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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 1-12001
ALLEGHENY TELEDYNE INCORPORATED
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 25-1792394
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation of Organization) Number)
1000 Six PPG Place
Pittsburgh, Pennsylvania 15222-5479
- -------------------------------- -------------------------------
(Address of Principal Executive (Zip Code)
Offices)
(412) 394-2800
-------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At November 5, 1999, the Registrant had outstanding 187,114,591 shares of its
Common Stock.
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ALLEGHENY TELEDYNE INCORPORATED
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
September 30, December 31,
1999 1998
---- ----
(Unaudited)
ASSETS
Cash and cash equivalents $ 49.2 $ 74.8
Accounts receivable 500.8 534.7
Inventories 647.6 659.9
Deferred income taxes 60.8 59.3
Tax refund 3.5 5.9
Prepaid expenses and other current assets 28.1 29.9
---------- ----------
Total Current Assets 1,290.0 1,364.5
Property, plant and equipment 994.3 1,003.6
Prepaid pension cost 501.9 418.6
Cost in excess of net assets acquired 242.8 256.0
Other assets 112.0 132.8
---------- ----------
Total Assets $ 3,141.0 $ 3,175.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 238.9 $ 227.0
Accrued liabilities 324.6 327.1
Current portion of long-term debt 73.9 68.2
---------- ----------
Total Current Liabilities 637.4 622.3
Long-term debt 256.7 446.8
Accrued postretirement benefits 578.0 582.6
Other 251.2 183.9
---------- ----------
Total Liabilities 1,723.3 1,835.6
---------- ----------
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-197,937,664 shares at September 30, 1999 and
December 31, 1998; outstanding-189,059,875 shares at September 30,
1999 and 194,873,151 shares at December 31, 1998 19.8 19.8
Additional paid-in capital 470.8 467.3
Retained earnings 1,107.7 923.9
Treasury stock: 8,877,789 shares at September 30, 1999
and 3,064,513 shares at December 31, 1998 (183.9) (67.6)
Foreign currency translation losses (4.4) (5.9)
Unrealized gains on securities 7.7 2.4
---------- ----------
Total Stockholders' Equity 1,417.7 1,339.9
---------- ----------
Total Liabilities and Stockholders' Equity $ 3,141.0 $ 3,175.5
========== ==========
The accompanying notes are an integral part of these statements.
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ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
------ ------ -------- --------
Sales $855.9 $927.1 $2,708.4 $2,948.4
Costs and expenses:
Cost of sales 675.0 707.8 2,093.8 2,248.8
Selling and administrative expenses 118.1 119.4 349.1 363.4
Transformation, merger and
restructuring costs 3.1 -- 7.4 67.8
Interest expense, net 2.5 4.0 19.8 12.7
------ ------ -------- --------
798.7 831.2 2,470.1 2,692.7
Earnings before other income 57.2 95.9 238.3 255.7
Other income 2.0 11.2 5.1 15.9
------ ------ -------- --------
Income before income taxes and
extraordinary gains 59.2 107.1 243.4 271.6
Provision for income taxes 21.2 41.6 87.5 103.7
------ ------ -------- --------
Income before extraordinary gains 38.0 65.5 155.9 167.9
Extraordinary gains on sales of
operations, net of income tax 129.6 -- 129.6 --
------ ------ -------- --------
Net income $167.6 $ 65.5 $ 285.5 $ 167.9
====== ====== ======== ========
Basic net income per common share:
Income before extraordinary gains $ 0.20 $ 0.33 $ 0.81 $ 0.85
Extraordinary gains 0.68 -- 0.67 --
------ ------ -------- --------
Basic net income per common share $ 0.88 $ 0.33 $ 1.48 $ 0.85
====== ====== ======== ========
Diluted net income per common share:
Income before extraordinary gains $ 0.20 $ 0.33 $ 0.81 $ 0.85
Extraordinary gains 0.68 -- 0.67 --
------ ------ -------- --------
Diluted net income per common share $ 0.88 $ 0.33 $ 1.48 $ 0.85
====== ====== ======== ========
Dividends declared per common share $ 0.16 $0.16 $ 0.48 $ 0.48
====== ====== ======== ========
The accompanying notes are an integral part of these statements.
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ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)(Unaudited)
Nine Months Ended
September 30,
------------------------------
1999 1998
------- -------
Operating Activities:
Net income $ 285.5 $ 167.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on sales of businesses and investments (209.3) (0.2)
Depreciation and amortization 92.6 81.2
Deferred income taxes 7.4 1.7
Non-cash restructuring costs -- 50.8
Change in operating assets and liabilities:
Prepaid pension cost (83.3) (66.1)
Accrued income taxes 40.4 (28.6)
Accounts payable 22.7 (70.3)
Accrued liabilities (16.3) 22.1
Accounts receivable (1.9) 55.0
Inventories (6.9) 39.7
Other 8.6 (15.1)
------- -------
Cash provided by operating activities 139.5 238.1
Investing Activities:
Proceeds from the sale of businesses and investments 346.8 27.2
Purchases of property, plant and equipment (78.6) (118.3)
Disposals of property, plant and equipment 10.0 12.5
Purchases of businesses and investment in ventures (9.4) (129.3)
Short-term investments - sales -- 34.4
Other (1.5) (6.9)
------- -------
Cash provided (used) by investing activities 267.3 (180.4)
Financing Activities:
Net borrowings (repayments) under credit agreements (196.8) 43.2
Payments on long-term debt and capital leases (1.5) (4.3)
------- -------
Net increase (decrease) in debt (198.3) 38.9
Purchases of treasury stock (148.3) --
Cash dividends (92.2) (91.0)
Exercises of stock options 6.4 9.1
------- -------
Cash used by financing activities (432.4) (43.0)
Increase (decrease) in cash and cash equivalents (25.6) 14.7
Cash and cash equivalents at beginning of the year 74.8 53.7
------- -------
Cash and cash equivalents at end of period $ 49.2 $ 68.4
======= =======
Non-cash transactions:
Assets acquired under promissory note $ 6.6 $ --
======= =======
Cash provided by operating activities in the 1999 nine months is net of
payments of taxes on gains on sales of businesses of $79.9 million. Excluding
these tax payments, cash provided by operating activities was $219.4 million.
The accompanying notes are an integral part of these statements.
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ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
Basis of Presentation
These interim consolidated financial statements include the accounts of
Allegheny Teledyne Incorporated and its subsidiaries ("Allegheny Teledyne" or
the "Company"). These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and note
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, all adjustments (which
include only normal recurring adjustments) considered necessary for a fair
presentation have been included. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1998 Annual Report. The
results of operations for these interim periods are not necessarily indicative
of the operating results for a full year.
Accounting Pronouncements
Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, FASB
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities: Deferral of the Effective Date of FASB Statement No. 133" was
issued. This statement delays the effective date of FASB Statement No. 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company is presently evaluating the effect of adopting this statement.
Note 2. Inventories
Inventories were as follows (in millions):
September 30, December 31,
1999 1998
---- ----
Raw materials and supplies $ 145.7 $ 196.1
Work-in-process 491.9 471.6
Finished goods 145.8 133.4
---------- ----------
Total inventories at current cost 783.4 801.1
Less allowances to reduce current cost
values to LIFO basis (122.5) (128.7)
Progress payments (13.3) (12.5)
---------- ----------
Total inventories $ 647.6 $ 659.9
========== ==========
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Note 3. Business Segments
Information on the Company's business segments was as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
Sales:
Specialty metals $ 495.5 $ 487.0 $ 1,506.7 $ 1,559.5
Aerospace and electronics 206.0 192.4 606.3 596.5
Industrial 67.0 80.8 214.0 266.6
Consumer 58.0 56.5 176.5 162.0
-------- -------- ---------- ----------
Total continuing
operations 826.5 816.7 2,503.5 2,584.6
Operations sold or held
for sale 29.4 110.4 204.9 363.8
-------- -------- ---------- ----------
Total sales $ 855.9 $ 927.1 $ 2,708.4 $ 2,948.4
======== ======== ========== ==========
Operating Profit:
Specialty metals $ 28.4 $ 59.6 $ 139.5 $ 208.8
Aerospace and electronics 23.6 21.8 61.5 64.7
Industrial 1.8 8.0 10.2 30.5
Consumer 3.9 5.7 12.0 13.1
-------- -------- ---------- ----------
Total operating profit 57.7 95.1 223.2 317.1
Transformation, merger
and restructuring costs (3.1) -- (7.4) (67.8)
Corporate expenses (10.8) (8.9) (27.8) (27.3)
Interest expense, net (2.5) (4.0) (19.8) (12.7)
Investments and
operations sold or held
for sale 0.5 14.3 26.0 30.5
Excess pension income 17.4 10.6 49.2 31.8
-------- -------- ---------- ----------
Income before income
taxes and
extraordinary gains $ 59.2 $ 107.1 $ 243.4 $ 271.6
======== ======== ========== ==========
In the 1999 third quarter and 1999 nine months, transformation, merger and
restructuring costs included costs of $3.1 million and $7.4 million,
respectively, related to the previously announced transformation of the Company.
In the 1998 nine months, transformation, merger and restructuring costs
included deal costs of $10.3 million related to the acquisition of OREMET, along
with pretax charges of $5.8 million for a planned salaried workforce reduction
related to integrating the operations of OREMET and Wah Chang. Allegheny Ludlum
also recorded a $19.3 million pretax charge due to a planned
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salaried workforce reduction. In addition, pretax charges of $32.4 million were
recorded for costs associated with exiting certain product lines and asset
impairments resulting from capital expenditure programs.
Pension income in excess of amounts allocated to business segments to offset
pension and other postretirement benefit expenses is presented separately.
Note 4. Divestitures
In the 1999 third quarter, the Company completed the sale of its unmanned
aerial vehicle and its pyrotechnic components and systems businesses, Ryan
Aeronautical and McCormick Selph Ordnance Unit. In addition, the Company sold
its pressure relief valve, vehicle control valve, nitrogen gas springs, consumer
drinkware and its construction and mining equipment businesses.
During the 1999 third quarter, the Company realized more than $340 million in
gross proceeds and recognized extraordinary gains of $129.6 million, net of
$79.9 million in taxes, in connection with the sales of these businesses.
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Note 5. Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per common share (in millions, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------------------------- ----------------- ----------------
Numerator:
Income before extraordinary gains $ 38.0 $ 65.5 $ 155.9 $ 167.9
Extraordinary gains on sales of
operations 129.6 -- 129.6 --
------- ------- ------- -------
Numerator for basic and diluted
net income per common share -
net income available to common
stockholders $ 167.6 $ 65.5 $ 285.5 $ 167.9
======= ======= ======= =======
Denominator:
Weighted average shares 190.3 197.0 192.2 196.6
Contingent issuable stock 0.2 0.4 0.2 0.3
------- ------- ------- -------
Denominator for basic net income
per common share 190.5 197.4 192.4 196.9
Effect of dilutive securities:
Employee stock options 0.7 1.0 0.9 1.6
------- ------- ------- -------
Dilutive potential common shares 0.7 1.0 0.9 1.6
Denominator for diluted net
income per common share -
Adjusted weighted average shares 191.2 198.4 193.3 198.5
======= ======= ======= =======
Basic net income per common share:
Income before extraordinary gains $ 0.20 $ 0.33 $ 0.81 $ 0.85
Extraordinary gains on sales of
operations 0.68 -- 0.67 --
------- ------- ------- -------
Basic net income per common share $ 0.88 $ 0.33 $ 1.48 $ 0.85
======= ======= ======= =======
Diluted net income per common share:
Income before extraordinary gains $ 0.20 $ 0.33 $ 0.81 $ 0.85
Extraordinary gains on sales of
operations 0.68 -- 0.67 --
------- ------- ------- -------
Diluted net income per common share $ 0.88 $ 0.33 $ 1.48 $ 0.85
======= ======= ======= =======
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Note 6. Comprehensive Income
The components of comprehensive income, net of tax, were as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
Net income $167.6 $ 65.5 $285.5 $167.9
Foreign currency translation gains
(losses) arising during the
period 1.7 (2.9) (3.4) (6.5)
Less: foreign currency translation
losses due to sale of foreign entities (4.9) -- (4.9) --
------ ------ ------ ------
6.6 (2.9) 1.5 (6.5)
Unrealized holding gains arising
during period 0.7 0.6 5.3 0.2
------ ------ ------ ------
Comprehensive income $174.9 $ 63.2 $292.3 $161.6
====== ====== ====== ======
Note 7. Stockholders' Equity
Allegheny Teledyne paid a cash dividend of $0.16 per common share in each of
the 1999 and 1998 first, second and third quarters. On November 11, 1999, the
Company's Board of Directors declared a regular quarterly dividend of $0.16 per
share of common stock. The dividend is payable on December 14, 1999 to
stockholders of record at the close of business on November 22, 1999.
At a stockholders meeting held on November 11, 1999, Allegheny Teledyne's
stockholders approved a one-for-two reverse split of the Company's stock. The
reverse split will be effective immediately following the spin-offs of the
Company's Aerospace and Electronics and Consumer segments to Allegheny
Teledyne's stockholders. Allegheny Teledyne will complete the spin-offs on
November 29, 1999.
The Board of Directors has preliminarily approved setting the regular
quarterly dividend at $0.10 per share of common stock, or $0.20 per share after
giving effect to the reverse split. It is anticipated that this new dividend
rate will be implemented with the regular quarterly dividend payable in March
2000.
On October 1, 1998, the Company's Board of Directors authorized a stock
repurchase program to acquire up to 20 million shares of Allegheny Teledyne's
common stock. The shares may be purchased from time-to-time in the open market
or in negotiated transactions. In the first nine months of 1999, the Company had
purchased 7.3 million shares for $148.3 million under this program. In the 1999
third quarter, the Company had purchased 2.1 million shares for $39.7 million
under this program. During the month of October 1999 the Company purchased over
1.7 million shares at a cost of approximately $28 million. From the inception of
the share repurchase program through November
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9, 1999, the Company has repurchased approximately 12.0 million shares at an
aggregate cost of $232.5 million.
On November 12, 1999, the Company announced that its board of directors had
set November 22, 1999 as the record date and November 29, 1999 as the
distribution date for the spin-offs of the Company's Aerospace and Electronics
and Consumer segments. The Aerospace and Electronics segment will be spun off to
Allegheny Teledyne's stockholders at the ratio of one share of the common stock
of the new aerospace and electronics company, which will be known as Teledyne
Technologies Incorporated, for each seven shares of Allegheny Teledyne common
stock. The Consumer segment will be spun off to Allegheny Teledyne's
stockholders at the ratio of one share of the common stock of the new consumer
company, which will be known as Water Pik Technologies, Inc., for each 20 shares
of Allegheny Teledyne common stock.
Note 8. Commitments and Contingencies
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.
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 the amounts, and the possible range
of loss in excess of amounts accrued, are not reasonably estimable. Based on
currently available information, however, management does not believe future
environmental costs in excess of those accrued with respect to sites with which
the Company has been identified are likely to have a material adverse effect on
the Company's financial condition or 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 September 30, 1999, the Company's reserves for environmental remediation
obligations totaled approximately $44.0 million, of which approximately $10.6
million was included in other current liabilities. The reserve includes
estimated probable future costs of $12.6 million for federal Superfund and
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comparable state-managed sites; $14.5 million for formerly owned or operated
sites for which the Company has remediation or indemnification obligations; $6.4
million for owned or controlled sites at which Company operations have been
discontinued; and $10.5 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 for which it has identified remediation obligations in
up to thirty years.
Various claims (whether based on U.S. Government or Company audits and
investigations or otherwise) have been or may be asserted against the Company
related to its U.S. Government contract work, 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.
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 will 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, tax, and stockholder matters. While the outcome
of litigation cannot be predicted with certainty, and some of these lawsuits,
claims or proceedings may be determined adversely to the Company, management
does not believe that the disposition of any such pending matters is likely to
have a material adverse effect on the Company's financial condition or
liquidity, although the resolution in any reporting period of one or more of
these matters could have a material adverse effect on the Company's results of
operations for that period.
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Note 9. Subsequent Events
In November 1999, the Company completed the previously announced sale of
Specialty Equipment's material handling business to Terex Corporation. The
Material Handling business is the last remaining business to be sold as part of
the transformation initiatives Allegheny Teledyne announced in January 1999.
On November 12, 1999, the Company announced that its subsidiary, Allegheny
Ludlum Corporation, has entered into a definitive agreement with Bethlehem Steel
Corporation in which Allegheny Ludlum will acquire the Washington, PA plant of
Lukens' Washington Steel Division for approximately $20 million. The plant has
been idle since April 1999 and was formerly used to cold roll and finish
stainless steel sheet and strip. The agreement is subject to customary
regulatory approval and closing conditions.
Note 10. Unaudited Pro Forma Financial Information
Following extensive studies and strategic analyses initiated in the summer of
1998, the Company announced in January 1999 that it would pursue a significant
strategic transformation and reconfiguration of the Company. As part of this
transformation, the Company is spinning off its Aerospace and Electronics
segment as a stand-alone company (which will be called Teledyne Technologies
Incorporated) and its Consumer segment as a stand-alone company (which will be
called Water Pik Technologies, Inc.) on November 29, 1999. In addition, the
Company has sold several of its businesses as described in Note 4 and Note 9.
At the time of the spin-offs, Allegheny Teledyne will change its name to
Allegheny Technologies Incorporated ("Allegheny Technologies"). In addition, the
Company will effect a one-for-two reverse split of its common stock immediately
after the spin-offs. The reverse stock split was approved by the Company's
stockholders at a special meeting held on November 11, 1999.
The following unaudited pro forma consolidated income statements for the nine
months ended September 30, 1999 and 1998 and the year ended December 31, 1998
and the unaudited pro forma balance sheet at September 30, 1999 present the
results of operations and financial position of Allegheny Technologies assuming
that the transactions contemplated by the spin-offs of the Aerospace and
Electronics and Consumer segments and the reverse stock split had been completed
as of the beginning of 1998 with respect to the consolidated income statements
and as of September 30, 1999 with respect to the consolidated balance sheet. In
addition, the statements reflect the operations of the segments to be spun-off
and the companies sold or to be sold as discontinued. In the opinion of
management, the statements include all material adjustments necessary to
reflect, on a pro forma basis, the impact of the spin-off transactions and the
reverse stock split on the historical financial information of Allegheny
Teledyne Incorporated. The adjustments are described in the notes to pro forma
consolidated financial information and are set forth in the "Pro Forma
Adjustments" column.
The unaudited pro forma financial information has been presented for
informational purposes only and does not reflect the results of operations or
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financial position of Allegheny Technologies that would have occurred had
Allegheny Technologies operated as a company without the spun-off operations and
the companies sold or to be sold for the period represented. Actual results
might have differed. The unaudited pro forma consolidated information should not
be relied upon as being indicative of results Allegheny Technologies would have
had or of future results after the spin-offs and sales of companies.
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ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1999
(Unaudited)
Historical Pro Forma
Allegheny Pro Forma Allegheny
(In millions) Technologies Adjustments Technologies
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 49.2 $ 133.7 $ 182.9
Accounts receivable 504.3 (163.8) 340.5
Inventories 647.6 (88.5) 559.1
Deferred income taxes 60.8 (26.0) 34.8
Prepaid expenses and other current assets 28.1 (3.6) 24.5
- -----------------------------------------------------------------------------------------------------------------
Total Current Assets 1,290.0 (148.2) 1,141.8
Property, plant and equipment 994.3 (88.7) 905.6
Prepaid pension cost 501.9 16.5 518.4
Cost in excess of net assets acquired 242.8 (36.5) 206.3
Net assets of discontinued operations -- 20.7 20.7
Other assets 112.0 (15.7) 96.3
- -----------------------------------------------------------------------------------------------------------------
Total Assets $3,141.0 $(251.9) $2,889.1
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 238.9 $ (76.3) $ 162.6
Accrued liabilities 324.6 (75.0) 249.6
Short-term debt and current portion of long-term debt 73.9 (0.2) 73.7
- -----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 637.4 (151.5) 485.9
Long-term debt 256.7 (6.8) 249.9
Accrued postretirement benefits 578.0 (33.3) 544.7
Other 251.2 (11.1) 240.1
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities 1,723.3 (202.7) 1,520.6
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock -- -- --
Common stock 19.8 (9.9) 9.9
Additional paid-in capital 470.8 9.9 480.7
Retained earnings 1,107.7 (50.1) 1,057.6
Treasury stock (183.9) -- (183.9)
Foreign currency translation losses (4.4) 0.9 (3.5)
Unrealized gains on securities 7.7 -- 7.7
- -----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,417.7 (49.2) 1,368.5
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $3,141.0 $(251.9) $2,889.1
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
14
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ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Nine Months Ended September 30, 1999
(Unaudited)
Pro Forma
Historical Pro Forma Effect of
Allegheny Pro Forma Allegheny Reverse
(In millions except per share amounts) Technologies Adjustments Technologies Stock Split
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ 2,708.4 $ (987.7) $ 1,720.7
- -----------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 2,093.8 (701.2) 1,392.6
Selling and administrative expenses 349.1 (190.0) 159.1
Transformation costs 7.4 (7.4) --
Interest expense, net 19.8 (0.1) 19.7
- -----------------------------------------------------------------------------------------------------------------------------
2,470.1 (898.7) 1,571.4
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before other income 238.3 (89.0) 149.3
Other income 5.1 (1.5) 3.6
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and extraordinary gains 243.4 (90.5) 152.9
Provision for income taxes 87.5 (38.9) 48.6
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
extraordinary gains 155.9 (51.6) 104.3
Income from discontinued operations, net of
income taxes -- 51.6 51.6
Extraordinary gains on sales of operations, net
of income taxes 129.6 -- 129.6
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 285.5 $ -- $ 285.5
- -----------------------------------------------------------------------------------------------------------------------------
Basic net income per common share:
Income from continuing operations before
extraordinary gains $ 0.81 $ (0.27) $ 0.54 $ 1.08
Income from discontinued operations -- 0.27 0.27 0.54
- -----------------------------------------------------------------------------------------------------------------------------
Extraordinary gains on sales of operations 0.67 -- 0.67 1.34
- -----------------------------------------------------------------------------------------------------------------------------
Basic net income per common share $ 1.48 $ -- $ 1.48 $ 2.96
- -----------------------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income from continuing operations before
extraordinary gains $ 0.81 $ (0.27) $ 0.54 $ 1.08
Income from discontinued operations -- 0.27 0.27 0.54
- -----------------------------------------------------------------------------------------------------------------------------
Extraordinary gains on sales of operations 0.67 -- 0.67 1.34
- -----------------------------------------------------------------------------------------------------------------------------
Diluted net income per common share $ 1.48 $ -- $ 1.48 $ 2.96
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
15
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ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1998
(Unaudited)
Pro Forma
Historical Pro Forma Effect of
Allegheny Pro Forma Allegheny Reverse
(In millions except per share amounts) Technologies Adjustments Technologies Stock Split
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ 3,923.4 $ (1,521.0) $ 2,402.4
- -----------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 2,950.2 (1,118.5) 1,831.7
Selling and administrative expenses 507.6 (263.2) 244.4
Transformation, merger and restructuring costs 67.8 -- 67.8
Interest expense, net 19.3 0.1 19.4
- -----------------------------------------------------------------------------------------------------------------------------
3,544.9 (1,381.6) 2,163.3
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before other income 378.5 (139.4) 239.1
Other income 12.7 (2.0) 10.7
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes 391.2 (141.4) 249.8
Provision for income taxes 150.0 (55.2) 94.8
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 241.2 (86.2) 155.0
Income from discontinued operations, net of
income taxes -- 86.2 86.2
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 241.2 $ -- $ 241.2
- -----------------------------------------------------------------------------------------------------------------------------
Basic net income per common share:
Income from continuing operations $ 1.23 $ (0.44) $ 0.79 $ 1.58
Income from discontinued operations -- 0.44 0.44 0.88
- -----------------------------------------------------------------------------------------------------------------------------
Basic net income per common share $ 1.23 $ -- $ 1.23 $ 2.46
- -----------------------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income from continuing operations $ 1.23 $ (0.44) $ 0.79 $ 1.58
Income from discontinued operations -- 0.44 0.44 0.88
- -----------------------------------------------------------------------------------------------------------------------------
Diluted net income per common share $ 1.23 $ -- $ 1.23 $ 2.46
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
16
18
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Nine Months Ended September 30, 1998
(Unaudited)
Pro Forma
Historical Pro Forma Effect of
Allegheny Pro Forma Allegheny Reverse
(In millions except per share amounts) Technologies Adjustments Technologies Stock Split
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ 2,948.4 $ (1,122.3) $ 1,826.1
- -----------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 2,248.8 (835.0) 1,413.8
Selling and administrative expenses 363.4 (194.7) 168.7
Transformation, merger and restructuring costs 67.8 -- 67.8
Interest expense, net 12.7 0.1 12.8
- -----------------------------------------------------------------------------------------------------------------------------
2,692.7 (1,029.6) 1,663.1
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before other income 255.7 (92.7) 163.0
Other income 15.9 (2.1) 13.8
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes 271.6 (94.8) 176.8
Provision for income taxes 103.7 (37.1) 66.6
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 167.9 (57.7) 110.2
Income from discontinued operations, net of
income taxes -- 57.7 57.7
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 167.9 $ -- $ 167.9
- -----------------------------------------------------------------------------------------------------------------------------
Basic net income per common share:
Income from continuing operations $ 0.85 $ (0.29) $ 0.56 $ 1.12
Income from discontinued operations -- 0.29 0.29 0.58
- -----------------------------------------------------------------------------------------------------------------------------
Basic net income per common share $ 0.85 $ -- $ 0.85 $ 1.70
- -----------------------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income from continuing operations $ 0.85 $ (0.29) $ 0.56 $ 1.12
Income from discontinued operations -- 0.29 0.29 0.58
- -----------------------------------------------------------------------------------------------------------------------------
Diluted net income per common share $ 0.85 $ -- $ 0.85 $ 1.70
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
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The pro forma unaudited consolidated balance sheet was prepared assuming the
spin-offs and reverse stock split occurred on September 30, 1999 and includes
"Pro Forma Adjustments" as follows:
(a) To reclassify the operations sold or to be sold and operations to be
spun-off as discontinued operations.
(b) To record cash proceeds of $134 million from credit facilities
established by Allegheny Teledyne on behalf of Teledyne Technologies
Incorporated and Water Pik Technologies, Inc. The repayment obligations
of $100 million and $34 million under these credit facilities will be
assumed by Teledyne Technologies Incorporated and Water Pik
Technologies, Inc., respectively.
(c) To record the distribution of the spun-off companies to Allegheny
Teledyne stockholders. (d) To reflect the one-for-two reverse stock
split.
The pro forma unaudited consolidated income statements were prepared assuming
the spin-offs and reverse stock split occurred at the beginning of 1998. These
statements include "Pro Forma Adjustments" as follows:
(a) To reclassify the operations sold or to be sold and operations to be
spun-off as discontinued operations.
(b) To reflect the one-for-two reverse stock split.
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20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Allegheny Teledyne Incorporated is a group of technology-based manufacturing
businesses with significant concentration in specialty metals, complemented by
aerospace and electronics, industrial, and consumer products. The Company's
Specialty Metals business segment accounted for 60 percent of the Company's
total sales from continuing operations of $2,503.5 million for the nine months
ended September 30, 1999. Its Aerospace and Electronics, Industrial and Consumer
business segments accounted for 24 percent, 9 percent and 7 percent,
respectively, of total sales from continuing operations. Such percentages were
approximately the same for the first nine months of 1998, where total sales from
continuing operations were $2,584.6 million.
For the 1999 nine months, operating profit was $223.2 million compared to
$317.1 million for the same 1998 period. Sales from continuing operations
declined 3.1 percent to $2,503.5 million for the 1999 nine months compared to
$2,584.6 million for the same 1998 period. The lower results were due mainly to
continuing difficult pricing conditions in stainless steel, nickel alloys,
titanium and tungsten carbide markets, higher raw material costs (primarily
nickel), and reduced demand for high performance metals in the commercial
aerospace and oil and gas markets. Strong cost controls partially offset the
negative market conditions experienced in some businesses.
Net income was $285.5 million, or $1.48 per diluted share, for the 1999 nine
months, compared to $167.9 million, or $0.85 per diluted share, for the same
1998 period. Net income was $167.6 million, or $0.88 per diluted share, for the
1999 third quarter, compared to $65.5 million, or $0.33 per diluted share, for
the same 1998 period. Net income in the third quarter 1999 was impacted by
$129.6 million, or $0.68 per diluted share from extraordinary gains on the sales
of operations and $5.6 million, or $0.03 per diluted share, relating to costs
associated with the previously announced planned spin-offs of certain businesses
of the Aerospace and Electronics and Consumer segments, workforce reductions and
facilities start-up costs.
Sales and operating profit for the Company's four business segments are
discussed below.
Specialty Metals
Third quarter 1999 operating profit declined to $28.4 million from $59.6
million in the same year-ago period and sales increased 2 percent to $495.5
million. For the 1999 nine months, operating profit declined 33 percent to
$139.5 million and sales declined 3 percent to $1,506.7 million.
Allegheny Ludlum
Combined sales and operating profits for Allegheny Ludlum, whose products
consist primarily of flat-rolled products, increased 15 percent and declined 57
percent, respectively, from the 1998 third quarter and increased 7 percent and
declined 18 percent, respectively, from the 1998 nine months. Sales increased
due to higher shipments compared to 1998, as a result of strong
19
21
demand and the utilization and capability of new strategic assets. Operating
profit declined due primarily to significantly higher nickel costs and
relatively flat prices for commodity stainless steel products.
With rising nickel costs, increased demand and lower imports reflecting the
impact of favorable trade cases, in the 1999 third quarter Allegheny Ludlum
announced two price increases totaling approximately 12 to 14 percent for most
stainless steel sheet, strip and coiled plate products. In addition, Allegheny
Ludlum reduced the surcharge mechanism for nickel to $2.75 per pound from $3.50
per pound effective with shipments beginning October 4, 1999. Due to existing
contracts, the full benefits of the price increases and surcharge change are not
expected to be realized until the first quarter 2000. The ability to maintain
price increases depends on market conditions, including pricing by foreign
producers.
Tons of flat-rolled specialty materials shipped in the third quarter and nine
months of 1999 increased to 168,200 tons and 480,200 tons, respectively,
compared to 130,200 tons and 402,200 tons for the same periods of 1998. The
average prices of flat-rolled specialty materials in the third quarter and nine
months of 1999 declined to $1,940 and $1,993 per ton, respectively, compared to
$2,181 and $2,230 per ton in the same 1998 periods due primarily to product mix,
including an increase in sales of semi-finished stainless steel products. Tight
cost controls and cost reduction efforts continue.
High Performance Metals
Operating profit and sales for high performance metals declined 48 percent
and 17 percent, respectively, over the 1998 third quarter and declined 45
percent and 17 percent, respectively, over the 1998 nine months. The decline in
operating results in 1999 occurred primarily due to lower prices and volume for
nickel alloy and titanium products resulting from continuing weak demand in
aerospace and oil and gas markets. This weakness was partially offset by strong
demand for nickel-based superalloys for large land-based power generation
turbines and medical implant devices. Results for the 1999 third quarter also
include start-up costs associated with Oremet-Wah Chang's new electron beam melt
facility. The results for the 1999 nine months include this item as well as
start-up costs associated with Allvac's new vacuum induction furnace and costs
related to a workforce reduction at Allvac's operation in the United Kingdom.
Aerospace and Electronics Segment
Operating profit increased 8 percent to $23.6 million for the 1999 third
quarter from $21.8 million in the same 1998 period, and sales increased 7
percent to $206.0 million. For the 1999 nine months, operating profit decreased
5 percent to $61.5 million and sales increased 2 percent to $606.3 million.
Product recall costs at Continental Motors and a continuing slow economic
recovery in some Asian markets negatively impacted performance during the 1999
nine-month period.
While sales at Continental Motors improved in the 1999 third quarter and
nine months, operating profit for the 1999 nine months was negatively impacted
by a recall of piston engines produced in 1998. Efforts associated with the
recall resulted in a $3.0 million charge during the 1999 nine months. Sales and
operating results for Continental Motors' turbine engines
20
22
increased in both the 1999 third quarter and nine months. At Electronic
Technologies, increased demand for business and commuter aircraft systems and
medical devices in both the 1999 third quarter and nine months were more than
offset by lower sales for microelectronics for the 1999 third quarter and lower
sales for contract manufacturing services and precision electronic devices for
the 1999 nine months. These results were also impacted by costs related to
workforce reductions at Electronic Technologies. At Brown Engineering, increased
1999 third quarter and nine-month sales in defense energy systems and
environmental programs partially offset lower sales for marine instrumentation
products. The decrease in operating results for marine instrumentation products
was attributable, in large part, to adverse conditions in the oil industry.
Third quarter 1999 and the 1999 nine months operating results for Teledyne Cast
Parts were adversely affected by reduced demand from commercial aerospace
markets.
Industrial Segment
Operating profit for the 1999 third quarter was $1.8 million compared to $8.0
million for the same quarter of 1998, and sales decreased 17 percent to $67.0
million. For the 1999 nine months, operating profit decreased 67 percent to
$10.2 million while sales decreased 20 percent to $214.0 million.
The decline in sales and operating profit in the 1999 third quarter and nine
months resulted primarily from reduced demand for tungsten, tungsten carbide,
and carbide cutting tools due to weaker global market conditions affecting
Metalworking Products. In addition, the 1999 third quarter and nine months
operating profit includes $2.1 million and $3.6 million, respectively, in costs
related to a workforce reduction at Metalworking Products.
Consumer Segment
Operating profit decreased to $3.9 million in the 1999 third quarter from
$5.7 million in the same 1998 period and sales increased 3 percent to $58.0
million. For the 1999 nine months, operating profit decreased to $12.0 million
from $13.1 million and sales increased 9 percent to $176.5 million from the
comparable 1998 period.
Corporate Items
Corporate expenses increased by 21 percent to $10.8 million for the 1999
third quarter primarily due to one-time costs related to executive management
transition. Corporate expenses increased 2 percent to $27.8 million for the 1999
nine months. Net interest expense decreased $1.5 million from the third quarter
1998 as substantial proceeds received from asset sales completed during the
quarter were used to reduce debt. Net interest expense for the 1999 nine months
increased $7.1 million from the nine months 1998 due to higher levels of debt
resulting from more than $400 million of purchases of businesses and investments
in ventures and increased capital spending during 1998. Excess pension income
increased to $17.4 million in the third quarter 1999 and $49.2 million in the
1999 nine months compared to $10.6 million in the third quarter 1998 and $31.8
million in the 1998 nine months due to higher pension assets as a result of
strong investment performance during 1998.
21
23
Special and Extraordinary Items
Net income in the 1999 third quarter was reduced by special items of $5.6
million, or $0.03 per diluted share, relating to costs associated with the
previously announced spin-offs of certain businesses of the Aerospace and
Electronics and Consumer segments, workforce reductions at Metalworking
Products, Water Pik and Teledyne Electronic Technologies and facilities start-up
costs at Oremet-Wah Chang and Allegheny Ludlum's joint venture in China.
Also, net income in the third quarter 1999 includes $129.6 million, or $0.68
per diluted share, from extraordinary gains on the sale of several businesses
including Fluid Systems, McCormick Selph Ordnance Unit, Ryan Aeronautical and
Specialty Equipment's construction and mining business.
In addition to the items described above, net income in the 1999 nine months
was reduced by special items of $10.8 million, or $0.05 per diluted share,
relating to costs associated with the previously announced spin-offs of the
Aerospace and Electronics and Consumer segments, facility consolidations in the
Consumer segment, workforce reductions at Allvac's operations in the United
Kingdom, Metalworking Products and Teledyne Electronic Technologies, start-up
costs relating to Oremet-Wah Chang's new electron beam melt facility and
Allegheny Ludlum's joint venture in China and operating losses on certain
businesses sold in the 1999 first quarter.
Non-recurring events resulted in an after-tax charge of $45.8 million, or
$0.23 per diluted share in the 1998 nine months. These events included deal
costs of $10.3 million, or $0.05 per share, related to the acquisition of
OREMET, along with charges of $3.5 million, or $0.02 per share, for a planned
salaried workforce reduction related to integrating the operations of OREMET and
Wah Chang. Also, Allegheny Ludlum recorded a $12.3 million charge, or $0.06 per
share, due to a planned salaried workforce reduction. In addition, charges of
$19.7 million, or $0.10 per share, relating to the Specialty Metals segment were
recorded associated with exiting certain product lines and asset impairments
resulting from capital expenditure programs.
Transformation Initiatives
Following extensive studies and strategic analyses initiated in the
summer of 1998, the Company announced in January 1999 that it would pursue a
significant strategic transformation and reconfiguration of the Company. As part
of this transformation, the Company is spinning off certain businesses of its
Aerospace and Electronics segment as a stand-alone company (which will be called
Teledyne Technologies Incorporated) and its Consumer segment as a stand-alone
company (which will be called Water Pik Technologies, Inc.).
On November 12, 1999, the Company announced that its board of directors had
set November 22, 1999 as the record date and November 29, 1999 as the
distribution date for the spin-offs of the two new companies. Teledyne
Technologies Incorporated will be spun off to Allegheny Teledyne's stockholders
at the ratio of one share of the common stock of Teledyne Technologies for each
seven shares of Allegheny Teledyne common stock. Water Pik Technologies, Inc.
will be spun off to Allegheny Teledyne's stockholders at the ratio of one share
of the common stock of Water Pik Technologies for each 20 shares of Allegheny
Teledyne common stock.
22
24
At a special meeting held on November 11, 1999, Allegheny Teledyne's
stockholders approved a one-for-two reverse split of the Company's stock. The
reverse split will be effective immediately following the spin-offs of the
Company's Aerospace and Electronics and Consumer segments to Allegheny
Teledyne's stockholders.
At the time of the spin-offs, Allegheny Teledyne will change its name to
Allegheny Technologies Incorporated. After the spin-offs, Allegheny Technologies
common stock will be traded on the New York Stock Exchange under the symbol
"ATI."
Additionally, as part of this strategic transformation, the Company sold
several of its businesses. In the 1999 third quarter, the Company completed the
sale of its unmanned aerial vehicle and its pyrotechnic components and systems
businesses, Ryan Aeronautical and McCormick Selph Ordnance Unit. In addition,
the Company sold its pressure relief valve, vehicle control valve, nitrogen gas
springs, consumer drinkware and its construction and mining equipment
businesses. During the 1999 third quarter, the Company realized more than $340
million in gross proceeds and recognized extraordinary gains of $129.6 million,
net of $79.9 million in taxes in connection with the sales of these businesses.
New Accounting Pronouncements
Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, FASB
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities: Deferral of the Effective Date of FASB Statement No. 133" was
issued. This statement delays the effective date of FASB Statement No. 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company is presently evaluating the effect of adopting this statement.
Income Taxes
The Company's effective tax rate decreased to 35.8 percent and 35.9 percent,
respectively, for the 1999 third quarter and nine months from 38.8 percent and
38.2 percent, respectively, for the same periods in 1998. The decrease in the
1999 rate reflects the impact of non-deductible merger and restructuring charges
in the first quarter of 1998, favorable adjustments to prior years' tax
liabilities, and favorable effects of tax planning initiatives.
Financial Condition and Liquidity
Working capital decreased to $652.6 million at September 30, 1999, compared
to $742.2 million at December 31, 1998. The current ratio decreased to 2.0 from
2.2 in this same period. The decrease in working capital was primarily due to
lower cash, accounts receivable and inventories balances and higher accounts
payable balances.
23
25
In the first nine months of 1999, cash generated from operations of $139.5
million, proceeds from the sale of businesses and investments and disposals of
property, plant and equipment of $356.8 million and proceeds from the exercise
of stock options of $6.4 million were used to pay net debt of $198.3 million,
repurchase common stock for $148.3 million, pay dividends of $92.2 million and
to invest $88.0 million in capital equipment and business expansion. Cash
generated from operations of $139.5 million is net of payments of taxes on gains
on sales of businesses of $79.9 million. Excluding these tax payments, cash
generated from operations is $219.4 million. Cash transactions plus cash on hand
at the beginning of the year resulted in a cash position of $49.2 million at
September 30, 1999. Capital expenditures for 1999 are expected to approximate
$115 million, of which $78.6 million were spent during the first nine months.
On October 1, 1998, the Company's Board of Directors authorized a stock
repurchase program to acquire up to 20 million shares of Allegheny Teledyne's
common stock. The shares may be repurchased from time-to-time in the open
market. During the third quarter of 1999, the Company repurchased 2.1 million
shares at a cost of $39.7 million. During the 1999 nine months, the Company
repurchased 7.3 million shares at a cost of $148.3 million. During the month of
October 1999, the Company purchased over 1.7 million shares at a cost of
approximately $28 million. From the inception of the share repurchase program
through November 9, 1999, the Company has repurchased a total of approximately
12.0 million shares at a cost of $232.5 million.
The Company will effect a one-for-two reverse split of its common stock
immediately after the completion of the previously announced spin-offs of
certain businesses of its Aerospace and Electronics and its Consumer segments.
The reverse stock split was approved by Allegheny Teledyne's stockholders at a
special meeting held on November 11, 1999. The spin-offs will be completed on
November 29, 1999.
On November 11, 1999, the Board of Directors declared a regular quarterly
dividend of $0.16 per share of common stock. The dividend is payable on December
14, 1999 to stockholders of record at the close of business on November 22,
1999. The Board of Directors has preliminarily approved setting the regular
quarterly dividend at $0.10 per share of common stock, or $0.20 per share after
giving effect to the reverse split. It is anticipated that this new dividend
rate will be implemented with the regular quarterly dividend payable in March
2000.
The Company believes that internally generated funds, current cash on hand
and borrowing from existing credit lines will be adequate to meet foreseeable
needs. The Company may choose, however, to issue additional debt depending on
market conditions.
Other Matters
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
24
26
investigation and remediation of a number of sites under these laws. The
Company's reserves for environmental investigation and remediation totaled
approximately $44.0 million at September 30, 1999. 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 36 such sites, excluding those at which it
believes it has no future liability. The Company's involvement is very limited
or de minimus at approximately 14 of these sites, and the potential loss
exposure with respect to any of these 36 sites is not considered to be material.
For additional discussion of environmental matters, see Note 8 to the
consolidated financial statements of the Company.
25
27
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.
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 8 to the
consolidated financial statements of the Company.
26
28
Impact of the Introduction of the Euro
The Company has continued to evaluate effects of the January 1, 1999
conversion and related transition by 11 member states of the European Union to a
common currency, the "Euro". The United Kingdom, where a significant portion of
the Company's European operations is located, is not currently a participating
country. Based on its evaluation, the Company currently does not expect the euro
conversion to have a material impact on the Company's results of operation or
financial condition. Like other companies with European sales and operations,
the Company anticipates that it will face wage and product pricing transparency
issues in participating countries; however, the Company does not expect the
resolution of these issues to have a material adverse effect on the Company.
Additionally, while the Company expects to encounter some technical challenges
to adapt information technology and other systems to accommodate
Euro-denominated transactions, associated costs to date have not been material.
Mostly due to evolving business needs and continuing technological advances, the
Company has been modifying and replacing its computer software and hardware at
its European operations. The Company believes that the euro conversion will not
have a material adverse effect on its foreign currency activities described
below.
Year 2000 Readiness Disclosure
Over the past several years, the Company has put in place management task
forces at its operating companies to identify whether its computer systems,
which include business computers, mill equipment and process control computers
and other devices using a microprocessor, as well as telecommunication and
payroll and employee benefit processing systems, would function properly with
respect to dates in the Year 2000 and thereafter. These task forces report to
the Executive Resource Information Committee, a senior management committee
charged with reviewing and establishing priorities for information
technology-related matters, including Year 2000 issues, and which reports to the
Audit and Finance Committee of the Company's Board of Directors. Through these
efforts, Year 2000 identification, solution development, testing and
implementation initiatives and contingency planning initiatives have proceeded
at Allegheny Teledyne and each of the operating companies.
In part as a result of its Year 2000 initiatives, but mostly due to evolving
business needs and continuing technological advancements, the Company has been
modifying and replacing portions of its computer software and hardware systems.
The Company estimates, based on dollars expended, that installation of solutions
to identified Year 2000 issues relating to its information technology systems is
nearly 100 percent complete. While the Company estimates that based on dollars
expended, nearly 100 percent of solutions have been implemented for its
non-information technology systems, the Company continues to work to resolve
various manufacturing-related Year 2000 issues. The Company believes that a
substantial portion of its internal solutions relating to Year 2000
functionality of its computer systems have been completed and implemented.
Confirmatory testing of implemented solutions is ongoing.
We have provided many customers and suppliers who we believe to be material to
our business with Year 2000 questionnaires. None of the responding customers and
suppliers have identified for the Company any material Year
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2000 issues. Efforts continue to be made to identify and resolve customer- and
supplier-based Year 2000 issues that could affect the Company and its operating
and support systems. The Company believes that it has identified substantially
all material customer- and supplier-based Year 2000 issues. Efforts also
continue to identify whether products produced and sold by Allegheny Teledyne's
operating companies have Year 2000 issues. The Company believes that it has
identified substantially all products that have Year 2000 issues, primarily a
limited number of products of Teledyne Electronic Technologies and Teledyne
Brown Engineering, and is working to resolve such issues. The Company believes
that there are no significant product-related Year 2000 issues. The Company has
not conducted any extensive review of products manufactured and sold by
discontinued businesses or businesses that it has sold.
Excluding expenditures necessitated by ordinary business needs and continuing
technological advancements in the computer industry, the Company spent
approximately $11 million in 1998 and anticipates spending another estimated $7
million in 1999 to address Year 2000 issues. These expenditures do not include
expenditures relating to Year 2000 issues associated with the products
identified above. Substantially all costs related to the Company's Year 2000
initiatives are expensed as incurred and funded through operating cash flows.
Although we currently do not have any plans for additional expenditures,
additional amounts may be spent in subsequent years.
Based upon internal assessments, formal communications with suppliers and
customers with which the Company exchanges electronic data, and work completed
to date, the Company believes that Year 2000 issues should not pose significant
operational problems or have a material impact on the Company's consolidated
financial position, results of operations or cash flow. A failure of third party
vendors or customers to be Year 2000 ready, however, could adversely affect
these beliefs and is not quantifiable. Such failure could have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flow in a given period, but probably not over the long-term.
The most reasonably likely worse case scenario of failure by the Company or its
suppliers or customers to resolve Year 2000 problems would be a temporary
slowdown or cessation of manufacturing operations at one or more of the
Company's facilities and a temporary inability on the part of the Company to
timely process orders and to deliver finished products to customers. Delays in
meeting customers' orders would affect the timing of billings to and payments
received from customers in respect to orders and could result in other
liabilities. Customers' Year 2000 problems could also delay the timing of
payments to the Company for orders.
The Company has been working to establish contingency plans with respect to
our critical business and operating systems should unplanned situations arise on
or after January 1, 2000, and expect such contingency plans to be in place prior
to December 31, 1999. Most of the Company's current contingency plans
contemplate the use of current personnel to make certain manual adjustments to
systems or to perform various tasks manually. Vacations for information
technology professionals and other relevant personnel are expected to be limited
toward the end of December 1999 and the early part of 2000 in order to have
employees on hand to assist in avoiding and responding to adverse scenarios. The
Company is also considering establishing additional inventories and back-up
procedures in the event suppliers are unable to deliver raw materials and
services in a timely manner.
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While the Company has been conducting a comprehensive Year 2000 review of its
computer systems, there may be Year 2000-related matters that have not been
identified. Actual dollar amounts spent by the Company to address Year 2000
issues could materially differ from the estimates for a number of reasons,
including changes in the availability or costs of personnel trained in this
area, changes made to the Company's remediation plans, the ability of the
Company's significant suppliers, customers and others with which it conducts
business, including governmental agencies, to identify and resolve their own
Year 2000 issues or identification of other Year 2000-related matters.
Forward-Looking Statements
From time to time the Company has made and may continue to make
forward-looking statements. Certain forward-looking statements are contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 8 to the consolidated financial statements of the Company,
including statements concerning the transformation of the Company, pricing, cost
savings, raw material costs, market conditions, capital spending plans, the
amount of dividends to be paid to the Company's stockholders, the adequacy of
available funds to meet foreseeable needs, anticipated effects of the Euro
conversion, anticipated expenditures to address Year 2000-computer-systems
issues, the impact of Year 2000-computer-systems issues, the Company's use of
derivative instruments, the outcome of any government inquiries, litigation or
other future proceedings related to government contract or other matters and
environmental costs. These statements are based on current expectations that
involve a number of risks and uncertainties, including those described above
under the captions "Other Matters - Environmental" and "Other Matters -
Government Contracts" and elsewhere herein. Completion of the previously
announced spin-offs and public offerings by the new companies being formed in
the spin-offs and achieving anticipated results involve inherent uncertainties,
including those related to whether legal, tax, financial and other
considerations can be successfully resolved. Realization of the anticipated
benefits described in the forward-looking statements could take longer than
expected and implementation difficulties, market factors and further
deterioration in domestic or global economic conditions could alter the
anticipated benefits. Actual results may differ materially from the results
anticipated in the forward-looking statements. Additional risk factors are
described from time to time in the Company's filings with the Securities and
Exchange Commission, including its Report on Form 10-K for the year ended
December 31, 1998. The Company assumes no duty to update its forward-looking
statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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.
Foreign currency exchange contracts are used to limit transactional exposure
to changes in currency exchange rates. The Company sometimes purchases foreign
currency forward contracts that effectively permit it to sell specified amounts
of foreign currencies expected to be received from its export sales for
pre-established U.S. dollar amounts at specified dates. The forward contracts
are denominated in the same foreign currencies in which export sales are
denominated. These contracts, which are not financially material, are designated
as hedges of export sales transactions in which settlement will occur in future
periods, which otherwise would expose the Company, on the basis of its aggregate
net cash flows in respective currencies, to foreign currency risk.
A portion of the Company's operations consists of investments in foreign
subsidiaries. As a result, the Company's financial results could be affected by
changes in foreign currency exchange rates. To mitigate this foreign currency
translation risk, the Company has a practice of recapitalizing operations using
local foreign currency debt to replace direct equity investment. The average
interest rate to service this foreign debt is favorable to current U.S. interest
rates.
As part of its risk management strategy, the Company purchases exchange-traded
futures contracts to manage exposure to changes in nickel prices, a component of
raw material cost for some of the specialty metals companies. The nickel futures
contracts obligate the Company to make or receive a payment equal to the net
change in value of the contract at its maturity. These contracts can also be
designated as hedges of the Company' firm sales commitments, are short-term in
nature to correspond to the commitment period, and are effective in hedging the
Company's exposure to changes in nickel prices during the cycle. The gains and
losses on these contracts are deferred and recognized in earnings when realized
as an adjustment to cost of goods sold. Historically, the Company has not closed
any significant contracts prior to the execution of the underlying sale
transaction, nor has any of the underlying sales transactions failed to occur
which resulted in a material adverse effect on the Company.
The Company guarantees the outstanding Allegheny Ludlum fixed rate 6.95%
debentures due in 2025. In a period of declining interest rates, the Company
faces the risk of required interest payments exceeding those based on the
current market rate. To mitigate interest rate risk, the Company attempts to
maintain a reasonable balance between fixed and variable rate debt to keep
financing costs as low as possible.
The Company believes that adequate controls are in place to monitor these
activities, which are not financially material. However, many factors, including
those beyond the control of the Company such as changes in domestic and foreign
political and economic conditions, as well as the magnitude and timing of
interest rate changes, could adversely affect these activities.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10(a) Employment Agreement made August 17, 1999 between Allegheny
Teledyne and Thomas A. Corcoran
10(b) Restricted Stock Agreement made September 16, 1999 between
Allegheny Teledyne Incorporated and Thomas A. Corcoran
10(c) Supplemental Pension Plan Agreement made September 16, 1999
between Allegheny Teledyne Incorporated and Thomas A. Corcoran
27 Financial Data Schedule for Nine Months Ended September 30,
1999.
(b) The Registrant did not file any Current Reports on Form 8-K during the
quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLEGHENY TELEDYNE INCORPORATED
(Registrant)
Date: November 15, 1999 By /s/ James L. Murdy
--------------------------------------
James L. Murdy
Executive Vice President, Finance and
Administration and Chief Financial
Officer
(Duly Authorized Officer)
Date: November 15, 1999 By /s/ Dale G. Reid
--------------------------------------
Dale G. Reid
Vice President - Controller and Chief
Accounting Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10(a) Employment Agreement made August 17, 1999 between Allegheny
Teledyne and Thomas A. Corcoran
10(b) Restricted Stock Agreement made September 16, 1999 between
Allegheny Teledyne Incorporated and Thomas A. Corcoran
10(c) Supplemental Pension Plan Agreement made September 16, 1999
between Allegheny Teledyne Incorporated and Thomas A. Corcoran
27 Financial Data Schedule for Nine Months Ended September 30, 1999.
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