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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 1-12001
ALLEGHENY TECHNOLOGIES INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 25-1792394
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1000 Six PPG Place
Pittsburgh, Pennsylvania 15222-5479
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(412) 394-2800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No _____
At May 4, 2001, the Registrant had outstanding 80,202,179 shares of its Common
Stock.
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ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 19
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(In millions except share and per share amounts)
March 31, December 31,
2001 2000
---- ----
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 23.5 $ 26.2
Accounts receivable 317.7 325.3
Inventories 577.6 585.7
Deferred income taxes 94.2 61.2
Prepaid expenses and other current assets 27.1 24.4
---------- ----------
Total Current Assets 1,040.1 1,022.8
Property, plant and equipment 875.3 872.0
Prepaid pension cost 617.5 593.6
Cost in excess of net assets acquired 193.9 194.5
Other assets 85.4 93.3
---------- ----------
Total Assets $ 2,812.2 $ 2,776.2
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 197.8 $ 169.3
Accrued liabilities 187.9 191.0
Short-term debt and current portion of long-term
debt 57.6 53.2
---------- ----------
Total Current Liabilities 443.3 413.5
Long-term debt 501.5 490.6
Accrued postretirement benefits 520.1 525.9
Deferred income taxes 184.4 158.7
Other 138.4 148.3
---------- ----------
Total Liabilities 1,787.7 1,737.0
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10: authorized-
50,000,000 shares; issued-none -- --
Common stock, par value $0.10, authorized-500,000,000
shares; issued-98,951,490 shares at March 31, 2001 and December 31, 2000;
outstanding-80,133,152 shares at March 31, 2001 and 80,339,957 shares
at December 31, 2000 9.9 9.9
Additional paid-in capital 481.2 481.2
Retained earnings 1,039.2 1,050.0
Treasury stock: 18,818,338 shares at
March 31, 2001 and 18,611,533 shares
at December 31, 2000 (483.1) (482.3)
Accumulated other comprehensive
loss, net of tax (22.7) (19.6)
---------- ----------
Total Stockholders' Equity 1,024.5 1,039.2
---------- ----------
Total Liabilities and Stockholders' Equity $ 2,812.2 $ 2,776.2
========== ==========
The accompanying notes are an integral part of these statements.
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ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-------------------
2001 2000
---- ----
Sales $542.5 $625.4
Costs and expenses:
Cost of sales 476.9 510.7
Selling and administrative expenses 48.4 51.0
Interest expense, net 8.0 6.9
------ ------
533.3 568.6
Earnings before other income 9.2 56.8
Other income 1.2 8.4
------ ------
Income before income taxes 10.4 65.2
Provision for income taxes 4.0 23.9
------ ------
Net income $ 6.4 $ 41.3
====== ======
Basic and diluted net income per common share
$ 0.08 $ 0.47
====== ======
The accompanying notes are an integral part of these statements.
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ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended
March 31,
---------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 6.4 $ 41.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24.8 24.8
Deferred income taxes (7.6) 15.8
Gains on sales of investments and businesses -- (10.5)
Change in operating assets and liabilities:
Accounts payable 28.4 12.4
Prepaid pension cost (23.9) (32.5)
Inventories 8.1 1.9
Accounts receivable 7.6 (15.3)
Accrued liabilities and other (16.8) (8.1)
------ -------
CASH PROVIDED BY OPERATING ACTIVITIES 27.0 29.8
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (24.7) (12.2)
Disposals of property, plant and equipment 0.9 1.7
Purchases of businesses and investment in ventures (0.5) --
Proceeds from the sale of investments -- 14.2
Other (0.3) (0.6)
------ -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (24.6) 3.1
FINANCING ACTIVITIES:
Net borrowings under credit facilities 9.6 115.6
Borrowings on long-term debt 4.5 2.4
Payments on long-term debt and capital leases (0.2) (0.7)
------ -------
Net increase in debt 13.9 117.3
Purchases of common stock (3.0) (130.6)
Dividends paid (16.0) (17.3)
Exercises of stock options -- 0.2
------ -------
CASH USED IN FINANCING ACTIVITIES (5.1) (30.4)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2.7) 2.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 26.2 50.7
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23.5 $ 53.2
====== =======
Cash provided by operating activities in 2000 is net of payment of taxes on
gain on sale of investments of $3.8 million. Excluding this tax payment, cash
provided by operating activities was $33.6 million.
The accompanying notes are an integral part of these statements.
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ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The interim consolidated financial statements include the accounts of
Allegheny Technologies Incorporated and its subsidiaries. Unless the context
requires otherwise, "Allegheny Technologies" and the "Company" refer to
Allegheny Technologies Incorporated and its subsidiaries.
Certain amounts from 2000 have been reclassified to conform with the 2001
presentation.
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of the Company, all adjustments (which include only normal recurring
adjustments) considered necessary for a fair presentation have been included.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 2000 Annual Report. The results of operations for these interim
periods are not necessarily indicative of the operating results for a full year.
New Accounting Pronouncements
On January 1, 2001, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" was adopted
by the Company. This statement establishes accounting and reporting standards
requiring the fair value of derivative instruments be recognized as either
assets or liabilities in the statement of financial position. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in the fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Based upon the Company's derivative positions at March 31, 2001, the
Company had recognized an unrealized net loss of $5.1 million, net of income
taxes, in stockholders' equity as a component of other comprehensive income. The
Company had no gain or loss from the cumulative effect of an accounting change
recognized in the statement of net income. The cumulative effect on other
comprehensive income was immaterial. Derivative instruments are principally used
by the Company to hedge certain raw material price, energy price and foreign
exchange risks. The Company continually monitors the effectiveness of its
derivative instruments. The Company had no gain or loss from hedge
ineffectiveness recognized in the statement of net income.
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NOTE 2. INVENTORIES
Inventories were as follows (in millions):
March 31, December 31,
2001 2000
(audited)
---- ----
Raw materials and supplies $ 95.6 $ 110.3
Work-in-process 492.9 488.4
Finished goods 99.2 99.1
-------- --------
Total inventories at current cost 687.7 697.8
Less allowances to reduce current cost
values to LIFO basis (103.5) (108.7)
Progress payments (6.6) (3.4)
-------- --------
Total inventories $ 577.6 $ 585.7
======== ========
NOTE 3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Property, plant and equipment at March 31, 2001 and December 31, 2000 were
as follows (in millions):
March 31, December 31,
2001 2000
(audited)
---- ----
Land $ 31.6 $ 31.7
Buildings 214.8 216.2
Equipment and leasehold improvements 1,535.2 1,507.9
-------- --------
1,781.6 1,755.8
Accumulated depreciation and amortization (906.3) (883.8)
-------- --------
Total property, plant and equipment $ 875.3 $ 872.0
======== ========
Accrued liabilities included salaries and wages of $27.3 million and $37.4
million at March 31, 2001 and December 31, 2000, respectively.
NOTE 4. BUSINESS SEGMENTS
Information on the Company's business segments was as follows (in
millions):
Three Months Ended
March 31,
-----------------------
2001 2000
---- ----
Total sales:
Flat-Rolled Products $ 289.5 $ 382.5
High Performance Metals 205.3 195.4
Industrial Products 72.7 71.9
-------- --------
567.5 649.8
Intersegment sales:
Flat-Rolled Products 7.0 6.6
High Performance Metals 18.0 17.8
-------- --------
25.0 24.4
Sales to external customers:
Flat-Rolled Products 282.5 375.9
High Performance Metals 187.3 177.6
Industrial Products 72.7 71.9
-------- --------
$ 542.5 $ 625.4
======== ========
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Three Months Ended
March 31,
-----------------------
2001 2000
---- ----
Operating Profit(Loss):
Flat-Rolled Products $ (4.5) $ 37.7
High Performance Metals 11.0 13.0
Industrial Products 4.1 6.6
-------- --------
Total operating profit 10.6 57.3
Corporate expenses (7.0) (8.3)
Interest expense, net (8.0) (6.9)
Gains (Losses) on asset sales
and other (1.7) 0.5
Excess pension income 16.5 22.6
-------- --------
Income before income taxes $ 10.4 $ 65.2
======== ========
Excess pension income represents the amount of pension income in excess of
amounts allocated to business segments to offset pension and other
postretirement benefit expenses.
NOTE 5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per common share (in millions, except per share amounts):
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Numerator:
Numerator for basic and diluted
net income per common share -
net income $ 6.4 $41.3
===== =====
Denominator:
Weighted average shares 80.2 87.2
Contingent issuable stock 0.1 0.1
----- -----
Denominator for basic net
income per common share 80.3 87.3
Effect of dilutive securities:
Employee stock options 0.1 0.1
----- -----
Dilutive potential common
shares 0.1 0.1
Denominator for diluted net
income per common share -
adjusted weighted average shares 80.4 87.4
===== =====
Basic and diluted net income
per common share $0.08 $0.47
===== =====
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NOTE 6. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, were as follows (in
millions):
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Net income $ 6.4 $41.3
Foreign currency translation gains
(losses) 3.1 (2.1)
Unrealized derivative gains (losses) (5.1) --
Unrealized gains (losses) on
securities:
Unrealized holding gains arising
during period (1.3) 0.6
Less: realized gains included in
net income -- 7.4
----- -----
(1.3) (6.8)
----- -----
Comprehensive income $ 3.1 $32.4
===== =====
NOTE 7. STOCKHOLDERS' EQUITY
Allegheny Technologies paid a cash dividend of $0.20 per share of common
stock in each of the 2001 and 2000 first quarters.
The Company's Board of Directors has authorized up to a total of 25 million
shares of Allegheny Technologies common stock to be acquired under the Company's
stock repurchase program. These shares may be purchased from time-to-time in the
open market or in negotiated transactions. In the first three months of 2001,
the Company repurchased 0.2 million shares for $3.0 million under this program.
From the inception of the share repurchase program on October 1, 1998 through
May 4, 2001, the Company has repurchased 20.5 million shares at a cost of
$531.1 million.
NOTE 8. FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
The payment obligations under the 6.95% debentures due 2025 issued by
Allegheny Ludlum Corporation (the "Subsidiary") are fully and unconditionally
guaranteed on a joint and several basis by Allegheny Technologies Incorporated
(the "Guarantor Parent"). In accordance with previous positions established by
the Securities and Exchange Commission, the following summarized financial
information illustrates separately the composition of the Subsidiary, the
Non-Guarantor Subsidiaries and the Guarantor Parent. Separate complete
financial statements of the Subsidiary are not presented because management has
determined that they would not provide additional material information that
would be useful in assessing the financial composition of the Subsidiary or the
guarantor and non-guarantors. The principal elimination entries eliminate
investments in subsidiaries and certain intercompany balances and transactions.
In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum
Corporation were merged with the overfunded defined benefit pension plans of
Teledyne, Inc. and Allegheny Technologies became the plan sponsor. As a result,
the summarized balance sheet information presented for Allegheny Ludlum
Corporation does not include the Allegheny Technologies net prepaid pension
asset or the related deferred taxes. Solely for purposes of this
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presentation, pension income has been allocated to Allegheny Ludlum Corporation
to offset pension and postretirement expenses which may be funded with pension
assets. This allocated pension income has not been recorded in the financial
statements of Allegheny Ludlum Corporation. Additionally, management and royalty
fees charged to Allegheny Ludlum Corporation and to the Non-Guarantor
Subsidiaries by the parent have been excluded solely for purposes of this
presentation.
Summarized Condensed Financial Information
For the quarter ended March 31, 2001 (unaudited)
- ----------------------------------------------------------------------------------------------------------------
Non-
Parent Guarantor
(In millions) Guarantor Subsidiary Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------
Current assets $ 0.7 $ 476.7 $ 581.1 $ (18.4) $1,040.1
- ----------------------------------------------------------------------------------------------------------------
Non-current assets 2,521.5 1,146.5 681.7 (2,577.6) 1,772.1
- ----------------------------------------------------------------------------------------------------------------
Current liabilities 440.9 157.0 334.1 (488.7) 443.3
- ----------------------------------------------------------------------------------------------------------------
Non-current liabilities 1,056.8 728.8 61.7 (502.9) 1,344.4
- ----------------------------------------------------------------------------------------------------------------
Net sales -- 239.1 303.4 -- 542.5
- ----------------------------------------------------------------------------------------------------------------
Gross profit -- 1.9 70.6 (6.9) 65.6
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6.4 $ (6.2) $ 26.1 $ (19.9) $ 6.4
- ----------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000 (audited)
- ----------------------------------------------------------------------------------------------------------------
Non-
Parent Guarantor
(In millions) Guarantor Subsidiary Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------
Current assets $ 3.1 $ 519.3 $ 563.3 $ (62.9) $1,022.8
- ----------------------------------------------------------------------------------------------------------------
Non-current assets 2,514.7 1,125.6 662.1 (2,549.0) 1,753.4
- ----------------------------------------------------------------------------------------------------------------
Current liabilities 430.2 172.0 324.5 (513.2) 413.5
- ----------------------------------------------------------------------------------------------------------------
Non-current liabilities $1,048.4 $ 691.9 $ 69.5 $ (486.3) $1,323.5
- ----------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2000 (unaudited)
- ----------------------------------------------------------------------------------------------------------------
Non-
Parent Guarantor
(In millions) Guarantor Subsidiary Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 373.8 $ 251.6 $ -- $ 625.4
- ----------------------------------------------------------------------------------------------------------------
Gross profit -- 48.6 73.6 (7.5) 114.7
- ----------------------------------------------------------------------------------------------------------------
Net income $ 41.3 $ 20.7 $ 37.6 $ (58.3) $ 41.3
- ----------------------------------------------------------------------------------------------------------------
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company is subject to various domestic and international environmental
laws and regulations which require that it investigate and remediate the effects
of the release or disposal of materials at sites associated with past and
present operations, including sites at which the Company has been identified as
a potentially responsible party under the federal Superfund laws and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws.
Environmental liabilities are recorded when the Company's liability is
probable and the costs are reasonably estimable. In many cases, however,
investigations are not yet at a stage where the Company has been able to
determine whether it is liable or, if liability is probable, to reasonably
estimate the loss or range of loss, or certain components thereof. Estimates of
the Company's liability are further subject to uncertainties regarding the
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nature and extent of site contamination, the range of remediation alternatives
available, evolving remediation standards, imprecise engineering evaluations and
estimates of appropriate cleanup technology, methodology and cost, the extent of
corrective actions that may be required, and the number and financial condition
of other potentially responsible parties, as well as the extent of their
responsibility for the remediation. Accordingly, as investigation and
remediation of these sites proceed, adjustments in the Company's accruals are
made to reflect new information. The amounts of any such adjustments could have
a material adverse effect on the Company's results of operations in a given
period, but the amounts, and the possible range of loss in excess of amounts
accrued, are not reasonably estimable. Based on currently available information,
however, management does not believe future environmental costs in excess of
those accrued with respect to sites with which the Company has been identified
are likely to have a material adverse effect on the Company's financial
condition or results of operations. The resolution in any reporting period of
one or more of these matters could have a material adverse effect on the
Company's results of operations of that period. In addition, there can be no
assurance that additional future developments, administrative actions or
liabilities relating to environmental matters will not have a material adverse
effect on the Company's financial condition or results of operations.
At March 31, 2001, the Company's reserves for environmental investigation
and remediation obligations totaled approximately $49.2 million, of which
approximately $18.2 million was included in other current liabilities. The
reserve includes estimated probable future costs of $21.1 million for federal
Superfund and comparable state-managed sites; $3.5 million for formerly owned or
operated sites for which the Company has remediation or indemnification
obligations; $13.7 million for owned or controlled sites at which Company
operations have been discontinued; and $10.9 million for sites utilized by the
Company in its ongoing operations. The Company is evaluating whether it may be
able to recover a portion of future costs for environmental liabilities from
third parties other than participating potentially responsible parties.
The timing of expenditures of these accrued amounts depends on a number
of factors that vary by site, including the nature and extent of contamination,
the number of potentially responsible parties, the timing of regulatory
approvals, the complexity of the investigation and remediation, and the
standards for remediation. The Company expects that it will expend present
accruals over many years, and will complete remediation of all sites for which
it has identified remediation obligations within approximately 30 years.
Various claims (whether based on U.S. Government or Company audits and
investigations or otherwise) have been or may be asserted against the Company
related to its U.S. Government contract work, principally related to the former
operations of Teledyne, Inc., including claims based on business practices, cost
classifications, and the False Claims Act. Depending on the circumstances and
the outcome, such proceedings could result in fines, penalties, compensatory and
treble damages or the cancellation or suspension of payments under one or more
U.S. Government contracts. Under government regulations, a company, or one or
more of its operating divisions or units, can also be suspended or debarred from
government contracts based on the results of investigations. Given the limited
extent of the Company's business with the U.S. Government, the Company believes
that a suspension or debarment of the Company would not have a material adverse
effect on the future operating results and consolidated financial condition of
the Company. Although the outcome of these matters cannot be predicted with
certainty, management does not believe there is any audit, review or
investigation currently pending against the Company of which management is aware
that is likely to have a material adverse effect on the Company's financial
condition or liquidity, although the resolution in any reporting period of one
or more of these matters could have a material adverse effect on the Company's
results of operations for that period.
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In the spin-offs of Teledyne Technologies Incorporated ("Teledyne") and
Water Pik Technologies, Inc. ("Water Pik"), completed in November 1999, the
new companies agreed to assume and to defend and hold the Company harmless
against all liabilities (other than certain income tax liabilities) associated
with the historical operations of their businesses, including all government
contracting, environmental, product liability and other claims and demands,
whenever any such claims or demands might arise or be made. If the new companies
were unable or otherwise fail to satisfy these assumed liabilities, the Company
could be required to satisfy them, which could have a material adverse effect on
the Company's results of operations and financial condition.
In connection with the spin-offs of Teledyne and Water Pik, the Company
received a tax ruling from the Internal Revenue Service stating that the
spin-offs would be tax-free to the Company and the Company's stockholders. While
the tax ruling, as supplemented, relating to the qualification of the spin-offs
as tax-free distributions within the meaning of the Internal Revenue Code
generally is binding on the Internal Revenue Service, the continuing validity of
the tax ruling, as supplemented, is subject to certain factual representations
and uncertainties that, among other things, require the new companies to take or
refrain from taking certain actions. If a spin-off were not to qualify as a
tax-free distribution within the meaning of the Internal Revenue Code, the
Company would recognize taxable gain generally equal to the amount by which the
fair market value of the common stock distributed to the Company's stockholders
in the spin-off exceeded the Company's basis in the new company's assets. In
addition, the distribution of the new company's common stock to Company
stockholders would generally be treated as taxable to the Company's stockholders
in an amount equal to the fair market value of the common stock they received.
If a spin-off qualified as a distribution within the meaning of the Internal
Revenue Code but was disqualified as tax-free to the Company because of certain
post-spin-off circumstances, the Company would recognize taxable gain as
described above, but the distribution of the new company's common stock to the
Company's stockholders in the spin-off would generally be tax-free to each
Company stockholder. In the spin-offs, the new companies executed tax sharing
and indemnification agreements in which each agreed to be responsible for any
taxes imposed on and other amounts paid by the Company, its agents and
representatives and its stockholders as a result of the failure of the spin-off
to qualify as a tax-free distribution within the meaning of the Internal Revenue
Code if the failure or disqualification is caused by post- spin-off actions by
or with respect to that company or its stockholders. Potential liabilities under
these agreements could exceed either new company's net worth by a substantial
amount. If either or both of the spin-offs were not to qualify as tax-free
distributions to the Company or its stockholders, and either or both of the new
companies were unable or otherwise failed to satisfy the liabilities they
assumed under the tax sharing and indemnification agreements, the Company could
be required to satisfy them without full recourse against the new companies.
This could have a material adverse effect on the Company's results of
operations and financial condition.
A number of other lawsuits, claims and proceedings have been or may be
asserted against the Company relating to the conduct of its business, including
those pertaining to product liability, patent infringement, commercial,
employment, employee benefits, tax, and stockholder matters. While the outcome
of litigation cannot be predicted with certainty, and some of these lawsuits,
claims or proceedings may be determined adversely to the Company, management
does not believe that the disposition of any such pending matters is likely to
have a material adverse effect on the Company's financial condition or
liquidity, although the resolution in any reporting period of one or more of
these matters could have a material adverse effect on the Company's results of
operations for that period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Allegheny Technologies is one of the largest and most diversified producers
of specialty materials in the world. It operates in the following three business
segments, which accounted for the following percentages of total sales for the
2001 and 2000 three months ended March 31:
2001 2000
---- ----
Flat-Rolled Products 52% 60%
High Performance Metals 35% 29%
Industrial Products 13% 11%
For the three months ended March 31, 2001, operating profit was $10.6
million compared to $57.3 million for the same 2000 period. Sales decreased 13.3
percent to $542.5 million for the three months ended March 31, 2001 compared to
$625.4 million for the same 2000 period.
Net income for the three months ended March 31, 2001 was $6.4 million, or
$0.08 per diluted share compared to $41.3 million, or $0.47 per diluted share,
for the three months ended March 31, 2000. Net income for the three months ended
March 31, 2000 included $5.0 million, or $0.06 per share, realized on the sale
of a minority interest in Gul Technologies Singapore Ltd., partially offset by a
charge for exiting the tungsten mill products business of Metalworking Products.
The Company realized $18.1 million in cost reductions during the three
months ended March 31, 2001. The Company has targeted $110.0 million of cost
reductions for 2001.
Sales and operating profit for the Company's three business segments are
discussed below.
FLAT-ROLLED PRODUCTS SEGMENT
The Flat-Rolled Products segment reported a first quarter 2001 operating
loss of $4.5 million compared to an operating profit of $37.7 million in the
same year-ago period. First quarter 2001 sales decreased 24.8 percent to $282.5
million compared to the prior year first quarter. The overall decrease in sales
and operating profit resulted from very weak demand and lower prices for
commodity stainless steel products due in part to the weakening U.S. industrial
economy. Operating profit was also reduced by $7.2 million, compared to the
first quarter 2000, due to higher natural gas prices, which resulted from high
demand and low supplies of natural gas in the U.S. The decrease in operating
profit was partially offset by ongoing cost reductions in the segment's
Allegheny Ludlum operation, including a 10 percent salaried workforce reduction,
which was completed in the first quarter of 2001.
The average price of flat-rolled products in the first quarter 2001 was
$2,261 per ton compared to $2,318 per ton in the same 2000 period. General
purpose product shipments in the segment (including stainless steel hot roll and
cold roll sheet, stainless steel plate and silicon electrical steel) decreased
approximately 27.0 percent compared to the first quarter 2000. This decrease was
due primarily to very weak demand from service centers due to continued high
inventory levels and the weakening U.S. industrial economy. High value product
shipments in the segment (including strip, Precision Rolled Strip(R), super
stainless steel, and high temperature alloy products)
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decreased 13.2 percent compared to the 2000 first quarter. Certain of these
products, particularly Precision Rolled Strip(R) products, are used primarily
in the automotive industry, which has also been impacted by the weakening U.S.
economy. Average prices per ton for general purpose products decreased 11.0
percent while average prices per ton of high value products remained flat
compared to the 2000 first quarter. Total tons shipped in the first quarter of
2001 were 124,333 tons compared to 163,080 tons for the same period of 2000.
HIGH PERFORMANCE METALS SEGMENT
Operating profit for the first quarter of 2001 decreased to $11.0 million
from $13.0 million in the 2000 first quarter, primarily due to $8.3 million in
higher energy costs. Sales for the 2001 first quarter increased 5.5 percent
compared to the same 2000 period. First quarter 2001 sales benefited from
increased demand for nickel-based super alloys, premium titanium alloys and
specialty steel alloys serving the aerospace, electrical energy and oil and gas
markets. Higher energy costs particularly affected the segment's Wah Chang
facility located in Oregon where the Company is constructing an electrical power
cogeneration system to help alleviate this cost issue. This system, which will
cost approximately $12.0 million, is expected to begin operating in the third
quarter of 2001.
Certain comparative information on the segment's major products is provided
in the following table:
Three Months Ended
March 31,
------------------ Percent
2001 2000 Change
---- ---- ------
Volume (000's pounds):
Nickel-based and specialty steel alloys 12,864 12,088 6.4
Titanium mill products 6,139 5,590 9.8
Zirconium and related alloys 741 810 (8.5)
Average prices (per pound):
Nickel-based and specialty steel alloys $ 6.29 $ 5.72 10.0
Titanium mill products $11.36 $11.92 (4.7)
Zirconium and related alloys $35.80 $33.72 6.2
INDUSTRIAL PRODUCTS SEGMENT
Operating profit for the 2001 first quarter was $4.1 million compared to
$6.6 million for the same quarter of 2000, and sales were flat compared to the
same prior period. Sales of tungsten-based specialty materials increased 12.0
percent over the first quarter of 2000 partially due to a 2000 second quarter
acquisition, which serves the oil and gas markets. Sales of forgings and
castings decreased 27.0 percent in the same time period due to very weak
conditions in industrial markets. Higher natural gas costs reduced first quarter
2001 operating profit by $1.0 million compared to the same 2000 period.
CORPORATE ITEMS
Corporate expenses decreased 15.7 percent to $7.0 million for the 2001
first quarter compared to the respective 2000 period, due to continued cost
controls and 13 percent fewer corporate employees. Net interest expense
increased to $8.0 million for the first quarter 2001 from $6.9 million for the
first quarter 2000 primarily due to higher debt levels. Excess pension income
decreased to $16.5 million for the 2001 first quarter compared to $22.6 million
in the 2000 first quarter due to weaker equity markets performance during 2000.
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SPECIAL ITEMS
The first quarter of 2000 results include special items of $5.0 million, or
$0.06 per share. These items include a gain on the sale of a minority interest
in Gul Technologies Singapore Ltd., included in other income, partially offset
by a charge for exiting the tungsten mill products business of Metalworking
Products included in cost of sales.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" was adopted
by the Company. This statement establishes accounting and reporting standards
requiring the fair value of derivative instruments be recognized as either
assets or liabilities in the statement of financial position. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in the fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Based upon the Company's derivative positions at March 31, 2001, the
Company had recognized an unrealized net loss of $5.1 million, net of income
taxes, in stockholders' equity as a component of other comprehensive income. The
Company had no gain or loss from the cumulative effect of an accounting
change recognized in the statement of net income. The cumulative effect on
other comprehensive income was immaterial. Derivative instruments are
principally used by the Company to hedge certain raw material price, energy
price and foreign exchange risks. The Company continually monitors the
effectiveness of its derivative instruments. The Company had no gain or loss
from hedge ineffectiveness recognized in the statement of net income.
INCOME TAXES
The Company's effective tax rate was 38.7 percent for the 2001 first
quarter compared to 36.5 percent for the same period in 2000. The increase in
the effective tax rate was primarily due to a change in the deferred state tax
rate affecting cumulative temporary differences and lower income before income
taxes.
FINANCIAL CONDITION AND LIQUIDITY
In the first three months of 2001, cash generated from operations of $27.0
million and proceeds from the net increase in debt of $13.9 million were used to
pay dividends of $16.0 million, invest $24.7 million in capital equipment and
business expansion, and repurchase shares of $3.0 million. Cash transactions
plus cash on hand at the beginning of the year resulted in a cash position of
$23.5 million at March 31, 2001.
Working capital decreased to $596.8 million at March 31, 2001, compared to
$609.3 million at December 31, 2000. The current ratio decreased to 2.3 from 2.5
in this same period. The decrease in working capital and current ratio at March
31, 2001 compared to December 31, 2000 was primarily due to higher accounts
payable balances and lower levels of inventory and accounts receivable partially
offset by a higher level of current deferred taxes.
Capital expenditures for 2001 are expected to approximate between $100.0
million to $120.0 million, of which $24.7 million had been expended through
March 31, 2001.
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On March 13, 2001, a regular quarterly dividend of $0.20 per share of
common stock was paid to stockholders of record at the close of business on
February 26, 2001. On May 3, 2001, the Board of Directors declared a regular
quarterly dividend of $0.20 per share of common stock. The dividend will be paid
on June 12, 2001 to stockholders of record at the close of business on May 29,
2001.
The Company's Board of Directors has authorized up to a total of 25 million
shares of Allegheny Technologies common stock to be acquired under the Company's
stock repurchase program. The shares may be purchased from time-to-time in the
open market or in negotiated transactions. In the first three months of 2001,
the Company repurchased approximately 0.2 million shares for $3.0 million under
this program. From the inception of the share repurchase program on October 1,
1998 through May 4, 2001, the Company has repurchased 20.5 million shares at
a cost of $531.5 million.
The Company believes that internally generated funds, current cash on hand
and borrowing from existing credit lines and its commercial paper program will
be adequate to meet foreseeable needs. The Company may choose, however, to issue
additional debt depending on market conditions.
OTHER MATTERS
Energy Costs
Prices and availability of energy resources are subject to market
conditions. These market conditions are often affected by political and economic
factors that are outside of the Company's control. The U.S. Government is
forecasting that supplies of natural gas may be at historically low levels
during 2001. Also, supply and demand factors affecting electricity in the
western U.S. have caused volatility in the cost of electric power. In addition,
the uncertainty surrounding the price of oil and the political environment in
the Middle East may impact petroleum costs. These factors, among other things,
may contribute to increased production costs that could have a material impact
on the results of operations of the Company. The Company is evaluating energy
factors with regard to production costs and has engaged an energy provider as a
partner to assist in our energy supply and demand initiatives, including cost
containment and control of energy consumption. The Company is constructing an
electrical power cogeneration system designed to significantly reduce energy
costs at Wah Chang located in Oregon. This system is expected to be operating in
the third quarter of 2001.
The Company may also periodically apply natural gas surcharges to certain
of its products. The Company's ability to implement or maintain energy
surcharges depends on market conditions, including pricing by foreign
competitors.
Costs and Pricing
Although inflationary trends in recent years have been moderate, during the
same period certain critical raw material costs, including nickel, have been
volatile. The Company primarily uses the last-in, first-out method of inventory
accounting that reflects current costs in the cost of products sold. The Company
considers these costs, the increasing costs of equipment and other costs in
establishing its sales pricing policies and has instituted raw material
surcharges on certain of its products to the extent permitted by competitive
factors in the marketplace. The Company continues to emphasize cost reductions
and containment in all aspects of its business.
The Company periodically announces price increases on certain of its
products. The ability of the Company to implement price increases is dependent
on market conditions, economic factors, raw material costs and availability,
competitive factors, operating costs and other factors that are
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beyond the Company's control. Furthermore, the benefits of price increases may
be delayed due to long manufacturing lead times and the terms of existing
contracts.
Labor Matters
The Company has approximately 11,400 employees. Approximately 47 percent of
the Company's workforce is covered by various collective bargaining agreements,
principally with the United Steelworkers of America ("USWA"), including:
approximately 3,900 Allegheny Ludlum production and maintenance employees
covered by collective bargaining agreements between Allegheny Ludlum and the
USWA, which are effective through June 30, 2001; approximately 340 Oremet
employees covered by a collective bargaining agreement with the USWA which was
effective through July 31, 2000; and approximately 650 Wah Chang employees
covered by a collective bargaining agreement with the USWA which the USWA
terminated as of January 28, 2001. In April, 2001, the USWA and Allegheny
Ludlum, Wah Chang and Oremet jointly announced that they had reached tentative
six-year agreements covering approximately 4,900 employees, subject to
ratification by the employees. To date, these agreements have not been ratified.
The costs associated with the new labor agreements, including the effect on
excess pension income, will be reflected in the results of operations commencing
with contract ratification.
Generally, agreements that expire may be terminated after notice by the
USWA. After termination, the USWA may authorize a strike. A strike by the
employees covered by one or more of the collective bargaining agreements could
materially adversely affect the Company's operating results. There can be no
assurance that the Company will succeed in concluding collective bargaining
agreements with the USWA or other unions to replace those that expire.
Growth Objective
The Company's growth objective over the long-term is to realize
double-digit annual revenue and earnings growth and earn a return on capital
employed of at least 300 basis points in excess of the cost of borrowed capital.
Environmental
The Company is subject to various domestic and international environmental
laws and regulations which require that it investigate and remediate the effects
of the release or disposal of materials at sites associated with past and
present operations, including sites at which the Company has been identified as
a potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as Superfund, and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws. The Company's reserves for
environmental remediation totaled approximately $49.2 million at March 31, 2001.
Based on currently available information, management does not believe that
future environmental costs in excess of those accrued with respect to sites with
which the Company has been identified are likely to have a material adverse
effect on the Company's financial condition or liquidity. The resolution in any
reporting period of one or more of these matters could have a material adverse
effect on the Company's results of operations for that period. In addition,
there can be no assurance that additional future developments, administrative
actions or liabilities relating to environmental matters will not have a
material adverse effect on the Company's financial condition or results of
operations.
With respect to proceedings brought under the federal Superfund laws, or
similar state statutes, the Company has been identified as a potentially
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responsible party at approximately 33 of such sites, excluding those at which it
believes it has no future liability. The Company's involvement is very limited
or de minimis at approximately 11 of these sites, and the potential loss
exposure with respect to any of the remaining 22 individual sites is not
considered to be material.
For additional discussion of environmental matters, see Note 9 to the
consolidated financial statements of the Company.
Government Contracts
One of the Company's operating companies directly performs contractual work
for the U.S. Government. Various claims (whether based on U.S. Government or
Company audits and investigations or otherwise) have been or may be asserted
against the Company related to its U.S. Government contract work, principally
related to the former operations of Teledyne, Inc., including claims based on
business practices and cost classifications and actions under the False Claims
Act. Depending on the circumstances and the outcome, such proceedings could
result in fines, penalties, compensatory and treble damages or the cancellation
or suspension of payments under one or more U.S. Government contracts. Under
government regulations, a company, or one or more of its operating divisions or
units, can also be suspended or debarred from government contracts based on the
results of investigations.
Given the limited extent of the Company's business with the U.S.
Government, the Company believes that a suspension or debarment of the Company
would not have a material adverse effect on the future operating results and
consolidated financial condition of the Company. In addition, although the
outcome of these matters cannot be predicted with certainty, management does not
believe there is any audit, review or investigation currently pending against
the Company of which management is aware that is likely to have a material
adverse effect on the Company's financial condition or liquidity. The resolution
in any reporting period of one or more of these matters could have a material
adverse effect on the Company's results of operations for that period.
For additional discussion of government contract matters, see Note 9 of the
consolidated financial statements of the Company.
FORWARD-LOOKING AND OTHER STATEMENTS
From time to time, the Company has made and may continue to make
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Certain forward-looking statements are contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 9 to the consolidated financial statements of the Company,
which represent the Company's expectations or beliefs concerning various future
events, unknown risks, uncertainties and other factors, many of which the
Company is unable to predict or control. Forward-looking statements include
those statements related to anticipated business, economic and market
conditions; operational actions taken to respond to market conditions; sales and
earnings, financial condition, financial performance and growth and return on
capital; prices, price increases and the effect of price increases on
performance and product demand; raw material and energy costs, expected capital
expenditures, cost reductions, including energy initiatives, anticipated cost
savings, including the anticipated time periods in which savings may be
realized, capital investments and the impact of investments on the Company's
capabilities; working capital, cash flow, dividends, potential repurchases of
Company stock; projected pension surplus, excess pension income and
reimbursement of retiree health care expenditures; realization of deferred
income tax assets; the ratification of labor agreements as well as the expected
benefits and costs under those agreements;
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anticipated effects of acquisitions, joint ventures or other business
combinations on earnings; the outcome of any government inquiries, litigation or
other proceedings related to government contracts or other matters; safety
performance; and future environmental costs. These statements are based on
current expectations that involve a number of risks and uncertainties, including
those described under the captions: "Other Matters - Labor Matters," "Other
Matters
- - Environmental" and "Other Matters - Government Contracts." Actual results or
performance may differ materially from any future results or performance
anticipated based on management's current expectations contained in such
forward-looking statements. Additional risk factors are described from time to
time in the Company's filings with the Securities and Exchange Commission,
including its Report on Form 10-K for the year ended December 31, 2000. The
Company assumes no duty to update its forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses derivative financial instruments from time to time to
hedge ordinary business risks for product sales denominated in foreign
currencies and to partially hedge against volatile energy and raw material cost
fluctuations in the Flat-Rolled Products and High Performance Metals segments.
Foreign currency exchange contracts are used to limit transactional
exposure to changes in currency exchange rates. The Company sometimes purchases
foreign currency forward contracts that permit it to sell specified amounts of
foreign currencies expected to be received from its export sales for
pre-established U.S. dollar amounts at specified dates. The forward contracts
are denominated in the same foreign currencies in which export sales are
denominated. These contracts, which are not financially material, are designated
as hedges of the variability in cash flows of a portion of the Company's
forecasted export sales transactions in which settlement will occur in future
periods and which otherwise would expose the Company, on the basis of its
aggregate net cash flows in respective currencies, to foreign currency risk.
Effective January 1, 2001, the Company began accounting for these contracts as
hedges under FASB Statement 133. Changes in the fair value of the Company's
foreign currency derivatives will be recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
A portion of the Company's operations consists of investments in foreign
subsidiaries. As a result, the Company's financial results could be affected by
changes in foreign currency exchange rates. To mitigate this foreign currency
translation risk, the Company has a practice of recapitalizing operations using
local foreign currency debt to replace direct equity investment. The average
interest rate to service this foreign debt is favorable to current U.S. interest
rates.
As part of its risk management strategy, from time to time, the Company
purchases exchange-traded futures contracts to manage exposure to changes in
nickel prices, a component of raw material cost for some of its flat-rolled and
high performance metals products. The nickel futures contracts obligate the
Company to make or receive a payment equal to the net change in value of the
contract at its maturity. These contracts are designated as hedges of the
variability in cash flows of a portion of the Company's forecasted purchases of
nickel. Effective January 1, 2001, the Company began accounting for these
contracts as hedges under FASB Statement 133. Changes in the fair value of the
Company's nickel derivatives will be recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
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The Company also enters into energy swap contracts as part of its overall
risk management strategy. The swap contracts are used to manage exposure to
changes in energy prices, a component of production costs for its operating
units. The energy swap contracts obligate the Company to make or receive a
payment equal to the net change in value of the contract at its maturity. These
contracts are designated as hedges of the variability in cash flows of a portion
of the Company's forecasted energy payments. Effective January 1, 2001, the
Company began accounting for these contracts as hedges under FASB Statement 133.
Changes in the fair value of the Company's energy derivatives will be recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Allegheny Technologies has guaranteed the outstanding Allegheny Ludlum
fixed rate 6.95 percent debentures due in 2025. In a period of declining
interest rates, the Company faces the risk of required interest payments
exceeding those based on the then current market rate. To mitigate interest rate
risk, the Company attempts to maintain a reasonable balance between fixed and
variable rate debt to keep financing costs as low as possible.
The Company believes that adequate controls are in place to monitor these
hedging activities, which are not financially material. However, many factors,
including those beyond the control of the Company such as changes in domestic
and foreign political and economic conditions, as well as the magnitude and
timing of interest rate, energy price and nickel price changes, could adversely
affect these activities.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.34 Allegheny Technologies Incorporated Total Shareholder
Return Incentive Compensation Plan (filed herewith).*
10.35 Allegheny Technologies Incorporated Total Shareholder
Return Incentive Compensation Program and form of
Award Agreement for the 2001-2003 Award Period (filed
herewith).*
10.36 Allegheny Technologies Incorporated Annual Incentive Plan
for the year 2001 (filed herewith).*
(b) Current Reports on Form 8-K filed by the Company -
None.
- -------------
*Management contract or compensation plan or arrangement required to be filed as
an Exhibit to this Report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLEGHENY TECHNOLOGIES INCORPORATED
-----------------------------------
(REGISTRANT)
Date: May 15, 2001 By /s/ R.J. Harshman
-----------------
Richard J. Harshman
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
Date: May 15, 2001 By /s/ D.G. Reid
-------------
Dale G. Reid
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
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