Allegheny Technologies Inc. ATI announced that it will idle the rotary crop shear (“RCS”) at its Hot-Rolling and Processing Facility (“HRPF”) due to the sudden discovery of a defective component during routine checkup. The RCS is thus anticipated to remain closed at least till the end of Sep 2015.
The RCS is used to cut the rear and front end of a slab during the production process before it enters the HRPF’s seven-stand finishing mill. However, the HRPF will remain operational without the RCS as the outage will not affect any dimensional capacity of Allegheny’s flat-rolled products.
The company thinks that this issue will not affect its customers as it will continue to produce the majority of the flat-rolled products on the HRPF. According to Rich Harshman, Chairman, President and Chief Executive Officer of Allegheny, the company will utilize alternative, less-efficient processes for the production of Grain-Oriented Electrical Steel, involving the hot strip mill.
Before the discovery of this defect, the HRPF’s strong performance had led to the expectations of cost reduction with new product sales on schedule. However, Allegheny anticipates that it would be able to continue with the momentum once the replacement of the RCS component is done and the RCS is operational again.
The loss of the RCS is expected to lead to reduction of HRPF-related operating profit benefit in the fourth quarter of 2015 by as much as $20 million. This is mainly due to the inability to realize cost-reduction measures coupled with additional costs related to the alternative production processes.
However, management remains confident that the HRPF operations will benefit annual operating profits by $150–$250 million as cost reduction and new product sales are realized. Additionally, the company now expects to reap the benefits of this projected improvement in the first quarter of 2016 instead of the fourth quarter of 2015.
Allegheny currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader basic materials sector include Haynes International, Inc. HAYN, Olympic Steel Inc. ZEUS and POSCO PKX. While Haynes International and Olympic Steel sport a Zacks Rank #1 (Strong Buy), POSCO carries a Zacks Rank #2 (Buy).
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