Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Allegheny Technologies Incorporated is one of the largest and most diversified
producers of specialty materials in the world. We use innovative technologies to
offer global markets a wide range of specialty materials. High-value products
include super stainless steel, nickel-based and cobalt-based alloys and
superalloys, titanium and titanium alloys, specialty steels, tungsten materials,
exotic alloys, which include zirconium, hafnium and niobium, and highly
engineered strip and Precision Rolled Strip(R) products. In addition, we produce
commodity specialty materials such as stainless steel sheet and plate, silicon
electrical and tool steels, and forgings and castings. Unless the content
requires otherwise, "we," "our", "us" and similar terms refer to Allegheny
Technologies Incorporated and its subsidiaries.
Certain statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are forward looking
statements. Actual results or performance could differ materially from those
encompassed within such forward looking statements as a result of various
factors, including those described below.
OVERVIEW
2002 was a very difficult year. Business conditions in most of our markets were
weak throughout the year, resulting in a net loss for 2002 of $65.8 million, or
$0.82 per share. Sales declined 10% in 2002 to $1,907.8 million as weak demand,
especially in the commercial aerospace, electrical energy and capital goods
markets, adversely affected our business segments.
Continued weak demand and pricing for products of the Flat-Rolled
Products segment, particularly commodity stainless steel, resulted in a 3.7%
decline in this segment's sales as compared to 2001 and an operating loss of
$7.9 million. We believe that overall reduced demand for commodity stainless
steel products is due to unfavorable general economic conditions, and that
pricing for these products has been and in the near term is likely to continue
to be adversely affected by those conditions and by industry overcapacity and
intense competition. Sales of High Performance Metals segment products declined
18.4% and the segment's operating profit declined by 62% to $31.2 million in
2002, as compared to 2001, largely due to reduced demand for products sold to
commercial aerospace and power generation markets. Recovery of the markets for
our products will depend, in part, on significant improvement in general
economic conditions.
The decline in the equity markets over the past three years has had a
significant negative impact on our financial results. In the 2002 fourth
quarter, in accordance with accounting standards, we recorded a charge against
stockholders' equity of $406 million, net of deferred taxes, in recognition of
the decline in pension plan investments to a level below that of the accumulated
pension benefit obligation ("ABO"). This charge did not affect earnings and does
not have a cash impact. In addition, this charge does not affect our compliance
with covenants in our unsecured bank credit agreement. In accordance with
accounting standards, the full charge against stockholders' equity would be
reversed in subsequent years if the value of pension plan investments returns to
a level that exceeds the ABO as of a future annual measurement date. We do not
expect to be required to make cash contributions to the defined benefit pension
plan during the next several years based upon current actuarial analyses and
forecasts. However, a further significant decline in the value of plan
investments in the future or unfavorable changes in laws or regulations that
govern pension plan funding could materially change the timing and amount of
required pension funding. Depending on the timing and amount, a requirement that
we fund our defined benefit pension plan could have a material adverse effect on
our results of operations and financial condition.
The decline in the equity markets has also resulted in a significant
increase in retirement benefit expense. Retirement benefit expense was $21.8
million, pre-tax, for 2002 compared to pre-tax income of $53.1 million for 2001
and $99.9 million for 2000.
Given the continuing near term uncertainties facing many of our
commercial markets, the Board of Directors, in the 2002 fourth quarter, reduced
the quarterly dividend paid on shares of our common stock from $0.20 per share
to $0.06 per share.
We anticipated that 2002 would present challenging conditions in most of
our markets. As a result, our top priorities were to enhance our leading market
positions while reducing costs, generating cash and reducing debt.
Accomplishments in these areas during 2002 include:
ATI | Annual Report 2002 | 9
- - We had a number of gains with customers, which should improve our
position in key markets beginning in 2003. In the Flat-Rolled Products
segment, we improved our 2003 position with major distributors of
commodity stainless steel products in large part due to our superior
reputation for quality and delivery reliability. We were awarded a new
long-term agreement (LTA) with a manufacturer of electrical transformers
representing potentially 30,000 new tons annually of silicon electrical
steel shipments. In addition, our STAL Precision Rolled Strip(R)
products operation in Shanghai, China won several new contracts in that
rapidly growing market. In the High Performance Metals segment, we
finalized a significant LTA and achieved gains at other customers for
our premium nickel-based alloys, superalloys and titanium alloys
products.
- - Cash flow from operations in 2002 was $204 million. We generated free
cash flow (operating cash flow less investing activities and dividend
payments) of $111 million. We used this free cash flow to repay $86
million of debt and increase cash on hand by $26 million. There were no
borrowings outstanding at the end of 2002 under our $250 million
unsecured domestic bank credit facility.
- - Managed working capital (gross inventory and accounts receivable less
accounts payable) was reduced by $146 million, more than double our full
year 2002 reduction goal of $65 million. Over the last two years, we
have reduced managed working capital by over $270 million. At the end
of 2002, managed working capital was 33% of annualized sales compared to
37% at the end of 2001.
- - We realized $135 million in gross cost reductions, before the effects
of inflation, exceeding our 2002 goal of $100 million. A significant
portion of these cost reductions resulted from our efforts to improve
productivity and align the size of our workforce with current business
conditions. During 2002, we reduced our workforce by approximately 10%,
which is expected to result in annual savings of $37 million. Since
2000, the workforce has been reduced by approximately 1,700 employees,
or 15%.
- - Over the past three years, we have taken significant steps to
restructure our operations. In 2002, we indefinitely idled our
Massillon, OH stainless steel plate facility, primarily due to poor
demand for wide continuous mill plate products. In 2001, we permanently
idled the Flat-Rolled Products melt shop and associated service
operations located in Houston, PA after determining that this facility
could no longer be operated economically in the highly competitive
global stainless steel market. In 2000, we permanently idled the
high-cost titanium sponge production assets of the High Performance
Metals segment.
- - As a result of the Company's continuing focus on safety, in 2002 the
OSHA Total Recordable Incident Rate improved 16%, the Lost Day Case Rate
improved 14%, and the Lost Time Case Rate improved 17% compared to 2001.
- - We continue to invest in our businesses to enhance our specialty
materials capabilities, increase efficiencies and reduce costs. During
2002, we announced two major projects; a $35 million investment in two
new electric arc furnaces for our Flat-Rolled Products melt shop located
in Brackenridge, PA, and a $30 million program to enhance the
capabilities of our High Performance Metals long products rolling mill
facility located in Richburg, SC. These projects are scheduled to be
fully completed in 2004.
Business conditions remain very difficult and uncertain as 2003 begins.
We are staying focused on improving operating profit in all business segments by
enhancing our leading market positions and reducing costs, while conserving
cash. In 2003, our initial cost reduction goal is $90 million and we intend to
further improve upon the gains we made in reducing managed working capital in
2002.
RESULTS OF OPERATIONS
Sales were $1.91 billion in 2002, $2.13 billion in 2001 and $2.46 billion in
2000. International sales represented approximately 23 percent of total sales in
2002 and 2001, and 18 percent in 2000.
Operating profit was $27.3 million in 2002, $54.3 million in 2001, and
$207.8 million in 2000. For 2002 and 2001, losses before taxes were $103.8
million and $36.4 million, respectively. This compares with income before tax of
$208.8 million in 2000. A severe decline in the equity markets in both 2000 and
2001 and higher benefit liabilities from long-term labor contracts negotiated in
2001 resulted in a pre-tax retirement benefit expense of $21.8 million for 2002
compared to pre-tax retirement benefit income of $53.1 million for 2001 and
$99.9 million for 2000. In accordance with new accounting standards, operating
results for 2002 exclude goodwill amortization expense while 2001 and 2000
included goodwill amortization expense of $5.8 million and $5.7 million,
respectively. For 2002 and 2001, net losses from operations were $65.8 million
and $25.2 million, respectively. In 2000, net income was $132.5 million. The net
loss for 2002 included after-tax charges of $27.0 million related to the
indefinite
10 | Annual Report 2002 | ATI
idling of our Massillon, OH stainless steel plate facility and workforce
reductions. In 2001, the permanent idling of the Houston, PA stainless steel
melt shop, workforce reductions and other asset impairments resulted in an
after-tax charge of $47.8 million. Net income for 2000 included after-tax
charges of $20.0 million related to permanently idling the high-cost titanium
sponge production assets of the High Performance Metals segment and employee
severance costs.
We operate in three business segments: Flat-Rolled Products, High
Performance Metals and Industrial Products. These segments represented the
following percentages of our total revenues for the years indicated:
2002 2001 2000
---- ---- ----
Flat-Rolled Products 55% 51% 59%
High Performance Metals 33% 36% 30%
Industrial Products 12% 13% 11%
Information with respect to our business segments is presented below and
in Note 10 of the Notes to Consolidated Financial Statements.
FLAT-ROLLED PRODUCTS
(In millions) 2002 % Change 2001 % Change 2000
=================================================================================================================
Sales to external customers $1,048.2 (3.7%) $1,088.4 (24.6%) $1,444.1
- -----------------------------------------------------------------------------------------------------------------
Operating profit (loss) (7.9) 79.3% (38.1) 119.6
- -----------------------------------------------------------------------------------------------------------------
Operating profit (loss) as a percentage of sales (0.8%) (3.5%) 8.3%
- -----------------------------------------------------------------------------------------------------------------
International sales as a percentage of sales 11.7% 11.9% 7.3%
=================================================================================================================
ATI Flat-Rolled
Products Shipped
(thousands of tons)
98 99 00 01 02
- ---- ---- ---- ---- ----
538 593 609 498 487
Our Flat-Rolled Products segment produces, converts and distributes
stainless steel, nickel-based alloys and superalloys, and titanium and
titanium-based alloys in sheet, strip, plate and Precision Rolled Strip(R)
products, as well as silicon electrical steels and tool steels. The operations
in this segment include Allegheny Ludlum, Allegheny Rodney, Rome Metals, and
Allegheny Ludlum's 60% interest in the Chinese joint venture company known as
Shanghai STAL Precision Stainless Steel Co., Ltd ("STAL"). The remaining 40%
interest in STAL is owned by Baosteel Group, a state authorized investment
company whose equity securities are publicly traded in the People's Republic of
China. The financial results of STAL are consolidated into the segment's
operating results with the 40% interest of our minority partner recognized on
the balance sheet in other long-term liabilities.
2002 Compared to 2001
Sales for the Flat-Rolled Products segment decreased 3.7% in 2002
resulting in an operating loss of $7.9 million for the year. Operating results
continued to be severely impacted by very low demand and declining prices for
most stainless steel products, but improved compared to 2001 results due to
on-going efforts to reduce costs. Finished tons shipped in 2002 further declined
by 2% to 487,335 tons compared to shipments of 498,066 tons for 2001. The
average price of flat-rolled products decreased by 1% to $2,134 per ton in the
2002 period. Shipments of commodity products (including stainless steel hot roll
and cold roll sheet, stainless steel plate and silicon electrical steel, among
other products) decreased 5% while average prices for these products were flat.
The decline in shipments was primarily attributable to continued depressed
demand for stainless steel sheet and plate due to the weak U.S. industrial
economy. The slight increase in average prices was primarily due to higher raw
material surcharges, principally for nickel. High-value product shipments in the
segment (including strip, Precision Rolled Strip(R), super stainless steel,
nickel alloy and titanium products) increased 5%, while average prices for
high-value products decreased 7%. Increased shipments of Precision Rolled
Strip(R) products in Europe and Asia were partially offset by the overall
decline in shipments of other high-value products. Certain of these high-value
products are used in the consumer durables and capital goods markets, both of
which were impacted by the weak U.S. economy, which negatively affected prices.
Operating results for 2002 were also adversely affected by settlement of a
dispute with the United Steelworkers of America ("USWA") regarding profit
sharing related to prior years, which resulted in a pre-tax charge of $3.9
million in the fourth quarter.
ATI | Annual Report 2002 | 11
During 2002, in light of the poor business conditions, we continued to
aggressively reduce costs and achieved gross cost reductions, before the effects
of inflation, of $80 million for the full year. We indefinitely idled our
Massillon, OH stainless steel plate facility, due primarily to poor demand for
wide continuous mill plate products. This action resulted in a pre-tax, non-cash
asset impairment charge of $34.4 million in the 2002 fourth quarter. In
addition, during the 2002 third quarter, we announced further workforce
reductions of approximately 230 salaried employees representing approximately
20% of the salaried workforce. These workforce reductions were substantially
complete by the end of the third quarter and resulted in a pre-tax severance
charge of $4 million, net of pension curtailment gain, in the 2002 third
quarter. These expenses are presented as restructuring costs on the statement of
operations and are not included in the results for the segment. These cost
reduction actions are expected to result in annual pre-tax cost savings of
approximately $18 million. Since 2000, the salaried workforce has been reduced
by approximately 33%. During the third quarter of 2002, we announced a capital
investment designed to significantly reduce operating costs and increase
productivity at the Flat-Rolled Products melt shop located in Brackenridge, PA.
We plan to install two new high-powered electric arc furnaces and related
equipment at a cost of approximately $35 million. Cost savings are estimated to
be over $20 million annually after completion of the project. The first furnace
is scheduled to be operational in December of 2003, and the second furnace is
expected to be operational in December 2004.
2001 Compared to 2000
Sales for the segment decreased 24.6% in 2001 resulting in an operating loss of
$38.1 million for the year. During 2001, operating results were severely
impacted by very low demand and poor prices for many stainless steel products.
Finished tons shipped in 2001 declined by 18% to 498,066 tons compared to
shipments of 608,601 tons for 2000. The average price of flat-rolled products in
2001 decreased by 9% to $2,162 per ton compared to $2,354 per ton in the same
2000 period. Commodity 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 20%. Average prices for commodity
products decreased 16% during the same period. These decreases were primarily
attributable to 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, nickel alloy and
titanium products) decreased 12%, while average prices for high-value products
decreased 1%. Certain of these high-value products are used largely in the
automotive industry and capital goods markets, both of which were impacted by
the weak U.S. economy. Increased international sales, primarily of Precision
Rolled Strip(R) products, in Europe and Asia were offset by the overall decline
in shipments of high-value products in the U.S.
Operating results were also adversely affected by $14.3 million in
higher energy costs, on a volume-adjusted basis, in 2001 compared to the prior
year. In addition, during 2001, accounts receivable reserves were increased by
$7.3 million in recognition of the decline in the economy and the reduced
availability of credit.
The decline in operating results was partially offset by ongoing cost
reductions in the segment's Allegheny Ludlum operation, including a 10 percent
salaried workforce reduction that was completed in the first quarter of 2001 and
a further 5 percent reduction in staff at the end of 2001. Gross cost
reductions, before the effects of inflation, for 2001 totaled approximately $80
million.
During the 2001 fourth quarter, we permanently idled the melt and
associated service operations located at our Houston, PA facility. We had
determined that this facility could no longer be operated economically. This
cost reduction action affected approximately 225 employees. A pre-tax charge of
$70.0 million, primarily non-cash, for the related asset impairments, employee
benefits, and other closure costs was recorded in the 2001 fourth quarter. These
expenses are presented as restructuring costs on the statements of operations
and are not included in the results for the segment. These cost reduction
actions resulted in annual pre-tax cost savings of approximately $12 million,
beginning in 2002.
HIGH PERFORMANCE METALS
(In millions) 2002 % Change 2001 % Change 2000
=========================================================================================================
Sales to external customers $630.0 (18.4%) $771.8 4.9% $735.4
- ---------------------------------------------------------------------------------------------------------
Operating profit 31.2 (62.0%) 82.0 23.3% 66.5
- ---------------------------------------------------------------------------------------------------------
Operating profit as a percentage of sales 5.0% 10.6% 9.0%
- ---------------------------------------------------------------------------------------------------------
International sales as a percentage of sales 39.3% 36.0% 34.9%
=========================================================================================================
12 | Annual Report 2002 | ATI
Our High Performance Metals segment produces, converts and distributes a wide
range of high performance alloys including nickel- and cobalt-based alloys and
superalloys, titanium and titanium-based alloys, exotic alloys such as
zirconium, hafnium, niobium, tantalum and their related alloys, and other
specialty materials, primarily in slab, ingot, billet, bar, rod, wire, coil and
seamless tube forms. The operations in this segment include Allvac, Allvac Ltd
(U.K.) and Wah Chang, which also produces and sells zirconium chemicals.
ATI Nickel-Based
and Specialty Steel
Alloys Shipped
(thousands of lbs.)
98 99 00 01 02
---- ---- ---- ---- ----
44,182 43,905 46,612 51,899 35,832
2002 Compared to 2001
Sales for the High Performance Metals segment declined 18.4% in 2002 primarily
as a result of reduced demand for nickel-based alloys and superalloys, and
titanium and titanium-based alloys from the segment's two largest markets,
commercial aerospace and power generation. This decrease in sales was partially
offset by improved shipments of exotic alloys primarily for the mining, high
energy physics, government and corrosion markets. Shipments of nickel-based and
specialty steel alloys decreased 31%, while average prices increased 1%.
Titanium mill products shipments decreased 17% and average prices increased 1%.
Shipments for exotic alloys increased 7% and average prices increased 8%.
Increases in prices for 2002 were primarily the result of favorable product mix.
Operating profit for 2002 declined 62% primarily as a result of the
reduced sales volume, which was partially offset by efforts to reduce costs.
Gross cost reductions, before the effects of inflation, for 2002 totaled
approximately $42 million. Operating profit in 2002 was also adversely impacted
by the effects of a seven month labor strike settled in March 2002 at our Wah
Chang operation, which is involved in the production of exotic alloys.
Backlog of confirmed orders for the segment was approximately $300
million at December 31, 2002 and approximately $350 million at December 31,
2001. While the backlog for our exotic materials remains strong, we expect
demand for products used in commercial aerospace, which historically has been
the segment's largest end-use market, to remain depressed in 2003. As a result,
in the 2002 third and fourth quarters we announced further workforce reductions
which affected approximately 285 employees at the Allvac and Allvac Ltd
operations. In connection with these reductions, which will be completed in the
first half of 2003, we recorded pre-tax charges of $3.3 million for the related
severance costs. These expenses are presented as restructuring costs on the
statement of operations and are not included in the results for the segment.
These cost reduction actions are expected to result in annual pre-tax cost
savings of approximately $12 million.
ATI Titanium Mill
Products Shipped
(thousands of lbs.)
98 99 00 01 02
---- ---- ---- ---- ----
24,739 22,792 24,798 23,070 19,044
ATI Exotic
Alloys Shipped
(thousands of lbs.)
98 99 00 01 02
---- ---- ---- ---- ----
4,690 3,756 3,691 3,457 3,712
In the 2002 first quarter, we announced a net $30 million capital
investment designed to enhance the capabilities of our High Performance Metals
Richburg, SC long products rolling mill facility. The project includes mutual
conversion agreements with AvestaPolarit's U.S. subsidiary, AvestaPolarit, Inc.
The agreement gives us access to process high performance long products at
AvestaPolarit's facility and gives AvestaPolarit access to process stainless
steel long products at our Richburg facility. The project should be completed in
the second half of 2004.
2001 Compared to 2000
Sales for the High Performance Metals segment increased 4.9% in 2001 as a result
of continued strong shipments of high-value products to the aerospace,
electrical energy, and oil and gas markets due, in part, to the strong order
backlog at the end of 2000 and the first half of 2001. Shipments of nickel-based
alloys and superalloys and specialty steel alloys increased 11% and prices
increased 8%. Titanium mill products shipments decreased 7% and prices increased
8%. Shipments and prices for exotic alloys were down 6%.
Operating profit for 2001 increased 23.3% compared to 2000 primarily as
a result of higher prices due to strong market conditions, combined with
favorable product mix and cost reduction efforts. Gross cost reductions, before
the effects of inflation, for 2001 totaled approximately $27 million. However,
operating profit was adversely affected by $14.1 million in higher energy costs
in the first nine months of 2001 compared to the prior year.
During the 2001 third quarter, USWA employees at the Wah Chang facility,
located in Albany, Oregon, went on strike after the union membership rejected
the previously negotiated tentative contract. After a brief shutdown, and while
discussions continued, full operation of the plant was resumed with management,
salaried employees and replacement workers. The Wah Chang facility is involved
in the production of exotic alloys including zirconium, hafnium and niobium, and
the strike did not impact our other operations.
During the 2001 fourth quarter, we divested our North American
operations of our titanium distribution company, Titanium Industries Inc.
Results of operations for this business for 2001 and proceeds from the
disposition of this business were not material.
ATI | Annual Report 2002 | 13
Backlog of confirmed orders for the segment was approximately $350
million at December 31, 2001 and approximately $375 million at December 31,
2000. Based on expectations of weaker demand for products used in commercial
aerospace, which historically has been the segment's largest end-use market, in
the 2001 fourth quarter we announced workforce reductions affecting
approximately 220 employees at the Allvac and Allvac Ltd operations. In
connection with these reductions, which were completed in the 2002 first
quarter, we recorded a pre-tax charge of $1.8 million for the severance related
costs. These expenses are presented as restructuring costs on the statement of
operations and are not included in the results for the segment. These cost
reduction actions are expected to result in annual pre-tax cost savings of
approximately $5 million.
INDUSTRIAL PRODUCTS
(In millions) 2002 % Change 2001 % Change 2000
========================================================================================================
Sales to external customers $ 229.6 (14.3%) $ 267.8 (4.7%) $ 280.9
- --------------------------------------------------------------------------------------------------------
Operating profit 4.0 (61.5%) 10.4 (52.1%) 21.7
- --------------------------------------------------------------------------------------------------------
Operating profit as a percentage of sales 1.7% 3.9% 7.7%
- --------------------------------------------------------------------------------------------------------
International sales as a percentage of sales 30.5% 34.4% 28.4%
========================================================================================================
Our Industrial Products segment's principal business consists of the
production of tungsten powder, tungsten carbide materials and carbide cutting
tools. The segment also produces carbon alloy steel forgings and large grey and
ductile iron castings. The companies in this segment are Metalworking Products,
Portland Forge and Casting Service.
2002 Compared to 2001
Sales and operating profit for the Industrial Products segment decreased 14.3%
and 61.5%, respectively, in 2002. Continued weak demand from most U.S.
industrial markets negatively impacted operating results for all businesses in
the segment. The decline in operating results was partially offset by ongoing
efforts to reduce costs, which totaled approximately $12 million in 2002. During
the second half of 2002, we announced workforce reductions of approximately 150
employees primarily at the European operations of Metalworking Products. These
workforce reductions will be substantially complete by the end of the first half
of 2003 and resulted in a pre-tax severance charge of $1.1 million in the 2002
fourth quarter. These expenses are presented as restructuring costs on the
statement of operations and are not included in the results for the segment.
These cost reduction actions are expected to result in annual pre-tax cost
savings of approximately $8 million.
2001 Compared to 2000
Sales and operating profit for the Industrial Products segment decreased 4.7%
and 52.1%, respectively, in 2001. Weak demand from most U.S. industrial markets
negatively impacted operating results for all businesses in the segment. In
addition, during 2001 accounts receivable reserves were increased by $1.7
million in recognition of the decline in the economy and the reduced
availability of credit. The decline in operating results was partially offset by
ongoing efforts to reduce costs, which totaled approximately $9 million in 2001.
RESTRUCTURING AND OTHER COSTS, NET OF GAINS ON ASSET SALES
Restructuring Costs
Restructuring costs were $42.8 million, $74.2 million, and $29.5 million in
2002, 2001 and 2000, respectively.
In 2002, we recorded total charges of $42.8 million related to the
indefinite idling of our Massillon, OH stainless steel plate facility, due to
continuing poor demand for wide continuous mill plate products, and further
workforce reductions across all of our operations. The Massillon, OH stainless
steel plate facility was indefinitely idled in the 2002 fourth quarter, and
resulted in a pre-tax non-cash asset impairment charge of $34.4 million,
representing the excess of the book value of the facility over its estimated
fair market value. In addition, during the second half of 2002, and in light of
the continuing decline in demand for our products in the markets served, we
announced workforce reductions of approximately 665 employees. These workforce
reductions, which will be substantially complete by the end of the first half of
2003, resulted in a pre-tax, primarily cash, severance charge of $8.4 million,
net of pension curtailment gain. These expenses are presented as restructuring
costs on the statement of operations and are not included in segment results.
These cost reduction actions are expected to result in annual pre-tax cost
savings of approximately $38 million when completed.
14 | Annual Report 2002 | ATI
Of the $42.8 million restructuring charge recorded in 2002, $6.4
million, net of tax benefits, will result in expenditures of cash, of which $4.3
million remains to be paid in 2003. Cash to meet these obligations is expected
to be generated from one or more of the following sources: internally generated
funds from operations, current cash on hand, or borrowings under existing credit
lines.
In 2001, we recorded total charges of $74.2 million related to the
permanent idling of the Houston, PA stainless steel melt shop, workforce
reductions and other asset impairments. Of this aggregate charge, $55.6 million
related to the Houston, PA stainless steel melt shop, which was permanently
idled in the 2001 fourth quarter, and other asset impairments; $9.8 million
related to pension and termination benefits; $5.8 million related to severance
and personnel costs; and $3.0 million related to contractual obligations and
other exit costs. The workforce reductions affected approximately 520 employees
across all of our business segments and headquarters operations, and were
substantially complete by the end of 2001. These cost reduction actions resulted
in pre-tax cost savings of approximately $19 million in 2002. Of the $74.2
million restructuring charges recorded in 2001, approximately $3.0 million, net
of tax benefits, resulted in expenditures of cash, the majority of which was
paid in 2002. Cash to meet these obligations was generated from internally
generated funds from operations and cash on hand.
In 2000, we recorded total restructuring charges of $29.5 million. The
2000 charges included $13.3 million for asset impairments and $6.7 million for
employee termination benefits, primarily severance pay, and other contractual
obligations related to the decision in the 2000 fourth quarter to permanently
idle the high-cost titanium sponge production assets of the High Performance
Metals segment. We ceased titanium sponge production in the first half of 2001,
and costs associated with operating the facility in 2001 were included in
results of operations as they were incurred. The 2000 charges also included $3.1
million related to a 10% salaried workforce reduction at our Allegheny Ludlum
operations. The salaried workforce was notified by management of the planned
workforce reduction and of the availability of termination benefits prior to
December 31, 2000. The reduction in workforce was completed in the 2001 first
quarter, and resulted in approximately $11 million in cost savings in 2001. In
addition, restructuring and transformation charges for 2000 included $6.4
million for costs related to changes in the Company's executive management. Two
executives left the Company in the 2000 fourth quarter. Both of these executives
were parties to employment and severance arrangements with the Company that
obligated Allegheny Technologies to make specific payments to them as a result
of their departure.
At December 31, 2002, substantially all cash expenditures related to the
2001 and 2000 restructuring charges had been paid.
Retirement Benefit Expense (Income)
Significantly lower pension investments as a result of severe declines in the
equity markets in 2000 and 2001, and higher benefit liabilities from long-term
labor contracts negotiated in 2001 resulted in a pre-tax retirement benefit
expense of $21.8 million for 2002 compared to pre-tax income of $53.1 million
for 2001 and $99.9 million for 2000, which had a negative effect on both cost of
sales and selling and administrative expenses.
As a result of the substantially lower value of pension plan
investments, combined with the changes in assumptions (discussed in Critical
Accounting Policies - Retirement Benefits) and higher projected retiree
healthcare costs, we expect pre-tax retirement benefit expenses to increase
significantly in 2003, based upon current actuarial assumptions, to
approximately $140 million, compared to $21.8 million in 2002. Approximately
79%, or $110 million, of the estimated 2003 retirement benefit expense will be
non-cash.
Sales of Assets and Other
Gains on sales of assets and other includes pre-tax gains and losses on the sale
of surplus real estate, non-strategic investments and other assets, which are
primarily included in other income (expense) in the statement of operations, as
well as charges incurred in connection with closed operations. These items
resulted in net charges of $11.6 million, $14.8 million and $4.4 million in
2002, 2001 and 2000, respectively. In 2002, we recognized a pre-tax charge of
$6.5 million for our approximate 30% share of the net losses in New Piper
Aircraft ("New Piper"), and for the write-off of the carrying value of this
investment. This investment, which is held for sale, is accounted for using the
equity method. Based on New Piper's fourth quarter 2002 realization of
additional losses, and adverse trends in its liquidity and financial condition,
we determined in the 2002 fourth quarter that it was more likely than not that
the carrying value of our equity interest in New Piper was not recoverable. In
2001, a pre-tax charge of $5.6 million was recorded to write-off our minority
interest in the e-Business site, MetalSpectrum, which terminated operations
during the 2001 second quarter. In 2000, we realized a gain of $11.0 million on
the sale of a minority interest in Gul Technologies Singapore, Ltd.
ATI | Annual Report 2002 | 15
INTEREST EXPENSE, NET
Interest expense, net of interest income, was $34.3 million for 2002 compared to
$29.3 million for 2001 and $34.4 million for 2000. In 2002, higher interest
costs associated with the $300 million of 8.375% 10-year Notes issued in
December 2001 more than offset the reduction in overall indebtedness from the
repayment of all outstanding commercial paper. During 2002, we entered into
"receive fixed, pay floating" interest rate swap contracts for $150 million
related to these Notes, which effectively convert this portion of the Notes to
variable rate debt. The result of the swap contracts was a decrease in interest
expense of $4.9 million in 2002 compared to the fixed interest expense of the
Notes.
Interest expense is presented net of interest income of $3.0 million for
2002, $1.4 million for 2001, and $3.2 million for 2000. The increase in interest
income for 2002 primarily relates to interest receivable on settlement of prior
years' tax liabilities.
CORPORATE EXPENSES
Corporate expenses were $20.6 million in 2002 compared to $25.5 million in 2001
and $30.6 million in 2000. The continued decline in corporate expenses is due to
cost controls, reductions in the number of corporate employees and lower
incentive compensation accruals.
INCOME TAXES
The effective income tax rate was (36.6)%, (30.8)%, and 36.5% in 2002, 2001 and
2000, respectively. The negative effective income tax rates for 2002 and 2001
represent tax benefits that will be realized by a refund of income taxes paid in
prior years. The effective tax rate for 2002 was a larger benefit than 2001
primarily due to favorable settlement of issues related to prior years'
estimated taxes. In 2002, we received $45.6 million in income tax refunds and
recognized $51.9 million of income taxes receivable at December 31, 2002, which
we expect to receive in the first half of 2003.
Deferred taxes result from temporary differences in the recognition of
income and expense for financial and income tax reporting purposes, and
differences between the fair value of assets acquired in business combinations
accounted for as purchases for financial reporting purposes and their
corresponding tax bases. Deferred income taxes represent future tax benefits or
costs to be recognized when those temporary differences reverse. At December 31,
2002, we had a net deferred tax asset of $106.2 million, net of valuation
allowances for certain state tax benefits which are not expected to be realized.
A significant portion of this net deferred tax asset relates to postretirement
employee benefit obligations, which have been recognized for book purposes but
are not recognized for income tax reporting until the benefits are paid. These
benefit payments are expected to occur over an extended period of years.
Although realization is not assured, we have concluded that the net deferred tax
asset should be realizable based upon our history of earnings, expectations of
future earnings, and potential tax planning strategies, including possible asset
sales.
FINANCIAL CONDITION AND LIQUIDITY
We believe that internally generated funds, current cash on hand and available
borrowings under existing unsecured credit lines will be adequate to meet
foreseeable liquidity needs. We did not borrow funds under our primary unsecured
credit facilities during 2002. However, our ability to borrow under existing
unsecured credit lines in the future could be negatively affected if we fail to
maintain required financial ratios under the agreement governing our primary
unsecured credit facilities.
Our ability to access the credit markets in the future to renew our
unsecured credit facilities or obtain other or additional unsecured financing,
if needed, will be influenced by our credit rating. In July 2002, Standard &
Poor's Ratings Services lowered its long-term credit ratings for our debt to BBB
from BBB+. In October 2002, Moody's Investor Service lowered its long-term
corporate credit ratings for our debt to Baa2 from Baa1. Changes in our credit
rating do not impact our access to our existing unsecured credit facilities.
If we were unable to utilize the existing unsecured credit facility due
to failure to comply with existing covenants, and were unable to obtain a waiver
or renegotiate the applicable covenants with our creditors, we would seek to
obtain credit lines secured by our current assets to satisfy future liquidity
needs.
We have no off-balance sheet financing relationships with variable
interest or structured finance entities.
Cash Flow and Working Capital
During 2002, cash generated from operations of $204.2 million and net proceeds
from asset sales of $9.2 million were used to reduce debt by $85.5 million,
invest $48.7 million in capital equipment (primarily in the High Performance
Metals segment), pay dividends of $53.2 million, and increase cash balances by
$25.7 million. Cash transactions plus cash on hand at the beginning of the year
resulted in an ending cash position of $59.4 million at December 31, 2002.
16 | Annual Report 2002 | ATI
Working capital decreased $123.0 million to $470.4 million at December 31, 2002,
compared to $593.4 million at the end of 2001. The current ratio, current assets
divided by current liabilities, decreased to 2.4 in 2002 from 2.8 in 2001 as
cash generated from reductions in working capital was used to retire long-term
debt.
Managed Working Capital
($ millions)
98 99 00 01 02
- ---- ---- ---- ---- ----
819 835 864 726 580
As part of managing the liquidity of the business, we focus on
controlling inventory, accounts receivable and accounts payable. In measuring
performance in controlling this managed working capital, we exclude the effects
of the LIFO inventory valuation reserves, excess and obsolete inventory
reserves, and reserves for uncollectible accounts receivable which, due to their
nature, are managed separately. During 2002, excluding the effects of operations
sold, managed working capital, which is defined as gross inventory plus accounts
receivable less accounts payable, was reduced by $146 million, or 20 percent, to
$580 million. For 2002, the decline in managed working capital resulted from a
$103 million reduction in inventory, a $36 million decline in accounts
receivable, and higher accounts payable balances of $7 million. Since the end of
2000, we have reduced managed working capital by $273 million, or 32%.
Capital expenditures for 2002 were $48.7 million, which was
significantly less than the $104.2 million spent in 2001, as we controlled our
investment spending due to the uncertain economy and to preserve liquidity.
Capital expenditures currently authorized for 2003 are approximately $70 million
and primarily relate to the investment in two new electric arc furnaces at our
Flat Rolled Products melt shop located in Brackenridge, PA, and investments to
enhance the capabilities at our High Performance metals long products rolling
mill facility located in Richburg, SC.
Debt
Total debt outstanding declined to $519.1 at December 31, 2002 from $582.2
million at the end of 2001, primarily due to the repayment of all outstanding
commercial paper. The decline in debt outstanding was partially offset by the
recognition of the fair value of interest rate swap contracts. At December 31,
2002, the accounting treatment required to adjust these swap contracts to fair
value resulted in the recognition of an $18.7 million asset on the balance
sheet, included in other assets, with an offsetting increase in long-term debt.
The debt to capitalization ratio increased to 53.6% at December 31, 2002 from
38.1% at December 31, 2001. Our net debt to total capitalization ratio, which
reduces debt and capitalization by the amount of cash and cash equivalents and
the fair value of interest rate swaps, increased to 49.6% December 31, 2002 from
36.7% December 31, 2001. These higher ratios resulted primarily from the decline
in stockholders' equity due to the write-off of the pension asset and the
recognition of a minimum pension liability, discussed below.
In December 2002, we reached an agreement with a group of banks ("Bank
Group") to renew the short-term portion of our unsecured credit facility, revise
the amount of available borrowings under the overall credit facility, and revise
certain financial covenants. This credit agreement amended a $325 million credit
facility established in December 2001, which was subsequently amended in August
2002 to revise financial covenants. As amended, the Bank Group unsecured credit
agreement provides for borrowings of up to $250 million on a revolving credit
basis, consisting of a $100 million short-term credit facility, which expires in
December 2003, and a $150 million credit facility, which expires in December
2006. Interest is payable based upon London Interbank Offered Rates (LIBOR) plus
a spread, which can vary depending on our credit rating. We also have the option
of using other alternative interest rate bases. The agreement has various
covenants that limit our ability to dispose of assets and merge with another
corporation. The agreement also contains covenants that require us to maintain
various financial statement ratios, including a covenant requiring the
maintenance of a specified minimum ratio of consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA") to gross interest
expense ("Interest Coverage Ratio"), and a covenant that requires that we not
exceed a specified maximum ratio of total consolidated indebtedness to total
capitalization ("Leverage Ratio"), both as defined by the agreement. We were
compliant with these covenants at December 31, 2002, and the applicable
covenants during 2002. Changes in our credit rating do not impact our ability to
access these unsecured credit facilities.
The following table summarizes the Interest Coverage Ratio requirement
which, in accordance with the agreement, is calculated for the preceding twelve
month period from the financial statement date:
December 31, 2002 through December 31, 2003 2.0 times EBITDA
After December 31, 2003 through June 30, 2004 2.5 times EBITDA
After June 30, 2004 through December 31, 2004 3.0 times EBITDA
Thereafter 3.5 times EBITDA
ATI | Annual Report 2002 | 17
The definition of EBITDA excludes up to $10 million of cash costs
related to workforce reductions in 2002, adds back non-cash pension expense or
deducts non-cash pension income calculated in accordance with SFAS No. 87,
"Employers' Accounting for Pensions" ("SFAS 87"), and adds back postretirement
benefits expenses that are funded by Voluntary Employee Benefit Association
(VEBA) trusts.
The Leverage Ratio requires that total consolidated indebtedness be not
more than 50% of total capitalization. The Leverage Ratio excludes any changes
to capitalization resulting from non-cash balance sheet adjustments due to
changes in net pension assets or liabilities recognized in accordance with the
minimum liability provisions of SFAS 87. The definitions of total indebtedness
and total capitalization deduct up to $50 million of cash and cash equivalent
balances held in excess of $25 million.
At December 31, 2002, EBITDA (calculated in accordance with the credit
agreement), for the prior twelve month period was 2.3 times gross interest
expense compared to a required ratio of at least 2.0 times gross interest
expense. At December 31, 2002, the Leverage Ratio was 38% compared to a required
ratio of not more than 50% of total capitalization. The Leverage Ratio has the
effect of limiting the total amount that we may borrow and the amount of
dividends which may be paid; at December 31, 2002, the Leverage Ratio would
limit the amount of additional borrowings and cash dividends to approximately
$300 million.
We had no borrowings outstanding under these unsecured revolving credit
agreements during 2002 or at December 31, 2002 or 2001.
In December 2001, we issued $300 million of 8.375% Notes due December
15, 2011. Interest on the Notes is payable semi-annually, on June 15 and
December 15, and is subject to adjustment under certain circumstances. These
Notes contain default provisions with respect to default for the following,
among other things: nonpayment of interest on the Notes for 30 days, default in
payment of principal when due, or failure to cure the breach of a covenant as
provided in the Notes. Any violation of the default provision could result in
the requirement to immediately repay the borrowings. These Notes are presented
on the balance sheet net of issuance costs of $6.4 million, which are being
amortized over the life of the debt.
At December 31, 2002, we had entered into "receive fixed, pay floating"
arrangements for $150 million related to the 8.375% ten-year Notes which
effectively convert this portion of the Notes to variable rate debt. The result
of the "receive fixed, pay floating" arrangements was a decrease in interest
expense of $4.9 million for the year ended December 31, 2002, compared to the
fixed interest expense of the ten-year Notes that would otherwise be applicable.
At December 31, 2002, the adjustment of these swap contracts to fair market
value resulted in the recognition of an asset of $18.7 million on the balance
sheet, included in other assets, with an offsetting increase in long-term debt.
Some of the swap contracts contain a provision which allows the swap
counterparty to terminate the swap contracts in the event our senior unsecured
debt credit rating falls below investment grade. We also have the ability to
terminate the swaps and receive (pay) the asset (liability) fair value of the
swaps.
A summary of required payments under financial instruments (excluding
accrued interest) and other commitments are presented below.
Less than 1-3 4-5 After 5
(In millions) Total 1 year years years years
==============================================================================================
CONTRACTUAL CASH OBLIGATIONS
- ----------------------------------------------------------------------------------------------
Total Debt including Capital Leases $519.1 $ 9.7 $ 27.9 $ 10.7 $470.8
Operating Lease Obligations 46.3 8.4 14.1 10.9 12.9
Unconditional Purchase Obligations (A) 33.0 29.8 3.2 -- --
- ----------------------------------------------------------------------------------------------
OTHER FINANCIAL COMMITMENTS
- ----------------------------------------------------------------------------------------------
Lines of Credit (B) $307.8 $100.0 $ 57.8 $150.0 $--
Standby Letters of Credit (C) 40.1 40.1 -- -- --
Guarantees 11.5 -- -- -- --
- ----------------------------------------------------------------------------------------------
(A) Contractual commitments related to expenditures for property, plant
and equipment.
(B) Drawn amounts are included in total debt.
(C) These instruments expire and are renewed annually and are used to
support: $21.9 million in workers compensation arrangements; $15.2 million
related to environmental matters; and $3.0 million related to international
trade.
18 | Annual Report 2002 | ATI
We use derivative contracts to hedge, in certain circumstances, our
exposure to fluctuations in the cost of energy, raw materials, and the value of
foreign currencies. As part of certain of these contracts, we have agreed that
the net value of the derivative instrument being used as a hedge will become
immediately payable, or receivable, if there is deterioration in the our credit
rating to non-investment grade. At December 31, 2002, the net value of hedges
that would require settlement in the event of a downgrade in our credit to
non-investment grade was approximately $8 million after-tax for interest rate
swap assets, which would be payable to us.
Retirement Benefits
As of November 30, 2002, our measurement date for pension accounting, the value
of the accumulated pension benefit obligation (ABO) exceeded the value of
pension investments by approximately $192 million as a result of a severe
decline in the equity markets in 2000, 2001 and 2002, higher benefit liabilities
from long-term labor contracts negotiated in 2001, and a lower assumed discount
rate for valuing the pension liabilities. As we discussed in last year's annual
report, accounting standards require that a minimum pension liability be
recorded and the pension asset recorded on the balance sheet be written off if
the value of pension investments is less than the ABO at the annual measurement
date. Accordingly, in the 2002 fourth quarter, we recorded a charge against
stockholders' equity of $406 million, net of deferred taxes, to write off our
prepaid pension cost representing the overfunded portion of the pension plan,
and to record a deferred pension asset of $165 million for unamortized prior
service cost relating to prior benefit enhancements. This charge did not affect
earnings and does not have a cash impact. In addition, this charge does not
affect our compliance with debt covenants in our bank credit agreement. In
accordance with accounting standards, the full charge against stockholders'
equity would be reversed in subsequent years if the value of pension plan
investments returns to a level that exceeds the ABO as of a future annual
measurement date. As of the 2002 annual measurement date, the value of pension
investments was $1.68 billion and the ABO was $1.87 billion. Based upon current
actuarial analyses and forecasts, the ABO is projected to be $1.89 billion at
the 2003 annual measurement date.
We do not expect to be required to make contributions to the defined
benefit pension plan during the next several years based upon current actuarial
analyses and forecasts. However, further significant declines in the value of
plan investments in the future or unfavorable changes in laws or regulations
that govern pension plan funding could materially change the timing and amount
of required pension funding. Depending on the timing and amount, a requirement
that we fund our defined benefit pension plan could have a material adverse
effect on our results of operations and financial condition.
In prior years, our defined benefit pension plan was fully funded with
investments significantly in excess of the projected benefit obligation. Under
Internal Revenue Code (Section 420) provisions, certain amounts that we paid for
retiree health care benefits could be reimbursed annually from the excess
pension plan investments. During the 2001 second quarter, we recovered $35.0
million under these provisions. While not affecting reported operating profit,
cash flow from operations increased by the recovered amount. Our ability to be
reimbursed for retiree medical costs in future years is dependent upon the level
of pension surplus, if any, as computed under regulations of the Internal
Revenue Service, as of the beginning of each year. The level of pension surplus
(the value of pension investments less pension obligations) changes constantly
due to the volatility of pension investments. Due to the decline in the U.S.
equities market in 2000, 2001 and 2002, the pension funded status at the
beginning of 2003 is substantially below the threshold required for
reimbursement of retiree medical costs in 2003. The ability to resume
reimbursement from pension investments for retiree health care costs beyond 2003
will depend upon the performance of the pension investments, and any changes in
the Internal Revenue Code and regulations pertaining to reimbursement of retiree
health care costs from pension surplus. Beginning in the second half of 2001, we
began funding certain retiree health care benefits for our Allegheny Ludlum
operation using investments held in a Voluntary Employee Benefit Association
(VEBA) trust. This allows us to recover a portion of the retiree medical costs
that were funded from the pension surplus prior to 2002. In accordance with our
labor agreements, during 2002, we funded $12.7 million of retiree medical costs
using the investments of the VEBA trust. We may continue to fund certain retiree
medical benefits utilizing the investments held in the VEBA if the value of
these investments exceed $50 million. The value of the investments held in the
VEBA was approximately $112 million as of December 31, 2002.
ATI | Annual Report 2002 | 19
Other
In November 2002, the Board of Directors reduced the quarterly dividend paid on
shares of the Company's common stock from $0.20 per share to $0.06 per share.
The reduction in the dividend is expected to save approximately $45 million
annually. We paid a quarterly dividend of $0.20 per share of common stock during
each of the first three quarters of 2002.
On February 13, 2003, the Board of Directors declared a regular
quarterly dividend of $0.06 per share of common stock. The dividend was paid on
March 11, 2003 to stockholders of record at the close of business on February
24, 2003.
The future declaration and payment of dividends and the amount of such
dividends will depend upon our results of operations, financial condition, cash
requirements, future prospects, any limitations imposed by credit agreements or
senior securities, and other factors deemed relevant by the Board of Directors.
In October 1998, the Company's Board of Directors authorized up to a
total of 25 million shares of Allegheny Technologies common stock to be acquired
under the Company's stock repurchase program from time to time in the open
market or in negotiated transactions. From the inception of the share repurchase
program through December 31, 2001, we repurchased 20.5 million shares at a cost
of $531.5 million. We have not repurchased shares under the program since early
2001, and do not expect to resume repurchases under the program in the
foreseeable future.
CRITICAL ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or the method of its application, is
generally accepted, management selects the principle or method that is
appropriate in our specific circumstances. Application of these accounting
principles requires our management to make estimates about the future resolution
of existing uncertainties; as a result, actual results could differ from these
estimates. In preparing these financial statements, management has made its best
estimates and judgments of the amounts and disclosures included in the financial
statements giving due regard to materiality.
Inventories
At December 31, 2002, the Company had net inventory of $409.0 million.
Inventories are stated at the lower of cost (last-in, first-out (LIFO),
first-in, first-out (FIFO) and average cost methods) or market, less progress
payments. Costs include direct material, direct labor and applicable
manufacturing and engineering overhead, and other direct costs. Most of our
inventory is valued utilizing the LIFO costing methodology. Inventory of our
non-U.S. operations is valued using average cost or FIFO methods.
We evaluate product lines on a quarterly basis to identify inventory
values that exceed estimated net realizable value. The calculation of a
resulting reserve, if any, is recognized as an expense in the period that the
need for the reserve is identified. At December 31, 2002, no such reserves were
required. It is our general policy to write-down to scrap value any inventory
that is identified as obsolete and any inventory that has aged or has not moved
in more than twelve months. In some instances this criterion is up to
twenty-four months.
Revenue Recognition and Accounts Receivable
Revenue is recognized when title passes or as services are rendered. We have no
significant unusual sale arrangements with any of our customers.
We market our products to a diverse customer base, principally
throughout the United States. Trade credit is extended based upon evaluations of
each customer's ability to perform its obligations, which are updated
periodically. Accounts receivable reserves are based upon an aging of accounts
and a review for collectibility of specific accounts. Accounts receivable are
presented net of a reserve for doubtful accounts of $10.1 million at December
31, 2002 and $12.3 million at December 31, 2001, which represented 4.1 percent
and 4.3 percent, respectively, of total gross accounts receivable. During 2002,
in recognition of the decline in the economy and reduced availability of credit,
the Company recognized expense of $1.8 million to increase the reserve for
doubtful accounts and wrote-off $4.0 million of uncollectible accounts, which
reduced the reserve.
20 | Annual Report 2002 | ATI
Asset Impairment
We monitor the recoverability of the carrying value of our long-lived assets. An
impairment charge is recognized when the expected net undiscounted future cash
flows from an asset's use (including any proceeds from disposition) are less
than the asset's carrying value, and the asset's carrying value exceeds its fair
value.
At December 31, 2002, we had $194 million of goodwill on our balance
sheet. Of the total, $127 million related to the Flat-Rolled Products segment,
$57 million related to the High Performance Metals segment, and $10 million
related to the Industrial Products segment. Goodwill is required to be reviewed
annually, or more frequently if impairment indicators arise. The impairment test
for goodwill is a two step process. The first step is a comparison of the fair
value of the reporting unit with its carrying amount, including goodwill. If
this step reflects impairment, then the loss would be measured as the excess of
recorded goodwill over its implied fair value. Implied fair value is the excess
of the fair value of the reporting unit over the fair value of all recognized
and unrecognized assets and liabilities.
During the 2002 fourth quarter, we completed our annual goodwill
impairment evaluation and no impairment was determined to exist. The evaluation
of goodwill included estimating the fair market value of each of the reporting
units, which have goodwill associated with their operations, using discounted
cash flow and multiples of cash earnings valuation techniques, plus valuation
comparisons to recent public sale transactions of similar businesses, if any.
These valuation methods require us to make estimates and assumptions regarding
future cash flows, profitability, and the cost of capital. Although we believe
that the estimates and assumptions used were reasonable, actual results could
differ from those estimates and assumptions.
Contingencies
When it is probable that a liability has been incurred or an asset of the
Company has been impaired, a loss is recognized if the amount of the loss can be
reasonably estimated.
We are subject to various domestic and international environmental laws
and regulations that govern the discharge of pollutants into the air or water,
and the disposal of hazardous substances, and which may require that we
investigate and remediate the effects of the release or disposal of materials at
sites associated with past and present operations, including sites at which we
have been identified as a potentially responsible party ("PRP") under the
Federal Superfund laws, and comparable state laws. We could incur substantial
cleanup costs, fines and civil or criminal sanctions, third party property
damage or personal injury claims as a result of violations or liabilities under
these laws or non-compliance with environmental permits required at our
facilities. We are currently involved in the investigation and remediation of a
number of our current and former sites as well as third party sites under these
laws.
With respect to proceedings brought under the Federal Superfund laws, or
similar state statutes, we have been identified as a PRP at approximately 31 of
such sites, excluding those at which we believe we have no future liability. Our
involvement is limited or de minimis at approximately 13 of these sites, and the
potential loss exposure with respect to any of the remaining 18 individual sites
is not considered to be material.
We are a party to various cost-sharing arrangements with other PRPs at
the sites. The terms of the cost-sharing arrangements are subject to
non-disclosure agreements as confidential information. Nevertheless, the
cost-sharing arrangements generally require all PRPs to post financial assurance
of the performance of the obligations or to pre-pay into an escrow or trust
account their share of anticipated site-related costs. In addition, the Federal
government, through various agencies, is a party to several such arrangements.
Environmental liabilities are recorded when our liability is probable
and the costs are reasonably estimable. In many cases, investigations are not at
a stage where we are able to determine whether we are liable or, if liability is
probable, to reasonably estimate the loss, or certain components thereof.
Accordingly, as investigation and remediation of these sites proceed and as we
receive new information, we expect that we will adjust our accruals to reflect
the new information. Future adjustments could have a material adverse effect on
our results of operations in a given period, but we cannot reliably predict the
amounts of such future adjustments. At December 31, 2002, our reserves for
environmental matters totaled approximately $41 million.
Environmental liabilities are recorded when our liability is probable
and the costs are reasonably estimable, but generally not later than the
completion of the feasibility study or our recommendation of a remedy or
commitment to an appropriate plan of action. The accruals are reviewed
periodically and, as investigations and remediations
ATI | Annual Report 2002 | 21
proceed, adjustments are made as necessary. Accruals for losses from
environmental remediation obligations do not take into account the effects of
inflation, and anticipated expenditures are not discounted to their present
value. The accruals are not reduced by possible recoveries from insurance
carriers or other third parties, but do reflect allocations among PRPs at
Federal Superfund sites or similar state-managed sites after an assessment is
made of the likelihood that such parties will fulfill their obligations at such
sites and after appropriate cost-sharing or other agreements are entered. Our
measurement of environmental liabilities is based on currently available facts,
present laws and regulations, and current technology. Such estimates take into
consideration our prior experience in site investigation and remediation, the
data concerning cleanup costs available from other companies and regulatory
authorities, and the professional judgment of our environmental experts in
consultation with outside environmental specialists, when necessary. Estimates
of our liability are further subject to additional uncertainties regarding the
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 participation, number and
financial condition of other PRPs, as well as the extent of their responsibility
for the remediation.
Based on currently available information, we do not believe that there
is a reasonable possibility that a loss exceeding the amount already accrued for
any of the matters with which we are currently associated (either individually
or in the aggregate) will be an amount that would be material to a decision to
buy or sell our securities. Future developments, administrative actions or
liabilities relating to environmental matters, however, could have a material
adverse effect on our financial condition and results of operation.
Retirement Benefits
We have defined benefit pension plans and defined contribution plans covering
substantially all of our employees. We have not made contributions to the
defined benefit pension plan in the past seven years because the plan has
remained adequately funded. We account for our defined benefit pension plans in
accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87"),
which requires that amounts recognized in financial statements be determined on
an actuarial basis, rather than as contributions are made to the plan. A
significant element in determining pension (expense) income in accordance with
SFAS 87 is the expected return on plan investments. In establishing the expected
return on plan investments, which is reviewed annually, we take into
consideration types of securities the plan investments are invested in, how
those investments have performed historically, and expectations for how those
investments will perform in the future. For 2002, 2001 and 2000, we had assumed
a 9% long-term expected return on pension investments. For 2003, in light of the
declines in the equity markets over the past several years, which comprise a
significant portion of our pension plan investments, we have lowered our
expected return on pension plan investments to 8.75%. This assumed long-term
rate of return on investments is applied to the fair market value of plan
investments at the end of the previous year. This produces the expected return
on plan investments that is included in annual pension (expense) income for the
current year. The effect of lowering the expected return on pension plan
investments will result in an increase in annual pension expense of
approximately $4 million for 2003. The cumulative difference between this
expected return and the actual return on plan investments is deferred and
amortized into pension income or expense over future periods. The expected
return on plan investments can vary significantly from year to year since the
calculation is dependent on the fair market value of plan investments as of the
end of the preceding year. U.S. generally accepted accounting principles allow
companies to calculate expected return on pension investments using either an
average of fair market values of pension investments over a period not to exceed
five years, which reduces the volatility in reported pension income or expense,
or their fair market value at the end of the previous year. However, the
Securities and Exchange Commission currently does not permit companies to change
from the fair market value at the end of the previous year methodology, which is
the methodology that we use, to an averaging of fair market values of plan
investments methodology. As a result, our results of operations and those of
other companies, including companies with which we compete, may not be
comparable due to other companies using a different methodology in calculating
expected return on pension investments.
At the end of November each year, we determine the discount rate to be
used to value pension plan liabilities. In accordance with SFAS 87, the discount
rate reflects the current rate at which the pension liabilities could be
effectively settled. In estimating this rate, we assess the rates of return on
high quality, fixed-income investments. Based on the Moody's average Aa
corporate bond yield as of the end of November 2002, we established a
22 | Annual Report 2002 | ATI
discount rate of 6.75% for valuing the pension liabilities as of the end of
2002, and for determining pension expense for 2003. We had previously assumed a
discount rate of 7% for 2001 and 2000. The effect of lowering the discount rate
increased the year-end 2002 projected pension obligation by approximately $50
million, and will increase annual pension expense by approximately $4 million.
The effect on pension liabilities for changes to the discount rate, as well as
the net effect of other changes in actuarial assumptions, and differences in
actual experience compared to that assumed, are deferred and amortized over
future periods in accordance with SFAS 87.
We also sponsor several defined benefit postretirement plans covering
certain hourly and salaried employees and retirees. These plans provide health
care and life insurance benefits for eligible employees. In certain plans, our
contributions towards premiums are capped based upon the cost as of a certain
date, thereby creating a defined contribution. We account for these benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"), which requires that amounts recognized in
financial statements be determined on an actuarial basis, rather than as
benefits are paid. We use actuarial assumptions, including the discount rate,
the expected trend in health care costs and the expected return on plan
investments, to estimate the costs and benefits obligations for the plans. The
discount rate, which is determined annually at the end of each year, is
developed based upon rates of return on high quality, fixed-income investments.
At the end of 2002, we determined this rate to be 6.75%. In 2001 and 2000, we
used a discount rate of 7%. The effect of lowering the discount rate increased
the year-end 2002 postretirement benefits obligation by approximately $20
million and will increase 2003 postretirement benefits expenses by approximately
$2 million. Based upon cost increases quoted by our medical care providers for
2003 and predictions of continued significant medical cost inflation in future
years, the annual assumed rate of increase in the per capita cost of covered
benefits for health care plans is estimated at 10.3% in 2003, and is assumed to
gradually decrease to 5.0% in the year 2009 and remain level thereafter. Certain
of these benefits are funded using plan investments held in a Voluntary Employee
Benefit Association (VEBA) trust. The expected return on plan investments is a
significant element in determining postretirement benefits expenses in
accordance with SFAS 106. In establishing the expected return on plan
investments, which is reviewed annually, we take into consideration the types of
securities the plan investments are invested in, how those investments have
performed historically, and expectations for how those investments will perform
in the future. For 2002, 2001 and 2000, we had assumed a 15% long-term expected
return on investments held in the VEBA trust, when a large percentage of the
investments were in private equities. For 2003, as a result of reduction in the
percentage of our private equity investments, we have lowered our expected
return on investments held in the VEBA trust to 9%. This assumed long-term rate
of return on investments is applied to the market value of plan investments at
the end of the previous year. This produces the expected return on plan
investments that is included in annual postretirement benefits expenses for the
current year. Therefore, the effect of lowering the expected return on plan
investments will result in an increase in annual postretirement benefits expense
of approximately $7 million for 2003.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). Under SFAS 143, obligations associated with the
retirement of tangible long-lived assets, such as landfill and other facility
closure costs, would be capitalized and amortized to expense over an asset's
useful life using a systematic and rational allocation method. This standard is
effective for fiscal years beginning after June 15, 2002. The adoption of SFAS
143 on January 1, 2003 will result in a charge of approximately $1.3 million,
net of tax, or $0.02 per share, which will be presented in our first quarter
2003 statement of operations as a cumulative change in accounting, principally
for asset retirement obligations related to landfills.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). This statement establishes accounting guidelines for
the recognition and measurement of liabilities for costs associated with exit or
disposal activities initially at fair value in the period in which the
liabilities are incurred, rather than at the date of a commitment to an exit or
disposal plan. This standard is effective January 1, 2003 for all exit or
disposal activities initiated after that date. We adopted this standard at
January 1, 2003. Subsequent to adoption, this standard may affect the periods in
which costs are recognized for workforce reductions or facility closures,
although the ultimate amount of costs recognized would be the same. SFAS 146 has
no effect on our previously announced restructuring charges.
ATI | Annual Report 2002 | 23
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN 45"). This interpretation
changes the accounting recognition and disclosure requirements for certain
guarantees issued on behalf of other parties which represent either a contingent
or a non-contingent obligation for the guarantor to make payments or to perform
specified activities. Effective January 1, 2003, FIN 45 mandates the separate
fair value recognition of guarantees entered into on or after that date. As of
December 31, 2002, we had no material guarantees as defined in FIN 45.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148), which amended SFAS No. 123 to allow multiple methods
of reporting the accounting transition for companies electing to adopt the
recognition provisions of SFAS 123 for fair valuing stock-based compensation. As
permitted by the accounting standards, we have elected to continue the use of
the intrinsic value method of accounting for stock-based compensation under APB
Opinion No. 25.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is
one where the contractual or ownership interests in an entity change with
changes in the entity's net asset value. This interpretation requires the
consolidation of a VIE by the primary beneficiary, and also requires disclosure
about VIEs where an enterprise has a significant variable interest but is not
the primary beneficiary. As of the effective date, we had not entered into any
VIEs, and therefore are not impacted by the provisions of FIN 46.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND OTHER MATTERS
Board of Directors
In July 2002, Brian P. Simmons was elected to the Board of Directors. Mr.
Simmons is a partner and one of the founders of Code Hennessy & Simmons LLC, a
private equity investment firm. He is also the son of Richard P. Simmons, who
beneficially owns more than 5% of the Common Stock of the Company and retired as
Chairman of the Company in 2000.
Forward-Looking 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 statements in this report relate to
future events and expectations and, as such, constitute forward-looking
statements. Forward-looking statements include those containing such words as
"anticipates," "believes," "estimates," "expects," "would," "should," "will,"
"will likely result," "forecast," "outlook," "projects," and similar
expressions. 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 our actual results or performance to materially differ from any future
results or performance expressed or implied by such statements. Various of these
factors are described from time to time in the Company filings with the
Securities and Exchange Commission, including Reports on Form 10-Q. We assume no
duty to update our forward-looking statements.
Factors that could cause actual results to differ from those in such
forward-looking statements include the following:
Risks Associated with Environmental Matters. We are subject to various
domestic and international environmental laws and regulations that govern the
discharge of pollutants into the air or water, and disposal of hazardous
substances, and which may 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 we have been identified as a
potentially responsible party ("PRP") under the Federal Superfund laws, and
comparable state laws. We could incur substantial cleanup costs, fines and civil
or criminal sanctions, third party property damage or personal injury claims as
a result of violations or liabilities under these laws or non-compliance with
environmental permits required at our facilities. We are currently involved in
the investigation and remediation of a number of our current and former sites as
well as third party locations sites under these laws.
With respect to proceedings brought under the federal Superfund laws, or
similar state statutes, we have been identified as a PRP at approximately 31 of
such sites, excluding those at which it believes it has no future liability. Our
involvement is limited or de minimis at approximately 13 of these sites, and the
potential loss exposure with respect to any of the remaining 18 individual sites
is not considered to be material.
24 | Annual Report 2002 | ATI
We are a party to various cost-sharing arrangements with other PRPs at
the sites. The terms of the cost-sharing arrangements are subject to
non-disclosure agreements as confidential information. Nevertheless, the
cost-sharing arrangements generally require all PRPs to post financial assurance
of the performance of the obligations or to pre-pay into an escrow or trust
account their share of anticipated site-related costs. In addition, the Federal
government, through various agencies, is a party to several such arrangements.
We believe that we operate our businesses in compliance in all material
respects with applicable environmental laws and regulations. However, we are a
party to lawsuits and other proceedings involving alleged violations of, or
liabilities arising from environmental laws. When our liability is probable and
we can reasonably estimate our costs, we record environmental liabilities on our
financial statements. In many cases, investigations are not at a stage where we
are able to determine liability, or if liability is probable, to reasonably
estimate the loss, or certain components thereof. Estimates of our liability
remain subject to additional uncertainties regarding the 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 participation number and financial
condition of other PRPs, as well as the extent of their responsibility for the
remediation. Accordingly, we periodically review the accruals, as investigation
and remediation of these sites proceed. As we receive new information, we expect
that we will adjust our accruals to reflect new information. Future adjustments
could have a material adverse effect on our results of operations in a given
period, but we cannot reliably predict the amounts of such future adjustments.
At December 31, 2002, our reserves for environmental matters totaled
approximately $41 million.
Based on currently available information, we do not believe that there
is a reasonable possibility that a loss exceeding the amount already accrued for
any of the sites with which the we are currently associated (either individually
or in the aggregate) will be an amount that would be material to a decision to
buy or sell our securities.
Risks Associated with Accessing the Credit Markets. Our ability to
access the credit markets in the future to renew the current portion of our
unsecured credit facility or obtain additional financing, if needed, is
influenced by the Company's credit rating. In July 2002, Standard & Poor's
Ratings Services lowered its long-term credit ratings for our debt to BBB from
BBB+. In October 2002, Moody's Investor Service lowered its long-term corporate
credit ratings for our debt to Baa2 from Baa1.
Risks Associated with Retirement Benefits. Our defined benefit pension
plan was funded in accordance with ERISA as of December 31, 2002. Based upon
current actuarial analyses and forecasts, we do not expect to be required to
make contributions to the defined benefit pension plan during the next several
years. However, a further significant decline in the value of plan investments
in the future or unfavorable changes in laws or regulations that govern pension
plan funding could materially change the timing and amount of required pension
funding. Depending on the timing and amount, a requirement that we fund our
defined benefit pension plan could have a material adverse effect on our results
of operations and financial condition.
In prior years, our defined benefit pension plan was fully funded with
assets significantly in excess of the projected benefit obligation. Under
Internal Revenue Code (Section 420) provisions, certain amounts that we paid for
retiree health care benefits could be reimbursed annually from the excess
pension plan assets. During the 2001 second quarter, we recovered $35.0 million
under these provisions. While not affecting reported operating profit, cash flow
from operations increased by the recovered amount. Our ability to be reimbursed
for retiree medical costs in future years is dependent upon the level of pension
surplus, if any, as computed under regulations 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 and 2002, the pension funded status at the beginning of 2003 is
substantially below the threshold required for reimbursement of retiree medical
costs in 2003. The ability to resume reimbursement from pension assets for
retiree health care costs beyond 2003 will depend upon the performance of the
pension investments, and any changes in the Internal Revenue Code and
regulations pertaining to reimbursement of retiree health care costs from
pension surplus. Beginning in the second half of 2001, we began funding certain
retiree health care benefits for Allegheny Ludlum using plan assets held in a
Voluntary Employee Benefit Association (VEBA) trust. This allows us to recover a
portion of the retiree medical costs that were previously funded from the
pension surplus. During 2002, we were able to fund $12.7 million of retiree
medical costs using the assets of the VEBA trust. We may continue to fund
certain retiree medical benefits utilizing the plan assets held in the VEBA if
the value of these plan assets exceed $50 million.
ATI | Annual Report 2002 | 25
Cyclical Demand for Products. The cyclical nature of the industries in
which our customers operate cause demand for products to be cyclical, creating
uncertainty regarding future profitability. Various changes in general economic
conditions affect the industries in which our customers operate. These changes
include decreases in the rate of consumption or use of our customers' products
due to economic downturns. Other factors causing fluctuation in our customers'
positions are changes in market demand, lower overall pricing due to domestic
and international overcapacity, currency fluctuations, lower priced imports and
increases in use or decreases in prices of substitute materials. As a result of
these factors, our profitability has been and may in the future be subject to
significant fluctuation.
Price Deflation. The current trend of price deflation for many commodity
products has adversely affected prices for many of our commodity products,
including stainless steel, and may continue to do so. Therefore, revenues and
operating results have been and may continue to be adversely affected by a
deflationary price environment for these products.
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. We primarily use the last-in, first-out
method of inventory accounting that reflects current costs in the cost of
products sold. We consider these costs, the increasing costs of equipment and
other costs in establishing our sales pricing policies and have instituted raw
material surcharges on certain of our products to the extent permitted by
competitive factors in the marketplace. We continue to emphasize cost reductions
and cost containment in all aspects of our business.
We change prices on certain of our products from time to time. The
ability to implement price increases is dependent on market conditions, economic
factors, raw material costs and availability, competitive factors, operating
costs and other factors, some of which are beyond our control. The benefits of
price increases may be delayed due to long manufacturing lead times and the
terms of existing contracts.
Volatility of Energy Prices; Availability of Energy Resources. Energy
resources markets are subject to conditions that create uncertainty in the
prices and availability of energy resources upon which we rely. We rely upon
third parties for our supply of energy resources consumed in the manufacture of
products. The prices for and availability of electricity, natural gas, oil and
other energy resources are subject to volatile market conditions. These market
conditions often are affected by political and economic factors beyond our
control. Disruptions in the supply of energy resources could temporarily impair
the ability to manufacture products for customers. Further, increases in energy
costs, or changes in costs relative to energy costs paid by competitors, has and
may continue to adversely affect our profitability. To the extent that these
uncertainties cause suppliers and customers to be more cost sensitive, increased
energy prices may have an adverse effect on our results of operations and
financial condition. We use approximately 10 to 12 million MMBtu's of natural
gas annually, depending upon business conditions, in the manufacture of our
products. These purchases of natural gas expose us to risk of higher gas prices.
For example, a hypothetical $1.00 per MMBtu increase in the price of natural gas
would result in increased annual energy costs of approximately $10 to $12
million.
As part of our risk management strategy, from time to time, we purchase
swap contracts to manage exposure to changes in energy costs. The contracts
obligate us 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 our forecasted energy payments.
Volatility of Prices of Critical Raw Materials; Unavailability of Raw
Materials. We rely to a substantial extent on outside vendors to supply certain
raw materials that are critical to the manufacture of products. Purchase prices
and availability of these critical raw materials are subject to volatility. At
any given time, we may be unable to obtain an adequate supply of these critical
raw materials on a timely basis, on price and other terms acceptable, or at all.
If suppliers increase the price of critical raw materials, we may not
have alternative sources of supply. In addition, to the extent that we have
quoted prices to customers and accepted customer orders for products prior to
purchasing necessary raw materials, we may be unable to raise the price of
products to cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and
requires long lead times. As a result, we have in the past and may in the future
experience delays or shortages in the supply of raw materials. If unable to
obtain adequate and timely deliveries of required raw materials, we may be
unable to timely manufacture sufficient quantities of products. This could cause
us to lose sales, incur additional costs, delay new product introductions and
suffer harm to our reputation.
26 | Annual Report 2002 | ATI
While we enter into raw materials, such as nickel, futures contracts
from time to time to hedge exposure to price fluctuations, we cannot be certain
that our hedge position adequately reduces exposure. We believe that we have
adequate controls to monitor these contracts, but we may not be able to
accurately assess exposure to price volatility in the markets for critical raw
materials. In addition, although we occasionally use raw materials surcharges to
offset the impact of increased costs, competitive factors in the marketplace can
limit ability to institute surcharges, and there can be a delay between the
increase in the price of raw materials and the realization of the benefit of
surcharges. For example, since the Company generally uses in excess of 40,000
tons of nickel each year, a hypothetical change of $1.00 per pound in nickel
prices would result in increased costs of approximately $80 million.
We acquire certain important raw materials that we use to produce
specialty materials, including nickel, chrome, cobalt, titanium sponge and
ammonia paratungstate, from foreign sources. Some of these sources operate in
countries that may be subject to unstable political and economic conditions.
These conditions may disrupt supplies or affect the prices of these materials.
Credit Agreement Covenants. The agreement governing our unsecured bank
credit facility imposes a number of covenants on us. For example, it contains
covenants that create limitations on our ability to, among other things, effect
acquisitions or dispositions or incur additional debt, and require us to, among
other things, maintain various financial ratios and comply with various other
financial covenants. Our ability to comply with these covenants may be affected
by events beyond our control and, as a result, we may be unable to comply with
these covenants. A failure to comply with these covenants could adversely affect
our ability to borrow under our unsecured credit facility and could result in an
event of default under the existing unsecured credit agreement.
Commercial Aerospace Downturn. A significant portion of the sales of our
High Performance Metals segment represent products sold to customers in the
commercial aerospace industry. Economic and other factors, including the
September 11, 2001 terrorist attacks, that are currently adversely affecting the
airline industry have resulted in overall reduced demand for the products that
we sell to the commercial aerospace market. The downturn in the commercial
aerospace industry could continue to adversely affect our results of operations,
and our business and financial condition could be materially adversely affected.
Political and Social Turmoil. The war on terrorism and recent political
and social turmoil, including terrorist and military actions and the
implications of war with Iraq, can be expected to put further pressure on
economic conditions in the United States and worldwide. These political, social
and economic conditions make it difficult for us, our suppliers and our
customers to forecast accurately and plan future business activities, and could
adversely affect the financial condition of our suppliers and customers and
affect customer decisions as to the amount and timing of purchases from us. As a
result, the recovery of our industry from weak demand conditions could be
delayed, and our business, financial condition and results of operations could
be materially adversely affected.
Insurance. We have maintained various forms of insurance, including
insurance covering claims related to our properties and risks associated with
our operations. Our existing property and liability insurance coverages contain
exclusions and limitations on coverage. In connection with renewals of
insurance, we have experienced additional exclusions and limitations on
coverage, larger self-insured retentions and deductibles and significantly
higher premiums. As a result, in the future our insurance coverage may not cover
claims to the extent that it has in the past and the costs that we incur to
procure insurance may increase significantly, either of which could have an
adverse effect on our results of operations.
Labor Matters. We have approximately 9,650 employees. A portion of our
workforce is covered by various collective bargaining agreements, principally
with the United Steelworkers of America ("USWA"), including: approximately 3,500
Allegheny Ludlum production and maintenance employees covered by collective
bargaining agreements between Allegheny Ludlum and the USWA, which are effective
through June 2007; approximately 165 Oremet employees covered by a collective
bargaining agreement with the USWA which is effective through June 2007; and
approximately 600 Wah Chang employees covered by a collective bargaining
agreement with the USWA which continues through March 2008. Negotiations are
ongoing for a new collective bargaining agreement with the USWA affecting
approximately 140 full and part-time employees at various Allegheny Ludlum
facilities in Western Pennsylvania. Also, negotiations are expected to begin
for a new collective bargaining agreement with the USWA affecting approximately
104 employees at the Casting Service facility in LaPorte, Indiana.
ATI | Annual Report 2002 | 27
Generally, agreements that expire may be terminated after notice by the
union. After termination, the union may authorize a strike. A strike by the
employees covered by one or more of the collective bargaining agreements could
materially adversely affect our operating results. There can be no assurance
that we will succeed in concluding collective bargaining agreements with the
unions to replace those that expire.
Export Sales. We believe that export sales will continue to account for
a significant percentage of our future revenues. Risks associated with export
sales include: political and economic instability, including weak conditions in
the world's economies; accounts receivable collection; export controls; changes
in legal and regulatory requirements; policy changes affecting the markets for
our products; changes in tax laws and tariffs; and exchange rate fluctuations
(which may affect sales to international customers and the value of profits
earned on export sales when converted into dollars). Any of these factors could
materially adversely effect our results for the period in which they occur.
Interest Rate Risk. We attempt to maintain a reasonable balance between
fixed- and floating-rate debt to keep financing costs as low as possible. At
December 31, 2002, including the effect of interest rate swap agreements, we
have approximately $176 million of floating rate debt outstanding with an
average interest rate of approximately 1.5%. Since the interest rate on this
debt floats with the short-term market rate of interest, we are exposed to the
risk that these interest rates may increase. For example, a hypothetical 1% in
rate of interest on $176 million of outstanding floating rate debt would result
in increased annual financing costs of $1.8 million.
Risks Associated with Acquisition and Disposition Strategies. We intend
to continue to strategically position our businesses in order to improve our
ability to compete. We plan to do this by seeking specialty niches, expanding
our global presence, acquiring businesses complementary to existing strengths
and continually evaluating the performance and strategic fit of existing
business units. We regularly consider acquisition, joint ventures, and other
business combination opportunities as well as possible business unit
dispositions. From time to time, management holds discussions with management of
other companies to explore such opportunities. As a result, the relative makeup
of the businesses comprising the Company is subject to change. Acquisitions,
joint ventures, and other business combinations involve various inherent risks,
such as: assessing accurately the value, strengths, weaknesses, contingent and
other liabilities and potential profitability of acquisition or other
transaction candidates; the potential loss of key personnel of an acquired
business; our ability to achieve identified financial and operating synergies
anticipated to result from an acquisition or other transaction; and
unanticipated changes in business and economic conditions affecting an
acquisition or other transaction. International acquisitions and other
transactions could be affected by export controls, exchange rate fluctuations,
domestic and foreign political conditions and a deterioration in domestic and
foreign economic conditions.
Uncertainties Relating to Spin-Offs--General. In November 1999, we
completed a major strategic transformation that included the spin-offs of
Teledyne Technologies Incorporated ("Teledyne"), which was comprised of certain
businesses in our former Aerospace and Electronics segment, and Water Pik
Technologies ("Water Pik"), which was comprised of businesses in our former
Consumer segment. Upon completion of the spin-offs, we distributed all of the
stock of Teledyne and Water Pik to our stockholders of record. Prior to the
spin-offs, we received a ruling from the Internal Revenue Service that the
spin-offs would be tax-free to Allegheny Technologies and its shareholders. In
the spin-offs of Teledyne and Water Pik, the new companies agreed to assume and
to defend and hold us 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, we could be required to satisfy them, which
could have a material adverse effect on our results of operations and financial
condition.
Risks Associated with Government Contracts. Some of our operating
companies directly perform contractual work for the U.S. Government. Various
claims (whether based on U.S. Government or Company audits and investigations or
otherwise) could be asserted against us related to our U.S. Government contract
work. 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.
28 | Annual Report 2002 | ATI
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share amounts)
For the Years Ended December 31, 2002 2001 2000
=========================================================================================================
SALES $ 1,907.8 $ 2,128.0 $ 2,460.4
- ---------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,744.5 1,862.3 1,998.5
Selling and administrative expenses 188.3 198.8 203.7
Restructuring costs 42.8 74.2 29.5
- ---------------------------------------------------------------------------------------------------------
Income (loss) before interest, other income and income taxes (67.8) (7.3) 228.7
Interest expense, net 34.3 29.3 34.4
Other income (expense), net (1.7) 0.2 14.5
- ---------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (103.8) (36.4) 208.8
Income tax provision (benefit) (38.0) (11.2) 76.3
- ---------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (65.8) $ (25.2) $ 132.5
- ---------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.82) $ (0.31) $ 1.60
=========================================================================================================
The accompanying notes are an integral part of these statements.
ATI | Annual Report 2002 | 29
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
DECEMBER 31, December 31,
2002 2001
===============================================================================================================
ASSETS
Cash and cash equivalents $ 59.4 $ 33.7
Accounts receivable, net 239.3 274.6
Inventories, net 409.0 508.4
Income tax refunds 51.9 48.5
Deferred income taxes 20.8 33.5
Prepaid expenses and other current assets 32.0 27.4
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 812.4 926.1
Property, plant and equipment, net 757.6 828.9
Cost in excess of net assets acquired 194.4 188.4
Deferred pension asset 165.1 --
Prepaid pension cost -- 632.9
Deferred income taxes 85.4 --
Other assets 78.3 66.9
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,093.2 $2,643.2
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 171.3 $ 155.3
Accrued liabilities 161.0 168.2
Short-term debt and current portion of long-term debt 9.7 9.2
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 342.0 332.7
Long-term debt 509.4 573.0
Accrued postretirement benefits 496.4 506.1
Pension liabilities 216.0 35.8
Deferred income taxes -- 153.7
Other long-term liabilities 80.6 97.2
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,644.4 1,698.5
===============================================================================================================
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 at 2002 and 2001; outstanding - 80,634,344 shares at 2002
and 80,314,624 shares at 2001 9.9 9.9
Additional paid-in capital 481.2 481.2
Retained earnings 835.1 957.5
Treasury stock: 18,317,146 shares at 2002 and 18,636,866 shares at 2001 (469.7) (478.2)
Accumulated other comprehensive loss, net of tax (407.7) (25.7)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 448.8 944.7
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,093.2 $2,643.2
===============================================================================================================
The accompanying notes are an integral part of these statements.
30 | Annual Report 2002 | ATI
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
For the Years Ended December 31, 2002 2001 2000
===============================================================================================
OPERATING ACTIVITIES:
Net Income (loss) $ (65.8) $ (25.2) $ 132.5
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 90.0 98.6 99.7
Non-cash restructuring costs and asset write-offs 39.2 79.7 30.8
Deferred income taxes 25.6 24.5 57.8
Gains on sales of investments and businesses (2.6) (2.8) (11.6)
Change in operating assets and liabilities:
Inventories 99.4 67.9 (20.4)
Accounts receivable 35.6 47.1 15.9
Accrued liabilities (22.6) (49.9) (61.5)
Accounts payable 16.5 (12.5) (3.6)
Deferred pension asset (4.2) (49.0) (89.8)
Accrued income taxes (3.4) (48.5) 0.2
Other (3.5) (7.1) (14.5)
- -----------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 204.2 122.8 135.5
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (48.7) (104.2) (60.2)
Disposals of property, plant and equipment 9.2 4.3 5.2
Proceeds from sales of businesses and investments 2.4 17.9 17.0
Purchases of businesses and investment in ventures -- (0.5) (28.1)
Other (2.7) (2.5) (3.9)
- -----------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (39.8) (85.0) (70.0)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under credit facilities (73.1) (266.6) 195.1
Dividends paid (53.2) (64.2) (66.0)
Payments of long-term debt and capital leases (12.4) (0.7) (1.4)
Issuance of Allegheny Technologies 8.375% Notes, net -- 292.5 --
Borrowings of other long-term debt -- 11.5 --
Purchases of common stock -- (3.0) (221.0)
Exercises of stock options -- 0.2 3.3
- -----------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES (138.7) (30.3) (90.0)
- -----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25.7 7.5 (24.5)
Cash and cash equivalents at beginning of year 33.7 26.2 50.7
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 59.4 $ 33.7 $ 26.2
===============================================================================================
Amounts presented on the Consolidated Statements of Cash Flows may not agree to
the corresponding changes in balance sheet items due to the accounting for
purchases and sales of businesses and the effects of foreign currency
translation.
The accompanying notes are an integral part of these statements.
ATI | Annual Report 2002 | 31
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions except per share amounts)
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income (Loss) Equity
================================================================================================================================
BALANCE, DECEMBER 31, 1999 $ 9.9 $ 481.0 $ 994.5 $ (288.7) $ 3.5 $1,200.2
- --------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 132.5 -- -- 132.5
Other comprehensive income, net of tax:
Foreign currency translation losses -- -- -- -- (19.4) (19.4)
Change in unrealized gains on
securities -- -- -- -- (3.7) (3.7)
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- 132.5 -- (23.1) 109.4
Cash dividends on common stock
($0.80 per share) -- -- (66.0) -- -- (66.0)
Purchase of common stock -- -- -- (221.0) -- (221.0)
Employee stock plans -- 0.2 (11.0) 27.4 -- 16.6
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 9.9 481.2 1,050.0 (482.3) (19.6) 1,039.2
================================================================================================================================
Net loss -- -- (25.2) -- -- (25.2)
Other comprehensive loss, net of tax:
Foreign currency translation losses -- -- -- -- (0.2) (0.2)
Unrealized losses on energy, raw
material and currency hedges -- -- -- -- (2.2) (2.2)
Change in unrealized gains on
securities -- -- -- -- (3.7) (3.7)
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- (25.2) -- (6.1) (31.3)
Cash dividends on common stock
($0.80 per share) -- -- (64.2) -- -- (64.2)
Purchase of common stock -- -- -- (3.0) -- (3.0)
Employee stock plans -- -- (3.1) 7.1 -- 4.0
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 9.9 481.2 957.5 (478.2) (25.7) 944.7
================================================================================================================================
Net loss -- -- (65.8) -- -- (65.8)
Other comprehensive income
(loss), net of tax:
Minimum pension liability adjustment -- -- -- -- (406.4) (406.4)
Foreign currency translation gains -- -- -- -- 16.6 16.6
Unrealized gains on energy, raw
material and currency hedges -- -- -- -- 7.4 7.4
Change in unrealized gains on
securities -- -- -- -- 0.4 0.4
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- (65.8) -- (382.0) (447.8)
Cash dividends on common stock
($0.66 per share) -- -- (53.2) -- -- (53.2)
Employee stock plans -- -- (3.4) 8.5 -- 5.1
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 9.9 $ 481.2 $ 835.1 $ (469.7) $ (407.7) $ 448.8
================================================================================================================================
The accompanying notes are an integral part of these statements.
32 | Annual Report 2002 | ATI
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
ALLEGHENY TECHNOLOGIES INCORPORATED
We have audited the accompanying consolidated balance sheets of Allegheny
Technologies Incorporated and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Allegheny Technologies Incorporated and subsidiaries at December 31, 2002 and
2001, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, in 2002 the Company
changed its method of accounting for goodwill and other intangible assets.
/s/ ERNST & YOUNG LLP
January 17, 2003
ATI | Annual Report 2002 | 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Principles of Consolidation
The consolidated financial statements include the accounts of Allegheny
Technologies Incorporated and its subsidiaries, including the Chinese joint
venture known as Shanghai STAL Precision Stainless Steel Co., LTD ("STAL"), in
which the Company has a 60% interest. The remaining 40% interest in STAL is
owned by Baosteel Group, a state authorized investment company whose equity
securities are publicly traded in the People's Republic of China. The financial
results of STAL are consolidated into the Company's operating results with the
40% interest of the Company's minority partner recognized on the balance sheet
in other long-term liabilities. Investments in which the Company exercises
significant influence, but which it does not control (generally a 20% to 50%
ownership interest) are accounted for under the equity method of accounting.
Significant intercompany accounts and transactions have been eliminated. Unless
the context requires otherwise, "Allegheny Technologies" and the "Company" refer
to Allegheny Technologies Incorporated and its subsidiaries.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates. Management believes that the
estimates are reasonable.
Cash Equivalents and Investments
Cash equivalents are highly liquid investments valued at cost, which
approximates fair value, acquired with original maturity of three months or
less.
The Company's investments in debt and equity securities are classified
as available-for-sale and are reported at fair values, with net unrealized
appreciation and depreciation on investments reported as a component of
accumulated other comprehensive income.
Accounts Receivable
Accounts receivable are presented net of a reserve for doubtful accounts of
$10.1 million at December 31, 2002 and $12.3 million at December 31, 2001. The
Company markets its products to a diverse customer base, principally throughout
the United States. Trade credit is extended based upon evaluations of each
customer's ability to perform its obligations, which are updated periodically.
Accounts receivable reserves are determined based upon an aging of accounts and
a review for collectibility of specific accounts.
Inventories
Inventories are stated at the lower of cost (last-in, first-out (LIFO),
first-in, first-out (FIFO), and average cost methods) or market, less progress
payments. Costs include direct material, direct labor and applicable
manufacturing and engineering overhead, and other direct costs. Most of the
Company's inventory is valued utilizing the LIFO costing methodology. Inventory
of the Company's non-U.S. operations is valued using average cost or FIFO
methods.
The Company evaluates product lines on a quarterly basis to identify
inventory values that exceed estimated net realizable value. The calculation of
a resulting reserve, if any, is recognized as an expense in the period that the
need for the reserve is identified. It is the Company's general policy to
write-down to scrap value any inventory that is identified as obsolete and any
inventory that has aged or has not moved in more than twelve months. In some
instances this criterion is up to twenty-four months.
Long-Lived Assets
Property, plant and equipment are recorded at cost. The principal method of
depreciation adopted for all property placed into service after July 1, 1996 is
the straight-line method. For buildings and equipment acquired prior to July 1,
1996, depreciation is computed using a combination of accelerated and
straight-line methods. Significant enhancements that extend the lives of
property and equipment are capitalized. Costs related to repairs and maintenance
are charged to expense in the year incurred. The cost and related accumulated
depreciation of property and equipment retired or disposed of are removed from
the accounts and any related gains or losses are included in income.
34 | Annual Report 2002 | ATI
The Company monitors the recoverability of the carrying value of its
long-lived assets. An impairment charge is recognized when the expected net
undiscounted future cash flows from an asset's use (including any proceeds from
disposition) are less than the asset's carrying value and the asset's carrying
value exceeds its fair value. 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")
which superseded the existing accounting standards. Although retaining many of
the fundamental recognition and measurement provisions of the existing
accounting standards, the new rules significantly changed the criteria that
would have to be met to classify an asset as held-for-sale. This distinction is
important because assets to be disposed of by sale are stated at the lower of
their fair values or carrying amounts and depreciation is no longer recognized.
SFAS 144 also expands the types of dispositions which qualify for discontinued
operations disclosure treatment and requires expected future operating losses
from discontinued operations to be displayed in discontinued operations in the
period in which the losses are incurred, rather than as of a measurement date.
Effective January 1, 2002, the Company adopted this statement.
Cost in Excess of Net Assets Acquired
At December 31, 2002, the Company had $194.4 million of goodwill on its balance
sheet. Of the total, $126.6 million related to the Flat-Rolled Products segment,
$57.1 million related to the High Performance Metals segment, and $10.7 million
related to the Industrial Products segment. Effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are reviewed
annually for impairment, or more frequently if impairment indicators arise. In
addition, SFAS 142 changes the test for goodwill impairment. The new impairment
test for goodwill requires a comparison of the fair value of each reporting unit
that has goodwill associated with its operations with its carrying amount,
including goodwill. If this comparison reflects impairment, then the loss would
be measured as the excess of recorded goodwill over its implied fair value.
Implied fair value is the excess of the fair value of the reporting unit over
the fair value of all recognized and unrecognized assets and liabilities.
During the 2002 second quarter, the Company completed its initial
impairment evaluation for the January 1, 2002 transition to SFAS 142 and no
impairment was determined to exist. The evaluation of goodwill included
estimating the fair market value of each of the reporting units which have
goodwill associated with their operations using discounted cash flow and
multiples of cash earnings valuation techniques, plus valuation comparisons to
recent public sale transactions of similar businesses, if any. These valuation
methods require the Company to make estimates and assumptions regarding future
cash flows, profitability, and the cost of capital. Although the Company
believes that the estimates and assumptions used were reasonable, actual results
could differ from those estimates and assumptions. In accordance with SFAS 142,
the Company evaluates goodwill annually for impairment. The Company will perform
this test in the fourth quarter each year, beginning in the 2002 fourth quarter.
Based on the 2002 annual evaluation, no impairment of goodwill was determined to
exist.
Effective January 1, 2002, in accordance with the SFAS 142
pronouncement, the Company discontinued amortizing goodwill. Prior to 2002, cost
in excess of net assets acquired related to businesses purchased after November
1970 was amortized on a straight-line basis over periods not exceeding 40 years.
Goodwill amortization expense was $5.8 million and $5.7 million in 2001 and
2000, respectively, or $0.04 per diluted share. Had the Company applied the
non-amortization provisions of SFAS 142 in prior years, the reported results of
operations for the year ended December 31, 2001 would have been a net loss of
$21.2 million, or $0.27 per diluted share, and for the year ended December 31,
2000, the reported results of operations would have been net income of $136.1
million, or $1.64 per diluted share. At December 31, 2002 and 2001, accumulated
amortization related to goodwill was $34.2 million.
Environmental
Costs that mitigate or prevent future environmental contamination or
extend the life, increase the capacity or improve the safety or efficiency of
property utilized in current operations are capitalized. Other costs that relate
to current operations or an existing condition caused by past operations are
expensed. Environmental liabilities are recorded when the Company's liability is
probable and the costs are reasonably estimable, but generally not later than
the completion of the feasibility study or the Company's recommendation of a
remedy or commitment to an appropriate plan of action. The accruals are reviewed
periodically and, as investigations and remediations proceed, adjustments are
made as necessary. Accruals for losses from environmental remediation
obligations do not take into account the effects of inflation, and anticipated
expenditures are not discounted to their present value. The accruals are not
reduced by possible recoveries from insurance carriers or other third parties,
but do reflect allocations among potentially responsible parties ("PRPs") at
Federal Superfund sites or similar state-
ATI | Annual Report 2002 | 35
managed sites after an assessment is made of the likelihood that such parties
will fulfill their obligations at such sites and after appropriate cost-sharing
or other agreements are entered. The measurement of environmental liabilities by
the Company is based on currently available facts, present laws and regulations,
and current technology. Such estimates take into consideration the Company's
prior experience in site investigation and remediation, the data concerning
cleanup costs available from other companies and regulatory authorities, and the
professional judgment of the Company's environmental experts in consultation
with outside environmental specialists, when necessary.
Derivative Financial Instruments and Hedging
As part of its risk management strategy the Company, from time to time,
purchases futures and swap 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, and energy costs. The 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 and energy payments. The majority of these contracts mature within one
year. Effective January 1, 2001, the Company began accounting for all of these
contracts as hedges under Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
Changes in the fair value of these contracts are recognized as a component of
other comprehensive income (loss) in stockholders' equity until the hedged item
is recognized in the statement of operations within cost of sales. If a portion
of the contract is ineffective as a hedge of the underlying exposure, the change
in fair value related to the ineffective portion is immediately recognized as
income or expense in the statement of operations within cost of sales.
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 are designated as hedges of the variability in cash
flows of a portion of the forecasted future export sales transactions which
otherwise would expose the Company to foreign currency risk. Effective January
1, 2001, the Company began accounting for all of these contracts as hedges under
SFAS 133. Changes in the fair value of these contracts are recognized as a
component of other comprehensive income (loss) in stockholders' equity until the
hedged item is recognized in the statement of operations. If a portion of the
contract is ineffective as a hedge of the underlying exposure, the change in
fair value related to the ineffective portion is immediately recognized as
income or expense in the statement of operations.
Derivative interest rate contracts are used from time to time to manage
the Company's exposure to interest rate risks. For example, in 2002 the Company
entered into interest rate swap contracts for the receipt of fixed rate amounts
in exchange for floating rate interest payments over the life of the contracts
without an exchange of the underlying principal amount. These contracts are
designated as fair value hedges. As a result, changes in the fair value of these
swap contracts and the underlying fixed rate debt are recognized in the
statement of operations.
In general, hedge effectiveness is determined by examining the
relationship between offsetting changes in fair value or cash flows attributable
to the item being hedged and the financial instrument being used for the hedge.
Effectiveness is measured utilizing regression analysis and other techniques, to
determine whether the change in the fair market value or cash flows of the
derivative exceeds the change in fair value or cash flow of the hedged item.
Calculated ineffectiveness, if any, is immediately recognized on the statement
of operations.
Foreign Currency Translation
Assets and liabilities of international operations are translated into U.S.
dollars using year-end exchange rates, while revenues and expenses are
translated at average exchange rates during the period. The resulting net
translation adjustments are recorded as a component of accumulated other
comprehensive income (loss) in stockholders' equity.
Revenue Recognition
Revenue is recognized when title passes or as services are rendered.
Research and Development
Company funded research and development costs were $12.0 million in 2002, $11.3
million in 2001 and $13.6 million in 2000 and were expensed as incurred.
Customer funded research and development costs were $2.7 million in 2002, $2.0
million in 2001 and $2.0 million in 2000. Customer funded research and
development costs are recognized in the consolidated statement of operations in
accordance with revenue recognition policies.
36 | Annual Report 2002 | ATI
Income Taxes
Deferred income taxes are recognized based upon the future income tax effects
(which is based upon enacted tax laws and rates) of the differences that arise
in the carrying amount of assets and liabilities for financial reporting and tax
purposes. The Company evaluates the realizability of deferred tax assets using
historical earnings, estimates of future operating results, and potential tax
planning strategies. Valuation allowances are established when it is estimated
that it is more likely than not that the tax benefit of the deferred tax asset
will not be realized.
Net Income (Loss) Per Common Share
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted income per share is calculated by using the weighted
average number of common shares outstanding adjusted to include the potentially
dilutive effect, if any, of outstanding stock options.
Stock-based Compensation
The Company accounts for its stock option plans and other stock-based
compensation in accordance with APB Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Under APB Opinion No. 25, for awards
which vest without a performance-based contingency, no compensation expense is
recognized when the exercise price of the Company's employee stock options
equals the market price of the underlying stock at the date of the grant.
Compensation expense for fixed stock-based awards, generally awards of
non-vested stock, is recognized over the associated employment service period
based on the fair value of the stock at the date of the grant. The Company also
has performance-based stock award programs which are accounted for under the
variable plan rules of APB Opinion No. 25. Compensation expense for these awards
of stock, which are earned based on performance-based criteria, is recognized at
the measurement date based on the stock price at the end of the performance
period, with compensation expense recognized at interim dates based on
performance criteria achieved and the Company's stock price at the interim
dates.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
(In millions, except per share amounts) 2002 2001 2000
============================================================================================
Net income (loss) as reported $(65.8) $(25.2) $132.5
Stock-based compensation under SFAS 123 fair value method, net
of related tax effects (3.8) (5.0) (7.1)
- --------------------------------------------------------------------------------------------
Pro forma net income (loss) $(69.6) $(30.2) $125.4
- --------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic and diluted - as reported $(0.82) $(0.31) $ 1.60
- --------------------------------------------------------------------------------------------
Basic and diluted - pro forma $(0.86) $(0.38) $ 1.51
- --------------------------------------------------------------------------------------------
New Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). Under SFAS 143,
obligations associated with the retirement of tangible long-lived assets, such
as landfill and other facility closure costs, would be capitalized and amortized
to expense over an asset's useful life using a systematic and rational
allocation method. This standard is effective for fiscal years beginning after
June 15, 2002. The Company's adoption of SFAS 143 on January 1, 2003 will be
reported in the first quarter 2003 statement of operations as a cumulative
effect of a change in accounting principle, resulting in a charge of
approximately $1.3 million, net of tax, or $0.02 per share, principally for
asset retirement obligations related to landfills.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). This statement establishes accounting guidelines for
the recognition and measurement of liabilities for costs associated with exit or
disposal activities initially at fair value in the period in which the
liabilities are incurred, rather than at the date of a commitment to an exit or
disposal plan. This standard is effective January 1, 2003 for all exit or
disposal activities initiated after that date. The Company adopted this standard
at January 1, 2003. Subsequent to adoption, this standard may affect the periods
in which costs are recognized for workforce reductions or facility closures,
although the ultimate amount of costs recognized would be the same. SFAS 146 has
no effect on the Company's previously announced restructuring charges.
ATI | Annual Report 2002 | 37
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN 45"). This interpretation
changes the accounting recognition and disclosure requirements for certain
guarantees issued on behalf of other parties which represent either a contingent
or a non-contingent obligation for the guarantor to make payments or to perform
specified activities. Effective January 1, 2003, FIN 45 mandates the separate
fair value recognition of guarantees entered into on or after that date. At
December 31, 2002, the Company has no material guarantees as defined in FIN 45.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS 123 to allow multiple methods of reporting the
accounting transition for companies electing to adopt the recognition provisions
of SFAS 123 for fair valuing stock-based compensation. As permitted by
accounting standards, the Company has elected to continue the use of the
intrinsic value method of accounting for stock-based compensation under APB
Opinion No. 25.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is
one where the contractual or ownership interests in an entity change with
changes in the entity's net asset value. This interpretation requires the
consolidation of a VIE by the primary beneficiary, and also requires disclosure
about VIEs where an enterprise has a significant variable interest but is not
the primary beneficiary. At the effective date, the Company has not entered into
any VIEs.
Reclassifications
Certain amounts from prior years have been reclassified to conform with the 2002
presentation.
NOTE 2. INVENTORIES --
DECEMBER 31, December 31,
(In millions) 2002 2001
===================================================================================================
Raw materials and supplies $ 49.4 $ 85.9
Work-in-process 361.0 419.6
Finished goods 77.9 83.0
- ---------------------------------------------------------------------------------------------------
Total inventories at current cost 488.3 588.5
Less allowances to reduce current cost values to LIFO basis (74.7) (77.2)
Progress payments (4.6) (2.9)
===================================================================================================
Total inventories $409.0 $508.4
===================================================================================================
Inventories, before progress payments, determined on the last-in,
first-out method were $343.7 million at December 31, 2002 and $420.2 million at
December 31, 2001. The remainder of the inventory was determined using the
first-in, first-out and average cost methods. These inventory values do not
differ materially from current cost.
During 2002 and 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 decrease
the net loss by $2.4 million in 2002 and by $6.8 million in 2001.
38 | Annual Report 2002 | ATI
NOTE 3. DEBT --
Debt at December 31, 2002 and 2001 was as follows:
(In millions) 2002 2001
=============================================================================================
Allegheny Technologies $300 million 8.375% Notes due 2011, net (a) $ 312.3 $ 292.5
Allegheny Ludlum 6.95% debentures, due 2025 150.0 150.0
Domestic Bank Group $250 million unsecured credit agreement -- --
Foreign credit agreements 26.7 25.6
Industrial revenue bonds, due through 2007 21.5 22.5
Commercial paper -- 70.0
Capitalized leases and other 8.6 21.6
- ---------------------------------------------------------------------------------------------
Total short-term and long-term debt 519.1 582.2
Short-term debt and current portion of long-term debt (9.7) (9.2)
- ---------------------------------------------------------------------------------------------
Total long-term debt $ 509.4 $ 573.0
=============================================================================================
(a) Includes fair value adjustments for interest rate swap contracts of $18.7
million at December 31, 2002.
Interest expense was $37.3 million in 2002, $30.7 million in 2001 and
$37.6 million in 2000. Interest and commitment fees paid were $37.5 million in
2002, $31.1 million in 2001 and $38.0 million in 2000.
Scheduled maturities of borrowings during the next five years are $9.7
million in 2003, $27.3 million in 2004, $0.6 million in 2005, $0.6 million in
2006 and $10.1 million in 2007.
In December 2001, the Company issued $300 million of 8.375% Notes due
December 15, 2011, in a transaction exempt from registration pursuant to Rule
144A under the Securities Act of 1933, as amended. During 2002, holders of the
Notes exchanged the outstanding Notes for new Notes with substantially identical
terms, but which are registered under the Securities Act. Interest on the Notes
is payable semi-annually, on June 15 and December 15, and is subject to
adjustment under certain circumstances. These Notes contain default provisions
with respect to default for the following, among other things: nonpayment of
interest on the Notes for 30 days, default in payment of principal when due, or
failure to cure the breach of a covenant as provided in the Notes. Any violation
of the default provision could result in the requirement to immediately repay
the borrowings. These Notes are presented on the balance sheet net of issuance
costs of $6.4 million, which are being amortized over the life of the debt.
At December 31, 2002, the Company had entered into "receive fixed, pay
floating" arrangements for $150 million related to the 8.375% ten-year Notes
which effectively convert this portion of the Notes to variable rate debt. The
result of the "receive fixed, pay floating" arrangements was a decrease in
interest expense of $4.9 million for the year ended December 31, 2002, compared
to the fixed interest expense of the ten-year Notes. At December 31, 2002, the
adjustment of these swap contracts to fair market value resulted in the
recognition of an asset of $18.7 million on the balance sheet, included in other
assets, with an offsetting increase in long-term debt. Some of the swap
contracts contain a provision which allows the swap counterparty to terminate
the swap contracts in the event the Company's senior unsecured debt credit
rating falls below investment grade. The Company also has the ability to
terminate the swaps and receive (pay) the asset (liability) fair value of the
swaps.
In December 2002, the Company reached an agreement with a group of banks
("Bank Group") to renew the short-term portion of its unsecured credit facility,
revise the amount of available borrowings under the overall credit facility, and
revise related financial covenants. This credit agreement revised a $325 million
credit facility established in December 2001, which was subsequently amended in
August 2002 to revise financial covenants. As amended, the Bank Group unsecured
credit agreement provides for borrowings of up to $250 million on a revolving
credit basis, consisting of a $100 million short-term credit facility which
expires in December 2003, and a $150 million credit facility which expires in
December 2006. The interest is payable based upon London Interbank Offered Rates
(LIBOR) plus a spread, which can vary depending on the Company's credit rating.
The Company also has the option of using other alternative interest rate bases.
The agreement has various covenants that limit the Company's ability to dispose
of assets and merge with another corporation. The agreement also contains
covenants that require the Company to maintain various financial statement
ratios, including a covenant requiring the maintenance of a specified minimum
ratio of consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") to gross interest expense ("Interest Coverage Ratio")
and a second covenant that requires the Company to not exceed a specified
maximum ratio of total consolidated indebtedness to total capitalization
("Leverage Ratio"), both as defined by the agreement. The Company was compliant
with these covenants at December 31, 2002 and the applicable covenants during
2002.
ATI | Annual Report 2002 | 39
The following table summarizes the Interest Coverage Ratio requirement
which, in accordance with the agreement, is calculated for the preceding twelve
month period from the financial statement date:
December 31, 2002 through December 31, 2003 2.0 times EBITDA
After December 31, 2003 through June 30, 2004 2.5 times EBITDA
After June 30, 2004 through December 31, 2004 3.0 times EBITDA
Thereafter 3.5 times EBITDA
The definition of EBITDA excludes up to $10 million of cash costs
related to workforce reductions in 2002, includes the add back of non-cash
pension expense or the deduction of non-cash pension income calculated in
accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87"),
and excludes postretirement benefits expenses that are funded by Voluntary
Employee Benefit Association (VEBA) trusts.
The Leverage Ratio requires that total consolidated indebtedness be not
more than 50% of total capitalization. The Leverage Ratio excludes any changes
to capitalization resulting from non-cash balance sheet adjustments due to
changes in net pension assets or liabilities recognized in accordance with the
minimum liability provisions of SFAS 87. The definitions of total indebtedness
and total capitalization allow for the deduction of up to $50 million of cash
and cash equivalent balances held in excess of $25 million.
At December 31, 2002, EBITDA (calculated in accordance with the credit
agreement) for the prior twelve month period was 2.3 times gross interest
expense compared to a required ratio of at least 2.0 times gross interest
expense. At December 31, 2002, the Leverage Ratio was 38% compared to a required
ratio of not more than 50% of total capitalization. The Leverage Ratio has the
effect of limiting the total amount the Company may borrow as well as the amount
of cash dividends which may be paid; at December 31, 2002, the Leverage Ratio
would limit the amount of additional borrowings as well as dividends to
approximately $300 million.
The Company had no borrowings outstanding under these revolving
unsecured credit agreements during 2002 or at December 31, 2002 or 2001.
During the fourth quarter of 2000, the Company implemented a commercial
paper program. There were no borrowings outstanding under the commercial paper
program at December 31, 2002. The weighted average interest rate for the
outstanding commercial paper was 3.09% at December 31, 2001. In July 2002
Standard & Poor's Ratings Services lowered its long-term and short-term
corporate credit ratings for the Company's debt to BBB from BBB+ and to A-3 from
A-2, respectively. In October 2002 Moody's Investor Service lowered its
long-term corporate credit ratings for the Company's debt to Baa2 from Baa1.
The Company's subsidiaries also maintain credit agreements with various
foreign banks, which provide for borrowings of up to approximately $57.8
million. At December 31, 2002, the Company had approximately $26 million of
available borrowing capacity under these foreign credit agreements. These
agreements provide for annual facility fees of up to 0.20%.
Borrowings outstanding under the credit agreements are unsecured.
Commitments under separate standby letters of credit outstanding were $40.1
million at December 31, 2002 and $49.6 million at December 31, 2001.
The Company has no off-balance sheet financing relationships with
variable interest entities, structured finance entities, or any other
unconsolidated entities. At December 31, 2002, the Company has not guaranteed
any third-party indebtedness.
NOTE 4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION --
Cash and cash equivalents at December 31, 2002 and 2001 were as follows:
(In millions) 2002 2001
=====================================================================================================
Cash $16.1 $19.1
Other short-term investments, at cost which approximates market 43.3 14.6
- -----------------------------------------------------------------------------------------------------
Total cash and cash equivalents $59.4 $33.7
=====================================================================================================
40 | Annual Report 2002 | ATI
The estimated fair value of financial instruments at December 31, 2002 and 2001
was as follows:
(In millions) 2002 2001
====================================================================================================================================
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
====================================================================================================================================
Cash and cash equivalents $59.4 $59.4 $33.7 $33.7
Other assets -- Interest rate swap agreements 18.7 18.7 -- --
Debt:
Allegheny Technologies $300 million 8.375% Notes
due 2011, net (a) 312.3 315.7 292.5 295.3
Allegheny Ludlum 6.95% debentures, due 2025 150.0 126.0 150.0 125.0
Foreign credit agreements 26.7 26.7 25.6 25.6
Industrial revenue bonds, due through 2007 21.5 21.5 22.5 22.5
Commercial paper -- -- 70.0 70.0
Capitalized leases and other 8.6 8.6 21.6 21.6
====================================================================================================================================
(a) Includes fair value adjustments for interest rate swap contracts of $18.7
million at December 31, 2002.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount on the balance sheet
approximates fair value.
Interest rate swap agreements: The fair values were obtained from the
agreement counterparties.
Short-term and long-term debt: The fair values of the Allegheny
Technologies 8.375% Notes and the Allegheny Ludlum 6.95% debentures were based
on quoted market prices. The carrying amounts of the other short-term and
long-term debt approximate fair value.
Accounts receivable are presented net of a reserve for doubtful accounts
of $10.1 million at December 31, 2002 and $12.3 million at December 31, 2001.
During 2002, the Company recognized expense of $1.8 million to increase the
reserve for doubtful accounts and wrote-off $4.0 million of uncollectible
accounts, which reduced the reserve. During 2001, the Company recognized expense
of $10.1 million to increase the reserve for doubtful accounts and wrote-off
$5.2 million of uncollectible accounts, which reduced the reserve.
Property, plant and equipment at December 31, 2002 and 2001 were as
follows:
<Table>
<Caption>
(In millions) 2002 2001
================================================================================
Land $29.5 $30.6
Buildings 228.6 219.4
Equipment and leasehold improvements 1,521.5 1,534.4
- --------------------------------------------------------------------------------
1,779.6 1,784.4
Accumulated depreciation and amortization (1,022.0) (955.5)
- --------------------------------------------------------------------------------
Total property, plant and equipment $757.6 $828.9
================================================================================
</Table>
Depreciation and amortization for the years ended December 31, 2002,
2001 and 2000 was as follows:
(In millions) 2002 2001 2000
=====================================================================================
Depreciation of property, plant & equipment $85.4 $88.4 $89.8
Amortization of goodwill -- 5.8 5.7
Software and other amortization 4.6 4.4 4.2
- -------------------------------------------------------------------------------------
Total depreciation and amortization $90.0 $98.6 $99.7
=====================================================================================
In accordance with SFAS 142, amortization of goodwill was discontinued
January 1, 2002.
Accrued liabilities included salaries and wages of $38.4 million and
$33.8 million at December 31, 2002 and 2001, respectively.
ATI | Annual Report 2002 | 41
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) --
The components of accumulated other comprehensive income (loss), net of tax, at
December 31, 2002 and 2001 were as follows:
Total
Foreign Net Unrealized Minimum Accumulated
Currency Gains (losses) Pension Net Unrealized Other
Translation On Derivative Liability Gains (Iosses) Comprehensive
(In millions) Adjustments Instruments Adjustments On Investments Income (loss)
===================================================================================================================
Balance, December 31, 1999 $(3.6) $-- $ -- $ 7.1 3.5
- -------------------------------------------------------------------------------------------------------------------
Amounts arising during the year (21.7) -- -- 3.8 (17.9)
Amounts realized 2.3 -- -- (7.5) (5.2)
- -------------------------------------------------------------------------------------------------------------------
Net change (19.4) -- -- (3.7) (23.1)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 (23.0) -- -- 3.4 (19.6)
Amounts arising during the year (0.3) (2.2) -- (1.4) (3.9)
Amounts realized 0.1 -- -- (2.3) (2.2)
- -------------------------------------------------------------------------------------------------------------------
Net change (0.2) (2.2) -- (3.7) (6.1)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 (23.2) (2.2) -- (0.3) (25.7)
Amounts arising during the year 16.6 7.4 (406.4) 0.4 (382.0)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $(6.6) $5.2 $(406.4) $0.1 $(407.7)
===================================================================================================================
Other comprehensive income (loss) amounts are net of income tax expense
(benefit) at the effective tax rate for each year.
NOTE 6. STOCKHOLDERS' EQUITY --
Preferred Stock
Authorized preferred stock may be issued in one or more series, with
designations, powers and preferences as shall be designated by the Board of
Directors. At December 31, 2002, there were no shares of preferred stock issued.
Common Stock
During 2000, the Company adopted the Allegheny Technologies Incorporated 2000
Incentive Plan (the "Incentive Plan"). Options granted under the Incentive Plan,
and predecessor plans, have been granted at not less than market prices on the
dates of grant. Options granted under the Incentive Plan have a maximum term of
10 years. Vesting of stock options granted under the Incentive Plan generally
occurs in three annual increments, beginning on the first anniversary of the
grant date. At December 31, 2002, approximately 4.2 million shares of common
stock were available for future awards under the Incentive Plan.
The Company accounts for its stock option plans in accordance with APB
Opinion 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Under APB Opinion 25, for awards which vest without a
performance-based contingency, no compensation expense for stock option plans is
recognized because the exercise price of the Company's employee stock options
equals the market price of the underlying stock at the date of the grant. If
compensation cost for these stock option awards had been determined using the
fair-value method prescribed by FASB Statement No. 123, "Accounting for
Stock-based Compensation," ("SFAS 123") net loss would have increased by $3.8
million (or $0.04 per diluted share), $5.0 million (or $0.07 per diluted share)
and net income would have been reduced by $7.1 million (or $0.09 per diluted
share) for the years ended December 31, 2002, 2001 and 2000, respectively. Under
SFAS 123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
2002 2001 2000
======================================================================================================
Expected dividend yield 4.4% 4.7% 4.3%
Expected volatility 35% 39% 36%
Risk-free interest rate 4.0% 4.8% 5.5%
Expected lives 8.0 8.0 8.0
Weighted average fair value of options granted during year $2.95 $4.89 $5.38
======================================================================================================
42 | Annual Report 2002 | ATI
Stock option transactions under the Company's employee plans for the
years ended December 31, 2002, 2001 and 2000 are summarized as follows:
(shares in thousands) 2002 2001 2000
========================================================================================================================
WEIGHTED Weighted Weighted
NUMBER OF AVERAGE Number of Average Number of Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
========================================================================================================================
Outstanding, beginning of year 5,077 $27.88 4,480 $30.26 4,870 $29.66
Granted 3,141 9.04 847 17.08 304 18.59
Exercised -- -- (28) 14.53 (195) 16.95
Cancelled (299) 28.07 (222) 30.75 (499) 27.86
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 7,919 $20.42 5,077 $27.88 4,480 $30.26
- ------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 4,190 $29.38 3,453 $32.10 2,318 $33.62
========================================================================================================================
Options outstanding at December 31, 2002 were as follows:
(shares in thousands)
==============================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
==============================================================================================================
Weighted Weighted Weighted
Average Average Average Value of Stock Options at
Range of Number of Remaining Exercise Number of Exercise December 31, 2002 (a)
Exercise Prices Shares Contractual Life Price Shares Price Exercisable Unexercisable
==============================================================================================================
$7.00-$10.00 2,338 9.8 $ 7.25 -- $-- $ 0 $ 0
10.01-15.00 562 8.9 12.86 130 14.44 0 0
15.01-20.00 1,362 8.5 17.38 403 18.16 0 0
20.01-30.00 1,819 6.7 21.78 1,819 21.78 0 0
30.01-40.00 838 5.0 36.30 838 36.30 0 0
40.01-50.00 1,000 3.9 43.84 1,000 43.84 0 0
- --------------------------------------------------------------------------------------------------------------
7,919 7.5 $20.42 4,190 $29.38 $ 0 $ 0
==============================================================================================================
(a) The value of stock options is calculated by subtracting the exercise
price per share from $6.13, which was the average of the high and low sales
prices of a share of Company Common Stock on the New York Stock Exchange on the
last business day of 2002.
The Company sponsors other stock-based compensation programs, which
resulted in compensation expense of $0.8 million in 2002, $1.2 million in 2001
and $10.2 million in 2000. These recognized amounts included reversals of $1.9
million in 2002 and $2.2 million in 2001 for adjustments to prior years
incentive compensation expenses based on changes to estimates of compensation
made at interim measurement dates. In 2002, the Company granted 174,418 shares
of non-vested stock with an aggregate grant date fair value of $2.7 million
which vests over a five year service period. Loans to employees in connection
with stock-based compensation programs were $11.2 million at December 31, 2002.
Stockholders' Rights Plan
Under the Company's stockholder rights plan, each share of Allegheny
Technologies common stock is accompanied by one right to purchase two
one-hundredths of a share of preferred stock for $100. Each two hundredths of a
share of preferred stock would be entitled to dividends and to vote on an
equivalent basis with one share of common stock. The rights are neither
exercisable nor separately transferable from shares of common stock unless a
party acquires or effects a tender offer for more than 15% of Allegheny
Technologies common stock. If a party acquired more than 15% of the Allegheny
Technologies common stock or acquired the Company in a business combination,
each right (other than those held by the acquiring party) would entitle the
holder to purchase common stock or preferred stock at a substantial discount.
The rights expire on March 12, 2008, and the Company's Board of Directors can
amend certain provisions of the plan or redeem the rights at any time prior to
heir becoming exercisable.
ATI | Annual Report 2002 | 43
NOTE 7. INCOME TAXES --
Income tax provision (benefit) was as follows:
(In millions) 2002 2001 2000
=====================================================================
Current:
Federal $ (64.1) $ (40.4) $ 7.8
State 0.1 0.5 5.7
Foreign 0.4 2.5 5.0
- ---------------------------------------------------------------------
Total (63.6) (37.4) 18.5
=====================================================================
Deferred:
Federal 21.0 25.9 55.1
State 4.6 0.3 2.7
- ---------------------------------------------------------------------
Total 25.6 26.2 57.8
=====================================================================
Income tax provision (benefit) $ (38.0) $ (11.2) $ 76.3
=====================================================================
In general, the Company is responsible for filing consolidated U.S.,
foreign and combined, unitary or separate state income tax returns. The Company
is responsible for paying the taxes relating to such returns, including any
subsequent adjustments resulting from the redetermination of such tax liability
by the applicable taxing authorities. Income taxes paid were $2.0 million, $3.4
million and $20.5 million in 2002, 2001, and 2000, respectively. The Company
received $45.6 million of income tax refunds in 2002 and has recognized $51.9
million of income taxes receivable at December 31, 2002 for refunds to be
received in 2003, utilizing recent net operating losses to recover income taxes
paid in prior years.
No provision has been made for U.S., state or additional foreign taxes
related to undistributed earnings of foreign subsidiaries which have been or are
intended to be permanently re-invested. It is not practical to estimate the
income tax expense or benefit that might be incurred if earnings were remitted
to the U.S.
Income (loss) before income taxes included income (loss) from domestic
operations of $(99.8) million in 2002, $(45.3) million in 2001 and $200.1
million in 2000.
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate:
Tax Provision (Benefit)
2002 2001 2000
=======================================================================================
Federal tax rate (35.0%) (35.0%) 35.0%
State and local income taxes, net of federal tax 0.8 2.7 1.1
benefit
Other (2.4) 1.5 0.4
- ---------------------------------------------------------------------------------------
Effective income tax rate (36.6%) (30.8%) 36.5%
=======================================================================================
The effective tax rate for 2002 was a larger benefit than 2001 primarily
due to a favorable settlement of issues related to prior years estimated taxes.
Deferred income taxes result from temporary differences in the
recognition of income and expense for financial and income tax reporting
purposes, and differences between the fair value of assets acquired in business
combinations accounted for as purchases for financial reporting purposes and
their corresponding tax bases. Deferred income taxes represent future tax
benefits or costs to be recognized when those temporary differences reverse. The
categories of assets and liabilities that have resulted in differences in the
timing of the recognition of income and expense at December 31, 2002 and 2001
were as follows:
44 | Annual Report 2002 | ATI
(In millions) 2002 2001
==========================================================================
Deferred income tax assets:
Postretirement benefits other than pensions $ 192.7 $ 200.0
Net operating loss state tax carryforwards 38.0 18.2
Deferred compensation and other benefit plans 20.4 30.2
Environmental reserves 15.9 18.9
Vacation accruals 9.2 11.9
Self-insurance reserves 9.8 11.0
Pension 6.6 --
Other items 34.8 21.9
- --------------------------------------------------------------------------
Gross deferred income tax assets 327.4 312.1
Valuation allowance for deferred tax asset (38.0) (18.2)
- --------------------------------------------------------------------------
Total deferred income tax assets 289.4 293.9
==========================================================================
Deferred income tax liabilities:
Pension -- 245.4
Bases of property, plant and equipment 141.0 150.0
Inventory valuation 19.7 --
Other items 22.5 18.7
- --------------------------------------------------------------------------
Total deferred income tax liabilities 183.2 414.1
==========================================================================
Net deferred income tax asset (liability) $ 106.2 $(120.2)
==========================================================================
At December 31, 2002 and December 31, 2001, the Company had a state
deterred tax asset resulting from net operating loss tax carryforwards of $38.0
million and $18.2 million, respectively A valuation allowance was established
for the full value of these net operating loss carryforwards since the Company
has concluded that it is more likely than not that these tax benefits would not
be realized. For most of these net operating loss carryforwards, expiration will
occur in 20 years and utilization of the tax benefit is limited to $2 million
per year. The increases in the net operating loss tax carryforward and the
related valuation allowance in 2002 is due to operating results.
Although realization is not assured, the Company has concluded that the
remaining deferred tax assets should be realized based upon its history of
earnings, expectations of future earnings, and potential tax planning
strategies, including possible asset sales.
In 2002, a minimum pension liability was recognized due to the value of
pension assets declining below the Company's accumulated benefit obligation. In
conjunction with this event, the Company reduced its deferred pension asset and
recorded deferred taxes of $252.0 million, which changed the deferred taxes for
the pension from a deferred tax liability of $245.4 million to a deferred tax
asset of $6.6 million. At December 31, 2002 and 2001, the balance sheet
composition of the Company's net deferred tax assets and liabilities was as
follows:
(In millions) 2002 2001
===================================================================
Net current asset $ 20.8 $ 33.5
Net noncurrent asset 85.4 --
Net noncurrent liability -- 153.7
- -------------------------------------------------------------------
Net deferred income tax asset (liability) $ 106.2 $(120.2)
===================================================================
ATI | Annual Report 2002 | 45
NOTE 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS --
The Company has defined benefit pension plans and defined contribution plans
covering substantially all employees. Benefits under the defined benefit pension
plans are generally based on years of service and/or final average pay. The
Company funds the pension plans in accordance with the requirements of the
Employee Retirement Income Security Act of 1974, as amended, and the Internal
Revenue Code.
The Company also sponsors several defined benefit postretirement plans
covering certain salaried and hourly employees. The plans provide health care
and life insurance benefits for eligible retirees. In certain plans, Company
contributions towards premiums are capped based on the cost as of a certain
date, thereby creating a defined contribution.
Components of pension expense (income) for the Company's defined benefit
plans and components of postretirement benefit expense included the following:
EXPENSE (INCOME)
===============================================================================================================================
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
===============================================================================================================================
(In millions) 2002 2001 2000 2002 2001 2000
===============================================================================================================================
Service cost -- benefits earned during the year $ 26.6 $ 22.9 $ 20.9 $ 7.4 $ 8.4 $ 7.9
Interest cost on benefits earned in prior years 123.7 113.5 114.2 42.7 43.4 42.5
Expected return on plan assets (174.7) (209.1) (228.4) (19.3) (20.6) (17.5)
Amortization of unrecognized transition asset (10.8) (24.1) (24.1) -- -- --
Amortization of prior service cost 26.1 19.3 13.7 (4.3) (4.5) (4.7)
Amortization of net actuarial (gain) loss 5.1 (0.6) (22.2) (1.5) (1.7) (2.2)
- -------------------------------------------------------------------------------------------------------------------------------
Excess pension (income) expense (4.0) (78.1) (125.9) 25.0 25.0 26.0
Curtailment and termination benefits (gain) loss -- 9.8 -- (1.7) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total retirement benefit (income) expense $ (4.0) $ (68.3) $(125.9) $ 23.3 $ 25.0 $ 26.0
===============================================================================================================================
In 2002, the Company recorded $1.7 million of non-cash income on the
curtailment of postretirement benefits for terminated employees related to work
force reductions in the Flat-Rolled Products segment. This amount is included in
restructuring costs in the statement of operations.
In 2001, the Company recorded curtailment and termination benefits
expense of $9.8 million related to employees of the Company's Houston, PA
stainless steel melt shop that was permanently idled during the fourth quarter.
Of this amount, $8.2 million related to curtailment charges and $1.6 million
related to a termination charge recorded in accordance with generally accepted
accounting principles. This amount is included in restructuring costs in the
statement of operations.
Actuarial assumptions used to develop the components of pension expense
(income) and postretirement benefit expense were as follows:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
======================================================================================================================
(In millions) 2002 2001 2000 2002 2001 2000
======================================================================================================================
Discount rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Rate of increase in future compensation levels 3%-4.5% 3%-4.5% 3%-4.5% -- -- --
Expected long-term rate of return on assets 9.0% 9.0% 9.0% 9%-15% 9%-15% 9%-15%
======================================================================================================================
A discount rate of 6.75% and 7.0% at December 31, 2002 and 2001,
respectively, was used for the valuation of pension and postretirement
obligations. For 2003, the expected long-term rate of returns on pension and
other postretirement benefits assets will be 8.75% and 9.0%, respectively.
A reconciliation of funded status for the Company's pension and
postretirement benefit plans at December 31, 2002 and 2001 was as follows:
46 | Annual Report 2002 | ATI
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
=======================================================================================================================
(In millions) 2002 2001 2002 2001
=======================================================================================================================
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $1,816.1 $1,629.1 $ 651.3 $ 638.5
Service cost 26.6 22.9 7.4 8.4
Interest cost 123.7 113.5 42.7 43.4
Benefits paid (137.4) (131.2) (45.7) (43.5)
Plan amendments 16.3 108.0 (9.4) 4.5
Net actuarial (gains) losses -- discount rate change 47.2 -- 10.6 --
-- other 53.0 67.2 56.3 (1.1)
Effect of curtailment and special termination benefits -- 6.6 (1.9) 1.1
- -----------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,945.5 1,816.1 711.3 651.3
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 2,012.0 2,388.3 134.9 138.0
Actual returns (losses) on plan assets and plan expenses (199.1) (213.0) (10.7) (4.5)
Benefits paid (134.2) (128.3) (12.7) (3.2)
Section 420 transfer -- (35.0) -- --
Transfers of assets into plan -- -- -- 4.6
- -----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,678.7 2,012.0 111.5 134.9
- -----------------------------------------------------------------------------------------------------------------------
Overfunded (underfunded) status of the plan (266.8) 195.9 (599.8) (516.4)
Unrecognized net actuarial (gain) loss 709.2 236.1 132.9 36.3
Adjustment to recognize minimum liability (658.4) -- -- --
Unrecognized transition asset -- (10.8) -- --
Unrecognized prior service cost 165.1 175.9 (29.5) (26.0)
- -----------------------------------------------------------------------------------------------------------------------
PREPAID (ACCRUED) BENEFIT COST $ (50.9) $ 597.1 $ (496.4) $ (506.1)
=======================================================================================================================
Amounts recognized in the balance sheet consist of:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
==========================================================================================
(In millions) 2002 2001 2002 2001
==========================================================================================
Deferred pension asset $ 165.1 $ -- $ -- $ --
Prepaid pension cost -- 632.9 -- --
Pension liabilities (216.0) -- -- --
Accrued postretirement benefits -- -- (496.4) (506.1)
Other long-term liabilities -- (35.8) -- --
- ------------------------------------------------------------------------------------------
Net amount recognized $ (50.9) $ 597.1 $(496.4) $(506.1)
==========================================================================================
In 2002, the Company entered into a new six-year labor agreement
covering Wah Chang employees represented by the United Steelworkers of America
("USWA"). In 2001, the Company entered into new six-year labor agreements
covering Allegheny Ludlum and Oremet employees represented by the USWA. These
labor agreements included enhancements to pension benefits. The increase in the
pension liability resulting from these labor agreements, as well as pension
enhancements at other operations of the Company are presented as plan amendments
in the tables above.
ATI | Annual Report 2002 | 47
The plan assets for the defined benefit pension plan at December 31,
2002 and 2001 include 1.3 million shares of Allegheny Technologies common stock
with a fair value of $8.1 million and $21.8 million, respectively. Dividends of
$0.9 million and $1.0 million were received by the plan in 2002 and 2001,
respectively on the Allegheny Technologies common stock held by the plan. Any
reversion of pension plan assets to the Company would be subject to federal and
state income taxes, substantial excise tax and other possible claims.
Pension costs for defined contribution plans were $12.1 million in 2002
and $14.8 million in both 2001 and 2000. Company contributions to the defined
contribution plans are funded with cash.
The Company contributes on behalf of its union employees at its Oremet
facility to a pension plan which is administered by the USWA and funded pursuant
to a collective bargaining agreement. Pension expense and contributions to this
plan were $0.6 million in 2002, $1.1 million in 2001 and $1.4 million in 2000.
The annual assumed rate of increase in the per capita cost of covered
benefits (the health care cost trend rate) for health care plans was 10.3% in
2003 and is assumed to gradually decrease to 5.0% in the year 2009 and remain at
that level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one percentage point
change in assumed health care cost trend rates would have the following effects:
One Percentage One Percentage
(ln millions) Point Increase Point Decrease
=============================================================================================================
Effect on total of service and interest cost components for the year
Ended December 31, 2002 $ 6.7 $ (5.4)
Effect on other postretirement benefit obligation
at December 31, 2002 82.4 $ (68.5)
=============================================================================================================
At November 30, 2002, the Company's measurement date for pension
accounting, the value of the accumulated pension benefit obligation (ABO)
exceeded the value of pension assets by approximately $192 million as a result
of a severe decline in the equity markets in 2002, 2001 and 2000, higher benefit
liabilities from long-term labor contracts negotiated in 2002 and 2001, and a
lower assumed discount rate for valuing the pension liabilities. As discussed in
last year's annual report, accounting standards require a minimum pension
liability be recorded and the pension asset recorded on the balance sheet be
written off if the value of pension assets is less than the ABO at the annual
measurement date. Accordingly, in the 2002 fourth quarter, the Company recorded
a charge against stockholders' equity of $406 million, net of deferred taxes, to
write off the prepaid pension asset representing the overfunded position of the
pension plan, and to record a deferred pension asset of $165 million for
unamortized prior service cost relating to prior benefit enhancements. This
charge did not affect earnings and does not have a cash impact. In addition,
this charge does not affect compliance with debt covenants in the Company's bank
credit agreement. In accordance with accounting standards, the full charge
against stockholders' equity would be reversed in subsequent years if the value
of pension plan investments returns to a level that exceeds the ABO as of a
future annual measurement date.
In prior years the Company's defined benefit pension plan was fully
funded with assets significantly in excess of the projected benefit obligation.
Under Internal Revenue Code (Section 420) provisions, certain amounts that the
Company paid for retiree health care benefits could be reimbursed annually from
the excess pension plan assets. During the 2001 second quarter, the Company
recovered $35.0 million under these provisions. While not affecting reported
operating profit, cash flow from operations increased by the recovered amount.
The Company's ability to be reimbursed for retiree medical costs in future years
is dependent upon the level of pension surplus, if any, as computed under
regulations 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 during the last
three years, the pension funded status at the beginning of 2003 is substantially
below the threshold required for reimbursement of retiree medical costs in 2003.
The ability to resume reimbursement from pension assets for retiree health care
costs beyond 2003 will depend upon the performance of the pension investments,
and any changes in the Internal Revenue Code and regulations pertaining to
reimbursement of retiree health care costs from pension surplus. As a result of
labor contracts negotiated in .2001, beginning in the second half of 2001, the
Company began funding certain retiree health care benefits for Allegheny Ludlum
using plan assets held in a Voluntary Employee Benefit Association (VEBA) trust.
This allows the Company to recover a portion of the retiree medical costs that
were previously funded from the pension surplus. During 2002 and 2001, the
Company was able to fund $12.7 million and $3.2 million, respectively, of
retiree medical costs using the assets of the VEBA trust. The Company may
continue to fund certain retiree medical benefits utilizing the plan assets held
in the VEBA if the value of these plan assets exceed $50 million. The value of
the assets held in the VEBA was approximately $112 million as of December 31,
2002.
48 | Annual Report 2002 | ATI
NOTE 9. ACQUISITIONS AND DIVESTITURES --
During the 2001 fourth quarter, the Company divested its North American
operations of its titanium distribution company, Titanium Industries Inc.
Results of operations for this business for 2001 and proceeds from the
disposition of this business were not material to the Company.
During the 2000 second quarter, the Company purchased the Hughes
Metallurgical Products Division, a tungsten carbide products business from
Hughes Christensen. Operating results have been included in the Company's
consolidated financial statements since the date of acquisition.
NOTE 10. BUSINESS SEGMENTS --
The Company operates in three business segments: Flat-Rolled Products, High
Performance Metals and Industrial Products.
The Flat-Rolled Products segment produces, converts and distributes
stainless steel, nickel-based alloys and superalloys, and titanium and
titanium-based alloys in sheet, strip, plate and Precision Rolled Strip(R)
products as well as silicon electrical steels and tool steels. The companies in
this segment include Allegheny Ludlum, Allegheny Rodney, Rome Metals and
Allegheny Ludlum's 60% interest in STAL.
The High Performance Metals segment produces, converts and distributes
nickel- and cobalt-based alloys and superalloys, titanium and titanium-based
alloys, zirconium, hafnium, niobium, tantalum, their related alloys, and other
specialty materials, primarily in slab, ingot, billet, bar, rod, wire, coil and
seamless tube forms. The companies in this segment include Allvac, Allvac Ltd
(U.K.) and Wah Chang, which also produces and sells zirconium chemicals.
The Industrial Products segment's principal business produces tungsten
powder, tungsten carbide materials and carbide cutting tools. This segment also
produces large grey and ductile iron castings and carbon alloy steel forgings.
The companies in this segment are Metalworking Products, Portland Forge and
Casting Service.
Intersegment sales are generally recorded at full cost or market. Common
services are allocated on the basis of estimated utilization.
Information on the Company's business segments was as follows:
(In millions) 2002 2001 2000
==========================================================================
Total sales:
Flat-Rolled Products $1,058.8 $1,118.8 $1,479.9
High Performance Metals 660.1 831.7 800.5
Industrial Products 229.6 267.8 280.9
- --------------------------------------------------------------------------
Total sales 1,948.5 2,218.3 2,561.3
Intersegment sales:
Flat-Rolled Products 10.6 30.4 35.8
High Performance Metals 30.1 59.9 65.1
- --------------------------------------------------------------------------
Total intersegment sales 40.7 90.3 100.9
==========================================================================
Sales to external customers:
Flat-Rolled Products 1,048.2 1,088.4 1,444.1
High Performance Metals 630.0 771.8 735.4
Industrial Products 229.6 267.8 280.9
- --------------------------------------------------------------------------
Total sales to external customers $1,907.8 $2,128.0 $2,460.4
==========================================================================
Total international sales were $440.0 million in 2002, $499.5 million in
2001 and $441.9 million in 2000. Of these amounts, sales by operations in the
United States to customers in other countries were $276.9 million in 2002,
$318.9 million in 2001 and $286.4 million in 2000.
ATI | Annual Report 2002 | 49
(In millions) 2002 2001 2000
==================================================================================================
Operating profit (loss):
Flat-Rolled Products $ (7.9) $ (38.1) $ 119.6
High Performance Metals 31.2 82.0 66.5
Industrial Products 4.0 10.4 21.7
- --------------------------------------------------------------------------------------------------
Total operating profit 27.3 54.3 207.8
Corporate expenses (20.6) (25.5) (30.6)
Interest expense, net (34.3) (29.3) (34.4)
Restructuring and other costs, net of gains on asset sales (54.4) (89.0) (33.9)
Retirement benefit (expense) income (21.8) 53.1 99.9
- --------------------------------------------------------------------------------------------------
Income (loss) before income taxes $(103.8) $ (36.4) $ 208.8
==================================================================================================
In accordance with accounting standards, in 2002, the Company
discontinued the amortization of goodwill. Goodwill amortization by segment for
the years ended December 31, 2001 and 2000 was as follows:
(In millions) 2001 2000
=============================================================
Flat-Rolled Products $ 3.9 $ 3.9
High Performance Metals 1.4 1.4
Industrial Products 0.5 0.4
- -------------------------------------------------------------
Total goodwill amortization expense $ 5.8 $ 5.7
=============================================================
Restructuring and other costs, net of gains on assets sales includes
pre-tax gains and losses resulting from the sale of real estate, certain
investments and other assets, which are primarily included in other income
(expense) on the statement of operations, as well as charges incurred in
connection with closed operations. Restructuring and other costs, net of gains
on asset sales was as follows for the years ended December 31, 2002, 2001 and
2000.
(In millions) 2002 2001 2000
====================================================================================================
Restructuring and other costs, net of gains on assets sales:
Restructuring costs $ (42.8) $ (74.2) $ (29.5)
Other asset impairments and write-offs (6.5) (5.6) --
Closed company expenses, net of asset gains (5.1) (9.2) (4.4)
- ----------------------------------------------------------------------------------------------------
Restructuring and other costs, net of gains on asset sales $ (54.4) $ (89.0) $ (33.9)
====================================================================================================
Retirement benefit (expense) income represents pension income net of
other postretirement benefit expenses, and related legal and administrative
expenses. Operating profit with respect to the Company's business segments
excludes any retirement benefit expense or income.
5O | Annual Report 2002 | ATI
(In millions) 2002 2001 2000
======================================================================================
Depreciation and amortization:
Flat-Rolled Products $ 57.0 $ 65.4 $ 65.9
High Performance Metals 20.9 20.3 22.3
Industrial Products 11.3 11.9 10.6
Corporate 0.8 1.0 0.9
- --------------------------------------------------------------------------------------
Total depreciation and $ 90.0 $ 98.6 $ 99.7
amortization
======================================================================================
Capital expenditures:
Flat-Rolled Products $ 15.8 $ 20.1 $ 25.6
High Performance Metals 30.8 75.8 21.7
Industrial Products 2.1 8.2 12.7
Corporate -- 0.1 0.2
- --------------------------------------------------------------------------------------
Total capital expenditures $ 48.7 $ 104.2 $ 60.2
======================================================================================
Identifiable assets:
Flat-Rolled Products $ 875.9 $ 1,037.5 $ 1,219.3
High Performance Metals 594.7 625.0 599.9
Industrial Products 160.6 169.5 184.3
Corporate:
Pension Asset 165.1 632.9 593.6
Income Taxes 158.1 82.0 61.2
Other 138.8 96.3 117.9
- --------------------------------------------------------------------------------------
Total assets $ 2,093.2 $ 2,643.2 $ 2,776.2
======================================================================================
Geographic information for external sales, based on country of origin
and assets are as follows:
PERCENT Percent Percent
(In millions) 2002 OF TOTAL 2001 Of Total 2000 Of Total
================================================================================================
External Sales:
United States $ 1,468.0 77% $ 1,628.5 77% $ 2,018.7 82%
United Kingdom 93.2 5% 117.1 5% 106.4 4%
Germany 86.9 5% 89.9 4% 73.6 3%
France 61.8 3% 90.7 4% 79.0 3%
Canada 40.2 2% 55.1 3% 50.7 2%
Japan 28.7 2% 32.0 1% 26.6 1%
China 21.3 1% 18.4 1% 8.6 1%
Other 107.7 5% 96.3 5% 97.0 4%
- ------------------------------------------------------------------------------------------------
Total External Sales $ 1,907.8 100% $ 2,128.0 100% $ 2,460.6 100%
================================================================================================
PERCENT Percent Percent
(In millions) 2002 OF TOTAL 2001 Of Total 2000 Of Total
==================================================================================================
Total Assets:
United States $ 1,800.7 86% $ 2,357.5 89% $ 2,491.7 90%
United Kingdom 170.8 8% 157.3 6% 152.0 5%
China 49.2 2% 51.6 2% 49.6 2%
Germany 18.7 1% 24.2 1% 19.3 1%
France 8.2 --% 6.8 --% 6.9 --%
Japan 7.3 --% 10.8 1% 13.5 1%
Canada 4.9 --% 5.1 --% 11.0 --%
Other 33.4 3% 29.9 1% 32.2 1%
- --------------------------------------------------------------------------------------------------
Total Assets $ 2,093.2 100% $ 2,643.2 100% $ 2,776.2 100%
==================================================================================================
ATI | Annual Report 2002 | 51
NOTE 11. RESTRUCTURING AND OTHER CHARGES --
Restructuring Charges
For the years ended December 31, 2002, 2001 and 2000, the Company recorded
restructuring charges of $42.8 million, $74.2 million and $29.5 million,
respectively, which are separately classified in the statement of operations.
In 2002, the Company recorded total charges of $42.8 million related to
the indefinite idling of the Massillon, OH stainless steel plate facility, due
to continuing poor demand for wide continuous mill plate products, and further
workforce reductions across all of the Company's operations. The Massillon, OH
stainless steel plate facility was indefinitely idled in the 2002 fourth quarter
and resulted in a pre-tax non-cash asset impairment charge of $34.4 million,
representing the book value of the facility in excess of its fair market value.
In addition, during the second half of 2002, and in light of the continuing
decline in demand for the Company's products in the markets served, the Company
announced workforce reductions of approximately 665 employees. These workforce
reductions, which will be substantially complete by the end of the first half of
2003, resulted in a pre-tax, primarily cash, severance charge of $8.4 million,
net of pension curtailment gain. These cost reduction actions are expected to
result in annual pre-tax cost savings of approximately $38 million when
completed. These expenses are presented as restructuring costs in the statement
of operations and are not included in the results for the segments.
Of the $42.8 million restructuring charge recorded in 2002, $5.2
million, net of tax benefits, will result in expenditures of cash, of which $4.3
million remains to be paid in 2003. Cash to meet these obligations is expected
to be generated from one or more of the following sources: internally generated
funds from operations, current cash on hand, or borrowings under existing credit
lines.
In 2001, the Company recorded total restructuring charges of $74.2
million related to the permanent idling of the Houston, PA stainless steel melt
shop, workforce reductions and other asset impairments was recognized. Of this
aggregate charge, $55.6 million related to the Houston, PA stainless steel melt
shop, which was permanently idled in the 2001 fourth quarter, and other asset
impairments; $9.8 million related to pension and termination benefits; $5.8
million related to severance and personnel costs; and $3.0 million related to
contractual obligations and other exit costs. The workforce reductions affected
approximately 520 employees across all business segments and headquarters
operations, and were substantially complete by the end of 2001. These cost
reduction actions resulted in pre-tax cost savings of approximately $19 million
in 2002. Of the $74.2 million restructuring charge recorded in 2001,
approximately $3.0 million, net of tax benefits, resulted in expenditures of
cash, the majority of which was paid in 2002.
In 2000, the Company recorded total restructuring charges of $29.5
million. The 2000 charges included $13.3 million for asset impairments, and $6.7
million for employee termination benefits, primarily severance pay, and other
contractual obligations related to the decision in the 2000 fourth quarter to
permanently idle the high-cost titanium sponge production assets of the High
Performance Metals segment. The Company ceased titanium sponge production in the
first half of 2001, and costs associated with operating the facility in 2001
were included in results of operations as they were incurred. The 2000 charge
also included $3.1 million related to a 10 percent salaried workforce reduction
at Allegheny Ludlum. The salaried workforce was notified by management of the
planned workforce reduction and of the availability of termination benefits
prior to December 31, 2000. The reduction in workforce was completed in the 2001
first quarter, and resulted in approximately $11 million in cost savings in
2001. In addition, restructuring and transformation charges for 2000 included
$6.4 million for costs related to changes in the Company's executive management.
Two executives left the Company in the 2000 fourth quarter. Both of these
executives were parties to employment and severance arrangements with the
Company that obligated Allegheny Technologies to make specific payments to them
as a result of their departure.
At December 31, 2002, substantially all cash expenditures related to the
2001 and 2000 restructuring charges had been paid.
Other Charges
In 2002, the Company recorded $6.5 million in charges relating to its
approximately 30% equity interest in New Piper Aircraft, Inc. ("New Piper"), an
investment which is held for sale, including equity in net losses of New Piper
and the write-down of the Company's investment to its estimated realizable
value. Based on New Piper's fourth quarter 2002 realization of additional
losses, and adverse trends in its liquidity and financial condition, the
Company determined in the 2002 fourth quarter that it was more likely than not
that the carrying value of its equity interest in New Piper was not recoverable.
These charges are classified in other income (expense) in the consolidated
statements of operations.
In 2001, the Company also recorded a non-cash charge of $5.6 million
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 is included in other income (expense) on the consolidated
statement of operations.
52 | ANNUAL REPORT 2002 | ATI
NOTE 12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS --
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 sets forth separately financial information
with respect to 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 the Subsidiary
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 the Subsidiary 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 the Subsidiary 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 the Subsidiary or the non-guarantor subsidiaries. Management and royalty fees
charged to the Subsidiary 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
December 31, 2002
================================================================================================================================
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
================================================================================================================================
ASSETS
Cash and cash equivalents $ 0.2 $ 43.0 $ 16.2 $ -- $ 59.4
Accounts receivable, net -- 82.3 157.0 -- 239.3
Inventories, net -- 181.6 227.4 -- 409.0
lncome tax refunds 51.9 -- -- -- 51.9
Deferred income taxes 20.8 -- -- -- 20.8
Prepaid expenses end other current assets 0.3 8.8 22.9 -- 32.0
================================================================================================================================
TOTAL CURRENT ASSETS 73.2 315.7 423.5 -- 812.4
Property, plant, and equipment, net -- 383.2 374.4 -- 757.6
Deferred pension asset 165.1 -- -- -- 165.1
Deferred income taxes 85.4 -- -- -- 85.4
Cost in excess of net assets acquired -- 112.1 82.3 -- 194.4
Investments in subsidiaries and other assets 1,169.8 608.8 347.1 (2,047.4) 78.3
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,493.5 $1,419.8 $1,227.3 $(2,047.4) $2,093.2
================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1.9 $ 96.3 $ 73.1 $ -- $ 171.3
Accrued liabilities 510.8 52.1 97.9 (499.8) 161.0
Short-term debt and
current portion of long-term debt -- 0.6 9.1 -- 9.7
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 512.7 149.0 180.1 (499.8) 342.0
Long-term debt 312.4 441.3 37.2 (281.5) 509.4
Accrued postretirement benefits -- 308.1 188.3 -- 496.4
Pension liabilities 216.0 -- -- -- 216.0
Other 3.6 23.1 53.9 -- 80.6
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,044.7 921.5 459.5 (781.3) 1,644.4
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 448.8 498.3 767.8 (1,266.1) 448.8
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,493.5 $1,419.8 $1,227.3 $(2,047.4) $2,093.2
================================================================================================================================
ATI | Annual Report 2002 | 53
ALLEGHENY TECHNOLOGIES INCORPORATED
FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
STATEMENTS OF OPERATIONS
For the year ended December 31, 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
==================================================================================================================================
SALES $ -- $ 984.3 $ 923.5 $ -- $1,907.8
Cost of sales 17.6 959.3 767.6 -- 1,744.5
Selling and administrative expenses 40.8 27.5 120.0 -- 188.3
Restructuring and transformation -- 38.5 4.3 -- 42.8
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest, other income
and income taxes (58.4) (41.0) 31.6 -- (67.8)
Interest expense, net 22.0 10.2 2.1 -- 34.3
Other income (expense) including equity
in income (loss) of unconsolidated subsidiaries (22.1) 0.1 9.1 11.2 (1.7)
==================================================================================================================================
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (102.5) (51.1) 38.6 11.2 (103.8)
Income tax provision (benefit) (36.7) (16.6) 11.2 4.1 (38.0)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (65.8) $ (34.5) $ 27.4 $ 7.1 $ (65.8)
==================================================================================================================================
ALLEGHENY TECHNOLOGIES INCORPORATED
FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
CONDENSED STATEMENTS OF CASH FLOWS
For the year December 31, 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
==================================================================================================================================
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 13.2 $ 81.3 $ (72.0) $ 181.7 $204.2
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES -- (11.5) (40.7) 12.4 (39.8)
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES (13.4) (41.1) 109.9 (194.1) (138.7)
==================================================================================================================================
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (0.2) $ 28.7 $ (2.8) $ -- $ 25.7
==================================================================================================================================
54 | Annual Report 2002 | ATI
ALLEGHENY TECHNOLOGIES INCORPORATED
FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
BALANCE SHEETS
December 31, 2001
=============================================================================================================================
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
=============================================================================================================================
ASSETS
Cash and cash equivalents $ 0.4 $ 14.3 $ 19.0 $ -- $ 33.7
Accounts receivable, net 0.1 84.8 189.7 -- 274.6
Inventories, net -- 249.2 259.2 -- 508.4
Income tax refunds 48.5 -- -- -- 48.5
Deferred income taxes 33.5 -- -- -- 33.5
Prepaid expenses and other current assets 0.1 9.9 17.4 -- 27.4
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 82.6 358.2 485.3 -- 926.1
Property, plant, and equipment, net -- 459.7 369.2 -- 828.9
Prepaid pension cost 632.9 -- -- -- 632.9
Cost in excess of net assets acquired -- 112.1 76.3 -- 188.4
Investments in subsidiaries and other assets 1,175.6 539.3 337.4 (1,985.4) 66.9
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,891.1 $ 1,469.3 $ 1,268.2 $ (1,985.4) $2,643.2
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1.4 $ 77.4 $ 76.5 $ -- $ 155.3
Accrued liabilities 413.2 45.0 222.5 (512.5) 168.2
Short-term debt and
current portion of long-term debt -- 0.5 8.7 -- 9.2
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 414.6 122.9 307.7 (512.5) 332.7
Long-term debt 362.5 370.4 40.0 (199.9) 573.0
Accrued postretirement benefits -- 302.4 203.7 -- 506.1
Deferred income taxes 153.7 -- -- -- 153.7
Other 15.6 28.7 88.7 -- 133.0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 946.4 824.4 640.1 (712.4) 1,698.5
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 944.7 644.9 628.1 (1,273.0) 944.7
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,891.1 $ 1,469.3 $ 1,268.2 $ (1,985.4) $2,643.2
=============================================================================================================================
ATI | Annual Report 2002 | 55
ALLEGHENY TECHNOLOGIES INCORPORATED
FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
STATEMENTS OF OPERATIONS
For the year ended December 31, 2001
=================================================================================================================================
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
=================================================================================================================================
SALES $ -- $1,062.9 $1,065.1 $ -- $2,128.0
Costs and expenses:
Cost of sales (55.4) 1,058.4 859.3 -- 1,862.3
Selling and administrative expenses (3.4) 42.1 160.1 -- 198.8
Restructuring costs 9.8 61.5 2.9 -- 74.2
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest, other income
and income taxes 49.0 (99.1) 42.8 -- (7.3)
Interest expense, net 16.9 10.9 1.5 -- 29.3
Other income (expense) including equity in
income 6oss) of unconsolidated subsidiaries (71.2) 8.9 7.6 54.9 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (39.1) (101.1) 48.9 54.9 (36.4)
Income tax provision (benefit) (13.9) (43.9) 29.8 16.8 (11.2)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (25.2) $ (57.2) $ 19.1 $ 38.1 $ (25.2)
=================================================================================================================================
ALLEGHENY TECHNOLOGIES INCORPORATED
FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
CONDENSED STATEMENTS OF CASH FLOWS
For the year December 31, 2001
===================================================================================================================================
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
===================================================================================================================================
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 45.1 $ 131.5 $ 42.7 $ (96.5) $ 122.8
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES -- (17.3) (71.4) 3.7 (85.0)
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES (44.8) (100.4) 22.1 92.8 (30.3)
===================================================================================================================================
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 0.3 $ 13.8 $ (6.6) $ -- $ 7.5
===================================================================================================================================
56 | Annual Report 2002 | ATI
ALLEGHENY TECHNOLOGIES INCORPORATED
FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
STATEMENTS OF OPERATIONS
For the year ended December 31, 2000
================================================================================================================================
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
================================================================================================================================
SALES $ -- $ 1,432.8 $1,027.6 $ -- $2,460.4
Cost and expenses:
Cost of sales (62.3) 1,269.6 791.2 -- 1,998.5
Selling and administrative expenses 13.7 54.5 135.5 -- 203.7
Restructuring costs -- -- 29.5 -- 29.5
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest, other income
and income taxes 48.6 108.7 71.4 -- 228.7
Interest expense, net 20.6 11.0 2.8 -- 34.4
Other income (expense) including equity in
income (loss) of unconsolidated subsidiaries 194.3 13.5 24.2 (217.5) 14.5
- --------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 222.3 111.2 92.8 (217.5) 208.8
Income tax provision (benefit) 89.8 44.2 29.3 (87.0) 76.3
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 132.5 $ 67.0 $ 63.5 $ (130.5) $ 132.5
=================================================================================================================================
ALLEGHENY TECHNOLOGIES INCORPORATED
FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
CONDENSED STATEMENTS OF CASH FLOWS
For the year December 31, 2000
================================================================================================================================
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
================================================================================================================================
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 106.5 $ 78.3 $ 94.1 $(143.4) $ 135.5
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES (0.9) (20.8) (52.1) 3.8 (70.0)
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES (105.5) (57.1) (67.0) 139.6 (90.0)
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 0.1 $ 0.4 $ (25.0) $ -- $ (24.5)
================================================================================================================================
ATI | Annual Report 2002 | 57
NOTE 13. PER SHARE INFORMATION --
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
(In millions except per share amounts)
Years ended December 31, 2002 2001 2000
===========================================================================================================
Numerator for basic and diluted net income
(loss) per common share --
net income (loss) $(65.8) $(25.2) $132.5
- -----------------------------------------------------------------------------------------------------------
Denominator:
Weighted average shares 80.6 80.2 82.9
Contingent issuable stock -- 0.1 0.1
- -----------------------------------------------------------------------------------------------------------
Denominator for basic and diluted net income
(loss) per common share 80.6 80.3 83.0
- -----------------------------------------------------------------------------------------------------------
Basic and diluted net income (loss) per common
share $(0.82) $(0.31) $ 1.60
===========================================================================================================
Weighted average shares issuable upon the exercise of stock options
which were antidilutive thus not included in the calculation were 5.9 million in
2002, 4.5 million in 2001 and 4.0 million 2000.
NOTE 14. COMMITMENTS AND CONTINGENCIES --
Rental expense under operating leases was $15.9 million in 2002, $22.2 million
in 2001 and $21.9 million in 2000. Future minimum rental commitments under
operating leases with non-cancelable terms of more than one year at December 31,
2002, were as follows: $8.4 million in 2003, $7.4 million in 2004, $6.7
million in 2005, $5.9 million in 2006, $5.0 million in 2007 and $12.9 million
thereafter. Commitments for expenditures on property, plant and equipment at
December 31, 2002 were approximately $33.0 million.
When it is probable that a liability has been incurred or an asset of the
Company has been impaired, a loss is recognized if the amount of the loss can be
reasonably estimated.
The Company is subject to various domestic and international environmental
laws and regulations that govern the discharge of pollutants into the air or
water, and disposal of hazardous substances, and which may 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 PRP under the Federal Superfund laws and
comparable state laws. The Company could incur substantial cleanup costs, fines,
and civil or criminal sanctions, third party property damage or personal injury
claims as a result of violations or liabilities under these laws or
noncompliance with environmental permits required at its facilities. The Company
is currently involved in the investigation and remediation of a number of the
Company's current and former sites as well as third party location sites under
these laws.
In accordance with the Company's accounting policy disclosed in Note 1,
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
remain subject to additional uncertainties regarding the 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, participation, and financial
condition of other PRPs, as well as the extent of their responsibility for the
remediation. Accordingly, the Company periodically reviews accruals as
investigation and remediation of these sites proceed. As the Company receives
new information, the Company expects that it will adjust its accruals to reflect
the new information. Future adjustments could have a material adverse effect on
the Company's results of operations in a given period, but the Company cannot
reliably predict the amounts of such future adjustments.
Based on currently available information, the Company does not believe that
there is a reasonable possibility that a loss exceeding the amount already
accrued for any of the sites with which the Company is currently associated
(either individually or in the aggregate) will be an amount that would be
material to a decision to buy or sell the Company's securities.
58 | Annual Report 2002 | ATI
Additional future developments, administrative actions or liabilities
relating to environmental matters however could have a material adverse effect
on the Company's financial condition or results of operations.
At December 31, 2002, the Company's reserves for environmental remediation
obligations totaled approximately $41.0 million, of which approximately $12.9
million were included in other current liabilities. The reserve includes
estimated probable future costs of $16.7 million for federal Superfund and
comparable state-managed sites; $9.3 million for formerly owned or operated
sites for which the Company has remediation or indemnification obligations; $4.0
million for owned or controlled sites at which Company operations have been
discontinued; and $11.0 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 depends on a number of factors that vary by site,
including the nature and extent of contamination, the number of participating
PRPs, 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 with which it has been identified in up to thirty 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 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. 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.
In the spin-offs of Teledyne and 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 June 1995, the U.S. Government commenced an action against Allegheny
Ludlum in the United States District Court for the Western District of
Pennsylvania, alleging multiple violations of the Federal Clean Water Act. The
trial of this matter concluded in February 2001. In February 2002, the Court
issued a decision imposing a penalty of $8.2 million for incidents at five
facilities that occurred over a period of approximately six years which
Allegheny Ludlum had reported to the appropriate environmental agencies. The
Company asked the Court to reconsider its decision, which the Court denied in
October 2002. The Company has appealed the Court decision. At December 31, 2002,
the Company had adequate reserves for this matter.
Allegheny Ludlum and the United Steelworkers of America ("USWA") are parties
to various collective bargaining agreements which set forth a "Profit Sharing
Plan." The Company and the USWA were involved in litigation regarding Profit
Sharing Pool calculations for 1996, 1997, 1998 and 1999. The USWA claimed
adjustments that alleged the Company owed to USWA represented employees
approximately $32 million. The Company maintained that its certified
determinations of the Profit Sharing Pool calculations were made as prescribed
by the Profit Sharing Plan. On January 13, 2003, the Company formalized a
settlement agreement with the USWA that provided for an aggregate $5 million
distribution to eligible employees. At December 31, 2002, the Company had
adequate reserves for this matter.
In March 1995, Kaiser Aerospace & Electronics Corporation ("Kaiser") filed a
civil complaint against Teledyne Industries, Inc. (now TDY Industries, Inc.
("TDY"), a wholly-owned subsidiary of the Company, and Dimeling Schreiber & Park
("DS&P"), DS&P's general partners, and New Piper Aircraft, Inc. in the state
court for Miami-Dade County, Florida. The complaint alleged that TDY breached a
Cooperation and Shareholder's Agreement with Kaiser
ATI | Annual Report 2002 | 59
under which the parties agreed to cooperate in the filing and promotion of a
proposed plan for acquiring out of bankruptcy the assets of Piper Aircraft, a
manufacturer of general aviation aircraft. TDY and Kaiser are engaged in
discovery and have agreed to participate in a mediation. Kaiser requests that
the court impose a constructive trust on TDY's equity interest in privately held
New Piper Aircraft, Inc., which represents approximately 30% of the equity of
New Piper Aircraft, Inc. In the alternative, Kaiser also seeks unspecified
damages in an amount "to be determined at trial." The trial for this matter is
not set. While the outcome of the litigation cannot be predicted, and the
Company believes that the claims are not meritorious, an adverse resolution of
this matter could have a material adverse effect on the Company's results of
operations and financial condition.
TDY Industries, Inc. and the San Diego Unified Port District ("Port
District") entered into a lease of property located in San Diego, California
("San Diego facility") on October 1, 1984. TDY operated its Teledyne Ryan
Aeronautical division ("Ryan") at the San Diego facility until May 1999, when
substantially all the assets and business of Ryan were sold to Northrop Grumman
Corporation ("Northrop"). Northrop subleased a portion of the property with the
approval of the Port District until early 2001. TDY also entered into three
separate sublease arrangements for portions of the property subject to the
approval of the Port District, which the Port District refused. After its
administrative appeal to the Port District was denied, TDY commenced a lawsuit
against the Port District. The complaint, filed in December 2001 in state court
in San Diego, alleges breach of contract, inverse condemnation, tortious
interference with a prospective economic advantage and other causes of action
relating to the Port District's failure to consent to subleases of the space.
The Complaint seeks at least $4 million for damages from the Port District and
declaratory relief. The trial for this matter is scheduled for October 2003.
Despite the Port District's failure to consent to the three subleases, TDY
continued its marketing efforts to sublease the San Diego facility. The rental
payments and other expenses for the property amounted to approximately $0.4
million per month. At December 31, 2002 the Company had a reserve of
approximately $3 million to cover the costs of occupying the San Diego facility.
TDY and the Port District discussed resolution of this matter but did not reach
any agreement even after court-sponsored mediation. In June 2002 TDY ceased
paying rent on the grounds that the Port District had rescinded the Lease when
it refused to allow TDY to sublease the property and that the Port District's
condemnation of the property voided the lease. In September 2002, the Port
District demanded that rent be paid or possession of the property be returned to
the Port District. TDY returned possession to the Port District on October 31,
2002 and denied that any remaining amounts were due under the lease.
The Port District filed a cross-complaint against TDY in March 2003. The
Complaint alleges breach of contract for failure to pay rent and for certain
environmental contamination on the property. The Port District seeks $1.2
million in past rent, along with future rent and an unspecified sum of damages
for failure to remedy. The Port District also alleges anticipatory breach
relating to removal of structures and debris from the San Diego facility and
seeks specific performance or reimbursement to the Port District. The Port
District further alleges that it is entitled to indemnity for potential
liability related to environmental matters at the San Diego facility, and seeks
a declaratory judgment in its favor. TDY has various defenses to the
allegations in the Port District's Complaint and denies that it has any
obligation to the Port District.
In another matter related to the San Diego facility, the Port District
requested that the California Department of Toxic Substances Control ("DTSC")
evaluate whether the property is regulated as a hazardous waste transportation,
storage, or disposal facility under the Resource Conservation and Recovery Act
("RCRA") and similar state laws. DTSC recognizes that the information pertaining
to the RCRA permitting status of the property is ambiguous and referred the
issue of the property's RCRA permitting status to DTSC's Legal Office for
further consideration. TDY discussed this matter directly with DTSC's Legal
Office and DTSC agreed to refrain from taking action regarding this issue until
after completion of DTSC's Legal Office review. To the extent the facility is
subject to RCRA permitting and corrective action is required at the property,
DTSC has agreed that the San Diego Regional Water Quality Control Board
("Regional Board") is the appropriate agency to oversee the corrective action
work. The Regional Board is currently overseeing other investigative work at the
property, the costs of which are included in the Company's environmental
reserves.
The Company is conducting an environmental assessment of portions of the San
Diego facility at the request of the Regional Board. At this stage of the
assessment, the Company cannot predict if any remediation will be necessary. The
Company remediated in 1998 and continues to monitor a lagoon near the San Diego
facility. The Company is also seeking approval from the San Diego Department of
Public Health for the 1996 closure of four underground storage tanks at the San
Diego facility. The Company is evaluating potential claims it has against
neighboring property owners and other PRPs related to the environmental
condition of the San Diego facility.
60 | Annual Report 2002 | ATI
TDY Industries, Inc. (TDY) and another wholly-owned subsidiary, among
others, have been identified by the U.S. Environmental Protection Agency (EPA)
as PRPs at the Li Tungsten Superfund Site in Glen Cove, New York. The Company
believes that most of the contamination at the Site resulted from work done
while the United States government either owned or controlled operations at the
Site, or from processes done for various agencies of the United States, and that
the United States is liable for a substantial portion of the remediation costs
at the Site. In November 2000, TDY filed a cost recovery and contribution action
against the United States government. Discovery is ongoing but no trial date has
been set. In March 2003, the Court ordered the United States government to fund
a portion of the remediation costs at the Site. An adverse resolution of this
matter could have a material adverse effect on the 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, environmental 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.
NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) --
Quarter Ended
==================================================================================================================================
(In millions except share and per share amounts) March 31 June 30 September 30 December 31
==================================================================================================================================
2002 -
Sales $ 493.1 $ 491.2 $ 469.3 $ 454.2
Gross profit 40.4 47.1 49.6 26.2
Net loss (11.1) (7.5) (7.5) (39.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share $ (0.14) $ (0.09) $ (0.09) $ (0.49)
- ----------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 80,445,647 80,575,657 80,623,077 80,634,920
==================================================================================================================================
2001 -
Sales $ 542.5 $ 554.7 $ 537.7 $ 493.1
Gross profit 65.6 70.9 67.4 61.8
Net income (loss) 6.4 6.2 8.0 (45.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net income (loss) per common share $ 0.08 $ 0.08 $ 0.10 $ (0.57)
- ----------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 80,162,491 80,209,965 80,237,977 80,264,682
==================================================================================================================================
The 2002 fourth quarter includes an after-tax charge of $29.0 million,
primarily non-cash, related to asset impairments and cost reduction actions,
including the indefinite idling of the Massillon, Ohio stainless steel plate
facility, charges for settlement of a labor issue, write-off of the Company's
investment in New Piper Aircraft, Inc., and other workforce reductions.
The 2002 third quarter includes an after-tax charge of $4.5 million,
including $3.4 million for workforce reductions and $1.1 million related to the
Company's approximately 30% equity in net losses of New Piper Aircraft, Inc., an
investment held for sale.
The 2001 fourth quarter includes an after-tax charge of $47.8 million,
primarily non-cash, related to asset impairments and cost reduction actions,
including the permanent idling of the Houston, Pennsylvania stainless steel melt
shop and other workforce reductions.
The 2001 second quarter includes a non-cash after-tax write-off of $3.4
million related to the Company's minority interest in the e-Business site,
MetalSpectrum, which terminated operations during the 2001 second quarter.
ATI | Annual Report 2002 | 61
Management's Report
The accompanying consolidated financial statements of Allegheny Technologies
Incorporated and subsidiaries have been prepared in accordance with generally
accepted accounting principles and include some amounts that are based upon
Management's best estimates and judgments. Management has the primary
responsibility for the information contained in the financial statements and in
other sections of this Annual Report and for their integrity and objectivity.
The Company has a system of internal controls designed to provide
reasonable assurance that assets are safeguarded and transactions are properly
executed and recorded for the preparation of financial information. The concept
of reasonable assurance is based on the recognition that there are inherent
limitations in all systems of internal accounting control and that the cost of
such systems should not exceed the benefits to be derived.
The Company maintains a staff of professional internal auditors, who
assist in audit coverage with the independent accountants and conduct
operational and special audits. The independent accountants express their
opinion on the Company's financial statements based on procedures, including an
evaluation of internal controls, which they consider to be sufficient to form
their opinion.
The Audit Committee of the Board of Directors is composed of four
independent non-employee members. Among its principal duties, the Committee is
responsible for recommending the independent accountants to conduct the annual
audit of the Company's financial statements and for reviewing the financial
reporting and accounting practices.
/s/James L. Murdy /s/Richard J. Harshman /s/Dale G. Reid
James L. Murdy Richard J. Harshman Dale G. Reid
President Senior Vice President, Vice President,
and Chief Finance and Chief Controller and
Executive Officer Financial Officer Chief Accounting
Officer
62 | Annual Report 2002 | ATI
SELECTED FINANCIAL DATA
For the Years Ended December 31, 2002 2001 2000 1999 1998
===============================================================================================================
Volume:
Flat-Rolled Products (finished tons) 487,335 498,066 608,601 592,619 537,807
Commodity (finished tons) 360,301 367,894 460,940 475,557 424,659
High value (finished tons) 137,034 130,172 147,661 117,062 113,148
High Performance Metals -- nickel-based
and specialty steel alloys (000's lbs.) 35,832 51,899 46,612 43,905 44,182
High Performance Metals -- titanium
mill products (000's lbs.) 19,044 23,070 24,798 22,792 24,739
High Performance Metals -- exotic
alloys (000's lbs.) 3,712 3,457 3,691 3,756 4,690
- ---------------------------------------------------------------------------------------------------------------
Average Prices:
Flat-Rolled Products (per finished ton) $ 2,134 $ 2,162 $ 2,354 $ 2,081 $ 2,194
Commodity (per finished ton) 1,529 1,527 1,819 1,562 1,663
High value (per finished ton) 3,677 3,956 4,025 4,189 4,187
High Performance Metals -- nickel-based
and specialty steel alloys (per lb.) 6.39 6.31 5.86 5.98 7.33
High Performance Metals -- titanium
mill products (per lb.) 11.83 11.70 10.87 11.70 14.03
High Performance Metals -- exotic
alloys (per lb.) 36.29 33.52 35.56 34.77 29.69
- ---------------------------------------------------------------------------------------------------------------
(In millions except per share amounts)
For the Years Ended December 31, 2002 2001 2000 1999 1998
===============================================================================================================
Sales:
Flat-Rolled Products $1,048.2 $1,088.4 $1,444.1 $1,296.7 $1,193.1
High Performance Metals 630.0 771.8 735.4 722.7 860.3
Industrial Products 229.6 267.8 280.9 276.7 349.0
- ---------------------------------------------------------------------------------------------------------------
Total sales $1,907.8 $2,128.0 $2,460.4 $2,296.1 $2,402.4
- ---------------------------------------------------------------------------------------------------------------
Operating profit (loss):
Flat-Rolled Products $ (7.9) $ (38.1) $ 119.6 $ 85.2 $ 126.3
High Performance Metals 31.2 82.0 66.5 87.0 156.0
Industrial Products 4.0 10.4 21.7 12.2 35.8
- ---------------------------------------------------------------------------------------------------------------
Total operating profit $ 27.3 $ 54.3 $ 207.8 $ 184.4 $ 318.1
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
become extraordinary items $ (65.8) $ (25.2) $ 132.5 $ 111.0 $ 155.0
Income from discontinued operations -- -- -- 59.6 86.2
Extraordinary gains on sales of operations -- -- -- 129.6 --
- ---------------------------------------------------------------------------------------------------------------
Net Income (loss) $ (65.8) $ (25.2) $ 132.5 $ 300.2 $ 241.2
- ---------------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share:
Income (loss) from continuing operations
before extraordinary Items $ (0.82) $ (0.31) $ 1.60 $ 1.17 $ 1.57
Income from discontinued operations -- -- -- 0.62 0.88
Extraordinary gains on sales of operations -- -- -- 1.36 --
- ---------------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share $ (0.82) $ (0.31) $ 1.60 $ 3.15 $ 2.45
- ---------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share:
Income (loss) from continuing operations
before extraordinary Items $ (0.82) $ (0.31) $ 1.60 $ 1.16 $ 1.56
Income from discontinued operations -- -- -- 0.62 0.87
Extraordinary gains on sales of operations -- -- -- 1.35 --
- ---------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share $ (0.82) $ (0.31) $ 1.60 $ 3.13 $ 2.43
===============================================================================================================
ATI | Annual Report 2002 | 63
For the Years Ended December 31, 2002 2001 2000 1999 1998
==========================================================================================================================
Dividends declared $0.66 $0.80 $0.80 $1.28 $1.28
- --------------------------------------------------------------------------------------------------------------------------
Working capital 470.4 593.4 609.3 493.5 574.9
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2,093.2 2,643.2 2,776.2 2,750.6 2,943.5
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt 509.4 573.0 490.6 200.3 430.6
- --------------------------------------------------------------------------------------------------------------------------
Total debt 519.1 582.2 543.8 353.0 498.8
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 59.4 33.7 26.2 50.7 74.2
- --------------------------------------------------------------------------------------------------------------------------
Fair value of interest rate swap assets 18.7 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net debt (a) 441.0 548.5 517.6 302.3 424.6
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 448.8 944.7 1,039.2 1,200.2 1,339.9
- --------------------------------------------------------------------------------------------------------------------------
(a) Net debt represents total debt less cash and cash equivalents, and
interest rate swap assets.
Net income (loss) was adversely affected by after-tax transformation, merger
and restructuring charges of $27.1 million in 2002, $47.8 million in 2001, $18.7
million in 2000 and $45.8 million in 1998.
Stockholders' equity for 2002 includes the effect of recognizing a
minimum pension liability of $406.4 million, net of related tax effects.
In 1999, the Company completed a strategic transformation in which it
spun-off Teledyne Technologies Incorporated and Water Pik, Inc. and sold certain
businesses. The results of the companies spun-off and companies sold are
reflected as discontinued operations for all periods presented. The Company
recognized extraordinary gains of $129.6 million, net of $79.9 million in taxes,
in connection with the sales of businesses in 1999.
At a stockholders' meeting held in November 1999, the Company's stockholders
approved a one-for-two reverse stock split of the Company's stock. The reverse
stock split was effective immediately following the spin-offs of Teledyne and
Water Pik on November 29, 1999. All references to number of shares and per share
amounts have been restated to reflect the reverse stock split.
COMMON STOCK PRICES
The Company's common stock is traded on the New York Stock Exchange (symbol
ATI). At December 31, 2002, there were approximately 7,900 record holders of
Allegheny Technologies Incorporated common stock. The Company paid a cash
dividend of $0.06 per share on its common stock in the fourth quarter of 2002,
and $0.20 per share on its common stock in each of the first three quarters of
2002 and each of the four quarters of 2001. The Company's stock price ranges
were as follows:
Quarter Ended
=========================================================================
2002 March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------
High $16.95 $18.11 $15.35 $7.52
Low $14.72 $15.54 $ 6.20 $5.30
- -------------------------------------------------------------------------
=========================================================================
2001 March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------
High $19.00 $21.07 $19.80 $17.01
Low $13.19 $16.40 $12.55 $12.50
- -------------------------------------------------------------------------
64 | Annual Report 2002 | ATI