AK Steel
Third-Quarter Net Income Increases Four-Fold
Despite challenging business conditions, including “a rather difficult” carbon steel environment and a stagnant market for 300-series stainless steel, AK Steel Corp. reported a four-fold increase in its net income in the third quarter vs. a year earlier. The West Chester, Ohio, mill expects similar results in the fourth quarter, which should mean that full year 2007 will “even exceed our own expectations,” said James L. Wainscott, chairman, president and chief executive officer, during last month’s conference call with analysts and investors.

The integrated carbon and specialty steelmaker posted a net income of $108.4 million in the quarter, up from $26.0 million during third-quarter 2006 on net sales of $1.72 billion, up 10.8 percent from $1.55 billion during the year-earlier quarter. Through September, the company posted a net income of $281.0 million on net sales of $4.91 billion vs. $61.3 million on sales of $4.65 billion for the first nine months of 2006.

AK Steel generated an operating profit of $163.5 million or $102 per ton in the third quarter, marking the second consecutive quarter and the second time in its history that it achieved an operating profit exceeding $100 per ton.

Wainscott admitted that AK’s largest market, automotive, is having a difficult year, with 2007 light vehicle production at its lowest level in a decade. However, he says, “With 59 days of supply on hand, U.S. light vehicle inventory levels are in reasonably good shape. With any kind of pickup in the economy, steel demand [from this sector] could be impacted in a significantly positive way.”

Housing starts are likely to remain weak for a while, putting pressure on pricing and volumes in AK’s ACM (appliance, construction and manufacturing) business segment, he said. On a positive note, steel imports continue to decline. “Service centers and distributors continue to be cautious buyers in the current market environment, but with service center inventories at their lowest levels in 20 months, any change in their outlook should equate to higher shipments,” Wainscott said.

AK Steel has been gradually realizing the $30 per ton carbon flat-roll increase it announced in August “and we will not be shy about responding to the markets that we serve with additional price increases when and where they are warranted,” he said.

Commenting on the specialty steel market, Wainscott said commodity flat-rolled stainless has been weak due to a combination of high inventory levels and declining nickel prices, “but as nickel prices have begun to stabilize recently, we’ve seen a fairly significant increase in customer buying activity.”

Meanwhile, demand for grain-oriented electrical steel continues to be strong, especially in light of new U.S. Department of Energy standards for transformer efficiency. As a result of this and good global demand, Wainscott expects price increases averaging over 20 percent in AK’s electrical steel contracts for 2008.

He noted that AK Steel’s most recent electrical steel expansion project, originally scheduled for mid-2008, should be completed early. The company expects to complete work at AK’s Butler Works this month and at the Zanesville Works in December.

In mid-October, AK’s board approved yet another electrical steel expansion project—its fourth in four years—which will increase the capacity at Butler and Zanesville by another 9,000 tons a year at a cost of slightly more than $50 million.

The board, at the same time, authorized another project at Butler, the installation of a new, modern electric arc furnace capable of melting 1.45 million tons of stainless, electrical and carbon steel products per year, replacing two less-efficient EAFs. At a cost of about $130 million, it is expected to generate an annual savings of about $60 million.

“Not only does this provide us with significant cost savings and flexibility going forward, it can also provide us with about 400,000 tons annually of carbon slabs. Thus this project also allows us to improve our self-sufficiency and substantially reduce the company’s need to purchase carbon slabs in the open market,” Wainscott said.

Some skeptics doubt one EAF can be used to produce all three kinds of steel, but Wainscott is confident. “The reality is that we are doing it today at Butler, just not to the extent that we expect to.”

Alcoa
Quarter’s Weakness Belies Record Pace

Alcoa, Pittsburgh, Pa., reported third-quarter net income of $555 million, up from the $537 million posted during the same period in 2006. Sales, however, were down slightly in both year-over-year and sequential comparisons.

Revenues for the quarter totaled $7.4 billion, compared with $7.6 billion in 2006 and $8.1 billion in the second quarter of 2007. The third-quarter figures were affected by the exclusion of the company’s soft alloy extrusion business as a result of forming a joint venture with Sapa in June, along with lower metal prices, seasonality and softness in the North American markets, officials said.

“Macroeconomic drivers such as the weakening U.S. dollar, higher petroleum costs and market softness in North America impacted the quarter,” Chairman and CEO Alain Belda told investors and analysts last month. “Despite these challenges, we have established all-time records for revenue, net income, earnings per share and cash from operations in the first nine months of the year.”

In 2007’s first three quarters, net income hit $1.93 billion, compared with $1.89 billion in 2006. 

Third-quarter after-tax operating income on flat-rolled products was down $32 million from the previous quarter, but up $13 million from a year ago. Belda said seasonably lower volumes and an unfavorable product mix were to blame for the decline from the previous quarter.

Extruded and end products suffered a more sizable drop to $13 million in income, down from $46 million in the second quarter but up from $3 million in the third quarter of 2006.

Looking forward, Belda said aerospace will continue to be a solid market for Alcoa, while Class 8 trucks will be down. He also expects destocking in the distribution industry to continue into the first quarter of 2008.

Alcoa reported capital expenditures for the quarter of $941 million, with 66 percent dedicated to growth projects. Year-to-date, the company has invested $1.74 billion in growth projects, or 67 percent of capital expenditures.

Alcoa’s board of directors has authorized the repurchase of up to 25 percent of the company’s outstanding common stock, or approximately 217 million shares. Under the earlier repurchase program, 43 million shares or approximately 5 percent, had already been repurchased by the end of the third quarter, leaving the company with authorization to buy back approximately 174 million shares.

“The Chalco sale, combined with proceeds from the upcoming sales of our packaging and auto castings businesses, give us a strong balance sheet, increased flexibility to ramp-up share repurchases and deliver greater shareholder value,” said Belda.

Allegheny Technologies Inc. 
Exotic Alloys Strong, Stainless Weak

Allegheny Technologies Inc., Pittsburgh, reported net income for third-quarter 2007 of $193.9 million on sales of $1.33 billion, up from a net income of $160.2 million on sales of $1.29 billion in third-quarter 2006.

For the first nine months of 2007, ATI’s net income totaled $598.2 million on sales of $4.18 billion, up from a net income of $411.0 million on sales of $3.54 billion.

“Our third quarter 2007 results had two divergent story lines. Strong demand trends continued in our High Performance Metals segment and for our high-value flat-rolled products. On the other hand, shipments of our standard stainless products were extraordinarily weak,” said L. Patrick Hassey, chairman, president and CEO.

Compared to the same period last year, shipments of ATI’s High Performance Metals segment titanium, nickel and exotic alloys grew 18 percent, 5 percent and 10 percent, respectively. In its Flat-Rolled Products segment, shipments of titanium and ATI-produced Uniti titanium products grew 25 percent to approximately 2.6 million pounds, while shipments of grain-oriented silicon electrical steel grew 12 percent, vs. last year’s third quarter. In contrast to this strong performance, shipments of standard stainless products declined 52 percent to approximately 57,000 tons, the lowest level in many years.

“As previously stated, we had expected orders and shipments for our flat-rolled standard stainless sheet to improve once the price of nickel stabilized. The monthly average price of nickel did stabilize during the third quarter and the October surcharge for Type 304, the most common nickel-bearing stainless grade, is the lowest surcharge for that grade in 11 months,” Hassey reported. “In addition, U.S. service center data indicates that inventories continued to decline during the third quarter. However, according to published information, mill-owned inventories of finished goods increased. ATI neither built a significant quantity of inventory, nor did we chase the base price down just to increase our shipments. We believe that our standard stainless sheet business should begin to improve in early 2008.”

ATI officials expect growth in demand for high-value products in key growth markets, which represent 70 percent of ATI sales. During the last few months, ATI’s operating companies have added several long-term agreements with customers in the global aerospace and defense, chemical process industry, oil and gas, electrical energy, and medical markets.

“Our long-term profitable growth outlook remains intact,” Hassey said. “We believe ATI remains very well-positioned to achieve strong earnings growth in 2008 and beyond from the global markets that have been driving our profitable growth over the last several years.”

Nucor
Sales Up, Earnings Down
Through First Nine Months

Nucor Corp., Charlotte, N.C., reported net earnings for the first nine months of 2007 totaling $1.11 billion, a decrease of 18 percent from net earnings of $1.35 billion in last year’s first nine months.

Net earnings of $381.2 million in this year’s third quarter increased 11 percent from the $344.9 million earned in the second quarter of 2007, but were down 27 percent compared with $521.6 million earned in the third quarter of 2006.

Nucor Chairman and CEO Dan DiMicco told investors and analysts that the company is on track to record its second-best earnings mark in company history.

In the first nine months of 2007, Nucor’s net sales increased 8 percent to $12.20 billion, compared with $11.28 billion in last year’s first nine months. The average sales price per ton increased 8 percent, while total tons shipped to outside customers remained flat compared to the first nine months of 2006.

In the third quarter of 2007, Nucor’s net sales increased 8 percent to $4.26 billion, compared with $3.93 billion in the third quarter of 2006, and increased 2 percent compared with $4.17 billion in the second quarter of 2007. The average sales price per ton increased 5 percent from the third quarter of 2006 and decreased 1 percent from the second quarter of 2007.

Total steel shipments decreased 4 percent to 16,663,000 tons in the first nine months of 2007, compared with 17,286,000 tons in last year’s first nine months. Steel shipments to outside customers decreased 5 percent to 15,157,000 tons in the first nine months of 2007, compared with 15,936,000 tons in last year’s first nine months.

In the third quarter, Nucor completed the acquisition of three downstream companies: Magnatrax Corp., LMP Steel & Wire and Consolidated Rebar Inc.  These followed the acquisitions of Verco Manufacturing and Harris Steel.

“Vertical integration has always been a successful strategy for Nucor,” said Ham Lott, executive vice president of fabricated products. “In addition to consistently generating attractive returns through the economic cycle, these downstream businesses provide a profitable base load of volume for Nucor’s steel mills.”

With the acquisitions, Nucor has increased its value-added steel products annual capacity by more than 80 percent to approximately 3.5 million tons. At that capacity, Nucor claims to be the second-largest building products company in the United States.

In addition, Nucor announced two acquisitions in September that are expected to close in the fourth quarter. Nucor has entered into an agreement to acquire Nelson Steel Inc., a producer of wire mesh and related products, with capacity of approximately 80,000 tons. Nucor’s wholly owned subsidiary, Harris Steel Inc., has entered into an agreement with Barker Steel Co. Inc. to form a new entity that combines the two companies’ rebar fabrication operations in the northeastern U.S. market.

Looking forward, DiMicco expects continued strength in bar, beam and plate, while the conditions are beginning to improve in the sheet market. Additionally, company officials were pleased with the latest data from the Metals Service Center Institute indicating that inventories at U.S. service centers have reached a 22-month low.

“We are finally seeing a significant drop in imports,” DiMicco said. “That has helped bring service center inventories back into better balance.”

Still, while imports have scaled back considerably during the second half of 2007, DiMicco cautioned against expecting that to become the norm.

“The China concern is still there and will stay there until its capacity is not out of balance with its own demand,” said DiMicco. “Just because you have one or two good months of imports doesn’t mean that concern disappears.”

Steel Dynamics Inc.
Strong Sequential Earnings,
Revenue, Volume Growth

Steel Dynamics Inc., Fort Wayne, Ind., announced third-quarter earnings of $101 million, after accounting adjustments related to the company’s July acquisition of The Techs.

Third-quarter revenues increased to $1.2 billion, 27 percent higher than both the year-ago quarter and the second quarter of 2007. Third-quarter consolidated shipments of 1.6 million tons increased 26 percent as compared to the year-ago quarter. The company experienced this progress despite violent electrical storms in August that caused brief but significant outages at its Columbia City, Ind., mill.

The sequential volume increase from the second quarter of approximately 336,000 tons, or 27 percent, was due primarily to increased shipments of 335,000 tons from the company’s steel operations, of which 231,000 tons were from The Techs and 110,000 tons were from increased shipments by the Flat-Roll Division.

During the first nine months of 2007, net income grew to $297 million on revenues of $2.9 billion. Consolidated shipments for the first nine months grew 15 percent to 4.1 million tons, compared to 3.5 million tons in the first nine months of 2006. The company’s steel operations showed increased year-over-year nine-month shipments of nearly 513,000 tons, or 14 percent.

“Overall, Steel Dynamics is experiencing another strong year,” said Keith Busse, chairman and CEO. “From an operating standpoint, we saw sequential improvement from the second quarter, in spite of continued softness in flat-rolled steels and some spotty slowness in merchant and specialty bar steels.

“The integration of The Techs is proceeding well. The Techs represent an increase in steel operating revenues and volumes. The product mix sold by The Techs generally elicits higher average selling values, but the resulting operating margins are somewhat lower than traditionally experienced at SDI as The Techs do not currently produce their own substrate as does our Flat-Roll Division.”

In the third quarter, SDI’s operating income was $111 per ton shipped with an operating margin of 15 percent, compared with second-quarter operating income of $136 per ton shipped and an operating margin of 18 percent. The third quarter’s average consolidated selling price per ton decreased to $737 from $739 in the second quarter of 2007, but increased $4 from the year-ago quarter. The average scrap cost per net ton charged decreased $21 compared to the second quarter, which had seen an increase of $44 from the first quarter.

“The outlook for the fourth quarter is positive,” Busse said. “The costs of ferrous resources have trended down and we expect them to remain relatively stable going into winter. We expect selling prices to remain steady or increase slightly. Market demand for flat-rolled steel should improve in the fourth quarter due to inventory destocking and limited imports. We expect continued strength in our long products mills, particularly structural steel that is used in the non-residential construction markets. Improved market conditions will be offset by scheduled outages for upgrades at three of our five mills.

“During the third quarter, we made two important announcements that have strong implications for our future,” Busse continued. “The acquisition of OmniSource helps anchor our supply of domestic ferrous scrap resources and the commencement of the Mesabi Nugget project develops future self-sufficiency in pig-iron supply, both of which are critical steps in providing a strong platform for future growth initiatives.

“The acquisition of OmniSource creates an environment that allows us to capture margins at every step of the value chain. We believe that scrap resources in the future could become scarce at times due to increasing global demand and a softer U.S. dollar. Given these assumptions, we anticipate scrap margins could increase in the future, and we hope to continue to grow this arm of our business.”

OmniSource can, at times, provide SDI with a more dependable, nearby supply of high-quality steel scrap and affords SDI a measure of protection from supply chain shortages under certain market conditions, Busse said. SDI currently gets about 15 percent of its scrap from OmniSource. That could increase to 20 or 30 percent, but will still represent only a portion of Omni’s business. Omni will continue to value and serve its other customers, as SDI will continue to buy scrap from those who have consistently furnished it in the past, he added.

“Our plan to develop iron resources on the Mesabi Range in Minnesota promises to provide a consistent future supply of high-quality, lower-cost iron nuggets for use in our minimills. We expect ultimately to control the entire process from mining, concentrating, and then direct reduction of the concentrate into pig iron. We believe that the economics of production will make these resources attractive compared to imported pig iron today and even more attractive as global demand grows and the cost of iron units continues to increase.”

The $75 million expansion of the company’s Structural and Rail Division at Columbia City has experienced delays. SDI won’t be able to commission the mill until March or April, rather than in the fourth quarter, because equipment deliveries are running behind schedule.With service center inventories at low levels, coupled with already high production levels at the mills, an uptick in demand could tighten supply, especially in light of lower than normal imports due to the weak dollar, said SDI executives.

“I don’t think the company has ever been in better shape from a growth perspective. If you want to interpret fourth-quarter earnings projections as flat, that’s fine. I view that as a good thing because historically fourth quarters are down,” Busse said.

Timken
Sales Increase 6 Percent

The Timken Company, Canton, Ohio, reported sales of $1.26 billion in third-quarter 2007, an increase of 6 percent over the same period a year ago. Strong sales in industrial markets were partially offset by the strategic divestment of the company's automotive steering and European steel tube manufacturing operations in prior periods. The company achieved third-quarter income from continuing operations of $41.2 million, up from $38.7 million in last year's third quarter.

"While Timken's third-quarter performance exceeded what we achieved last year, our results still fell short of what we had expected to deliver," said James W. Griffith, Timken's president and chief executive officer.

Service Center Third-Quarter Financials

Reliance
Unexpected Price Declines Hurt Margins

Surprised by sharp price declines, particularly in the stainless market, Los Angeles-based Reliance Steel & Aluminum Co. reported a third-quarter gross profit that fell slightly below expectations, among otherwise positive results.

“Considering the overall market factors, we are pleased with the 2007 third-quarter results. It was, based on market conditions and the overall business environment, the most challenging quarter we’ve had since 2003,” said David Hannah, Reliance chairman and CEO, during last month’s conference call with analysts and investors.

“Managing gross profit margins was our biggest challenge,” agreed Reliance President and COO Gregg Mollins. “Nickel surcharges on stainless steel fell 74 cents a pound on the quarter, the largest decline ever. Midwest spot aluminum ingot dropped 13 cents a pound. Carbon steel was also extremely competitive, with several price discounts announced on flat-roll and plate. The race to reduce inventories was intense, and our customers bought only what they absolutely needed, expecting prices to fall. It was a battle that was, and continues to be, hard fought.”

Reliance reported 2007 third-quarter sales totaling $1.81 billion, an increase of 11.4 percent compared with 2006 third-quarter sales of $1.63 billion. Third-quarter 2007 net income of $93.6 million was down nearly 15 percent from a net income of $107.5 million for the 2006 third quarter, however. Sales for the first three quarters of 2007 totaled a record $5.55 billion, an increase of 33 percent compared with 2006 nine-month sales of $4.17 billion. For the nine-month period, Reliance’s net income amounted to a record $328.0 million, up 17 percent compared with net income of $279.9 million for the same period in 2006.

“During the third quarter, pricing on many carbon steel products was soft, common alloy aluminum driven by LME pricing decreased somewhat unexpectedly, and stainless prices fell faster and lower than expected,” Hannah said. “Demand for our products was relatively stable for a third quarter, however, with our volume only off about 4 percent from our record second- quarter amount. We managed our receivables and inventories well, which when combined with our operating profits resulted in a very strong cash flow.”

In August, Reliance began using some of its cash to repurchase about 1.7 million shares of its own stock. “We began buying our shares when the price dropped down to the low $40 per share range. At that point it was more accretive for us to purchase our own shares than to acquire other companies,” Hannah said, emphasizing that the company is not buying back stock in lieu of other acquisitions or internal growth projects.

Its most recent acquisition was Clayton Metals, headquartered in Wood Dale, Ill., with three additional service centers in California, North Carolina and New Jersey. The purchase of the $123 million distributor closed in July. In addition, Reliance completed the acquisition of Metalweb plc Oct. 1. Metalweb is headquartered in Birmingham, England, with three additional service centers in London, Manchester and Oxford. The $53 million company specializes in the processing and distribution of aluminum products. “This transaction brings an additional global presence to Reliance and marks our first metals service center based in the United Kingdom,” said Hannah.

Reliance plans to grow internationally mostly by sticking with customers as they establish businesses offshore. “We have followed customers into South Korea, China and Belgium,” Hannah said. “As a percentage, our international growth rates will be substantial, but as a dollar amount it will be small compared to the rest of the company.”

Hannah and Mollins said they expect demand to soften further in the fourth quarter due to the normal seasonal slowdowns, as well as cautious buying by customers in the midst of an uncertain economic environment. They anticipate relatively flat pricing and only a slight improvement in gross profit margins for the quarter, though they still expect to achieve record sales and earnings for the year.