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Article by DailyStocks_admin    (01-07-08 02:56 AM)

Description
The Daily Magic Formula Stock for 01/06/2008 is Allegheny Technologies Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 50-75 %.

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 silicon electrical steel and tool steels, 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.
We are Building the World’s Best Specialty Metals Company ™ by focusing our technological and 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 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 to, or to supplement, 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.
Our specialty metals are used in the manufacturing and storage of biofuels, particularly ethanol. Demand for our stainless and specialty alloys products for ethanol applications has recently increased significantly and we expect demand to stay strong for the next several years.
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) 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 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 one of a few producers of very large ductile iron castings used for wind turbines.
For electrical power distribution, our grain-oriented silicon electrical steel 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 developing countries, such as China and India, electrify and build electrical power distribution grids.
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. Through 2009, we intend to spend at least $925 million of internally generated funds to renew and expand our annual titanium sponge production capabilities to approximately 44 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 metals, 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 alloy, and zirconium and hafnium alloy 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 silicon electrical steel, and tool steels. 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 2006, approximately 70% by volume of our 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 2006, 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 2006, approximately 60% by volume of our plate products were sold to independent service centers, with the remainder sold directly to end-use customers.
Grain-oriented silicon electrical steel is used in power transformers where electrical conductivity and magnetic properties are important. Nearly all of our grain-oriented silicon electrical steel products are sold directly to end-use customers.
Tool steels are used for hand tools and for cutting, shaping, forming, blanking, and drilling of materials. Included in this category are our armor materials, which are designed to resist penetration by ballistic projectiles and to resist blasts.
Engineered Products Segment
The principal business of our Engineered Products segment includes the production of tungsten powder, tungsten heavy alloys, tungsten carbide materials and 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 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

The Board of Directors determines the number of directors. The Board currently consists of ten members: L. Patrick Hassey (Chairman), H. Kent Bowen, Robert P. Bozzone, Diane C. Creel, James C. Diggs, Michael J. Joyce, W. Craig McClelland, James E. Rohr, Louis J. Thomas and John D. Turner.

In accordance with the Corporate Governance Guidelines, at least 75% of the Company’s directors are, and at least a substantial majority of its directors will be, “independent” under the New York Stock Exchange (“NYSE”) definition of independence and the Company’s categorical Board independence standards, which are set forth in the Corporate Governance Guidelines and attached to this Proxy Statement as Appendix A. A director is “independent” only if the director is a non-management director and, in the Board’s judgment, does not have a material relationship with the Company or its management.

In addition to L. Patrick Hassey, the current Chairman, President and Chief Executive Officer of the Company, the Board considers Robert P. Bozzone, a former Chairman, President and Chief Executive Officer of the Company and whose son-in-law is the President of ATI Allegheny Ludlum, to be a management director.

The Board, at its February 22, 2007 meeting, affirmatively determined that the remaining eight of the Company’s current directors, H. Kent Bowen, Diane C. Creel, James C. Diggs, Michael J. Joyce, W. Craig McClelland, James E. Rohr, Louis J. Thomas and John D. Turner, are independent in accordance with the foregoing standards. Seven of the Company’s directors have no relationships with the Company other than as directors and stockholders of the Company. One of the Company’s directors, James E. Rohr, is Chairman and Chief Executive Officer of The PNC Financial Services Group, Inc. (“PNC”). The Company has a $325 million secured revolving credit facility with a syndicate of 14 financial institutions, including PNC Bank, National Association, a subsidiary of PNC, as lender and administrative and collateral agent. The Company pays fees to PNC Bank under the terms of this facility. The Company also invests in three money market funds managed by BlackRock, Inc. (“BlackRock”). PNC currently holds approximately 34% of the outstanding common stock of BlackRock. During 2006, the Company paid fees to PNC and its affiliates representing a de minimis portion of both the Company’s revenues and PNC’s revenues, and therefore, all amounts were substantially less than the materiality threshold under NYSE rules. Mr. Rohr’s compensation is not affected by the fees that the Company pays to PNC. The Board has determined that (A) the transactions between the Company and PNC (i) are commercial transactions carried out at arm’s length in the ordinary course of business, (ii) are not material to PNC or Mr. Rohr, (iii) do not and would not potentially influence Mr. Rohr’s objectivity as a member of the Company’s Board of Directors in a manner that would have a meaningful impact on his ability to satisfy requisite fiduciary standards on behalf of the Company and its stockholders, and (iv) do not preclude a determination that Mr. Rohr’s relationship with the Company in his capacity as Chairman and Chief Executive Officer of PNC is immaterial under NYSE rules, and (B) Mr. Rohr is an independent director under NYSE existing standards and the Company’s categorical Board independence standards.

The Board has also determined that each member of the Audit Committee satisfies the enhanced standards of independence applicable to Audit Committee members under NYSE listing standards and the rules of the Securities and Exchange Commission (“SEC”).

COMPENSATION
In 2006, non-employee directors received an annual cash retainer of $60,000 for services as a director, at least 25% of which was paid in the form of unrestricted Company Common Stock, and an annual grant of options to purchase

1,000 shares of Company Common Stock under the terms of the Company’s Non-Employee Director Stock Compensation Plan (the “Director Compensation Plan”). The stock options vest in their entirety on the first anniversary of the date of grant. Directors were paid $1,500 per day for Board meetings and $1,000 for each committee meeting attended. The Company also has paid for ATI orientation or training of Board members outside of Board and committee meetings. An annual fee of $5,000 was also paid to each committee chair. Directors who are employees of the Company do not receive any compensation for their service on the Board or its committees.

We also pay our directors’ travel, lodging, meal and other expenses connected with their Board service. In addition, certain benefits were made available to Mr. Bozzone, the retired Chairman, President and Chief Executive Officer, including office space, secretarial services, newspaper subscriptions and parking space at ATI’s headquarters building.

The non-employee directors of the Board earned the following in 2006:





L. Patrick Hassey, President and Chief Executive Officer of the Company, is Chairman of the Board of Directors and does not receive any compensation for his service on the Board of Directors. All compensation paid to Mr. Hassey by the Company for his service as an executive officer is reflected in the Summary Compensation Table.

This column reflects 75% of the annual retainer fee and committee chair fees paid to each director. The Company’s Director Compensation Plan requires non-employee directors to receive at least 25% of their annual retainer fee, including applicable committee chair fees, in unrestricted shares of Company Common Stock; the value of these shares is reflected in the “Stock Awards” column. In accordance with the Director Compensation Plan, directors can, and some did, elect to receive greater than 25% of their retainer fees in Company Common Stock. The value of these additional shares is reflected in this column. Each of Messrs. Bowen and Joyce and Ms. Creel, who elected to receive 50% of their respective annual retainer fees and applicable committee chair fees in shares of Company Common Stock, received 351 shares. Mr. Thomas, who elected to receive 50% of his annual retainer fee in shares of Company Common Stock, received 316 shares. See also note 3 to this table.

This column sets forth the value of the 25% of the annual retainer fee and committee chair fees required to be received by the directors in shares of Company Common Stock (fractional share amounts are paid in cash). The value of the additional shares received by Board members who elected to receive more than 25% of their retainer fees in shares of Company Common Stock are reflected in the “Fees Earned or Paid in Cash” column. See also note 2 to this table. Grant date fair value is computed in accordance with Statement of Financial Accounting Standards (FAS) No. 123(R) “Share-Based Payments” (“FAS 123(R)”). At December 31, 2006, all stock awards made to non-employee directors were fully vested.

The values set forth in this column are based on the aggregate grant date fair value of stock options computed in accordance with FAS 123(R), and represent the expense recorded by the Company in 2006 under FAS 123(R) for grants made in 2005 and 2006. A discussion of the relevant assumptions made in the valuations may be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and in Notes 1 and 7 to the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The fair value of the stock option awards for each director, calculated in accordance with FAS 123(R), is $30,960 for options to purchase 1,000 shares of Company Common Stock granted on May 4, 2006. At December 31, 2006, the non-employee directors held unexercised options to purchase Company Common Stock, whether or not vested, in the following amounts: Mr. Bowen, 4,886; Mr. Bozzone, 33,000; Ms. Creel, 18,506; Mr. Diggs, 1,000; Mr. Joyce, 1,000; Mr. McClelland, 2,000; Mr. Rohr, 8,701; Mr. Thomas, 2,000; and Mr. Turner, 3,000.

Represents the aggregate incremental cost to the Company of office space, secretarial services, newspaper subscriptions and parking space at ATI’s headquarters building.

The Board encourages directors to obtain a meaningful stock ownership interest in the Company. Directors are expected to own shares of ATI Common Stock having a market value of at least two times the annual retainer amount by December 31, 2009 or within five years of first becoming a director, whichever occurs first, and at least three times the annual retainer amount within a reasonable time thereafter. These guidelines have been met as of December 31, 2006.

In December 2004, the Board froze and discontinued the Company’s Fee Continuation Plan for Non-Employee Directors. Under the frozen plan, an amount equal to the annual retainer fee in effect for 2004, which was $28,000, will be paid annually to members of the Board as of January 1, 2005 following the termination of the director’s service as a Board member for each year of the director’s credited service as a director (as defined in the Plan) up to a maximum of ten years.

On December 15, 2006, the Board of Directors approved changes to the non-employee director compensation program. Effective January 1, 2007, the annual retainer fee consists of a cash payment of $60,000 and restricted stock valued at $75,000, subject to approval by the stockholders of the 2007 Incentive Plan. Committee chairpersons receive a $10,000 cash retainer fee and directors will continue to be paid $1,500 per day for Board meetings and $1,000 for each committee meeting attended. The Company also pays for ATI orientation or training of Board members outside of Board and committee meetings.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview of 2006 Financial Performance

ATI’s 2006 performance was a record year for sales, segment operating profit, and earnings per share. Net income for the full year 2006 increased 59% to $571.9 million, or $5.59 per share, compared to $359.8 million, or $3.57 per share, for 2005. For 2006, return on capital employed was 34.5%, and return on stockholders’ equity was 49.9%. Sales increased 39% to $4.94 billion for 2006 as higher base-selling prices, the effect of raw material surcharges, and higher shipments for most of our major products resulted from improved business conditions in most of the major markets we serve. Our continued growth is being driven by strong and increasing demand from the aerospace and defense market and increasing demand from those markets that are vital to the building and rebuilding of the global infrastructure. For 2006, 30% of our sales were to the aerospace and defense market, 19% to the chemical process industry and oil and gas markets, 11% to the electrical energy market, and 3% to the medical market. These major high-value markets represented 63% of ATI’s 2006 sales.
In our High Performance Metals segment, year-over-year sales increased 45% to $1.81 billion due primarily to continuing strong demand from the aerospace and defense, medical, and oil and gas markets for our titanium alloys, nickel-based alloys and superalloys, and vacuum melted specialty alloys, and 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 $657.5 million, a 96% increase compared to 2005, due primarily to the improved pricing and increased shipments resulting from increased demand and benefits from our gross cost reduction efforts, partially offset by the impact on the LIFO inventory accounting methodology from rising raw material costs.
In our Flat-Rolled Products segment, sales increased 42% to $2.70 billion due primarily to strong demand for our products from the global chemical process industry, electrical energy, and oil and gas markets, and good demand from construction, appliance and automotive markets. This improvement in demand, combined with higher base prices for most of the Flat-Rolled Products segment products and the benefits from our gross cost reduction efforts, more than offset the significant negative impact of the LIFO inventory accounting methodology from rising raw material costs, and resulted in an operating profit for this segment of $344.3 million, a 130% improvement compared to 2005.
Results for our Engineered Products segment also improved, as sales increased to $432.7 million, or 10%, compared to 2005, and operating profit increased to $56.7 million, a 19% increase, due to improved demand from the oil and gas, construction and mining, aerospace and defense, power generation, and transportation markets, plus benefits from our gross cost reduction actions.
Total segment operating profit increased to $1.06 billion, an increase of $525.8 million compared to 2005. This significant improvement in segment profitability was achieved after LIFO inventory valuation reserve charges of $197.0 million, due primarily to higher overall raw material costs, which was partially offset by the benefits of $141 million in gross cost reductions across the Company.
During 2006, 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 driving lean manufacturing throughout our operations. Our accomplishments during 2006 from these important efforts included:
• We continued to grow our global market presence as direct international sales reached a record $1.17 billion, or 24% of total sales, an increase of $300.7 million compared to 2005. During 2006, we realigned our European sales and distribution organization to better support our customer needs and the distribution of ATI’s products.

• We continued to build a foundation for further profitable growth. During 2006, we entered into long-term agreements with aerospace and defense customers to supply them with titanium and nickel-based superalloys.

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), which is expected to be put into service beginning in 2008, will utilize approximately 250,000 pounds (buy weight) of titanium alloys per aircraft, a significant increase over any previous commercial aircraft airframe. The 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 significant backlog and development plans by the aircraft manufacturers, this increasing demand for titanium alloys is expected to last into the next decade.

• 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. The major strategic capital projects include:
— 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 will ramp up through the first half of 2007 when it will reach an annualized production rate of approximately 16 million pounds, and will reach approximately 20 million pounds of annualized production by the second half of 2008 when all phases are completed.

— 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 updated estimate of the cost of this facility is expected to be $425 to $450 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 44 million pounds, and is intended to supplement our purchased titanium sponge and purchased titanium scrap requirements.

— The design and construction of a $215 million titanium alloys and nickel-based alloys and superalloy forging facility in the Carolinas. 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.

— 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 2008.

— A significant expansion of our capability to produce ammonium paratungstate (“APT”), a raw material used in the production of tungsten powder and tungsten materials in our Engineered Products segment. 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. The full benefit of this expansion is expected to be realized beginning in the first half of 2007.

— 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.
• We realized strong cash generation in 2006. Cash on hand at the end of 2006 was $502.3 million, an increase of $140 million compared to the end of 2005. This increase in cash is after investing $534 million in managed working capital due primarily to higher business activity, $235 million in capital expenditures, $100 million in a voluntary cash contribution to our U.S. qualified defined benefit pension plan, and $43 million in dividend payments.

• We continued to strengthen our balance sheet. Our net debt to total capitalization improved to 3.3% at December 31, 2006, compared to 19.8%, 43.8% and 72.1% at year-end 2005, 2004 and 2003, respectively. At the end of 2006, our U.S. qualified defined benefit pension plan was essentially fully funded. This is significant as the previous funded status of the plan 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 $50 million in 2007, compared to 2006.

• We continued to realize significant improvement in safety across ATI’s operations. As a result of our continuing focus on and commitment to safety, in 2006 our OSHA Total Recordable Incident Rate improved by 19% and our Lost Time Case Rate improved by 42%, both compared to 2005.

• We realized continued success from the ATI Business System, which is driving lean manufacturing throughout our operations. In addition to $141 million in gross cost reductions achieved in 2006, which was $41 million higher than our 2006 goal of $100 million, and the improved safety performance discussed above, another result of our ATI Business System efforts was the continuing improvement in managed working capital. We define managed working capital as accounts receivable and gross inventories less accounts payable. At December 31, 2006, managed working capital improved to 29.0% of annualized sales compared to 30.3% at 2005 year-end.

• 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 30% to $0.13 per share in December 2006. This is the second consecutive year the Board has significantly increased the dividend.
As a result of these accomplishments, we believe that the foundation has been set for further profitable growth in 2007 and beyond. Our businesses are positioned to continue to deliver outstanding operational performance. We have several major long-term customer supply agreements in place, and ATI’s presence and sales are growing around the world. Our strategic capital projects are expected to contribute significant growth with very good returns beginning in 2007. To achieve additional growth and to meet the demands for our products from the global markets we serve, we plan $450 to $500 million of self-funded capital investments in 2007, approximately 70% of which is related to the previously announced strategic growth projects discussed above. We expect strong cash flow in 2007 to support this level of investment. We remain dedicated to our disciplined plan and vision of Building the World’s Best Specialty Metals Company .™
Results of Operations
Sales were $4.94 billion in 2006, $3.54 billion in 2005 and $2.73 billion in 2004. Direct international sales represented approximately 24% of 2006 sales, 25% of 2005 sales and 20% of 2004 sales.
Segment operating profit was $1.06 billion in 2006, $532.7 million in 2005, and $167.1 million in 2004. 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, curtailment gains 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 $869.2 million in 2006, $307.1 million in 2005, and $19.8 million in 2004. 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. Income before tax for 2004 included a curtailment gain, net of restructuring charges, of $40.4 million.
Income before the cumulative effect of change in accounting principle was $571.9 million for 2006, $361.8 million for 2005, and $19.8 million for 2004. 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 impairments 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. Results for 2004 did not include an income tax provision or benefit for current or deferred taxes primarily as a result of the uncertainty regarding full utilization of our net deferred tax assets and available operating loss carryforwards. Net income for 2004 included a curtailment gain, net of restructuring costs of $40.4 million, related to the elimination of retiree medical benefits for certain non-collectively bargained employees beginning in 2010, and costs associated with the acquisition of the J&L assets and the 2004 labor agreement.

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. 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.

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 silicon electrical steel and tool steels, 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.

Sales for the second quarter 2007 were $1.47 billion, an increase of 21.5% compared to the second quarter 2006, and 7% higher than the first quarter 2007. Compared to the 2006 second quarter, sales for the 2007 second quarter increased 24% in both the High Performance Metals and Flat-Rolled Products segments, and were essentially flat for the Engineered Products segment. For the first six months of 2007, sales were $2.84 billion, a 26% increase over the first six months of 2006. Sales increased 20% in the High Performance Metals segment and 36% in the Flat-Rolled Products segment, while Engineered Products segment sales were unchanged, compared to the first six months of 2006. Over 63% of year-to-date sales were generated by our key growth markets, namely aerospace and defense, chemical process industry, oil and gas, and electrical energy. Total shipments of ATI’s titanium and titanium alloy products were 8.8 million pounds in the second quarter, nearly 14% higher than the second quarter 2006 and 2% higher than the first quarter 2007. Aerospace and defense was the largest of our markets at 30% of year-to-date 2007 sales. Our international sales growth continued, as direct international sales for the first six months of 2007 were $718.2 million, or 25.3% of total sales.

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 gain 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 second quarter 2007 included a LIFO inventory valuation reserve charge of $21.7 million, due primarily to higher nickel and nickel-bearing scrap prices. For the same 2006 period, the LIFO inventory valuation reserve charge was $45.5 million. For the first six months of 2007, LIFO inventory valuation reserve charges were $42.6 million, compared to $52.4 million for the comparable 2006 period.

Second quarter 2007 cost reductions, before the effects of inflation, totaled $26.6 million. Year-to-date cost reductions, before the effects of inflation, totaled $54.3 million.
Income before tax for the second quarter 2007 was $325.9 million, an increase of $116.2 million compared to the second quarter 2006. Net income for the second quarter 2007 was $206.5 million, or $2.00 per share, compared to the second quarter 2006 of $144.3 million, or $1.41 per share. Second quarter 2007 results include an income tax provision of $119.4 million, or 36.6% of income before tax. Second quarter 2006 results include an income tax provision of $65.4 million, or 31.2% of income before tax, which benefited from a $10.2 million reduction of the deferred tax valuation allowance due to the expected future realization of state income tax credits.
In the first quarter 2007, we entered into new four-year labor agreements with United Steelworkers represented employees at ATI Allegheny Ludlum and at ATI’s Albany, OR titanium operations. The new agreements expire on June 30, 2011, and succeeded contracts that ran through June 30, 2007. The new agreements include wage and benefit increases that are in line with anticipated inflation. The ATI Allegheny Ludlum contract provides for profit sharing above a specified minimum pre-tax profit at the ATI Allegheny Ludlum operations, and is capped to provide for no more than $20 million of profit sharing payments under this provision over the four-year life of the contract. Any profit sharing payments made under this provision are contributed to an independently administered VEBA (Voluntary Employee Benefit Association) trust. As a result of the new agreements, we recognized a non-recurring charge of $5.8 million, or $3.7 million after-tax, in the first half 2007, which is primarily reflected in the operating results of the High Performance Metals and Flat-Rolled Products business segments.
Income before tax for the first six months of 2007 was $630.5 million, a 68% increase over the first six months of 2006. Net income for the six months ended June 30, 2007 was $404.3 million, or $3.93 per share, compared to $250.8 million, or $2.46 per share for the first half of 2006. First half 2007 results include an income tax provision of $226.2 million, or 35.9% of income before tax, which included the benefit of a $4.2 million reduction in the valuation allowances associated with state deferred tax assets recorded in the first quarter 2007. Results for the first six months of 2006 include an income tax provision of $125.3 million, or 33.3% of income before tax, and benefited from the second quarter 2006 $10.2 million deferred tax adjustment.
Looking ahead, we expect ATI’s overall performance in the second half 2007 to be at least as good as that achieved in the first half 2007, with fourth quarter earnings stronger than the third quarter. We expect third quarter earnings to reflect higher costs of approximately $0.07 to $0.09 per share associated with scheduled major maintenance outages at several plants. The second half 2007 could be impacted by continued volatility in raw materials costs. In our High Performance Metals segment, titanium alloy shipments under long-term agreements are expected to continue to grow with the robust aerospace build rate. We also expect key growth markets in our Flat-Rolled Products segment to remain strong in 2007. We expect third quarter flat-rolled products shipments to be comparable to the second quarter. Flat-rolled products orders and shipments should improve once the price of nickel stabilizes.
High Performance Metals Segment
Sales increased 24% to a record $557.7 million, compared to the second quarter 2006. Demand for our titanium alloys, nickel-based superalloys, and vacuum-melted specialty alloys was strong from the aerospace and defense, and oil and gas markets. Demand was strong for our exotic alloys from the global chemical process industry, aerospace and defense, and nuclear electrical energy markets. Segment operating profit in the quarter increased to $180.2 million, or 32.3% of sales, a $23.0 million increase compared to the second quarter 2006.
Sales of our titanium and titanium alloys continued to grow. High Performance Metals segment titanium product shipments in the second quarter 2007 were 16% higher than the second quarter 2006 and 10% higher than the first quarter 2007. Part of this increase is due to the expanding use of titanium in airframes. Specifically, in the second quarter 2007, sales of our titanium alloys to airframe customers were 43% higher than the first quarter 2007 and more than four times higher than the second quarter 2006. Nickel-based and specialty alloys shipments in the second quarter 2007 were 6% higher than the second quarter 2006 and 14% higher than the first quarter 2007 driven largely by increased demand from the jet engine market. Exotic alloys shipments in the second quarter 2007 were 39% higher than the second quarter 2006 and 45% higher than the first quarter 2007 driven by strong demand from the global chemical process industry and nuclear energy markets, and by strong demand from aerospace and defense. Average selling prices in the second quarter 2007 compared to the second quarter 2006 decreased 7% for titanium products due primarily to reduced index pricing associated with lower scrap raw material costs. Average selling prices in the second quarter 2007 compared to the second quarter 2006 increased 43% for nickel-based and specialty alloys due primarily to improved product mix and increased index pricing associated with higher raw material costs, primarily nickel. Average selling prices in the second quarter 2007 compared to the second quarter 2006 for exotic alloys decreased by 7% primarily due to product mix.
The increase in operating profit primarily resulted from increased shipments and the benefits of gross cost reductions. Raw material cost inflation and higher inventory levels resulted in a LIFO inventory valuation reserve charge of $1.6 million in the second quarter 2007, compared to an $18.5 million charge in the second quarter 2006.
The High Performance Metals segment benefited from year-to-date 2007 gross cost reductions of $19.6 million, before the effects of inflation.

Flat-Rolled Products Segment
Second quarter 2007 sales were $804.6 million, 24% higher than the second quarter 2006, as significantly higher raw material surcharges and improved product mix offset a 29% decrease in pounds shipped. Demand was strong for our specialty and titanium sheet, specialty plate, and grain oriented silicon electrical steel products from the chemical process industry, oil and gas, electrical energy markets, and aerospace and defense markets. Demand for stainless sheet commodity products was lower primarily due to U.S. service center customers reducing inventories and remaining cautious due to volatile nickel costs and the related surcharges. While total high-value products shipments were 8% lower than the second quarter 2006, shipments of specialty and titanium sheet, specialty plate, and grain-oriented silicon electrical steel increased 4%. Average transaction prices, which include surcharges, were 73% higher. Segment operating profit increased to $166.3 million, or 20.7% of sales, a $79.8 million increase compared to the second quarter 2006. The significant increase in operating profit was primarily as a result of improved product mix for higher value products and the benefit of gross cost reductions. Raw material cost inflation, primarily nickel and nickel-bearing scrap, resulted in a LIFO inventory valuation reserve charge of $20.2 million in the second quarter 2007, compared to a LIFO inventory valuation reserve charge of $27.0 million in the second quarter 2006. The Flat-Rolled Products segment benefited from year-to-date 2007 gross cost reductions of $30.5 million, before the effects of inflation.

Engineered Products Segment
Sales of $109.0 million were comparable to the second quarter 2006. Demand for our tungsten and tungsten carbide products was strong from the power generation, and medical markets, and demand was soft from the oil and gas market for down-hole drilling applications. Demand was strong for our forged products from the construction and mining, and oil and gas markets, and demand was soft from the transportation market, primarily for Class 8 trucks. Demand for our cast products was strong from the wind energy market, and was good from the transportation and oil and gas markets. Demand remained very strong for our titanium precision metal processing conversion services.
Segment operating profit in the second quarter 2007 was $10.7 million, or 9.8% of sales, compared to $15.2 million, or 13.8% of sales for the comparable 2006 period. The decline in operating profit was primarily due to the slower than planned ramp up of the use of ore in producing ammonium paratungstate (APT) in our newly expanded APT plant. This forced us to consume more scrap in the production of APT, which drove scrap material costs higher than expected in the quarter. While we are now self-sufficient for our APT needs, including the flexibility to use either tungsten or ore scrap to produce APT, we do not expect to see significant improvement in this segment until the fourth quarter 2007. LIFO inventory valuation reserve charges were not significant for either the second quarter 2007 or 2006.
For the six months ended June 30, 2007, sales were comparable to the prior year at $220.5 million, and operating profit was $23.2 million, or 10.6% of sales, compared to $33.0 million, or 14.9% of sales in 2006. Operating results for the first half of 2007 include LIFO inventory valuation reserve charges of $0.2 million, whereas the first six months of 2006 do not include any LIFO reserve changes. Operating results for the first half 2007 were negatively impacted by higher purchased raw material costs and APT plant start-up costs.
The Engineered Products segment benefited from 2007 gross cost reductions of $4.2 million, before the effects of inflation.

Corporate Items
Corporate expenses declined to $17.4 million for the second quarter of 2007, compared to $18.0 million in the year-ago period. For the six months ended June 30, 2007, corporate expenses were $38.4 million compared to $31.9 million in the prior year-to-date period. Changes in corporate expenses for the quarter and six month periods are primarily due to expenses associated with annual and long-term performance-based incentive compensation programs. Compensation expense related to share-based incentive plans for three months ended June 30, 2007 and 2006 was $4.3 million and $2.8 million, respectively. For the six months ended June 30, 2007 and 2006, share-based incentive plans compensation expense was $9.2 million and $5.9 million, respectively.
Net interest expense in the second quarter 2007 decreased to $2.6 million from $5.8 million for the same period last year. For the six months ended June 30, 2007, net interest expense was $6.9 million compared to $13.3 million in the prior year-to-date period. These decreases in net interest expense were primarily due to increased interest income resulting from higher cash balances and capitalized interest. Increased capital expenditures associated with strategic investments to expand our production capabilities resulted in higher capitalization of interest costs on capital projects. As a result of capitalization of interest costs, interest expense was reduced by $3.2 million in the first six months of 2007, and by $2.2 million in the first six months of 2006.
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 $3.8 million for the second quarter of 2007 and $5.1 million for the second quarter of 2006. For the six months ended June 30, 2007, other expense, net of gains on asset sales was $6.6 million, compared to $11.2 million for the comparable 2006 period.
Retirement benefit expense decreased to $7.5 million in the second quarter 2007, compared to $20.3 million in the second quarter 2006, primarily as a result of higher than expected returns on plan assets in 2006 and the positive benefits of the 2006 voluntary pension contribution. For the second quarter 2007, the amount of retirement benefit expense included in cost of sales was $5.1 million, and the amount included in selling and administrative expenses was $2.4 million. For the second quarter 2006, the amount of retirement benefit expense included in cost of sales was $14.0 million, and the amount included in selling and administrative expenses was $6.3 million.

For the six months ended June 30, 2007 retirement benefit expense was $15.1 million, compared to $40.9 million in the same period of 2006. Retirement benefit expense increased cost of sales for the six months ended June 2007 by $10.1 million, and increased selling and administrative expenses by $5.0 million. For the six months ended June 2006, retirement benefit expenses increased cost of sales by $27.4 million and increased selling and administrative expenses by $13.5 million.
We are not required to make cash contributions to our U.S. defined benefit pension plan for 2007 and, based on current regulations and actuarial studies, we do not expect to be required to make cash contributions to our U.S. defined benefit pension plan for at least the next several years. However, we may elect, depending upon investment performance of the pension plan assets and other factors, to make voluntary cash contributions to this pension plan in the future.
Income Taxes
Results for the second quarter 2007 included a provision for income taxes of $119.4 million, or 36.6% of income before tax, compared to an income tax provision of $65.4 million or 31.2% of income before tax for the second quarter 2006. For the first half 2007, the provision for income taxes was $226.2 million, or 35.9% of sales, compared to $125.3 million, or 33.3% of sales, for the first half 2006. The first quarter 2007 benefited from a $4.2 million reduction in the valuation allowances associated with state deferred tax asset as a result of the increased profitability of the Flat-Rolled Products segment. The second quarter 2006 benefited from the elimination of a $10.2 million deferred tax valuation allowance with respect to certain state tax credits.
Financial Condition and Liquidity
Cash Flow and Working Capital
During the six months ended June 30, 2007, cash provided by operating activities was $186.7 million, as the significant improvement in operating earnings more than offset a $318.7 million investment in managed working capital. Investing activities included capital expenditures of $151.5 million. Cash used in financing activities was $12.1 million in the first half 2007, as dividend payments of $26.5 million and a reduction in borrowings of $13.0 million were partially offset by $5.0 million of proceeds received from the exercise of stock options and tax benefits on share-based compensation of $22.4 million. At June 30, 2007, cash and cash equivalents totaled $529.6 million, an increase of $27.3 million from year end 2006.
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 June 30, 2007, managed working capital was 31.5% of annualized sales, compared to 29.0% of annualized sales at December 31, 2006. During the first six months of 2007, managed working capital increased by $318.7 million, to $1,900.9 million. The investment in managed working capital resulted from a $98.7 million increase in accounts receivable, which reflects the significantly higher level of sales in the second quarter 2007 compared to the fourth quarter 2006, and a $309.1 million increase in inventory mostly as a result of increased operating volumes and higher raw material costs, partially offset by a $89.1 million increase in accounts payable. Most of the increase in raw material costs is expected to be recovered through surcharge and index pricing mechanisms. Managed working capital has increased $1.05 billion since the end of 2004, as our level of business activity has increased significantly and the cost of most of the raw materials we use to manufacture our products have significantly increased. This increase in managed working capital is expected to represent a future source of cash if the level of business activity or the cost of the raw materials we use were to decline. Accounts receivable and inventory balances have increased during 2007, compared to year-end 2006. However, days sales outstanding, which measures actual collection timing for accounts receivable, have stayed relatively constant. In addition, gross inventory turns, which exclude the effect of LIFO inventory valuation reserves, have declined due primarily to a shift in mix to more value-added products, which have a longer manufacturing process.

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