sustain profitability.”

Wainscott said AK improved its position on three fronts: contracts with customers, contracts with raw material suppliers and labor deals. New customer contracts were forged with variable pricing mechanisms tied to input costs, while the company agreed to deals with raw material suppliers through the end of the decade.

On the labor front, AK reached three new agreements, including the fourth-quarter agreement with the United Steelworkers at its Mansfield, Ohio, facility. The single unfinished “fix” remains a contract with union employees at the company’s Middletown facility, an impasse that has reached 11 months.

AK reported record net sales of $1.58 billion on shipments of 1.5 million tons during the fourth quarter. The average fourth-quarter selling price of $1,041 per ton, a 21 percent increase from the same period in 2005, was also a record.

For the year, net sales cracked $6 billion for the first time in company history. On shipments of 6.2 million tons, AK posted sales of $6.07 billion in 2006, a 6.9 percent increase from 2005.

The average selling price was $984 per ton, a 12 percent increase from the $879 per ton recorded in the previous year.

Much of AK Steel’s gains on price per ton were a result of the strong performance of its specialty steels—stainless and electrical steel. The continued strong outlook for those metals has the company anticipating more gains in the first quarter of 2007.

Unlike carbon steel, whose distributors are still working off an inventory overhang, specialty inventories remain in balance, Wainscott says. Moreover, demand for electrical steel remains ahead of supply both in the United States and abroad. Average selling prices are expected to increase another 4 to 5 percent in the first quarter of 2007, he says, and profits will average more than $60 per ton.

AK Steel will expand its electrical steel capacity in 2007 with capital projects at the company’s Butler, Pa., and Zanesville, Ohio, facilities. The company expects to complete a $14 million investment at its Butler Works this quarter. A second, $55 million expansion project at the two sites will ultimately increase AK’s electrical steel capacity to 335,000 tons by mid-2008.

While the outlook for carbon steel isn’t as rosy as the specialty metals picture, the overall forecast remains positive for most of 2007, Wainscott says. “We look for the U.S. economy to be down slightly, but still have a pretty good year. We see solid growth, but at a somewhat slower pace.”

Alcoa Inc.
Historic Year Reported by Aluminum Leader
2006 was the best financial year ever for Pittsburgh-based Alcoa Inc., both from a top line and bottom line perspective, said Alain Belda, chairman and chief executive officer of the aluminum producer.

“A higher LME price was definitely a positive factor, but our management team took full advantage of the opportunities the market offered by increasing revenues, mitigating costs, introducing new products and innovations to the market, expanding our global footprint, managing our portfolio and growing our customer base,” Belda said. “We accomplished all of this while continuing to invest in modernizing our plants, building the operation that will enable us to deliver stronger results for years to come. We are delivering stronger results now and investing in our future.”

For the year, Alcoa posted a net income of $2.25 billion, up 82.2 percent from 2005, on sales of $30.38 billion, up 18.8 percent from a year earlier. Net income for the fourth quarter ended Dec. 31 was $359 million, up 60.3 percent from a year earlier, on sales of $7.84 billion, which was just under 20 percent higher than in the fourth quarter of 2005.

The fourth quarter numbers were significantly affected by restructuring and impairment charges, said Charles D. McLane Jr., the company’s vice president and chief financial officer. Those charges amounted to $554 million, or $386 million after tax. Excluding those charges Alcoa’s income from continuing operations in the fourth quarter was $664 million, up 20 percent from the third quarter.

Alcoa announced a targeted restructuring of several of its downstream operations, as well as the creation of a soft alloy extrusion joint venture with Orkla ASA’s Sapa Group, with the intention of offering the venture to the public markets through an IPO in November. Once the restructuring is completed—probably in another year or so—it is expected to result in $125 million in annual savings.

Alcoa  is continuing to review assets for strategic fit and long-term shareholder value, but currently has no plans for divestitures. One potential divestiture might include parts of the company’s packaging business, Belda said, but Alcoa won’t make that decision until late 2007 or early 2008.

Alcoa has been investing in growth projects both in its upstream and downstream businesses. Its upstream activity includes expansions of its Alumar smelter and its Pinjarra refinery, as well as perhaps its most significant growth project—the Fjardaal smelter in Iceland—which is on target to produce its first metal in the second quarter. Also, construction is ongoing in Brazil on a bauxite mine and a refinery expansion at its San Luis facility.

Downstream, it has expanded its aerospace sheet and plate production by 50 percent with projects at its Davenport, Iowa; Kits Green, England; Fusina, Italy; and Kalitva, Russia, facilities. Alcoa also continues with major improvements at its Kofem facility in Hungary, its new fabrication facility in Russia and its strategic position in China.

“I’ve never seen us as well positioned and with as good a market to show the results of our actions,” Belda concluded. “I believe the work done has laid the foundation for a great 2007.”

Carpenter Technology Corp.
Nickel Erodes Margins, But Sales Remain Strong
Carpenter Technology Corp, Wyomissing, Pa., earned record sales and net income for its fiscal second quarter. Results benefited from increased shipments, a continued focus on cost improvements through lean manufacturing and higher prices, company officials reported.

Net sales for the second fiscal quarter ended Dec. 31 were $441.3 million, compared with $345.7 million for the same quarter a year ago. Net income in the second quarter was $48.1 million, compared with net income of $42.9 million a year ago.

“We achieved record second quarter results due, in part, to solid demand from the industrial and aerospace markets and our greater emphasis on the energy market,” said Anne Stevens, chairman, president and chief executive officer.

“Our ability to achieve record earnings despite nickel prices that more than doubled from a year ago reflected our strong operational focus,” she added. “The rapid rise in the cost of nickel had a profound impact on our margins. If raw materials prices stabilize, we fully expect that our margins will improve.”

For the second quarter, Carpenter’s sales were 28 percent higher than a year ago. Surcharges, an increase in pounds shipped, and higher base prices contributed to the sales gain. Adjusted for surcharges, sales increased 14 percent from the second quarter a year ago.

Carpenter reported major gains in sales to the industrial market, the automotive and truck market (despite lower U.S vehicle production), oil and gas, power generation, aerospace and consumer products. Medical market sales decreased 5 percent from last year’s second quarter record due to inventory adjustments in that sector.

“The overall 2007 outlook for our end-use markets remains strong, and we are particularly excited by the opportunities we are developing in the energy market,” Stevens said. “I am confident in our strategic direction and the long-term strength in the key end-use markets that we serve. Our announcement to invest $115 million in additional premium melt capacity will allow us to capitalize on the growth opportunities within these markets.”

Nucor Corp.
More Record Growth Despite Volatility
Nucor Inc. credited its product diversity for its ability to achieve a third consecutive earnings record in 2006. “Our earnings in bar, beams, plate and downstream products have allowed us to grow despite the volatility in the flat-roll market,” said Dan DiMicco, chairman, president and chief executive of the Charlotte, N.C., minimill.

Nucor’s net income of just under $1.8 billion in 2006 was up 34.1 percent from 2005 and more than five and a half times greater than its net income of $311 million in 2000, the last economic peak. It achieved this on net sales of just under $15.8 billion, which were up 16.1 percent from 2005.

In the fourth quarter of 2006, Nucor’s net earnings totaled $408.2 million, up 19.7 percent from the year earlier, on net sales of $3.5 billion, up 8.1 percent over sales in the fourth quarter of 2005.

Nucor’s fourth-quarter earnings were actually better than the company had predicted due to several factors, said Terry Lisenby, chief financial officer, treasurer and executive vice president. Nucor’s steel shipments declined less than expected, its steel mill metal margin was better than expected, and both energy costs and the cost of scrap and scrap substitutes improved more than expected.

John Ferriola, executive vice president, said Nucor’s sheet mill group had an excellent year in 2006, achieving extremely strong, profitable growth over 2005. “In 2006, our team did an outstanding job of both capitalizing on improved sheet market conditions for the first nine months of the year and managing through the weaker fourth quarter,” which was affected by a record level of imports resulting in higher service center inventories.

“Nucor was not interested in chasing steel prices lower during this inventory correction,” he said, and as a result the sheet mill group’s shipments in the fourth quarter declined 15 percent from the third quarter and 7 percent from a year earlier. “Although our production discipline during the fourth quarter adversely impacted our results for that quarter, it provided a more stable pricing environment during the period that we were negotiating our 2007 contracts,” he said.

As a result of these negotiations, 60 percent of Nucor’s available sheet mill capacity for 2007 (and 70 percent of its capacity in the first quarter) is now under contract. That should help Nucor’s margin performance, DiMicco said, “as those margins are already locked in and the contracts already have scrap adjustment clauses in them.”

Nucor’s other product groups are not as heavily sold, with only 15 to 20 percent of special bar quality and plate under contract, and almost none under contract for beams.

“When I look at Nucor in 2007, I see a company generating its strongest growth ever. In fact, I can comfortably assert that Nucor is better positioned and better equipped to grow profitably than at any other time in our company’s history,” DiMicco told analysts and shareholders.

Nucor plans to spend approximately $940 million on capital expenditures in 2007, well over double the $338 million spent in 2006. About $500 million of this will be spent on greenfield projects, including an 850,000-ton-per-year SBQ mill in Memphis, Tenn.; a second Castrip production facility with a 500,000-ton capacity to be located at Nucor-Yamato Steel in Blytheville, Ark.; a 500,000-ton steel galvanizing facility to be built at Nucor’s sheet mill in Decatur, Ala.; and a 45,000-ton-per-year metal building systems plant in Brigham City, Utah.

Nucor completed two acquisitions in 2006. The May purchase of Connecticut Steel for $44 million gave the company attractive new downstream product offerings in the rebar and wire mesh markets. In November, it purchased Verco Manufacturing Co. for $180 million, a buy that expands its leadership position in the steel floor and roof decking market.

In what would be Nucor’s largest acquisition ever, the steelmaker in January announced that it would be making a $1 billion tender offer for Harris Steel Group, a deal that could close by the end of the first quarter. According to Hamilton Lott Jr., Nucor’s executive vice president in charge of downstream operations, this would be a major step forward in advancing the company’s vertical integration strategy. Currently North America’s largest producer of rebar, Nucor will also become the continent’s third largest rebar fabricator upon completion of this transaction. At the same time, Harris’ Laurel Steel unit will expand Nucor’s position in cold-finished bars, and there will be attractive downstream growth opportunities from Harris’ metal gratings, steel distribution and steel trading operations.

Nucor also announced that its Nu-Iron direct reduced iron facility in Trinidad is up and running, shipping its first vessel of DRI in mid-January.

Steel Dynamics Inc.
Roanoke Helps Produce Record Earnings, Income
The successful integration of Roanoke Electric Steel into Steel Dynamics Inc. produced record results for the Fort Wayne, Ind., minimill.

SDI reported net sales of $840 million for the fourth quarter, an increase of 47 percent from the same period one year earlier. Net sales for the year totaled $3.2 billion, 48 percent ahead of the $2.2 billion posted in 2005.

Net income showed an even greater increase compared to the same period one year earlier. For the quarter, net income totaled $105 million, 61.5 percent ahead of the final three months of 2005. For the full year, net income totaled $397 million, 79 percent ahead of the figure from 2005.

“During 2006, we were able to take advantage of numerous marketplace opportunities as a result of the production capabilities we’ve put into place over the past several years,” SDI President Keith Busse told investors and analysts during the company’s year-end conference call. “With the exception of some softening of demand for flat-rolled steel in the fourth quarter due to market oversupply, the markets for our products were strong all year. With prices for steel scrap and energy costs remaining relatively stable or declining, and selling prices relatively strong, we were able to achieve stronger margins.”

SDI’s shipments increased 30 percent to 4.7 million tons, with all three of its Indiana steel mills establishing production and shipping milestones. The company’s flat-roll division exceeded 2.5 million tons for the first time, while its structural and rail division topped 1 million tons and engineered bar products surpassed 500,000 tons.

The mills acquired in the Roanoke Electric Steel deal, which was completed in April, also achieved record results in 2006.

“With the addition to our product mix of Roanoke’s merchant bars and Steel of West Virginia’s specialty structural steel products, as well as the strong growth in wide-flange beams and SBQ bars, Steel Dynamics ended 2006 as a much more diversified steelmaker,” Busse said. “In 2005, two-thirds of our volume was in flat-rolled steel, but by the fourth quarter of 2006 flat-rolled accounted for slightly less than half of our steel operations shipments. The strength of other steel products helped us offset lower volumes in flat-rolled toward the end of the year.”

Given the recent flurry of mergers among steelmakers, SDI’s solid performance makes it an attractive target for a takeover. But Busse said the company is not on the auction block, and won’t be there for the foreseeable future.

“We have been discussed in both veins, being potentially acquired or acquiring others. We’d rather view ourselves as acquirers or greenfield constructors,” he said. “The company is not for sale and will not likely be for sale. We’re going to continue the path of adding capacity where prudent at existing locations, considering greenfield projects and looking at assets that would become available for Steel Dynamics.”

The company’s capital expenditures budget for 2007 represents a significant increase over the $128 million spent in 2006. SDI anticipates spending $400 million on capital improvements this year, with more than $250 million earmarked toward expansion at Columbia City.

SDI will also spend between $40 million and $50 million to upgrade equipment at Roanoke.

Busse told investors that his company is not immediately concerned about any effects from the launch of SeverCorr, the new steel mill in Mississippi. “Obviously ramp-ups take some time. There will be minimal impact from a new entrant in ‘07. SeverCorr’s going to be a customer for the first four to six months, buying steel to feed the cold-mill startup,” he noted.

U.S. Steel Corp.
‘One of the Best Years in Our Long History’
U.S. Steel Corp., Pittsburgh, reported net income of $1.374 billion in 2006, up over 50 percent from 2005’s net income of $910 million. The company’s fourth-quarter net income of $297 million was nearly three times its income of $109 million in fourth-quarter 2005.

“Our performance in 2006 resulted in another outstanding year, with record sales, operating income and net earnings,” said U. S. Steel Chairman and CEO John P. Surma.

“During the year, our strong cash flow generation enabled us to reduce our debt by almost $600 million, to repurchase common shares for $442 million, to make voluntary cash contributions of $190 million to our domestic benefit plans, and to make significant capital investments. All in all, 2006 will go down as one of the best years in our long history,” he added.

U.S. Steel’s fourth quarter was significantly better than the fourth quarter the previous year, but was weaker than the earlier 2006 quarters as inventory rebalancing and high import levels reduced domestic demand for steel.

“We expect first-quarter results to decline from the fourth quarter, but flat-rolled demand is firming and we have restarted several domestic blast furnaces to bring our production in line with improving order rates,” Surma said.