UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
Commission File Number 1-12001
ALLEGHENY TECHNOLOGIES INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 25-1792394
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1000 Six PPG Place
Pittsburgh, Pennsylvania 15222-5479
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(412) 394-2800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
At May 3, 2002, the Company had outstanding 80,576,890 shares of its Common
Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 2002
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 19
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 27
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
March 31, December 31,
2002 2001
---- ----
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 30.5 $ 33.7
Accounts receivable, net 291.2 274.6
Inventories, net 461.2 508.4
Income tax refunds 5.3 48.5
Deferred income taxes 40.2 33.5
Prepaid expenses and other current assets 29.1 27.4
---------- ----------
Total Current Assets 857.5 926.1
Property, plant and equipment, net 821.5 828.9
Prepaid pension cost 636.0 632.9
Cost in excess of net assets acquired 188.5 188.4
Other assets 64.1 66.9
---------- ----------
TOTAL ASSETS $ 2,567.6 $ 2,643.2
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 155.0 $ 155.3
Accrued liabilities 167.3 168.2
Short-term debt and current portion
of long-term debt 16.4 9.2
---------- ----------
Total Current Liabilities 338.7 332.7
Long-term debt 509.0 573.0
Accrued postretirement benefits 505.5 506.1
Deferred income taxes 166.9 153.7
Other 117.6 133.0
---------- ----------
TOTAL LIABILITIES 1,637.7 1,698.5
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10: authorized-
50,000,000 shares; issued-none -- --
Common stock, par value $0.10, authorized-500,000,000
shares; issued-98,951,490 shares at March 31, 2002 and December 31, 2001;
outstanding-80,568,079 shares at March 31, 2002 and 80,314,624 shares
at December 31, 2001 9.9 9.9
Additional paid-in capital 481.2 481.2
Retained earnings 927.7 957.5
Treasury stock: 18,383,411 shares at
March 31, 2002 and 18,636,866 shares
at December 31, 2001 (471.4) (478.2)
Accumulated other comprehensive
loss, net of tax (17.5) (25.7)
---------- ---------
Total Stockholders' Equity 929.9 944.7
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,567.6 $ 2,643.2
========== ==========
The accompanying notes are an integral part of these statements.
3
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2002 2001
--------- ---------
Sales $ 493.1 $ 542.5
Costs and expenses:
Cost of sales 452.7 476.9
Selling and administrative
expenses 50.5 48.4
--------- ---------
Income (loss) before interest,
other income and income taxes (10.1) 17.2
Interest expense, net 9.9 8.0
Other income 2.0 1.2
--------- ---------
Income (loss) before income taxes (18.0) 10.4
Income tax provision (benefit) (6.9) 4.0
--------- ---------
Net income (loss) $ (11.1) $ 6.4
========= =========
Basic and diluted net income
(loss) per common share $ (0.14) $ 0.08
========= =========
Dividends declared per common share $ 0.20 $ 0.20
========= =========
The accompanying notes are an integral part of these statements.
4
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2001
-------- -------
OPERATING ACTIVITIES:
Net income (loss) $ (11.1) $ 6.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 22.8 24.8
Deferred income taxes 1.8 (7.6)
Change in operating assets and liabilities:
Inventories 47.1 8.1
Accrued income taxes 43.2 --
Accounts receivable (16.4) 7.6
Prepaid pension cost (3.1) (23.9)
Accounts payable 0.2 28.4
Accrued liabilities and other (2.6) (16.8)
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 81.9 27.0
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (15.4) (24.7)
Other 2.7 0.1
------- -------
CASH USED IN INVESTING ACTIVITIES (12.7) (24.6)
FINANCING ACTIVITIES:
Net borrowings (repayments) under credit facilities (50.4) 9.6
Borrowings on long-term debt -- 4.5
Payments on long-term debt and capital leases (5.9) (0.2)
------- -------
Net increase (decrease) in debt (56.3) 13.9
Dividends paid (16.1) (16.0)
Purchases of common stock -- (3.0)
------- -------
CASH USED IN FINANCING ACTIVITIES (72.4) (5.1)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (3.2) (2.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 33.7 26.2
------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 30.5 $ 23.5
======= =======
The accompanying notes are an integral part of these statements.
5
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of
Allegheny Technologies Incorporated and its subsidiaries. Unless the context
requires otherwise, "Allegheny Technologies" and "the Company" refer to
Allegheny Technologies Incorporated and its subsidiaries.
Certain amounts from 2001 have been reclassified to conform with the 2002
presentation.
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States for complete financial statements. In management's
opinion, 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
2001 Annual Report on Form 10-K. The results of operations for these interim
periods are not necessarily indicative of the operating results for any future
period.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). Although retaining many of the fundamental recognition and measurement
provisions of the existing accounting standards, the new rules significantly
change the criteria that would have to be met in order to classify an asset as
held-for-sale. This distinction is important because assets to be disposed of
are stated at the lower of their fair values or carrying amounts, and
depreciation is no longer recognized. SFAS 144 also expands the types of
dispositions which qualify for discontinued operations disclosure treatment and
requires expected future operating losses from discontinued operations to be
displayed in discontinued operations in the period in which the losses are
incurred, rather than as of a measurement date. Effective January 1, 2002 the
Company adopted this Statement, which had no impact to the financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), and Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). These statements change the accounting for goodwill
and intangible assets, and asset retirement obligations.
Under SFAS 142, goodwill and indefinite-lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that have finite
lives will continue to be amortized over their useful lives, with no maximum
life. In addition, SFAS 142 changes the test for goodwill impairment.
The new impairment test for goodwill is a two step process. The first step
is a comparison of the fair value of the reporting unit with its carrying
amount, including goodwill. If this step reflects impairment, then the loss
would be measured as the excess of recorded goodwill over its implied fair
value. Implied fair value is the excess of the fair value of the reporting unit
over the fair value of all recognized and unrecognized assets and liabilities.
The amortization provisions of SFAS 142 apply to goodwill and
6
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS 142 in their fiscal year beginning after December 15, 2001.
The Company is currently evaluating whether goodwill of approximately $188
million at December 31, 2001 was impaired at January 1, 2002. Goodwill at
December 31, 2001 was approximately $127 million for the Flat-Rolled Products
segment, $51 million for the High Performance Metals segment, and $10 million
for the Industrial Products segment. If goodwill is determined to be impaired,
the Company would record a non-cash after-tax charge for the amount of the
impairment. This initial impairment charge, if any, would be recorded as a
cumulative effect of a change in accounting principle in the Company's results
for the second quarter ended June 30, 2002. For the first three months of 2001,
the Company recognized goodwill amortization expense of $1.5 million or $0.01
per diluted share. Effective January 1, 2002, in accordance with this
pronouncement, the Company ceased the amortization of goodwill.
Under SFAS 143, obligations associated with the retirement of tangible
long-lived assets, such as landfill and other facility closure costs, would be
capitalized and amortized to expense over an asset's useful life using a
systematic and rational allocation method. This standard is effective for fiscal
years beginning after June 15, 2002. The Company is currently evaluating
adoption of SFAS 143 and has not yet determined the impact on its overall
financial condition, if any, that may result.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
As part of its risk management strategy the Company from time to time
purchases exchange-traded futures and swap contracts to manage exposure to
changes in nickel prices, a component of raw material cost for some of its
flat-rolled and high performance metals products, and energy costs. The
contracts obligate the Company to make or receive a payment equal to the net
change in value of the contract at its maturity. These contracts are designated
as hedges of the variability in cash flows of a portion of the Company's
forecasted purchases of nickel and energy payments.
Foreign currency exchange contracts are used to limit transactional
exposure to changes in currency exchange rates. The Company sometimes purchases
foreign currency forward contracts that permit it to sell specified amounts of
foreign currencies expected to be received from its export sales for
pre-established U.S. dollar amounts at specified dates. The forward contracts
are denominated in the same foreign currencies in which export sales are
denominated. These contracts, which are not financially material, are designated
as hedges of the variability in cash flows of a portion of the Company's
forecasted export sales transactions in which settlement will occur in future
periods and which otherwise would expose the Company, on the basis of its
aggregate net cash flows in respective currencies, to foreign currency risk.
Changes in the fair value of these contracts are recognized as a component
of other comprehensive income (loss) in stockholders' equity until the hedged
item is recognized in the statement of operations. If a portion of the contract
is ineffective as a hedge of the underlying exposure, the change in fair value
related to the ineffective portion is immediately recognized as income or
expense.
The Company attempts to maintain a reasonable balance between fixed- and
floating rate debt to keep financing costs as low as possible. Interest rate
swap contracts are used to modify the Company's exposure to interest rate risk
by converting a portion of its fixed-rate debt to a floating rate. These
agreements involve the receipt of fixed-rate amounts in exchange for floating
rate interest payments over the life of the agreements without an exchange of
the underlying principal amount. These agreements are designated as fair value
hedges, with changes in the fair value of the swap agreements and the underlying
fixed-rate debt recognized in the statement of operations.
7
At March 31, 2002, the Company had entered into receive fixed, pay floating
arrangements for $125 million related to the 8.375% ten-year Notes.
In general, hedge effectiveness is determined by examining the relationship
between offsetting changes in fair value or cash flows attributable to the item
being hedged and the financial instrument being used for the hedge.
Effectiveness is measured utilizing regression analysis and other techniques, to
determine whether the change in the fair market value or cash flows of the
derivative exceeds the change in fair value or cash flow of the hedged item.
Calculated ineffectiveness, if any, is immediately recognized on the statement
of operations.
NOTE 2. INVENTORIES
Inventories were as follows (in millions):
March 31, December 31,
2002 2001
--------- ------------
(unaudited) (audited)
Raw materials and supplies $ 68.4 $ 85.9
Work-in-process 385.2 419.6
Finished goods 81.7 83.0
------ ------
Total inventories at current cost 535.3 588.5
Less allowances to reduce current cost
values to LIFO basis (70.3) (77.2)
Progress payments (3.8) (2.9)
------ ------
Total inventories $461.2 $508.4
====== ======
NOTE 3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Property, plant and equipment were as follows (in millions):
March 31, December 31,
2002 2001
---------- ------------
(unaudited) (audited)
Land $ 30.3 $ 30.6
Buildings 226.1 219.4
Equipment and leasehold improvements 1,539.6 1,534.4
-------- --------
1,796.0 1,784.4
Accumulated depreciation and amortization (974.5) (955.5)
-------- --------
Total property, plant and equipment, net $ 821.5 $ 828.9
======== ========
8
NOTE 4. BUSINESS SEGMENTS
Information on the Company's business segments was as follows (in
millions):
Three Months Ended
March 31,
-----------------------
2002 2001
------- -------
(unaudited)
Total sales:
Flat-Rolled Products $ 265.4 $ 289.5
High Performance Metals 181.4 205.3
Industrial Products 58.1 72.7
-------- -------
504.9 567.5
Intersegment sales:
Flat-Rolled Products 3.3 7.0
High Performance Metals 8.5 18.0
------- -------
11.8 25.0
Sales to external customers:
Flat-Rolled Products 262.1 282.5
High Performance Metals 172.9 187.3
Industrial Products 58.1 72.7
------- -------
$ 493.1 $ 542.5
======= =======
Operating profit(loss):
Flat-Rolled Products $ (0.4) $ (4.5)
High Performance Metals 4.3 11.0
Industrial Products (0.7) 4.1
------- -------
Total operating profit 3.2 10.6
Corporate expenses (5.7) (7.0)
Interest expense, net (9.9) (8.0)
Restructuring costs and other costs,
net of gains on asset sales 0.1 (1.7)
Retirement benefit (expense) income (5.7) 16.5
------- -------
Income (loss) before income taxes $ (18.0) $ 10.4
======= =======
Pension income is allocated to business segments to offset pension and
other postretirement benefit expenses. Retirement benefit (expense) income
represents total pension income net of other postretirement benefit expenses.
9
NOTE 5. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per common share (in millions, except per share amounts):
Three Months Ended
March 31,
--------------------
2002 2001
------- -----
(unaudited)
Numerator for basic and diluted
net income (loss) per common
share - net income (loss) $(11.1) $ 6.4
====== =====
Denominator:
Weighted average shares 80.4 80.2
Contingent issuable stock -- 0.1
------ -----
Denominator for basic net
income (loss) per common share 80.4 80.3
Effect of dilutive securities:
Employee stock options -- 0.1
------ -----
Dilutive potential common shares -- 0.1
Denominator for diluted net
income (loss) per common share -
adjusted weighted average shares 80.4 80.4
====== =====
Basic and diluted net income (loss)
per common share $(0.14) $0.08
====== =====
For 2002, the effect of dilutive securities were antidilutive and thus not
included in the calculation of dilutive earnings per share.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, were as follows
(in millions):
Three Months Ended
March 31,
-------------------
2002 2001
---- ----
(unaudited)
Net income (loss) $(11.1) $ 6.4
------ -----
Foreign currency translation
gains(losses) -- 3.1
Unrealized gains (losses)on energy,
raw material and currency hedges,
net of tax 7.8 (5.1)
Unrealized holding gains (losses)
arising during period 0.4 (1.3)
------ -----
8.2 (3.3)
------ -----
Comprehensive income (loss) $ (2.9) $ 3.1
====== =====
10
NOTE 7. FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
The payment obligations under the $150 million 6.95% debentures due 2025
issued by Allegheny Ludlum Corporation (the "Subsidiary") are fully and
unconditionally guaranteed by Allegheny Technologies Incorporated (the
"Guarantor Parent"). In accordance with positions established by the Securities
and Exchange Commission, the following financial information sets forth
separately financial information with respect to the Subsidiary, the
non-guarantor subsidiaries and the Guarantor Parent. The principal elimination
entries eliminate investments in subsidiaries and certain intercompany balances
and transactions.
In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum
Corporation were merged with the overfunded defined benefit pension plans of
Teledyne, Inc. and Allegheny Technologies became the plan sponsor. As a result,
the balance sheets presented for Allegheny Ludlum Corporation and the
non-guarantor subsidiaries do not include the Allegheny Technologies net prepaid
pension asset or the related deferred taxes. Solely for purposes of this
presentation, pension income has been allocated to Allegheny Ludlum Corporation
and the non-guarantor subsidiaries to offset pension and postretirement expenses
which may be funded with pension assets. This allocated pension income has not
been recorded in the financial statements of Allegheny Ludlum Corporation or the
non-guarantor subsidiaries. Management and royalty fees charged to Allegheny
Ludlum Corporation and to the non-guarantor subsidiaries by the Guarantor Parent
have been excluded solely for purposes of this presentation.
(this space intentionally left blank)
11
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
March 31, 2002 (unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ - $ 16.0 $ 14.5 $ - $ 30.5
Accounts receivable - 102.1 189.1 - 291.2
Inventories - 212.6 248.6 - 461.2
Deferred income taxes 45.5 - - - 45.5
Prepaid expenses and other
current assets 0.1 9.9 19.1 - 29.1
-------------------------------------------------------------------------------
Total current assets 45.6 340.6 471.3 - 857.5
Property, plant, and
equipment, net - 449.5 372.0 - 821.5
Prepaid pension cost 636.0 - - - 636.0
Cost in excess of net
assets acquired - 112.1 76.4 - 188.5
Other assets 1,210.5 551.6 335.0 (2,033.0) 64.1
-------------------------------------------------------------------------------
Total assets $1,892.1 $1,453.8 $ 1,254.7 $ (2,033.0) $ 2,567.6
===============================================================================
Liabilities and
stockholders' equity:
Current Liabilities:
Accounts payable $ 1.0 $ 76.2 $ 77.8 $ - $ 155.0
Accrued liabilities 466.1 54.9 171.4 (525.1) 167.3
Short-term debt - 10.6 5.8 - 16.4
-------------------------------------------------------------------------------
Total current liabilities 467.1 141.7 255.0 (525.1) 338.7
Long-term debt 312.4 360.3 36.3 (200.0) 509.0
Accrued postretirement
benefits - 308.1 197.4 - 505.5
Deferred income taxes 166.9 - - - 166.9
Other long-term liabilities 15.8 26.5 75.3 - 117.6
-------------------------------------------------------------------------------
Total liabilities 962.2 836.6 564.0 (725.1) 1,637.7
-------------------------------------------------------------------------------
Total stockholders' equity 929.9 617.2 690.7 (1,307.9) 929.9
-------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,892.1 $1,453.8 $ 1,254.7 $ (2,033.0) $ 2,567.6
===============================================================================
12
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent Statements of
Operations
For the three months ended March 31, 2002 (unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Sales $ - $ 252.9 $ 240.2 $ - $ 493.1
Cost of sales 3.5 243.6 205.6 - 452.7
Selling and administrative
expenses 12.9 6.9 30.7 - 50.5
Interest expense (income) 6.9 3.0 - - 9.9
Other income(expense)
including equity in income of
unconsolidated subsidiaries
6.4 (0.8) 4.7 (8.3) 2.0
--------------------------------------------------------------------------------
Income (loss) before income
taxes (16.9) (1.4) 8.6 (8.3) (18.0)
Income tax provision (benefit)
(5.8) (2.4) 4.2 (2.9) (6.9)
--------------------------------------------------------------------------------
Net income (loss) $ (11.1) $ 1.0 $ 4.4 $ (5.4) $ (11.1)
================================================================================
Condensed Statement of Cash Flows For the three months ended March 31, 2002
(unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating
activities $ 53.6 $ 27.0 $ (37.5) $ 38.8 $ 81.9
--------------------------------------------------------------------------------
Cash flows from investing
activities - (3.3) (11.9) 2.5 (12.7)
--------------------------------------------------------------------------------
Cash flows from financing
activities $ (54.0) $ (22.0) $ 44.9 $ (41.3) $ (72.4)
==============================================================================--
13
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2001 (audited)
- --------------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 0.4 $ 14.3 $ 19.0 $ - $ 33.7
Accounts receivable 0.1 84.8 189.7 - 274.6
Inventories - 249.2 259.2 - 508.4
Deferred income taxes 82.0 - - - 82.0
Prepaid expenses and other
current assets 0.1 9.9 17.4 - 27.4
---------------------------------------------------------------------------------
Total current assets 82.6 358.2 485.3 - 926.1
Property, plant, and
equipment, net - 459.7 369.2 - 828.9
Prepaid pension cost 632.9 - - - 632.9
Cost in excess of net
assets acquired - 112.1 76.3 - 188.4
Other assets 1,175.6 539.3 337.4 (1,985.4) 66.9
---------------------------------------------------------------------------------
Total assets $1,891.1 $1,469.3 $ 1,268.2 $ (1,985.4) $ 2,643.2
=================================================================================
Liabilities and
stockholders' equity:
Current Liabilities:
Accounts payable $ 1.4 $ 77.4 $ 76.5 $ - $ 155.3
Accrued liabilities 413.2 45.0 222.5 (512.5) 168.2
Short-term debt - 0.5 8.7 - 9.2
---------------------------------------------------------------------------------
Total current liabilities 414.6 122.9 307.7 (512.5) 332.7
Long-term debt 362.5 370.4 40.0 (199.9) 573.0
Accrued postretirement
benefits - 302.4 203.7 - 506.1
Deferred income taxes 153.7 - - - 153.7
Other long-term liabilities 15.6 28.7 88.7 - 133.0
---------------------------------------------------------------------------------
Total liabilities 946.4 824.4 640.1 (712.4) 1,698.5
---------------------------------------------------------------------------------
Total stockholders' equity 944.7 644.9 628.1 (1,273.0) 944.7
---------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,891.1 $1,469.3 $ 1,268.2 $ (1,985.4) $ 2,643.2
=================================================================================
14
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent Statements of
Operations
For the three months ended March 31, 2001 (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Sales $ - $ 274.4 $ 268.1 $ - $ 542.5
Cost of sales (10.0) 270.4 216.5 - 476.9
Selling and administrative
expenses 1.5 9.5 37.4 - 48.4
Interest expense (income) 5.2 2.9 (0.1) - 8.0
Other income (expense)
Including equity in income of
unconsolidated subsidiaries 8.0 4.5 1.6 (12.9) 1.2
---------------------------------------------------------------------------------
Income (loss) before income taxes 11.3 (3.9) 15.9 (12.9) 10.4
Income tax provision
(benefit) 4.9 1.8 2.4 (5.1) 4.0
---------------------------------------------------------------------------------
Net income (loss) $ 6.4 $ (5.7) $ 13.5 $ (7.8) $ 6.4
=================================================================================
Condensed Statement of Cash Flows
For the three months ended March 31, 2001 (unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating
activities $ 10.6 $ 20.7 $ 23.9 $ (28.2) $ 27.0
---------------------------------------------------------------------------------
Cash flows from investing
activities - (3.4) (22.2) 1.0 (24.6)
---------------------------------------------------------------------------------
Cash flows from financing
activities $ (10.6) $ (14.5) $ (7.2) $ 27.2 $ (5.1)
=================================================================================
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is subject to various domestic and international environmental
laws and regulations that govern the discharge of pollutants into the air or
water, and disposal of hazardous substances, and which may require that it
investigate and remediate the effects of the release or disposal of materials at
sites associated with past and present operations, including sites at which the
Company has been identified as a potentially responsible party under the federal
Superfund laws and comparable state laws. The Company could incur substantial
cleanup costs, fines, and civil or criminal sanctions, third party property
damage or personal injury claims as a result of violations or liabilities under
these laws or noncompliance with environmental permits required at the Company's
facilities. The Company is currently involved in the investigation and
remediation of a number of the Company's current and former sites as well as
third party location sites under these laws.
15
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 the amounts accrued, are not reasonably estimable. Based on
currently available information, however, management does not believe it is
reasonably possible that future environmental costs in excess of those accrued
with respect to sites with which the Company has been identified are likely to
have a material adverse effect on the Company's financial condition or results
of operations. In addition, there can be no assurance that additional future
developments, administrative actions or liabilities relating to environmental
matters will not have a material adverse effect on the Company's financial
condition or results of operations.
In June 1995, the U.S. Government commenced an action against Allegheny
Ludlum in the United States District Court for the Western District of
Pennsylvania, alleging multiple violations of the federal Clean Water Act. The
trial of this matter concluded in February 2001 with a favorable jury verdict
for Allegheny Ludlum of approximately 85% of the claims. In February 2002, the
Court issued a decision imposing a penalty of $8.2 million for approximately 160
incidents at five facilities that occurred over a period of about six years
which Allegheny Ludlum had reported to the appropriate environmental agencies.
The Company is reviewing options for appealing the Court's decision. At March
31, 2002, the Company had adequate reserves for this matter.
At March 31, 2002, the Company's reserves for environmental remediation
obligations totaled approximately $45.7 million, of which approximately $18.3
million, including the federal Clean Water Act matter, were included in other
current liabilities. The reserves include estimated probable future costs of
$19.7 million for federal Superfund and comparable state-managed sites; $3.5
million for formerly owned or operated sites for which the Company has
remediation or indemnification obligations; $10.6 million for owned or
controlled sites at which Company operations have been discontinued; and $11.9
million for sites utilized by the Company in its ongoing operations. The Company
is evaluating whether it may be able to recover a portion of future costs for
environmental liabilities from third parties other than participating
potentially responsible parties.
The timing of expenditures 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.
Various claims (whether based on U.S. Government or Company audits and
investigations or otherwise) have been or may be asserted against the Company
related to its U.S. Government contract work, principally related to the former
operations of Teledyne, Inc., including claims based on business
16
practices and cost classifications and actions under the False Claims Act.
Depending on the circumstances and the outcome, such proceedings could result in
fines, penalties, compensatory and treble damages or the cancellation or
suspension of payments under one or more U.S. Government contracts. Under
government regulations, a company, or one or more of its operating divisions or
units, can also be suspended or debarred from government contracts based on the
results of investigations. Given the limited extent of the Company's business
with the U.S. Government, the Company believes that a suspension or debarment of
the Company would not have a material adverse effect on the future operating
results and consolidated financial condition of the Company.
Although the outcome of these matters cannot be predicted with certainty,
management does not believe there is any audit, review or investigation
currently pending against the Company of which management is aware that is
likely to have a material adverse effect on the Company's financial condition or
liquidity, although the resolution in any reporting period of one or more of
these matters could have a material adverse effect on the Company's results of
operations for that period.
In the spin-offs of Teledyne and Water Pik, completed in November 1999, the
new companies agreed to assume and to defend and hold the Company harmless
against all liabilities (other than certain income tax liabilities) associated
with the historical operations of their businesses, including all government
contracting, environmental, product liability and other claims and demands,
whenever any such claims or demands might arise or be made. If the new companies
were unable or otherwise fail to satisfy these assumed liabilities, the Company
could be required to satisfy them, which could have a material adverse effect on
the Company's results of operations and financial condition.
In connection with the spin-offs of Teledyne and Water Pik, the Company
received a tax ruling from the Internal Revenue Service stating that the
spin-offs will be tax-free to the Company and the Company's stockholders. While
the tax ruling relating to the qualification of the spin-offs as tax-free
distributions within the meaning of the Internal Revenue Code generally is
binding on the Internal Revenue Service, the continuing validity of the tax
ruling is subject to certain factual representations and uncertainties that,
among other things, require the new companies to take or refrain from taking
certain actions. If a spin-off were not to qualify as a tax-free distribution
within the meaning of the Internal Revenue Code, the Company would recognize
taxable gain generally equal to the amount by which the fair market value of the
common stock distributed to the Company's stockholders in the spin-off exceeded
the Company's basis in the new company's assets. In addition, the distribution
of the new company's common stock to Company stockholders would generally be
treated as taxable to the Company's stockholders in an amount equal to the fair
market value of the common stock they received. If a spin-off qualified as a
distribution within the meaning of the Internal Revenue Code but was
disqualified as tax-free to the Company because of certain post-spin-off
circumstances, the Company would recognize taxable gain as described in the
preceding sentence, but the distribution of the new company's common stock to
the Company's stockholders in the spin-off would generally be tax-free to each
Company stockholder. In the spin-offs, the new companies executed tax sharing
and indemnification agreements in which each agreed to be responsible for any
taxes imposed on and other amounts paid by the Company, its agents and
representatives and its stockholders as a result of the failure of the spin-off
to qualify as a tax-free distribution within the meaning of the Internal Revenue
Code if the failure or disqualification is caused by post-spin-off actions by or
with respect to that company or its stockholders. Potential liabilities under
these agreements could exceed the respective new company's net worth by a
substantial amount. If either or both of the spin-offs were not to qualify as
tax-free distributions to the Company or its stockholders, and either or both of
the new companies were unable or otherwise failed to satisfy the liabilities
they assumed under the tax sharing and indemnification agreements, the Company
could be required to satisfy them without full
17
recourse against the new companies. This could have a material adverse effect on
the Company's results of operations and financial condition.
Allegheny Ludlum and the United Steelworkers of America ("USWA") are
parties to various collective bargaining agreements which set forth a "Profit
Sharing Plan." The USWA disputes the Company's Profit Sharing Pool calculations
for 1996, 1997, 1998 and 1999. The USWA's outside accountant, KPMG LLP,
identified certain adjustments it believed should be made to those calculations
and that the net effect of those adjustments would result in additional amounts
allegedly owed to USWA represented employees of approximately $20 million. In
March 2002, the USWA claimed an additional $12 million for the last profit
sharing year, 2000. The Company maintains that its certified determinations of
the Profit Sharing Pool calculations were made as prescribed by the Profit
Sharing Plan. On November 20, 2001, the USWA filed a Complaint to compel the
arbitration in this matter. The Complaint has been filed in the United States
District Court for the Western District of Pennsylvania and is captioned United
Steelworkers of America, AFL-CIO CLC v. Allegheny Ludlum Corporation, Civil
Action No. 01-2196. The Company denies that any adjustments to the Profit
Sharing Pool calculations are required and intends to contest the USWA's claim
vigorously. The Company believes that the disposition of this matter is not
likely to have a material adverse effect on the Company's financial condition or
liquidity, although resolution in any reporting period could have a material
adverse effect on the Company's results of operations for that period.
In March 1995, Kaiser Aerospace & Electronics Corporation ("Kaiser") filed
a civil complaint against Teledyne Industries, Inc. (now TDY Industries, Inc.
("TDY")), a wholly-owned subsidiary of the Company, and Dimeling Schreiber &
Park ("DS&P"), DS&P's general partners, and New Piper Aircraft, Inc. in the
state court for Miami-Dade County, Florida. The complaint alleged that TDY
breached a Cooperation and Shareholder's Agreement with Kaiser under which the
parties agreed to cooperate in the filing and promotion of a proposed plan for
acquiring out of bankruptcy the assets of Piper Aircraft, a manufacturer of
general aviation aircraft. Kaiser alleged that TDY breached contractual and
fiduciary duty obligations under the agreement by instead entering into a
proposed plan with DS&P and sought damages as well as a constructive trust over
the shares of New Piper Aircraft. TDY and the other parties are engaged in
discovery and have agreed to participate in a mediation. Kaiser's complaint
requests that the court impose a constructive trust on approximately 68% of the
equity interest in privately held New Piper Aircraft, Inc. The Company owns
approximately 30% of the equity of New Piper Aircraft and the other current
defendant shareholder owns approximately 10%. In the alternative, Kaiser seeks
unspecified damages in an amount "to be determined at trial." This matter is
tentatively scheduled for trial during the fourth quarter of 2002. While the
outcome of the litigation cannot be predicted, and the Company believes that the
claims are not meritorious, an adverse resolution of this matter could have a
material adverse effect on the Company's results of operations, financial
condition or liquidity.
TDY Industries, Inc. and the San Diego Unified Port District ("Port
District") entered into a lease of property located in San Diego, California on
October 1, 1984. The current lease term expires in March 2004, with options to
renew, which ultimately expire in 2024. TDY operated its Teledyne Ryan
Aeronautical division ("Ryan") at the property until May 1999, when
substantially all the assets and business of Ryan were sold to Northrop Grumman
Corporation ("Northrop"). Northrop subleased a portion of the property until
early 2001. TDY also entered into three separate sublease arrangements for
portions of the property. TDY sought Port District consent to the subleases,
which the Port District refused. After its administrative appeal to the Port
District was denied, TDY Industries, Inc. commenced a lawsuit against the Port
District. The complaint, filed in December 2001 in state court in San Diego,
alleges breach of contract, inverse condemnation, tortuous interference with a
prospective economic advantage and other causes of action relating to the Port
District's failure to consent to subleases of
18
the space. The Complaint seeks at least $4 million for damages from the Port
District and declaratory relief.
TDY is obligated to continue to pay rent to the Port District, in an amount
of approximately $0.4 million per month. Due to the Port District's failure to
consent to subleases, TDY is unable to mitigate its costs related to the
property. While TDY is continuing its marketing efforts to sublease the
property, TDY and the Port District continue to discuss a resolution to the
matter. At March 31, 2002, the Company had a reserve of approximately $4.6
million to cover the costs while the facility remains unoccupied.
In another matter related to the property, the Port District has requested
that the California Department of Toxic Substances Control ("DTSC") evaluate
whether the property is regulated as a hazardous waste transportation, storage,
or disposal facility under the Resource Conservation and Recovery Act ("RCRA")
and similar state laws. DTSC recognizes that the information pertaining to the
RCRA permitting status of the property is ambiguous and has agreed to refer the
issue of the property's RCRA permitting status to DTSC's Legal Office for
further consideration. TDY has an opportunity to discuss this matter directly
with DTSC's Legal Office and DTSC will refrain from taking action regarding this
issue until after completion of DTSC's Legal Office review and discussions with
TDY. To the extent the facility is subject to RCRA permitting and corrective
action is required at the property, DTSC has agreed that the San Diego Regional
Water Quality Control Board ("Regional Board") is the appropriate agency to
oversee the corrective action work. The Regional Board is currently overseeing
other investigative work at the property.
A number of other lawsuits, claims and proceedings have been or may be
asserted against the Company relating to the conduct of its business, including
those pertaining to product liability, patent infringement, commercial,
employment, employee benefits, environmental and stockholder matters. While the
outcome of litigation cannot be predicted with certainty, and some of these
lawsuits, claims or proceedings may be determined adversely to the Company,
management believes that the disposition of any such pending matters is not
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Allegheny Technologies Incorporated is one of the largest and most
diversified producers of specialty materials in the world. Unless the content
requires otherwise, "we", "our" and "us" refer to Allegheny Technologies
Incorporated and its subsidiaries. We operate in the following three business
segments, which accounted for the following percentages of total sales for the
first three months of 2002 and 2001:
2002 2001
---- ----
Flat-Rolled Products 53% 52%
High Performance Metals 35% 35%
Industrial Products 12% 13%
For the first three months of 2002, operating profit was $3.2 million
compared to $10.6 million for the same 2001 period. Sales decreased 9% to $493.1
million for the first three months of 2002 compared to $542.5 million for the
same 2001 period.
19
Net loss was $11.1 million, or ($0.14) per diluted share, for the first
three months of 2002 compared to net income of $6.4 million, or $0.08 per
diluted share, for the first three months of 2001.
We realized $25 million in cost reductions during the first three months of
2002. We have targeted $100 million of cost reductions for 2002.
Sales and operating profit (loss) for our three business segments are
discussed below.
FLAT-ROLLED PRODUCTS SEGMENT
Flat-Rolled Products segment sales declined 7% to $262.1 million, due to
weaker market conditions. The segment recorded an operating loss of $0.4 million
for the 2002 first quarter compared to an operating loss of $4.5 million in the
first three months of 2001. Operating results in the 2002 first quarter
benefited significantly from cost reduction initiatives.
Total shipments of finished flat-rolled products in the 2002 first quarter
were 2% below the same period last year and average prices per finished ton
decreased by 6%.
Finished commodity product shipments in the segment (including stainless
steel sheet and plate, silicon electrical steel, and tool steel among other
products) decreased 3% compared to the first quarter 2001. Average prices for
finished commodity products decreased 7% during the same period. This decrease
was primarily due to continued weak demand for stainless steel sheet and plate
due to the weak U.S. industrial economy and lower raw material surcharges.
High-value product shipments in the segment (including standard strip, Precision
Rolled Strip(R), nickel-based alloys and specialty steels, and titanium and
titanium alloys) were flat compared to the 2001 first quarter, while average
prices for high-value products decreased 6%.
Comparative information on the segment's products is provided in the
following table:
Three Months Ended
March 31,
---------------------- %
2002 2001 Change
-------------------------------------
Volume (finished tons):
Commodity 87,431 89,764 (3)
High Value 34,362 34,212 -
Total 121,793 123,976 (2)
Average prices (per finished ton):
Commodity $ 1,487 $ 1,592 (7)
High Value $ 3,761 $ 4,017 (6)
Total $ 2,129 $ 2,261 (6)
HIGH PERFORMANCE METALS SEGMENT
Sales declined 8% to $172.9 million for the 2002 first quarter compared to the
same period of last year due primarily to reduced demand from our two largest
markets, commercial aerospace and electrical energy. The decline in sales and
the effects of the seven month labor strike at Wah Chang lowered operating
profit to $4.3 million compared to $11.0 million in the year-ago period.
Shipments of nickel-based and specialty steel products decreased 16% with
average prices increasing 3%. Shipments of titanium products decreased 19% with
average prices increasing 7%. While average prices increased due to product mix
changes, prices of some products declined due to weaker market conditions.
Shipments of exotic alloys increased 17% but average prices were 2% lower.
20
On March 22, 2002, we announced that our Wah Chang facility and the United
Steelworkers of America (USWA) reached a new six-year labor agreement ending a
seven-month strike, which began on September 4, 2001. The new agreement covers
approximately 660 employees. The new agreement became effective on April 1, 2002
and expires on March 31, 2008. The anticipated increase in labor costs as a
result of the new agreement is less than one percent of our overall labor costs
and is not material.
Certain comparative information on the segment's major products is provided
in the following table:
Three Months Ended
March 31,
-------------------- %
2002 2001 Change
---------------------------------
Volume (000's pounds):
Nickel-based and specialty steel alloys 10,765 12,864 (16)
Titanium mill products 4,949 6,139 (19)
Exotic alloys 869 741 17
Average prices (per pound):
Nickel-based and specialty steel alloys $ 6.46 $ 6.29 3
Titanium mill products $12.11 $11.36 7
Exotic alloys $35.03 $35.80 (2)
INDUSTRIAL PRODUCTS SEGMENT
Due to generally weak demand, first quarter 2002 sales decreased 20% to
$58.1 million, compared to the same period last year, and the segment had an
operating loss of $0.7 million, compared to an operating profit of $4.1 million
in the year-ago period.
CORPORATE ITEMS
Corporate expenses decreased 19% to $5.7 million for the 2002 first quarter
compared to the prior year period due to continued cost reductions. Net interest
expense increased to $9.9 million for the 2002 first quarter from $8.0 million
for the 2001 first quarter. The increase in interest expense primarily was due
to higher interest costs associated with the ten-year notes issued in December
2001.
A decline in the equities markets in 2001 and higher benefit liabilities
from long-term labor contracts negotiated in 2001 resulted in a pre-tax
retirement benefit expense of $5.7 million in the first quarter 2002 compared to
pre-tax retirement benefit income of $16.5 million in the first quarter 2001.
These factors resulted in a $22.2 million reduction in pre-tax income in the
first quarter 2002 compared to the first quarter 2001. The reduction in
retirement benefit income had a negative effect on both cost of sales, and
selling and administrative expenses for the current quarter. Retirement benefit
expense is expected to increase to approximately $6.8 million a quarter for the
remainder of 2002 as a result of the new Wah Chang labor agreement.
INCOME TAX PROVISION (BENEFIT)
Our effective tax rate was (38.3%) and 38.5% for the first three months of
2002 and 2001, respectively.
21
FINANCIAL CONDITION AND LIQUIDITY
CASH FLOW AND WORKING CAPITAL
During the three months ended March 31, 2002, cash generated from
operations was $81.9 million, which included a federal income tax refund for the
2001 tax year of $43.2 million. Cash generated from operations and cash on hand
at the beginning of the year was utilized to reduce debt by $56.3 million, pay
dividends of $16.1 million and invest $15.4 million in capital equipment. At
March 31, 2002, we had a cash position of $30.5 million.
Working capital decreased to $518.8 million at March 31, 2002 compared to
$593.4 million at December 31, 2001. The current ratio decreased to 2.5 from 2.8
in this same period. The change in working capital and current ratio at March
31, 2002 compared to December 31, 2001 was primarily due to the reduction in
inventories and a reduction in the income tax refund receivable.
As part of managing the liquidity of the business, we focus on controlling
inventory, accounts receivable and accounts payable at our operating companies.
In measuring performance in controlling this managed working capital, we exclude
the effects of LIFO inventory valuation reserves, excess and obsolete inventory
reserves, and reserves for uncollectible accounts receivable which, due to their
nature, are managed separately. During the 2002 first quarter, managed working
capital, which is defined as gross inventory plus accounts receivable less
accounts payable, declined by $41 million, or 5.6%, to $685 million. For the
2002 first quarter, the decline in managed working capital resulted from a $54
million decline in gross inventory and a $5 million increase in accounts payable
balances, partially offset by an increase in accounts receivable of $18 million.
Capital expenditures for 2002 are expected to be approximately $50.0
million, of which $15.4 million had been expended through March 31, 2002.
On March 12, 2002, a regular quarterly dividend of $0.20 per share of
common stock was paid to stockholders of record at the close of business on
February 25, 2002. On May 9, 2002, the Board of Directors declared a regular
quarterly dividend of $0.20 per share of common stock. The dividend will be paid
on June 11, 2002 to stockholders of record at the close of business on May 29,
2002.
DEBT
At March 31, 2002, we had $525.4 million in total outstanding debt. Our
debt to capitalization ratio decreased to 36.1% at March 31, 2002 from 38.1% at
December 31, 2001. Our net debt to total capitalization ratio decreased to 34.7%
at March 31, 2002 from 36.7% at December 31, 2001. These lower ratios resulted
primarily from the use of operating cash flows to repay $56 million of debt.
In December 2001, we issued $300 million of 8.375% Notes due December 15,
2011 in a transaction exempt from registration pursuant to Rule 144A under the
Securities Act of 1933, as amended. We have initiated an exchange offer pursuant
to which the holders of the Notes are able to exchange the outstanding Notes for
new notes with substantially identical terms, but which are registered under the
Securities Act. Interest on the Notes is payable semi-annually, on June 15 and
December 15, and is subject to adjustment under certain circumstances. These
Notes contain default provisions with respect to default for the following,
among other things: nonpayment of interest on the Notes for 30 days, default in
payment of principal when due, or failure to comply with any covenant. Any
violation of the default provision could result in the requirement to
immediately repay the borrowings.
On December 21, 2001, we entered into a credit agreement with a group of
banks that provides for borrowings of up to $325 million on a revolving credit
basis. The credit agreement
22
consists of a short-term 364-day $130 million credit facility which expires in
December 2002, and a $195 million credit facility which expires in December
2006. Interest is payable based upon London Interbank Offered Rates ("LIBOR")
plus a spread, which is dependent on our credit rating. We also have the option
of using other alternative interest rate bases. The agreement has various
covenants that limit our ability to dispose of assets and merge with another
corporation. We are also required to maintain various financial statement
ratios, including a covenant requiring the maintenance of specified consolidated
earnings before interest, taxes, depreciation and amortization ("EBITDA"). For
2002, we must have, on a quarterly basis for the preceding twelve month period,
EBITDA of at least 3.0 times gross interest expense. For 2003 through the
remaining life of the credit agreement, we must have, on a quarterly basis for
the preceding twelve month period, EBITDA of at least 3.5 times gross interest
expense. Our EBITDA coverage (calculated in accordance with the credit
agreement, which excludes certain non-cash charges) for the twelve months ended
March 31, 2002 was 4.2 times gross interest expense. We had no borrowings
outstanding under the revolving credit agreement at March 31, 2002.
We have a commercial paper program designed to cost effectively enhance our
access to credit markets. At March 31, 2002, we had $20 million of commercial
paper outstanding. These commercial paper borrowings are presented as long-term
obligations due to our ability and intent to refinance a portion or all of these
obligations on a long-term basis. Our intention is to continue to use the
commercial paper program to fund our capital needs in excess of cash flow
generated from operations. However, our ability to continue our commercial paper
program is dependent upon maintaining our current A2/P2 commercial paper credit
rating, and on having a bank credit facility to support the program.
We believe that internally generated funds, current cash on hand and
borrowings from existing credit lines and our commercial paper program will be
adequate to meet our foreseeable needs. However, our ability to continue to
utilize borrowings from existing credit lines and maintain our commercial paper
program may be negatively affected by changes in our credit rating based upon
our financial performance and the credit ratings agencies' and credit market's
outlook for the industry and markets in which we participate, as well as failure
to maintain required financial ratios, and other factors beyond our control.
CRITICAL ACCOUNTING POLICIES
A summary of our significant accounting policies is discussed in Note 1 in
our Annual Report on Form 10-K for the year ended December 31, 2001.
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
judgements, estimates and assumptions regarding uncertainties that affect the
reported amounts of assets and liabilities. Areas of uncertainty that require
judgments, estimates and assumptions include the accounting for derivatives,
retirement plans, environmental and other contingencies as well as asset
impairment, inventory valuation and collectibility of accounts receivable. We
use historical experience and all available information to make these judgments
and estimates. However, actual results may differ from those estimates and
assumptions that are used to prepare our financial statements. Despite these
inherent limitations, we believe that the Management's Discussion and Analysis
and the financial statements and footnotes provide a meaningful and fair
perspective of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). Under SFAS 142, the test for goodwill impairment
changed and, commencing in 2002, goodwill is required to be
23
reviewed annually, or more frequently if impairment indicators arise. The new
impairment test for goodwill is a two step process. The first step is a
comparison of the fair value of the reporting unit with its carrying amount,
including goodwill. If this step reflects impairment, then the loss would be
measured as the excess of recorded goodwill over its implied fair value. Implied
fair value is the excess of the fair value of the reporting unit over the fair
value of all recognized and unrecognized assets and liabilities.
At December 31, 2001, we had goodwill of approximately $188 million on our
balance sheet. Of the total, $127 million related to the Flat-Rolled Products
segment, $51 million related to the High Performance Metals segment, and $10
million related to the Industrial Products segment. We are currently evaluating
whether the goodwill on the balance sheet at December 31, 2001 is impaired at
January 1, 2002. If goodwill is determined to be impaired, we would record a
non-cash after-tax charge for the amount of the impairment. This initial
impairment charge, if any, would be recorded as a cumulative effect of a change
in accounting principle in our results for the quarter ended June 30, 2002.
For the first three months of 2001, goodwill amortization expense was $1.5
million or $0.01 per diluted share, principally recognized in the Flat-Rolled
Products segment. Effective January 1, 2002, in accordance with this
pronouncement, we ceased the amortization of goodwill.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). Although retaining many of the fundamental recognition and
measurement provisions of the existing accounting standards, the new rules
significantly change the criteria that would have to be met in order to classify
an asset as held-for-sale. This distinction is important because assets to be
disposed of are stated at the lower of their fair values or carrying amounts,
and depreciation is no longer recognized. SFAS 144 also expands the types of
dispositions which qualify for discontinued operations disclosure treatment and
requires expected future operating losses from discontinued operations to be
displayed in discontinued operations in the period in which the losses are
incurred, rather than as of a measurement date. The adoption of this Statement
had no impact to the financial statements.
In June 2001, the FASB issued statement No. 143, "Accounting for Asset
Retirement Obligations." ("SFAS 143"). Under SFAS 143, obligations associated
with the retirement of tangible long-lived assets, such as landfill and other
facility closure costs, would be capitalized and amortized to expense over an
asset's useful life using a systematic and rational allocation method. This
standard is effective for fiscal years beginning after June 15, 2002. We are
currently evaluating adoption of SFAS 143 and have not yet determined the impact
on our overall financial condition, if any, that may result.
OTHER MATTERS
COSTS AND PRICING
Although inflationary trends in recent years have been moderate, during the
same period certain critical raw material costs, such as nickel and scrap
containing nickel, have been volatile. We primarily use the last-in, first-out
method of inventory accounting that reflects current costs in the cost of
products sold. We consider these costs, the increasing costs of equipment and
other costs in establishing our sales pricing policies and has instituted raw
material surcharges on certain of our products to the extent permitted by
competitive factors in the marketplace. We continue to emphasize cost reductions
and containment in all aspects of our business.
We periodically announce price increases on certain of our products. The
ability to implement price increases is dependent on market conditions, economic
factors, raw material costs and availability, competitive factors,
24
operating costs and other factors that are beyond our control. Furthermore, the
benefits of price increases may be delayed due to long manufacturing lead times
and the terms of existing contracts.
COMPETITION
As reported in Part I. Item 1 of our Annual Report on Form 10-K for the
year ended December 31, 2001, President Bush announced, on March 5, 2002, a
decision imposing tariffs on certain steel imports resulting from his June 5,
2001 order for an investigation by the U.S. International Trade Commission
("ITC") under Section 201 of the 1974 Trade Act ("Section 201") related to
certain specialty steel products, including stainless steel bar, rod and wire,
and tool steel. The ITC did not recommend and we did not seek that tariffs be
imposed on products of the type we produce other than certain tool steels that
represent an immaterial portion of our sales. We believe that the tariffs
resulting from this decision will have minimal impact on our business because of
limited applicability to the Company's products. Foreign countries where some of
our products are sold and that are affected by the U.S. Government's imposition
of the Section 201 tariffs have threatened retaliatory duties on products sold
in those countries. On May 14, 2002, the European Union identified products
subject to retaliatory duties. Except for products that account for an
insignificant portion of our sales, the identified products did not include
products that we currently sell in Europe.
LABOR MATTERS
We have approximately 10,700 employees. A portion of our workforce is
represented under various collective bargaining agreements, principally with the
United Steelworkers of America ("USWA"), including: approximately 3,700
Allegheny Ludlum production and maintenance employees covered by collective
bargaining agreements between Allegheny Ludlum and the USWA, which are effective
through June 2007; approximately 325 Oremet employees covered by a collective
bargaining agreement with the USWA which is effective through June 2007; and
approximately 660 Wah Chang employees.
On March 22, 2002, we announced that our Wah Chang facility and the USWA
reached a new six-year labor agreement ending a seven-month strike, which began
on September 4, 2001. The new agreement became effective on April 1, 2002 and
expires on March 31, 2008.
Generally, agreements that expire may be terminated after notice by the
USWA. After termination, the USWA may authorize a strike. A strike by the
employees covered by one or more of the collective bargaining agreements could
materially adversely affect our operating results. There can be no assurance
that we will succeed in concluding collective bargaining agreements with the
USWA or other unions to replace those that expire.
In April 2002, we were notified by the USWA that it would begin an
organizing campaign of full-time and regular part-time office and clerical
employees and unrepresented technical employees at Allegheny Ludlum facilities
in western Pennsylvania.
ENVIRONMENTAL
We are subject to various domestic and international environmental laws and
regulations that govern the discharge of pollutants into the air or water, and
disposal of hazardous substances, and which may require that us investigate and
remediate the effects of the release or disposal of materials at sites
associated with past and present operations, including sites at which we have
been identified as a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund, and comparable state laws. We could incur substantial
cleanup costs, fines and civil or criminal sanctions, third party property
damage or personal injury claims as a result of violations or liabilities under
these laws or non-compliance with environmental permits required at our
facilities. We are currently involved in the investigation and remediation of a
number of the our current and former sites as well as third party locations
sites under these laws.
With respect to proceedings brought under the federal Superfund laws, or
similar state statutes, we have been identified as a potentially responsible
party at approximately 31 of such sites, excluding those at which we believe we
have no future liability. Our involvement is very limited or de minimis at
approximately 13 of these sites, and the potential loss exposure with respect to
any of the remaining 18 individual sites is not considered to be material.
In June 1995, the U.S. Government commenced an action against Allegheny
Ludlum in the United States District Court for the Western District of
Pennsylvania, alleging multiple violations of the federal Clean Water Act. The
trial of this matter concluded in February 2001 with a favorable jury verdict
for Allegheny Ludlum of approximately 85% of the claims. In February 2002, the
Court issued a decision imposing a penalty of $8.2 million for approximately 160
incidents at five facilities that occurred over a period of about six years
which Allegheny Ludlum had reported to the appropriate environmental agencies.
We are reviewing options for appealing the Court's decision. At March 31, 2002,
we had adequate reserves for this matter.
At March 31, 2002, our reserves for environmental remediation obligations
totaled approximately $45.7 million, of which approximately $18.3 million,
including the federal Clean Water Act matter, were included in other current
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liabilities. The reserves include estimated probable future costs of $19.7
million for federal Superfund and comparable state-managed sites; $3.5 million
for formerly owned or operated sites for which we have remediation or
indemnification obligations; $10.6 million for owned or controlled sites at
which our operations have been discontinued; and $11.9 million for sites
utilized by us in our ongoing operations. We are evaluating whether we may be
able to recover a portion of future costs for environmental liabilities from
third parties other than participating potentially responsible parties.
The timing of expenditures depends on a number of factors that vary by
site, including the nature and extent of contamination, the number of
potentially responsible parties, the timing of regulatory approvals, the
complexity of the investigation and remediation, and the standards for
remediation. We expect that we will expend present accruals over many years, and
will complete remediation of all sites with which we have been identified in up
to thirty years.
We are a party to various cost-sharing arrangements with other PRPs at the
sites. The terms of the cost-sharing arrangements are subject to non-disclosure
agreements as confidential information. Nevertheless, the cost-sharing
arrangements generally require all PRPs to post financial assurance of the
performance of the obligations or to pre-pay into an escrow or trust account
their share of anticipated site-related costs. In addition, the Federal
government, through various agencies, is a party to several such arrangements.
We believe that we operate our businesses in compliance in all material
respects with applicable environmental laws and regulations. However, we are a
party to lawsuits and other proceedings involving alleged violations of
environmental laws. When our liability is probable and we can reasonably
estimate our costs, we record environmental liabilities on our financial
statements. However, some of these environmental investigations are not at a
stage where we have been able to determine liability, or if liability is
probable, to reasonably estimate the loss or range of loss. Estimates of our
liability remain subject to additional uncertainties regarding: the nature and
extent of site contamination; the range of remediation alternatives available;
evolving remediation standards; imprecise engineering evaluations and estimates
of appropriate cleanup technology, methodology and cost; the extent of
corrective actions that may be required; and the number and financial condition
of other potentially responsible parties, as well as the extent of their
responsibility for the remediation. Accordingly, as investigation and
remediation of these sites proceed and as we receive new information, we expect
that we will adjust our accruals to reflect new information. Future adjustments
could have a material adverse effect on our results of operations in a given
period, but we cannot reliably predict the amounts of such future adjustments.
Based on currently available information, management does not believe it is
reasonably possible that future environmental costs, in excess of those already
accrued, will materially adversely affect the our financial condition or results
of operations. However, we cannot provide any assurance that additional future
developments, administrative actions or liabilities relating to environmental
matters will not have a material adverse effect on our financial condition or
results of operations.
For additional discussion of environmental matters, see Note 8 to the
consolidated financial statements.
FORWARD-LOOKING AND OTHER STATEMENTS
From time to time, we have made and may continue to make "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Certain forward-looking statements are contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 8 to the consolidated financial statements, which
26
represent our expectations or beliefs concerning various future events, unknown
risks, uncertainties and other factors, many of which the we are unable to
predict or control. Forward-looking statements include those statements related
to anticipated business, economic, and market conditions, including energy
market conditions and actions taken to respond to these conditions, product
demand, sales, shipments, prices and price competitiveness, operating profit and
earnings, financial performance and growth, cost reductions and anticipated cost
savings, working capital reductions, cash conservation, dividends, financial
strength, cash flow and initiatives to improve cash flow, capital expenditures
and other investments, the benefits and effects of new labor agreements,
projected pension income or expense, including non-cash excess pension income
and reimbursement of retiree health care expenditures. Such forward-looking
statements are based on management's current expectations and include known and
unknown risks, uncertainties and other factors, many of which we are unable to
predict or control, that may cause our actual results or performance to
materially differ from any future results or performance expressed or implied by
such statements. These statements are based on current expectations that involve
a number of risks and uncertainties, including those described under the
captions: "Other Materials - Costs and Pricing," "Other Matters - Competition,"
"Other Matters - Labor Matters," and "Other Matters - Environmental." Actual
results or performance may differ materially from any future results or
performance anticipated based on management's current expectations contained in
such forward-looking statements. Additional risk factors are described from time
to time in our filings with the Securities and Exchange Commission, including
our Report on Form 10-K for the year ended December 31, 2001 and our quarterly
reports on Form 10-Q. We assume no duty to update our forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative financial instruments from time to time to hedge ordinary
business risks for product sales denominated in foreign currencies, to partially
hedge against volatile energy and raw material cost fluctuations in the
Flat-Rolled Products and High Performance Metals segments and to manage exposure
to changes in interest rates.
Foreign currency exchange contracts are used to limit transactional
exposure to changes in currency exchange rates. We sometimes purchase foreign
currency forward contracts that permit us to sell specified amounts of foreign
currencies expected to be received from our export sales for pre-established
U.S. dollar amounts at specified dates. The forward contracts are denominated in
the same foreign currencies in which export sales are denominated. These
contracts, which are not financially material, are designated as hedges of the
variability in cash flows of a portion of our forecasted export sales
transactions in which settlement will occur in future periods and which
otherwise would expose us, on the basis of aggregate net cash flows in
respective currencies, to foreign currency risk. Changes in the fair value of
our foreign currency derivatives are recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in the statement of
operations.
A portion of our operations consists of investments in foreign
subsidiaries. As a result, our financial results could be affected by changes in
foreign currency exchange rates. To mitigate this foreign currency translation
risk, we have 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 our risk management strategy, from time to time, we purchase
exchange-traded futures contracts to manage exposure to changes in nickel
prices, a component of raw material cost for some of our flat-rolled and high
performance metals products. The nickel futures contracts obligate us to make or
receive a payment equal to the net change in value of the contract at its
27
maturity. These contracts are designated as hedges of the variability in cash
flows of a portion of our forecasted purchases of nickel. Changes in the fair
value of our nickel derivatives are recognized in other comprehensive income
until the hedged item is recognized in the statement of operations. The
ineffective portion of a derivative's change in fair value is immediately
recognized in the statement of operations.
We also enter into energy swap contracts as part of our overall risk
management strategy. The swap contracts are used to manage exposure to changes
in energy prices, a component of production costs for our operating units. The
energy swap contracts obligate us to make or receive a payment equal to the net
change in value of the contract at its maturity. These contracts are designated
as hedges of the variability in cash flows of a portion of our forecasted energy
payments. Changes in the fair value of our energy derivatives are recognized in
other comprehensive income until the hedged item is recognized in the statement
of operations. The ineffective portion of a derivative's change in fair value is
immediately recognized in the statement of operations.
As part of our strategy to manage our exposure to changes in interest rates
by maintaining a mix of fixed and variable rate debt, we enter into interest
rate swap contracts. At March 31, 2002, we have entered into receive floating,
pay fixed agreements for $125 million related to our ten-year, 8.375% Notes,
which effectively converts this portion of the Notes to variable rate debt.
These agreements are designated as fair value hedges, with changes in the fair
value of the swap agreements and the underlying fixed-rate debt recognized in
the statement of operations.
We have guaranteed the outstanding $150 million Allegheny Ludlum fixed rate
6.95% debentures due in 2025. In a period of declining interest rates, we face
the risk of required interest payments exceeding those based on the then current
market rate. To mitigate interest rate risk, we attempt to maintain a reasonable
balance between fixed and variable rate debt to keep financing costs as low as
possible.
We believe that adequate controls are in place to monitor these hedging
activities, which are not financially material. However, many factors, including
those beyond our control such as changes in domestic and foreign political and
economic conditions, as well as the magnitude and timing of interest rate,
energy price and nickel price changes, could adversely affect these activities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The litigation to which the Company is a party is more fully discussed
in Item 3. of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. There have been no material changes in any of the Company's
legal proceedings since the date of the Company's Annual Report on Form 10-K.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Current Reports on Form 8-K filed by the Company -
DATE NATURE OF THE REPORT
April 17, 2002 News release disclosing the results of
operations for Allegheny Technologies
Incorporated for the three months ended
2002 and selected financial data.
May 3, 2002 Presentation of historical Price and
Volume information for the Company's
Flat-Rolled Products segment.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLEGHENY TECHNOLOGIES INCORPORATED
-----------------------------------
(REGISTRANT)
Date: May 15, 2002 By /s/ R.J. Harshman
---------------------------------
Richard J. Harshman
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
Date: May 15, 2002 By /s/ D.G. Reid
---------------------------------
Dale G. Reid
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
30