Allegheny Ludlum Corporation Business Information, Profile, and History

History of Allegheny Ludlum Corporation

Allegheny Ludlum Corporation is one of the largest manufacturers of specialty steel and other specialty metals in the United States. Stainless steel, by far the principal product line of Allegheny Ludlum, accounts for about 80 percent of its total sales and ranks it among the three largest manufacturers of the specialty metal. Silicon electrical steel and other specialty alloys compose the remainder of the corporation's product lines, accounting for about 16 percent and 4 percent of total sales, respectively. The niche the company has carved in the specialty steel market has withstood the deleterious effects of the historically cyclical steel market and survived mounting foreign competition by keeping a technological step ahead of its competitors, increasing productivity and efficiency and maintaining a broad market base.

Allegheny Ludlum's genesis can be traced to the 1938 merger of Allegheny Steel Company of Brackenridge, Pennsylvania, and Ludlum Steel Company of Watervliet, New York. Both companies were manufacturers of specialty steel, and each desired facilities the other possessed; for example, Allegheny wanted to enter the bar business, and Ludlum wished to get into the flat business. Consequently, the merger produced scarcely any duplication of facilities and enabled the newly formed corporation, named Allegheny Ludlum Steel Corporation (ALSC), to move to the forefront of the specialty steel market by virtue of the combined product lines of the two companies. W. F. Detwiler, a former night-shift apprentice for Allegheny Steel Company, became the corporation's first chairman of the board, and Hiland G. Batcheller, president of Ludlum Steel Company, was appointed its president.

At the completion of ALSC's first full year of operation in 1940, the demand for specialty steel had shown a steady increase for the past decade. ALSC reported more than $37 million in sales for the year, 58 percent of which were made in the final quarter. The United States' entry into World War II took the steady increase of the market to unprecedented heights. As the demand for jet airplanes and armaments spiraled upward, research engineers at ALSC intensified their search for metal materials that would answer the growing demand. ALSC developed heat-resisting alloys for use in the construction of aircraft turbine engines. By 1944 the number of employees had ballooned to 17,000, almost three times the number at the outbreak of the war. Sales had climbed to more than $114 million, and ALSC parlayed this wartime-induced success toward an $80 million expansion and modernization program in 1946. The expansion program focused on increasing ALSC's production capacities of stainless steel--which had more than quadrupled in use since 1920--and the burgeoning demand for flat-rolled silicon electrical steel, used in the manufacture of electrical transformers and communication equipment.

The 1950s, a decade of vast growth for the steel industry as a whole, occasioned only a marginal gain in sales for ALSC. At the conclusion of 1950, sales were just below $190 million and by the end of the decade had grown to only $230 million. But during those ten years, ALSC's sales figures fluctuated wildly, reaching a peak of $286 million in 1956 and a nadir of $170 million two years earlier. Although part of the blame for the vacillating sales was attributed to slackening demand, ALSC nevertheless remained steadfast to its long-term policy of expansion and modernization. By 1956 it had spent more than $100 million on such programs since the merger of Allegheny Steel and Ludlum Steel and continued to fund further programs. ALSC's capacity for melting and refining special steel alloys was doubled in 1956, and, in the same year, $30 million to be spent over a two year period was allotted for expanding its production of stainless, electrical, and other high alloy specialty steels.

At this time, ALSC also made improvements in production efficiency and the quality of its products by installing the steel industry's first semi-automated system for hot working steel. Instead of having to manually set the measurements each time a slab of steel passed through a rolling mill--a process that could take up to 15 passes to achieve the desired thickness and shape--the semi-automated system required only one operator to insert a card containing the specifications for the slab into the system and then push a button. This procedure greatly diminished the chances of error since the measurements were dictated by a computer, and consequently the quality of the formed steel product was improved.

Having now firmly established itself as one of the leading specialty steels manufacturers in the United States, ALSC began to turn to foreign markets as the backlog demand dating from World War II began to ebb. It was a direction the steel industry as a whole followed by the mid-1960s, but in 1960 ALSC became one of the first U.S. steel companies to engage in overseas steel manufacturing investments. In a bid to capitalize on the rapid growth of specialty steel sales in the European Common Market area, ALSC formed a Belgian company in partnership with Evence Coppee & Cie., of Brussels, and Société Anonyme Metallurgique d'Esperance-Longdoz, to produce and sell specialty steel.

ALSC also expanded once again on the home front. After posting sales of $292 million in 1964, its highest since 1956, the corporation invested $28 million in new plants and equipment, focusing its efforts on the conversion from open hearth furnaces for silicon-steel production to basic-oxygen furnaces in 1966.

Two acquisitions in the late 1960s augured a change of market focus for ALSC. In 1967 the company acquired True Temper Corporation, a maker of sporting goods and garden tools. This acquisition, which represented a significant diversification of ALSC's product line, was followed in 1969 by the acquisition of Jacobsen Manufacturing Co., a maker of power lawn mowers, garden tractors, and snow blowers.

In early 1970 Allegheny Ludlum Steel Corporation changed its name to Allegheny Ludlum Industries Inc. (ALI). As a consequence of the name change, the specialty steel operation became a division of ALI but continued to bear the ALSC name. As quoted in the Wall Street Journal, a company spokesperson stated the name change "would reflect the changing nature of the business of Allegheny Ludlum." Indeed, the 1970s, a horrendous decade for the steel industry, marked the decline of the specialty steel market as a major focus of ALI. By the end of 1970, a third of ALI's sales came from non-steel items.

Then, in early 1972, ALI reached outside of the steel industry for a new president and chief operating officer (COO). Robert J. Buckley, who had held various positions in industrial management, was selected to lead ALI into a more diversified future. The announcement by ALI in the Wall Street Journal of Buckley's selection as president and COO, reiterated the company's movement, articulated two years earlier, toward a more diversified product line. When questioned about the specific duties Buckley would assume as president, a spokesperson for the corporation stated Buckley would "run the day-to-day operations of Allegheny Ludlum Industries, which includes more than just a steel company." The qualifying statement clearly underscored ALI's decision to branch out and aggressively pursue markets other than specialty steel.

Still, by 1974, ALSC continued to be the major money earner for the parent company. Specialty steel accounted for 70 percent of the corporation's sales, producing over $500 million in revenue, but Buckley had already decided by 1973 to dispose of the specialty steel operation. He began to actively pursue buyers for a minority equity position in the subsidiary, but by 1976 he had found no satisfactory offers.

At this time, in the mid-1970s, the steel market was plummeting. If there ever was a time to exit the steel market, now was such a time. The steel industry was severely hampered by undercutting its own demand projections, slow world-wide economic growth, massive oil price increases, and increased foreign competition. By the end of the decade, ALSC had begun to feel the brunt of the harsh economic times. In 1978 Buckley engaged investment bankers to attempt to sell the specialty steel unit. The bar division had been spun off in 1976 as a leveraged buyout to existing management. When the bankers had no success in finding a buyer, Richard P. Simmons was asked and received approval to try to put together his own buyout, while the bankers continued their efforts to find a buyer for the specialty steel operation.

Simmons, president of the steel division and executive vice-president of ALI, began working for ALSC in 1953 as a metallurgist. Six years later, he left ALSC and worked for two steel companies before returning to ALSC in 1968 to become vice-president of manufacturing. After becoming president of ALSC in 1972, he merged manufacturing plants, reduced staff, established cost control systems, and formulated the strategies that would carry the steel company into the next decade.

In 1980 Simmons and Clint W. Murchinson, Jr., a Dallas financier who owned the Dallas Cowboys football team and held investments in petroleum and broadcasting properties, began negotiations for the sale of ALSC. By the end of the year, an agreement had been reached. As part of the deal, Simmons agreed to leave ALI and become president of the spun off specialty steel operation. In late December of 1980, the sale of the corporation for approximately $195 million was approved by ALI shareholders, but then, during final arrangements between Murchinson, Simmons, and the managers of the specialty steel subsidiary who held an invested interest in the sale, negotiations stalled due to last-minute disagreements, and Murchinson withdrew his offer.

As quickly as the deal fell through, however, it was revived when a wealthy Pittsburgh industrialist, George W. Tippins, entered the scene at the behest of Simmons. Tippins filled the void created by Murchinson's departure by offering the necessary financial backing to enable the sale of ALSC for the same amount offered by Murchinson--and exactly the same terms agreed to by both partners&mdashø the private ownership of Tippins, Simmons, and 16 of his managers. The unexpected withdrawal of Murchinson's offer and the sale to the group headed by Tippins occurred virtually overnight. It is interesting to note that this 1980 leveraged buyout was the second-largest at that point in time, and it was completed without investment bankers.

With Tippins as chairman of the board and Simmons as president and chief executive officer, ALSC braced itself for yet another downturn in the steel market. Large U.S. steel companies suffered disastrous losses--nearly $6 billion over a two-year period--during the early 1980s. Outdated facilities and inefficient production processes, as well as a decreasing demand for steel, were to blame for the losses. For years, steel manufacturers had looked toward raising prices rather than improving their productivity as a source for ameliorating their profits, and by 1983 their practices had begun to severely affect them. ALSC's largest competitor, Crucible Steel, went out of business during this difficult period, as did several other specialty steel producers. This was the most challenging time experienced by the steel industry, including specialty steel, going back to the Great Depression of the 1930s. Nevertheless, ALSC posted a profit for every quarter and every year.

The impact of foreign steel companies on U.S. steel manufacturers was also one of the other major contributors to the ills of the steel industry during the 1980s. The increasing rate of foreign subsidized steel imports entering the U.S. market and the practice of foreign steel companies selling steel in the United States at prices below the cost of production in the U.S. market--referred to as "dumping"&mdashøok its toll on the industry. Although the effect of foreign steel manufacturers had been felt years before, the U.S. steel industry began lobbying in earnest by the late 1970s for government intervention. In late 1984 their pleas were answered by the introduction of voluntary restraint agreement (VRA) curbs on illegally dumped and subsidized steel imports. The VRAs, in effect for five years and then subject to renewal, would restrict steel imports from 29 countries to just under a fifth of the U.S. market. The steel industry, ALSC included, used this grace period to finance capital-spending projects, totaling more than $6.5 billion in a five-year period, in an effort to modernize their facilities and make them more efficient. The VRAs also aided ALSC by offering a respite from foreign competition at a time when imports were surging into the specialty steel market. Even during the period when VRAs were in effect, record input levels of specialty steel continued.

In 1985 Robert P. Bozzone, an employee of ALSC since 1955, succeeded Simmons as president of the company. Simmons remained as chief executive officer and a year later became the chairman of the board, replacing Tippins. The corporation remained financially healthy at this time, posting a profit every quarter since its buy out from ALI. Sales stood at $716 million by 1985, and ALSC's survival through the economic slide was attributed to its focus on product lines ignored by the big steel companies as well as its modern facilities that increased worker production. In 1986 ALSC changed its name to Allegheny Ludlum Corporation. A year later, sales topped $1 billion, and in May the corporation went public.

By the end of the decade, sales were hovering around $1.2 billion and VRAs had been extended for another two-and-a-half years, giving ALC additional incentive to boost its capital-spending projects by $25 million. Buoyed by a U.S. stainless steel market that had more than doubled over the past two decades, ALC entered the 1990s as another recession loomed on the horizon. Yet ALC was able to record profits, albeit at lower levels than previous years, throughout the downturn by adhering to the corporate strategies that had carried the company through decades of cyclical ups and downs since 1938. Since going private in 1980, Allegheny Ludlum has earned 15 percent on total capital employed, a record matched by few metals companies.

By this time, ALC produced stainless steel and other specialty steel for a wide variety of uses beyond traditional markets. Its products were used in the production of stainless steel skis, home cookware, personal computer diskettes, Gillette's Sensor razor, and in the creation of Biosphere 2, the scientific experiment that attempted to replicate a self-sustaining environment in a hermetically sealed complex. The search for new applications and markets for its products and the practice of eschewing overdependence on cyclical customers--both hallmarks of ALC's history&mdash-abled the corporation to remain stable during an economic period that rocked many other steel companies.

Another linchpin of ALC's survival has been its efforts toward seeking innovative technology to improve efficiency and lower production costs, a characteristic that continued into the 1990s. In 1992 ALC completed construction of the first prototype casting machine to produce stainless and carbon steel products from molten steel. The casting machine, called COILCAST and developed in cooperation with a company in Linz, Austria, would eliminate the need for several stages of the production process, thereby improving the efficiency of production and lowering costs. When commercialized, it would provide a continuing advantage for Allegheny Ludlum over its competition.

Although the steel industry is fraught with many ills and has experienced a turbulent history, ALC has remained comparatively stable throughout its history and has continued to grow by pursuing objectives established at its inception. The markets for Allegheny Ludlum's stainless steel grow at an annual rate of approximately five percent. Thus, it describes itself as a cyclical growth company. Its strategies for remaining cost competitive, finding special niches, increasing exports, and being sensitive to customer needs have kept Allegheny Ludlum in good standing. Based on history, dedication to technology, and focus on specialty materials, and with continuity and large ownership positions of key managers, Allegheny Ludlum would likely remain one of the most successful metals companies in the world.

Principal Subsidiaries: ALstrip, Inc.