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, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
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Commission File Number 1-12001
ALLEGHENY TELEDYNE INCORPORATED
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 25-1792394
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Six PPG Place
Pittsburgh, Pennsylvania 15222-5479
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(Address of Principal Executive Offices) (Zip Code)
(412) 394-2800
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(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 November 8, 1996, Registrant had outstanding 174,320,036
shares of its Common Stock.
ALLEGHENY TELEDYNE INCORPORATED
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Cash and cash equivalents $ 204.8 $ 112.6
Receivables 520.1 554.5
Inventories 461.7 465.9
Deferred income taxes 62.6 59.8
Prepaid expenses and other current assets 24.0 27.2
------- --------
Total current assets 1,273.2 1,220.0
Property and Equipment 730.0 755.9
Prepaid Pension Cost 366.5 314.9
Cost in Excess of Net Assets Acquired 173.2 161.0
Other Assets 130.3 163.7
-------- --------
Total Assets $2,673.2 $ 2,615.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 198.8 $ 223.9
Accrued liabilities 339.5 332.2
Current portion of long-term debt 5.8 8.7
-------- --------
Total current liabilities 544.1 564.8
Long-Term Debt 590.7 561.1
Accrued Postretirement Benefits 565.1 541.8
Other Long-Term Liabilities 128.6 128.9
-------- --------
Total Liabilities 1,828.5 1,796.6
-------- --------
Redeemable Preferred Stock, par value
$1.00: authorized- 2,500,000
shares; issued- 2,209,122 shares
in 1995 - 33.1
-------- --------
Stockholders' Equity:
Preferred Stock, par value $0.10:
authorized- 50,000,000 shares;
issued- none
Common Stock, par value $0.10:
authorized- 600,000,000 shares,
issued and outstanding- 174,167,144
shares in 1996 and 174,486,110 shares
in 1995 17.4 17.4
3
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
(Unaudited)
-Continued-
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
Additional Paid-in Capital 244.8 255.8
Retained Earnings 573.2 498.1
Net Unrealized Appreciation 6.6 10.3
Currency Translation Adjustment 2.7 4.2
--------- --------
Total stockholders' equity 844.7 785.8
--------- --------
Total Liabilities and
Stockholders' Equity $2,673.2 $2,615.5
======== ========
The accompanying notes are an integral part of these statements.
4
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ -------- --------
Sales $879.7 $962.8 $2,895.3 $3,075.8
Costs and Expenses:
Cost of sales 664.0 746.2 2,219.8 2,395.3
Selling and administrative
expenses 132.3 117.1 383.1 356.4
Merger and restructuring
costs 31.9 0.3 38.6 6.1
Interest expense, net 9.4 9.1 29.1 28.5
------ ------ ------- --------
837.6 872.7 2,670.6 2,786.3
------ ------ -------- --------
Earnings Before Other Income 42.1 90.1 224.7 289.5
Other Income 1.4 8.3 52.5 71.1
------ ------ -------- --------
Income before Income Taxes 43.5 98.4 277.2 360.6
Provision for Income Taxes 23.9 33.7 115.6 135.7
------ ------ -------- --------
Net Income 19.6 64.7 161.6 224.9
Preferred Stock Dividends - 0.5 2.0 0.9
------ ------ -------- --------
Net Income Applicable to
Common Stockholders $ 19.6 $ 64.2 $ 159.6 $ 224.0
====== ====== ======== ========
Net Income Per Common Share $ 0.11 $ 0.36 $ 0.91 $ 1.27
====== ====== ======== ========
Dividends Per Common Share $ 0.16 $ 0.13 $ 0.48 $ 0.38
====== ====== ======= ========
The accompanying notes are an integral part of these statements.
5
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
September 30,
-----------------
1996 1995
-------- -------
Operating Activities:
Net income $ 161.6 $ 224.9
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gains on sales of businesses (44.3) (51.1)
Depreciation and amortization of
property and equipment 82.8 84.2
Deferred income taxes 19.2 31.8
Increase in prepaid pension costs (56.2) (79.5)
Increase (decrease) in accrued
postretirement benefits 9.3 (2.8)
Decrease (increase) in receivables 17.9 (10.0)
Decrease (increase) in inventories (11.8) 7.4
Decrease in accounts payable (18.6) (51.8)
Increase in accrued liabilities 12.8 28.5
Other (11.0) (0.1)
------- -------
Cash provided by operating activities 161.7 181.5
------- -------
Investing Activities:
Proceeds from the sales of businesses 106.0 69.0
Purchase of property and equipment, net (46.9) (55.5)
Purchases of businesses (17.0) (9.5)
Other (5.2) (11.3)
------- --------
Cash provided by (used in) investing
activities 36.9 (7.3)
------- --------
Financing Activities:
Dividends paid - common and preferred stock (78.2) (34.4)
Redemption of preferred stock (41.4) -
Increase in long term debt 34.6 15.8
Purchase of common stock (23.7) (50.5)
Payments on long-term debt and capital leases (10.4) (7.2)
Exercises of stock options 12.7 6.2
------- -------
Net cash used in financing activities (106.4) (70.1)
------- -------
Increase in cash and cash equivalents 92.2 104.1
6
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
-Continued-
Nine Months Ended
September 30,
-----------------
1996 1995
-------- -------
Cash and cash equivalents at beginning
of period 112.6 40.9
------- -------
Cash and cash equivalents at end of period $ 204.8 $ 145.0
======= =======
Non-cash transactions:
Preferred stock dividend on common stock $ 8.3 $ 24.8
======= =======
The accompanying notes are an integral part of these statements.
7
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies -
Basis of Presentation
The interim consolidated financial statements include the
accounts of Allegheny Teledyne Incorporated and its subsidiaries.
As described in Note 2, on August 15, 1996 Allegheny Ludlum
Corporation ("Allegheny Ludlum") and Teledyne, Inc. ("Teledyne")
combined to form Allegheny Teledyne Incorporated. The
combination was accounted for under the pooling of interests
method of accounting and these consolidated financial statements
reflect the combined financial position, operating results and
cash flows of Allegheny Ludlum and of Teledyne as if they had
been combined for all periods presented.
These unaudited condensed 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
management, all adjustments (which include only recurring normal
adjustments except as discussed below) considered necessary for a
fair presentation have been included. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in
the Company s Current Report on Form 8-K dated August 30, 1996.
The results of operations for these interim periods are not
necessarily indicative of the operating results for a full year.
Depreciation and Amortization
The straight-line method of depreciation was adopted for all
property placed into service after July 1, 1996. For buildings
and equipment acquired prior to July 1, 1996, depreciation is
computed using a combination of accelerated and straight-line
methods. The Company believes the new method will more
appropriately reflect its financial results by better allocating
costs of new property over the useful lives of these assets. In
addition, the new method more closely conforms with that
prevalent in the industries in which the Company operates and to
that used by the Company's other operating entities. The effect
of this change on net income for the period ended September 30,
1996 was not material.
8
Note 2. Combination of Allegheny Ludlum and Teledyne -
On August 15, 1996, Allegheny Ludlum and Teledyne became
wholly owned subsidiaries of Allegheny Teledyne Incorporated.
Allegheny Ludlum shareholders received one share of common stock
in Allegheny Teledyne Incorporated for each one of their shares
in Allegheny Ludlum. Teledyne stockholders received 1.925 shares
of common stock in Allegheny Teledyne for each of their Teledyne
common shares. There were 174.2 million shares of Allegheny
Teledyne Incorporated issued in the combination. Revenues and
net income for the six months ended June 30, 1996 (the most
recent interim period prior to the pooling) were $691.7 million
and $39.6 million, respectively, for Allegheny Ludlum and
$1,331.5 million and $102.4 million, respectively, for Teledyne.
Intercompany transactions prior to the combination were not
material.
Note 3. Inventories -
Inventories were as follows (in millions):
September 30, December 31,
1996 1995
------------- ------------
Raw materials and supplies $110.1 $141.7
Work-in-process 501.9 544.4
Finished goods 128.4 97.1
------ ------
Total inventories at current cost 740.4 783.2
Less allowances to reduce current
cost values to LIFO basis (247.9) (273.0)
Progress payments (30.8) (44.3)
------ ------
$461.7 $465.9
====== ======
Note 4. Credit Agreement and Long-Term Debt -
Credit Agreement
In August 1996, the domestic credit facilities of Allegheny
Ludlum and Teledyne were replaced with a new five year credit
agreement for Allegheny Teledyne Incorporated that provides for
borrowings of up to $500 million on a revolving credit basis.
Interest is payable at prime or other alternative interest rate
bases, at the Company's option. The agreement provides for an
annual facility fee of 0.075%.
The credit agreement has various covenants which limit the
Company's ability to dispose of properties and merge with another
9
corporation. The Company is also required to maintain certain
financial ratios as defined in the agreement which can also limit
the amount of dividend payments and share repurchases. Under the
most restrictive requirement, approximately 50% of the Company's
retained earnings are currently free of restrictions pertaining
to cash dividend distributions and share repurchases. Borrowings
outstanding under the credit agreement are unsecured.
Long Term Debt
During the 1996 third quarter, the Company guaranteed the
payment of outstanding Teledyne 10% subordinated debentures, due in
2004, Teledyne 7% subordinated debentures, due in 1999, and
Allegheny Ludlum 6.95% debentures, due in 2025.
During the 1996 third quarter, the Company called for the
redemption of the Teledyne 10% subordinated debentures, due in
2004. These debentures were subsequently redeemed on October 9,
1996 utilizing $250 million from the new credit facilities
discussed above and $115 million from cash on hand. As a result,
an extraordinary loss of $22.3 million pretax, or approximately
$0.08 per share net of tax, will be recognized in the 1996 fourth
quarter to expense the related unamortized original issue
discount.
Note 5. Redemption of Preferred Stock -
On August 14, 1996, all of the outstanding shares of
Teledyne Series E Cumulative Preferred Stock were redeemed at
$15.00 per share, together with an additional $0.60 per share,
representing an amount equal to the dividend payment that would
have otherwise been due September 1, 1996.
Note 6. Business Segments -
Information on the Company's business segments for the
three and nine months ended September 30, 1996 and 1995 was as
follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
-------- -------- ------- --------
1996 1995 1996 1995
-------- -------- -------- --------
Sales:
Specialty metals $486.4 $545.0 $1,562.4 $1,683.3
Aerospace and electronics 223.7 223.5 735.0 682.8
Industrial 100.2 91.2 343.2 287.8
Consumer 68.2 67.7 207.2 195.8
------ ------ --------- --------
10
Three Months Ended Nine Months Ended
September 30, September 30,
-------- -------- -------- --------
1996 1995 1996 1995
-------- -------- -------- --------
Total Continuing Operations 878.5 927.4 2,847.8 2,849.7
Discontinued Operations 1.2 35.4 47.5 226.1
------ ------ --------- --------
$879.7 $962.8 $2,895.3 $3,075.8
====== ====== ======== ========
Operating Profit:
Specialty metals $59.2 $ 76.2 $208.3 $243.5
Aerospace and electronics 19.0 21.7 65.1 66.7
Industrial 8.7 8.5 32.9 29.0
Consumer 3.2 4.0 12.5 7.9
----- ------ ------ ------
Total operating profit 90.1 110.4 318.8 347.1
Closed operations 0.6 (0.7) 44.2 62.7
Corporate expenses (12.2) (4.3) (32.3) (29.8)
Merger and restructuring
costs (31.9) (0.3) (38.6) (6.1)
Interest expense, net (9.4) (9.1) (29.1) (28.5)
Operating income from
assets held for sale 0.3 2.4 2.2 9.7
Excess pension income 6.0 - 12.0 5.5
----- ------ ------ ------
Income before income taxes $43.5 $ 98.4 $277.2 $360.6
===== ====== ====== ======
Operating results for closed operations for the nine months
include pretax gains of $41.0 million on the sale of the defense
vehicle business in 1996 and $50.7 million on the sale of the
defense electronics systems business in 1995. These amounts are
included with other income in the statements of income for the
respective periods.
Corporate expenses for the 1995 periods include $5.9 million
for the recovery of an amount previously written off. Merger and
restructuring costs include proxy expenses in 1995.
Pension income in excess of amounts allocated to business
segments to offset pension and other post retirement benefit
expenses is presented separately.
11
Note 7. Net Income Per Share -
The weighted average number of shares of common stock used
in the computation of net income per share for the three and nine
months ended September 30, 1996 was 174,068,161 and 174,010,470,
respectively, and 176,186,299 and 176,879,918, respectively, for
the same periods in 1995.
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.
The Company accrues for losses associated with environmental
remediation obligations when the Company's liability is probable
and the costs are reasonably estimable. In many cases, however,
investigations are not yet at a stage where the Company has been
able to determine whether it is liable or, if liability is
probable, to reasonably estimate the loss or range of loss, or
certain components thereof. Estimates of the Company's liability
are further subject to uncertainties regarding the nature and
extent of site contamination, the range of remediation
alternatives available, evolving remediation standards, imprecise
engineering evaluations and estimates of appropriate cleanup
technology, methodology and cost, the extent of corrective
actions that may be required, and the number and financial
condition of other potentially responsible parties, as well as
the extent of their responsibility for the remediation.
Accordingly, as investigation and remediation of these sites
proceeds, it is likely that adjustments in the Company's accruals
will be necessary to reflect new information. The amounts of any
such adjustments could have a material adverse effect on the
Company's results of operations in a given period, but are not
reasonably estimable. Based on currently available information,
however, management does not believe 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.
At September 30, 1996, the Company's reserves for
environmental remediation obligations totaled approximately $49
million, of which approximately $18 million was included in other
current liabilities. The reserve includes estimated probable
future costs of $18 million for federal Superfund and comparable
state-managed sites; $9 million for formerly owned or operated
12
sites for which the Company has remediation or indemnification
obligations; $10 million for owned or controlled sites at which
Company operations have been discontinued; and $12 million for
sites utilized by the Company in its ongoing operations. The
Company is evaluating whether it may be able to recover a portion
of future costs for environmental liabilities from its insurance
carriers and from third parties other than participating
potentially responsible parties.
The timing of expenditures depends on a number of factors
that vary by site, including the nature and extent of
contamination, the number of potentially responsible parties, the
timing of regulatory approvals, the complexity of the
investigation and remediation, and the standards for remediation.
The Company expects that it will expend present accruals over
many years, and will complete remediation of all sites with which
it has been identified in up to thirty years.
Various claims (whether based on U.S. government or Company
audits and investigations or otherwise) have been or may be
instituted or asserted against the Company related to its U.S.
government contract work, including claims based on business
practices and cost classifications and actions under the False
Claims Act. Although such claims are generally resolved by
detailed fact-finding and negotiation, on those occasions when
they are not so resolved, civil or criminal legal or
administrative proceedings may ensue. Depending on the
circumstances and the outcome, such proceedings could result in
fines, penalties, compensatory and treble damages or the
cancellation or suspension of payments under one or more U.S.
government contracts. Under government regulations, a company,
or one or more of its operating divisions or units, can also be
suspended or debarred from government contracts based on the
results of investigations. However, although the outcome of
these matters cannot be predicted with certainty, management does
not believe there is any audit, review or investigation currently
pending against the Company of which management is aware that is
likely to result in suspension or debarment of the Company, or
that is otherwise likely to have a material adverse effect on the
Company's financial condition or liquidity, although the
resolution in any reporting period of one or more of these
matters could have a material adverse effect on the Company's
results of operations for that period.
In October 1996, the Company reached an agreement in
principle with the U.S. government for a joint settlement of two
cases, one involving the Company's former Teledyne Neosho unit,
divested in 1992 and the other involving the Company's Teledyne
Thermatics unit, divested in 1996, for an aggregate of $11.5
million. The matter involving Teledyne Neosho was an action
brought in 1991 under the False Claims Act in the U.S. District
Court for the Western District of Missouri and related to alleged
13
misappropriations of government-owned aircraft parts and
falsification of inventory control documents. The matter
involving Teledyne Thermatics commenced in 1993 when Teledyne
Thermatics sought admission into the Department of Defense
Voluntary Disclosure Program with respect to testing practices at
variance from military specifications. Previously established
reserves for these matters amounted to $3.8 million. The
agreement in principle to settle these cases is subject to formal
approval by the Department of Justice and negotiation of a final
settlement agreement both of which are expected to be consummated
before year end.
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, as these cases are under seal, the
Company does not possess sufficient information to determine
whether the Company will sustain a material loss in such matters,
or to reasonably estimate the amount of any loss attributable to
such case or cases. Consequently, the Company is not able to
identify whether a material loss contingency could arise
therefrom.
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,
stockholder and tax 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.
In June 1996, the United States Court of Appeals for the
Third Circuit upheld a lower court ruling that found in favor of
Allegheny Ludlum in a case brought by Allegheny International,
Inc. ("AI") to recover a $5.5 million refund received by
Allegheny Ludlum in 1989 with respect to a federal income tax
overpayment. The case, which was brought in the United States
District Court for the Western District of Pennsylvania, arose
out of the 1980 management-led buyout of Allegheny Ludlum from AI
and was pursued by Sunbeam Corporation, the successor to AI
following AI's bankruptcy reorganization. The Third Circuit
denied Sunbeam's request for a rehearing. No further appeals are
available to Sunbeam.
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
COMBINATION OF ALLEGHENY LUDLUM AND TELEDYNE
On August 15, 1996, Allegheny Ludlum Corporation ("Allegheny
Ludlum") and Teledyne, Inc. ("Teledyne") combined to form
Allegheny Teledyne Incorporated. As a result of the combination,
Allegheny Ludlum and Teledyne became wholly owned subsidiaries of
Allegheny Teledyne Incorporated. Allegheny Ludlum shareholders
received one share of common stock in Allegheny Teledyne
Incorporated for each one of their shares in Allegheny Ludlum.
Teledyne stockholders received 1.925 shares of common stock in
Allegheny Teledyne for each of their Teledyne common shares. The
combination was accounted for under the pooling of interests
method of accounting and the consolidated financial statements
reflect the combined financial position, operating results and
cash flows of Allegheny Ludlum and Teledyne as if they had been
combined for all periods presented. As a result, income includes
nonrecurring merger and restructuring costs of $31.9 million,
$26.3 net of tax, in the 1996 third quarter and $38.6 million,
$31.5 million net of tax, for the 1996 nine months.
Additionally, income for the 1995 nine months was adversely
affected by costs of $6.1 million, $3.7 million net of tax,
related to an unsolicited merger proposal and ensuing proxy
contest involving Teledyne.
RESULTS OF OPERATIONS
Allegheny Teledyne Incorporated is a federation of
technology-based manufacturing businesses with significant
concentration in specialty metals complemented by aerospace and
electronics, industrial, and consumer products.
Sales and operating profit for the Company's four business
segments are discussed below.
Specialty Metals
Sales declined 10.7 percent to $486.4 million and operating
profit declined 22.3 percent to $59.2 million for the 1996 third
quarter compared to 1995. For the 1996 nine months, sales
declined 7.2 percent to $1,562.4 million and operating profit
declined 14.4 percent to $208.3 million from the comparable
periods of 1995.
In flat rolled products, sales and operating profits for
Allegheny Ludlum and Rodney Metals combined declined 20.5 percent
and 47.0 percent, respectively, from the 1995 third quarter and
declined 13.7 percent and 30.9 percent, respectively, from the
1995 nine months. Sales and operating profit for all other
businesses in the specialty metals segment increased 18.0 percent
15
and 161.6 percent, respectively, over the year ago third quarter
and increased 12.6 percent and 102.7 percent, respectively, over
the 1995 nine months. This performance was helped by robust
sales to commercial aerospace and industrial markets that use
highly specialized metals from Allvac and Wah Chang.
Commodity stainless steel pricing declined steeply under
heavy pressure from European and Asian commodity stainless steel
imports. At the same time, flat rolled tonnage shipments were
weaker than recent third quarter levels. Tons shipped in the
third quarter and first nine months of 1996 were 126,000 and
409,000 respectively, compared to 139,000 and 461,000 for the
same periods of 1995. The average price per ton of flat rolled
specialty metals shipped in the quarter was $2,554 compared with
$2,880 in the 1995 third quarter. Even with the price declines,
higher valued non-commodity products at Allegheny Ludlum and
Rodney Metals kept the average price per ton higher than the
balance of the industry. Lower raw material costs and tight
operating controls did not offset the price and volume declines.
On November 6, 1996, Allegheny Ludlum announced price
increases of approximately 5% for stainless steel sheet, strip,
continuous mill plate and plate mill plate, effective with
shipments March 3, 1997. All current raw material surcharges
will continue to apply.
Aerospace and Electronics
On sales of $223.7 million, the same level as last year,
third quarter operating profit declined 12.8 percent to $19.0
million from the comparable 1995 quarter. For the 1996 nine
months, sales increased 7.6 percent to $735.0 million while
operating profit declined 2.4 percent to $65.1 million compared
to the 1995 period.
Sales improvements resulted from increased development work
on the "Global Hawk". Sales also increased for electronic
devices and electromechanical relays for commercial customers,
and engineering services related to environmental cleanup of
chemical munitions. Sales declined in electronic countermeasure
equipment for the international market, and fabricated products
and airframe structures for the U.S. Government. Increases in
operating profit primarily due to improved performance from
electronic devices and instruments, and electromechanical relays,
were more than offset by higher research, development and
contract proposal costs.
Industrial
Sales increased 9.8 percent to $100.2 million and operating
profit increased 2.4 percent to $8.7 million for the 1996 third
quarter compared to the same period of 1995. For the 1996 nine
16
months, sales increased 19.2 percent to $343.2 million and
operating profit increased 13.4 percent to $32.9 million for the
same period last year. The improvement in sales and operating
profit was due principally to the acquisition in December 1995 of
the European-based Stellram Group, a manufacturer of high
precision milling, boring and drilling systems.
Consumer
While sales of $68.2 million in the 1996 third quarter were
marginally higher compared to the same period of 1995, operating
profit decreased by 20.0 percent to $3.2 million. For the 1996
nine months, sales increased 5.8 percent to $207.2 million and
operating profit improved 58.2 percent to $12.5 million. Sales
improved primarily due to two acquisitions: Jandy Industries, a
major United States producer of water flow control valves and
electronic control systems for the swimming pool industry, and
Envases Comerciales, S.A., a Costa Rican manufacturer of
specialty packaging for pharmaceutical and food companies. These
improved sales were partially offset by declining revenues in
oral health, shower, and filtration products. Operating profit
benefited from reduced product introduction expenses in the 1996
nine months compared to the 1995 period. Operating profit for the
1996 third quarter was adversely affected by a patent litigation
settlement.
DISPOSITIONS
In March 1996, the Company sold Teledyne Vehicle Systems, a
defense supplier, at a pretax gain of $41.0 million, which is
included in other income. In January 1995, the Company sold
substantially all of its defense electronic systems business and
related assets at a pretax gain of $50.7 million, which is
included in other income.
INCOME TAXES
The Company's higher effective tax rates for 1996 third
quarter and nine months were the result of non-deductible merger
and restructuring costs.
FINANCIAL CONDITION AND LIQUIDITY
Working capital increased to $729.1 million at September 30,
1996 compared to $655.2 million at the end of 1995. The current
ratio increased to 2.3 from 2.2 in the same periods. The
increase in working capital of $73.9 million was primarily due to
an increase in cash balances of $92.2 million and lower accounts
payable partially offset by a decrease in receivables.
In the first nine months of 1996, cash generated from
operations of $161.7 million, proceeds from the sales of
17
businesses of $106.0 million and an increase in net borrowings of
$24.2 million were used to pay dividends on common and preferred
stock of $78.2 million and invest $63.9 million in capital
equipment and business expansion. In addition, prior to the
combination, $41.4 million was used to redeem the outstanding
Teledyne Series E Preferred Stock and $23.7 million was used to
repurchase common stock. Cash transactions plus cash on hand at
the beginning of the year resulted in a cash position of $204.8
million at September 30, 1996. Allegheny Ludlum and Teledyne
terminated their respective stock repurchase programs on or
before April 1, 1996. Minor amounts of common stock are acquired
from time to time under stock-based employee compensation plans.
Capital expenditures for 1996 are expected to approximate
$110 million.
In August 1996, the domestic credit facilities of Allegheny
Ludlum and Teledyne were replaced with a new five year credit
agreement for Allegheny Teledyne Incorporated that provides for
borrowings of up to $500 million on a revolving credit basis.
Interest is payable at prime or other alternative interest rate
bases, at the Company's option. For additional discussion of the
new credit agreement, see Note 4 to the condensed consolidated
financial statements of the Company.
During the 1996 third quarter, the Company guaranteed the
payment of the outstanding Teledyne 10% subordinated debentures,
due in 2004, Teledyne 7% subordinated debentures, due in
1999, and Allegheny Ludlum 6.95% debentures, due in 2025.
During the 1996 third quarter the Company called for the
redemption of the Teledyne 10% subordinated debentures, due in
2004. These debentures were subsequently redeemed on October 9,
1996 utilizing $250 million from the new credit facilities
discussed above and $115 million from cash on hand. As a result,
an extraordinary loss of $22.3 million pre-tax, or approximately
$0.08 per share net of tax, will be recognized in the 1996 fourth
quarter to expense the related unamortized original issue
discount.
Additionally, in the 1996 fourth quarter, the Company
completed a $25 million sale of commercial real estate related to
a business previously sold. The Company expects to record a gain
on this transaction.
During the 1996 third and fourth quarters, the underfunded
defined benefit pension plans of Allegheny Ludlum are being
merged with overfunded defined benefit pension plans of Teledyne.
The resulting pension plan will be fully funded with assets
significantly in excess of the projected benefit obligations. As
a result, the Company does not anticipate that it will have to
contribute to its defined benefit pension plans for the
18
indefinite future. Under current Internal Revenue Code
regulations, certain amounts paid for retiree medical expenses
may be reimbursed annually from the excess pension plan assets.
The Company believes that internally generated funds,
current cash on hand and borrowing from existing credit lines
will be adequate to meet foreseeable needs.
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 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.
The Company's reserves for environmental investigation and
remediation totaled approximately $49 million at September 30,
1996, of which approximately $18 million was included in other
current liabilities. The reserve includes estimated probable
future costs of $18 million for federal Superfund and comparable
state-managed sites; $9 million for formerly owned or operated
sites for which the Company has remediation or indemnification
obligations; $10 million for owned or controlled sites at which
Company operations have been discontinued; and $12 million for
sites utilized by the Company in its ongoing operations.
With respect to proceedings brought under the Comprehensive
Environmental Response, Compensation and Liability Act, commonly
known as Superfund, or similar state statutes, the Company has
been identified as a potentially responsible party at
approximately 60 of such sites, excluding those at which it
believes it has no future liability. The Company's involvement
is very limited or de minimis at approximately 50 of these sites,
and the potential loss exposure with respect to any individual
site is not considered to be material.
The measurement of environmental liabilities by the Company
is based on currently available facts, present laws and
regulations, and current technology. 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 any one period, but are not reasonably estimable.
Based on currently available information, however, management
19
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.
For additional discussion of environmental matters, see
Note 8 to the condensed consolidated financial statements of the
Company.
Government Contracts
A number of Company 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.
There is risk on such contracts 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.
Various claims (whether based on U.S. government or Company
audits and investigations or otherwise) have been or may be
instituted or 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. 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
20
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 condensed consolidated financial statements of
the Company.
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 condensed consolidated
financial statements of the Company, including statements
concerning anticipated effects of the business combination of
Allegheny Ludlum and Teledyne on future earnings, cost savings
and operations of the Company (including anticipated benefits
relating to the merger of the respective pension plans of
Allegheny Ludlum and Teledyne), expected capital expenditures,
the outcome of any government inquiries, litigation or other
proceedings related to government contract or other matters, and
future 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--Government Contracts" and "Other Matters--
Environmental." In addition, realization of the anticipated
benefits of the combination of Allegheny Ludlum and Teledyne
could take longer than expected and implementation difficulties
and market factors 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
8-K dated August 30, 1996.
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10 Credit Agreement dated as of August 30, 1996
18 Letter re change in accounting principles
27 Financial data schedule
(b) Registrant filed the following reports on Form 8-K
relating to items 2, 5 and 7: August 21, 1996 relating to the
guarantee of debt and August 30, 1996 related to the combination.
22
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 13, 1996 By /s/ James L. Murdy
------------------------------
James L. Murdy
Senior Vice President - Finance
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
23
EXHIBIT INDEX
Exhibit Sequential Page
Number Number
-------- ----------------
10 Credit Agreement dated as of August 30, 1996
18 Letter re change in accounting principles
27 Financial data schedule
24