1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are forward-looking statements.
Actual results could differ materially from those encompassed within such
forward-looking statements as a result of various factors, certain of which are
described below.
COMBINATION OF ALLEGHENY LUDLUM AND TELEDYNE
On August 15, 1996, Allegheny Ludlum Corporation ("Allegheny Ludlum") and
Teledyne, Inc. ("Teledyne") combined to form Allegheny Teledyne Incorporated
("Allegheny Teledyne"). Allegheny Ludlum shareholders received one share of
Allegheny Teledyne common stock for each of their Allegheny Ludlum common
shares. Teledyne stockholders received 1.925 shares of Allegheny Teledyne
common stock for each of their Teledyne common shares. The combination was
accounted for under the pooling of interests method of accounting. The
following discussion reflects the combination as if the companies had been
combined for all periods presented. Unless the context requires otherwise, the
"Company" refers to Allegheny Teledyne and its subsidiaries.
During the initial months following the formation of Allegheny Teledyne,
several actions were taken to capitalize on the Company's financial strength:
o $357 million of Teledyne's 10% subordinated notes were retired and
refinanced at an annual interest expense savings of approximately $16
million at current rates.
o A new $500 million revolving credit agreement was arranged with a group of
fourteen major banks to provide funds to redeem high cost debt as well as
to provide significant liquidity reserves for operations and for potential
new investment opportunities.
o Substantially all pension plans were merged into a single new plan with an
initial surplus of approximately $690 million and pension assets equal to
142% of accumulated pension liabilities. This saved an estimated $40
million of pension contributions which would otherwise have had to be
funded each year from the Company's operating cash flow.
o The pension investment surplus was also used to reimburse retiree medical
payments in 1996. On an annualized basis, this should amount to
approximately $30 million.
o Several components of the former separate insurance programs were combined
providing greater coverage at lower premium costs which should save
approximately $4 million on an annualized basis.
Cash from operating activities was strong during 1996 despite lower
operating results in the Company's flat-rolled stainless steel business.
Capital spending totaled $88.6 million in 1996.
With net debt at 29% of total capitalization, the Company is well-positioned
financially to carry through on its strategic plans. The Company expects free
cash flow to be consistently strong. This should provide sufficient financial
resources for the Company to capitalize on new profitable growth opportunities
while keeping its strong credit rating and low cost access to capital markets.
The Company's debt structure has several important attributes. First, 33% of
long-term debt has a maturity of 29 years with a fixed rate of 6.95%. Second,
the revolving credit agreement has a five-year maturity, which gives
significant stability to nearer term debt arrangements. Finally, low cost
interest rate pricing alternatives currently give the Company an after-tax
blended cost to borrow of approximately 3.1%. This low cost incremental
liquidity is an important strategic advantage for the Company.
The Company recorded a charge of $57.5 million ($42.9 million net of tax) in
1996 for financial advisory, legal, accounting, severance and other costs
associated with the integration of the combined companies.
RESULTS OF OPERATIONS
The Company's sales from continuing businesses were $3.8 billion in 1996 and
1995, and $3.1 billion in 1994. Foreign sales represented approximately 17%,
15% and 17% of total sales in 1996, 1995 and 1994, respectively. Sales under
contracts with the U.S. Government, which included contracts with the
Department of Defense, represented approximately 18%, 19% and 23% of total
sales in 1996, 1995 and 1994, respectively. Defense sales represented
approximately 12%, 15% and 17% of total sales in 1996, 1995 and 1994,
respectively.
Sales and operating profit for the Company's four business segments are
presented separately below and in Note 11 of the Notes to Consolidated
Financial Statements.
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2
SPECIALTY METALS
(In millions) 1996 1995 1994
- --------------------------------------- ----------------------------------------
Sales $2,045.3 $2,203.6 $1,674.0
- --------------------------------------------------------------------------------
Operating Profit 278.9 301.1 106.8
- --------------------------------------------------------------------------------
Foreign sales represented approximately 10% of total segment sales for 1996
and 1995 and 11% in 1994.
1996 COMPARED TO 1995
Sales and operating profit for the specialty metals segment declined 7% in 1996
compared to 1995. Strong demand by commercial aerospace and industrial markets
for highly specialized metals, such as nickel-based superalloys and titanium,
and improved profitability of zirconium products were offset by weak selling
prices for commodity flat-rolled stainless steel.
Sales of Allegheny Ludlum and Rodney Metals, which consisted primarily of
flat-rolled products, declined 14% in 1996. Lower shipments, primarily at
Allegheny Ludlum, coupled with significant pricing pressure in commodity
stainless steel products caused this sales decline. Tons shipped in 1996 were
535,000 compared to a record 589,000 in 1995.
Operating profit declined 31% reflecting the impact of European and Asian
pricing pressure and increased imports in the U.S. markets. Average selling
prices of flat-rolled specialty materials declined to $2,547 per ton in 1996
from a high of $2,680 in 1995. In addition, raw material surcharges declined
throughout 1996 and were virtually eliminated by year end. The raw material
surcharge mechanism remains in place. Raw material costs decreased in 1996 but
only partially offset lower selling prices of commodity products. Allegheny
Ludlum's two unplanned equipment outages in the first quarter of 1996 also
contributed to the decline in operating profit.
Allegheny Ludlum has announced price increases of approximately 5% for its
stainless steel sheet, strip and plate shipments effective March 3, 1997 and
price increases of approximately 4% for all tool steel plates and bars cut from
plate effective with shipments March 31, 1997. Allegheny Ludlum has also
announced price increases of approximately 5% for its stainless steel sheet,
strip and plate shipments effective May 5, 1997. The ability to effect and
maintain these price increases will depend in part on market pricing pressures,
including pricing by foreign producers.
Sales and operating profit at Allvac increased substantially in 1996
primarily due to increased shipments and higher average sales prices in
nickel-based and titanium-based alloys. The sales price increase reflected
strong demand from commercial aerospace, biomedical and recreation markets, and
was supplemented with continuing cost containment efforts.
Operating results at Wah Chang also increased substantially in 1996
primarily due to increased sales, especially of titanium products, and cost
reduction efforts begun in the fourth quarter of 1995. Titanium products
benefited from significant sales increases primarily due to the improved
commercial aerospace industry and the increasing use of titanium in
recreational products. The profitability of zirconium products benefited from
favorable sales mix shifts, lower raw material costs and price increases.
Earnings from niobium products increased primarily due to lower processing
costs and lower cost foreign-sourced raw materials.
1995 COMPARED TO 1994
Sales for the segment increased 32% and operating profit increased 182% in 1995
compared to 1994. Shipments of flat-rolled products improved to 589,000 tons in
1995 from 512,000 in 1994. The improvement in sales and operating results for
stainless steel were complemented by increased demand for nickel-based
superalloys, zirconium, and titanium for the commercial aerospace, power
generation and industrial markets. The results for 1994 were adversely affected
by a ten-week strike at Allegheny Ludlum called by the United Steelworkers of
America (USWA) and by a charge of $13.0 million to resolve a U.S. Government
export investigation matter involving Teledyne Wah Chang.
Sales and operating profit for Allegheny Ludlum and Rodney Metals, which
consisted primarily of flat-rolled products, increased 36% and 139%,
respectively, in 1995. The average price per ton of flat-rolled specialty
metals shipped by these two companies increased to $2,680 for 1995 from $2,290
for 1994. Flat-rolled products benefited from very strong market demand,
improved prices, raw material related selling price surcharges, higher volume
and improved product mix.
Operating profit at Allvac increased significantly in 1995 primarily due to
increased sales and improved operating margins in nickel-based and
titanium-based alloys which were partially offset by increased raw material
costs and higher research and development costs.
24
3
Operating profit at Wah Chang increased in 1995 primarily due to increased
sales and lower environmental and legal costs which were partially offset by
decreased productivity related to protracted labor negotiations.
AEROSPACE AND ELECTRONICS
(In millions) 1996 1995 1994
- ------------------------------------------------------------------------------------
Sales $987.8 $914.4 $863.7
Operating Profit Before
Government Settlements 99.9 88.2 78.3
Government Settlements -- -- (85.0)
- ------------------------------------------------------------------------------------
Operating Profit (Loss) 99.9 88.2 (6.7)
- ------------------------------------------------------------------------------------
The segment's U.S. Government sales represented 59%, 57% and 56% of total
segment sales in 1996, 1995 and 1994, respectively. Foreign sales, which
consisted primarily of exports, accounted for 20%, 22% and 24% of total segment
sales in 1996, 1995 and 1994, respectively.
1996 COMPARED TO 1995
Sales for the aerospace and electronics segment increased 8% and operating
profit increased 13% in 1996 compared to 1995. Sales increased in development
work on the Global Hawk High Altitude Endurance Unmanned Aerial
Surveillance/Reconnaissance Vehicle and in electronic devices,
electromechanical relays and avionics for commercial customers. The initial
test flights for the Global Hawk aircraft are scheduled for the second half of
1997.
Sales also improved in engineering services related to the environmental
cleanup of chemical munitions and engines for the general aviation market.
These sales improvements were partially offset by the scheduled wind-down of
the current phase of the U.S. Apache helicopter program and by the completion
of contracts to supply electronic countermeasure equipment for the
international market and fabricated products to the U.S. Government. In 1997,
work will commence on foreign orders for Apache helicopter airframes with
significant sales related to those contracts expected to occur beyond 1997.
Operating profit for the segment benefited from the increase in sales and
improved profitability on a contract to supply mid-range unmanned aerial
vehicles.
1995 COMPARED TO 1994
Sales for the segment increased 6% and operating profit before government
settlements increased 13% in 1995 compared to 1994. Principal areas of
improvement were in development work on the Global Hawk unmanned aerial
vehicle, electromechanical relays for commercial customers, airframe structures
and fabricated products for the U.S. Government, marine seismic cables for the
oil exploration industry, and avionics for the commercial aviation industry.
Decreased sales of and margins on piston engine rebuilds for the general
aviation market and lower shipments of aerial targets and certain other
military unmanned aerial vehicles partially offset the 1995 increases.
Operating results for the segment for 1994 were adversely affected by Teledyne's
settlements of certain U.S. Government contracting issues for $85.0 million.
INDUSTRIAL
(In millions) 1996 1995 1994
- ---------------------------------------------------------------------------
Sales $447.1 $378.5 $292.3
- ---------------------------------------------------------------------------
Operating Profit 44.0 33.5 21.1
- ---------------------------------------------------------------------------
Foreign sales accounted for 42%, 30% and 24% of total segment sales in 1996,
1995 and 1994, respectively.
1996 COMPARED TO 1995
Sales for the industrial segment increased 18% and operating profit increased
31% in 1996 compared to 1995. Improvements were primarily the result of the
acquisition of the European-based Stellram Group, a
25
4
manufacturer of high precision milling, boring and drilling systems, in
December 1995. Increased sales of nitrogen cylinder systems for the metal
stamping industry, improved operating efficiencies in the pressure relief valve
business and cost reductions in the material handling business also contributed
to the growth in the segment's operating profit.
1995 COMPARED TO 1994
Sales for the segment increased 29% and operating profit increased 59% in 1995
compared to 1994. Sales improved primarily in tungsten-based products for the
cutting tool market and metal stamping dies and plastic compression molds for
the automotive industry, and as a result of the January 1995 acquisition of
Kooi B.V., a European manufacturer of material handlers.
Operating profit for the segment in 1995 increased due to strong sales and
as a result of a gain on the sale of an industrial valve product line. The
improvement in operating profit was partially offset by costs associated with
the integration and rationalization of Kooi product lines, plant
rationalization expenses and decreased margins on certain machine tools as a
result of a labor dispute.
CONSUMER
(In millions) 1996 1995 1994
- ------------------------------------------------------------------------------
Sales $287.9 $267.9 $255.5
- ------------------------------------------------------------------------------
Operating Profit 18.5 12.7 15.7
- ------------------------------------------------------------------------------
Foreign sales accounted for 19% of total segment sales in 1996 and 16% of
total segment sales in 1995 and 1994.
1996 COMPARED TO 1995
Sales for the consumer segment increased 7% and operating profit increased 46%
in 1996 compared to 1995. Sales improved primarily due to two acquisitions:
Jandy Industries, a major United States producer of water flow control valves
and electronic control systems for the swimming pool industry, and Envases
Comerciales, S.A., a Costa Rican manufacturer of specialty packaging for
pharmaceutical and food companies. Residential and commercial heating systems
and home water treatment products also contributed to the improvement in sales.
Operating profit for the segment increased as a result of the acquisitions
and reduced product introduction expenses in 1996, which were partially offset
by costs associated with discontinuing products and restructuring manufacturing
facilities and by a settlement of patent litigation.
1995 COMPARED TO 1994
Sales for the segment increased 5% while operating profit declined 19% in 1995
compared to 1994. The increase in sales was primarily attributable to increased
demand for commercial and residential heating systems and the introduction of
three new products: Teledyne Water Pik's SenSonic(TM) Plaque Removal Instrument
and its WaterFresh(R) pour-thru water filter device, and Teledyne Laars'
MAXX-PURE(TM) ozone sanitizing system for swimming pools. Sales for pool
heaters decreased as a result of poor weather conditions and a slowdown in
spending on consumer durables.
Operating profit for the segment declined as a result of advertising and
start-up costs for the three new products and the sales decline for pool
heaters.
CORPORATE EXPENSES
Corporate expenses declined to $42.1 million in 1996 from $47.7 million in
1995, excluding a one-time gain discussed below, and $51.3 million in 1994. The
decline in 1996 resulted from a reduction in legal and compliance expenses.
In 1995, the New Piper Aircraft, Inc. emerged from bankruptcy with the
Company having exchanged its major creditor position for 24.2% equity ownership
and an option to purchase an additional 24.2%. As a result, the Company
recognized a gain of $5.9 million in 1995.
Corporate expenses for 1994 included a loss on a limited partnership
investment and costs associated with relocating offices. These expenses are
included in other income on the income statement.
26
5
OPERATIONS SOLD OR HELD FOR SALE
Income from operations sold or held for sale in 1996 included pretax gains of
$41.0 million on the sale of the Company's defense vehicle business and $20.3
million on the sale of surplus California real estate.
For 1995, income from operations sold or held for sale included a pretax
gain of $50.7 million on the sale of the Company's defense electronics systems
business.
These amounts are included in other income on the income statement.
In 1994, loss from operations sold or held for sale included a $38.8 million
charge related to Teledyne's settlement of certain U.S. Government contracting
matters and is included in selling and administrative expenses.
INCOME TAXES
The Company's effective income tax rate increased in 1996 to 41.1% from 37.2%
in 1995 primarily as a result of non-deductible business combination costs. In
1994, the Company's effective income tax rate was unusually high primarily as a
result of government settlement expenses, part of which were not deductible for
tax purposes.
The Company has determined, based on its history of operating earnings,
expectations of future operating earnings and potential tax planning
strategies, that it is more likely than not that the deferred income tax assets
at December 31, 1996 will be realized.
FINANCIAL CONDITION AND LIQUIDITY
In 1996, cash generated from operations of $226.8 million, proceeds from the
sales of businesses of $124.8 million and cash on hand of $112.6 million were
used to reduce debt by $146.0 million, pay dividends on common and preferred
stock totaling $106.1 million, and invest $105.6 million in capital equipment
and business expansion. In addition, prior to the business combination, $41.4
million was used to redeem the outstanding Teledyne Series E Cumulative
Preferred Stock and $23.7 million was used to repurchase common stock. These
cash transactions plus cash on hand at the beginning of the year resulted in a
cash position of $62.5 million at December 31, 1996. Allegheny Ludlum and
Teledyne terminated their respective stock repurchase programs on or before
April 1, 1996.
Working capital decreased to $614.0 million at December 31, 1996 compared to
$679.8 million at the end of 1995. The current ratio declined to 2.0 in 1996
from 2.2 in 1995, largely due to the use of cash for the prepayment of debt and
the redemption of preferred stock.
In 1996, the domestic credit facilities of Allegheny Ludlum and Teledyne
were replaced with a new five-year credit agreement for Allegheny Teledyne
which provides for borrowings of up to $500 million on a revolving credit
basis. Interest is payable at prime or other alternative interest rate bases,
at the Company's option. Also in 1996, Allegheny Teledyne guaranteed the
payment of the outstanding Teledyne 7% subordinated debentures, due in 1999,
and the outstanding Allegheny Ludlum 6.95% debentures, due in 2025.
In the 1996 fourth quarter the Company redeemed the Teledyne 10%
subordinated debentures, due in 2004, utilizing $250 million from the new
credit facility discussed above and $107 million from cash on hand. As a
result, an extraordinary pretax loss of $22.3 million was recognized to
write-off the related unamortized original issue discount.
As a result of retiring debt and preferred stock in 1996, the Company's debt
to capitalization ratio declined to 34% in 1996 from 42% in 1995. The Company's
net debt to total capitalization ratio declined to 29% in 1996 from 34% in
1995.
Total capital expenditures for 1997 are expected to approximate $130 million
with the largest item being $12 million of the total cost of approximately $40
million for a Sendzimir Mill which is expected to go on stream at Allegheny
Ludlum's Vandergrift, PA plant in late 1999.
In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum
were merged with overfunded defined benefit pension plans of Teledyne. The
resulting pension plan is fully funded with assets significantly in excess of
the projected benefit obligations. As a result, for the indefinite future, the
Company does not anticipate that it will have to contribute to its defined
benefit pension plan. Under current Internal Revenue Code regulations, certain
amounts paid for retiree medical expenses may be reimbursed annually from the
excess pension plan assets. In 1996, the Company recovered the pretax amount of
$30.5 million under these regulations. While not affecting reported operating
profit, cash flow increased by the after-tax effect of the recovered amount.
The Company believes that internally generated funds, current cash on hand
and borrowings from existing credit lines will be adequate to meet foreseeable
needs.
In March 1997, the Company's Board of Directors authorized a stock
repurchase program to acquire up to 12 million shares of common stock in the
open market from time to time using internally generated funds.
27
6
OTHER MATTERS
COSTS AND PRICING
Although inflationary trends in recent years have been moderate, during the
same period certain critical raw material costs have been volatile. The Company
primarily uses the last-in, first-out method of inventory accounting which
reflects current costs in the cost of products sold. The Company considers
these costs, the increasing costs of equipment and other costs in establishing
its sales pricing policies and has instituted raw material surcharges on
certain of its products to the extent permitted by competitive factors in the
marketplace. The Company continues to emphasize cost containment in all
aspects of its business.
HEDGING
The Company uses derivative financial instruments from time-to-time to hedge
ordinary business risks regarding foreign currencies on product sales and to
partially hedge against volatile raw material cost fluctuations in the
specialty metals segment. The Company believes that adequate controls are in
place to monitor these activities which are not financially material.
ENVIRONMENTAL
The Company is subject to federal, state and local environmental laws and
regulations which require that it investigate and remediate the effects of the
release or disposal of materials at sites associated with past and present
operations, including sites at which the Company has been identified as a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as Superfund, and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws. The Company's reserves for
environmental investigations and remediation totaled approximately $44 million
at December 31, 1996. Based on currently available information, management does
not believe future environmental costs at sites with which the Company has been
identified in excess of those accrued are 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.
With respect to proceedings brought under the federal Superfund laws, or
similar state statutes, the Company has been identified as a potentially
responsible party at approximately 60 of such sites, excluding those at which
it believes it has no future liability. The Company's involvement is very
limited or de minimis at approximately 50 of these sites, and the potential
loss exposure with respect to any individual site is not considered to be
material.
In 1996, AICPA Statement of Position 96-1, Environmental Remediation
Liabilities, was issued which establishes accounting standards for recognition
of environmental costs. This statement, which is effective in 1997, is not
expected to have a material effect on the consolidated financial statements.
For additional discussion of environmental matters, see Notes 1 and 13 of
the Notes to Consolidated Financial Statements.
GOVERNMENT CONTRACTS
A number of the Company's subsidiaries perform work on contracts with the U.S.
Government. Many of these contracts include price redetermination clauses, and
most are terminable at the convenience of the government. Certain of these
contracts are fixed-price or fixed-price incentive development contracts which
involve a risk that costs may exceed those expected when the contracts were
negotiated. Absent modification of these contracts, any costs incurred in
excess of the fixed or ceiling prices must be borne by the Company. In
addition, virtually all defense programs are subject to curtailment or
cancellation due to the year-to-year nature of the government appropriations
and allocations process. A material reduction in U.S. Government appropriations
may have an adverse effect on the Company's business, depending upon the
specific programs affected by any such reduction. Since certain contracts
extend over a long period of time, all revisions in cost and funding estimates
during the progress of work have the effect of adjusting the current period
earnings on a cumulative catch-up basis. When the current contract estimate
indicates a loss, provision is made for the total anticipated loss. The Company
obtains many U.S. Government contracts through the process of competitive
bidding. There can be no assurance that the Company will continue to be
successful in having its bids accepted.
28
7
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, including claims based on
business practices and cost classifications and actions under the False Claims
Act. The False Claims Act permits a person to assert the rights of the U.S.
Government by initiating a suit under seal against a contractor if such person
purports to have information that the contractor falsely submitted a claim to
the U.S. Government for payment. If it chooses, the U.S. Government may
intervene and assume control of the case.
Although government contracting claims may be resolved by detailed
fact-finding and negotiation, on those occasions when they are not so resolved,
civil or criminal legal or administrative proceedings may ensue. 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 extent of the Company's business with the U.S.
Government, a suspension or debarment of the Company could have a material
adverse effect on the future operating results and consolidated financial
condition of the Company. However, 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 result in suspension or debarment of the
Company, or that is otherwise 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.
For additional discussion of government contract matters, see Note 13 of the
Notes to Consolidated Financial Statements.
FORWARD LOOKING AND OTHER STATEMENTS
This annual report contains various "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements, which represent the Company's expectations or beliefs concerning
various future events, include the following: statements concerning anticipated
effects of the combination of the businesses of Allegheny Ludlum and Teledyne
on future earnings, cost savings and operations of the Company; announced price
increases for stainless steel sheet, strip and plate and tool steel; net cash
flow; aviation industry trends; certain expected capital expenditures; the
outcome of any government inquiries, litigation or other proceedings related to
government contracts or other matters; and future environmental costs. These
statements are based on current expectations that involve a number or risks and
uncertainties, including those described under the captions "Other Matters -
Environmental" and "Other Matters - Government Contracts." Other important
factors that could cause actual results to differ from those in such
forward-looking statements include the following:
Demand for Specialty Metals. Demand for products of the Company's specialty
metals businesses is cyclical because the industries in which customers in such
businesses operate are cyclical and are subject to changes in general economic
conditions. As a result, the Company's operating results could be subject to
significant fluctuation.
Raw Materials for Specialty Metals. Certain of the principal raw materials
used to produce specialty metals can be acquired only from foreign sources,
some of which are located in countries that may be subject to unstable
political and economic conditions which might disrupt supplies or affect the
prices of these materials. Purchase prices of certain critical raw materials
are volatile. As a result, the Company's operating results could be subject to
significant fluctuation.
Export Sales. Among the risks associated with export sales are export
controls, changes in legal and regulatory requirements, policy changes
affecting the markets for the Company's products, changes in tax laws and
tariffs, exchange rate fluctuations, political and economic instability,
accounts receivable collection and the seasonality of foreign sales. Any of
these factors could have an adverse effect on the Company's results of
operations.
Uncertainties relating to Realization of Synergies. There can be no
assurance that the Company will be able to realize, or do so within any
particular time frame, the cost reductions, cash-flow increases or other
synergies expected to result from the combination or generate additional
revenue to offset any unanticipated inability to realize such expected
synergies. Realization of the anticipated benefits of the combination could
take longer than expected and implementation difficulties and market factors
could alter the anticipated benefits.
Additional risk factors are described from time to time in the Company's
filings with the Securities and Exchange Commission.
29
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ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
For the Years Ended 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
SALES $ 3,815.6 $ 4,048.1 $ 3,457.3
- ---------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 2,901.7 3,158.9 2,766.8
Selling and administrative expenses 515.5 479.0 622.1
Merger and restructuring costs 57.5 6.4 --
Interest expense, net 34.7 37.6 44.0
- ---------------------------------------------------------------------------------------------------------------------------
3,509.4 3,681.9 3,432.9
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before Other Income 306.2 366.2 24.4
Other Income 78.5 74.7 4.8
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 384.7 440.9 29.2
PROVISION FOR INCOME TAXES 158.2 164.1 19.4
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS 226.5 276.8 9.8
EXTRAORDINARY LOSS ON REDEMPTION
OF DEBT, NET OF INCOME TAX BENEFIT (13.5) (2.9) --
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 213.0 273.9 9.8
Dividends on Preferred Stock 2.0 1.6 --
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 211.0 $ 272.3 $ 9.8
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Income before Extraordinary Loss $ 1.28 $ 1.56 $ 0.06
Extraordinary Loss (0.08) (0.02) --
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1.20 $ 1.54 $ 0.06
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
30
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ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 62.5 $ 112.6
Accounts receivables 525.3 554.5
Inventories 518.4 465.9
Deferred income taxes 70.1 75.7
Prepaid expenses and other current assets 23.5 27.2
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,199.8 1,235.9
Property, plant and equipment 731.4 755.9
Prepaid pension cost 352.5 314.9
Cost in excess of net assets acquired 177.1 161.0
Other assets 145.6 161.2
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,606.4 $ 2,628.9
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 241.7 $ 223.9
Accrued liabilities 344.1 332.2
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 585.8 556.1
Long-term debt 443.4 561.1
Accrued postretirement benefits 567.5 563.9
Other 138.2 128.9
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,734.9 1,810.0
- ---------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock (redeemed in 1996) -- 33.1
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10: authorized - 50,000,000 shares;
issued - none -- --
Common stock, par value $0.10: authorized - 600,000,000 shares; issued and
outstanding - 174,389,377 shares in 1996 and 174,486,110 shares in 1995 17.4 17.4
Additional paid-in capital 246.6 255.8
Retained earnings 596.7 498.1
Other 10.8 14.5
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 871.5 785.8
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,606.4 $ 2,628.9
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
31
10
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
For the Years Ended 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 213.0 $ 273.9 $ 9.8
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 105.3 110.9 108.4
Gains on sales of businesses (64.5) (51.1) --
Deferred income taxes 18.6 42.4 44.0
Extraordinary loss on redemption of debt 13.5 2.9 --
Change in operating assets and liabilities:
Inventories (67.1) (12.9) (4.4)
Prepaid pension costs (41.8) (83.6) (75.4)
Accounts payable 21.3 (46.3) 68.4
Accrued income taxes 17.9 12.5 (5.6)
Accrued liabilities (13.8) (30.8) (47.4)
Accounts receivables 13.0 (7.5) (112.4)
Long-term postretirement liability 11.6 (0.6) 1.3
Other (0.2) 3.3 (14.2)
- ---------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 226.8 213.1 (27.5)
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from the sales of businesses 124.8 69.0 7.2
Purchases of property, plant and equipment (88.6) (93.8) (117.2)
Purchases of businesses (17.0) (43.2) (25.0)
Disposals of property, plant and equipment 16.0 14.8 11.2
Sales of short-term investments -- -- 50.5
Other (9.3) (15.1) (6.6)
- ---------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 25.9 (68.3) (79.9)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt and capital leases (436.5) (114.9) (67.9)
Increase in long-term debt 290.5 167.3 56.7
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in long-term debt (146.0) 52.4 (11.2)
Dividends paid - common and preferred stock (106.1) (57.1) (34.0)
Redemption of preferred stock (41.4) -- --
Purchases of common stock (23.7) (75.6) (10.9)
Exercises of stock options 13.9 6.4 0.4
Other 0.5 0.8 0.9
- ---------------------------------------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES (302.8) (73.1) (54.8)
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (50.1) 71.7 (162.2)
Cash and cash equivalents at beginning of year 112.6 40.9 203.1
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 62.5 $ 112.6 $ 40.9
- ---------------------------------------------------------------------------------------------------------------------------
NON-CASH TRANSACTIONS:
Preferred stock dividends on common stock $ 8.3 $ 33.1 $ --
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
32
11
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
Additional
Common Paid-In Retained Stockholders'
Stock Capital Earnings Other Equity
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $ 17.8 $ 326.0 $ 339.0 $ 3.5 $ 686.3
Net income -- -- 9.8 -- 9.8
Cash dividends on common
stock (Allegheny Ludlum
$0.48 per share) -- -- (34.0) -- (34.0)
Employee stock plans -- 4.3 (0.5) -- 3.8
Purchase and cancellation
of common stock -- (10.9) -- -- (10.9)
Increase in net unrealized appreciation -- -- -- 0.5 0.5
Currency translation adjustment -- -- -- (0.1) (0.1)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 17.8 319.4 314.3 3.9 655.4
Net income -- -- 273.9 -- 273.9
Preferred stock dividends on common
stock (Teledyne $0.31 per share) -- -- (33.1) -- (33.1)
Cash dividends on common and
preferred stock (Allegheny Ludlum
$0.49 per common share,
Teledyne $0.21 per common share
and $0.60 per preferred share) -- -- (57.1) -- (57.1)
Employee stock plans -- 11.6 0.1 -- 11.7
Purchase and cancellation
of common stock (0.4) (75.2) -- -- (75.6)
Increase in net unrealized appreciation -- -- -- 9.9 9.9
Currency translation adjustment -- -- -- 0.7 0.7
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 17.4 255.8 498.1 14.5 785.8
Net income -- -- 213.0 -- 213.0
Preferred stock dividends on common
stock (Teledyne $0.08 per share) -- -- (8.3) -- (8.3)
Cash dividends on common and preferred
stock (Allegheny Teledyne $0.16
per common share, Allegheny Ludlum
$0.42 per common share, Teledyne
$0.44 per common share and
$1.20 per preferred share) -- -- (106.1) -- (106.1)
Employee stock plans -- 14.5 -- -- 14.5
Purchase and cancellation
of common stock -- (23.7) -- -- (23.7)
Decrease in net unrealized appreciation -- -- -- (1.6) (1.6)
Currency translation adjustment -- -- -- (2.1) (2.1)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 17.4 $ 246.6 $ 596.7 $ 10.8 $ 871.5
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
33
12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
ALLEGHENY TELEDYNE INCORPORATED
We have audited the accompanying consolidated balance sheets of Allegheny
Teledyne Incorporated and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
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 audit. We did not audit the 1995 and 1994 financial statements of
Teledyne, Inc., a wholly owned subsidiary, which statements reflect total
assets constituting 61.1% of the related consolidated totals as of December 31,
1995, and total revenues constituting 63.1% and 68.9% of the related
consolidated totals for the years ended December 31, 1995 and 1994,
respectively. Those statements were audited by other auditors whose report
thereon dated January 13, 1996 has been furnished to us, and our opinion,
insofar as it relates to data included for Teledyne, Inc., is based solely on
the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit and the report of other
auditors provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Allegheny Teledyne
Incorporated at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company changed its method of accounting for depreciation.
/s/ ERNST & YOUNG LLP
- ------------------------
Pittsburgh, Pennsylvania
January 22, 1997
34
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Allegheny
Teledyne Incorporated ("Allegheny Teledyne") and its subsidiaries. As described
in Note 2, on August 15, 1996 Allegheny Ludlum Corporation ("Allegheny Ludlum")
and Teledyne, Inc. ("Teledyne") combined to form Allegheny Teledyne. The
combination was accounted for under the pooling of interests method of
accounting and these consolidated financial statements reflect the combined
financial position, operating results and cash flows of Allegheny Ludlum and
Teledyne as if they had been combined for all periods presented. Significant
intercompany accounts and transactions have been eliminated. Unless the context
requires otherwise, the "Company" refers to Allegheny Teledyne and its
subsidiaries.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts and related disclosures. Actual results could
differ from those estimates. Management believes that the estimates are
reasonable.
Cash Equivalents
Marketable securities with original maturities of three months or less are
included in cash equivalents. The carrying amounts approximate market.
ACCOUNTS RECEIVABLE
Receivables are presented net of a reserve for doubtful accounts of $13.0
million at December 31, 1996 and $11.0 million at December 31, 1995. 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.
INVENTORIES
Inventories are stated at the lower of cost (last-in, first-out; first-in,
first-out 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.
PROPERTY AND EQUIPMENT
Property, plant and equipment are carried at cost. The straight-line method of
depreciation was adopted for all property placed into service after July 1,
1996. For buildings and equipment acquired prior to July 1, 1996, depreciation
is computed using a combination of accelerated and straight-line methods. The
Company believes the new method will more appropriately reflect its financial
results by better allocating costs of new property over the useful lives of
these assets. In addition, the new method more closely conforms with that
prevalent in the industries in which the Company operates and with that used by
Allegheny Ludlum. The effect of this change on net income for 1996 was not
material.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired related to businesses purchased after
November 1970 is being amortized on a straight-line basis over periods not
exceeding 40 years.
FINANCIAL INSTRUMENTS
The fair values of financial instruments approximated their carrying values at
December 31, 1996. Fair values have been determined through information
obtained from quoted market sources and management estimates.
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 separate component
of stockholders' equity.
35
14
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 consider 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 anticipated allocations among potentially
responsible parties at federal Superfund sites or similar state-managed sites
and an assessment of the likelihood that such parties will fulfill their
obligations at such sites. 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.
REVENUE RECOGNITION
Commercial sales and revenue from U.S. Government fixed-price type contracts
are generally recorded as deliveries are made or as services are rendered. For
certain fixed-price type contracts that require substantial performance over a
long time period before deliveries begin, sales are recorded based upon
attainment of scheduled performance milestones. Sales under cost-reimbursement
contracts are recorded as costs are incurred and fees are earned.
Since certain contracts extend over a long period of time, all revisions in
cost and funding estimates during the progress of work have the effect of
adjusting the current period earnings on a cumulative catch-up basis. When the
current contract estimate indicates a loss, provision is made for the total
anticipated loss.
RESEARCH AND DEVELOPMENT
Company-funded research and development costs ($66.2 million in 1996, $66.5
million in 1995 and $74.1 million in 1994), which include bid and proposal
costs, are expensed as incurred. Costs related to customer-funded research and
development contracts are charged to costs and expenses as the related sales
are recorded. A portion of the costs incurred for Company-funded research and
development is recoverable through overhead cost allowances on government
contracts.
INCOME TAXES
Provision for income taxes included deferred taxes resulting from temporary
differences in income for financial and tax purposes using the liability
method. Such temporary differences result primarily from differences in the
carrying value of assets and liabilities.
NET INCOME PER COMMON SHARE
The weighted average number of shares of common stock used in the computation
of net income per share was 174,082,298 in 1996, 176,386,341 in 1995 and
177,561,482 in 1994. The potential dilution of common stock equivalents is not
material and, therefore, is not included in the computation of per share data.
NOTE 2. COMBINATION OF ALLEGHENY LUDLUM AND TELEDYNE --
On August 15, 1996, Allegheny Ludlum and Teledyne became wholly owned
subsidiaries of Allegheny Teledyne. Allegheny Ludlum shareholders received one
share of Allegheny Teledyne common stock for each one of their Allegheny Ludlum
common shares. Teledyne stockholders received 1.925 shares of Allegheny
Teledyne common stock for each of their Teledyne common shares. There were
174.2 million shares of Allegheny Teledyne issued in the combination of the two
companies. Revenues and net income for the six months ended June 30, 1996 (the
most recent interim period prior to the pooling) were $691.7 million and $39.6
million, respectively, for Allegheny Ludlum and $1.3 billion and $102.4
million, respectively, for Teledyne. Intercompany transactions prior to the
combination were not material.
36
15
The Company recorded merger and restructuring costs of $57.5 million ($42.9
million net of tax) in 1996 for financial advisory, legal, accounting,
severance and other costs associated with the integration of the combined
companies.
NOTE 3. INVENTORIES --
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Raw materials and supplies $153.8 $141.7
Work-in-process 515.1 544.4
Finished goods 104.8 97.1
- ---------------------------------------------------------------------------------------------------------------------------
Total inventories at current cost 773.7 783.2
Less allowances to reduce current cost values to LIFO basis (229.6) (273.0)
Progress payments (25.7) (44.3)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVENTORIES $518.4 $465.9
- ---------------------------------------------------------------------------------------------------------------------------
Inventories, before progress payments, determined on the last-in, first-out
method were $423.3 million at December 31, 1996 and $411.5 million at December
31, 1995. 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 1996, 1995 and 1994, inventory usage resulted in liquidations of
last-in, first-out inventory quantities. These inventories were carried at the
lower costs prevailing in prior years as compared with the cost of current
purchases. The effect of these last-in, first-out liquidations was to increase
net income by $4.9 million in 1996, $8.0 million in 1995 and $8.5 million in
1994.
The Company enters into raw material (principally nickel) future contracts
from time-to-time to hedge its exposure to price fluctuations. Gains and losses
on hedged contracts are deferred and recognized in cost of sales upon
expiration of the contract period. These contracts are not significant to the
Company's total raw material purchases and are not material from a financial
point of view.
Inventories, before progress payments, related to long-term contracts were
$8.1 million and $25.3 million at December 31, 1996 and 1995, respectively.
Progress payments related to long-term contracts were $8.5 million and $24.1
million at December 31, 1996 and 1995, respectively.
NOTE 4. LONG-TERM DEBT --
CREDIT AGREEMENTS
In August 1996, Allegheny Teledyne entered into a five-year credit agreement
with a group of banks that provides for borrowings of up to $500 million on a
revolving credit basis. Interest is payable at prime or other alternative
interest rate bases, at the Company's option. The agreement provides for an
annual facility fee of 0.075%. The agreement has various covenants that limit
the Company's ability to dispose of properties and merge with another
corporation. The Company is also required to maintain certain financial ratios
as defined in the agreement that can also limit the amount of dividend payments
and share repurchases. Under the most restrictive requirement, approximately
56% of the Company's retained earnings is currently free of restrictions
pertaining to cash dividend distributions and share repurchases.
The Company's subsidiaries also maintain credit agreements with various
foreign banks which provide for additional borrowings of up to $66.0 million.
These agreements provide for annual facility fees of 0.15%.
Borrowings outstanding under the credit agreements are unsecured.
Commitments under separate standby letters of credit outstanding were $38.3
million at December 31, 1996 and $72.0 million at December 31, 1995.
DEBENTURES
In 1996, Allegheny Teledyne guaranteed the outstanding Allegheny Ludlum 6.95%
debentures and Teledyne 7% subordinated debentures. In addition, utilizing $250
million from the credit agreement discussed above and $107 million from cash on
hand, the Company redeemed the Teledyne 10% subordinated debentures. As a
result, an extraordinary loss of $13.5 million, net of a tax benefit of $8.8
million, was recognized to write-off the unamortized original issue discount.
37
16
In 1995, $150 million of Allegheny Ludlum 6.95% debentures were issued. A
portion of the proceeds from this issue was used to extinguish, at a premium to
book value, $100 million of Allegheny Ludlum 5-7/8% convertible subordinated
debentures resulting in an extraordinary loss of $2.9 million, net of a tax
benefit of $2.0 million.
Long-term debt at December 31, 1996 and 1995 was as follows:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Credit agreements $ 241.3 $ 29.1
Allegheny Ludlum 6.95% debentures, due 2025 150.0 150.0
Teledyne 7% subordinated debentures, due 1999,
$1.9 payable annually 20.7 22.4
Industrial revenue bonds due 1997 through 2007 16.6 18.0
Teledyne 10% subordinated debentures, due 2004, Series A
and C (net of unamortized discount of $24.6 in 1995) -- 332.4
Capitalized leases and other 19.3 17.9
- ---------------------------------------------------------------------------------------------------------------------------
447.9 569.8
Current portion (4.5) (8.7)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 443.4 $ 561.1
- ---------------------------------------------------------------------------------------------------------------------------
The weighted average interest rate of borrowings outstanding under the
credit agreements was 5.2% at December 31, 1996 and 4.4% at December 31, 1995.
Scheduled maturities of long-term borrowings during the next five years are
$4.5 million in 1997, $58.4 million in 1998, $19.3 million in 1999, $1.3
million in 2000, and $191.5 million in 2001 including borrowings under
revolving credit agreements of $51.3 million in 1998 and $190.0 million in
2001.
Interest expense was $48.5 million in 1996, $50.6 million in 1995, and $52.0
million in 1994. Interest and commitment fees paid were $48.5 million in 1996,
$48.1 million in 1995, and $48.6 million in 1994.
NOTE 5. SUPPLEMENTAL BALANCE SHEET INFORMATION --
Cash and cash equivalents were as follows:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Cash $ 27.9 $ 22.1
Repurchase agreements, at cost which approximates market -- 13.0
Other short-term investments, at cost which approximates market 34.6 77.5
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents $ 62.5 $ 112.6
- ---------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment were as follows:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Land $ 41.1 $ 36.6
Buildings 281.4 289.6
Equipment and leasehold improvements 1,256.9 1,227.0
- ---------------------------------------------------------------------------------------------------------------------------
1,579.4 1,553.2
Accumulated depreciation and amortization (848.0) (797.3)
- ---------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment $ 731.4 $ 755.9
- ---------------------------------------------------------------------------------------------------------------------------
38
17
Accounts payable included $30.6 million at December 31, 1996 and $9.6
million at December 31, 1995 for checks outstanding in excess of cash balances.
Accrued liabilities included salaries and wages of $80.7 million and $75.2
million in 1996 and 1995, respectively, and accrued severance costs of $11.9
million in 1996.
NOTE 6. REDEMPTION OF PREFERRED STOCK --
On August 14, 1996, all of the outstanding shares of the Teledyne Series E
Cumulative Preferred Stock were redeemed at $15.60 per share.
NOTE 7. 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, 1996, there were no shares of preferred stock
issued.
COMMON STOCK
In connection with the combination of Allegheny Ludlum and Teledyne,
Allegheny Teledyne assumed stock options and awards, as well as purchase and
designation rights and related awards outstanding under stock-based
compensation plans maintained by Allegheny Ludlum and Teledyne prior to the
combination. In addition, Allegheny Teledyne's Board of Directors adopted the
Allegheny Teledyne Incorporated 1996 Incentive Plan and the 1996 Non-Employee
Director Stock Compensation Plan, which were approved by the stockholders on
August 15, 1996. The 1996 Incentive Plan provides for awards of up to
9,000,000 shares of Allegheny Teledyne common stock to officers and key
employees of the Company. A maximum of 700,000 shares may be issued under the
1996 Non-Employee Director Stock Compensation Plan to directors who are not
employees of the Company.
FASB Statement 123, "Accounting for Stock-based Compensation," became
effective in 1996. Compensation cost for the Company's stock option plans,
determined on the basis of the fair values at the grant dates for awards under
those plans consistent with the method of FASB Statement 123, was not material
to net income and earnings per share.
The Company has elected to continue to account for its stock option plans in
accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Under APB Opinion 25, no compensation expense 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.
39
18
Stock option transactions under the Company's employee plans, which reflect
options granted prior to the combination which were assumed by the Company, are
summarized as follows:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
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 7,937,884 $10.90 7,626,897 $10.51 6,033,937 $11.47
Granted 2,058,200 $16.57 1,207,301 $12.54 2,115,918 $ 8.68
Exercised (1,074,512) $ 9.35 (723,339) $ 9.28 (164,488) $ 9.12
Cancelled (374,389) $11.75 (172,975) $11.31 (358,470) $10.03
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding
end of year 8,547,183 $12.42 7,937,884 $10.90 7,626,897 $10.51
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable at
end of year 4,003,054 $10.49 3,500,875 $ 9.71 2,830,269 $ 9.70
- ---------------------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1996 ranged from
$8.33 to $22.94. The weighted-average remaining contractual life of those
options is 7.6 years.
In addition to the Company's stock option plans, at December 31, 1996, a
maximum of 357,600 shares were issuable to forty-four employees under the
Allegheny Ludlum Performance Share Plan based on units awarded to such
participants for the 1995-1996 award period, which are payable in three annual
installments beginning in 1997.
Compensation expense related to the various stock-based plans was $5.5
million in 1996, $10.0 million in 1995 and $0.2 million in 1994.
NOTE 8. INCOME TAXES --
Provision for income taxes was as follows:
(In millions) Year Ended
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Current - Federal $114.6 $100.4 $(31.7)
- State 19.0 17.3 5.1
- Foreign 6.0 4.0 2.0
- ---------------------------------------------------------------------------------------------------------------------------
- Total 139.6 121.7 (24.6)
- ---------------------------------------------------------------------------------------------------------------------------
Deferred - Federal 11.2 29.8 40.9
- State 7.2 12.6 3.1
- Foreign 0.2 -- --
- ---------------------------------------------------------------------------------------------------------------------------
- Total 18.6 42.4 44.0
- ---------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $158.2 $164.1 $ 19.4
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes paid $115.4 $ 55.0 $ 15.3
- ---------------------------------------------------------------------------------------------------------------------------
40
19
Income before income taxes and extraordinary loss included income from
domestic operations of $366.6 million in 1996, $437.1 million in 1995 and $23.6
million in 1994.
The following is a reconciliation of the statutory federal income tax rate
to the actual effective income tax rate:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal tax benefit 4.3 4.4 18.3
Capitalization of merger and restructuring costs 1.8 -- --
Amortization of cost in excess of net assets acquired 0.3 0.3 4.3
Foreign sales corporation exemption (0.6) (0.4) (7.5)
Non-deductible settlement expenses -- -- 16.3
Other 0.3 (2.1) --
- ---------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 41.1% 37.2% 66.4%
- ---------------------------------------------------------------------------------------------------------------------------
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 which have resulted in differences in the timing of
the recognition of income and expense were as follows:
(In millions) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Income Tax Assets
- ---------------------------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions $219.0 $219.6
Deferred compensation and other benefit plans 37.0 37.4
Self-insurance reserves 16.1 17.0
Long-term contracts 6.6 13.6
Other items 84.8 71.6
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 363.5 359.2
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Income Tax Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Pension asset 136.7 128.3
Bases of property, plant and equipment 110.7 106.8
Inventory valuation 15.8 10.6
Other items 26.6 26.7
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 289.8 272.4
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred income tax asset $ 73.7 $ 86.8
- ---------------------------------------------------------------------------------------------------------------------------
NOTE 9. PENSION PLANS AND OTHER POSTEMPLOYMENT BENEFITS --
In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum were
merged with over-funded defined benefit pension plans of Teledyne, and
Allegheny Teledyne became the plan sponsor.
The Company has defined benefit pension plans and defined contribution
plans, covering substantially all of its 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.
41
20
Components of pension expense (income) for the Company's defined benefit
plans included the following:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
Expense (Income)
--------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 33.9 $ 28.4 $ 38.7
Interest cost on benefits earned in prior years 124.1 121.8 104.3
Expected return on plan assets (202.7) (164.1) (146.5)
Net amortization of unrecognized amounts (22.3) (42.8) (57.2)
- ---------------------------------------------------------------------------------------------------------------------------
Pension income for defined benefit plans (67.0) (56.7) (60.7)
Other -- -- (2.9)
- ---------------------------------------------------------------------------------------------------------------------------
Pension income $ (67.0) $(56.7) $(63.6)
- ---------------------------------------------------------------------------------------------------------------------------
Actual return on plan assets was income of $28.8 million in 1996, income of
$375.6 million in 1995 and loss of $48.5 million in 1994. Pension costs for
defined contribution plans were $16.2 million in 1996, $14.9 million in 1995
and $13.5 million in 1994.
Actuarial assumptions used to develop the components of pension expense
(income) were as follows:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Discount rate 7.5% 7.9% 7.4%
Rate of increase in future compensation levels 3%-4.5% 3%-4.5% 3%-4.5%
Expected long-term rate of return on assets 8.6% 7.8% 6.6%
Plan assets in excess of projected benefit obligation were as follows:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value, primarily listed stocks,
government securities and pooled investment funds $2,359.2 $2,415.3
- ---------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation
Vested benefit obligation 1,573.4 1,539.8
Non-vested benefit obligation 91.1 41.5
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 1,664.5 1,581.3
Additional benefits related to future compensation levels 172.8 166.1
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 1,837.3 1,747.4
Plan assets in excess of projected benefit obligation $ 521.9 $ 667.9
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation:
Included in balance sheet:
Prepaid pension cost $ 352.5 $ 314.9
Other long-term liabilities (4.0) (5.9)
Not included in balance sheet:
Unrecognized net gain due to experience different from
that assumed and changes in the discount rate 90.5 251.5
Unrecognized net asset at adoption of SFAS No. 87, net of amortization 161.9 195.6
Unrecognized prior service cost (79.0) (88.2)
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $ 521.9 $ 667.9
- ---------------------------------------------------------------------------------------------------------------------------
42
21
Any reversion of pension plans assets to the Company would be subject to
federal and state income taxes, substantial excise tax and other possible
claims.
Discount rates of 7.25% at December 31, 1996 and 7.3% at December 31, 1995
were used for the valuation of pension obligations.
OTHER POSTRETIREMENT BENEFIT PLANS
The Company 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.
Cash from excess pension assets of $30.5 million in 1996 and $17.5 million
in 1995 was transferred pre-tax under Section 420 of the Internal Revenue Code
from the Company's defined benefit pension plans to the Company. The Internal
Revenue Code permits transfers annually of an amount not to exceed the
Company's actual expenditures on retiree health care benefits. While not
affecting reported operating profit, cash flow increased by the after-tax
effect of the transferred amount.
Components of postretirement benefit expenses included the following:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
Expense (Income)
--------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 7.9 $ 6.9 $ 7.4
Interest cost on benefits earned in prior years 46.1 46.7 42.2
Expected return on plan assets (6.5) (4.7) (2.7)
Net amortization of unrecognized amounts 2.3 0.5 (0.8)
- ---------------------------------------------------------------------------------------------------------------------------
Postretirement benefit expense $ 49.8 $ 49.4 $ 46.1
- ---------------------------------------------------------------------------------------------------------------------------
Actual return on plan assets was $5.4 million in 1996, $4.8 million in 1995
and $2.7 million in 1994.
Discount rates of 7.5% in 1996, 7.7% in 1995 and 7.5% in 1994 were used in
determining the post-retirement benefit expense.
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 9.03% in
1996 and was assumed to decrease to 5.25% percent in the year 2002 and remain
at that level thereafter. The health care cost trend rate assumption had a
significant effect on the amounts reported. If the assumed health care cost
trend rates were increased by one percentage point in each year, this would
increase the accumulated postretirement benefit obligation (APBO) for health
care plans at December 31, 1996 by $70.1 million and the postretirement benefit
expense for 1996 by $7.6 million.
The following table sets forth the postretirement benefit plans' combined
funded status reconciled with the amounts recognized in the balance sheet:
(In millions) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $441.7 $482.4
Other fully eligible plan participants 72.5 82.4
Other active plan participants 121.9 134.4
- ---------------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 636.1 699.2
Less plan assets at fair value, primarily investment in limited
partnership funds 52.5 45.6
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 583.6 653.6
Unrecognized net loss (35.1) (82.3)
Unrecognized prior service cost 19.0 (7.4)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $567.5 $563.9
- ---------------------------------------------------------------------------------------------------------------------------
43
22
The Company intends to make transfers of excess pension assets to the extent
and for each year permitted under Section 420 of the Internal Revenue Code.
Under the assumptions set forth above and assuming that the expiration date of
Section 420 of the Internal Revenue Code is deferred, the present value of
excess pension assets available for transfer under Section 420 is sufficient to
fund more than 50% of the present value of the accumulated postretirement
benefit cost of the Company as a whole including those attributable to each of
its subsidiaries.
The Company's Chairman, President and Chief Executive Officer serves on the
advisory boards of the limited partnership funds.
The discount rates used in determining the APBO were 7.25% at December 31,
1996 and 7.2% at December 31, 1995. The expected long-term rate of return on
plan assets ranged from 9% to 15% in 1996 and 1995.
NOTE 10. ACQUISITIONS --
In May 1996, the Company acquired Jandy Industries, a United States producer of
water flow control valves and electronic control systems for the swimming pool
industry. The business was purchased for $13.5 million in cash. In connection
with the purchase, the Company acquired operating assets with a fair value of
$20.9 million and assumed operating liabilities of $7.4 million.
In January 1995, the Company acquired the material handling business of Kooi
B.V., a Netherlands company that is a European supplier of material handlers.
In December 1995, the Company acquired two businesses: Stellram Group, based in
Europe, manufacturers of high precision milling, boring and drilling systems
primarily for the European market; and Envases Comerciales, S.A., a Costa Rican
manufacturer of specialty packaging for pharmaceutical and food companies
throughout Central America and Mexico. These three businesses were purchased
for $59.5 million, consisting of $43.2 million in cash and the assumption of
$16.3 million in debt. In connection with these purchases, the Company acquired
operating assets with a fair value of $87.9 million and assumed operating
liabilities of $28.4 million.
NOTE 11. BUSINESS SEGMENTS --
Allegheny Teledyne is a group of technology-based manufacturing businesses
serving worldwide customers with specialty metals for consumer, industrial and
aerospace applications; commercial and government-related aerospace and
electronics products; and industrial and consumer products. Approximately 26%
of the Company's workforce is covered by various union contracts.
Information on the Company's business segments was as follows:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Sales:
Specialty metals $2,045.3 $2,203.6 $1,674.0
Aerospace and electronics 987.8 914.4 863.7
Industrial 447.1 378.5 292.3
Consumer 287.9 267.9 255.5
- ---------------------------------------------------------------------------------------------------------------------------
Total continuing operations 3,768.1 3,764.4 3,085.5
Operations sold or held for sale 47.5 283.7 371.8
- ---------------------------------------------------------------------------------------------------------------------------
Total sales $3,815.6 $4,048.1 $3,457.3
- ---------------------------------------------------------------------------------------------------------------------------
44
23
The Company's backlog of confirmed orders was approximately $1.2 billion at
December 31, 1996 and 1995. Backlog of the specialty metals segment was $658.8
million at December 31, 1996 and $564.9 million at December 31, 1995.
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Sales to the U.S. Government including direct sales as
prime contractor and indirect sales as subcontractor:
Specialty metals $ 77.1 $ 44.3 $ 50.5
Aerospace and electronics 581.8 518.0 485.0
Industrial and consumer 1.4 2.8 3.5
Operations sold or held for sale 22.4 195.3 246.8
- ---------------------------------------------------------------------------------------------------------------------------
Total sales to U.S. Government $682.7 $760.4 $785.8
- ---------------------------------------------------------------------------------------------------------------------------
Sales to the U.S. Government included sales to the Department of Defense of
$450.5 million in 1996, $613.4 million in 1995 and $599.5 million in 1994.
Total foreign sales were $652.6 million in 1996, $626.2 million in 1995 and
$586.3 million in 1994. Of these amounts, sales by operations in the United
States to customers in other countries were $440.5 million in 1996, $517.1
million in 1995 and $448.2 million in 1994. Sales between business segments,
which were not material, generally were priced at prevailing market prices.
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Operating profit:
Specialty metals $278.9 $301.1 $106.8
Aerospace and electronics 99.9 88.2 (6.7)
Industrial 44.0 33.5 21.1
Consumer 18.5 12.7 15.7
- ---------------------------------------------------------------------------------------------------------------------------
Total operating profit 441.3 435.5 136.9
Merger and restructuring costs (57.5) (6.4) --
Corporate expenses (42.1) (41.8) (51.3)
Interest expense, net (34.7) (37.6) (44.0)
Operations sold or held for sale 60.5 83.9 (29.8)
Excess pension income 17.2 7.3 17.4
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary loss $384.7 $440.9 $ 29.2
- ---------------------------------------------------------------------------------------------------------------------------
Operating results for operations sold or held for sale included pretax gains
of $41.0 million on the sale of the Teledyne defense vehicle business and $20.3
million on the sale of surplus real estate in California in 1996 and $50.7
million on the sale of the Teledyne defense electronic systems business in
1995. These amounts are included with other income in the statements of income
for the respective periods. In addition, operating results for operations sold
or held for sale for 1996 included a charge of $7.7 million to settle certain
U.S. Government contracting legal issues relating to two former Teledyne
units. Merger and restructuring expenses included proxy expenses in 1995.
For 1994, operating results were adversely affected by pretax charges
totalling $136.8 million related to Teledyne's settlements of certain
litigation concerning U.S. Government contracting and export matters. Operating
results of the specialty metals segment, aerospace and electronics segment and
operations sold or held for sale included $13.0 million, $85.0 million and
$38.8 million, respectively, for these settlements.
Excess pension income represents the amount of pension income in excess of
amounts allocated to business segments to offset pension and other
postretirement benefit expenses.
45
24
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Specialty metals $ 69.6 $ 69.2 $ 63.7
Aerospace and electronics 12.8 14.9 14.7
Industrial 11.3 9.6 9.1
Consumer 6.7 7.8 7.7
Corporate and operations sold or held for sale 4.9 9.4 13.2
- ---------------------------------------------------------------------------------------------------------------------------
$ 105.3 $ 110.9 $ 108.4
- ---------------------------------------------------------------------------------------------------------------------------
Capital expenditures:
Specialty metals $ 47.3 $ 58.4 $ 75.7
Aerospace and electronics 15.3 12.7 13.9
Industrial 13.4 13.0 8.3
Consumer 9.1 6.4 11.1
Corporate and operations sold or held for sale 3.5 3.3 8.2
- ---------------------------------------------------------------------------------------------------------------------------
$ 88.6 $ 93.8 $ 117.2
- ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Specialty metals $1,290.6 $1,331.4 $1,247.8
Aerospace and electronics 267.3 249.2 236.4
Industrial 226.6 179.5 143.8
Consumer 149.8 131.4 114.1
Corporate and operations sold or held for sale 672.1 737.4 737.3
- ---------------------------------------------------------------------------------------------------------------------------
$2,606.4 $2,628.9 $2,479.4
- ---------------------------------------------------------------------------------------------------------------------------
NOTE 12. SUMMARIZED FINANCIAL INFORMATION OF ALLEGHENY LUDLUM AND TELEDYNE --
Summarized financial information for Allegheny Ludlum and Teledyne is presented
below:
Balance Sheets:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
Allegheny Ludlum Teledyne
December 31 December 31
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Current assets $ 450.8 $ 454.3 $ 748.0 $ 788.1
Non-current assets 862.3 690.0 449.1 818.1
Current liabilities 196.7 183.5 394.4 403.7
Non-current liabilities 489.0 585.3 585.1 773.8
Redeemable preferred stock -- -- -- 33.1
Statements of Operations:
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
Allegheny Ludlum Teledyne
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Sales $1,277.8 $1,494.3 $1,076.9 $2,551.5 $2,553.8 $2,380.4
Gross profit 130.1 234.2 87.1 804.6 655.0 603.4
Net income (loss) before
extraordinary loss on
redemption of debt 73.2 114.8 18.2 144.1 162.0 (8.4)
Net income (loss) 73.2 111.9 18.2 130.6 162.0 (8.4)
46
25
In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum
were merged with overfunded defined benefit pension plans of Teledyne, and
Allegheny Teledyne became the plan sponsor. As a result, the 1996 summarized
balance sheet information presented for Allegheny Ludlum and Teledyne does not
include the Allegheny Teledyne net prepaid pension asset or the related
deferred taxes. Pension income has been allocated to Allegheny Ludlum and
Teledyne to offset pension and postretirement expenses which may be funded with
the pension assets.
NOTE 13. COMMITMENTS AND CONTINGENCIES --
Rental expense under operating leases was $31.1 million in 1996, $30.2 million
in 1995, and $34.1 million in 1994. Future minimum rental commitments under
operating leases with non-cancelable terms of more than one year as of December
31, 1996, were as follows: $20.4 million in 1997, $18.4 million in 1998, $16.4
million in 1999, $13.9 million in 2000, $11.0 million in 2001 and $41.8 million
thereafter.
The Company is subject to federal, state and local environmental laws and
regulations which require that it investigate and remediate the effects of the
release or disposal of materials at sites associated with past and present
operations, including sites at which the Company has been identified as a
potentially responsible party under the federal Superfund laws and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws.
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 are further subject to 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 and financial condition
of other potentially responsible parties, as well as the extent of their
responsibility for the remediation. Accordingly, as investigation and
remediation of these sites proceeds, it is likely that adjustments in the
Company's accruals will be necessary to reflect new information. The amounts of
any such adjustments could have a material adverse effect on the Company's
results of operations in a given period, but are not reasonably estimable.
Based on currently available information, however, management does not believe
that future environmental costs in excess of those accrued with respect to
sites with which the Company has been identified are likely to have a material
adverse effect on the Company's financial condition or liquidity. However,
there can be no assurance that additional future developments, administrative
actions or liabilities relating to environmental matters will not have a
material adverse effect on the Company's financial condition or results of
operations.
At December 31, 1996, the Company's reserves for environmental remediation
obligations totaled approximately $44 million, of which approximately $14
million was included in other current liabilities. The reserve includes
estimated probable future costs of $17 million for federal Superfund and
comparable state-managed sites; $7 million for formerly owned or operated sites
for which the Company has remediation or indemnification obligations; $9
million for owned or controlled sites at which Company operations have been
discontinued; and $11 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 its insurance
carriers and 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 potentially
responsible parties, the timing of regulatory approvals, the complexity of the
investigation and remediation, and the standards for remediation. The Company
expects that it will expend present accruals over many years, and will complete
remediation of all sites with which it has been identified in up to thirty
years.
In 1996, Statement of Position 96-1, Environmental Remediation Liabilities,
which was issued by the American Institute of Certified Public Accountants,
establishes accounting standards for recognition of environmental costs. This
statement, which is effective in 1997, is not expected to have a material
effect on the consolidated financial statements.
47
26
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, including claims based on
business practices and cost classifications and actions under the False Claims
Act. Although such claims are generally resolved by detailed fact-finding and
negotiation, on those occasions when they are not so resolved, civil or
criminal legal or administrative proceedings may ensue. 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. However, 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 result in suspension or debarment of the
Company, or that is otherwise 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 October 1996, the Company reached an agreement in principle with the U.S.
Government for a joint settlement of two cases (one involving the Company's
former Teledyne Neosho unit, divested in 1992 and the other involving the
Company's former Thermatics unit, divested in 1996) for an aggregate of $11.5
million. The settlement was finalized and the Company made payment in December
1996. The matter involving the former Neosho unit involved an action brought in
1991 under the False Claims Act in the U.S. District Court for the Western
District of Missouri and related to alleged misappropriations of
government-owned aircraft parts and falsification of inventory control
documents. The matter involving the former Thermatics unit commenced in 1993
when Thermatics sought admission into the Department of Defense Voluntary
Disclosure Program with respect to testing practices at variance from military
specifications. Established reserves for these matters in 1994 amounted to $3.8
million.
The Company learns from time to time that it has been named as a defendant
in civil actions filed under seal pursuant to the False Claims Act. Generally,
since such cases are under seal, the Company does not in all cases possess
sufficient information to determine whether the Company could sustain a
material loss in connection with such cases, or to reasonably estimate the
amount of any loss attributable to such cases.
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 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.
48
27
NOTE 14. QUARTERLY DATA (UNAUDITED) --
(In millions except share and per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------------------------
1996 --
Sales $1,017.9 $ 997.7 $ 879.7 $ 920.3
Gross profit 222.3 237.5 215.7 238.4
Income before extraordinary loss 81.6 60.4 19.6 64.9
Extraordinary loss on redemption of debt -- -- -- (13.5)
Net income 81.6 60.4 19.6 51.4
Net income per common share:
Income before extraordinary loss $ 0.46 $ 0.34 $ 0.11 $ 0.38
Extraordinary loss -- -- -- (0.08)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 0.46 $ 0.34 $ 0.11 $ 0.30
- ---------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 174,122,080 173,841,171 174,068,161 174,297,782
- ---------------------------------------------------------------------------------------------------------------------------
1995 --
Sales $1,018.2 $1,094.8 $ 962.8 $ 972.3
Gross profit 229.2 234.7 216.6 208.7
Income before extraordinary loss 93.2 67.0 64.7 51.9
Extraordinary loss on redemption of debt -- -- -- (2.9)
Net income 93.2 67.0 64.7 49.0
Net income per common share:
Income before extraordinary loss $ 0.53 $ 0.38 $ 0.36 $ 0.30
Extraordinary loss -- -- -- (0.02)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 0.53 $ 0.38 $ 0.36 $ 0.28
- ---------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 177,406,678 177,041,325 176,186,299 174,868,670
- ---------------------------------------------------------------------------------------------------------------------------
Net income for 1996 included after-tax gains of $24.8 million on sale of the
Teledyne defense vehicle business in the first quarter, and $12.8 million on
the sale of surplus California real estate in the fourth quarter.
Net income for 1996 was adversely affected by after-tax merger and
restructuring charges of $5.2 million in the second quarter, $26.3 million in
the third quarter and $11.4 million in the fourth quarter. In addition, the
1996 fourth quarter included an after-tax charge of $4.7 million for settlement
of legal cases involving U.S. Government contracting issues related to divested
operations of Teledyne.
For the 1995 first quarter, net income included an after-tax gain of $30.3
million on the sale of Teledyne's defense electronics systems business.
The Company paid a cash dividend of $0.16 per share on its common stock in
the 1996 fourth quarter.
Allegheny Ludlum paid cash dividends in 1996 of $0.13 per share in each of
the first and second quarters, and $0.16 per share in the third quarter. In
1995, Allegheny Ludlum paid cash dividends of $0.12 per share in each of the
first three quarters and $0.13 per share in the fourth quarter.
Teledyne paid cash dividends in 1996 of $0.12 per equivalent common share in
the first quarter and $0.16 per equivalent common share in each of the second
and third quarters. In addition, a dividend of $0.08 per equivalent share in
face amount of Teledyne's Series E Cumulative Preferred Stock was paid in the
1996 first quarter. For each quarter of 1995, Teledyne paid dividends
consisting of $0.052 per equivalent share in cash and $0.08 per equivalent
share in face amount of Teledyne's Series E Cumulative Preferred Stock.
49
28
COMMON STOCK PRICE
- -----------------------------------------------------------------------------------------------------------------
Quarters
---------------------------------------------------------------
1996 1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------------------
Allegheny Teledyne Incorporated (from August 16)
High -- -- $23-1/2 $23-3/4
Low -- -- $19-7/8 $20-1/8
Allegheny Ludlum Corporation (through August 15)
High $21-1/16 $21-3/8 $21-1/8 --
Low $18 $17-3/8 $18-1/4 --
Teledyne, Inc. (through August 15)
High $29-3/4 $40-1/8 $40-5/8 --
Low $24-1/8 $27-3/4 $34-3/4 --
- -----------------------------------------------------------------------------------------------------------------
Quarters
---------------------------------------------------------------
1995 1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------------------
Allegheny Ludlum Corporation
High $21-3/8 $23 $22-5/8 $20-1/2
Low $18-3/8 $18-3/4 $19-3/4 $16-3/8
Teledyne, Inc.
High $27-3/8 $26-1/2 $27-3/8 $27-5/8
Low $20 $23-3/8 $22-1/8 $23-1/8
- -----------------------------------------------------------------------------------------------------------------
Note: All stock prices are as historically presented.
On August 15, 1996, Allegheny Ludlum Corporation ("Allegheny Ludlum") and
Teledyne, Inc. ("Teledyne") became wholly owned subsidiaries of Allegheny
Teledyne Incorporated ("Allegheny Teledyne"). Allegheny Ludlum shareholders
received one share of Allegheny Teledyne common stock for each one of their
Allegheny Ludlum common shares. Teledyne stockholders received 1.925 shares of
Allegheny Teledyne common stock for each of their Teledyne common shares.
Allegheny Teledyne common stock is listed on the New York Exchange, under
the symbol "ALT." As of December 31, 1996, there were approximately 9,342
record holders of Allegheny Teledyne common stock.
50
29
MANAGEMENT'S REPORT
The accompanying consolidated financial statements of Allegheny Teledyne
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 and Finance Committee of the Board of Directors is composed of
five 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/ R. P. SIMMONS
- ---------------------------
R. P. Simmons
Chairman, President
and Chief Executive Officer
/s/ J. L. MURDY
- ---------------------------
J. L. Murdy
Executive Vice President,
Finance and Administration
and Chief Financial Officer
51
30
SELECTED FINANCIAL DATA
For the Years Ended December 31,
(In millions except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Sales:
Continuing $3,768.1 $3,764.4 $3,085.5 $3,072.3 $3,070.3
Operations sold or held for sale 47.5 283.7 371.8 489.7 827.5
- ---------------------------------------------------------------------------------------------------------------------------
$3,815.6 $4,048.1 $3,457.3 $3,562.0 $3,897.8
- ---------------------------------------------------------------------------------------------------------------------------
Income, after tax, before
extraordinary loss and
cumulative effect of
accounting changes $ 226.5 $ 276.8 $ 9.8 $ 143.6 $ 92.8
Extraordinary loss on
redemption of debt (13.5) (2.9) -- (3.7) (2.7)
Cumulative effect of
accounting changes -- -- -- (185.6) (135.2)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 213.0 $ 273.9 $ 9.8 $ (45.7) $ (45.1)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) per common share:
Income after tax, before
extraordinary loss
and cumulative effect
of accounting changes $ 1.28 $ 1.56 $ 0.06 $ 0.83 $ 0.54
Extraordinary loss on
redemption of debt (0.08) (0.02) -- (0.02) (0.02)
Cumulative effect of
accounting changes -- -- -- (1.07) (0.78)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss)
per common share $ 1.20 $ 1.54 $ 0.06 $ (0.26) $ (0.26)
- ---------------------------------------------------------------------------------------------------------------------------
Dividends declared:
Allegheny Teledyne $ 0.16 $ -- $ -- $ -- $ --
Allegheny Ludlum $ 0.42 $ 0.49 $ 0.48 $ 0.47 $ 0.44
Teledyne $ 0.52 $ 0.52 $ -- $ 0.42 $ 0.42
- ---------------------------------------------------------------------------------------------------------------------------
Working capital $ 614.0 $ 679.8 $ 540.1 $ 635.8 $ 787.6
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $2,606.4 $2,628.9 $2,479.4 $2,535.1 $2,304.9
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 443.4 $ 561.1 $ 489.7 $ 495.5 $ 587.8
- ---------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock $ -- $ 33.1 $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 871.5 $ 785.8 $ 655.4 $ 686.3 $ 698.0
- ---------------------------------------------------------------------------------------------------------------------------
52
31
The historical selected financial data reflects the results of Allegheny
Ludlum and of Teledyne as if they had been combined for all periods presented.
Net income included after-tax gains of $37.6 million on the sale of the
Teledyne defense vehicle business and surplus California real estate in 1996,
$30.3 million on the sale of the Teledyne defense electronic systems business
in 1995, $24.2 million on the sale of an investment in Litton Industries common
stock in 1993, and $14.8 million on sales of other operations in 1992.
Net income was adversely affected by after-tax merger, restructuring and
proxy contest charges of $42.9 million in 1996 and $3.9 million in 1995.
Results of operations included after-tax charges of $4.7 million in 1996,
$88.0 million in 1994, $10.7 million in 1993 and $19.0 million in 1992 related
to Teledyne's settlement of certain legal matters with the U.S. Government.
Results for 1994 were adversely affected by a ten-week strike at Allegheny
Ludlum called by the United Steelworkers of America.
Net losses for 1993 and 1992 included charges of $185.6 million and $125.2
million, respectively, for the cumulative effect of changing the accounting for
postretirement health care and life insurance benefits for Teledyne in 1993 and
Allegheny Ludlum in 1992. Prior year financial statements have not been
restated.
Effective January 1, 1992, Allegheny Ludlum and Teledyne changed their
method of accounting for income taxes to comply with the provisions of SFAS No.
109. The cumulative effect of the accounting change was a charge of $10.0
million.
Teledyne dividends declared included $0.08 per equivalent share in 1996 and
$0.31 per equivalent share in 1995 paid in face amount of Teledyne's Series E
Cumulative Preferred Stock. The Teledyne Series E Cumulative Preferred Stock
was redeemed for cash in 1996.
53