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Article by DailyStocks_admin    (12-23-08 04:11 AM)

The Daily Magic Formula Stock for 12/23/2008 is Allegheny Technologies Inc. According to the Magic Formula Investing Web Site, the ebit yield is 35% and the EBIT ROIC is 25-50%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

The Company
Allegheny Technologies Incorporated (ATI) is a Delaware corporation with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone number (412) 394-2800. Allegheny Technologies was formed on August 15, 1996 as a result of the combination of Allegheny Ludlum Corporation and Teledyne, Inc. References to “Allegheny Technologies,” “ATI,” the “Company,” the “Registrant,” “we,” “our” and “us” and similar terms mean Allegheny Technologies Incorporated and its subsidiaries, unless the context otherwise requires.
Our Business
Allegheny Technologies is one of the largest and most diversified specialty metals producers in the world. We use innovative technologies to offer growing global markets a wide range of specialty metals solutions. Our products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium and niobium, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, carbon alloy impression die forgings, and large grey and ductile iron castings. Our specialty metals are produced in a wide range of alloys and product forms and are selected for use in environments that demand metals having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics.
We focus our technological and unsurpassed manufacturing capabilities to serve global end use markets with highly diversified and specialized product offerings. Key end use markets for our products include:
Aerospace and Defense . We are a world leader in the production of premium titanium alloys, nickel-based and cobalt-based alloys and superalloys, and vacuum-melted specialty alloys used in the manufacture of both commercial and military jet engines, as well as replacement parts for those engines. We also produce titanium alloys, vacuum-melted specialty alloys, and high-strength stainless alloys for use in commercial and military airframes and airframe components.
Titanium and titanium alloys are critical metals in aerospace and defense applications. Titanium and titanium alloys possess an extraordinary combination of properties, including superior strength-to-weight ratio, good elevated temperature resistance, low coefficient of thermal expansion, and extreme corrosion resistance. These metals are used to produce jet engine components such as blades, vanes, discs, and casings, and airframe components such as structural members, landing gear, hydraulic systems, and fasteners. The latest and next-generation airframes and jet engines use even more titanium and titanium alloys in component parts in order to minimize weight and maximize fuel efficiency.
Our nickel-based alloys and superalloys and specialty alloys are also widely used in aerospace and defense applications. Nickel-based alloys and superalloys remain extremely strong at high temperatures and resist degradation under extreme conditions. Typical aerospace applications for nickel-based alloys and superalloys include jet engine shafts, discs, blades, vanes, rings and casings.
Our specialty alloys include vacuum-melted maraging steels used in the manufacture of aircraft landing gear and structural components, as well as jet engine components.
We continuously seek to develop new alloys to better serve the needs of this end use market. For example, we have developed ATI 425® titanium, a new cold-rollable alloy, as a lower cost alternative to the most popular high-strength titanium alloys, for use in airframe components. We have also developed Allvac® 718 Plus® alloy, a new nickel-based superalloy that can withstand higher temperatures than the standard 718 superalloy, for use in the next generation of fuel efficient jet engines.
Demand for our products by the aerospace and defense market has increased significantly over the last several years, and we expect it to remain strong and continue to grow into the next decade.
Chemical Process Industry and Oil and Gas. Oil and gas prices have reached record levels over the past two years, resulting in increased global oil and gas exploration and development. The environments in which oil and gas can be found in commercial quantities have become more challenging, involving deep offshore wells, high pressure and temperature conditions, sour wells and unconventional sources, such as oil sands. Sustained high oil and gas prices have also led to increased interest in biofuels, such as ethanol, as an alternative or supplement to gasoline and other fossil fuels, and in liquefied natural gas (LNG).
All of our business segments produce metals that are critical to the chemical process industry and oil and gas industry. Our specialty metals, including titanium and titanium alloys, nickel-based alloys, stainless steel alloys and other specialty alloys, have the strength and corrosion resistant properties necessary in the chemical process industry, and global demand for these materials has been increasing, particularly in rapidly growing industrial markets in Asia. We also provide advanced specialty metals used in offshore oil and gas production, including offshore piping systems and subsea oil and gas fields.
We continuously seek to develop new alloys to better serve the needs of this end use market. For example, we have developed AL 2003™ lean duplex alloy as a low cost substitute for type 316L stainless steel. AL 2003™ lean duplex stainless, AL 2205™ duplex stainless, and AL-6XN® superaustenitic stainless steel in strip and plate product forms are NORSOK qualified. ATI’s titanium castings are also qualified under NORSOK standards. The NORSOK standards are developed by the Norwegian petroleum industry and are intended to identify metals used in oil and gas applications that are safe and cost-effective.
Tungsten is the most dense and heat resistant metal commercially available. One application for our tungsten products is oil and gas drill bit inserts. As drilling methods, including directional drilling, become more complex, our advanced tungsten carbide and diamond matrix materials are often utilized in order to enable faster drilling and longer drill bit life.
Electrical Energy . Our specialty metals are widely used in the global electric power generation and distribution industry. We believe that U.S. and European environmental policies and the electrification of rapidly developing Asian countries will likely result in continuing strong demand for our specialty metals products that we sell for use in this industry.
Coal-fired power plants account for more than one-half of the electricity produced in the United States. Under the Clean Air Interstate Rule adopted by the U.S. Environmental Protection Agency (EPA), power plants in several eastern states will be required, in stages through 2015, to dramatically reduce emissions of sulfur dioxide and nitrous oxide generated from the burning of coal. Most of these plants will be required to install additional filtration systems, or “scrubbers”, which are made of specialty metals we produce, on their smokestacks to comply with the rule. Demand for our specialty metals for pollution control systems is also significant in growing industrial economies, including China. We supply a broad range of alloys, including many proprietary alloys, for these applications. AL-6XN® alloy, a 6-molybdenum super-austenitic alloy, is used in absorber towers, piping, damper doors, ducting and vessels. The nickel-based AL 22™ and AL 276™ alloys are used in the absorber inlet, absorber outlet ducting, damper door seals, and expansion joints.
For electrical power generation, our specialty metals and corrosion resistant alloys (CRAs) and ductile iron castings are used in coal, nuclear, natural gas, and wind power applications. In coal-fired plants, our CRAs are used for pipe, tube, and heat exchanger applications in water systems in addition to the pollution control scrubbers mentioned in the preceding paragraph. For nuclear power plants, we are an industry pioneer in producing reactor-grade zirconium and hafnium alloys nuclear fuel cladding and structural components. Our CRAs are also used in water systems for nuclear power plants. We are a technology leader for large diameter nickel-based superalloys used in natural gas turbines. We are also one of a few producers of very large ductile iron castings used for wind turbines.
For electrical power distribution, our grain-oriented electrical steel (GOES) is used in large and small power transformers, where electrical conductivity and magnetic properties are important. We believe that demand for these advanced specialty metals is in the early stage of an expected long growth cycle as the U.S. rebuilds its electrical energy distribution grid and as developing countries, such as China and India, electrify and build electrical power distribution grids. The U.S. Department of Energy (DOE) published its final rule on distribution transformer efficiency on October 12, 2007, regarding minimum energy efficiency standard levels for electrical energy distribution transformers beginning January 1, 2010. This DOE rule establishes requirements for more efficient transformers, which increases premium grade GOES usage per transformer. ATI is a leading producer of these premium grades of GOES.
Medical . ATI’s advanced specialty metals are used in medical device products that save and enhance the quality of lives.
Our zirconium-niobium, titanium-and cobalt-based alloys are used for knees, hips and other prosthetic devices. These replacement devices offer the potential of lasting much longer than previous implant options.

Our biocompatible nickel-titanium shape memory alloy is used for stents to support collapsed or clogged blood vessels. Reduced in diameter for insertion, these stents expand to the original tube-like shape due to the metal’s superelasticity. Our ultra fine diameter (0.002 inch/0.051 mm) titanium wire is used for screens to prevent blood clots from entering critical areas of the body. In addition, our titanium bar and wire are used to make surgical screws for bone repairs.
Manufacturers of magnetic resonance imaging (MRI) devices rely on our niobium superconducting wire to help produce electromagnetic fields that allow physicians to safely scan the body’s soft tissue. In addition, our tungsten heavy alloy materials are used for shielding applications in MRI devices.
Enhancing and Expanding Our Manufacturing Capabilities and Capacity. Demand for our products from the aerospace and defense, chemical process industry and oil and gas, electrical energy, and medical markets has increased significantly over the last several years, and we expect demand to remain strong and continue to grow into the next decade. We are currently undertaking a multi-phase program to enhance and expand our capabilities and capacities to produce premium specialty metals aimed at these key growth markets. In 2006 and 2007, we announced that we intended to spend at least $950 million of internally generated funds to renew and expand our annual titanium sponge production capabilities to approximately 46 million pounds; expand our premium titanium alloy melt and remelt capacity; expand our nickel-based alloy and superalloy melt and remelt capacity; expand our titanium and specialty alloy plate capacity; and expand our premium titanium and nickel-based superalloy forging capacity. These investments strengthen ATI’s leadership position in the production of technically demanding specialty metals.

High Performance Metals Segment
Our High Performance Metals segment produces, converts and distributes a wide range of high performance alloys, including nickel- and cobalt-based alloys and superalloys, titanium and titanium-based alloys, exotic metals such as zirconium, hafnium, niobium, nickel-titanium, and their related alloys, and other specialty alloys, primarily in long product forms such as ingot, billet, bar, rod, wire, and seamless tube. We are integrated from raw materials (sponge) to melt, remelt, and finish processing in our titanium and titanium alloys, and zirconium and hafnium alloys products. The major end markets served by our High Performance Metals Segment are aerospace and defense, chemical process industry, oil and gas, medical, and electrical energy. Most of the products in our High Performance Metals segment are sold directly to end-use customers. A significant portion of our High Performance Metals segment products are sold under multi-year agreements. The operating units in this segment are ATI Allvac, ATI Allvac Ltd (U.K.) and ATI Wah Chang.
Flat-Rolled Products Segment
Our Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys, in a variety of product forms, including plate, sheet, engineered strip, and Precision Rolled Strip® products, as well as grain-oriented electrical steel. The major end markets for our flat-rolled products are chemical process industry, oil and gas, electrical energy, automotive, food equipment and appliances, machine and cutting tools, construction and mining, aerospace and defense, and electronics, communication equipment and computers. The operations in this segment are ATI Allegheny Ludlum, our 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited (STAL), and our 50% interest in the industrial titanium joint venture known as Uniti LLC. The remaining 40% interest in STAL is owned by the Baosteel Group, a state authorized investment company whose equity securities are publicly traded in the People’s Republic of China. The remaining 50% interest in Uniti LLC is held by Verkhnaya Salda Metallurgical Production Association (VSMPO), a Russian producer of titanium, aluminum, and specialty steel products.

Stainless steel, nickel-based alloys and titanium sheet products are used in a wide variety of industrial and consumer applications. In 2007, approximately 60% by volume of our stainless sheet products were sold to independent service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers.
Engineered strip and very thin Precision Rolled Strip® products are used by customers to fabricate a variety of products primarily in the automotive, construction, and electronics markets. In 2007, approximately 90% by volume of our engineered strip and Precision Rolled Strip products were sold directly to end-use customers or through our own distribution network, with the remainder sold to independent service centers.
Stainless steel, nickel-based alloy and titanium plate products are primarily used in industrial markets. In 2007, approximately 50% by volume of our plate products were sold to independent service centers, with the remainder sold directly to end-use customers.
Grain-oriented electrical steel is used in power transformers where electrical conductivity and magnetic properties are important. Nearly all of our grain-oriented electrical steel products are sold directly to end-use customers.
Engineered Products Segment
The principal business of our Engineered Products segment includes the production of tungsten powder, tungsten heavy alloys, tungsten carbide materials, and tungsten carbide cutting tools. We are now integrated from the raw materials (ammonium paratungstate (APT)) to the manufacture of finished cutting tools. The segment also produces carbon alloy steel impression die forgings, and large grey and ductile iron castings, and provides precision metals processing services. The operating units in this segment are ATI Metalworking Products, ATI Portland Forge, ATI Casting Service and ATI Rome Metals.
We produce a line of sintered tungsten carbide products that approach diamond hardness for industrial markets including automotive, chemical process industry, oil and gas, machine and cutting tools, aerospace, construction and mining, and other markets requiring tools with extra hardness. Technical developments related to ceramics, coatings and other disciplines are incorporated in these products. We also produce tungsten and tungsten carbide powders.
We forge carbon alloy steels into finished forms that are used primarily in the transportation and construction equipment markets. We also cast grey and ductile iron metals used in the transportation, wind power generation and automotive markets. We have precision metals processing capabilities that enable us to provide process services for most high-value metals from ingots to finished product forms. Such services include grinding, polishing, blasting, cutting, flattening, and ultrasonic testing.
Competition
Markets for our products and services in each of our three business segments are highly competitive. We compete with many producers and distributors who, depending on the product involved, range from large diversified enterprises to smaller companies specializing in particular products. Factors that affect our competitive position are the quality of our products, services and delivery capabilities, our capabilities to produce a wide range of specialty materials in various alloys and product forms, our technological capabilities including our research and development efforts, our marketing strategies, the prices for our products and services, our manufacturing costs, and industry manufacturing capacity.
We face competition from both domestic and foreign companies, some of which are government subsidized. In 1999, the United States imposed antidumping and countervailing duties on dumped and subsidized imports of stainless steel sheet and strip in coils and stainless steel plate in coils from companies in ten foreign countries. These duties were reviewed by the U.S. Commerce Department and the U.S. International Trade Commission in 2005 and generally remain in effect. We continue to monitor unfairly traded imports from foreign producers for appropriate action.

CEO BACKGROUND

Diane C. Creel

Age: 59

Director Since: 1996

Principal Occupation: Chairman, Chief Executive Officer and President of Ecovation, Inc., a subsidiary of Ecolab Inc. and a waste stream technology company using patented technologies, since May 2003.

Recent Business Experience: Chief Executive Officer and President of Earth Tech, an international consulting engineering firm, from 1992 to May 2003.

Other Directorships: Foster Wheeler Ltd. and Goodrich Corporation.


James E. Rohr


Age: 59

Director Since: 1996

Principal Occupation: Chairman and Chief Executive Officer, The PNC Financial Services Group, Inc., a diversified financial services organization.

Recent Business Experience: Mr. Rohr had served as President of The PNC Financial Services Group from 1992-2002 and assumed the position of Chief Executive Officer in 2000. He was named Chairman in 2001.

Other Directorships: Equitable Resources, Inc., The PNC Financial Services Group, Inc., and BlackRock, Inc. The PNC Financial Services Group, Inc. holds approximately 33.5% of the outstanding common stock of BlackRock, Inc.

Louis J. Thomas


Age: 65

Director Since: 2004

Recent Business Experience: Mr. Thomas served as Director, District 4, United Steelworkers for the Northeastern United States and Puerto Rico prior to his retirement in May 2004.



MANAGEMENT DISCUSSION FROM LATEST 10K


Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results or performance could differ materially from those encompassed within such forward-looking statements as a result of various factors, including those described below.
Overview of 2007 Financial Performance
In 2007, we strengthened our position in key global growth markets, launched new production facilities, and solidified our balance sheet while achieving record sales and profits. Net income for the full year 2007 increased 30% to $747.1 million, or $7.26 per share, compared to $574.1 million, or $5.61 per share, for 2006. For 2007, return on capital employed was 31.2%, and return on stockholders’ equity was 40.1%. Sales increased 10.5% to $5.45 billion for 2007. Direct international sales increased $294.8 million, or 25%, and represented 27% of our total sales. Our growth is being driven by demand from the aerospace and defense market and strong demand from those markets that are vital to the building and rebuilding of the global infrastructure. For 2007, 31% of our sales were to the aerospace and defense market, 24% to the chemical process industry and oil and gas markets, 13% to the electrical energy market, and 3% to the medical market. These major high-value growing global markets represented 71% of ATI’s 2007 sales.
In our High Performance Metals segment, year-over-year sales increased 14% to $2.07 billion due primarily to demand from the aerospace and defense, and oil and gas markets for our titanium and titanium alloys, nickel-based alloys and superalloys, and vacuum melted specialty alloys. In addition, sales benefited from the continued strong demand for our exotic materials, especially from the aerospace and defense, chemical process industry, and electrical energy markets. Operating profit for the High Performance Metals segment improved to $729.1 million, an 11% increase compared to 2006, due primarily to higher shipments resulting from increased demand, higher average selling prices for nickel-based alloys, specialty alloys and exotic alloys, and benefits from our gross cost reduction efforts. Lower raw material costs, primarily titanium scrap, resulted in a LIFO inventory valuation benefit of $96.3 million for 2007 compared to a LIFO inventory valuation charge in 2006 of $49.4 million.
In our Flat-Rolled Products segment, sales increased 9% to $2.95 billion primarily as a result of improved product mix, higher average base selling prices and raw material surcharges. While demand for our specialty and titanium sheet, and grain-oriented electrical steel products was strong from the global electrical energy, oil and gas, and chemical process industry markets, shipments of our standard stainless products declined primarily due to U.S. and European service center customers’ destocking actions, and concerns by other customers due to the volatility of raw material surcharges as a result of the extreme volatility in the cost of nickel throughout most of 2007. Total Flat-Rolled Products shipments declined 25%, with shipments of standard stainless products declining 37%. Even with the decline in shipments, operating profit for the Flat-Rolled Products segment was a record $505.2 million, a 45% increase compared to 2006. This improvement in 2007 operating profit was due primarily to improved product mix, higher average base selling prices, and the benefits from our gross cost reduction efforts. Increased raw material costs, partially offset by lower inventory quantities, resulted in a LIFO inventory valuation charge of $1.9 million for 2007 compared to a LIFO inventory valuation charge of $147.3 million in 2006.
In our Engineered Products segment, 2007 sales were comparable to prior year at $433.0 million. However, operating profit declined to $32.1 million, compared to $56.7 million in 2006, primarily due to higher purchased raw material costs, and start-up costs associated with our newly expanded ammonium paratungstate (APT) plant, including the slower than planned ramp-up of this plant.
For 2007, total segment operating profit increased 19% to $1.27 billion, an increase of $204.5 million compared to 2006. Total segment operating profit as a percentage of total sales reached a record 23.2% in 2007, compared to 21.5% in 2006.
During 2007, we continued to enhance our leading market positions, reduce costs, and improve our balance sheet. We also realized continued success in implementing the ATI Business System, which is continuing to drive lean manufacturing throughout our operations. Our accomplishments during 2007 from these important efforts included:
•
We continued to grow our global market presence as direct international sales reached a record $1.47 billion, or 27% of total sales, an increase of $294.8 million compared to 2006. We believe that nearly 50% of ATI’s 2007 sales were driven by global markets when we consider exports of our customers.

•
We continued to build a foundation for further profitable growth. During second half 2007, we entered into additional long-term agreements with customers for our titanium and titanium alloy, nickel-based alloy, specialty alloy, grain-oriented electrical steel, and iron castings products. These contracts build upon agreements announced earlier in 2007 and in the second half of 2006 with The Boeing Company and GE Aviation to supply these aerospace and defense customers with titanium and nickel-based superalloys. We believe these agreements indicate that long-term supply of these products remained critically important to our customers.

•
We continued to realize significant benefits of our strategic focus for high value specialty products, especially titanium. In 2007, shipments of titanium products, including ATI produced products for our Uniti titanium joint venture, increased 15% to approximately 41 million pounds. For 2008, we currently expect shipments of titanium products to increase an additional 25% to over 50 million pounds. These volume increases are being achieved utilizing our manufacturing capabilities across both our High Performance Metals and Flat-Rolled Products segments and demonstrate our ability to supply the marketplace with both long and flat-rolled products.

•
We significantly increased self-funded strategic capital investments in our businesses to support the growth in our markets, especially for titanium and titanium alloys, nickel-based alloys and superalloys, and vacuum melted specialty alloys. During the past three years, we have invested over $800 million, of which $457.1 million was spent in 2007, to expand our titanium sponge production, and our melting, rolling and finishing capabilities. Our major strategic capital projects include:
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A significant upgrade to and restarting of our titanium sponge facility in Albany, OR, at a total capital investment of approximately $100 million, including the announced expansion in February 2007. Titanium sponge is an important raw material used to produce our titanium mill products. The annual production of titanium sponge from our Albany, OR facility achieved an annualized production rate of approximately 16 million pounds at the end of 2007, and is expected to reach approximately 22 million pounds of annualized production by the second half of 2008 when all phases are completed.

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The design and construction of a greenfield premium-grade titanium sponge facility in Rowley, UT, which will be the first greenfield titanium sponge facility built in the U.S. in over thirty years. The estimated cost of this facility is expected to be approximately $460 million, including engineering and design for future expansion. Titanium sponge production from the Rowley, UT facility is expected to begin in late 2008 and reach an initial annualized production rate of approximately 24 million pounds in 2009. When the Oregon and Utah facilities are operational in 2009, our total annual titanium sponge production capacity is expected to be approximately 46 million pounds, and is intended to supplement our purchased titanium sponge and purchased titanium scrap requirements. The Utah facility could be expanded to a total annual capacity of 42 million pounds with additional capital investment if market conditions warrant such an investment.

—
The design and construction of a titanium alloys and nickel-based alloys and superalloy forging facility at our operations in North Carolina at an estimated cost of $237 million. This new facility, which is expected to be constructed in phases through 2009, will include a new 10,000 ton press forge and a new 700mm rotary forge, both of which will be the largest of their kind in the world for producing these types of alloys. It will also include billet conditioning and finishing equipment. We will also add our fourth Plasma Arc Melt (PAM) furnace for cold hearth melting premium titanium alloys, primarily for aeroengine rotating-quality applications, and we will build additional vacuum arc remelt (VAR) capacity to support premium nickel-based superalloy and titanium growth. These investments are expected to commence production in phases through 2009 and into 2010.

—
A $60 million upgrade and expansion of our titanium and titanium alloys, nickel-based alloys, stainless steel, and specialty alloys plate finishing facility in Washington, PA. This upgrade and expansion is expected to be completed in the second quarter of 2008.

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A significant expansion of our capability to produce ammonium paratungstate (“APT”), a raw material used in the production of tungsten powder and tungsten-based cutting tools and other products in our Engineered Products segment. This investment was completed in 2007 and is now fully operational. This investment is expected to position ATI to be self-sufficient for APT, by producing this important raw material from scrap at a much lower cost than purchased APT.

—
Our Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited (“STAL”), in which ATI has a 60% interest, commenced an expansion of its Precision Rolled Strip® operations in Shanghai, China. This expansion is expected to more than triple STAL’s precision rolling and slitting capacity when fully operational in 2009.
For 2008, we currently plan to spend approximately $500 million for capital expenditures, excluding the capital expansion underway at our STAL joint venture.

•
We realized strong cash generation in 2007. Cash on hand at the end of 2007 was $623 million, an increase of $121 million compared to the end of 2006. This increase in cash is after investing $457 million in capital expenditures and purchases of businesses, $44 million in managed working capital due primarily to higher business activity, $100 million in a voluntary cash contribution to our U.S. qualified defined benefit pension plan, $61 million to repurchase ATI stock, and $58 million in dividend payments.

•
We continued to strengthen our balance sheet. At the end of 2007, ATI had more cash than debt. Therefore, our net debt to total capitalization improved to a negative 4.5% compared to a positive 3.3%, 19.7%, 43.5% and 71.7% at year-end 2006, 2005, 2004 and 2003, respectively. Total debt to total capital declined to 19.2% compared to 26.9%, 41.0%, 57.5%, and 74.9% at year-end 2006, 2005, 2004, and 2003, respectively. At the end of 2007, our U.S. qualified defined benefit pension plan was 111% funded. This is significant as the funded status of the plan prior to 2006 had a significant negative impact on our balance sheet. As a result of the improvement in funding status, total retirement benefit expense is expected to decline by $29 million in 2008, compared to 2007.

•
We continued to realize significant progress in safety across ATI’s operations. As a result of our continuing focus on and commitment to safety, in 2007 our OSHA Total Recordable Incident Rate improved by 5% to 3.02 and our Lost Time Case Rate was 0.52, which we believe to be competitive with world class performance.

•
We realized continued success from the ATI Business System, which is continuing to drive lean manufacturing throughout our operations. In addition to the improved safety performance discussed above, we realized $112 million in gross cost reductions in 2007 which exceeded our goal of $100 million. We have targeted additional gross cost reductions of $100 million in 2008.

•
With the continuing strength in our major end markets and confidence in ATI’s ability to continue to generate strong cash flow over the next several years, the Board of Directors increased the quarterly dividend by nearly 40% to $0.18 per share in November 2007. This is the third consecutive year the Board has significantly increased the dividend. Additionally in November 2007, the Board of Directors authorized a $500 million share repurchase program.
As a result of these accomplishments, we believe our long-term profitable growth outlook remains intact. With our new production capabilities and our strong financial position, we believe ATI is well positioned to continue to expand our presence in the growing global markets that have been driving our performance over the last several years. We expect demand from the commercial aerospace market to remain at a high level as our airframe and jet engine customers’ backlogs are at record levels. We also expect demand from the chemical process industry, oil and gas, and electrical energy markets to stay strong as the global infrastructure build and rebuild continues.
Results of Operations
Sales were $5.45 billion in 2007, $4.94 billion in 2006 and $3.54 billion in 2005. Direct international sales represented approximately 27% of 2007 sales, 24% of 2006 sales and 25% of 2005 sales.
Segment operating profit was $1.27 billion in 2007, $1.06 billion in 2006, and $536.7 million in 2005. Our measure of segment operating profit, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest expense, retirement benefit expense, other costs net of gains on asset sales and restructuring costs, if any. We believe segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.
Income before tax and the cumulative effect of change in accounting principle was $1.15 billion in 2007, $872.6 million in 2006, and $311.1 million in 2005. For 2005, income before tax included a restructuring charge of $23.9 million for asset impairments and a charge of $12.6 million for legal matters.
Net income was $747.1 million for 2007, $574.1 million for 2006, and $362.4 million for 2005. Net income for 2005 included a $20.9 million net special gain, which included a tax benefit associated with the reversal of the Company’s remaining valuation allowance for U.S. Federal net deferred tax assets, partially offset by asset impairment charges in the Flat-Rolled Products segment, charges for legal matters, and the cumulative effect of adopting a new accounting principle for conditional asset retirement obligations.

2007 Compared to 2006

Sales for the High Performance Metals segment for 2007 increased 14% to $2.07 billion, due primarily to improved volume and higher average selling prices for our nickel-based alloys and superalloys, vacuum-melted specialty alloys, and exotic alloy products driven by increased demand from the aerospace and defense, oil and gas, chemical process industry, and electrical energy markets. Our direct international sales increased $94.5 million, or 17%, to $660.8 million, and represented 32% of sales for the High Performance Metals segment.

Aerospace represents a significant market for our High Performance Metals segment, especially for premium quality specialty metals used in the manufacture of jet engines for the original equipment and spare parts markets. In addition, we are becoming a larger supplier of specialty metals used in airframe construction. In January 2007, we announced a long-term sourcing agreement with GE Aviation for the supply of premium titanium alloys, nickel-based superalloys, and vacuum-melted specialty alloys products for commercial and military jet engine applications. Total revenues under this agreement plus Allvac’s direct sales to GE Aviation for the period 2007 through 2011 may exceed $2 billion. In addition, in October 2006 we announced a long-term agreement with The Boeing Company to supply titanium alloys products for Boeing’s aircraft airframes and structural components, including Boeing’s 787 Dreamliner. Total revenues under this contract are expected to be approximately $2.5 billion for the years 2007 through 2015. This long-term agreement includes both long-product forms which are manufactured within the High Performance Metals segment, and a significant amount of plate products which are manufactured utilizing assets of both the High Performance Metals and Flat-Rolled Products segments. Revenues and profits associated with these mill products covered by the long-term agreement are included primarily in the results for the High Performance Metals segment.
The commercial aerospace market’s use of titanium is expected to increase significantly as new aircraft airframe production is utilizing a larger percentage of titanium material. For example, the new Boeing 787 Dreamliner airframe (excluding engines), is expected to require approximately 250,000 pounds of titanium alloys mill products per aircraft, a significant increase over any previous commercial aircraft airframe. New aircraft designs from Airbus, the A380 and A350-XWB, and from defense contractors are also expected to utilize a greater percentage of titanium. Given the record backlogs of both Boeing and Airbus, and the engine manufacturers, this increasing demand for titanium alloys mill products is expected to last into the next decade.
Annually, revenue passenger miles and freight miles have increased 8.8% and 7.4%, respectively, since 2003, according to the International Civil Aviation Organization (ICAO). The ICAO expects this growth trend to continue at over 6% annually well into the next decade based on the demand for passenger and freight travel from developing economies, especially in Asia and the Middle East, and continuing economic growth in the rest of the world. Commercial and military jet aircraft deliveries of new aircraft have increased 5.4% annually since 2003. Independent forecasts from both Airline Monitor and Forecast International project continuing growth of commercial and military jet aircraft deliveries into the next decade. Due to manufacturing cycle times, demand for our specialty metals leads the deliveries of new aircraft by 12 to 18 months.

High Performance Metals segment operating profit for 2007 increased 11% to $729.1 million compared to 2006 primarily due to higher volume, higher average selling prices for many of our products, and improved product mix. Segment results in 2007 and 2006 were affected by volatile raw material costs. Nickel and nickel-bearing scrap, and titanium scrap increased significantly in 2006 and the first half of 2007, but declined sharply in the 2007 second half. These material costs are largely recovered in product selling prices through raw material indices which attempt to match purchased material costs with shipments. However in an environment of rapidly increasing, or declining costs, these raw material indices included in product selling prices may not completely offset purchased material costs. The rapid fall in raw material costs in the 2007 second half had a significant negative effect on operating profit as shipments produced with raw material purchased earlier in the year at higher costs were sold based upon raw material indices which reflected lower raw material prices. This negative impact on operating profit was offset by a LIFO inventory valuation reserve benefit of $96.3 million. In 2006, higher nickel, nickel-bearing scrap, and titanium raw material costs resulted in a LIFO inventory valuation reserve charge of $49.4 million.

We continued to aggressively reduce costs in 2007. Gross cost reductions, before the effects of inflation, totaled approximately $42 million. Major areas of gross cost reductions included $26 million from procurement, $11 million from operating efficiencies, and $5 million from salaried and hourly labor cost savings.
To support our strategic growth initiatives in the High Performance Metals segment, we have committed to significantly expand our manufacturing capabilities. Under projects announced in the past three years, we expect to spend approximately $885 million, of which approximately $355 million has been spent as of December 31, 2007. These projects include a multi-phase titanium products expansion that is expected to yield up to 46 million pounds of annual titanium sponge production capacity, an increase in ATI’s annual titanium melt capacity by at least 25 million pounds, and expansion of our forging and finishing operations for titanium and titanium alloys, nickel-based alloys and superalloys, and vacuum-melted specialty alloys. These strategic capital investments are designed to expand and enhance ATI’s capacity and capabilities to meet current and expected demand growth from the aerospace (both engine and airframe), defense, chemical process industry, oil and gas, and medical markets.
In the first quarter 2007, we entered into a new labor agreement, which expires on June 30, 2011, with the United Steelworkers represented at ATI’s Allvac Albany, Oregon operations. As a result of this new agreement, we recognized a non-recurring pre-tax charge of $0.7 million.
2006 Compared to 2005
Sales for the High Performance Metals segment increased 45% to $1.81 billion in 2006 due primarily to increased volume and higher average selling prices for most of our products driven by strong demand from the aerospace and defense, medical, oil and gas, chemical process industry, and electrical energy markets. Our exotic alloys business continued to benefit from demand from the aerospace, defense, chemical processing, and medical markets.

Segment operating profit for 2006 increased due to higher volume and pricing, and also improved due to product mix. Segment results in 2006 and 2005 was adversely affected by higher raw material costs, which increased significantly in the past several years. These higher costs, while largely recovered in product selling prices through raw material indices, had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology, resulting in LIFO inventory valuation reserve charges of $49.4 million in 2006, and $46.0 million in 2005.
We continued to aggressively reduce costs in 2006. Gross cost reductions, before the effects of inflation, for 2006 totaled approximately $39 million. Major areas of gross cost reductions included $20 million from procurement, $15 million from operating efficiencies, and $3 million from salaried and hourly labor cost savings.


MANAGEMENT DISCUSSION FOR LATEST QUARTER


Overview
Allegheny Technologies Incorporated (ATI) is a Delaware corporation with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone number (412) 394-2800. References to “Allegheny Technologies,” “ATI,” the “Company,” the “Registrant,” “we,” “our” and “us” and similar terms mean Allegheny Technologies Incorporated and its subsidiaries, unless the context otherwise requires.
Allegheny Technologies is one of the largest and most diversified specialty metals producers in the world. We use innovative technologies to offer growing global markets a wide range of specialty metals solutions. Our products include titanium and titanium alloys, nickel-based alloys and superalloys, grain-oriented electrical steel, zirconium, hafnium and niobium, stainless and specialty alloys, tungsten-based materials, and forgings and castings. Our specialty metals are produced in a wide range of alloys and product forms and are selected for use in environments that demand metals having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics.

Results of Operations
We operate in three business segments: High Performance Metals, Flat-Rolled Products, and Engineered Products.
Sales for the third quarter 2008 were $1.39 billion, 4.3% higher than the third quarter 2007. Compared to the third quarter 2007, sales increased 8% in the Flat-Rolled Products segment, and 12% for the Engineered Products segment but declined 2% in the High Performance Metals segment. Direct international sales increased to a quarterly record of $402.1 million, and represented 29% of our total sales. We believe that more than 50% of our sales are driven by demand from global markets when we consider exports of our customers.
The aerospace and defense markets, and the global infrastructure markets, namely chemical process industry, oil and gas, electrical energy, and the medical markets, have been driving our performance. These markets accounted for nearly 70% of sales in the nine months ended September 30, 2008. The aerospace and defense market comprised 28% of sales for the nine months 2008, down slightly from the same period of last year due primarily to declines in average selling prices. There has been a labor strike at The Boeing Company, a significant customer, which commenced in September 2008. On October 27, 2008, it was announced that tentative terms for a labor contract had been reached between Boeing and the International Association of Machinists and Aerospace Workers. These conditions created a period of short-term uncertainty regarding the length of the labor disruption and associated negative impact on demand in the aerospace supply chain for both airframe and aero engine related programs. Long-term demand is expected to be strong in the aerospace market due to the high levels of backlogs at our airframe and jet engine customers. Demand continued to be strong from the global infrastructure markets: chemical process industry, oil and gas, and electrical energy. Demand was weak from the U.S. automotive and housing markets. ATI titanium product shipments, including ATI-produced products for our Uniti titanium joint venture, were over 36 million pounds in the nine months 2008, a 19% increase over the same period of last year, as we leverage our manufacturing capabilities across both our High Performance Metals and Flat-Rolled Products segments and demonstrate our ability to supply diversified global markets with both long and flat-rolled products.
Segment operating profit for the third quarter 2008 decreased 23%, compared to the third quarter 2007, to $248.4 million, or 17.8% of sales. Segment operating profit for the nine months 2008 decreased 26% compared to the 2007 period, to $759.8 million, or 18.1% of sales. The decreases in operating profit were primarily due to rapidly declining raw material costs, which resulted in higher cost material purchased earlier in the year flowing through cost of sales and not matching raw material indices or surcharge pricing mechanisms.

Our measure of segment operating profit, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest expense, retirement benefit expense, and other costs net of gains on asset sales. We believe segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.
Results for the third quarter 2008 included a LIFO inventory valuation reserve benefit of $41.0 million due to declining raw material costs, primarily nickel and nickel-bearing scrap, and titanium scrap. For the same 2007 period, the LIFO inventory valuation reserve benefit was $61.2 million. For the first nine months of 2008, LIFO inventory valuation reserve benefit was $36.3 million, compared to a benefit of $18.6 million for the comparable 2007 period.
Third quarter and first nine months 2008 gross cost reductions, before the effects of inflation, totaled $35 million and $104 million, respectively, as we remained focused on reducing costs through improving operating efficiencies.
In the first quarter 2007, we entered into four-year labor agreements with United Steelworkers represented employees at ATI Allegheny Ludlum and at ATI’s Albany, OR titanium operations. As a result of the new agreements, we recognized a non-recurring charge of $5.8 million, or $3.7 million after-tax, in 2007, which is primarily reflected in the year to date 2007 operating results of the High Performance Metals and Flat-Rolled Products business segments.
Income before tax for the third quarter 2008 was $228.0 million, a decrease of $66 million compared to the third quarter 2007. Net income for the third quarter 2008 was $144.1 million, or $1.45 per share, compared to the third quarter 2007 of $193.9 million, or $1.88 per share. Third quarter 2008 results include an income tax provision of $83.9 million, or 36.8% of income before tax, compared to an income tax provision of $100.1 million, or 34.0% of income before tax, for the comparable 2007 quarter. The 2007 third quarter included a favorable one-time net tax benefit of $8.1 million, primarily related to the reduction of a deferred tax valuation allowance for certain state tax credits expected to be realized in future periods.
Income before tax for the nine months ended September 30, 2008 was $698.0 million, a 25% decrease compared to the first nine months of 2007. Net income for the nine months ended September 30, 2008 was $455.0 million, or $4.51 per share, compared to $598.2 million, or $5.81 per share for the first nine months of 2007. Results for the first nine months of 2008 include an income tax provision of $243.0 million, or 34.8% of income before tax, which included the favorable one-time net tax benefit of $11.2 million in the second quarter. Results for the first nine months of 2007 include an income tax provision of $326.3 million, or 35.3% of income before tax, and benefited from a $12.1 million reduction in valuation allowances associated with state deferred tax assets.
In the first nine months of 2008, our strong cash flow supported investments of $185 million in managed working capital, $365 million of capital expenditures, nearly $242 million in share repurchases, and dividend payments of over $54 million. We ended the quarter with nearly $273 million of cash on hand.
We are focused on delivering solid financial results during this period of uncertainty. We now expect our fourth quarter 2008 results to be in the range of $1.00 to $1.10 per share, resulting in full year 2008 earnings of $5.51 to $5.61 per share. We expect 2008 fourth quarter volumes to be down and pricing to be very competitive for most of our products with the exceptions of grain-oriented electrical steel and our exotic alloys. The strike at The Boeing Company and the delay in their 787 aircraft production program has created uncertainty in the supply chain for both airframe and aero engine products. Demand is weak for our standard stainless sheet and plate products domestically and globally. With the exception of oil and gas, most markets for our standard stainless products are soft with housing, appliance, and automotive being particularly weak. According to industry reports, service center inventories of standard stainless products were low in the third quarter. These inventory levels could trend lower in the 2008 fourth quarter as some customers take actions to avoid raw material cost risk. However, even in this weak market, we expect to ship approximately 300,000 tons of standard stainless products in 2008, which is the low end of our targeted range. We are proactively adjusting the production levels of some of our products and increasing our 2009 cost reductions to meet this changing economic environment. We expect strong cash flow in the fourth quarter 2008, including a significant reduction in managed working capital.
We believe the long-term growth opportunities of our major global end markets remain strong. We intend to continue to enhance our leadership position in specialty metals with a focus on near-term and long-term opportunities in the aerospace and defense, chemical processing industry, oil and gas, electrical energy generation and distribution, and medical markets.
High Performance Metals Segment
Third quarter 2008 sales were $510.2 million, 2% lower than third quarter 2007 primarily due to lower shipments and selling prices for nickel-based and specialty alloys, and lower selling prices for titanium mill products, which was partially offset by increased shipments and higher prices for our exotic alloys, and higher titanium mill products shipments. Demand for our premium titanium alloys was good for jet engine applications. Demand for our titanium alloys was steady from airframe customers and improved from the biomedical market. Demand for our nickel-based alloys and specialty alloys was softer from the jet engine market and improved from the oil and gas and electrical energy markets. Demand for our exotic alloys was strong from the chemical process industry and was good from the aerospace and defense and nuclear energy markets.
Segment operating profit in the quarter was $139.6 million, or 27.4% of sales, a $54.6 million decrease compared to the third quarter 2007. The third quarter 2008 operating profit was compressed by rapidly declining raw material costs, primarily titanium and titanium scrap, and nickel and nickel-bearing scrap. This resulted in higher cost material purchased earlier in the year flowing through cost of sales and not matching raw material indices included in the selling prices due to the long manufacturing cycle times of some of our products. This compression was partially offset by a $16.7 million reduction in the LIFO inventory valuation reserve, increased shipments and selling prices for zirconium products, higher titanium mill products shipments, and the benefits of gross cost reductions. The third quarter 2007 had a LIFO inventory valuation reserve benefit of $43.1 million. Results for the 2008 third quarter benefited from $18.2 million of gross cost reductions, bringing year to date 2008 gross cost reductions in this segment to $49.6 million.

The decline in the average selling price for titanium and titanium-based alloys, and nickel-based and specialty alloys was primarily due to lower raw material indices due to lower raw material costs and a more competitive pricing environment.
For the nine months ended September 30, 2008, segment sales decreased 4% to $1.50 billion. Operating profit was $421.8 million for the nine months ended September 30, 2008, or 28.2% of sales, compared to $541.9 million, or 34.8% of sales, for the comparable prior year to date period. Shipments of titanium mill products increased primarily due to higher aerospace airframe volume. Shipments of nickel-based and specialty alloys declined primarily due to product mix and inventory management actions at distribution customers. The nine months 2008 operating profit was impacted by a more competitive pricing environment for certain titanium mill products and nickel-based alloys and superalloys. In addition, year to date 2008 margins were compressed by rapidly declining raw material costs, primarily titanium and titanium scrap, and nickel and nickel-bearing scrap. This resulted in higher cost material purchased earlier in the year flowing through cost of sales and not matching raw material indices included in the selling prices due to the long manufacturing cycle times of some of our products. These impacts were partially offset by increased shipments of titanium mill products, a $30.1 million reduction in the LIFO inventory valuation reserve, increased shipments and selling prices for exotic alloys, and the benefits of gross cost reductions. Results for the nine months 2007 included a LIFO inventory valuation reserve benefit of $34.9 million.

Flat-Rolled Products Segment
Third quarter 2008 sales were $764.6 million, 8% higher than the third quarter 2007, due primarily to increased shipments, including higher foreign sales, partially offset by lower raw material surcharges. Direct international sales increased $41.0 million to 26.9% of total 2008 segment sales. Demand was strong for our industrial titanium sheet, grain-oriented electrical steel, and nickel-based and specialty alloy products from the chemical process industry, oil and gas, and electrical energy markets. Shipments of standard stainless products increased 16% while total high-value products shipments increased 10%. Within high-value products, shipments of substantially all products, namely industrial titanium sheet, grain-oriented electrical steel, nickel-based alloys, and Precision Rolled Strip ® products, exceeded year-ago levels. Average transaction prices for all products were 4% lower, primarily due to lower raw material surcharges, product mix, and more competitive prices for standard stainless products.
Segment operating profit was $102.7 million or 13.4% of sales, a decrease of $20.3 million compared to the third quarter 2007, primarily as a result of lower average base selling prices for standard stainless products and the timing difference between raw material surcharges and costs. Third quarter 2008 operating profit was negatively impacted by lower base prices for standard stainless sheet and plate products. In addition, third quarter 2008 operating profit was compressed by a rapid decline in raw material costs, primarily nickel and nickel bearing scrap. This resulted in higher cost material purchased earlier in the year flowing through cost of sales and not matching raw material surcharges included in the selling prices due to the long manufacturing cycle times of some of our products. This compression was partially offset by increased shipments and higher selling prices for our grain-oriented electrical steel, increased shipments of our flat-rolled titanium products, increased shipments of standard grade sheet products, and the benefits of gross cost reductions. Declining raw material costs, primarily for nickel and nickel scrap, resulted in a LIFO inventory valuation reserve benefit of $25.1 million in the third quarter 2008. The third quarter 2007 included a LIFO inventory valuation benefit of $18.2 million.

For the nine months ended September 30, 2008, Flat-Rolled Products sales increased 2%, to $2.35 billion, compared to the nine months 2007, however, segment operating profit declined 30%, or $134.3 million, to $315.2 million, or 13.4% of sales, compared to $449.5 million, or 19.6% of sales, for the prior year-to-date period. Average prices for the first nine months 2008, which include surcharges, were 7% lower than the same period of last year. Demand was strong from the segment’s largest markets: chemical process industry, oil and gas, and electrical energy, which accounted for 54% of year-to-date segment sales. 2008 operating profit was negatively impacted by significantly lower base selling prices for standard stainless sheet and plate and by margin compression due to a rapid decline in raw material costs, primarily nickel and nickel bearing scrap. This resulted in higher cost material purchased earlier in the year flowing through cost of sales and not matching raw material surcharges included in the selling prices due to the long manufacturing cycle times of some of our products. These negative impacts were partially offset by increased shipment volumes for most products, higher selling prices for grain oriented electrical steel products and the benefits of gross cost reductions. Segment results for the 2008 year-to-date period included a LIFO inventory reserve benefit of $8.7 million, compared to a prior year LIFO inventory reserve charge of $16.0 million in 2007, due primarily to raw material cost deflation for nickel and nickel-bearing scrap.

Engineered Products Segment
Sales for the third quarter 2008 of $117.6 million were 12% higher than the third quarter 2007. Demand was solid for our forged products from the construction and mining, and oil and gas markets. Demand for our cast products was good from the electrical energy market, particularly for wind and gas turbine components. Demand for our tungsten and tungsten carbide products was down due to the work stoppage in the aerospace supply chain and shipments were down to the oil and gas and construction and mining markets due to disruptions after Hurricane Ike. Demand from the aerospace market remained good for our titanium precision metal processing conversion services.

Segment operating profit in the third quarter 2008 was $6.1 million, or 5.2% of sales, compared to $7.3 million, or 6.9% of sales, for the comparable 2007 period. An increase in operating profit due to increased sales was offset by $1.5 million start-up expenses with our Alpena, MI casting operation, and the negative impact of higher raw material costs which resulted in a LIFO inventory valuation reserve charge of $0.8 million. The third quarter 2007 included a LIFO inventory valuation reserve charge of $0.1 million. Prior year results were also impacted by start-up costs of our operation to internally produce ammonium paratungstate (APT), a key raw material of the tungsten and tungsten carbide products. Results benefited from $2.7 million of gross cost reductions, bringing year-to-date gross cost reductions in this segment to $6.7 million.
For the nine months ended September 30, 2008, sales increased 9% to $355.7 million, and operating profit was $22.8 million, or 6.4% of sales, compared to $30.6 million, or 9.4% of sales in 2007. Operating results for the first nine months of 2008 include LIFO inventory valuation reserve charges of $2.5 million, whereas the first nine months of 2007 include LIFO inventory valuation reserve charges of $0.3 million. Operating results for the first nine months of 2008 were affected by higher raw material costs, operational execution issues, and start-up expenses associated with our Alpena, MI casting operation. Nine months 2007 results were negatively impacted by higher purchased raw material costs and APT plant start-up costs.
We expect to begin to see some improvement in operating results in the Engineered Products segment. The product mix in our tungsten products business is improving and sales are growing in the aerospace and defense, electrical energy, oil and gas, and mining markets. Also, our new casting shop in Alpena, MI is expected to complete qualifications in the fourth quarter for certain wind energy products, and ramp up production in 2009. Demand for our castings is robust in wind energy applications.
Corporate Items
Corporate expenses decreased to $13.4 million for the third quarter of 2008, compared to $18.5 million in the year-ago period. For the nine months ended September 30, 2008, corporate expenses were $46.5 million compared to $56.9 million in the prior year-to-date period. Changes in corporate expenses for the quarter and nine month periods are primarily due to lower expenses associated with annual and long-term performance-based cash incentive compensation programs.
Net interest expense in the third quarter 2008 increased to $1.7 million from $0.1 million for the same period last year. The increase in net interest expense was primarily due to less interest income. For the nine months ended September 30, 2008, net interest expense was $2.8 million compared to $7.0 million in the prior year-to-date period. The declines in net interest expense in the nine months 2008 were primarily due to interest capitalization on capital projects offsetting lower interest income. As a result of capitalization of interest costs, interest expense was reduced by $17.7 million in the first nine months of 2008, and by $6.0 million in the first nine months of 2007.
Other expense, net of gains on asset sales, includes charges incurred in connection with closed operations, pretax gains and losses on the sale of surplus real estate and other assets, and other non-operating income or expense. These items are presented primarily in selling and administration expenses, and in other income (expense) in the statement of income and resulted in other expense of $2.8 million for the third quarter of 2008 and $4.3 million for the third quarter of 2007. For the nine months ended September 30, 2008, other expense, net of gains on asset sales was $6.7 million, compared to $10.9 million for the comparable 2007 period. The decreases for the three and nine month periods ended September 30, 2008 were primarily related to lower charges for environmental costs at closed operations.
Retirement benefit expense decreased to $2.5 million in the third quarter 2008, compared to $7.6 million in the third quarter 2007, primarily as a result of higher than expected returns on plan assets in 2007 and the positive benefits of voluntary pension contributions made over the last several years. In April 2008, we entered into a new five-year labor agreement with USW represented employees at our ATI Wah Chang operation. As a result, retirement benefit expense will be approximately $8 million for the full year 2008 due to the establishment of a VEBA for certain post-retirement benefits. This expense is being recognized over the last three quarters of 2008, with $2.3 million included in the third quarter 2008 and $5.4 million recorded year to date. For the third quarter 2008, the amount of retirement benefit expense included in cost of sales was $1.6 million, and the amount included in selling and administrative expenses was $0.9 million. For the third quarter 2007, the amount of retirement benefit expense included in cost of sales was $4.8 million, and the amount included in selling and administrative expenses was $2.8 million.

For the nine months ended September 30, 2008, retirement expense was $5.8 million, compared to $22.7 million in the same period of 2007. Retirement benefit expense increased cost of sales for the nine months ended September 2008 by $3.4 million, and increased selling and administrative expenses by $2.4 million. For the nine months ended September 2007, retirement benefit expenses increased cost of sales by $14.9 million and increased selling and administrative expenses by $7.8 million.
As of September 30, 2008, our U.S. defined benefit pension plan was approximately 92% funded which represents a decline in the funding level for this plan from the beginning of the year and results primarily from a significant decline in the value of global equity and fixed income investments held by the pension fund. If the value of the pension plan investments remains at this level at year-end, we would recognize a significant increase in pension expense in 2009 compared to 2008. We are not required to make cash contributions to our U.S. defined benefit pension plan for 2008. However, we expect to make a voluntary cash contribution of approximately $30 million in the fourth quarter 2008 to improve the plan’s funded position.
Income Taxes
Results for the third quarter 2008 included a provision for income taxes of $83.9 million, or 36.8% of income before tax, for U.S. Federal, foreign and state income taxes. The third quarter 2007 included a provision of $100.1 million, or 34.0% of income before tax. For the first nine months of 2008, the provision for income taxes was $243.0 million, or 34.8% of sales, compared to $326.3 million, or 35.3% of sales, for the same period of 2007. The year to date 2008 tax provision included a favorable one-time net tax benefit of $11.2 million, primarily associated with tax refunds and credits related to prior years. The year to date 2007 tax provision included a benefit of $12.1 million due to reductions in state deferred tax asset valuation allowances due to increased state taxable income and the probability of realizing the corresponding state deferred tax assets.
Financial Condition and Liquidity
We believe that internally generated funds, current cash on hand, and available borrowings under existing credit lines will be adequate to meet foreseeable liquidity needs, including a substantial expansion of our production capabilities over the next few years. We did not borrow funds under our $400 million domestic senior unsecured credit facility during the first nine months of 2008. However, a portion of this facility is utilized to support letters of credit.
Our ability to access the credit markets in the future to obtain additional financing, if needed, may be influenced by our credit rating. As of September 30, 2008, Moody’s Investor Service’s senior unsecured debt rating for our Company was Baa3 with a stable outlook. As of September 30, 2008, Standard & Poor’s Ratings Services’ corporate credit and senior unsecured debt rating for our Company was BBB- with a stable outlook. Changes in our credit rating do not impact our access to, or the cost of, our existing credit facilities.
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K.
Cash Flow and Working Capital
For the nine months ended September 30, 2008, cash provided by operating activities was $344.6 million, as operating earnings were partially offset by a $185.2 million increase in managed working capital. Investing activities included capital expenditures of $365.1 million. Cash used in financing activities was $331.5 million in the first nine months of 2008, and included purchases of $241.8 million of the Company’s common stock, dividend payments of $54.1 million, cash usage related to the repurchase of shares to satisfy employee-owed taxes on share-based compensation of $15.5 million, reductions in estimated federal and state income tax benefits from share-based compensation of $9.0 million, and a reduction in borrowings of $12.2 million. At September 30, 2008, cash and cash equivalents totaled $272.6 million, a decrease of $350.7 million from year end 2007.
As part of managing the liquidity of our business, we focus on controlling managed working capital, which is defined as gross accounts receivable and gross inventories, less accounts payable. In measuring performance in controlling this managed working capital, we exclude the effects of LIFO inventory valuation reserves, excess and obsolete inventory reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. At September 30, 2008, managed working capital was 31.8% of annualized sales, compared to 32.2% of annualized sales at December 31, 2007. During the first nine months of 2008, managed working capital increased by $185.2 million, to $1,811.7 million. The increase in managed working capital since December 31, 2007 was due to increased accounts receivable of $92.5 million, which reflects the timing of sales in the third quarter 2008 compared to the fourth quarter 2007, and increased inventory of $119.7 million, mostly as a result of increased business activity, which was partially offset by increased accounts payable of $27.0 million. While accounts receivable and inventory balances have increased during third quarter 2008, days sales outstanding, which measures actual collection timing for accounts receivable, have stayed relatively constant. Gross inventory turns, which excludes the effect of LIFO inventory valuation reserves, declined compared to year-end 2007, due primarily to a shift in mix to more value-added products and the increase in Flat-Rolled Products segment inventory balances.



CONF CALL

Dan L. Greenfield

Thank you, Fab. Good afternoon and welcome to Allegheny Technologies earnings conference call for the third quarter 2008. This conference call is being broadcast live on our website at AlleghenyTechnologies.com and on CCBN.com. Members of the media have been invited to listen to this call.

Participating in the conference call today are Pat Hassey, Chairman, President and Chief Executive Officer, and Rich Harshman, Executive Vice President, Finance and Chief Financial Officer.

After some initial comments, we will ask for questions. During the question-and-answer session, please limit yourself to two questions to be considerate of others on the line.

Please note that all forward-looking statements made this afternoon are subject to various assumptions and caveats as noted in the earnings release. Actual results may differ materially.

Here is Pat Hassey.

L. Patrick Hassey

Thanks, Dan, and thanks to everyone for joining us today. We had a solid quarter in a period of uncertainty. We demonstrated strong cash flow and we have a solid balance sheet.

Return on capital employed was 22%. Excluding our capital projects currently under construction, return on capital employed was 26%.

Return on stockholders equity was over 27%.

Net debt to total capitalization was 9.3%.

Gross cost reductions totaled nearly $104 million for the nine months. We remain focused on reducing costs to systematically improve operating efficiency.

We had $273 million of cash on hand at the end of the third quarter. This is after our self-funded investments during the first nine months of 2008. We had $185 million increase in managed working capital, year-to-date capital investments totaled $365 million, and we spent $242 million to repurchase shares of ATI stock. We are not accumulating cash as we expect strong cash flow to continue in the fourth quarter, managed working capital was reduced by over $86 million in the third quarter compared to the second quarter, and we expect a significant reduction in working capital in the fourth quarter.

Finally, we have no borrowings under our $400 million credit facility, so let's get right into our view of the markets.

Some of our markets are strong, while others are weak due to the credit issues and a slowing global economy. There is also short-term uncertainty in the aerospace supply chain. Aerospace and Defense accounted for 28% of our year-to-date sales. There's a strike at Boeing, and their 787 program is delayed.

While our third quarter performance in Aerospace was good, we are now in a period of increasing short-term uncertainty. First tier customers are hesitant to make forward purchases due to the strike. We are encouraged that the parties are returning to the table and hopeful that a resolution to the strike can be achieved soon.

Order backlogs at our Airframe and Jet Engine customers remain at high levels. Our long-term strong growth view of this market has not changed. Expected new or additional growth for Commercial Aerospace has been pushed out, for how long depends upon the resolution of the Boeing strike and the successful flight and production ramp of the 787.

Even with the uncertainty in the Aerospace supply chain, total ATI shipments of our titanium products increased to 12.5 million pounds or by over 19% in the third quarter 2008 compared to last year's quarter. In short, we stayed on scheduled growth.

We have moved our titanium units to non-Aerospace markets. ATI, along with our titanium joint venture, is now a leading supplier to the industrial titanium markets, which include chemical processing, oil and gas, electrical energy, desalinization, and architectural applications.

For the first nine months, ATI shipped over 36 million pounds of titanium products. We expect to reach 48 million pounds of total titanium shipments in 2008. This would represent growth of 17.5% over 2007. We believe our 2009 titanium product shipments will be essentially flat, with that expected to be achieved this year, or in the 45 to 50 million pound range as in 2008.

You have heard me say that ATI is flexible and that we can move our metallic units to changing markets and to new markets for ATI. One such target market is defense armor. Why would we choose this market? Because the global market is very large, it needs our titanium and specialty alloys, and it's a new market for ATI.

Our recently launched market sector team, ATI Defense, is making good progress through business development. It is introducing new titanium and specialty alloys and alloy systems. Global customer inquiry volume continues to grow. Trial and production orders are being books with new ATI customers each month. The defense hardware market for our specialty metals is also strong and growing.

The chemical process industry and oil and gas accounted for 23% of year-to-date 2008 sales. This is the largest market for our zirconium alloy and for our flat rolled products. The market is being driven by global growth to make a better world and to feed the growing population. Demand has been so strong for our industrial grade zirconium that we are adding capacity. Prices are increasing and supply is tight.

The global oil and gas market still looks strong.

Electrical Energy accounted for 16% of year-to-date 2008 sales. Strong global market conditions and extended prospects for our grain-oriented electrical steel are expected to continue. We expect to sell 120,000 tons of grain-oriented electrical steel next year, which is our annual capacity for this product.

Demand is solid for our nickel-based alloys from the industrial gas turbine market.

Now turning to the alternative energy markets, demand for our castings for wind energy applications is robust. We are hearing concern about credit availability from one of our wind energy customers. While not a trend, we will continue to watch this closely.

We believe that solar energy could be a big new market for our stainless steel plate and precision rolled strip products.

Thirdly, demand from the geothermal market is expected to continue to grow.

Very importantly, we are beginning to see the nuclear energy renaissance. We are seeing increased inquiries from this market. A recent team leader was named for our ATI nuclear energy market sector team. For the last 50 years ATI has been a leading supplier of the many specialty metals from zirconium hafnium to titanium and other specialty alloys required for nuclear power plants. No other company brings such a range of specialty metals to the nuclear energy market.

Direct International Sales were a record $400 million or 29% of sales in the third quarter 2008. Our strategy is to continue to diversify and differentiate ATI in key global markets. We see both near-term and long-term growth opportunities in Asia as well as Europe. We target markets in these regions that need our specialty metals. We recently added to our sales and marketing presence in Eastern Europe and also in the Middle East. There are areas of the world that we believe have a lot of potential for us.


Aerospace and Defense plus the infrastructure markets and the medical market have been driving ATI's performance. These markets accounted for 70% of sales in the nine months of 2008. We continue to believe in the long-term prospects of these markets.

An interesting point before we move on to another topic. ATI sales in 2008 remained stable even while raw material indices and surcharges have decreased significantly. We have focused on profitable growth through penetration of our existing markets, new markets and volume growth. In other words, our operating companies and market sector teams have successfully found customers for our specialty metals.

We continue to make progress on our capital investments, which better position ATI for long-term growth. In June we commissioned our upgraded specialty and titanium plate facility in Western Pennsylvania. Our premium titanium sponge facility in Utah is on a revised schedule to be in production during the second quarter of 2009. Our titanium and superalloy forging facility in North Carolina remains on schedule and is expected to begin operations in the third quarter of 2009. The expansion of our precision rolled strip joint venture facility in China is expected to be fully operational in the first quarter of 2009.

In September we announced that our Board of Directors had approved, subject to satisfactory resolution of certain open issues, a new hot rolling and processing facility in our Flat Roll Products segment. This project is necessary and the returns are very good. Progress is being made in resolving the open issues. We expect to begin construction of this project some time in 2009. Major expenditures are not expected until 2010 and 11, which is after our Utah and North Carolina projects are completed.

ATI has grown and been transformed without the use of leverage. We deploy our strong cash flow with a balanced approach to create long-term value for our shareholders. We are committed to this philosophy and can adjust the timing of our self-funded capital projects accordingly.

Now turning to our fourth quarter outlook, we expect volumes to be down and pricing to be competitive for most of our products in the fourth quarter. The exceptions are grain-oriented electrical steel and our exotic alloys. Demand is weak for our standard stainless steel sheet and plate products. In fact, the global stainless market in total we would classify as anemic. With the exception of oil and gas, most markets are soft. Housing, appliance and automotive are particularly weak.

Service center inventories were low in the third quarter. Industry reports put the inventory level at three months in September. Inventory levels could even trend lower in the fourth quarter as some customers take actions to avoid raw material risk.

Even in this weak market we expect to ship approximately 300,000 tons of standard stainless products this year. This is at the low end of our targeted range and base prices are also very low.

Of note, even though demand for our stainless products is weak, our Flat Rolled Products segment was nicely profitable in the third quarter 2008, and we expect this segment to be nicely profitable going forward. This segment continues to benefit from an ongoing transformation. Product, market, geographic diversification and costs have been greatly improved in this business.

Now, let me summarize where we are. First, we had another solid quarter in a very challenging economic environment.

Two, our cash flow is strong and continues to fund our growth investments and our share repurchases.

Three, our financial position is strong. Our balance sheet is solid and we have no borrowings under our $400 million credit facility.

Four, we are diversified, global and we have the ability to move our metallic units to changing global markets.

Five, the global credit crisis has created an environment of uncertainty, particularly in the last few months.

Six, ATI is more resilient to economic downturns than at any time in our history, yet we are not immune to the economic outfall of the global credit crisis.

Seven, there's an ongoing strike at Boeing and their 787 program has been delayed. This is creating short-term uncertainty in the Aerospace supply chain for both airframe and aero-engine related products.

Eight, as a result of this, we expect fourth quarter volumes to be down somewhat. Pricing remains very competitive for most of these products. We now expect fourth quarter earnings to be in the range of $1 to $1.10 per share. This would result in 2008 earnings of between $5.51 a share to $6.51 a share - $5.61 a share.

We expect 2009 to present a challenging but manageable environment. We are proactively adjusting the production levels of some of our products and ratcheting up our 2009 cost reduction programs to meet this challenging economic environment.

Lastly, we will continue to manage this company for solid earnings and strong cash flow.

With that, we'll now open the earnings call for questions. Operator, may we have the first question?



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