1

Johnson & Wales University

Providence, Rhode Island

Feinstein Graduate School

Allegheny Technologies Inc. Strategic Business Analysis

Term Project Submitted in Partial Fulfillment of the Requirements for the

MBA Degree Course: MGMT 6800

Yaocheng Li

2

Contents 1.0 Executive Summary ................................................................................................................................. 4

2.0 Background Information on Allegheny Technologies Inc. ...................................................................... 5

2.1. Brief History of Company ............................................................................................................... 5

2.2. Historical Timeline of ATI ............................................................................................................... 8

3.0 External Analysis ................................................................................................................................... 11

3.1. General Environmental Analysis ................................................................................................... 11

3.1.1. Political/Legal Factors ............................................................................................................... 11

3.1.2. Technological Factors ................................................................................................................ 16

3.1.3. Sociocultural Factors ................................................................................................................. 20

3.1.4. Demographic Factors ................................................................................................................ 21

3.1.5. Economic Factors ...................................................................................................................... 21

3.1.6. Global Factors ........................................................................................................................... 25

3.1.7. Summary of the General Environmental Analysis .................................................................... 27

3.2. Industry Analysis ........................................................................................................................... 27

3.2.1. Industry Description .................................................................................................................. 28

3.2.2. Industry Dominant Economic Features ..................................................................................... 28

3.2.3. Market Size and Growth Rate. .................................................................................................. 28

3.3.1. The Threat of New Entrants ...................................................................................................... 29

3.3.2. The Power of Buyers ................................................................................................................. 30

3.3.3. The Power of Suppliers ............................................................................................................. 31

3.3.4. The Threat of Substitutes .......................................................................................................... 31

3.3.5. Competitive Rivalry ................................................................................................................... 31

3.4.1. Industry Competitors ................................................................................................................ 33

3.4.2. Carpenter Technology Corp. ..................................................................................................... 35

3.4.3. Precision Castparts Corp. .......................................................................................................... 36

3.5. Summary of External Analysis .......................................................................................................... 38

4.0 Internal Analysis ................................................................................................................................... 38

4.1. Organizational Analysis................................................................................................................. 39

4.1.1. Corporate Vision and Mission ................................................................................................... 40

4.1.2. Leadership ................................................................................................................................. 40

4.1.3. Culture ....................................................................................................................................... 41

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4.1.4 Structure. ................................................................................................................................... 42

4.1.5. Summary of Organizational Analysis ........................................................................................ 45

4.2. Evaluation of Financial Performance ............................................................................................... 45

4.2.1. Compare to the rivals. ............................................................................................................... 54

4.3. Strategic Analysis. ............................................................................................................................ 55

4.3.1 Corporate-Level Strategy and Internal Strategy. ....................................................................... 55

4.3.2 Business-Level Strategy and Internal Strategy. .......................................................................... 55

5.0 Recommendations. ............................................................................................................................... 56

6.0 Reference .............................................................................................................................................. 59

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1.0 Executive Summary

The purpose of this paper is to provide a comprehensive and exquisite strategic analysis

of Allegheny Technologies Incorporated (NYSE:ATI). This paper will concentrate on a

description of the external and internal factors that affect Allegheny Technologies Inc. in the

present and the future. In the external analysis, a general environment analysis will be

conducted to determine the driving forces in the industry. It will continue with an industry and

competitor analysis to determine the primary firms competing in the Specialty Metals Industry.

The external analysis will conclude by talking about key success factors that Allegheny

Technologies Inc. position itself in specialty metal industry. The internal analysis will be broken

into six sections that include an organizational analysis, a look at the firm’s resources, an

objective analysis, a detailed financial analysis, strategic analysis, and a value chain analysis. A

strategic fit analysis will then be conducted to determine the direction Allegheny Technologies

Inc. needs to precede in based on the external and internal analyses. The strategic analysis will

conclude by providing two recommendations for ensuring the survival and prosperity of

Allegheny Technologies Inc. into the future.

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2.0 Background Information on Allegheny Technologies Inc.

Allegheny Technologies Incorporated (NYSE:ATI) is one of the largest and most

diversified specialty metals producers in the world. Not being as famous as Boeing and GE, ATI

is a hidden empire of manufacturing special metals. As a fully integrated supplier from raw

material for titanium and melt for other specialty alloy systems through highly engineered

finished components, ATI spans more than four industries among Aerospace & Defense, Oil&

Gas/ Chemical process, Electrical Energy and Medical in multi-nations. ATI exerts innovative

technologies to offer growing global markets a wide range of specialty metals solutions. By

dividing its business into three main segments, High Performance Metals Segment, Flat-Rolled

Products Segment, and Engineered Products Segment, ATI’s products varies from stainless and

specialty steel, nickel-based alloy and specialty alloy and titanium melt to the world most

efficient titanium, tabular quality alloys stainless sheet and precision rolled strip products.

Through its fourteen subsidiaries and two joint ventures, ATI has 11,200 full-time employees.

ATI is divided into three geographic groups, which include North America, Europe and Asia via

14 facilities and 2 joint ventures.

2.1. Brief History of Company

Allegheny Technologies Incorporated (ATI) was founded in 1750s in New Jersey called

Pompton Furnace, as a pudding factory, which manufactured the hand-forged chain links to

block the Hudson River during the Revolutionary War.

In 1901, Allegheny Steel & Iron started to headquarter in Western Pennsylvania. As the first

company to use the electric furnace in manufacturing alloys is Allegheny Steel & Iron in 1910.

After Fourteen years, ATI received its first patent award for stainless. ATI stainless structured the

Chrysler building in 1927. In the next two years, ATI stainless was bringing in trimming on the

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Ford Model A automobile.

Allegheny Steel Company combined with Ludlum Steel Company in 1938. The first Jet

engine alloys was developed by ATI in early 1940s, as well as the first commercial gas turbine.

Titanium for the aerospace and defense market was innovated by ATI in the late 1940s.

By a consumable electrode vacuum melt process, ATI first commercialized the using of super

alloys in the Boeing 707 in 1955. ATI is the earliest one to use the key technology for

manufacturing aerospace quality nickel-base alloys is vacuum induction melting in 1957. ATI is

also a pioneer in the specialty metals necessary for the nuclear electrical power generation

industry. ATI’s zirconium products were used in the late 1950s for the nation's first full-scale

commercial power plant, built in Shippingport, PA.

In 1960, Teledyne Inc. was founded. And Teledyne ranked No.293 on the Fortune 500 list

after six years. At the same time, ATI developed Vasco Supreme, the first super-hard, high-speed

steel that revolutionized many industrialized metalworking processes. Rene® 41, a titanium and

nickel-based super alloy were used for the structure and reentry heat shield for the Gemini 4

spacecraft, whose flight included the first American spacewalk, was generalized by ATI in 1965.

In the 1970s, ATI invented the 3-2.5 Titanium alloy, used for aircraft hydraulic tubing.

ATI's titanium was used for the hydraulic control system of the Concorde supersonic transport

(SST). Meanwhile, ATI’s zirconium was used in the first large high-pressure, high-speed

centrifugal pump for an acetic acid facility for the chemical processing industry. In 1984, ATI's

AL 29-4C® alloy becomes patented; this alloy is used in high-efficiency gas furnaces.

Immediately, ATI's AL-6XN® alloy was used for the first high-strength, durable firewalls for an

offshore oil facility in the North Sea.

In 1996, Allegheny Ludlum and Teledyne, Inc. combined to form Allegheny Teledyne

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Incorporated. But in order to concentrate on its core business of metal and alloy production, ATI

spun off several subsidiaries as independent public companies such as Teledyne Technologies,

Inc. and WaterPik Technologies in 1999. This reconfiguration of the company is a milestone of

ATI strategic turn.

To add a low-cost production path for stainless sheet products and additional finishing

capabilities for our high-value sheet and strip products, ATI purchased J&L Specialty Steel in

2004. ATI sold its World Minerals subsidiary to French company Imerys in 2005.ATI 2003®

Lean Duplex Alloy was in a subsea flow line system for the Kikeh Field Development Project,

offshore Sabah, East Malaysia in 2006. In the following year, the proprietary of ATI was used for

the largest stainless roof in the world. The roof is for the New Doha International Airport in

Qatar. ATI 425® Alloy was used on the Phoenix Mars Lander in 2008. Right after that, ATI

added powder metal into its product portfolio through the purchase of Crucible Compaction

Metals and Crucible Research in 2009.

In 2010, ATI and VSMPO made the joint venture as UNITI to supply titanium for the

world's largest seawater desalination plant in Ras Az Zawr, Saudi Arabia. The plant's daily

potable water output will be the largest in the world, sufficient to meet the needs of 3.5 million

people.

Through the acquisition of Ladish, ATI added highly engineered forged, cast and

machined components to its product portfolio 2011. Simultaneously, ATI added titanium and

other high-performance metal fabrication capabilities in Bolingbrook, IL. Products include kits,

sub-assemblies, assemblies and machined components. On Nov. 4, 2013, ATI announced today

that it has completed the sale of its Tungsten Materials business to Kennametal Inc. for $605

million.

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2.2. Historical Timeline of ATI

The following figure shows a brief timeline of the major events that have occurred in

Allegheny Technologies’ history. It highlights not only the scientific achievement the company

has reached, but also the many of the wise stripping off of subsidiaries and strategic acquisition

history.

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10

Historical Timeline of ATI.

1750

1901

1920

1927

1929

1938

1940

1950

1955

1957

1960

1965

1970

1980

1984

1999

2006

2007

2008

2009

2010

2011

2013

Pompton Furnace

New Jersey

Allegheny

Steel & Iron

The first to use

the electric furnace

Build the Chrysler building

Combination of Allegheny and Ludlum

(Steel Corporation)

Titanium

Alloys

Nuclear

Electric

al

Power

Gemini 4 spacecraft

Firewalls for oil facility

UNITI Ladish

specialty alloys for jet engine

Teledyne, Inc. S

ST

Allegheny Teledyne

Subsea Flow Line

Crucible Compact

ion Metals

Boeing 707

Ford Model A

Allegheny Technologies Incorporated

Largest Roof in Qatar

ATI 425

Tungsten Materials

Sold

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3.0 External Analysis

The external analysis is necessary for ATI to realize the opportunities and threats that

exist in the industry they are competing with the other peers fiercely. The external analysis

consists of a general environmental analysis, industry analysis, five forces analysis, industry

competitor’s analysis, and the key success factors for the industry.

3.1. General Environmental Analysis

There are six sections of external environmental factors a firm must understand to

effectively compete in a specific market, which are political/legal, economic, socio-cultural,

demographic, technological, and global. In order to provide the firm with a description of the

elements in society that directly affect the industry and the direction managers must take to

implement appropriate strategies to survive. The detail analysis will be developed in the six

primary factors.

3.1.1. Political/Legal Factors

Different from other commercial industries, the specialty metal industry is highly

politically and legally sensitive. The definition of specialty metals can be found in 10 U.S.C.

2533b; specialty metal means any of Steel with a maximum alloy content exceeding one or more

of the following limits:

(1) Manganese, 1.65 percent; silicon, 0.60 percent; or copper, 0.60 percent; or containing

more than 0.25 percent of any of the following elements: aluminum, chromium, cobalt,

columbium, molybdenum, nickel, titanium, tungsten, or vanadium.

(2) Metal alloys consisting of nickel, iron-nickel, and cobalt base alloys containing a total

of other alloying metals (except iron) in excess of 10 percent.

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(3) Titanium and titanium alloys.

(4) Zirconium and zirconium base alloys (DFARS 225.252.7009, 2012).

As the majority products of ATI, titanium is used in airframe components and jet engines.

It offers greater strength at lower weight than other metals. Among a number of shapes it

produced, aircraft, missile and space systems, ships, Tank-automotive, weapons, ammunition

such as bars, billets and sheet are limited Department of Defense (DOD).The domestic

preference restrictions has forbid DOD from using funds to procure certain items that are not 100

percent American-made since the Berry Amendment enacted in 1941, which can be found in

United States Code (10 U.S.C. 2533a). The Berry Amendments’ specialty metals restrictions are

requirements in addition to the Buy American Act (BAA) and Trade Agreements Acts (TAA).

Furthermore, the specialty metal clause first appeared in the 1973 Defense Appropriations

Act. In 1978, the “qualifying country exception” was added to the specialty metals domestic

source restriction, which waived the requirement for procuring specialty metals produced in the

United States when the purchase relates to agreements the United States has with foreign

governments, known as the qualifying countries exception. Aircraft component manufacturers in

23 qualifying countries currently are exempt from the specialty metals domestic source

restriction and are permitted to use non-domestic produced titanium to manufacture DOD aircraft

components.

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23 Qualifying Countries

Australia France Poland

Austria Germany Portugal

Belgium Greece Spain

Canada Israel Sweden

Czech Republic Italy Switzerland

Denmark Luxembourg Turkey

Egypt Netherland

United Kingdom of

Great Britain and

Finland Norway Northern Ireland

Figure 3.1.1-1: 23 qualifying countries (Source: DFARS 225.003(10))

As these qualifying countries list above, the most productive mineral resources countries

such as China, Kazakhstan, Mozambique, Norway, Ukraine, Vietnam, Sierra Leone and South

Africa are excluded from the exception. From the perspective of the author, United States

Military protection regulations jeopardize the commercial industrial operations. The compulsory

requisition of titanium products for DOD aircraft components must be made in the United States

and 23 qualifying countries makes the U.S. manufacturers lose market share to qualifying

countries that are able to use foreign produced titanium.

Defense Federal Acquisition Regulation Supplement (DFARS) issued the Restriction on

Acquisition of Specialty Metals (DFARS Case 2008-D003) in July 21, 2008. DFARS requires a

clause on the Contract Terms and Conditions Required to Implement Statutes or Executive

Orders Applicable to Defense Acquisitions of Commercial Items. It must specifically state: “The

Contractor agrees to comply with any clause that is checked on the following list of DFARS

clauses which, if checked, is included in this contract by reference to implement provisions of

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law or Executive orders applicable to acquisitions of commercial items or components.”

DFARS 252.225-7014 is also inserted into contracts via DFARS 252.212-7001(c) and

includes guidance from the Federal Acquisition Regulation (FAR): In addition to the clauses

listed above of the Contract Terms and Conditions Required to Implement Statutes or Executive

Orders, Commercial Items clause of this contract (FAR 52.212-5), the Contractor shall include

the terms of the following clauses, if applicable, in subcontracts for commercial items or

commercial components, awarded at any tier under this contract. What’s more, the specialty

metals are also regulated by FAR 25.104(a). If an end item or component contains manganese, or

is a spare/replacement part for foreign-manufactured equipment, it is arguable that this exception

could be applicable. Similar to the “Acquisitions by Foreign Vessels” exception, this is another

example of an exception in DFARS 225.7002-2 that is not maintained in the John Warner

National Defense Authorization Act of 2007 (JWNDAA). Without doubt, the preference for

Domestic Specialty Metals required by DFARS and FAR is burden compliance to commercial

industry.

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Concentrate type and country Ilmenite and leucoxene Rutile Titaniferous slag

Australia 1,501,000 474,000

Brazil 75,000 2,550

Canada 0 0 878,000

China 1,100,000 0

India 550,000 25,000

Kazakhstan 25,000 0

Malaysia 28,782 10,810

Mozambique 636,800 6,500

Norway 600,000 0

Sierra Leone 15,946 67,916

Sri Lanka 520,000 2,700

South Aferica 0 0 1,300,000

Ukraine 500,000 60,000

United States 400,000 W

Vietnam 915,000 0

Figure 3.1.1-2 2011 Titanium: world production of mineral concentrates, by country.

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium/myb1-2011-titan.pdf)

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Figure 3.1.1-3 2011 titanium: world production of mineral concentrates column chart by country

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium/myb1-2011-titan.pdf)

However, there is a positive exception, DFARS 225.7003-3(b)(5) waives the specialty metal

domestic source restriction when DOD makes a determination that the specialty metal melted or

produced in the U.S. cannot be acquired s and when needed at a fair and reasonable price in a

satisfactory quality, a sufficient quantity, and the required form. This means when the specialty

metal aircraft components are not available in the U.S. in the required form and at a reasonable

price, the restriction is not compulsory any more.

3.1.2. Technological Factors

There are two factors of technology need to be taken into consideration. The first factor is

the manufacturing technology, while the second comes from information technology.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Titaniferious

Rutiles(TiO2)

Ilmenite(FeTiO3)

2011 TITANIUM: WORLD PRODUCTION OF MINERAL CONCENTRATES, BY COUNTRY

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The world reserves of titanium are mainly concentrated in two titanium ores, which are Ilimenite

and Rutile. In terms of FeTiO3, titanium is contained in Ilmenite, while titanium exists in Rutile

by the form of TiO2. Only two ways can get the titanium of the complex ore, the Kroll and

Hunter method. Followed by the bankruptcy of RMI, the Hunter method has been obsoleted. The

dominant Kroll method is a magnesium reduction process.

Limited to the scale of manufacturers’ facility, there are two types of furnace, the I-type

semi-combined furnace and U-type combined furnace to make the magnesium reduction-

distillation process. Most large scale facilities are using the U-type combined furnace to make

titanium sponge. The process can be simplified as below,

TiCl4 + 2Mg= Ti + 2 MgCl2 + Q

The primary product is titanium sponge, which is mostly used for the preparation of titanium and

its alloys. For each country, there are different standards for titanium sponge.

The two magnates of U.S. Sponge producers are Rowley, Utah, facility of ATI and

Titanium Metal Corp. Henderson. The Rowley, UT titanium sponge facility of ATI has

completed the Standard-grade Qualification (SQ) process on Mar. 14, 2012. The ATI Rowley

facility uses the Kroll reduction - vacuum distillation process, which reduces titanium

tetrachloride with magnesium to produce the sponge, accomplished the cost-effective premium-

titanium sponge facility.

From the international trade perspective, Japan, Kazakhstan, China and Russia are the big

four countries exports and ships titanium sponge to U.S. By the analysis above, the technological

factors are relatively steady. The information technology factor for ATI is essential as well. In the

contemporary dynamic market, information technology infrastructure is critical to support

business objectives. The successful information technology infrastructure can assist the

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manufacturing industry effectively plan and generate. The instant price reporting of raw material

and finishing products will help ATI improve financial performance.

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Figure 3.1.2-1 Flow Chart of Titanium Production

Ore

•Ilmenity and Leucoxene

•Rutile

•Titaniferous Slag

Sponge

•is the commercially pure form of titanium metal that is refined from titanium ore.

Ingot

•A cylinder or rectangular slab, which is often produced by melting titanium sponge, titanium scrap metal, and other metals.

Mill Shapes

•Bar & Billets

•Sheets & Slabs

HRPF

•Hot- Rolling and processing Facility

Elaborate Processing

•Cold Rolling, Welding, Straighten, Machining

•Picking, Wire-drawing

Finishing Products

•Precision Rolled strip

•Tubular Quality Alloys

•......

Markets

•Aerospace & Defense

•Oil & Gas/CPI

•Electrical Energy

•......

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3.1.3. Sociocultural Factors

Since involved in the heavy industry and armament industry, there are pros and cons must be

taken into the consideration of social-culture factors. As far as the concerned by the author, at

least three factors will affluent ATI future management, the environmental, martial and patriotic

factors.

ATI has been listed as the 26th-largest corporate producer of air pollution in the United States by

researchers of the University of Massachusetts Amherst on August 19, 2013. Approximately

590,000 lbs. of toxic chemicals are released into the air annually. ATI has also been identified as

a potentially responsible party at approximately 43 Superfund toxic waste sites, which may

require ATI investigate and remediate the cleanup cost, fines and civil or criminal sanctions.

Being a party to lawsuits and other proceeding involved in alleged violations or liabilities, ATI

has to record the estimated cost on Financial Statements. At December 31, 2012, ATI reserves for

environmental matters totaled approximately $16 million.

For instance, Allegheny Ludlum's Natrona and Brackenridge, PA, facility contributed to the

waste at the ALSCO Park Lindane Dump—an EPA Superfund site. These facilities also released

chromium into the air, which adversely affected air quality at schools in the Highlands School

District. In 2005, Allegheny Ludlum agreed to pay a US$2,375,000 penalty to settle a lawsuit

brought by the U.S. Department of Justice on behalf of the Environmental Protection Agency,

which alleged that Ludlum had unlawfully discharged oil and other pollutants, such as

chromium, zinc, copper, and nickel, into the Allegheny and Kiskiminetas rivers in the suburbs of

Pittsburgh.

The second factor comes from the political and social Turmoil. The war on terrorism as well as

political and social turmoil could put pressure on economic conditions in the United States and

worldwide. These political, social and economic conditions could make it difficult for ATI, ATI’s

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suppliers, such as China and Russia, to forecast accurately and plan future business activities

could adversely affect the financial condition. As a result, ATI’s financial condition and results of

operations could be materially adversely affected.

The third factor could be the only positive factor for ATI, that’s the patriotic factor. Registered in

Delaware, headquartered in Philadelphia, born in New Jersey and had been served for the U.S.

for more than 110 years, ATI is an authentic American Sam. Patriots will support ATI by

purchasing it products. Other governmental contractor will choose ATI as co-partner as well,

which gains business opportunities.

3.1.4. Demographic Factors

Since ATI is not a Business to Consumer company, but more Business to Business and

Business to Government company, the author will more concentrate on the analysis of business

units and facilities geographical distribution and labor allocation in internal analysis part.

3.1.5. Economic Factors

There are three factors need to be cautious from the perspective of Economics. The First

one is the Macroeconomics perspective. By the Statistics data showed by USGS, the titanium

ores of world production has been dropped in recent years. And U.S. doesn’t product as much as

it demand. Most of the Titanium Ores are relied on import.

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Figure 3.1.5-1 Overview of Titanium world Production (units in tons)

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium)

Besides the original mineral resources, U.S. is also a semi-product import country. The semi-

product includes the titanium sponge and titanium scrap. Both numbers of imports and exports

titanium sponge and titanium scrap has been increased since 2009. The price went down steadily.

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

U.S. Production

Imports

Exports

World Production

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Exports

Imports

TITANIUM SPONGE STATISTICS

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Figure 3.1.5-2 U.S. Titanium Sponge Imports and Exports(units in tons).

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium)

Figure 3.1.5-3 Titanium Sponge Value Variation.

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium)

Figure 3.1.5-4 Flow Chart of Titanium Production (units in tons)

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium)

0

5,000

10,000

15,000

20,000

25,000

Unit Value($/t)

Unit Value(98$/t)

TITANIUM SPONGE STATISTICS

0

5,000

10,000

15,000

20,000

25,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Imports

Exports

TITANIUM SCRAP STATISTICS

24

Figure 3.1.5-5 Titanium Scrap Value Variation

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium)

The second factor which influent the Titanium Industry is whether the government will

stock the spillover. By the data acquired, the U.S. government hasn’t stock any titanium since

2005. The over flow has been absorbed by the industry stocks. Without the collection of

government, the titanium market trends to be a perfect competition, which price mechanism will

exerts the effects obviously on the demand and supply relationship.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Unit Value($/t)

Unit Value(98$/t)

TITANIUM SCRAP STATISTICS

25

Figure 3.1.5- Titanium Stocks by Industry and Government (units in tons).

(Source: http://minerals.usgs.gov/minerals/pubs/commodity/titanium)

The third factor is based on the second one. Titanium will be a price sensitive product in the

domestic market of U.S. To set up the titanium option price alert and titanium option index is

necessary.

3.1.6. Global Factors

By the unavoidable product step, TiO2, the author accesses the global demand and supply

relationship based on the production amount and the demand amount of TiO2. China producers

are very numerous, and many of these sites are very small in capacity. Asia-Pacific is the largest

consuming region, and China surpassed the US in 2009 as the largest consuming country. China

now consumes more TiO2 than any other individual region in the world, now at more than 25%.

Growth during the last five years has been led by major emerging economies – most notably

China, the emerging economies of Asia-Pacific (Indonesia, Thailand, Vietnam, Philippines, etc.),

Brazil, Turkey, Russia, and India. The mature economies of Western Europe and North America

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Industry Stocks

Government Stocks

26

have remained flat or declined slightly in consumption. The sovereign debt crisis in Europe and

the resulting reduced spending and high unemployment levels have significantly eroded demand

in the region (TZMI, 2013).

Figure 3.1.6-1 TiO2 Demand by region: 2012

(Source: http://www.tzmi.com/)

Figure 3.1.6-2 Production by producer: 2012

13%

27%

4% 8% 6%

5%

17%

20% Asia- Pacific ex C&J

China

Japan

Central & south America

Central Europe

Middle East Africa

North America

Western Europe

32%

18% 10%

9%

8%

6%

3% 2% 11%

Chinese

Dupont

Cristal Global

Kronos

Huntsman

Tronox

Sachtleben

ISK

Others

27

(Source: http://www.tzmi.com/)

What’s more, the Chinese Titanium market varied a lot since 2010. It turned into a

titanium export country. And the excess production capacity forced the Chinese government to

stock titanium ingot 4,000 tons in 2010. The visible hand of Chinese government has interfered

with the market.

3.1.7. Summary of the General Environmental Analysis

Market of specialty metals is highly competitive. ATI compete with many producers and

distributors who, depending on the product involved, range from large diversified enterprises to

smaller companies specializing in particular products. Some competitors are either directly or

indirectly subsidized by governments. The biggest force that weighs heavily on the specialty

metal industry is government regulations and variable mineral price. Not only opportunities but

also risks exist in this industry. The political/ legal has a strong effect on this industry. The legal

powers and litigation cost will eventually shape the industry.

3.2. Industry Analysis

The U.S. specialty metals industry is focused on modern, efficient, and the leading edge

in both new product development and the implementation of advanced manufacturing

technology, not conventional steel. Being isolated from the steel refining and forging, specialty

metals has been an independent industry. Strategy can be viewed as building defenses against the

competitive forces or as finding positions in the industry where the forces are weakest.

Knowledge of the company’s capabilities and of the causes of the competitive forces will

highlight the areas where the company should confront competition and where avoid it(Porter,

1998).

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3.2.1. Industry Description

The specialty metals industry has both cyclical and secular drivers from the commercial

aerospace market to medical and engine perspective. The economic fundamentals include

Allegheny Technologies (ATI), Dynamic Materials (BOOM), Carpenter Technology (CRS), A.

M. Castle (CAS)Haynes International (HAYN), RTI International Metals (RTI), Schnitzer Steel

Industries (SCHN), Universal Stainless & Alloy Products (USAP) and Worthington Industries

(WOR).

3.2.2. Industry Dominant Economic Features

The high valued-added premium alloys that are more levered to the commercial

aerospace market is the most robust demand. The modern society us going through a transition

here with wide-body aircraft garnering a larger percent of the global aircraft market, so beyond

the sheer size of the larger aircraft benefiting the specialty metals industry, there are also

structural changes underway, as well as some of these aircraft are more composite-based. This

consequently results in a higher mix of specialty metals beyond just the larger size of the aircraft.

So you have both cyclical and secular drivers that are benefiting the specialty metals side of the

world.

Additionally, new aircraft engines as well as those that are still being designed call for

higher thrust and fuel efficiency and typically operate at higher temperatures, which is an

additional secular driver for the specialty metals industry. What’s more, the use of titanium in

industrial applications is more price sensitive in Europe and North America Market than in

China.

3.2.3. Market Size and Growth Rate.

U.S. imports more than half the world trade in titanium sponge. After shrinking to 124,000 tons

29

in 2009, global supply of titanium sponge rose by an average of 26.5% per year from 2010 to

2012 to 241,000mt, an estimated 20,000 tons surplus in demand. To the smaller segment market

of titanium recovered rapidly from the stagnancy in 2009, and the demand for mill product has

bad been reached 165,000 t in 2011, the highest level experienced by industry.

3.3. Five Forces Analysis

Whatever their collective strength, the corporate strategist’s goal is to a find a position in

the industry where ATI can best defend itself against these forces or can influence them in its

favor. The strongest competitive force or forces determine the profitability of an industry and so

are greatest importance in strategy formulation (Porter, 1998).

3.3.1. The Threat of New Entrants

The threat of new entrants by new competitors in the domestic specialty metal

industry is considered to be low, while the international specialty metal industry is moderate.

Except the large capital investment and technology thresholds, new entrants have to overcome

regulatory and legislative barriers before they can compete in the specialty metal market. From

the domestic perspective, there is no real threat of new entrants into the market. The construction

and infrastructure of melting and forging facilities is not a short period. The standards of

products qualification also takes time to get proven. The patent and royalty controlled by

magnates made a prerequisite to exclude new entrants. The acquisition and merger strategy of

industrial magnates wielded slows entry into this industry. The restrictions of capital and scale of

firms makes its even hard for small entrants to compete with the magnates.

But from the international perspective, the threat of new entrants is coming from the

developing countries, such as China, India, Russia and so on. Due to the blockade of techniques,

these countries with abundant mineral resource might research and develop the technologies on

30

their own. For example, Baoji Titanium Industry Co., Ltd.is established in 1999, Shaanxi, China,

is a newborn infant in Titanium Industry; while the production of Baoji Titanium Industry Co.,

Ltd., takes 40% to 50% of China’s titanium market. New entrants are established under the

political instructions in a collectivism culture, the Entry Barrier of high capital input and

technology is not a challenge anymore. However, this possibility is relatively small. Product

Differentiation and Access to Distribution Channels also block the new entrants. ATI uses the

strategy of Joint Venture, which help it get the royalty in these resourceful countries and also

restraint these small companies in the miniature size.

3.3.2. The Power of Buyers

The power of buyers in the waste disposal industry is moderate to low. ATI has

long-term agreements with customers for Mission Critical Metallics® in the form of mill

products and components, to reduce their supply uncertainty. These agreements include a

titanium products supply agreement for aircraft airframes and structural components with The

Boeing Company that extends through the end of 2018.ATI has long-term agreements with

Rolls-Royce PLC for the supply of nickel-based super alloy disc-quality products and precision

forgings and castings for commercial jet engine applications. ATI has long-term agreements with

GE Aviation for the supply of premium titanium alloys, nickel-based alloys, and vacuum-melted

specialty alloys products for commercial and military jet engine applications.

The commercial aerospace market’s use of titanium alloys is expected to increase

significantly as new aircraft airframe designs use a larger percentage of titanium alloys. For

example, the airframe of the new Boeing 787 Dreamliner, which entered service in late 2011,

uses significantly more titanium and titanium alloys as a percentage of total weight than any

previous commercial aircraft airframe. New aircraft designs from Airbus, the A380 and A350-

31

XWB, and from defense contractors also utilize a greater percentage of titanium alloys. Given

the significant current backlogs of Boeing and Airbus, as well as the engine manufacturers, this

increasing demand for titanium alloys mill products is expected to last for at least the next

several years. ATI announced it has extended its long-term titanium products supply agreement

with Boeing Company on Oct. 16, 2013. The extension agreement covers value-added titanium

mill products and provides opportunity for greater use of ATI's next-generation and advanced

titanium alloys in both long product and flat-rolled product forms.

3.3.3. The Power of Suppliers

In evaluating the power of suppliers, it was found to be very low. First of all, ATI

is now a fully integrated supplier, from raw material (for titanium) and melt through highly

engineered technically complex parts, creating a more stable and sustainable supply chain for

aerospace, defense and industrial markets. Secondly, the energy supplier such as national grid

would be relatively steady.

3.3.4. The Threat of Substitutes

The treat of substitutes in the waste disposal industry is considerably low. Being

lightweight, strong, and corrosion and heat resistant, there is not much competitive substitute

product of titanium. However, the new material Carbon-Fiber Reinforced Polymers (CFRP) is

compatible with titanium from some aspects, especially its lower-cost. But titanium’s key

material position in the frame and jet engine of aircraft is unshaken, even the new generation of

large passenger aircraft, the A380 and A350 from Airbus and the B787 from Boeing, used greater

volumes of CFRP.

3.3.5. Competitive Rivalry

The specialty metal market is one that is high when it comes to competitive rivalry.

32

Different countries compete with each other in this industry. The world production of titanium in

2010 is 111,721 tons, China produced 38,323 tons, 34.3% of the whole world, U.S. produced

34,635 tons, Russia produced 21,000 tons, Japan produced 13,783, and Europe produced 4,000.

The Russian company VSMPO-AVISMA is the leading supplier of mill products to the

aerospace industry, supplying in excess of 20,000 tons in 2012. Manufacturers and distributors of

U.S. are Allegheny Technologies International Inc., RTI International Metals Incorporated,

Titanium Metals Corporation (TIMET, which is purchased by Precision Castparts Corp in Nov.

2012), Carpenter Technology Corporation. In Japan, there is no independent titanium company;

most of the titanium producers are set in the steel company, which saves cost. The Chinese

producers include Baoji Titanium Industry Co., Ltd. (Baoti Group Ltd.), Shanghai Baosteel

Group Corporation and Fushun Titanium Co. Ltd. As referred before, the Russia, American and

Japanese are focus on the aerospace grade titanium production, while Chia is currently supplying

the chimerical grade products, which is the low and primitive level of titanium products.

3.4. Industry Competitive Analysis

The specialty metal is a mature business with different competitors. Competition can be

divided into four categories by the three segments of ATI business, which are high performance

metals, flat- rolled products and engineered products. The author will illustrate the three

segments of ATI revenue percentage first, and then list the major competitors by four categories.

By Figure 3.4-1, the flat- rolled products makes the largest percentage of revenue, the high

performance metals ranks the second. The engineered products make 10% of whole revenue.

33

Figure 3.4-1: ATI three business segments revenue percentage of 2012.

(Source: ATI Annual Report, 2013)

3.4.1. Industry Competitors

Nickel-based alloys and superalloys and specialty steel

alloys

Carpenter Technology Corporation A

Special Metals Corporation,

a Precision Castparts Corp.

company C

Haynes International, Inc.

B

Outokumpu oyj (Finland)

C

Titanium and titanium-based alloys

Titanium Metals Corporation

a Precision Castparts Corp.

company C

RMI titanium, an RTI international Metal C

43%

47%

10%

High performance Metals

Flat- Rolled Products

Engineered Products

34

Company

VSMPO - AVISMA (Russia) A

Precision forgings and titanium investment castings

Precision Castparts Corp A

Firth Rixson Limited (United Kingdom):

A

Aubert & Duval, a group member of Eramet (France) A

Zirconium and related alloys

Cezus, a group member of AREVA (France) A

H.C. Starck

A

Western Zirconium Plant of Westinghouse Electric Company, owned by Toshiba

Corporation A

Stainless steel

AK Steel Corporation B

North American Stainless (NAS), owned by Acerinox S.A. (Spain)

B

Outokumpu Oyj (Finland)

B

Imports from

B

Aperam (formerly part of Arcelor Mittal) (France, Belgium and Germany)

B

Outokumpu Oyj (Finland) including Mexinox S.A. de C.V., group member (Mexico):

B

Ta Chen International Corporation (Taiwan) B

Tungsten and tungsten carbide products

Kennametal Inc D

Iscar (Israel)

D

Sandvik AB (Sweden)

D

35

Seco Tools AB (Sweden), owned by Sandvik AB D

Figure 3.4.1-1: ATI’s major competitors.

(Source: ATI Annual Report, 2013)

As showed above, within each industry ATI has different competitors by different

product. A stands for High Performance Metals segment; B stands for Flat-Rolled Products

segment; C is the aggregate of High Performance Metals and Flat-Rolled Products segments; and

D is Engineered Products segment. The author will choose three domestic companies to

compare.

3.4.2. Carpenter Technology Corp.

Carpenter Technology Corp. (NYSE:CRS) was incorporated in 1904 and headquartered

in Wyomissing, PA. CRS develops, manufactures and distributes stainless steels and high

performance specialty alloys to meet the difficult challenges of advancing technologies.

Similarly involved in Aerospace and Defense, Automotive and Energy, and Medical industries, it

has a very close market capitalization as ATI, but only half of ATI’s employees. Approximately,

15% of the 11,200 ATI employees are located in outside of U.S. at a market capitalization of

$3.65 billion. Similar to ATI’s market capitalization at $3.25 billon, the Carpenter Technology

Corp. has 4,800 employees as their workforce. By the same industries involved in, ATI doubled

the employee numbers of CRS. The author made an inference that ATI is a more labor intensive

company than its peer.

36

Table 3.4.1-2: Current Financial Information of CRS

(Source: CRS Annual Report, 2013)

Table 3.4.1-2: Business Segment revenue and percentage of CRS

(Source: CRS Annual Report, 2013)

In addition, CRS considers acquisition, joint ventures and other business combination

opportunities, as well as possible business unit dispositions, as part of business strategy, which

opportunities involve uncertainties and potential risk. Gross profit of CRS in fiscal year 2012

increased to $391.0 million for fiscal year 2011. The results primarily reflect the higher volumes

in fiscal year 2012, an improved product mix, price increases and better operating performance.

Fiscal year 2012 results include costs associated with $11.6 million of acquisition inventory fair

value cost adjustments in connection with the Latrobe Acquisition.

3.4.3. Precision Castparts Corp.

Precision Castparts Corp. (NYSE:PCC), a worldwide manufacturer of complex metal

37

components and products, provides high-quality investment castings, forgings, fasteners/fastener

systems and aerostructures for critical aerospace and power generation applications. Quite

different from ATI and CRS, at a market capitalization around $3.65 billion and $3.25 billion,

PCC has a market capitalization of 36.55 billion and 28,500 employees, which is makes PCC a

real market leader in specialty metals industry. PCC owns unique Revert Management, which

includes metal chips, casting gates, bar ends, forging flash and other byproducts from forging,

casting and fastener manufacturing processes that can be re-melted and reused. PCC’s

infrastructure and capabilities create a closed loop system for the retention and reuse of

internally-generated reverts. Besides, PCC also provide metallurgical processing solutions and

services worldwide for our use and for other companies that require the melting and processing

of specialty alloys. Major markets include specialty alloy producers, foundries and other

industries with special metallurgical requirements.

Table 3.4.3-1: Current Financial Information of PCC

(Source: PCC Annual Report, 2013)

38

Table 3.4.3-2: Current Financial Information of PCC

(Source: PCC Annual Report, 2013)

Strategically, PCC utilize the acquisition to keep their position in the specialty industry.

During 2012, by issuing senior, unsecured notes PCC acquired 8 companies which include

TIMET, the largest titanium manufacturer in the U.S., offers a full range of titanium products,

including ingot and slab, forging billet and mill forms. TIMET operates seven primary melting or

mill facilities in Henderson, Nevada and Toronto, Ohio.

3.5. Summary of External Analysis

Recognized by the major competitor by the industry leader PCC, ATI positioned second

in the specialty metal industry. The key to growth—even survival—is to stake out a position that

is less vulnerable to attack from head-to-head opponents, whether established or new, and less

vulnerable to erosion from the direction of buyers, suppliers, and substitute goods. Both ATI and

PCC devise strategy of acquisition to keep the new entrants out of this industry. But compare

with PCC, ATI is more technology focused, it builds most facilities by themselves, investing

capital and technology via a long period. Innovation in marketing can raise brand identification,

the ATI exclusive products, such as ATI 425 has built a production differentiation from other

products based on the stringent industry demand.

4.0 Internal Analysis

To determine the core competitive advantage that exists within a firm, internal analysis

evaluates the capabilities and resources that a firm possesses which relates to achieving core

competencies. This helps to develop solutions and creates a competitive advantage in the

industry. This ultimately provides a strategic competitiveness the company can use to ensure a

39

profitable future. The analysis consists of an organizational analysis, the analysis of the

firm’s resources, the objectives of the firm, and an evaluation of its financial performance. This

ultimately leads to a strategic analysis.

4.1. Organizational Analysis

Registered in Delaware, headquartered in Pittsburgh, Pennsylvania, ATI has 14 facilities

in the U.S. and 2 Joint Venture overseas.

ATI principle properties are scattered in the whole U.S. territory, such as Titanium

sponge production facilities are located at Rowley, UT and Albany, OR. Domestic melting

operations are located in Monroe, NC, Bakers, NC, and Lockport, NY (vacuum induction

melting, vacuum arc re-melt, electro-slag re-melt, plasma melting); Richland, WA (electron beam

melting); and Albany, OR (vacuum arc re-melt). Production of high performance metals, most of

which are in long product form, takes place at our domestic facilities in Monroe, NC, Lockport,

NY, Richburg, SC, Albany, OR, and Oakdale, PA. Our production of zirconium and related alloys

takes place at facilities located in Albany, OR, Huntsville, AL, and Frackville, PA. Our

production of highly engineered forgings, castings, and machined components takes place at

facilities in Cudahy and Coon Valley, WI, Windsor, CT, Albany, OR, and Irvine, CA. The melting

stainless steel and other flat-rolled specialty metals are located in Brackenridge, Midland and

Latrobe, PA. Hot rolling of material is performed at our domestic facilities in Brackenridge,

Washington and Houston, PA. Finishing of our flat-rolled products takes place at our domestic

facilities located in Brackenridge, Bagdad, Vandergrift, Midland and Washington, PA, and in

Wallingford and Waterbury, CT, New Bedford, MA, and Louisville, OH.

ATI constructed a new advanced specialty metals Hot-Rolling and Processing Facility

(HRPF) for our Flat-Rolled Products business segment at our existing Brackenridge, PA site.

40

Construction of the HRPF is expected to be completed with assets ready for service by the end of

2013. The HRPF is designed to produce thinner and wider hot-rolled coils of exceptional quality

at reduced cost with shorter lead times and require lower working capital requirements. The

engineered production facilities are located in Nashville, TN, Huntsville, Grant and Gurley, AL,

Houston, TX, and Waynesboro, PA (tungsten powder, tungsten carbide materials and carbide

cutting tools and threading systems). Other domestic facilities in this segment are located in

Portland, IN and Lebanon, KY (carbon alloy steel forgings), LaPorte, IN (grey and ductile iron

castings), Bolingbrook, IL (specialty metals fabrication) and southwestern Pennsylvania

(precision metals finishing services) (ATI, 2013).

4.1.1. Corporate Vision and Mission

Set aside the slogan of building the world’s best Specialty Metals Company. An ATI

initiative is to integrate and coordinate ATI’s global capabilities to offer current and new

customers access to the Company’s full range of products, processes, and technical resources. Its

strategy is to identify secular growth trends in the global economy that have a meaningful impact

on the use of products.

In addition to achieving with the safety performance, ATI set cost reduction targets in

each year of every business cycle. ATI improved cost structure with nearly $114 million in gross

cost reductions. This brings ATI nine-year total to over $1.2 billion in gross cost reductions,

before the effects of inflation. Driving a lean manufacturing throughout operations made ATI

success from the Business System. ATI has targeted additional gross cost reductions of at least

$100 million in 2013.

4.1.2. Leadership

ATI understands that pursuing long-term, sustainable leadership in the specialty metals

41

industry mandates more than operational excellence. Leadership requires us to achieve

excellence in employee safety, environmental stewardship, and social responsibility. The health

and safety of our employees and environmental compliance go hand-in-hand with operational

excellence. We are committed to continuing to improve safety in all of our operations.

ATI’s goal is to finish each day incident and injury free. In 2012, OSHA Total Recordable

Incident Rate of ATI was 2.71 and Lost Time Case Rate was 0.58 per 200,000 hours worked,

which is competitive with world-class performance. As a demonstration of environmental

stewardship, ATI Wah Chang achieved ISO 14001 certification in 2012. ISO 14001 recognizes

our system to identify and control environmental impact and constantly improve environmental

performance. In addition, as a corporate citizen, we believe in giving back to the communities in

which we operate. Across ATI, in 2012 we raised more than $1 million for United Way charities,

and many employees donated their time by participating in Days of Caring(ATI, 2013).

4.1.3. Culture

In Building the World’s Best Specialty Metals Company, ATI is committed to Relentless

Innovation. ATI aims to do more, makes our products better, and implements and executes faster

through the ATI Business System (ATIBS). ATIBS drives lean manufacturing initiatives,

improves safety, quality and yields, leads to improved productivity and cost efficiencies, and

delivers excellent customer reliability and service (Richard J. Harshman, 2013).

That is through a shared commitment to our core values. ATI believe that Values-Based Leaders

are the true difference in companies that move people to new levels of achievement and success.

Key core values ATI addressed are,

• Integrity as the Cornerstone of our business. To that end, we must be honest and forthright in

42

everything we do.

• We expect everyone to be treated with dignity and respect and we embrace the values of

cooperation, diversity, and teamwork.

• ATI is committed to more than just adherence to laws and regulations. ATI’s commitment is to

reflect the highest level of integrity and ethics.

• Personal accountability for outcomes ensures the long-term success of ATI.

• Safety, Health and Environmental Compliance are the prerequisites to all operations, and our

goal is to finish each day incident- and injury-free.

• Product Quality and Excellence is demonstrated in everything we do.

• Technology, Creativity, Learning, and Freedom of people to reach their individual potential is

ATI’s culture.

ATI’s commitment to Do What’s Right continues to guide us throughout our global operations

and business activities.

4.1.4 Structure.

Domestic Facilities Name Products

Stainless & specialty steels

ATI Allegheny Ludlum Grain-oriented electrical steel (GOES)

Titanium & titanium alloys

Nickel- & cobalt-based alloys

Nickel- & and cobalt-based superalloys

ATI Allvac Titanium & titanium alloys

Specialty & specialty steels

43

Zirconium alloys

ATI Wah Chang

Exotic alloys (hafnium, tantalum, tungsten &

vanadium)

Titanium & titanium alloys

ATI Ladish Forging Highly-engineered forgings

Isothermal forgings

ATI Chen-Tech Forging Hot-die forgings

ATI Pacific Cast Technologies Titanium investment castings

ATI ZKM Forging Forgings

ATI Portland Forge Carbon and alloy steel forgings

Closed-die forging, machining, heat-treating and

fabrication

ATI Casting Service High-quality ductile and gray iron castings

ATI Powder Metals

Superalloy, nickel, and titanium powder metal

components

ATI Precision Finishing Precision finishing services

ATI Ladish Machining Aerospace machining and subassembly

Aerospace precision machining

ATI Valley Machining Aerospace sonic configuration machining

ATI Ladish Diecast Tooling High-quality shot-end tooling

ATI Firth Sterling

rough mold, semi-finished and finished cemented

tungsten carbide and tungsten heavy alloy components.

ATI Stellram indexable and solid carbide cutting tool systems,

44

specialty abrasives

Table 4.1.4-1: ATI facilities and products.

(Source: http://www.atimetals.com/businesses/business-units/Pages/default.aspx )

Two Global Joint Ventures

Shanghai STAL Precision Stainless Steel Co., Ltd (STAL) is a joint venture company

between ATI Allegheny Ludlum and Baosteel, China’s largest integrated steel company. STAL

specializes in manufacturing and marketing precision-rolled stainless strip. STAL is located in

Xin-Zhuang Industrial Zone and equipped with state-of-the-art equipment, including 20-roller

Sendzimir mills, continuous bright annealing furnaces, tension levelers, degreasing cleaning

lines and precision slitters. STAL is the first manufacturer in China to produce super thin, super

flat and super hard precision stainless steel. The products are sold to mainland China, Taiwan and

Hong Kong, as well as many countries in Asia, for such industries as information technology,

computers, automotive, medical equipment, tubing, semiconductors and more.

UNITI Titanium brings together two major global titanium producers with complimentary

manufacturing and technical capabilities: ATI and VSMPO-AVISMA (Verkhnaya Salda

Metallurgical Production Association – Berezniki Titanium-Magnesium Works) from Russia, to

create a joint venture focused on titanium mill products for industrial, consumer and other non-

aerospace, non-military and non-medical markets. Uniti Titanium integrates the synergistic use

of the raw material, melting, hot rolling, finishing, research and technology resources of the two

companies. Uniti Titanium is a supplier of a broad array of commercially pure titanium products

for target markets in ingot, slab, plate, sheet, coil, bar, billet, welded tubing and seamless

tubing(ATI,2013).

45

4.1.5. Summary of Organizational Analysis

Geographical scattered facilities locations don’t influent ATI’s manufacturing operation.

But the different level product line will increase the transportation cost. The heave weight and

batch process features and cost will force ATI choose maritime and train transportation, the mass

goods transportation will gear down the production efficiency. From the logistic considerations,

reasonably arrange the contract products from the closest facility would help to reduce the

transportation cost. For instance, ATI ZKM Forging, located in Stalowa Wola, Poland, the west

coast of U.S., is one of Central Europe’s largest suppliers of forgings. But the transportation fees

would definitely larger than the European locals, or even larger than the other manufacturers in

the east coast.

4.2. Evaluation of Financial Performance

46

Table 4.2-1 ATI 2010-2012.ATI Consolidated Statements of Income

(Source: ATI annual report, 2013).

Recovered from the financial crisis in 2009, ATI and its industry peers increased steadily

from the chasm. By the Sales amount of $5,031.5 million and net in $9.4 million, the specialty

metal industry is a high input and low output industry. Morningstar gave ATI a narrow economic

moat, which is formed by high-performance titanium- and nickel-based alloys. A narrow

economic moat means slight competitive advantage that one company enjoys over competing

firms operating in the same industry. A narrow moat is still an advantage for a company, but it is

one that only provides a limited amount of economic benefit and will typically last for only a

relatively short period of time before competition marginalizes its importance. Multiple specialty

products that must be developed to exacting customer specifications, using production methods

that are not easy to replicate, creating barriers to entry for competitors. With only a handful of

companies able to supply the specialty alloys demanded by the aerospace industry, many

aerospace customers enter into long-term contracts with Allegheny to assure supply. Some new

alloys are developed in collaboration with customers, usually capped off by a long-term sourcing

agreement for the new alloy. For such circumstance, high-performance metal business benefits

from switching costs, and competition in the industry will be largely limited to existing players.

From the balance sheet showed below, from the year 2011 to last year, all the assets accounts has

been decrease except the inventory account. This might not be a good signal from the perspective

of effective operation. The overstocking might being caused by ATI doesn’t have a good

understanding of the future market. However, ATI explained this as below,

Inventories are stated at the lower of cost or market, less progress payments. Costs

include direct material, direct labor and applicable manufacturing and engineering overhead, and

47

other direct costs. Most of our inventory is valued utilizing the LIFO costing methodology.

Inventory of our non-U.S. operations is valued using average cost or FIFO methods. Under the

LIFO inventory valuation method, changes in the cost of raw materials and production activities

are recognized in cost of sales in the current period even though these material and other costs

may have been incurred at significantly different values due to the length of time of our

production cycle. The prices for many of the raw materials we use have been extremely volatile

during the past four years. Since we value most of our inventory utilizing the LIFO inventory

costing methodology, a rise in raw material costs has a negative effect on our operating results,

while, conversely, a fall in material costs results in a benefit to operating results(ATI, 2013).

The explanation is very acceptable, but from the perspective of financing position, the author

suggests ATI to change their inventory method on 10-K, but keep using it as an internal control.

48

Table 4.2-2 ATI 2010-2012.ATI Consolidated Balance Sheet.

(Source: ATI annual report, 2013).

49

Table 4.2-3 ATI 2010-2012.ATI Consolidated Balance Sheet.(Source: ATI annual report, 2013).

From the cash flow table, ATI use the money earned from operation and issuing long-

term debt to acquire other companies to enlarge their product portfolio, and ATI is a stock barely

releases dividends.

50

Allegheny Technologies Inc.

TERM Year End 12/31/2012 Year End 12/31/2011 Year End 12/31/2010 Year End 12/31/2009 Year End 12/31/2008

Net Sales in $M 5,031.50 5,183.00 4,047.80 3,054.90 5,309.70

PREDICTOR RATIOS: Year End 12/31/2012 Year End 12/31/2011 Year End 12/31/2010 Year End 12/31/2009 Year End 12/31/2008

Altman Z-Score 1.81 2.26 2.72 2.3 3.03

Sustainable Growth Rate 3% 6% 0% -2% 25%

PROFITABILITY RATIOS:

P/E Ratio 20.3 22.9 76.1 137.3 4.5

Gross Profit Margin on Sales 13.80% 15.70% 12.10% 13.40% 21.70%

Net Profit Margin (Pre-tax) 4.80% 6.50% 3.10% 2.10% 16.30%

Net Profit Margin (After-tax) 3.10% 4.10% 1.70% 1.00% 10.70%

Operating Expense to Sales 93.70% 91.70% 95.40% 97.30% 83.60%

Operating Profit to Sales 6.30% 8.30% 4.60% 2.70% 16.40%

Basic Earning Power 3.90% 5.60% 2.80% 1.50% 20.80%

Return on Assets (After-tax) 2.50% 3.50% 1.60% 0.70% 13.60%

Return on Equity 6.40% 8.70% 3.50% 1.60% 28.90%

51

Table 4.2-4 ATI 2008-2012.Profitability Ratios.

(Source: http://0-www.ventureline.com.helin.uri.edu/ratio-analysis-accounting-ratios/sample/publicly_traded_company/)

From the five year Profitability Ratios, it’s clear to see the cyclic driving factor behaved in ATI’s financial ratios. Periodically up and

down profit margin. ATI has a steadily growth in net profit margin. In the year end 2008, ATI has its best net profit margin and highest

return on equity, however, the hurt of financial crisis showed delayed in the recent four year, different from the retailer industry or

financial derivatives industry.

52

Allegheny Technologies Inc.

ASSET MANAGEMENT RATIOS:

Year End

12/31/2012

Year End

12/31/2011

Year End

12/31/2010

Year End

12/31/2009

Year End

12/31/2008

Collection Period (Period

Average) 48 44.2 42.3 55.1 40.7

Collection Period (Period End) 44.5 49.9 49.2 46.8 36.5

Inventory Turns (Period Average) 3 3.6 3.8 3.1 4.6

Inventory Turns (Period End) 2.8 3.2 3.5 3.2 4.7

Days Inventory 122.9 100.6 94.9 118.1 79.2

Working Capital Turnover 3.1 3 3.1 2.2 4.3

Fixed Asset Turnover 2 2.2 2 1.6 3.3

Total Asset Turnover 0.8 0.9 0.9 0.7 1.3

LIQUIDITY RATIOS:

Year End

12/31/2012

Year End

12/31/2011

Year End

12/31/2010

Year End

12/31/2009

Year End

12/31/2008

Current Ratio 2.9 3 2.7 3.2 2.8

Quick Ratio 1.1 1.4 1.4 1.9 1.5

Sales/Receivables 8.2 7.3 7.4 7.8 10

Gearing Ratio 37.10% 37.40% 31.10% 34.00% 20.20%

53

DEBT MANAGEMENT RATIOS:

Year End

12/31/2012

Year End

12/31/2011

Year End

12/31/2010

Year End

12/31/2009

Year End

12/31/2008

Times Interest Earned 3.5 4.2 2.6 2.1 23.7

Equity Multiplier 2.5 2.4 2.2 2.2 2.1

Fixed Assets (net)/Net Worth 1.03 0.96 0.97 0.95 0.83

Debt Ratio 0.6 0.6 0.5 0.5 0.5

Debt to Equity 1.5 1.4 1.2 1.2 1.1

Long-term-debt to Equity 0.6 0.6 0.5 0.5 0.3

Current-debt to Total Debt 23.10% 24.10% 32.20% 26.80% 31.40%

Table 4.2-5 ATI 2008-2012 Assets Management Ratios and Liquidity Ratios.

(Source: http://0-www.ventureline.com.helin.uri.edu/ratio-analysis-accounting-ratios/sample/publicly_traded_company/).

The days of inventory is getting longer in the five years. There must be an effective operation problem in Inventory management. The

Debt Ratio is almost not changed, while the Debt to Equity is getting bigger, this means ATI getting more cash to buy new properties

by issuing long-term bonds, but not issuing stocks, which cost is more interest but less tax

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4.2.1. Compare to the rivals.

By the same data the author get, the Industry leader PCC maintains a net profit margin around

23.3% to 25.4% during the five years, compare to ATI’s Net Profit Margin used to be 16.3% to

4.8%. The market capitalization of PCC is ten times of ATI, the conclusion of scale of economy

and scope of economy authentically helped PCC to avoid the effect of financial crisis. Different

from ATI’s nonferrous operation, PCC contains more steel manufacture.

Compare to the smaller rivals, RTI, around one third market capitalization of ATI, its net profit

margin drops from 14.4% to 4.3% in 2012, which also match the trend, the smaller, the easier

fluctuate.

Table 4.2.1-1: Comparison with CRS.

(Source: www. finance.yahoo.com).

For more detailed contrast to the same size rivals, CRS is giving more solutions. The half

employee size saved labor cost and administration fees. ATI has to take the necessary human

resource consult into consideration. Besides, by more than $ 2 billion revenue, the Earnings

before Interest and Tax of ATI is even smaller than CRS’s, this is abnormal. The large

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expenditure should be investigates.

4.3. Strategic Analysis.

To recall ATI’s goal and objectives, this part will analyze the strategy ATI applied.

4.3.1 Corporate-Level Strategy and Internal Strategy.

By Acquisition and Joint venture, ATI diversify into new business. As recorded above,

ATI strategically acquire related business companies and relevant suppliers and customers. The

quick entry avoid barriers and gained ATI complementary resources and capabilities. For

example, ATI acquired Ladish at a price of $778 million in 2011. Ladish used to be a major

customer of ATI’s titanium and nickel business makes a range of highly specialized metal parts

for the aerospace industry and the larger industrial market. ATI currently had a much smaller

presence in the engineered products sector; it makes fasteners and shafts for Rolls Royce jet

engines. Obviously, ATI choose related business as their diversification path, which has

competitively valuable cross business value chain and resource matchups.

4.3.2 Business-Level Strategy and Internal Strategy.

The product differentiation strategy is applied by ATI. ATI has developed and innovated

the new products to meet the customers’ demand. For instance, to replace the traditional titanium

alloy for jet engines, ATI innovated the 6-4 titanium. As well the next-generation and future-

generation jet engines require more ATI 17™ alloy and ATI 6-2-4-2™ alloy. Similarly, while the

workhorse nickel-based superalloy has been 718, hotter-burning, next- generation and future-

generation jet engines require ATI 718Plus® alloy, Rene 65 alloy, ATI 720™ alloy, powder

metals, and titanium aluminates.

Without doubt, the commitment to relentless innovation guides ATI’s management

actions to improve the competitiveness of their legacy products while charting a course to realize

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future benefits of new products and processes. Sustaining innovation maintains or grows our

position in legacy products. Game-changing innovation creates competitive advantage and

advances ATI’s leading position in specialty metals technology in our key growth markets, as

well as in markets that are more commoditized. Relentless Innovation earns ATI the ability to

engage in long-term strategic relationships that are mutually beneficial with our customers at the

highest levels. Our relationships are with the OEMs and the key suppliers on whom they depend

(ATI annual Report).

5.0 Recommendations. Six recommendations will be conclude into this article.

Firstly, continue the efforts to reduction of cost. The manufacture nature is not labor

intensive; ATI’s employee numbers is quite outrageous. The necessary administration

examination and human resource review need to be done in this instantly grow company. During

the fast acquisition, the human resource redundancy might generate unnecessary cost. To

reallocate the function of different departments in the new acquired companies is imperative.

Secondly, the Financial Statements need to be improved by the cooperation of accounting

firms. 10-K is not an internal control file, but a demonstration method to show the public how

efficient and effective the company operation. The method and presentation ATI currently used is

not excellently to demonstrate its strength and capability. Make the accounting fees works. By

creating a new appearance of its Financial Statements, ATI will definitely win more benefit from

the stock market and more opportunities to get investing and financing cash flows. For example,

to change the method of recording Inventory, will definitely avoid the currency exchange rate

fluctuation and raw material price vibrations.

Thirdly, not only getting cash flows from issuing a long-term bond, the benefit of saving

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tax from interest cost is limited. Although issuing stocks is more costly, but the nature of stocks

will gain ATI more cash flows to control. Set up a portfolio of issuing bonds and stocks,

integrated the financial tools to acquire more capital from the market.

Improve the information system in the specialty metal market. Since ATI use surcharge

pricing for its alloy products, which helps insulate ATI from wild fluctuations in raw material

prices, the more sensitive the information system is, the more efficient operation ATI will have.

As we known, ATI buys scrap metal, nickel, molybdenum, cobalt, and other metals to make

products. Price fluctuations in metal and scrap prices can have a large impact on near-term

results for the company, but, in general, surcharges and index mechanisms offset the impact of

increased raw material costs over the long run. While changes in metal prices don't always

directly affect results, periods of high metal demand (and resulting high prices) usually coincide

with solid results for

Besides, due to the pollutants released into the air, especially contaminating facilities in

the demographically intensive area, ATI have to improve its public image. Improving the

technology of purring exhaust gas, absorbing the exhausted heat into new use or product in to

secondary product, such as supply the civil heating. At the same time, by encourage technology

innovation, sponsor mechanical majored student or involving philanthropic and environmental

activities, ATI will gain favorable impression from the public.

Last but not least, the expand direction ATI decided is wisdom. Engaged into the

engineering products market is an excellent strategy. Keep tracking to affordable sized

companies, acquiring them at a reasonable price will aggregate the market share and revenue

percentage of ATI. Statically enlarge its capitalization will help ATI get the benefits of scale

economy and scope of economy. Maintaining the innovation of specialty metals will hold the

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current leadership. Name more products start by ATI will improve the brand recognition.

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6.0 Reference

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HlwZT0z&t=1

Boeing: The Boeing Company (2013). Financial. Retrieved from;

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