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 SEPTEMBER 30, 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 the 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 October 31, 2001, the Registrant had outstanding 80,260,713 shares of its
Common Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Page No.
--------
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
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 17
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 26
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(In millions except share and per share amounts)
September 30, December 31,
2001 2000
---- ----
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 37.8 $ 26.2
Accounts receivable 310.5 325.3
Inventories 548.2 585.7
Deferred income taxes 77.2 61.2
Prepaid expenses and other current assets 27.5 24.4
--------- ---------
Total Current Assets 1,001.2 1,022.8
Property, plant and equipment, net 883.5 872.0
Prepaid pension cost 624.4 593.6
Cost in excess of net assets acquired 191.1 194.5
Other assets 74.7 93.3
--------- ---------
TOTAL ASSETS $ 2,774.9 $ 2,776.2
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 176.3 $ 169.3
Accrued liabilities 190.1 191.0
Short-term debt and current portion
of long-term debt 384.2 53.2
--------- ---------
Total Current Liabilities 750.6 413.5
Long-term debt 200.5 490.6
Accrued postretirement benefits 513.4 525.9
Deferred income taxes 170.9 158.7
Other 136.9 148.3
--------- ---------
TOTAL LIABILITIES 1,772.3 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 September 30, 2001 and
December 31, 2000; outstanding-80,260,713 shares at September
30, 2001 and 80,339,957 shares at December 31, 2000 9.9 9.9
Additional paid-in capital 481.2 481.2
Retained earnings 1,020.0 1,050.0
Treasury stock: 18,690,777 shares at
September 30, 2001 and 18,611,533 shares
at December 31, 2000 (479.6) (482.3)
Accumulated other comprehensive
loss, net of tax (28.9) (19.6)
--------- ---------
Total Stockholders' Equity 1,002.6 1,039.2
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,774.9 $ 2,776.2
========= =========
The accompanying notes are an integral part of these statements.
3
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
2001 2000 2001 2000
-------- ------- --------- ---------
Sales $ 537.7 $ 612.0 $ 1,634.9 $ 1,875.7
Costs and expenses:
Cost of sales 470.3 490.5 1,431.0 1,516.0
Selling and administrative
expenses 45.3 45.0 146.2 149.0
-------- ------- --------- ---------
Income before interest, other
income(expense) and income taxes 22.1 76.5 57.7 210.7
Interest expense, net 7.1 11.0 22.7 25.3
Other income (expense) (0.5) 0.8 0.5 14.7
-------- ------- --------- ---------
Income before income taxes 14.5 66.3 35.5 200.1
Provision for income taxes 6.5 24.2 14.9 73.0
-------- ------- --------- ---------
Net income $ 8.0 $ 42.1 $ 20.6 $ 127.1
======== ======= ========= =========
Basic and diluted net income per
common share $ 0.10 $ 0.52 $ 0.26 $ 1.52
======== ======= ========= =========
Dividends declared per common share $ 0.20 $ 0.20 $ 0.60 $ 0.60
======== ======= ========= =========
4
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2001 2000
------- ---------
OPERATING ACTIVITIES:
Net income $ 20.6 $ 127.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 74.7 75.6
Non-cash write-off of MetalSpectrum investment 5.5 -
Gains on sales of investments (2.7) (11.1)
Deferred income taxes (0.8) 51.6
Change in operating assets and liabilities:
Inventories 37.5 (43.2)
Prepaid pension cost (30.8) (96.7)
Accounts receivable 14.8 (3.8)
Accounts payable 7.0 (7.5)
Accrued liabilities and other (31.4) (41.3)
------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 94.4 50.7
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (78.3) (45.1)
Proceeds from the sale of investments 7.2 16.7
Disposals of property, plant and equipment 2.6 4.5
Purchases of businesses and investment in ventures (0.5) (25.4)
Other (1.9) (8.0)
------- ----------
CASH USED IN INVESTING ACTIVITIES (70.9) (57.3)
FINANCING ACTIVITIES:
Net borrowings under credit facilities 35.0 251.4
Borrowings on long-term debt 4.5 4.8
Payments on long-term debt and capital leases (0.5) (1.1)
------- ----------
Net increase in debt 39.0 255.1
Dividends paid (48.1) (50.0)
Purchases of common stock (3.0) (207.3)
Exercises of stock options 0.2 1.7
------- ----------
CASH USED IN FINANCING ACTIVITIES (11.9) (0.5)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11.6 (7.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 26.2 50.7
------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 37.8 $ 43.6
======= ==========
The accompanying notes are an integral part of these statements.
5
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 on Form 10-K. The results of operations for these
interim periods are not necessarily indicative of the operating results for any
future period.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement is
effective for fiscal years beginning after December 15, 2001. This statement
supercedes SFAS 121, while retaining many of the requirements of that statement.
Under SFAS 144, assets held for sale will be included in discontinued operations
if the operations and cash flows will be or have been eliminated from continuing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the Company. The Company intends to adopt this
new statement effective January 1, 2002.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations ("SFAS 141"), and Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
These statements change the accounting for business combinations, goodwill, and
intangible assets.
SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. SFAS 141 supersedes Accounting Principles Board
Opinion No. 16 ("APB 16"); however, certain purchase accounting guidance in APB
16, as well as certain of its amendments and interpretations, have been carried
forward to SFAS 141. SFAS 141 changes the criteria to recognize intangible
assets separately from goodwill. The requirements of SFAS 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that have finite
lives will continue to be amortized over their useful lives, with no maximum
life. The amortization provisions of SFAS 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and
6
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS 142 in their fiscal year beginning after December 15, 2001. Because
of the different transition dates for goodwill and intangible assets acquired on
or before June 30, 2001, and those acquired after that date, pre-existing
goodwill and intangibles will be amortized during this transition period until
adoption, whereas new goodwill and indefinite lived intangible assets acquired
after June 30, 2001 will not.
The Company is currently evaluating adoption of SFAS 142 and has not yet
determined the impact on the overall financial condition of the Company, if any,
that may result. Amortization of existing goodwill is $5.8 million annually.
NOTE 2. INVENTORIES
Inventories were as follows (in millions):
September 30, December 31,
2001 2000
------------- -----------
(unaudited) (audited)
Raw materials and supplies $ 87.1 $ 110.3
Work-in-process 470.7 488.4
Finished goods 93.1 99.1
------- --------
Total inventories at current cost 650.9 697.8
Less allowances to reduce current cost
values to LIFO basis (98.9) (108.7)
Progress payments (3.8) (3.4)
------- --------
Total inventories $ 548.2 $ 585.7
======= ========
During 2001, inventory usage resulted in liquidations of last-in, first-out
inventory quantities. These inventories were carried at the lower costs
prevailing in prior years as compared with the cost of current purchases. The
effect of these last-in, first-out liquidations was to increase net income by
$4.8 million in 2001.
NOTE 3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Property, plant and equipment were as follows (in millions):
September 30, December 31,
2001 2000
------------- -----------
(unaudited) (audited)
Land $ 31.0 $ 31.7
Buildings 214.8 216.2
Equipment and leasehold improvements 1,586.5 1,507.9
--------- ---------
1,832.3 1,755.8
Accumulated depreciation and amortization (948.8) (883.8)
--------- ---------
Total property, plant and equipment, net $ 883.5 $ 872.0
========= =========
7
NOTE 4. BUSINESS SEGMENTS
Information on the Company's business segments was as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------------
2001 2000 2001 2000
------- ------- --------- ---------
Total sales:
Flat-Rolled Products $ 290.0 $ 366.6 $ 865.2 $ 1,144.3
High Performance Metals 205.0 201.0 634.3 595.4
Industrial Products 67.2 69.8 211.0 212.8
------- ------- --------- ---------
562.2 637.4 1,710.5 1,952.5
Intersegment sales:
Flat-Rolled Products 8.1 10.1 24.8 26.7
High Performance Metals 16.4 15.3 50.8 50.1
------- ------- --------- ---------
24.5 25.4 75.6 76.8
Sales to external customers:
Flat-Rolled Products 281.9 356.5 840.4 1,117.6
High Performance Metals 188.6 185.7 583.5 545.3
Industrial Products 67.2 69.8 211.0 212.8
------- ------- --------- ---------
$ 537.7 $ 612.0 $ 1,634.9 $ 1,875.7
======= ======= ========= =========
Operating Profit(Loss):
Flat-Rolled Products $ (6.0) $ 32.4 $ (22.7) $ 103.8
High Performance Metals 22.9 23.4 56.4 52.7
Industrial Products 2.5 4.7 12.0 18.7
------- ------- --------- ---------
Total operating profit 19.4 60.5 45.7 175.2
Corporate expenses (5.7) (6.6) (19.7) (22.5)
Interest expense, net (7.1) (11.0) (22.7) (25.3)
Other costs, net of gains on
asset sales (2.2) (3.9) (10.8) 0.1
Excess pension income 10.1 27.3 43.0 72.6
------- ------- --------- ---------
Income before income taxes $ 14.5 $ 66.3 $ 35.5 $ 200.1
======= ======= ========= =========
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.
At September 30, 2001, there were no significant remaining unexpended
reserves related to previously disclosed transformation, merger and
restructuring costs.
8
NOTE 5. NET INCOME PER COMMON 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator for basic and diluted
net income per common share -
net income $ 8.0 $ 42.1 $ 20.6 $ 127.1
======== ======== ======== ========
Denominator:
Weighted average shares 80.2 81.1 80.2 83.7
Contingent issuable stock 0.1 0.1 0.1 0.1
-------- -------- -------- --------
Denominator for basic net
income per common share 80.3 81.2 80.3 83.8
Effect of dilutive securities:
Employee stock options 0.2 0.1 0.2 0.1
-------- -------- -------- --------
Dilutive potential common
shares 0.2 0.1 0.2 0.1
Denominator for diluted net
income per common share -
adjusted weighted average
shares 80.5 81.3 80.5 83.9
======== ======== ======== ========
Basic and diluted net income per
common share $ 0.10 $ 0.52 $ 0.26 $ 1.52
======== ======== ======== ========
NOTE 6. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, were as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 8.0 $ 42.1 $ 20.6 $ 127.1
Foreign currency translation
gains(losses) 1.6 0.3 2.9 (12.9)
Unrealized derivative instrument gains (losses) 0.1 - (8.6) -
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (1.9) 2.1 (2.3) 3.8
Less: realized gains
included in net income - - 1.3 7.4
-------- -------- -------- --------
(1.9) 2.1 (3.6) (3.6)
-------- -------- -------- --------
Comprehensive income $ 7.8 $ 44.5 $ 11.3 $ 110.6
======== ======== ======== ========
9
NOTE 7. STOCKHOLDERS' EQUITY
Allegheny Technologies paid cash dividends of $0.20 per share of common
stock in each of the 2001 and 2000 first, second and third 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 nine months of 2001, the
Company repurchased 0.2 million shares for $3.0 million under this program.
There were no repurchases made during the second and third quarters of 2001.
From the inception of the share repurchase program on October 1, 1998 through
October 31, 2001, the Company has repurchased 20.5 million shares at a cost of
$531.1 million.
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 that 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 September 30, 2001, the
Company had recognized an unrealized net loss of $8.6 million net of income
taxes in stockholders' equity as a component of other comprehensive income.
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. For the first nine
months of 2001, the Company's loss from hedge ineffectiveness recognized in the
statement of net income was immaterial.
NOTE 8. FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
The payment obligations under the $150 million 6.95% debentures due 2025
issued by Allegheny Ludlum Corporation (the "Subsidiary") are fully and
unconditionally guaranteed by Allegheny Technologies Incorporated (the
"Guarantor Parent"). In accordance with positions established by the Securities
and Exchange Commission, the following financial information illustrates
separately the composition of the Subsidiary, the non-guarantor subsidiaries and
the Guarantor Parent. 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 balance sheets presented for Allegheny Ludlum Corporation and the
non-guarantor subsidiaries do not include the Allegheny Technologies net prepaid
pension asset or the related deferred taxes. Solely for purposes of this
presentation, pension income has been allocated to Allegheny Ludlum Corporation
and the non-guarantor subsidiaries 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 or the
non-guarantor subsidiaries. In addition, solely for this presentation, the
balance sheets presented for Allegheny Ludlum Corporation and the non-guarantor
subsidiaries do not include the
10
post-retirement liabilities or the related deferred taxes. Additionally,
management and royalty fees charged to Allegheny Ludlum Corporation and to the
non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for
purposes of this presentation.
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
September 30, 2001 (unaudited)
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 1.3 $ 12.0 $ 24.5 $ - $ 37.8
Accounts receivable - 119.1 191.4 - 310.5
Inventories - 269.1 279.1 - 548.2
Deferred income taxes 77.2 - - - 77.2
Prepaid expenses and other current
assets 1.0 9.0 17.5 - 27.5
---------------------------------------------------------------------------
Total current assets 79.5 409.2 512.5 - 1,001.2
Property, plant, and
equipment, net - 525.7 357.8 - 883.5
Prepaid pension cost 624.4 - - - 624.4
Cost in excess of net
assets acquired - 113.0 78.1 - 191.1
Other assets 1,773.8 541.5 340.4 (2,581.0) 74.7
---------------------------------------------------------------------------
Total assets $2,477.7 $1,589.4 $ 1,288.8 $ (2,581.0) $ 2,774.9
===========================================================================
Liabilities and
stockholders' equity:
Current Liabilities:
Accounts payable $ 1.1 $ 91.2 $ 84.0 $ - $ 176.3
Accrued liabilities 399.1 58.7 245.5 (513.2) 190.1
Short-term debt 375.0 0.5 8.7 - 384.2
---------------------------------------------------------------------------
Total current liabilities 775.2 150.4 338.2 (513.2) 750.6
Long term debt - 370.6 29.8 (199.9) 200.5
Accrued post-retirement
benefits 513.4 - - - 513.4
Deferred income taxes 170.9 - - - 170.9
Other long-term liabilities 15.6 26.4 94.9 - 136.9
---------------------------------------------------------------------------
Total liabilities 1,475.1 547.4 462.9 (713.1) 1,772.3
---------------------------------------------------------------------------
Total stockholders' equity 1,002.6 1,042.0 825.9 (1,867.9) 1,002.6
---------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,477.7 $1,589.4 $ 1,288.8 $ (2,581.0) $ 2,774.9
===========================================================================
11
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Income
For the nine months ended September 30, 2001 (unaudited)
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Sales $ - $823.6 $811.3 $ - $ 1,634.9
Cost of sales (24.0) 814.1 640.9 - 1,431.0
Selling and administrative
expenses 6.2 30.1 109.9 - 146.2
Interest expense (income) 27.2 (0.6) (3.9) - 22.7
Other income(expense)
including equity in income of
unconsolidated subsidiaries 53.2 - 0.6 (53.3) 0.5
----------------------------------------------------------------------------
Income (loss) before income
taxes 43.8 (20.0) 65.0 (53.3) 35.5
Income tax provision (benefit) 23.2 (4.5) 22.5 (26.3) 14.9
----------------------------------------------------------------------------
Net income (loss) $ 20.6 $(15.5) $ 42.5 $ (27.0) $ 20.6
============================================================================
Condensed Statement of Cash Flows
For the nine months ended September 30, 2001 (unaudited)
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating
activities $ 3.5 $106.2 $ 85.7 $(101.0) $ 94.4
----------------------------------------------------------------------------
Cash flows from investing
activities 7.4 (14.5) (61.2) (2.6) (70.9)
----------------------------------------------------------------------------
Cash flows from financing
activities $(9.7) $(80.2) $(25.6) $ 103.6 $ (11.9)
============================================================================
(This space intentionally left blank)
12
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2000 (unaudited)
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 0.1 $ 0.5 $ 25.6 $ - $ 26.2
Accounts receivable - 133.8 191.5 - 325.3
Inventories - 321.1 264.6 - 585.7
Deferred income taxes 61.2 - - - 61.2
Prepaid expenses and other current
assets 1.9 8.2 14.3 - 24.4
----------------------------------------------------------------------------
Total current assets 63.2 463.6 496.0 - 1,022.8
Property, plant, and
equipment, net - 556.6 315.4 - 872.0
Prepaid pension cost 593.6 - - - 593.6
Cost in excess of net
assets acquired - 115.7 78.8 - 194.5
Other assets 1,811.8 509.1 349.3 (2,576.9) 93.3
----------------------------------------------------------------------------
Total assets $2,468.6 $1,645.0 $ 1,239.5 $ (2,576.9) $ 2,776.2
============================================================================
Liabilities and
stockholders' equity:
Current Liabilities:
Accounts payable $ 2.6 $ 83.8 $ 82.9 $ - $ 169.3
Accrued liabilities 385.4 55.4 199.0 (448.8) 191.0
Short-term debt 50.0 0.5 2.7 - 53.2
----------------------------------------------------------------------------
Total current liabilities 438.0 139.7 284.6 (448.8) 413.5
Long term debt 287.0 403.0 32.7 (232.1) 490.6
Accrued post-retirement
benefits 525.9 - - - 525.9
Deferred income taxes 158.7 - - - 158.7
Other long-term liabilities 19.8 28.2 100.3 - 148.3
----------------------------------------------------------------------------
Total liabilities 1,429.4 570.9 417.6 (680.9) 1,737.0
----------------------------------------------------------------------------
Total stockholders' equity 1,039.2 1,074.1 821.9 (1,896.0) 1,039.2
----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,468.6 $1,645.0 $ 1,239.5 $ (2,576.9) $ 2,776.2
============================================================================
13
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Income
For the nine months ended September 30, 2000 (unaudited)
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Sales $ - $ 1,112.8 $ 762.9 $ - $ 1,875.7
Cost of sales (42.1) 979.2 578.9 - 1,516.0
Selling and administrative
expenses 10.7 35.6 102.7 - 149.0
Interest expense (income) 31.5 (1.9) (4.3) 25.3
Other income(expense)
including equity in income of
unconsolidated subsidiaries 207.8 - 14.7 (207.8) 14.7
----------------------------------------------------------------------------
Income (loss) before income
taxes 207.7 99.9 100.3 (207.8) 200.1
Income tax provision
(benefit) 80.6 40.1 32.3 (80.0) 73.0
----------------------------------------------------------------------------
Net income $127.1 $ 59.8 $ 68.0 $(127.8) $ 127.1
============================================================================
Condensed Statement of Cash Flows
For the nine months ended September 30, 2000 (unaudited)
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating
activities $ 22.6 $ 132.8 $ 213.6 $(318.3) $ 50.7
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Cash flows from investing
activities (2.9) (19.4) (27.0) (8.0) (57.3)
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Cash flows from financing
activities $(19.6) $(105.7) $(201.5) $ 326.3 $ (0.5)
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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
nature and extent of site contamination, the range of remediation
14
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. 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
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 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.
At September 30, 2001, the Company's reserves for environmental
investigation and remediation obligations totaled approximately $49.1 million,
of which approximately $8.0 million was included in other current liabilities.
The reserve includes estimated probable future costs of $21.4 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; $14.5 million for owned or controlled sites at which Company
operations have been discontinued; and $9.7 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.
15
In the spin-offs of Teledyne Technologies Incorporated ("Teledyne") and
Water Pik Technologies, Inc. ("Water Pik") completed in November 1999, each of
these 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 these 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 spun-off 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 spun-off company's assets.
In addition, the distribution of the spun-off 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 spun-off 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 spun-off 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 spun-off 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 spun-off 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
spun-off 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Allegheny Technologies Incorporated 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 first nine months of 2001 and 2000:
2001 2000
---- ----
Flat-Rolled Products 51% 60%
High Performance Metals 36% 29%
Industrial Products 13% 11%
For the first nine months of 2001, operating profit was $45.7 million
compared to $175.2 million for the same 2000 period. Sales decreased 13 percent
to $1,634.9 million for the first nine months of 2001 compared to $1,875.7
million for the same 2000 period.
Net income was $20.6 million, or $0.26 per diluted share, for the first
nine months of 2001 compared to $127.1 million, or $1.52 per diluted share, for
the first nine months of 2000. Net income for the first nine months of 2001
included an after-tax write-off of $3.4 million, or $0.04 per share, for the
Company's minority investment in the e-Business site, MetalSpectrum, which
terminated operations during the second quarter of 2001. Net income for the
first nine months of 2000 was increased by $5.0 million, or $0.06 per share, due
to a gain recognized 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 $79.1 million in cost reductions during the first nine
months of 2001, including $35.0 million in the 2001 third quarter. 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
Flat-Rolled Products segment sales for the third quarter declined 21
percent to $281.9 million, compared to $356.5 million in the third quarter of
2000. The segment also reported a third quarter 2001 operating loss of $6.0
million compared to an operating profit of $32.4 million in the same year-ago
period. Higher energy costs on a volume-adjusted basis reduced operating profit
by $5.4 million during the third quarter compared to the third quarter of 2000.
Operating profit was reduced by $3.4 million in the quarter as accounts
receivable reserves were adjusted due to the uncertain economy and reduced
availability of credit.
For the first nine months of 2001, the segment reported an operating loss
of $22.7 million compared to an operating profit of $103.8 million for the first
nine months of 2000. Sales decreased 25 percent to $840.4 million for the first
nine months of 2001 from the comparable 2000 period. The decrease in sales and
operating profit was primarily due to weak demand and lower prices. The impact
to operating profit was partially offset by ongoing cost reductions in the
segment's Allegheny Ludlum ("Allegheny Ludlum") operation, including a 10
percent salaried workforce reduction that was completed in the first quarter of
2001.
The average price of flat-rolled products in the third quarter 2001
decreased by 10 percent to $2,151 per ton compared to $2,380 per ton in the
17
same 2000 period. Total tons shipped in the third quarter of 2001 declined by
13% to 129,978 tons compared to shipments of 149,080 tons for the same period of
2000. General-purpose product shipments in the segment (including stainless
steel hot roll and cold roll sheet, stainless steel plate and silicon electrical
steel, among other products) decreased 13 percent compared to the third quarter
2000. Average prices for general-purpose products decreased 15 percent during
the same period. This decrease was primarily due to continued weak demand for
stainless steel sheet and plate due to the weak 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) decreased
12 percent compared to the 2000 third quarter, while average prices for
high-value products decreased 3 percent. Certain of these high-value products,
particularly Precision Rolled Strip(R) products, are used largely in the
automotive industry, which has also been impacted by the weak U.S. economy.
The average price of flat-rolled products for the first nine months of 2001
decreased by 8 percent to $2,194 per ton compared to $2,372 per ton in the same
2000 period. Total tons shipped in the first nine months of 2001 declined by 19%
to 382,091 tons compared to shipments of 472,256 tons for the same period of
2000. General-purpose product shipments in the segment decreased 22 percent
compared to the first nine months of 2000. Average prices for general-purpose
products decreased 15 percent during the same period. High-value product
shipments in the segment decreased 11 percent compared to the first nine months
of 2000, while average prices for high-value products decreased 1 percent during
the same period.
On October 22, 2001, the Company announced that it would indefinitely idle
the melt and associated service operations located at its Houston, PA facility.
The idling is expected to be completed by December 31, 2001, and will impact
approximately 220 employees. The Company plans to continue to operate the
Steckel mill located at this facility. The Company is currently evaluating
whether to permanently idle this facility and such a decision, if made, may
result in a special charge that would be material to the Company's operations in
the quarter the charge is taken.
HIGH PERFORMANCE METALS SEGMENT
Third quarter results benefited from continued strong shipments for
high-value products to the aerospace, electrical energy, and oil and gas
markets. Sales increased nearly 2 percent to $188.6 million and operating profit
was essentially flat compared to the same period last year due to $3.2 million
in higher energy costs and the labor strike at Wah Chang.
On September 4, 2001, the USWA employees at the Wah Chang facility, located
in Albany, Oregon, called a strike after the union membership failed to ratify
the proposed contract. While the Company and the USWA continue discussions, the
Company has implemented a phased-in restart of the plant with management and
salaried employees and replacement workers. The Wah Chang facility is involved
in the production of exotic alloys including zirconium and niobium and the
strike does not impact other Company operations.
Shipments of nickel-based and specialty steel products grew 15 percent and
average prices increased 5 percent compared to the prior-year period. Shipments
of titanium products decreased 1 percent, but prices increased 6 percent. Due in
part to the labor strike, shipments of exotic alloys declined 37 percent;
however, average prices were 2 percent higher.
Operating profit for the first nine months of 2001 increased 7 percent to
$56.4 million from $52.7 million in the same year-ago period. Sales for the
first nine months of 2001 increased 7 percent to $583.5 million compared to the
prior year period. For the first nine months of 2001, shipments of nickel-based
and specialty steel products grew by 12 percent and average
18
prices increased 8 percent compared to the prior year period. Shipments of
titanium products for the first nine months of 2001 increased 6 percent and
prices increased 2 percent.
Higher energy costs in 2001 particularly affected the segment's Wah Chang
facility located in Oregon where the Company has constructed an electrical power
cogeneration system to help alleviate this cost issue. This system, which cost
$14.6 million, began operating in late June 2001. As a result of this system and
overall lower purchased electricity costs, the Company expects to realize lower
and less volatile energy costs.
Certain comparative information on the segment's major products is provided
in the following table:
Three Months Ended
September 30,
-------------------------- Percent
2001 2000 Change
--------------------------------------
Volume (000's pounds):
Nickel-based and specialty steel alloys 12,783 11,147 15
Titanium mill products 5,960 6,027 (1)
Exotic alloys 632 1,002 (37)
Average prices (per pound):
Nickel-based and specialty steel alloys $ 6.23 $ 5.92 5
Titanium mill products $ 11.53 $ 10.88 6
Exotic alloys $ 38.66 $ 37.95 2
Nine Months Ended
September 30,
-------------------------- Percent
2001 2000 Change
--------------------------------------
Volume (000's pounds):
Nickel-based and specialty steel alloys 39,040 34,906 12
Titanium mill products 17,851 17,410 3
Exotic alloys 2,493 2,887 (14)
Average prices (per pound):
Nickel-based and specialty steel alloys $ 6.29 $ 5.81 8
Titanium mill products $ 11.69 $ 11.22 4
Exotic alloys $ 34.04 $ 34.59 (2)
INDUSTRIAL PRODUCTS SEGMENT
As a result of generally weak demand, sales decreased 4 percent and
operating profit decreased 47 percent to $2.5 million compared to the same
period for 2000. For the first nine months of 2001, operating profit decreased
to $12.0 million compared to $18.7 million for the first nine months of 2000.
Sales for the first nine months of 2001 were flat compared to the prior year.
CORPORATE ITEMS
Corporate expenses decreased 14 percent to $5.7 million for the 2001 third
quarter and decreased 12 percent to $19.7 million for the first nine months of
2001, compared to the respective 2000 periods, due to continued cost reductions.
Net interest expense decreased to $7.1 million for the 2001 third quarter from
$11.0 million for the 2000 third quarter. Net interest expense decreased to
$22.7 million for the first nine months of 2001 compared to $25.3 million for
the first nine months of 2000. The decrease in interest expense primarily was
due to lower interest rates and lower debt. Excess
19
pension income decreased to $10.1 million for the 2001 third quarter and
decreased to $43.0 million for the first nine months of 2001 compared to $27.3
million and $72.6 million in the same 2000 periods, respectively, reflecting the
carry-forward impact of lower investment returns in 2000 and increased
liabilities as a result of pension benefit enhancements, primarily associated
with new labor agreements that went into effect at the end of June 2001.
Non-cash excess pension income is expected to be approximately $10 million
in fourth quarter of 2001 and approximately $53 million for 2001. With the
decline in the U.S. equities market in 2001 to date, it is anticipated that
non-cash excess pension income for 2002 will be substantially lower than excess
pension income in 2001 and could result in an overall non-cash pension expense,
including retiree health care benefit expenses for 2002.
SPECIAL ITEMS
The 2001 second quarter results include an after-tax special item of $3.4
million, or $0.04 per share, related to the write-off of the Company's minority
investment in the e-Business site, MetalSpectrum, which terminated operations
during the second quarter of 2001. This amount was included in other income
(expense). There were no special items in the third quarter of 2001.
The 2000 first quarter results include after-tax 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. There were no special items in
the third quarter of 2000.
INCOME TAXES
The Company's effective tax rate was 42.0 percent and 44.8 percent for the
first nine months of 2001 and for the 2001 third quarter, respectively, compared
to 36.5 percent and 36.5 percent for the same periods 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 the impact of lower income
before income taxes.
FINANCIAL CONDITION AND LIQUIDITY
During the nine months ended September 30, 2001, cash generated from
operations of $94.4 million and proceeds from the net increase in debt of $39.0
million were used to pay dividends of $48.1 million, invest $78.3 million in
capital equipment and business expansion, primarily in the High Performance
Metals Segment, and repurchase shares of $3.0 million. The Company had a cash
position of $37.8 million at September 30, 2001.
Working capital decreased to $250.6 million at September 30, 2001 compared
to $609.3 million at December 31, 2000. The current ratio decreased to 1.3 from
2.5 in this same period. The change in working capital and current ratio at
September 30, 2001 compared to December 31, 2000 was primarily due to the
reclassification of long-term borrowings under the Company's commercial paper
program to short-term, as these borrowings, and the Company's primary bank
credit facility, will mature in less than one year.
The Company's defined benefit pension plan is fully funded with assets in
excess of the projected benefit obligation. Under current Internal Revenue Code
provisions, certain amounts that the Company pays for retiree health care
benefits may be reimbursed annually from the excess pension plan assets. During
the 2001 second quarter, the Company recovered $35.0 million under
20
these provisions. While not affecting reported operating profit, cash flow from
operations increased by the recovered amount. The ability for the Company to be
reimbursed for retiree medical costs in future years is dependent upon the level
of pension surplus, as computed under the code provisions of the Internal
Revenue Service, as of the beginning of each year. The level of pension surplus,
the value of pension assets less pension obligations, changes constantly due to
the volatility of pension asset investments. Due to the decline in the U.S.
equities market in 2001 to date, it is uncertain if the Company will be able to
be reimbursed for retiree medical costs in 2002.
Accounting standards require a minimum pension liability be recorded if the
value of pension assets are less than the accumulated pension benefit obligation
(ABO) at the end of the year. Based upon the value of pension assets as of
September 30, 2001, the Company would not be required to record such a minimum
pension liability. However, if the value of pension assets were to decline to
level below the ABO, the Company would record a minimum pension liability and
record a charge to shareholders' equity for the value of the prepaid pension
asset, currently recognized on the balance sheet, and the required minimum
pension liability, net of deferred taxes.
Capital expenditures for 2001 are expected to approximate between $100.0
million to $110.0 million, of which $78.3 million had been expended through
September 30, 2001.
On September 11, 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
August 27, 2001. On November 8, 2001, the Board of Directors declared a regular
quarterly dividend of $0.20 per share of common stock. The dividend will be paid
on December 11, 2001 to stockholders of record at the close of business on
November 26, 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 nine months of 2001, the
Company repurchased approximately 0.2 million shares for $3.0 million under this
program. There were no repurchases made during the second and third quarters of
2001. From the inception of the share repurchase program on October 1, 1998
through October 31, 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 borrowings 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.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement is
effective for fiscal years beginning after December 15, 2001. This statement
supercedes SFAS 121, while retaining many of the requirements of that statement.
Under SFAS 144, assets held for sale will be included in discontinued operations
if the operations and cash flows will be or have been eliminated from continuing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the Company. The Company intends to adopt this
new statement effective January 1, 2002.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations ("SFAS 141"), and Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
21
142"). These statements change the accounting for business combinations,
goodwill, and intangible assets.
SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. SFAS 141 supersedes Accounting Principles Board
Opinion No. 16 ("APB 16"); however, certain purchase accounting guidance in APB
16, as well as certain of its amendments and interpretations, have been carried
forward to SFAS 141. SFAS 141 changes the criteria to recognize intangible
assets separately from goodwill. The requirements of SFAS 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that have finite
lives will continue to be amortized over their useful lives, with no maximum
life. The amortization provisions of SFAS 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142
in their fiscal year beginning after December 15, 2001. Because of the different
transition dates for goodwill and intangible assets acquired on or before June
30, 2001, and those acquired after that date, pre-existing goodwill and
intangibles will be amortized during this transition period until adoption
whereas new goodwill and indefinite lived intangible assets acquired after June
30, 2001 will not.
The Company is currently evaluating adoption of SFAS 142 and has not yet
determined the impact on the overall financial condition of the Company, if any,
that may result. Amortization of existing goodwill is $5.8 million annually.
OTHER MATTERS
Management
Effective July 1, 2001, James L. Murdy was elected President and Chief
Executive Officer by the Company's Board of Directors. Mr. Murdy succeeds Robert
P. Bozzone, who remains Chairman of the Board. Mr. Murdy has been an Executive
Vice President since 1996 and was Chief Financial Officer from August 1996
through August 2000. Mr. Murdy has also served as a director of the Company
since 1999.
Additionally, during the second quarter, the Company announced assignments
establishing the executive management team reporting to James L. Murdy. Douglas
A. Kittenbrink assumed the position of Executive Vice President, Chief Operating
Officer, and Jack W. Shilling became Executive Vice President, Strategic
Initiatives and Technology and Chief Technology Officer. Completing the
executive management team are Jon D. Walton, who is Senior Vice President, Chief
Legal and Administrative Officer, and Richard J. Harshman, Vice President,
Finance and Chief Financial Officer.
Board of Directors
On July 19, 2001, the Company announced the election of James C. Diggs,
Senior Vice President and General Counsel of PPG Industries, Inc., to the
Company's Board of Directors.
September 11 Events
According to published reports, the terrorist attack on September 11, 2001
has had an adverse effect on the U.S. and other economies and other acts of
violence or war could further exacerbate prevailing recessionary trends. As a
result, demand for our products, and our profitability, could decline,
22
perhaps significantly. In particular, the September 11 hijacked commercial
airline attacks have resulted in sharply reduced air travel, which has led to
curtailed or delayed new plane orders and the idling of large portions of the
fleets of commercial airlines. A significant portion of the sales of our High
Performance Metals Group products are made to customers in the aerospace
industry, and we expect that reduced orders from those customers are likely to
adversely affect our results of operations.
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. While the volatile energy
markets have begun to stabilize, energy costs remain a risk for the Company.
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,
including cost containment and control of energy consumption. The Company has
completed construction of an electrical power cogeneration system designed to
reduce costs and cost volatility at the Wah Chang facility located in Oregon.
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, such as nickel and scrap
containing 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 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 more than 11,000 employees. Approximately 48 percent of the
Company's workforce is represented under various collective bargaining
agreements, principally with the United Steelworkers of America ("USWA"),
including: approximately 4,000 Allegheny Ludlum production and maintenance
employees covered by collective bargaining agreements between Allegheny Ludlum
and the USWA, which are effective through June 2007; approximately 300 Oremet
employees covered by a collective bargaining agreement with the USWA which are
effective through June 2007; and approximately 700 Wah Chang employees covered
by a collective bargaining agreement with the USWA which the USWA terminated as
of January 28, 2001.
On September 4, 2001, the USWA employees at the Wah Chang facility, located
in Albany, Oregon, called a strike after the union membership failed
23
to ratify the proposed contract. While the Company and the USWA continue
discussions, the Company has implemented a phased-in restart of the plant with
management and salaried employees and replacement workers. The Wah Chang
facility is involved in the production of exotic alloys including zirconium and
niobium and the strike does not impact other Company operations.
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.
The costs associated with new ratified labor agreements covering Allegheny
Ludlum and Oremet employees represented by the USWA including the effect on
excess pension income are reflected in results of operations commencing with the
third quarter of 2001.
On October 22, 2001, the Company announced that it would indefinitely idle
the melt and associated service operations located at its Houston, PA facility.
The idling is expected to be completed by December 31, 2001, and will impact
approximately 220 employees. The Company plans to continue to operate the
Steckel mill located at this facility. The Company is currently evaluating
whether to permanently idle this facility and such a decision, if made, may
result in a special charge that would be material to the Company's operations in
the quarter the charge is taken.
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 $49.1 million at September 30,
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
responsible party at approximately 31 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 12 of these sites, and the potential loss
exposure with respect to any of the remaining 19 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.
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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, including energy market conditions and actions taken to respond to
these conditions, product demand, sales, shipments, prices and price
competitiveness, operating profit and earnings, financial performance and
growth, energy costs and energy conservation, cost reductions and anticipated
cost savings, the effects of the cogeneration system constructed at Wah Chang,
sale of excess power, working capital reductions, cash conservation, dividends,
commodity stainless steel service center inventory levels, financial strength,
cash flow and initiatives to improve cash flow, capital expenditures and other
investments, the benefits and effects of new and tentative labor agreements,
ongoing labor strike, the idling of the Houston facility, projected pension
income, including non-cash excess pension income and reimbursement of retiree
health care expenditures. Such forward-looking statements are based on
management's current expectations and include known and unknown risks,
uncertainties and other factors, many of which the Company is unable to predict
or control, that may cause the Company's actual results or performance to
materially differ from any future results or performance expressed or implied by
such statements. These statements are based on current expectations that involve
a number of risks and uncertainties, including those described under the
captions: "Other Matters - September 11 Events," "Other Matters - Energy Costs,"
"Other Materials - Costs and Pricing," "Other Matters - Labor Matters," "Other
25
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 and its
quarterly reports on Form 10-Q. 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.
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
26
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 $150 million
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.
27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Current Reports on Form 8-K filed by the Company -
None.
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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: November 14, 2001 By /s/ R.J. Harshman
---------------------------------
Richard J. Harshman
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
Date: November 14, 2001 By /s/ D.G. Reid
---------------------------------
Dale G. Reid
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
29