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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 1-12001
ALLEGHENY TELEDYNE INCORPORATED
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 25-1792394
------------------------------ ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1000 Six PPG Place
Pittsburgh, Pennsylvania 15222-5479
- --------------------------------------- ----------
(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 Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
At November 5, 1997, Registrant had outstanding 174,265,645 shares of its
Common Stock.
ALLEGHENY TELEDYNE INCORPORATED
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
September 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
Cash and cash equivalents $ 32.9 $ 62.5
Accounts receivables 533.4 525.3
Inventories 550.4 518.4
Deferred income taxes 47.7 70.1
Tax refund 51.5 -
Prepaid expenses and other current assets 27.8 23.5
---------- -----------
Total Current Assets 1,243.7 1,199.8
Property, plant and equipment 701.6 731.4
Prepaid pension cost 395.3 352.5
Cost in excess of net assets acquired 174.0 177.1
Other assets 124.7 145.6
---------- -----------
Total Assets $ 2,639.3 $ 2,606.4
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 210.5 $ 241.7
Accrued liabilities 334.5 339.6
Current portion of long-term debt 3.4 4.5
---------- -----------
Total Current Liabilities 548.4 585.8
Long-term debt 409.6 443.4
Accrued postretirement benefits 577.0 567.5
Other 140.3 138.2
---------- -----------
Total Liabilities 1,675.3 1,734.9
---------- -----------
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-174,967,635
shares at September 30, 1997 and 174,389,377
shares at December 31, 1996 17.6 17.4
Additional paid-in capital 288.4 246.6
Retained earnings 699.4 596.7
Treasury stock (42.1) -
Other 0.7 10.8
---------- -----------
Total Stockholders' Equity 964.0 871.5
---------- -----------
Total Liabilities and Stockholders' Equity $ 2,639.3 $ 2,606.4
========== ===========
The accompanying notes are an integral part of these statements.
3
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Sales $2,824.2 $2,895.3 $909.2 $879.7
Costs and expenses:
Cost of sales 2,147.2 2,219.8 698.6 664.0
Selling and administrative expenses 351.8 383.1 112.8 132.3
Merger and restructuring costs 10.4 38.6 - 31.9
Interest expense, net 15.9 29.1 5.7 9.4
------- ------- ------- -------
2,525.3 2,670.6 817.1 837.6
------- ------- ------- -------
Earnings before Other Income 298.9 224.7 92.1 42.1
Other Income 47.6 52.5 9.5 1.4
------- ------- ------- -------
Income before Income Taxes 346.5 277.2 101.6 43.5
Provision for Income Taxes 131.8 115.6 37.3 23.9
------- ------- ------- -------
Net Income 214.7 161.6 64.3 19.6
Dividends on Preferred Stock - 2.0 - -
------- ------- ------- -------
Net Income Available to $214.7 $159.6 $64.3 19.6
Common Stockholders ======= ======= ======= =======
Net Income Per Common Share $1.22 $0.91 $0.37 $0.11
======= ======= ======= =======
Cash Dividends Per Equivalent Common Share $0.48 $0.43 $0.16 $0.16
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
4
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating Activities:
Net income $ 214.7 $ 161.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 76.5 82.8
Gains on sales of businesses and investments (53.7) (44.3)
Deferred income taxes (3.2) 19.2
Change in operating assets and liabilities:
Prepaid pension cost (41.3) (56.2)
Inventories (33.3) (11.8)
Accounts payables (30.6) (18.6)
Accrued postretirement benefits 9.5 9.3
Accounts receivables (5.0) 17.9
Accrued liabilities 2.4 15.5
Other 5.0 (8.7)
---------- ----------
Cash provided by operating activities 141.0 166.7
---------- ----------
Investing Activities:
Purchases of property, plant and equipment (65.6) (54.9)
Proceeds from the sales of businesses and investments 58.4 106.0
Disposals of property, plant and equipment 13.4 8.0
Investment in ventures and purchases of businesses (12.4) (22.0)
Other (4.7) (5.2)
---------- ----------
Cash (used) provided by investing activities (10.9) 31.9
---------- ----------
Financing Activities:
Payments on long-term debt (25.8) (10.4)
Increase in long-term debt 2.5 34.6
---------- ----------
Net (decrease) increase in long-term debt (23.3) 24.2
Purchases of treasury stock (86.7) (23.7)
Cash dividends (84.3) (78.2)
Exercises of stock options 34.6 12.7
Redemption of preferred stock - (41.4)
---------- ----------
Cash used in financing activities (159.7) (106.4)
---------- ----------
Increase (decrease) in cash and cash equivalents (29.6) 92.2
---------- ----------
Cash and cash equivalents at beginning of the year 62.5 112.6
---------- ----------
Cash and cash equivalents at end of period $ 32.9 $ 204.8
========== ==========
The accompanying notes are an integral part of these statements.
5
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
NOTES TO 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.
These unaudited statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and note disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of the Company, all adjustments (which include only recurring normal
adjustments) 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
1996 Annual Report. The results of operations for these interim periods are not
necessarily indicative of the operating results for any future period or for a
full year. Certain amounts for 1996 have been reclassified to conform with the
1997 presentation.
Accounting Pronouncements
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income," and Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information," were
issued in 1997. These statements will be adopted by the Company in 1998, and are
not expected to have a material effect on the consolidated financial statements.
Note 2. Inventories -
Inventories were as follows (in millions):
September 30, December 31,
1997 1996
---- ----
Raw materials and supplies $ 144.7 $ 153.8
Work-in-process 543.1 515.1
Finished goods 110.6 104.8
--------- ---------
Total inventories at current cost 798.4 773.7
Less allowances to reduce current cost
values to LIFO basis (226.8) (229.6)
Progress payments (21.2) (25.7)
--------- ---------
Total Inventories $ 550.4 $ 518.4
========= =========
Note 3. Business Segments -
Following is certain financial information with respect to the Company's
business segments for the periods presented (in millions):
6
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Sales
Specialty metals $1,584.2 $1,562.4 $510.0 $486.4
Aerospace and electronics 654.0 698.9 208.8 211.5
Industrial 327.6 343.2 104.3 100.2
Consumer 226.5 207.2 75.0 68.2
------- -------- ------- -------
Total continuing operations 2,792.3 2,811.7 898.1 866.3
Operations sold or held for sale 31.9 83.6 11.1 13.4
------- -------- ------- -------
Total Sales $2,824.2 $2,895.3 $909.2 $879.7
======== ========= ======= =======
Operating Profit
Specialty metals $ 215.7 $ 208.3 $ 62.3 $ 59.2
Aerospace and electronics 61.2 63.3 17.7 18.4
Industrial 40.0 32.9 12.1 8.7
Consumer 25.9 12.5 9.3 3.2
------- ------- ------- -------
Total operating profit 342.8 317.0 101.4 89.5
------- ------- ------- -------
Merger and restructuring costs (10.4) (38.6) - (31.9)
Corporate expenses (22.8) (32.3) (6.6) (12.2)
Interest expense, net (15.9) (29.1) (5.7) (9.4)
Investments and operations sold or
held for sale 40.8 48.2 8.5 1.5
Excess pension income 12.0 12.0 4.0 6.0
------- ------- ------- -------
Income before income taxes $ 346.5 $277.2 $101.6 $43.5
======= ======== ======= =======
7
Investments and operations sold or held for sale in the 1997 third quarter
included an $8.4 million gain on the sale of Teledyne Economic Development.
In addition, the nine months ended September 1997 included a $27.6 million
gain on the sale of the Company's investment in Semtech Corporation common
stock, a gain of $15.3 million on the sale of the Company's investment in
Nitinol Development Corporation, and a $3.1 million gain on other investments.
These gains were partially offset by a charge of $6.8 million for a settlement
of a U.S. government contract dispute related to a unit divested in 1995 and by
a charge of $5.3 million to write-off the Company's investment in a research and
development venture.
In the nine months ended September 1996, investments and operations sold or
held for sale included a gain of $41.0 million on the sale of the Company's
defense vehicle business.
Pension income in excess of amounts allocated to business segments to
offset pension and other postretirement benefit expenses is presented
separately.
Note 4. 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, 1997 was 175,508,743 and 175,479,511, respectively, and
174,068,161 and 174,010,470 for the same periods in 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of this change on earnings per
share for the three and nine months ended September 30, 1997 and for the same
periods in 1996 was not material.
Note 5. Redemption of 7% Subordinated Debentures -
The Company redeemed the Teledyne, Inc. 7% subordinated debentures on
September 23, 1997. Payment was made in an amount equal to 100% of the principal
amount of the debentures, in the aggregate amount of $19.5 million, plus accrued
interest to the redemption date.
Note 6. 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 7. 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.
8
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 proceed, 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 in excess of those accrued with respect to sites with which
the Company has been identified are likely to have a material adverse effect on
the Company's financial condition or liquidity. However, there can be no
assurance that additional future developments, administrative actions or
liabilities relating to environmental matters will not have a material adverse
effect on the Company's financial condition or results of operations.
At September 30, 1997, the Company's reserves for environmental remediation
obligations totaled approximately $36 million, of which approximately $11
million was included in other current liabilities. The reserve includes
estimated probable future costs of $13 million for federal Superfund and
comparable state-managed sites; $4 million for formerly owned or operated sites
for which the Company has remediation or indemnification obligations; $7
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.
In 1996, Statement of Position 96-1, "Environmental Remediation
Liabilities," which was issued by the American Institute of Certified Public
Accountants, establishes accounting standards for recognition of environmental
costs. This statement, which became effective in 1997, did not have a material
effect on the consolidated financial statements.
Various claims (whether based on U.S. Government or Company audits and
investigations or otherwise) have been or may be asserted against the Company
related to its U.S. Government contract work, including claims based on business
practices and cost classifications and actions under the False Claims Act.
Although such claims are generally resolved by detailed fact-finding and
negotiation, on those occasions when they are not so resolved, civil or criminal
legal or administrative proceedings may ensue. Depending on the circumstances
and the outcome, such proceedings could result in fines, penalties, compensatory
and treble damages or the cancellation or suspension of payments under one or
more U.S. Government contracts. Under government regulations, a company, or one
9
or more of its operating divisions or units, can also be suspended or debarred
from government contracts based on the results of investigations. However,
although the outcome of these matters cannot be predicted with certainty,
management does not believe there is any audit, review or investigation
currently pending against the Company of which management is aware that is
likely to result in suspension or debarment of the Company, or that is otherwise
likely to have a material adverse effect on the Company's financial condition or
liquidity, although the resolution in any reporting period of one or more of
these matters could have a material adverse effect on the Company's results of
operations for that period.
The Company learns from time to time that it has been named as a defendant
in civil actions filed under seal pursuant to the False Claims Act. Generally,
since such cases are under seal, the Company does not in all cases possess
sufficient information to determine whether the Company will sustain a material
loss in connection with such cases, or to reasonably estimate the amount of any
loss attributable to such cases.
A number of other lawsuits, claims and proceedings have been or may be
asserted against the Company relating to the conduct of its business, including
those pertaining to product liability, patent infringement, commercial,
employment, employee benefits, and stockholder matters. While the outcome of
litigation cannot be predicted with certainty, and some of these lawsuits,
claims or proceedings may be determined adversely to the Company, management
does not believe that the disposition of any such pending matters is likely to
have a material adverse effect on the Company's financial condition or
liquidity, although the resolution in any reporting period of one or more of
these matters could have a material adverse effect on the Company's results of
operations for that period.
Note 8. Proposed Acquisition Of Oregon Metallurgical Corporation -
As previously announced, on October 31, 1997, the Company and Oregon
Metallurgical Corporation (OREMET) entered into an Agreement and Plan of Merger.
Pursuant to this Agreement, the Company agreed to acquire OREMET as a wholly
owned subsidiary and each outstanding share of OREMET common stock will be
converted into 1.296 shares of Company common stock. Upon the closing of the
transaction, former OREMET shareholders would own approximately 11 percent
pro-forma ownership of Company Common Stock. The following table sets forth
pro-forma combined sales for the two companies for the twelve months ended
September 30, 1997:
Business Segment Sales ($ millions) Percent of total
Specialty Metals
- Stainless steel $1,000 25%
- Titanium 426 11
- Nickel-based super alloys 274 7
- Other specialty metals 643 16
----- --
Subtotal 2,343 59
Aerospace and Electronics 895 22
Industrial 432 11
Consumer 307 8
====== ===
TOTAL $3,977 100%
Combined net income of the two companies, based on pro-forma financial
results for the twelve month period ending September 30, 1997, was $298 million.
Combined assets totaled $2.9 billion. The merger is expected to be tax free to
OREMET shareholders and will be accounted for under the pooling of interests
method. The transaction is subject to the approval of the shareholders of OREMET
as well as regulatory approval and other customary closing conditions.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Allegheny Teledyne Incorporated is a group of technology-based
manufacturing companies with significant concentration in specialty metals
complemented by aerospace and electronics, industrial, and consumer products.
On October 31, 1997, the Company and OREMET announced that they had entered
into an Agreement and Plan of Merger. See Note 8 of the Notes to Condensed
Consolidated Financial Statements (Unaudited).
Sales and operating profit for the Company's four business segments are
discussed below.
This discussion should be read in conjunction with the information in the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements.
SPECIALTY METALS
Operating profit increased 5 percent to $62.3 million in the third quarter
1997 compared to $59.2 million for the same quarter last year despite an
increasingly difficult pricing environment for stainless steel commodity grades.
Sales for the 1997 third quarter increased 5 percent to $510.0 million. For the
1997 nine months, operating profit increased 4 percent to $215.7 million while
sales increased 1 percent to $1,584.2 million. Tight operating cost controls
remained in effect throughout the specialty metals segment.
Operating profit and sales from businesses other than flat-rolled products
increased 41 percent and 15 percent, respectively, compared to the third quarter
1996 and increased 63 percent and 19 percent, respectively, over the 1996 nine
months. These results reflected strong demand from commercial aerospace and
chemical processing industries for specialized metals such as nickel-based
superalloys, titanium, niobium, and zirconium.
Combined operating profits and sales from Allegheny Ludlum and Rodney
Metals fell 17 percent and 1 percent, respectively, for the third quarter and 22
percent and 7 percent, respectively, for the nine months from the stronger 1996
periods. Tons shipped from Allegheny Ludlum and Rodney Metals increased 3
percent and 1 percent in the 1997 third quarter and nine months compared to the
same periods in 1996, but sales dropped due to depressed prices.
Tons of flat-rolled specialty metals shipped in the third quarter and nine
months of 1997 were 130,000 and 414,000, respectively, compared to 126,000 and
409,000 for the same periods of 1996. The average price per ton shipped in the
third quarter was $2,417 compared to $2,554 in the 1996 third quarter.
AEROSPACE AND ELECTRONICS SEGMENT
Third quarter 1997 operating profit decreased 4 percent to $17.7 million
compared to the same period in 1996, and sales decreased 1 percent to $208.8
million. For the 1997 nine months, operating profit decreased 3 percent to $61.2
million and sales decreased 6 percent to $654.0 million compared to the same
period in 1996.
For the 1997 third quarter and nine months, Teledyne Ryan Aeronautical
experienced declines in sales and operating profit primarily due to the
scheduled wind-downs of certain phases of the Apache helicopter and Global Hawk
unmanned aerial vehicle programs. In September, 1997, Ryan received
authorization from the Pentagon to build two additional Global Hawk vehicles and
to begin procuring certain items for a fifth vehicle. For the nine months ended
September 30, 1997, nonrecurring write-offs, primarily research and
development-related expenses for avionics, resulted in declines in operating
11
profit at Teledyne Controls. New process manufacturing difficulties reduced both
sales and operating profit at Teledyne Continental Motors. Teledyne Electronic
Technologies continued to be the largest contributor to the segment's sales and
profit for the quarter and nine months ended September 30, 1997. Demand for
electromechanical relays, circuit board contract manufacturing, and
microelectronic hybrid products paced these results.
INDUSTRIAL SEGMENT
Operating profit in the third quarter 1997 increased 39 percent to $12.1
million compared to the third quarter of 1996, and sales rose 4 percent to
$104.3 million. For the 1997 nine months, operating profit increased 22 percent
to $40.0 million while sales decreased 5 percent to $327.6 million.
Operating profit improved for Teledyne Metalworking Products, formerly
called Teledyne Advanced Materials. This business unit is the largest revenue
and profit producer in this segment. It manufactures tungsten and tungsten
carbide products, including cutting tools and inserts, for the global
metalforming market. Also, sales and operating profit improved for Teledyne
Specialty Equipment's mining and construction equipment and material handler
businesses. Shipments of Fluid Systems' metal stamping dies and plastic
compression molds declined for the 1997 nine months as the Company phases down
this business.
CONSUMER SEGMENT
Operating profit in the 1997 third quarter almost tripled to $9.3 million
compared to the third quarter 1996, and sales grew 10 percent to $75.0 million.
For the 1997 nine months, operating profit more than doubled to $25.9 million
and sales increased 9 percent to $226.5 million from the comparable 1996 period.
Profit improved at all of the segment's operating companies. Teledyne Water
Pik's improvement was particularly strong due to the favorable performance of
new products and cost reductions. Sales improved at Teledyne Laars due to the
successful introduction of a new pool heater product and increased seasonal
demand for commercial water heating systems.
SPECIAL ITEMS
Special items resulted in a net after-tax gain of $3.9 million, or $0.02
per share, in the 1997 third quarter. This after-tax gain included a gain on
sale of Teledyne Economic Development which was partially offset by a charge
relating to legal matters. Third quarter 1996 special items reduced after-tax
income by $26.3 million, or $0.15 per share, primarily due to charges related to
merger and restructuring.
In addition, the nine months ended September 1997 included after-tax gains
of $17.0 million on the sale of the Company's investment in Semtech Corporation
common stock, $9.2 million on the sale of the Company's investment in Nitinol
Development Corporation, and $1.9 million on other investments. These gains were
partially offset by after-tax charges of $4.1 million for a settlement of a U.S.
government contract dispute related to a unit divested in 1995, $3.5 million to
write-off a research and development venture and $6.3 million from merger and
restructuring costs.
In addition to the merger and restructuring costs discussed above, the nine
months ended September 30, 1996 also included an after-tax gain of $24.8 million
on the sale of the Company's defense vehicle business partially offset by a
charge of $3.6 million for costs related to a Teledyne, Inc. proxy contest.
Net gains from special items are expected to continue as Allegheny Teledyne
proceeds with previously announced non-strategic divestitures and the sale of
surplus real estate holdings.
12
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of this change on earnings per
share for the three and nine months ended September 30, 1997 and for the same
periods in 1996 was not material.
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income," and Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information," were
also issued in 1997. These statements will be adopted by the Company in 1998,
and are not expected to have a material effect on the consolidated financial
statements.
INCOME TAXES
The Company's effective tax rate declined to 36.7 percent and 38.0 percent,
respectively, for the 1997 third quarter and nine months from 54.9 percent and
41.7 percent, respectively, for the same periods in 1996 primarily due to
non-deductible business combination costs incurred in 1996.
FINANCIAL CONDITION AND LIQUIDITY
Working capital increased to $695.3 million at September 30, 1997, compared
to $614.0 million at December 31, 1996. The current ratio increased to 2.3 from
2.0 in this same period. The increase in working capital was primarily due to a
reclassification to current assets of a tax refund formerly carried in other
assets, higher inventories and lower accounts payable balances.
In the first nine months of 1997, cash generated from operations of $141.0
million, proceeds from the sales of businesses and investments of $58.4 million
and proceeds from the exercise of stock options of $34.6 million were used to
purchase treasury stock of $86.7 million, pay dividends of $84.3 million, invest
$69.3 million in capital equipment and business expansion and reduce long-term
debt by $23.3 million. These transactions plus cash on hand at the beginning of
the year resulted in a cash position of $32.9 million at September 30, 1997.
Capital expenditures for 1997 are expected to approximate $100 million.
In mid-March 1997, the Company's Board of Directors authorized a 12 million
share repurchase program. As of October 31, 1997, the company had repurchased
3.7 million shares on the open market for a cost of $106.8 million at per-share
prices ranging from $25 1/8 to $32 3/4. However, the average common shares
outstanding is slightly higher than in the third quarter of 1996 because of
stock option exercises net of share repurchases. On October 31, 1997, the
Company announced that it had terminated its stock repurchase program.
The Company redeemed the Teledyne, Inc. 7% subordinated debentures on
September 23, 1997. Payment was made in an amount equal to 100% of the principal
amount of the debentures, in the aggregate amount of $19.5 million, plus accrued
interest to the redemption date.
On October 3, 1997, the Company announced that the sale of Teledyne
Economic Development had been completed. On October 31, 1997, the Company sold
the assets of Teledyne Packaging for approximately $31 million. These are two of
eight non-strategic businesses identified by the Company for divestiture earlier
in the year.
The Company believes that internally generated funds, current cash on hand
and borrowing from existing credit lines will be adequate to meet foreseeable
needs.
13
On October 23, 1997, the Board of Directors declared a regular quarterly
dividend of $0.16 per share of common stock. The dividend is payable November
28, 1997 to shareholders of record at the close of business November 14, 1997.
OTHER MATTERS
ENVIRONMENTAL
The Company is subject to federal, state and local environmental laws and
regulations which require that it investigate and remediate the effects of the
release or disposal of materials at sites associated with past and present
operations, including sites at which the Company has been identified as a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as Superfund, and comparable
state laws. The Company is currently involved in the investigation and
remediation of a number of sites under these laws. The Company's reserves for
environmental investigation and remediation totaled approximately $36 million at
September 30, 1997. Based on currently available information, management does
not believe future environmental costs at sites with which the Company has been
identified in excess of those accrued are likely to have a material adverse
effect on the Company's financial condition or liquidity, although the
resolution in any reporting period of one or more of these matters could have a
material adverse effect on the Company's results of operations for that period.
With respect to proceedings brought under the federal Superfund laws, or
similar state statutes, the Company has been identified as a potentially
responsible party at approximately 35 such sites, excluding those at which it
believes it has no future liability. The Company's involvement is very limited
or de minimus at approximately 20 of these sites, and the potential loss
exposure with respect to any individual site is not considered to be material.
In 1996, Statement of Position 96-1, "Environmental Remediation
Liabilities," which was issued by the American Institute of Certified Public
Accountants, establishes accounting standards for recognition of environmental
costs. This statement, which became effective in 1997, did not have a material
effect on the consolidated financial statements.
For additional discussion of environmental matters, see Note 7 of the Notes
to Condensed Consolidated Financial Statements (Unaudited).
GOVERNMENT CONTRACTS
A number of the Company's subsidiaries perform work on contracts with the
U.S. government. Many of these contracts include price redetermination clauses,
and most are terminable at the convenience of the government. Certain of these
contracts are fixed-price or fixed-price incentive development contracts which
involve a risk that costs may exceed those expected when the contracts were
negotiated. Absent modification of these contracts, any costs incurred in excess
of the fixed or ceiling prices must be borne by the Company. In addition,
virtually all defense programs are subject to curtailment or cancellation due to
the year-to-year nature of the government appropriations and allocations
process. A material reduction in U.S. Government appropriations may have an
adverse effect on the Company's business, depending upon the specific programs
affected by any such reduction. Since certain contracts extend over a long
period of time, all revisions in cost and funding estimates during the progress
of work have the effect of adjusting the current period earnings on a cumulative
catch-up basis. When the current contract estimate indicates a loss, provision
is made for the total anticipated loss. The Company obtains many U.S. Government
contracts through the process of competitive bidding. There can be no assurance
that the Company will continue to be successful in having its bids accepted.
14
Various claims (whether based on U.S. Government or Company audits and
investigations or otherwise) have been or may be asserted against the Company
related to its U.S. Government contract work, including claims based on business
practices and cost classifications and actions under the False Claims Act. The
False Claims Act permits a person to assert the rights of the U.S. Government by
initiating a suit under seal against a contractor if such person purports to
have information that the contractor falsely submitted a claim to the U.S.
Government for payment. If it chooses, the U.S. Government may intervene and
assume control of the case.
Although government contracting claims may be resolved by detailed
fact-finding and negotiation, on those occasions when they are not so resolved,
civil or criminal legal or administrative proceedings may ensue. Depending on
the circumstances and the outcome, such proceedings could result in fines,
penalties, compensatory and treble damages or the cancellation or suspension of
payments under one or more U.S. Government contracts. Under government
regulations, a company, or one or more of its operating divisions or units, can
also be suspended or debarred from government contracts based on the results of
investigations. Given the extent of the Company's business with the U.S.
Government, a suspension or debarment of the Company could have a material
adverse effect on the future operating results and consolidated financial
condition of the Company. However, although the outcome of these matters cannot
be predicted with certainty, management does not believe there is any audit,
review or investigation currently pending against the Company of which
management is aware that is likely to result in suspension or debarment of the
Company, or that is otherwise likely to have a material adverse effect on the
Company's financial condition or liquidity, although the resolution in any
reporting period of one or more of these matters could have a material adverse
effect on the Company's results of operations for that period.
For additional discussion of government contract matters, see Note 7 of the
Notes to Condensed Consolidated Financial Statements (Unaudited).
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 7 of the Notes to Condensed Consolidated Financial Statements (Unaudited),
including statements concerning the expected adequacy of available funds to meet
foreseeable needs, proposed acquisitions and divestitures, the outcome of any
government inquiries, litigation or other future proceedings related to
government contract or other matters, and environmental costs. These statements
are based on current expectations that involve a number of risks and
uncertainties, including those described above under the captions "Other Matters
- - Environmental" and "Other Matters - Government Contracts." 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 10-K
for the year ended December 31, 1996.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company becomes involved from time to time in various lawsuits, claims
and proceedings relating to the conduct of its business, including those
pertaining to environmental, government contracting, product liability, patent
infringement, commercial, employment, employee benefits and stockholder matters.
While the outcome of litigation cannot be predicted with certainty, and
some of these lawsuits, claims or proceedings may be determined adversely to the
Company, management does not believe that the disposition of any such pending
matter is likely to have a material adverse effect on the Company's results of
operations for that period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
4 Assignment and Assumption Agreements dated as of August 22, 1997
and First Amendment to Credit Agreement dated as of August 31,
1997 relating to Credit Agreement dated as of August 30, 1996
27 Financial data schedule
(b) Registrant did not file any Form 8-K reports during the quarter for
which this report is filed.
16
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 14, 1997 By /s/ James L. Murdy
---------------------------------------
James L. Murdy
Executive Vice President, Finance and
Administration and Chief Financial
Officer
(Duly Authorized Officer)
Date: November 14, 1997 By /s/ Dale G. Reid
---------------------------------------
Dale G. Reid
Vice President - Controller
(Principal Accounting Officer)
17
EXHIBIT INDEX
Exhibit Number Description Page No.
- -------------- ----------- --------
4 Assignment and Assumption Agreements 19
dated as of August 22, 1997 and First
Amendment to Credit Agreement dated as
of August 31, 1997 relating to Credit
Agreement dated as of August 30, 1996
27 Financial data schedule 37
18