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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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 No.)
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 ______
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934).
Yes X No _______
At July 28, 2003, the registrant had outstanding 81,193,030 shares of its Common
Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED JUNE 30, 2003
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 22
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 39
Item 4. Controls and Procedures 40
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 41
SIGNATURES 43
EXHIBITS 44
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)
June 30, December 31,
2003 2002
---- ----
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 66.2 $ 59.4
Accounts receivable, net 274.8 239.3
Inventories, net 416.6 409.0
Income tax refunds 3.4 51.9
Deferred income taxes 22.6 20.8
Prepaid expenses and other current assets 27.7 32.0
---------- ----------
Total Current Assets 811.3 812.4
Property, plant and equipment, net 748.6 757.6
Deferred pension asset 165.1 165.1
Cost in excess of net assets acquired 196.0 194.4
Deferred income taxes 110.2 85.4
Other assets 71.9 78.3
---------- ----------
TOTAL ASSETS $ 2,103.1 $ 2,093.2
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 175.1 $ 171.3
Accrued liabilities 160.4 161.0
Short-term debt and current portion
of long-term debt 7.1 9.7
---------- ----------
Total Current Liabilities 342.6 342.0
Long-term debt 523.6 509.4
Accrued postretirement benefits 502.9 496.4
Pension liabilities 259.8 216.0
Other long-term liabilities 82.0 80.6
---------- ----------
TOTAL LIABILITIES 1,710.9 1,644.4
---------- ----------
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 June 30, 2003
and December 31, 2002; outstanding-80,961,069 shares
at June 30, 2003 and 80,634,344 shares
at December 31, 2002 9.9 9.9
Additional paid-in capital 481.2 481.2
Retained earnings 764.5 835.1
Treasury stock: 17,990,421 shares at
June 30, 2003 and 18,317,146 shares
at December 31, 2002 (461.2) (469.7)
Accumulated other comprehensive
loss, net of tax (402.2) (407.7)
---------- ----------
Total Stockholders' Equity 392.2 448.8
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,103.1 $ 2,093.2
========== ==========
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 Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Sales $ 489.9 $ 491.2 $ 970.4 $ 984.3
Costs and expenses:
Cost of sales 469.1 444.1 935.0 896.8
Selling and administrative
expenses 53.4 49.3 101.1 99.8
------- ------- ------- -------
Loss before interest, other income
and income taxes (32.6) (2.2) (65.7) (12.3)
Interest expense, net 8.4 7.9 15.8 17.8
Other income (expense) 0.2 (0.4) 0.7 1.6
------- ------- ------- -------
Loss before income tax benefit and
cumulative effect of change in
accounting principle (40.8) (10.5) (80.8) (28.5)
Income tax benefit (14.8) (3.0) (29.0) (9.9)
------- ------- ------- -------
Net loss before cumulative effect
of change in accounting principle (26.0) (7.5) (51.8) (18.6)
Cumulative effect of change in
accounting principle, net of tax -- -- (1.3) --
------- ------- ------- -------
Net loss $ (26.0) $ (7.5) $ (53.1) $ (18.6)
======= ======= ======= =======
Basic and diluted net loss per
common share before cumulative
effect of change in accounting
principle $ (0.32) $ (0.09) $ (0.64) $ (0.23)
Cumulative effect of change in
accounting principle -- -- (0.02) --
------- ------- ------- -------
Basic and diluted net loss per
common share $ (0.32) $ (0.09) $ (0.66) $ (0.23)
======= ======= ======= =======
Dividends declared per common share $ 0.06 $ 0.20 $ 0.12 $ 0.40
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
4
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
June 30,
-------------------
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net loss $ (53.1) $ (18.6)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of change in accounting principle 1.3 --
Depreciation and amortization 37.1 45.4
Deferred income taxes (26.0) 2.7
Gains on sales of businesses and investments (0.8) (2.4)
Change in operating assets and liabilities:
Income tax refunds receivable 48.5 45.6
Pension assets and liabilities 43.9 (5.2)
Accounts receivable (35.6) 9.6
Inventories (7.6) 83.8
Accounts payable 3.8 13.7
Accrued liabilities and other 5.6 (3.7)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 17.1 170.9
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (28.8) (25.5)
Asset disposals and other 6.7 2.1
-------- --------
CASH USED IN INVESTING ACTIVITIES (22.1) (23.4)
FINANCING ACTIVITIES:
Borrowings on long-term debt 9.2 --
Payments on long-term debt and capital leases (1.9) (7.5)
Net repayments under credit facilities (1.1) (71.3)
-------- --------
Net increase (decrease) in debt 6.2 (78.8)
Proceeds from interest rate swap termination 15.3 --
Dividends paid (9.7) (32.2)
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11.8 (111.0)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 6.8 36.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 59.4 33.7
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 66.2 $ 70.2
======== ========
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.
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
2002 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.
Stock-based Compensation
The Company accounts for its stock option plans and other stock-based
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. The following table illustrates the
effect on net loss and per share information if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The fair value
recognition provisions of SFAS 123 would not affect the compensation expense
recognized for non-vested stock and other performance-based share programs.
(in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
(unaudited) (unaudited)
Net loss as reported $ (26.0) $ (7.5) $ (53.1) $ (18.6)
Net impact of SFAS 123, net of tax (0.8) (0.8) (1.6) (1.6)
------- ------- ------- -------
Pro forma net loss $ (26.8) $ (8.3) $ (54.7) $ (20.2)
======= ======= ======= =======
Net loss per common share:
Basic and diluted--as reported $ (0.32) $ (0.09) $ (0.66) $ (0.23)
======= ======= ======= =======
Basic and diluted--pro forma $ (0.33) $ (0.10) $ (0.68) $ (0.25)
======= ======= ======= =======
New Accounting Pronouncements
Effective January 1, 2003, as required, the Company adopted Statement of
Financial Accounting Standards 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, are capitalized and amortized to expense over an asset's useful
life using a systematic and rational allocation method.
The adoption of SFAS 143 by the Company resulted in recognizing a charge of
$1.3 million, net of income taxes of $0.7 million, or $0.02 per share,
principally for asset retirement obligations related to landfills in the
6
Company's Flat-Rolled Products segment. This charge is reported in the statement
of operations for the six months ended June 30, 2003, as a cumulative effect of
a change in accounting principle. The pro forma effects of the application of
SFAS 143 as if the Statement had been adopted on January 1, 2002 were not
material.
NOTE 2. INVENTORIES
Inventories at June 30, 2003 and December 31, 2002 were as follows (in
millions):
June 30, December 31,
2003 2002
----------- ------------
(unaudited) (audited)
Raw materials and supplies $ 46.3 $ 49.4
Work-in-process 382.7 361.0
Finished goods 79.6 77.9
-------- --------
Total inventories at current cost 508.6 488.3
Less allowances to reduce current cost
values to LIFO basis (87.0) (74.7)
Progress payments (5.0) (4.6)
-------- --------
Total inventories, net $ 416.6 $ 409.0
======== ========
NOTE 3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Property, plant and equipment at June 30, 2003 and December 31, 2002 were
as follows (in millions):
June 30, December 31,
2003 2002
---------- ------------
(unaudited) (audited)
Land $ 26.3 $ 29.5
Buildings 226.5 228.6
Equipment and leasehold improvements 1,544.4 1,521.5
---------- ----------
1,797.2 1,779.6
Accumulated depreciation and amortization (1,048.6) (1,022.0)
---------- ----------
Total property, plant and equipment, net $ 748.6 $ 757.6
========== ==========
Reserves for restructuring charges recorded in 2002 and prior years
involving future payments were $4.6 million at June 30, 2003 and $6.8 million at
December 31, 2002. The reduction in reserves was from cash payments to meet
severance obligations.
7
NOTE 4. DEBT
Debt at June 30, 2003 and December 31, 2002 was as follows (in millions):
June 30, December 31,
2003 2002
----------- ------------
(unaudited) (audited)
Allegheny Technologies $300 million
8.375% Notes due 2011, net (a) $ 315.7 $ 312.3
Allegheny Ludlum 6.95% debentures,
due 2025 150.0 150.0
Foreign credit agreements 23.0 26.7
Industrial revenue bonds, due
through 2011 21.2 21.5
Capitalized leases and other 20.8 8.6
Senior secured domestic revolving
credit facility -- --
Unsecured domestic credit agreement -- --
--------- -----------
530.7 519.1
Short-term debt and current portion
of long-term debt (7.1) (9.7)
--------- -----------
Total long-term debt $ 523.6 $ 509.4
========= ===========
(a) Includes fair value adjustments for interest rate swap contracts of
$21.9 million and $18.7 million at June 30, 2003 and December 31,
2002, respectively.
During the 2003 second quarter, the Company entered into a $325 million
four-year senior secured domestic revolving credit facility ("the secured credit
facility" or "the facility"). The facility, which replaced a $250 million
unsecured facility, is secured by all accounts receivable and inventory of the
Company's U.S. operations, and includes capacity for up to $150 million of
letters of credit. There have been no borrowings made under either the secured
credit facility or the former unsecured credit facility since the beginning of
2002. The Company's outstanding letters of credit issued under the secured
credit facility were approximately $50 million at June 30, 2003.
The secured credit facility limits capital expenditures, investments and
acquisitions of businesses, new indebtedness, asset divestitures, payment of
dividends, and common stock repurchases which the Company may incur or undertake
during the term of the facility without obtaining permission of the lending
group. In addition, the secured credit facility contains a financial covenant,
which is not measured if the Company's undrawn availability under the facility
is equal to or more than $150 million. This financial covenant, when measured,
requires the Company to maintain a ratio of consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA") to fixed charges of at
least 1.0 to 1.0. EBITDA is adjusted for non-cash items such as income/loss on
investments accounted for under the equity method of accounting, non-cash
pension expense/income, and that portion of retiree medical and life insurance
expenses paid from the Company's VEBA trust. EBITDA is reduced by capital
expenditures, as defined in the facility, and cash taxes paid, and increased for
cash tax refunds. Fixed charges include gross interest expense, dividends paid
and scheduled debt payments. At June 30, 2003, the Company's undrawn
availability under the facility, which is calculated including outstanding
letters of credit and domestic cash on hand, was $315 million.
Borrowings under the secured credit facility bear interest at the Company's
option at either: (1) the one-, two-, three- or six- month LIBOR rate plus a
margin ranging from 2.25% to 3.00% depending upon the level of borrowings; or
(2) a base rate announced from time-to-time by the lending group (i.e. the Prime
lending rate) plus a margin ranging from 0% to 0.75% depending upon the level of
borrowings. In addition, the secured credit facility contains a facility fee of
0.25% to 0.50% depending on the level of
8
undrawn availability. The facility also contains fees for issuing letters of
credit of 0.125% per annum and annualized fees ranging from 2.25% to 3.00%
depending on the level of undrawn availability under the facility. The Company's
overall borrowing costs under the secured credit facility are not affected by
changes in the Company's credit ratings.
In June 2003, Standard & Poor's Rating Services ("S&P") lowered its
corporate credit rating on the Company to BB+ from BBB and lowered the Company's
senior unsecured debt rating to BB from BBB. At the same time, S&P assigned a
stable outlook. In June 2003, Moody's Investor Service lowered its senior
implied rating of the Company to Ba3 from Baa3, lowered the senior unsecured
debt rating on Allegheny Ludlum Corporation's 6.95% bonds to Ba3 from Baa3, and
lowered the senior unsecured debt rating of the Company's 8.375% notes to B2
from Baa3. At the same time, Moody's assigned a stable outlook.
Interest rate swap contracts are used from time-to-time to manage the
Company's exposure to interest rate risks. At the end of the 2002 first quarter,
the Company entered into interest rate swap contracts with respect to a $150
million notional amount related to its $300 million, 8.375% ten-year Notes, due
December 15, 2011, which involved the receipt of fixed rate amounts in exchange
for floating rate interest payments over the life of the contracts without an
exchange of the underlying principal amount. These contracts were designated as
fair value hedges. As a result, changes in the fair value of the swap contracts
and the underlying fixed rate debt are recognized in the statement of
operations. During the first six months of 2003, the Company terminated the
majority of these interest rate swap contracts and received $15.3 million in
cash. The $15.3 million gain on settlement remains a component of the reported
balance of the Notes, and will be ratably recognized as a reduction to interest
expense over the remaining life of the Notes, which is approximately 8.5 years.
In 2003, the Company entered into new "receive fixed, pay floating"
interest rate swap arrangements related to the 8.375% ten-year Notes which
re-established, in total, a $125 million notional amount which effectively
converted this portion of the Notes to variable rate debt. Including accretion
of the gain on termination of the swap contracts described above, the result of
the "receive fixed, pay floating" arrangements was a decrease in interest
expense of $3.4 million for the six months ended June 30, 2003, compared to the
fixed interest expense of the Notes that would otherwise have been realized. At
June 30, 2003, the adjustment of these swap contracts to fair market value
resulted in the recognition of an asset of $7.1 million on the balance sheet,
included in other assets, with an offsetting increase in long-term debt.
(this space intentionally left blank)
9
NOTE 5. BUSINESS SEGMENTS
Following is certain financial information with respect to the Company's
business segments for the periods indicated (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Total sales:
Flat-Rolled Products $ 264.5 $ 280.6 $ 526.9 $ 546.0
High Performance Metals 180.9 162.5 351.6 343.9
Industrial Products 62.9 59.6 123.6 117.7
---------- ---------- ---------- ----------
508.3 502.7 1,002.1 1,007.6
Intersegment sales:
Flat-Rolled Products 4.3 3.9 7.9 7.2
High Performance Metals 14.1 7.6 23.8 16.1
---------- ---------- ---------- ----------
18.4 11.5 31.7 23.3
Sales to external customers:
Flat-Rolled Products 260.2 276.7 519.0 538.8
High Performance Metals 166.8 154.9 327.8 327.8
Industrial Products 62.9 59.6 123.6 117.7
---------- ---------- ---------- ----------
$ 489.9 $ 491.2 $ 970.4 $ 984.3
========== ========== ========== ==========
Operating profit (loss):
Flat-Rolled Products $ (6.1) $ 0.7 $ (7.1) $ 0.3
High Performance Metals 11.6 8.6 19.9 12.9
Industrial Products 3.1 2.2 4.6 1.5
---------- ---------- ---------- ----------
Total operating profit 8.6 11.5 17.4 14.7
Corporate expenses (5.3) (4.5) (10.1) (10.2)
Interest expense, net (8.4) (7.9) (15.8) (17.8)
Other expenses, net
of gains on asset sales (2.3) (4.1) (4.1) (4.0)
Retirement benefit expense (33.4) (5.5) (68.2) (11.2)
---------- ---------- ---------- ----------
Loss before income tax
benefit and cumulative
effect of change in
accounting principle $ (40.8) $ (10.5) $ (80.8) $ (28.5)
========== ========== ========== ==========
Retirement benefit expense represents pension expense and other
postretirement benefit expenses. Operating profit (loss) with respect to the
Company's business segments excludes any retirement benefit expense.
10
NOTE 6. PER SHARE INFORMATION
The following table sets forth the computation of basic and diluted net
loss per common share (in millions, except share and per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(unaudited) (unaudited)
Numerator:
Basic and diluted net loss per common
share before cumulative effect of
change in accounting principle $ (26.0) $ (7.5) $ (51.8) $ (18.6)
Cumulative effect of change
in accounting principle, net of tax -- -- (1.3) --
--------- --------- --------- ---------
Basic and diluted net loss per common
share $ (26.0) $ (7.5) $ (53.1) $ (18.6)
========= ========= ========= =========
Denominator for basic and diluted net
loss per common share - adjusted
weighted average shares 81.0 80.6 80.8 80.5
========= ========= ========= =========
Basic and diluted net loss per
common share before cumulative
effect of change in accounting
principle $ (0.32) $ (0.09) $ (0.64) $ (0.23)
Cumulative effect of change in
accounting principle -- -- (0.02) --
--------- --------- --------- ---------
Basic and diluted net loss per common
share $ (0.32) $ (0.09) $ (0.66) $ (0.23)
========= ========= ========= =========
For the 2003 and 2002 periods, the effects of stock options were
antidilutive and thus not included in the calculation of dilutive earnings per
share.
11
NOTE 7. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, were as follows
(in millions):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
(unaudited) (unaudited)
Net loss $ (26.0) $ (7.5) $ (53.1) $ (18.6)
------- ------- ------- -------
Foreign currency translation
gains 3.1 3.7 7.6 3.7
Unrealized gains (losses) on
energy, raw materials and
currency hedges, net of tax (2.1) (0.4) (2.1) 7.4
Unrealized holding gains
arising during the period -- -- -- 0.4
------- ------- ------- -------
1.0 3.3 5.5 11.5
------- ------- ------- -------
Comprehensive loss $ (25.0) $ (4.2) $ (47.6) $ (7.1)
======= ======= ======= =======
NOTE 8. 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 financial information in this Note 8 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. Investments in subsidiaries, which are eliminated in
consolidation, are included in other assets on the balance sheets.
In 1996, the defined benefit pension plans of the Subsidiary were merged
with the defined benefit pension plans of Teledyne, Inc. and Allegheny
Technologies became the plan sponsor. As a result, the balance sheets presented
for the Subsidiary and the non-guarantor subsidiaries do not include the
Allegheny Technologies deferred pension asset, pension liabilities or the
related deferred taxes. The pension assets, liabilities and the related deferred
taxes and pension income or expense are recognized by the Guarantor Parent.
Management and royalty fees charged to the Subsidiary and to the non-guarantor
subsidiaries by the Guarantor Parent have been excluded solely for purposes of
this presentation.
12
NOTE 8. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
June 30, 2003 (unaudited)
- ------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------
Assets:
Cash $ -- $ 40.0 $ 26.2 $ -- $ 66.2
Accounts receivable, net 0.9 100.6 173.3 -- 274.8
Inventories, net -- 188.1 228.5 -- 416.6
Income tax refunds 3.4 -- -- -- 3.4
Deferred income taxes 22.6 -- -- -- 22.6
Prepaid expenses and other
current assets 1.2 7.3 19.2 -- 27.7
---------------------------------------------------------------------------
Total current assets 28.1 336.0 447.2 -- 811.3
Property, plant, and
equipment, net -- 378.2 370.4 -- 748.6
Deferred pension asset 165.1 -- -- -- 165.1
Cost in excess of net
assets acquired -- 112.0 84.0 -- 196.0
Deferred income taxes 110.2 -- -- -- 110.2
Investments in subsidiaries
and other assets 1,101.3 472.2 339.4 (1,841.0) 71.9
---------------------------------------------------------------------------
Total assets $ 1,404.7 $ 1,298.4 $ 1,241.0 $ (1,841.0) $ 2,103.1
===========================================================================
Liabilities and
stockholders' equity:
Accounts payable $ 1.6 $ 94.6 $ 78.9 $ -- $ 175.1
Accrued liabilities 431.1 67.2 106.6 (444.5) 160.4
Short-term debt and current
portion of long-term debt -- 0.8 6.3 -- 7.1
---------------------------------------------------------------------------
Total current liabilities 432.7 162.6 191.8 (444.5) 342.6
Long-term debt 315.6 361.1 48.6 (201.7) 523.6
Accrued postretirement
benefits -- 313.1 189.8 -- 502.9
Pension liabilities 259.8 -- -- -- 259.8
Other long-term liabilities 4.4 24.9 52.7 -- 82.0
---------------------------------------------------------------------------
Total liabilities 1,012.5 861.7 482.9 (646.2) 1,710.9
---------------------------------------------------------------------------
Total stockholders' equity 392.2 436.7 758.1 (1,194.8) 392.2
---------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,404.7 $ 1,298.4 $ 1,241.0 $ (1,841.0) $ 2,103.1
===========================================================================
13
NOTE 8. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the six months ended June 30, 2003 (unaudited)
- ---------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
Sales $ -- $ 476.7 $ 493.7 $ -- $ 970.4
Cost of sales 47.6 479.7 407.7 -- 935.0
Selling and administrative
expenses 33.5 12.0 55.6 -- 101.1
Interest expense, net 10.2 5.2 0.4 -- 15.8
Other income (expense)
including equity in income
of unconsolidated
subsidiaries 11.0 (1.8) 7.0 (15.5) 0.7
---------------------------------------------------------------------
Income (loss) before income
tax benefit and
cumulative effect of
change in accounting
principle (80.3) (22.0) 37.0 (15.5) (80.8)
Income tax provision
(benefit) (28.5) (8.6) 13.6 (5.5) (29.0)
---------------------------------------------------------------------
Net income (loss) before
cumulative effect of
change in accounting
principle (51.8) (13.4) 23.4 (10.0) (51.8)
Cumulative effect of change
in accounting principle,
net of tax (1.3) -- -- -- (1.3)
---------------------------------------------------------------------
Net income (loss) $ (53.1) $ (13.4) $ 23.4 $ (10.0) $ (53.1)
=====================================================================
14
NOTE 8. CONTINUED
Condensed Statements of Cash Flows
For the six months ended June 30, 2003 (unaudited)
- -------------------------------------------------------------------------------------------------------
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------
Cash flows provided by
(used in) operating
activities $ 1.9 $ 137.7 $ 48.2 $ (170.7) $ 17.1
Cash flows provided by
(used in) investing
activities -- (13.8) (13.7) 5.4 (22.1)
Cash flows provided by
(used in) financing
activities (2.1) (126.9) (24.5) 165.3 11.8
--------------------------------------------------------------------
Increase (decrease) in
cash and cash equivalents $ (0.2) $ (3.0) $ 10.0 $ -- $ 6.8
====================================================================
15
NOTE 8. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2002 (audited)
- ---------------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 0.2 $ 43.0 $ 16.2 $ - $ 59.4
Accounts receivable, net - 82.3 157.0 - 239.3
Inventories, net - 181.6 227.4 - 409.0
Income tax refunds 51.9 - - - 51.9
Deferred income taxes 20.8 - - - 20.8
Prepaid expenses, and other
current assets 0.3 8.8 22.9 - 32.0
-----------------------------------------------------------------------------
Total current assets 73.2 315.7 423.5 - 812.4
Property, plant, and
equipment, net - 383.2 374.4 - 757.6
Deferred pension asset 165.1 - - - 165.1
Cost in excess of net
assets acquired - 112.1 82.3 - 194.4
Deferred income taxes 85.4 - - - 85.4
Investment in subsidiaries
and other assets 1,169.8 608.8 347.1 (2,047.4) 78.3
-----------------------------------------------------------------------------
Total assets $ 1,493.5 $ 1,419.8 $ 1,227.3 $ (2,047.4) $ 2,093.2
=============================================================================
Liabilities and
stockholders' equity:
Accounts payable $ 1.9 $ 96.3 $ 73.1 $ - $ 171.3
Accrued liabilities 510.8 52.1 97.9 (499.8) 161.0
Short-term debt and current
portion of long-term debt - 0.6 9.1 - 9.7
-----------------------------------------------------------------------------
Total current liabilities 512.7 149.0 180.1 (499.8) 342.0
Long-term debt 312.4 441.3 37.2 (281.5) 509.4
Accrued postretirement
benefits - 308.1 188.3 - 496.4
Pension liabilities 216.0 - - - 216.0
Other long-term liabilities 3.6 23.1 53.9 - 80.6
-----------------------------------------------------------------------------
Total liabilities 1,044.7 921.5 459.5 (781.3) 1,644.4
-----------------------------------------------------------------------------
Total stockholders' equity 448.8 498.3 767.8 (1,266.1) 448.8
-----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,493.5 $ 1,419.8 $ 1,227.3 $ (2,047.4) $ 2,093.2
=============================================================================
16
NOTE 8. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the six months ended June 30, 2002 (unaudited)
- --------------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------
Sales $ - $ 517.7 $ 466.6 $ - $ 984.3
Cost of sales 6.7 499.9 390.2 - 896.8
Selling and administrative
expenses 20.6 13.8 65.4 - 99.8
Interest expense 11.7 5.4 0.7 - 17.8
Other income (expense)
including equity in
income of unconsolidated
subsidiaries 8.6 (1.1) 5.6 (11.5) 1.6
----------------------------------------------------------------------
Income (loss) before
income taxes (30.4) (2.5) 15.9 (11.5) (28.5)
Income tax provision
(benefit) (11.8) (3.5) 9.5 (4.1) (9.9)
----------------------------------------------------------------------
Net income (loss) $ (18.6) $ 1.0 $ 6.4 $ (7.4) $ (18.6)
======================================================================
Condensed Statements of Cash Flows
For the six months ended June 30, 2002 (unaudited)
- --------------------------------------------------------------------------------------------------
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------
Cash flows provided by
(used in) operating
activities $ 123.0 $ 68.8 $ (47.1) $ 26.2 $ 170.9
Cash flows provided by
(used in) investing
activities - (6.3) (21.4) 4.3 (23.4)
Cash flows provided by
(used in) financing
activities (123.4) (22.7) 65.6 (30.5) (111.0)
-------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents $ (0.4) $ 39.8 $ (2.9) $ - $ 36.5
===================================================================
17
NOTE 9. 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 the disposal of hazardous substances, which may require that the
Company 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
("PRP") under the Federal Superfund laws and comparable state laws. The Company
could incur substantial cleanup costs, fines and civil or criminal sanctions, as
well as 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 its facilities. The Company is currently involved in the
investigation and remediation at a number of its current and former sites as
well as third party sites under these laws.
Environmental liabilities are recorded when the Company's liability is
probable and the costs are reasonably estimable, but generally not later than
the completion of a feasibility study or the recommendation of a remedy or a
commitment to an appropriate plan of action. The accruals are reviewed
periodically and, as investigations and remediations proceed, adjustments are
made as necessary. Accruals for losses from environmental remediation
obligations do not take into account the effects of inflation, and anticipated
expenditures are not discounted to their present values. The accruals are not
reduced by possible recoveries from insurance carriers or other third parties,
but do reflect allocations among PRPs at Federal Superfund sites or similar
state-managed sites after an assessment is made of the likelihood that such
parties will fulfill their obligations at such sites and after appropriate
cost-sharing or other agreements are entered into. The Company's measurement of
environmental liabilities is based on currently available facts, present laws
and regulations, and current technology. Estimates take into consideration the
Company's prior experience in site investigation and remediation, the data
concerning cleanup costs available from other companies and regulatory
authorities, and the professional judgment of the Company's environmental
experts in consultation with outside environmental specialists, when necessary.
Estimates of the Company's liability are 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 participation and financial
condition of other PRPs, as well as the extent of their responsibility for the
remediation.
At June 30, 2003, the Company's reserves for environmental remediation
obligations totaled approximately $38.2 million, of which approximately $10.9
million were included in other current liabilities. The reserve includes
estimated probable future costs of $14.0 million for Federal Superfund and
comparable state-managed sites; $9.0 million for formerly owned or operated
sites for which the Company has remediation or indemnification obligations; $3.2
million for owned or controlled sites at which Company operations have been
discontinued; and $12.0 million for sites utilized by the Company in its ongoing
operations. In some cases 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 PRPs.
The timing of expenditures depends on a number of factors that vary by
site, including the nature and extent of contamination, the number of
participating PRPs, 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 respect to which accruals have been made in up to
thirty years.
18
Based on currently available information, the Company does not believe that
there is a reasonable possibility that a loss exceeding the amount already
accrued for any of the environmental matters with which it is currently
associated (either individually or in the aggregate) will be an amount that
would be material to a decision to buy or sell its securities. Additional future
developments, administrative actions or liabilities relating to environmental
matters, however, could have a material adverse effect on the Company's
financial condition and results of operations.
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 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 current 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.
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.
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. In February 2002, the Court
issued a decision imposing a penalty of $8.2 million for incidents at five
facilities that occurred over a period of approximately six years which
Allegheny Ludlum had reported to the appropriate environmental agencies. The
Company asked the Court to reconsider its decision, which the Court denied in
October 2002. The Company has appealed the Court's decision. At June 30, 2003,
the Company had adequate reserves, including accrued interest, for this matter.
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
19
parties agreed to cooperate in the filing and promotion of a proposed bankruptcy
reorganization plan for acquiring the assets of Piper Aircraft, a manufacturer
of general aviation aircraft. TDY and Kaiser are engaged in discovery and have
agreed to participate in a mediation. Kaiser has requested that the court impose
a constructive trust on TDY's equity interest in privately held New Piper
Aircraft, Inc., which represents approximately 30% of the equity of New Piper
Aircraft, Inc. In the alternative, Kaiser also seeks unspecified damages in an
amount "to be determined at trial." The trial for this matter has not been
scheduled. 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 and financial condition.
TDY and the San Diego Unified Port District ("Port District") entered into
a lease of property located in San Diego, California ("San Diego facility") on
October 1, 1984. TDY operated its Teledyne Ryan Aeronautical division ("Ryan")
at the San Diego facility 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 with the approval of the Port
District until early 2001. TDY also entered into three separate sublease
arrangements for portions of the property subject to the approval of the Port
District, which the Port District refused. After its administrative appeal to
the Port District was denied, TDY brought a lawsuit against the Port District.
The complaint, filed in December 2001 in state court in San Diego, alleges
breach of contract, inverse condemnation, tortious interference with a
prospective economic advantage and other causes of action relating to the Port
District's failure to consent to subleases of the space. The Complaint seeks at
least $4 million for damages from the Port District and declaratory relief. The
trial for this matter is scheduled for October 2003.
Despite the Port District's failure to consent to the three subleases, TDY
continued its marketing efforts to sublease the San Diego facility. At June 30,
2003 the Company had a reserve of approximately $3.7 million to cover the costs
of decommissioning the San Diego facility. TDY and the Port District discussed
resolution of this matter but did not reach any agreement even after
court-sponsored mediation. In June 2002, TDY ceased paying rent on the grounds
that the Port District had rescinded the Lease when it refused to allow TDY to
sublease the property and that the Port District's condemnation of the property
voided the lease. In September 2002, the Port District demanded that rent be
paid or possession of the property be returned to the Port District. TDY
returned possession to the Port District on October 31, 2002 and denied that any
remaining amounts were due under the lease.
The Port District filed a cross-complaint against TDY in March 2003. The
Complaint alleged breach of contract for failure to pay rent and for certain
environmental contamination on the property. In June 2003, the Port amended the
complaint and eliminated the allegations relating to environmental
contamination. In the amended complaint, the Port District seeks $1.2 million in
past rent, along with future rent. The Port District also alleges anticipatory
breach relating to removal of structures and debris from the San Diego facility
and seeks specific performance or reimbursement to the Port District. TDY has
various defenses to the allegations in the Port District's State Court
Cross-Complaint and denies that it has any obligation to the Port District.
In June 2003, the Port District also commenced a separate action in United
States District Court in San Diego against the Company ("Federal Court
Complaint"). The Federal Court Complaint alleges cost recovery and contribution
under CERCLA as well as state and common law claims related to alleged
environmental contamination on the property. The Complaint seeks an unspecified
amount of damages and a declaratory judgment as to TDY's liability for
contamination on the property. The Company filed a motion to dismiss portions of
the Complaint on the basis that the time period allowed for bringing state and
common law claims had elapsed and the allegations are therefore barred. Briefing
on the Motion to Dismiss was completed in July
20
2003 and a ruling will be made by the District Court. The Company denied
the remaining allegations in the Federal Court Complaint.
In another matter related to the San Diego facility, the Port District
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 referred the
issue of the property's RCRA permitting status to DTSC's Legal Office for
further consideration. TDY discussed this matter directly with DTSC's Legal
Office and DTSC agreed to refrain from taking action regarding this issue until
after completion of DTSC's Legal Office review. 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 Company conducted an environmental assessment of portions of the San
Diego facility at the request of the Regional Board. A report of the assessment
was submitted to the Regional Board and at this stage, the Company cannot
predict if any remediation will be necessary. The Company remediated in 1998 and
continues to monitor a lagoon near the San Diego facility. Also, the Company is
seeking approval from the San Diego Department of Public Health for the 1996
closure of four underground storage tanks at the San Diego facility. The Company
is evaluating potential claims it has against neighboring property owners and
other PRPs related to the environmental condition of the San Diego facility. The
Company has been informed by the Port District that it has commenced an
environmental investigation of the Property and that it will be removing, rather
than closing in place, all of the underground storage tanks.
An adverse resolution of the matters relating to the San Diego facility
could have a material adverse affect on the Company's results of operations and
financial condition.
TDY and another wholly-owned subsidiary of the Company, among others, have
been identified by the U.S. Environmental Protection Agency (EPA) as PRPs at the
Li Tungsten Superfund Site in Glen Cove, New York. The Company believes that
most of the contamination at the Site resulted from work done while the United
States government either owned or controlled operations at the Site, or from
processes done for various agencies of the United States, and that the United
States is liable for a substantial portion of the remediation costs at the Site.
In November 2000, TDY filed a cost recovery and contribution action against the
United States government. No trial date has been scheduled. In March 2003, the
Court ordered the parties, including the United States government, to fund a
portion of the remediation costs at the Site. The U.S. government advised the
Court in May 2003 that it had agreed to a settlement with EPA, the terms of
which were not disclosed. That settlement would preclude TDY's complaint from
proceeding. The Court has ordered a stay of discovery to allow the United States
and EPA to finalize the terms of settlement. At EPA's request, in May 2003, the
Company also made an offer of settlement to EPA, which was rejected by EPA
without any counter offer. Based on information presently available, the Company
believes its reserves on this matter are adequate. An adverse resolution of this
matter could have a material adverse effect on the Company's results of
operations and financial condition.
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 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 lawsuits, claims or proceedings may be determined adversely to the Company,
management does not believe that the disposition of
21
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Allegheny Technologies Incorporated is one of the largest and most
diversified producers of specialty materials in the world. Unless the context
requires otherwise, "we", "our" and "us" refer to Allegheny Technologies
Incorporated and its subsidiaries.
RESULTS OF OPERATIONS
We operate in the following three business segments, which accounted for
the following percentages of total external sales for the first six months of
2003 and 2002:
2003 2002
---- ----
Flat-Rolled Products 53% 55%
High Performance Metals 34% 33%
Industrial Products 13% 12%
For the first six months of 2003, operating profit improved to $17.4
million compared to $14.7 million for the same 2002 period, primarily due to our
cost reduction initiatives. Cost reductions, before the effects of inflation,
were $56 million through the six months ended June 30, 2003. Our cost reduction
goal for 2003 is $115 million. In our continuing effort to improve productivity
and align the size of our workforce with current business conditions, we
anticipate additional workforce reductions which could result in pre-tax
restructuring costs of between $6 million and $9 million in the second half of
2003. Sales decreased 1% to $970.4 million for the six months of 2003 compared
to $984.3 million for the same 2002 period.
Business conditions in most of our end-markets remained challenging. These
market conditions combined with higher pension, healthcare, and energy costs
resulted in the net loss before cumulative effect of a change in accounting
principle of $51.8 million, or a loss of $0.64 per diluted share, for the first
six months of 2003 compared to a net loss of $18.6 million, or a loss of $0.23
per diluted share, for the first six months of 2002. Pre-tax retirement benefit
expense was $68.2 million in the first six months of 2003, compared to $11.2
million in the comparable year ago period. Substantially all of this $57 million
increase in expense was non-cash. On a per share basis, retirement benefit
expense represented $0.54 per share of our $0.64 per share net loss, before the
cumulative effect of a change in accounting principle, for the six months ended
June 30, 2003. The increased retirement benefit expense was a result of the
severe decline in the equity markets over the prior three years combined with
the impact of lower expected returns on benefit plan investments and a lower
discount rate assumption on liabilities.
On January 1, 2003, we adopted Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). The
adoption of SFAS 143 resulted in an after-tax charge of $1.3 million or $0.02
per diluted share. This charge was reported as a cumulative effect of a change
in accounting in the 2003 first quarter.
22
Sales and operating profit (loss) for our three business segments are
discussed below.
FLAT-ROLLED PRODUCTS SEGMENT
Second quarter 2003 sales for the Flat-Rolled Products segment declined 6%
to $260.2 million, compared to the second quarter 2002, primarily due to
continued weakness in capital goods markets. Reduced demand, lower prices and
higher energy and raw materials costs more than offset lower depreciation
expense resulting in an operating loss of $6.1 million for the 2003 second
quarter, compared to an operating profit of $0.7 million in the comparable 2002
period. For the first six months of 2003, sales for the segment declined 4% to
$519 million and the operating loss was $7.1 million compared to a $0.3 million
profit in the same 2002 period.
As a result of higher natural gas and electricity prices, energy costs
increased by $4.6 million and $9.8 million for the quarter and six months ended
June 30, 2003, compared to the comparable 2002 periods, net of approximately
$1.5 million and $6 million, respectively, in gains from natural gas
derivatives. Results for the 2003 second quarter and first six months benefited
from $13.7 million and $28.7 million, respectively, in cost reductions, before
the effects of inflation and higher energy costs. In addition, results for the
June 30, 2003 quarter and year to date periods were favorably impacted by
approximately $4 million and $8 million, respectively, in lower depreciation
expense compared to the comparable prior year periods as a result of assets
becoming fully depreciated at the end of 2002.
For the second quarter of 2003, total shipments decreased 6% compared to
the same period of 2002. For the comparable periods, average transaction prices
to customers were basically flat due primarily to higher raw materials
surcharges; however, average base selling prices realized by the Company
declined by approximately 5%.
For the first six months of 2003, total product shipments were 4% lower
compared to the same 2002 period. For the comparable periods, average
transaction prices to customers increased 1% due primarily to higher raw
material surcharges; however, average base selling prices realized by the
Company declined by approximately 4%.
23
Comparative information on the segment's products is provided in the following
table (unaudited):
Three Months Ended
June 30,
--------------------- %
2003 2002 Change
--------- --------- ------
Volume (finished tons):
Commodity 87,337 92,483 (6)
High Value 33,217 36,007 (8)
--------- ---------
Total 120,554 128,490 (6)
Average prices (per finished ton):
Commodity $ 1,550 $ 1,541 1
High Value $ 3,708 $ 3,668 1
Combined Average $ 2,144 $ 2,141 -
Six Months Ended
June 30,
--------------------- %
2003 2002 Change
--------- --------- ------
Volume (finished tons):
Commodity 170,829 179,914 (5)
High Value 68,689 70,369 (2)
--------- ---------
Total 239,518 250,283 (4)
Average prices (per finished ton):
Commodity $ 1,557 $ 1,515 3
High Value $ 3,630 $ 3,713 (2)
Combined Average $ 2,151 $ 2,135 1
Flat-rolled commodity products include stainless steel hot roll and cold
roll sheet, stainless steel plate and silicon electrical steel, among other
products. Flat-rolled high value products include stainless steel strip,
Precision Rolled Strip(R) products, super stainless steel, nickel alloy and
titanium products.
HIGH PERFORMANCE METALS SEGMENT
Sales increased 8% to $166.8 million for the quarter ended June 30, 2003,
compared to the prior year's quarter, due to strong demand for premium exotic
alloys from government defense and high energy physics markets, partially offset
by reduced demand from the commercial aerospace and power generation markets.
Operating profit in the quarter improved to $11.6 million compared to $8.6
million in the year-ago period. Results for the 2003 second quarter benefited
from $11.2 million in cost reductions, before the effects of inflation.
Shipments of nickel-based and specialty steel products increased 12% and
shipments of titanium-based products decreased 12%. Average prices of
nickel-based and specialty steel products increased 2%, while average prices of
titanium-based products increased 4%, both due primarily to product mix.
Shipments of exotic alloys increased 14% and average prices were 17% higher.
Sales of $327.8 million for the first six months of 2003 were flat when
compared to the same period of 2002 while operating profit increased to $19.9
million compared to $12.9 million in the year-ago period, primarily due to cost
reductions and improved demand and pricing for exotic alloys. In addition,
operating results for the quarter and year-to date 2002 periods were adversely
affected by a labor strike at our Wah Chang operation, which was settled in
March 2002. Shipments of nickel-based and specialty steel products decreased 6%
and shipments of titanium-based products decreased 10%. Average prices of
nickel-based and specialty steel products increased 3%, while
24
average prices of titanium-based products increased 5%, both due primarily to
product mix. Shipments of exotic alloys increased 11% and average prices were
13% higher. Cost reductions, before the effects of inflation, were $21.0 million
in the segment for the six months ended June 30, 2003.
Backlog of confirmed orders within the segment declined to approximately
$279 million at June 30, 2003, 7% lower than at December 31, 2002. Backlog of
confirmed orders within the segment was approximately $277 million at June 30,
2002.
Certain comparative information on the segment's major products is provided
in the following table (unaudited):
Three Months Ended
June 30,
--------------------- %
2003 2002 Change
-------- --------- ------
Volume (000's pounds):
Nickel-based and specialty steel alloys 9,457 8,447 12
Titanium mill products 4,617 5,276 (12)
Exotic alloys 1,160 1,015 14
Average prices (per pound):
Nickel-based and specialty steel alloys $ 6.47 $ 6.32 2
Titanium mill products $ 11.16 $ 10.76 4
Exotic alloys $ 38.10 $ 32.45 17
Six Months Ended
June 30,
--------------------- %
2003 2002 Change
-------- --------- ------
Volume (000's pounds):
Nickel-based and specialty steel alloys 18,149 19,212 (6)
Titanium mill products 9,232 10,225 (10)
Exotic alloys 2,092 1,884 11
Average prices (per pound):
Nickel-based and specialty steel alloys $ 6.59 $ 6.40 3
Titanium mill products $ 12.00 $ 11.41 5
Exotic alloys $ 37.94 $ 33.64 13
INDUSTRIAL PRODUCTS SEGMENT
Sales increased 6% to $62.9 million resulting in an operating profit of
$3.1 million for the 2003 second quarter, compared to an operating profit of
$2.2 million for the same 2002 period. For the first six months of 2003, sales
increased 5% to $123.6 million resulting in an operating profit of $4.6 million,
compared to an operating profit of $1.5 million in the first six months of 2002.
The improvement in operating results benefited from continuing cost reduction
efforts, which totaled $2.2 million and $3.8 million, before the effects of
inflation, in the 2003 second quarter and first six months of 2003,
respectively. The segment also benefited from higher sales across all operations
in the segment for both the 2003 second quarter and first six months of 2003.
CORPORATE ITEMS
Corporate expenses increased to $5.3 million for the second quarter of 2003
compared to $4.5 million for the second quarter of 2002, but were essentially
25
flat for the first half of 2003 compared to 2002. Higher insurance costs in 2003
offset savings realized at the corporate office associated with reductions in
staffing and related costs. Net interest expense increased to $8.4 million for
the second quarter 2003 from $7.9 million in the same period last year. This
increase was primarily due to a pre-tax charge of $1.2 million to recognize the
unamortized fees associated with the former unsecured revolving credit facility,
which was replaced with a new senior secured revolving credit facility discussed
below.
The severe decline in the equity markets over the prior three years,
combined with lower expected returns on benefit plan investments and a lower
discount rate assumption for determining liabilities, resulted in a pre-tax
retirement benefit expense of $33.4 million in the second quarter 2003 compared
to $5.5 million in the second quarter 2002, and $68.2 million compared to $11.2
million for the first six months of 2003 and 2002, respectively. This increase
in retirement benefits expense resulted in a $27.9 million pre-tax, or $0.21 per
share after-tax, increase in the second quarter 2003 loss compared to the same
period of 2002. The increase in retirement benefits expense for the first six
months resulted in a $57 million pre-tax, or $0.45 per share after-tax increase
in the six months 2003 net loss. The increase in retirement benefit expense in
2003 negatively affected both cost of sales and selling and administrative
expenses in the 2003 second quarter and first six months of 2003 compared to the
same periods last year. For the second quarter ended June 30, 2003, retirement
benefit expense impacted cost of sales by $23.5 million and selling and
administrative expenses by $9.9 million. For the second quarter ended June 30,
2002, retirement benefit expense impacted cost of sales by $1 million and
selling and administrative expenses by $4.5 million. For the first six months
ended June 30, 2003, retirement benefit expense impacted cost of sales by $47.9
million and selling and administrative expenses by $20.3 million. For the first
six months ended June 30, 2002, retirement benefit expense impacted cost of
sales by $2.3 million and selling and administrative expenses by $8.9 million.
The majority of these retirement benefit expenses relate to our Allegheny Ludlum
operation. For the 2003 second quarter and first six months 2003, approximately
$25 million and $53 million, respectively, of the retirement benefit expense was
non-cash. Based upon the final actuarial study for 2003, retirement benefit
expenses for the 2003 full year are expected to be $134 million compared to $21
million for 2002.
We are not required to make cash contributions to the defined benefit
pension plan for 2003 and, based upon current actuarial studies, we do not
expect to be required to make cash contributions to the defined benefit pension
plan for the next several years.
INCOME TAX BENEFIT AND DEFERRED INCOME TAXES
Our effective tax rate was a benefit of 36.3% and 35.9% for the 2003 second
quarter and first six months 2003, respectively, compared to a benefit of 28.6%
and 34.7% for the same periods in 2002. These income tax benefits in 2003 are
expected to be realized primarily by reductions of future tax obligations. We
received federal income tax refunds of $48.5 million in 2003 and $45.6 million
in 2002, almost entirely in the first quarter in both years. Under current tax
laws we are limited in our ability to carry-back any current year or future year
tax losses to prior periods to obtain cash refunds of taxes paid during those
periods. Current year tax losses, if any, can be carried forward for up to 20
years and applied against taxes owed in those future years.
Deferred income taxes result from temporary differences in the recognition
of income and expense for financial and income tax reporting purposes, or
differences between the fair value of assets acquired in business combinations
accounted for as purchases for financial reporting purposes and their
corresponding tax bases. Deferred income taxes represent future tax benefits
(assets) or costs (liabilities) to be recognized when those temporary
differences reverse. We evaluate on a quarterly basis whether, based on all
26
available evidence, we believe that our deferred income tax assets will be
realizable. If it were determined that all or a portion of the deferred income
tax assets are not realizable, a valuation allowance would be recognized as a
non-cash charge to the income tax provision with an offsetting reserve against
the deferred income tax asset. Such a valuation allowance, if required, would be
reversed or increased in future years if the estimated realizability of the
deferred income tax asset changed.
Additionally, if a valuation allowance for the net deferred tax asset was
established, and should we generate pre-tax losses in subsequent periods, a tax
benefit would not be recorded and the valuation allowance recorded would
increase. Under these circumstances the net loss recognized and net loss per
share for that period would be larger than a comparable period when a favorable
tax benefit was recorded. However, tax provisions or benefits would continue to
be recognized, as appropriate, on state and local taxes, and taxes related to
foreign jurisdictions.
At June 30, 2003, we had a net deferred income tax asset, net of deferred
income liabilities, of $132.8 million. This net deferred income tax asset is net
of valuation allowances for certain state tax benefits that are not currently
expected to be realized. A significant portion of this net deferred income tax
asset relates to postretirement employee benefit obligations, which have been
recognized for financial reporting purposes but are not deductible for income
tax reporting purposes until the benefits are paid. These benefits payments are
expected to occur over an extended period of years.
Future realization of deferred income tax assets ultimately depends upon
the existence of sufficient taxable income within the carryback, carryforward
period available under tax law. Determining if a valuation allowance is needed
involves judgment and the consideration of all available evidence, both positive
and negative, regarding historical operating results including recent years with
reported losses, the estimated timing of future reversals of existing taxable
temporary differences, estimated future taxable income exclusive of reversing
temporary differences and carryforwards, and potential tax planning strategies
which may be employed to prevent an operating loss or tax credit carryforward
from expiring unused. We continue to evaluate whether our deferred tax assets
are impaired given the recent operating losses, the current economic conditions
impacting most of our end markets, and other tax considerations. It is possible
that our evaluation, as proscribed by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" may indicate that a valuation
allowance is required for a portion or all of the $132.8 million net deferred
tax asset, even though a significant portion of the deferrals does not expire
for a number of years while other deferrals have indefinite lives. If a
valuation allowance were required at any point in time, it would result in a
non-cash additional tax expense. The charge would not affect our ability to
utilize the deferred tax asset in the future. In addition, a charge, if taken,
may be reversed in a future period based upon consideration of all available
evidence.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2003, as required, we adopted Statement of Financial
Accounting Standards 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,
are capitalized and amortized to expense over an asset's useful life using a
systematic and rational allocation method.
Our adoption of SFAS 143 resulted in recognizing a charge of $1.3 million,
net of income taxes of $0.7 million, or $0.02 per share, principally for asset
retirement obligations related to landfills in our Flat-Rolled Products segment.
This charge is reported in the statement of operations for the six months ended
June 30, 2003 as a cumulative effect of a change in accounting principle. The
pro forma effects of the application of SFAS 143 as if the Statement had been
adopted on January 1, 2002 were not material.
27
FINANCIAL CONDITION AND LIQUIDITY
CASH FLOW AND WORKING CAPITAL
During the first six months ended June 30, 2003, cash generated from
operations was $17.1 million, which included Federal income tax refunds for the
2002 tax year of $48.5 million, which more than offset a $45 increase in managed
working capital. The increase in managed working capital was primarily due to a
$40 million increase in accounts receivable resulting from a higher level of
sales in the second quarter of 2003 compared to the fourth quarter of 2002, and
a $24 million increase in inventory as a result of higher raw material costs,
partially offset by a $19 million increase in accounts payable. Capital
expenditures of $28.8 million and dividend payments of $9.7 million were offset
by $15.3 million in proceeds from terminating some of our interest rate swap
contracts, and $6.7 million in proceeds from sales of non-strategic real estate
assets. At June 30, 2003, cash and cash equivalents totaled $66.2 million.
Cash and cash equivalents declined $45.2 million in the second quarter of
2003 compared to the first quarter of 2003. This decrease in cash resulted
primarily from an increase in managed working capital of $32 million mainly due
to higher accounts receivable due to increased sales, and higher inventory due
to raw material cost increases, partially offset by higher accounts payable.
Other cash uses in the 2003 second quarter included semi-annual interest
payments of approximately $16 million, $4 million in costs associated with the
new secured credit facility, and a one-time payment of $5 million concluding the
profit sharing dispute for prior years with the United Steelworkers of America.
In building the liquidity of the Company, we focus on controlling managed
working capital, which we define as accounts receivable and inventories less
accounts payable. We exclude the effects of LIFO inventory and other valuation
reserves. At June 30, 2003, managed working capital was 32% of annualized sales
compared to 34% of annualized sales at December 31, 2002. During the first six
months of 2003, managed working capital increased by $45 million, to $633
million.
28
The components of managed working capital were as follows:
June 30, December 31,
(Unaudited, in millions) 2003 2002(a) Change
--------- ------------ ---------
Accounts receivable, net $ 274.8 $ 239.3
Inventories, net 416.6 409.0
Accounts payable (175.1) (171.3)
--------- ---------
Subtotal 516.3 477.0
Allowance for doubtful accounts 9.3 10.1
LIFO reserves 87.0 74.7
Corporate and other 20.4 26.2
--------- ---------
Managed working capital $ 633.0 $ 588.0 $ 45.0
========= ========= =========
Annualized prior 2 months sales $ 1,953.0 $ 1,741.0
========= =========
Managed working capital as a
% of annualized sales 32% 34%
June 30, March 31,
(Unaudited, in millions) 2003 2003(a) Change
--------- --------- ---------
Accounts receivable, net $ 274.8 $ 260.4
Inventories, net 416.6 412.0
Accounts payable (175.1) (178.1)
--------- ---------
Subtotal 516.3 494.3
Allowance for doubtful accounts 9.3 10.3
LIFO reserves 87.0 77.7
Corporate and other 20.4 18.7
--------- ---------
Managed working capital $ 633.0 $ 601.0 $ 32.0
========= ========= =========
Annualized prior 2 months sales $ 1,953.0 $ 1,992.0
========= =========
Managed working capital as a
% of annualized sales 32% 30%
(a) Certain amounts from prior periods have been reclassified to
conform with the current presentation.
CAPITAL EXPENDITURES
Capital expenditures for 2003 are expected to be approximately $70 million,
of which $28.8 million had been expended in the 2003 first six months. Capital
expenditures primarily relate to the upgrade of our Flat-Rolled Products melt
shop located in Brackenridge, PA and investments to enhance the capabilities of
our High Performance Metals long products rolling mill facility located in
Richburg, SC.
DIVIDENDS
On June 10, 2003, a regular quarterly dividend of $0.06 per share of common
stock was paid to stockholders of record at the close of business on May 27,
2003. On August 1, 2003, the Board of Directors declared a regular quarterly
dividend of $0.06 per share of common stock. The dividend will be paid on
September 9, 2003 to stockholders of record at the close of business on August
25, 2003. The payment of dividends and the amount of such dividends depends upon
matters deemed relevant by our Board of Directors, such as our results of
operations, financial condition, cash requirements, future prospects, any
29
limitations imposed by law, credit agreements or senior securities, and other
factors deemed relevant and appropriate.
DEBT
At June 30, 2003, we had $530.7 million in total outstanding debt, compared
to $519.1 million at December 31, 2002. The increase in debt was primarily due
to $9.2 million of additional debt for project financing related to enhancements
to the Richburg, SC long products rolling mill facility. We anticipate funding a
total of approximately $17 million in 2003 with this project financing, which
will be ratably repaid over a five year period commencing in early 2004.
During the 2003 second quarter, we entered into a $325 million four-year
senior secured domestic revolving credit facility ("the secured credit facility"
or "the facility"). The facility, which replaced a $250 million unsecured
facility, is secured by all accounts receivable and inventory of our U.S.
operations, and includes capacity for up to $150 million in letters of credit.
There have been no borrowings made under either the secured credit facility or
the former unsecured credit facility since the beginning of 2002. Outstanding
letters of credit issued under the secured credit facility were approximately
$50 million at June 30, 2003.
The secured credit facility limits capital expenditures, investments and
acquisitions of businesses, new indebtedness, asset divestitures, payment of
dividends, and common stock repurchases which we may incur or undertake during
the term of the facility without obtaining permission of the lending group. In
addition, the secured credit facility contains a financial covenant, which is
not measured unless our undrawn availability under the facility is less than
$150 million. This financial covenant, when measured, requires us to maintain a
ratio of consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") to fixed charges of at least 1.0 to 1.0. EBITDA is
adjusted for non-cash items such as income/loss on investments accounted for
under the equity method of accounting, non-cash pension expense/income, and that
portion of retire medical and life insurance expenses paid from the our VEBA
trust. EBITDA is reduced by capital expenditures and cash taxes paid, and
increased for cash tax refunds. Fixed charges include gross interest expense,
dividends paid and scheduled debt payments. At June 30, 2003, our undrawn
availability under the facility, which is calculated including outstanding
letters of credit and domestic cash on hand, was $315 million.
Borrowings under the secured credit facility bear interest at our option at
either: (1) the one-, two-, three- or six- month LIBOR rate plus a margin
ranging from 2.25% to 3.00% depending upon the level of borrowings; or (2) a
base rate announced from time-to-time by the lending group (i.e. the Prime
lending rate) plus a margin ranging from 0% to 0.75% depending upon the level of
borrowings. In addition, the secured credit facility contains a facility fee of
0.25% to 0.50% depending on the level of undrawn availability. The facility also
contains fees for issuing letters of credit of 0.125% per annum and annualized
fees ranging from 2.25% to 3.00% depending on the level of undrawn availability
under the facility. Our overall borrowing costs under the secured credit
facility are not affected by changes in our credit ratings. Due to the higher
fees associated with the secured facility, we expect our annual facility fees
excluding interest expense, will increase approximately $3 million.
In June 2003, Standard & Poor's Rating Services ("S&P") lowered its
corporate credit rating on us to BB+ from BBB and lowered our senior unsecured
debt rating to BB from BBB. At the same time, S&P assigned a stable outlook. In
June 2003, Moody's Investor Service lowered its senior implied rating on us to
Ba3 from Baa3, lowered the senior unsecured debt rating on Allegheny Ludlum
Corporation's 6.95% bonds to Ba3 from Baa3, and lowered the senior unsecured
debt rating of the our 8.375% notes to B2 from Baa3. At the same time, Moody's
assigned a stable outlook.
30
Interest rate swap contracts are used from time-to-time to manage our
exposure to interest rate risks. At the end of the 2002 first quarter, we
entered into interest rate swap contracts with respect to a $150 million
notional amount related to our $300 million, 8.375% ten-year Notes, due December
15, 2011, which involved the receipt of fixed rate amounts in exchange for
floating rate interest payments over the life of the contracts without an
exchange of the underlying principal amount. These contracts were designated as
fair value hedges. As a result, changes in the fair value of the swap contracts
and the underlying fixed rate debt are recognized in the statement of
operations. During the first six months of 2003, we terminated the majority of
these interest rate swap contracts and received $15.3 million in cash. The $15.3
million gain on settlement remains a component of the reported balance of the
Notes, and will be ratably recognized as a reduction to interest expense over
the remaining life of the Notes, which is approximately 8.5 years.
In the 2003 first quarter, we entered into new "receive fixed, pay
floating" interest rate swap arrangements related to the 8.375% ten-year Notes
which re-established, in total, a $125 million notional amount which effectively
converted this portion of the Notes to variable rate debt. Including accretion
of the gain on termination of the swap contracts described above, the result of
the "receive fixed, pay floating" arrangements was a decrease in interest
expense of $3.4 million for the six months ended June 30, 2003, compared to the
fixed interest expense of the Notes that would otherwise have been realized. At
June 30, 2003, the adjustment of these swap contracts to fair market value
resulted in the recognition of an asset of $7.1 million on the balance sheet,
included in other assets, with an offsetting increase in long-term debt.
We believe that internally generated funds, current cash on hand and
capacity provided from our secured credit facility will be adequate to meet our
foreseeable liquidity needs. We have not borrowed funds under our domestic
secured or unsecured credit facilities during 2003 or during all of 2002, and at
this time we do not expect to draw on the secured credit facility for the
remainder of 2003. Our ability to borrow under the secured credit facility in
the future could be negatively affected if we fail to maintain the required
covenants under the agreement governing the facility.
CRITICAL ACCOUNTING POLICIES
RETIREMENT BENEFITS
We have defined benefit pension plans and defined contribution plans
covering substantially all of our employees. We have not made contributions to
the defined benefit pension plan in the past several years. We are not required
to make a contribution to the defined benefit pension plan for 2003, and, based
upon current actuarial analyses and forecasts, we do not expect to be required
to make cash contributions to the defined benefit pension plan for at least the
next several years.
We account for our defined benefit pension plans in accordance with SFAS
87, which requires that amounts recognized in financial statements be determined
on an actuarial basis, rather than as contributions are made to the plan. A
significant element in determining our pension (expense) income in accordance
with SFAS 87 is the expected investment return on plan assets. In establishing
the expected return on plan investments, which is reviewed annually in the
fourth quarter, we take into consideration types of securities the plan
investments are invested in, how those investments have performed historically,
and expectations for how those investments will perform in the future. For 2003,
in light of the declines in the equity markets over the past several years,
which comprise a significant portion of our pension plan investments, we have
lowered our expected return on pension plan investments to 8.75%, from a 9%
expected return on pension plan investments which was used in 2002. This assumed
rate is applied to the market value of plan assets at
31
the end of the previous year. This produces the expected return on plan assets
that is included in annual pension (expense) income for the current year. The
effect of lowering the expected return on pension plan investments will result
in an increase in annual pension expense of approximately $4 million for 2003.
The cumulative difference between this expected return and the actual return on
plan assets is deferred and amortized into pension income or expense over future
periods. The expected return on plan assets can vary significantly from
year-to-year since the calculation is dependent on the market value of plan
assets as of the end of the preceding year. Accounting principles generally
accepted in the United States allow companies to calculate the expected return
on pension assets using either an average of fair market values of pension
assets over a period not to exceed five years, which reduces the volatility in
reported pension income or expense, or their fair market value at the end of the
previous year. However, the Securities and Exchange Commission currently does
not permit companies to change from the fair market value at the end of the
previous year methodology, which is the methodology that we use, to an averaging
of fair market values of plan assets methodology. As a result, our results of
operations and those of other companies, including companies with which we
compete, may not be comparable due to these different methodologies in
calculating the expected return on pension investments. If the five year average
of the fair market values of plan assets had been used to calculate retirement
benefit costs, we estimate that retirement benefit expense for the first six
months of 2003 would been approximately $50 million less than the $68 million
expense recognized using the fair market value approach.
At the end of November of each year, we determine the discount rate to be
used to value pension plan liabilities. In accordance with SFAS 87, the discount
rate reflects the current rate at which the pension liabilities could be
effectively settled. In estimating this rate, we assess the rates of return on
high quality, fixed-income investments. Based on the Moody's average Aa
corporate bond yield at the end of November 2002, we established a discount rate
of 6.75% for valuing the pension liabilities as of the end of 2002, and for
determining the pension expense for 2003. We had previously assumed a discount
rate of 7% for 2001, which determined the 2002 expense. The effect of lowering
the discount rate increased pension liabilities by approximately $47 million and
annual pension expense by approximately $4 million for 2003. The effect on
pension liabilities for changes to the discount rate, as well as the net effect
of other changes in actuarial assumptions and experience, are deferred and
amortized over future periods in accordance with SFAS 87.
Accounting standards require a minimum pension liability be recorded when
the value of pension assets is less than the accumulated benefit obligation
("ABO") at the annual measurement date. As of November 30, 2002, our last
measurement date for pension accounting, the value of the ABO exceeded the value
of pension investments by approximately $192 million as a result of a severe
decline in the equity markets in 2000, 2001 and 2002, higher benefit liabilities
from long-term labor contracts negotiated in 2001, and a lower assumed discount
rate for valuing the pension liabilities. As a result, in the 2002 fourth
quarter, we recorded a non-cash charge against stockholders' equity of $406
million, net of deferred taxes, to write off our prepaid pension cost
representing the overfunded portion of the pension plan, and to record a
deferred pension asset of $165 million for the unamortized prior service cost
relating to prior benefit enhancements. In accordance with accounting standards,
the charge against stockholders' equity will be adjusted in the fourth quarter
of subsequent years to reflect the value of pension assets compared to the ABO
as of the end of November. If the level of pension assets exceeded the ABO as of
the measurement date, the full charge against stockholders' equity would be
reversed. If the level of pension assets remained below the ABO, the minimum
pension liability and the charge against stockholders' equity would be adjusted
to reflect the relative values as of the measurement date. The fair market value
of assets as of June 30, 2003 was approximately $1.67 billion.
We also sponsor several defined benefit postretirement plans covering
certain hourly and salaried employees and retirees. These plans provide health
32
care and life insurance benefits for eligible employees. In certain plans,
contributions towards premiums are capped based upon the cost as of a certain
date, thereby creating a defined contribution. We account for these benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"), which requires that amounts recognized in
financial statements be determined on an actuarial basis, rather than as
benefits are paid. We use actuarial assumptions, including the discount rate and
the expected trend in health care costs, to estimate the costs and benefits
obligations for the plans. The discount rate, which is determined annually at
the end of each year, is developed based upon rates of return on high quality,
fixed-income investments. At December 31, 2002, we determined this rate to be
6.75%. In prior years, a 7% discount rate was used. The effect of lowering the
discount rate increased 2003 postretirement benefit liabilities by approximately
$11 million and expenses by approximately $2 million. Based upon cost increases
quoted by our medical care providers and predictions of continued significant
medical cost inflation in future years, the annual assumed rate of increase in
the per capita cost of covered benefits for health care plans is estimated at
10.3% in 2003 and is assumed to gradually decrease to 5.0% in the year 2009 and
remain level thereafter. Certain of these benefits are funded using plan
investments held in a VEBA trust. The expected return on plan investments is a
significant element in determining postretirement benefits expenses in
accordance with SFAS 106. In establishing the expected return on plan
investments, which is reviewed annually in the fourth quarter, we take into
consideration the types of securities the plan investments are invested in, how
those investments have performed historically, and expectations for how those
investments will perform in the future. For 2003, as a result of a reduction in
the percentage of our private equity investments, we lowered our expected return
on investments held in the VEBA trust to 9%. A 15% return on investments was
assumed in prior years. This assumed long-term rate of return on investments is
applied to the market value of plan investments at the end of the previous year.
This produces the expected return on plan investments that is included in annual
postretirement benefits expenses for the current year. The effect of lowering
the expected return on plan investments will result in an increase in annual
postretirement benefits expense of approximately $7 million for 2003.
Changes in the equity markets may have a significant impact on retirement
benefit expenses that would be recognized in future years. For example, based
upon the expected composition of pension plan investments, for each $100 million
change in the value of pension assets, retirement benefit expense would change
by approximately $19 million, pre-tax, in the year subsequent to the measurement
date.
ASSET IMPAIRMENT
We monitor the recoverability of the carrying value of our long-lived
assets. An impairment charge is recognized when the expected net undiscounted
future cash flows from an asset's use (including any proceeds from disposition)
are less than the asset's carrying value, and the asset's carrying value exceeds
its fair value.
Goodwill and indefinite-lived intangible assets are reviewed annually for
impairment, or more frequently if impairment indicators arise. We perform this
annual impairment test in the fourth quarter of each fiscal year. The goodwill
impairment test requires a comparison of the fair value of each reporting unit
that has goodwill associated with its operations with its carrying amount,
including goodwill. If this comparison 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.
33
Our evaluation of goodwill includes estimating the fair market value of
each of the reporting units which have goodwill associated with their operations
using discounted cash flow and multiples of cash earnings valuation techniques,
plus valuation comparisons to recent public sale transactions of similar
businesses, if any. These valuation methods require us to make estimates and
assumptions regarding future cash flows, profitability, and the cost of capital.
Although we believe that the estimates and assumptions that we use are
reasonable, actual results could differ from those estimates and assumptions.
OTHER
A summary of other significant accounting policies is discussed in Note 1
in our Annual Report on Form 10-K for the year ended December 31, 2002.
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
judgments, estimates and assumptions regarding uncertainties that affect the
reported amounts of assets and liabilities. Significant areas of uncertainty
that require judgments, estimates and assumptions include the accounting for
derivatives, retirement plans, income taxes, environmental and other
contingencies as well as asset impairment, inventory valuation and
collectibility of accounts receivable. We use historical and other information
that we consider to be relevant to make these judgments and estimates. However,
actual results may differ from those estimates and assumptions that are used to
prepare our financial statements.
OTHER MATTERS
Management
On July 10, 2003, our Board of Directors selected L. Patrick Hassey to
become president and chief executive officer, effective October 1, 2003. Mr.
Hassey, a former executive at Alcoa, Inc. has been named to succeed James L.
Murdy, age 65, who is retiring effective September 30, 2003. Mr. Hassey was also
elected to our Board of Directors, effective July 10, 2003.
Board of Directors
On May 28, 2003, we announced that Brian P. Simmons resigned from our Board
of Directors.
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 have 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 change prices on certain of our products from time-to-time. The ability
to implement price increases is dependent on market conditions, economic
factors, raw material costs and availability, competitive factors, operating
costs and other factors, some of which are beyond our control. The benefits of
price increases may be delayed due to long manufacturing lead times and the
terms of existing contracts.
34
We maintain various types of insurance coverages. Insurance programs are
largely annual policies that are renewed each year. Due to a number of factors
outside our control, many of these insurance policies have increased in cost
while certain coverages have decreased.
Energy resources markets are subject to conditions that create uncertainty
in the prices and availability of energy resources. We rely upon third parties
for our supply of energy resources consumed in the manufacture of products. The
prices for and availability of electricity, natural gas, oil and other energy
resources are subject to volatile market conditions. These market conditions
often are affected by political and economic factors beyond our control.
Disruptions in the supply of energy resources could temporarily impair the
ability to manufacture products for customers. Further, increases in energy
costs, or changes in costs relative to energy costs paid by competitors, have
and may continue to adversely affect our profitability. To the extent that these
uncertainties cause suppliers and customers to be more cost sensitive, increased
energy prices may have an adverse effect on our results of operations and
financial condition. We use approximately 10 to 12 million MMBtu's of natural
gas annually, depending upon business conditions, in the manufacture of our
products. These purchases of natural gas expose us to a risk of higher gas
prices. For example, a hypothetical $1.00 per MMBtu increase in the price of
natural gas would result in increased annual energy costs of approximately $10
to $12 million.
As part of our risk management strategy, from time-to-time, we purchase
swap contracts to manage exposure to changes in natural gas costs. The 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.
Labor Matters
We have nearly 9,600 employees. A portion of our workforce is represented
under various collective bargaining agreements, principally with the United
Steelworkers of America ("USWA"), including: approximately 3,300 Allegheny
Ludlum production, and maintenance employees covered by collective bargaining
agreements between Allegheny Ludlum and the USWA, which are effective through
June 2007; approximately 165 Oremet employees covered by a collective bargaining
agreement with the USWA which is effective through June 2007; and approximately
600 Wah Chang employees covered by a collective bargaining agreement with the
USWA which continues through March 2008. Negotiations are ongoing for a new
collective bargaining agreement with the USWA affecting approximately 140 full
and part-time employees at various Allegheny Ludlum facilities in Western
Pennsylvania. Also, negotiations have begun for a new collective bargaining
agreement with the USWA affecting approximately 100 employees at the Casting
Service facility in LaPorte, IN. During the 2003 second quarter, we requested
the reopening of labor agreements with the USWA pertaining to the Allegheny
Ludlum and Oremet operations. Discussions with the USWA on this matter are
ongoing.
Generally, agreements that expire may be terminated after notice by the
union. After termination, the union 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
unions to replace those that expire, or in modifying existing agreements where
we have requested a reopening of an agreement.
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, which may require that we
35
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, as well as 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 at a
number of our current and former sites as well as third party sites under these
laws.
With respect to proceedings brought under the Federal Superfund laws, or
similar state statutes, we have been identified as a PRP 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. At June 30, 2003, we had
adequate reserves for these matters.
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. In February 2002, the Court
issued a decision imposing a penalty of $8.2 million for incidents at five
facilities that occurred over a period of approximately six years, which
Allegheny Ludlum had reported to the appropriate environmental agencies. We
asked the Court to reconsider its decision, which the Court denied in October
2002. We appealed the Court's decision. At June 30, 2003, we had adequate
reserves, including accrued interest, for this matter.
TDY and the San Diego Unified Port District ("Port District") entered into
a lease of property located in San Diego, California ("San Diego facility") on
October 1, 1984. TDY operated its Teledyne Ryan Aeronautical division ("Ryan")
at the San Diego facility 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 with the approval of the Port
District until early 2001. TDY also entered into three separate sublease
arrangements for portions of the property subject to the approval of the Port
District, which the Port District refused. After its administrative appeal to
the Port District was denied, TDY brought a lawsuit against the Port District.
The complaint, filed in December 2001 in state court in San Diego, alleges
breach of contract, inverse condemnation, tortious interference with a
prospective economic advantage and other causes of action relating to the Port
District's failure to consent to subleases of the space. The Complaint seeks at
least $4 million for damages from the Port District and declaratory relief. The
trial for this matter is scheduled for October 2003.
Despite the Port District's failure to consent to the three subleases, TDY
continued its marketing efforts to sublease the San Diego facility. At June 30,
2003, we had a reserve of approximately $3.7 million to cover the costs of
decommissioning the San Diego facility. TDY and the Port District discussed
resolution of this matter but did not reach any agreement even after
court-sponsored mediation. In June 2002 TDY ceased paying rent on the grounds
that the Port District had rescinded the Lease when it refused to allow TDY to
sublease the property and that the Port District's condemnation of the property
voided the lease. In September 2002, the Port District demanded that rent be
paid or possession of the property be returned to the Port District. TDY
returned possession to the Port District on October 31, 2002 and denied that any
remaining amounts were due under the lease.
The Port District filed a cross-complaint against TDY in March 2003. The
Complaint alleges breach of contract for failure to pay rent and for certain
36
environmental contamination on the property. In June 2003, the Port District
amended the cross-complaint and eliminated the allegations relating to
environmental contamination. The Port District seeks $1.2 million in past rent.
The Port District also alleges anticipatory breach relating to removal of
structures and debris from the San Diego facility and seeks specific performance
or reimbursement to the Port District. TDY has various defenses to the
allegations in the Port District's State Court Cross-Complaint and denies that
it has any obligation to the Port District.
In June 2003, the Port District also commenced a separate action in United
States District Court in San Diego against the Company ("Federal Court
Complaint"). The Federal Court Complaint alleges cost recovery and contribution
under CERCLA as well as state and common law claims related to alleged
environmental contamination on the property. The Complaint seeks an unspecified
amount of damages and a declaratory judgment as to TDY's liability for
contamination on the property. We filed a motion to dismiss portions of the
Complaint on the basis that the time period allowed for bringing state and
common law claims had elapsed and the allegations are therefore barred. Briefing
on the Motion to Dismiss will be completed in July 2003 and a ruling will be
made by the District Court. We denied the remaining allegations in the Federal
Court Complaint.
In another matter related to the San Diego facility, the Port District
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 referred the
issue of the property's RCRA permitting status to DTSC's Legal Office for
further consideration. TDY discussed this matter directly with DTSC's Legal
Office and DTSC agreed to refrain from taking action regarding this issue until
after completion of DTSC's Legal Office review. 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.
We conducted an environmental assessment of portions of the San Diego
facility at the request of the Regional Board. A report of the assessment was
submitted to the Regional Board and at this stage of the assessment, we cannot
predict if any remediation will be necessary. We remediated in 1998 and continue
to monitor a lagoon near the San Diego facility. Also, we are seeking approval
from the San Diego Department of Public Health for the 1996 closure of four
underground storage tanks at the San Diego facility. We are evaluating potential
claims we have against neighboring property owners and other PRPs related to the
environmental condition of the San Diego facility. We have been informed by the
Port District that it has commenced an environmental investigation of the
Property and that it will be removing, rather than closing in place, all of the
underground storage tanks.
An adverse resolution of the matters relating to the San Diego facility
could have a material adverse affect on our results of operations and financial
condition.
TDY and another wholly-owned subsidiary of the Company, among others, have
been identified by the U.S. Environmental Protection Agency (EPA) as PRPs at the
Li Tungsten Superfund Site in Glen Cove, New York. We believe that most of the
contamination at the Site resulted from work done while the United States
government either owned or controlled operations at the Site, or from processes
done for various agencies of the United States, and that the United States is
liable for a substantial portion of the remediation costs at the Site. In
November 2000, TDY filed a cost recovery and contribution action against the
United States government. No trial date has been scheduled. In March 2003, the
Court ordered the parties, including the United States government, to fund a
portion of the remediation costs at the Site. The U.S.
37
government advised the Court in May 2003 that it had agreed to a settlement
with EPA, the terms of which were not disclosed. That settlement would preclude
TDY's complaint from proceeding. The Court has ordered a stay of discovery to
allow the United States and EPA to finalize the terms of settlement. At EPA's
request, in May 2003, the Company also made an offer of settlement to EPA, which
was rejected by EPA without any counter offer. Based on information presently
available, we believe our reserves on this matter are adequate. An adverse
resolution of this matter could have a material adverse effect on our results of
operations and financial condition.
At June 30, 2003, our reserves for environmental remediation obligations
totaled approximately $38.2 million, of which approximately $10.9 million were
included in other current liabilities. The reserve includes estimated probable
future costs of $14.0 million for federal Superfund and comparable state-managed
sites; $9.0 million for formerly owned or operated sites for which we have
remediation or indemnification obligations; $3.2 million for owned or controlled
sites at which our operations have been discontinued; and $12.0 million for
sites utilized by us in our ongoing operations. In some cases 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.
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.
The timing of expenditures depends on a number of factors that vary by
site, including the nature and extent of contamination, the number of
participating PRPs, 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 respect to which accruals have been made in up to thirty
years.
Based on currently available information, we do not believe that there is a
reasonable possibility that a loss exceeding the amount already accrued for any
of the environmental matters with which we are currently associated (either
individually or in the aggregate) will be an amount that would be material to a
decision to buy or sell our securities. Future developments, administrative
actions or liabilities relating to environmental matters, however, could have a
material adverse effect on our financial condition and results of operations.
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 statements in this report relate to future events and
expectations and, as such, constitute forward-looking statements.
Forward-looking statements include those containing such words as "anticipates,"
"believes," "estimates," "expects," "would," "should," "will," "will likely
result," "forecast," "outlook," "projects," and similar expressions. 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. Various of these factors are described
from time-to-time in our filings with the Securities and Exchange
38
Commission, including our Report on Form 10-K for the year ended December 31,
2002. 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 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.
As part of our risk management strategy, we purchase exchange-traded
futures contracts from time-to-time 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
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 natural gas costs, 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.
At June 30, 2003, we had aggregate consolidated indebtedness of
approximately $531 million, most of which bears interest at fixed rates. In a
period of declining interest rates, we face the risk of required interest
payments exceeding those based on the then current market rate. From
time-to-time, we enter into interest rate swap contracts to manage our exposure
to interest rate risks. At June 30, 2003, we had entered into "receive fixed,
pay floating" arrangements for $125 million related to our 8.375% ten-year
Notes, which effectively convert this portion of the Notes to variable rate
debt. These contracts are designated as fair value hedges.
As a result, changes in the fair value of the swap contracts and the
underlying fixed rate debt are recognized in the statement of operations.
Including accretion of the gain on termination of the swap contracts described
above, the result of the "receive fixed, pay floating" arrangements
39
was a decrease in interest expense of $3.4 million for the first six months of
2003 compared to the fixed interest expense of the Notes. At June 30, 2003, the
adjustment of these swap contracts to fair market value resulted in the
recognition of an asset of $7.1 million on the balance sheet, included in other
assets, with an offsetting increase in long-term debt.
We believe that adequate controls are in place to monitor these hedging
activities. 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.
We market our products to a diverse customer base, principally throughout
the United States. Trade credit is extended based upon evaluations of each
customer's ability to perform its obligations, which are updated periodically.
Sales of our products are dependent upon the economic condition of the markets
in which we serve. The continuing difficult and uncertain business environment
may affect our customer's creditworthiness and ability to pay their obligations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the
Company's disclosure controls and procedures as of June 30, 2003, and they
concluded that these controls and procedures are effective.
Changes in Internal Controls
There were no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to June 30, 2003.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2003 annual meeting of stockholders was held on May 8, 2003. Proxies
for the meeting were solicited by us pursuant to Regulation 14A under the
Securities Exchange Act of 1934. At that meeting, the four nominees for election
as directors named in the proxy statement for the meeting were elected, having
received the following number of votes:
NAME NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
---- ------------------- ------------------------
Diane C. Creel 68,161,812 6,339,313
C. Fred Fetterolf 68,142,247 6,358,878
James E. Rohr 69,147,397 5,353,728
Brian P. Simmons 72,493,455 2,007,670
In addition, the stockholders voted on a proposal to ratify the selection
of Ernst & Young LLP as independent auditors of the Company for the 2003 fiscal
year. The number of votes cast for the ratification was 71,386,620, the number
of votes cast against approval was 2,574,489 and the number of abstentions was
540,015. There were no broker no-votes in connection with the ratification of
the selection of Ernst & Young LLP.
40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Allegheny Technologies
Incorporated, as amended, (incorporated by reference to
Exhibit 3.1 to the Registrant's report on Form 10-K for the
year ended December 31, 1999 (File No. 1-12001)).
3.2 Amended and Restated Bylaws of Allegheny Technologies
Incorporated (incorporated by reference to Exhibit 3.2 to the
Registrant's report on Form 10-K for the year ended December
31, 1998 (File No. 1-12001)).
4.1 Revolving Credit and Security Agreement dated June 13, 2003
(incorporated by reference to Exhibit 99.1 to the Registrant's
current report on Form 8-K dated June 19, 2003 (File No.
1-12001)).
4.2 Indenture dated as of December 18, 2001 between Allegheny
Technologies Incorporated and The Bank of New York, as
trustee, relating to Allegheny Technologies Incorporated
8.375% Notes due 2011 (incorporated by reference to Exhibit
4.2 to the Registrant's Report on Form 10-K for the year ended
December 31, 2001 (File No. 1-12001)).
4.3 Form of 8.375% Notes due 2011 (included as part of Exhibit
4.2).
4.4 Indenture dated as of December 15, 1995 between Allegheny
Ludlum Corporation and The Chase Manhattan Bank (National
Association), as trustee (relating to Allegheny Ludlum
Corporation's 6.95% Debentures due 2025) (incorporated by
reference to Exhibit 4(a) to Allegheny Ludlum Corporation's
Report on Form 10-K for the year ended December 31, 1995 (File
No. 1-9498)), and First Supplemental Indenture by and among
Allegheny Technologies Incorporated, Allegheny Ludlum
Corporation and The Chase Manhattan Bank (National
Association), as Trustee, dated as of August 15, 1996
(incorporated by reference to Exhibit 4.1 to Registrant's
report on Form 8-K dated August 15, 1996 (File No. 1-12001)).
4.5 Rights Agreement dated March 12, 1998, including Certificate
of Designation for Series A Junior Participating Preferred
Stock as filed with the State of Delaware on March 13, 1998
(incorporated by reference to Exhibit 1 to the Registrant's
report on Form 8-K dated March 12, 1998 (File No. 1-12001)).
31.1 Section 302 Certification of the President and Chief Executive
Officer
31.2 Section 302 Certification of the Senior Vice President-Finance
and Chief Financial Officer
32 Section 906 Certification
41
(b) Current Reports on Form 8-K filed by the Company -
Date Nature of the Report
---- --------------------
July 23, 2003 Disclosure pursuant to Item 12 - Results of
Operations and Financial Condition, furnished
under Item 9 in accordance with interim
guidance in SEC Release No. 33-8216.
June 19, 2003 Disclosure that Registrant arranged for an
asset based Revolving Credit and Security
Agreement.
May 20, 2003 Disclosure pursuant to Regulation FD stating
intent to replace revolving credit facility
with asset-based financing.
42
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: August 8, 2003 By: /s/ Richard J. Harshman
-----------------------------------
Richard J. Harshman
Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
Date: August 8, 2003 By: /s/ Dale G. Reid
-----------------------------------
Dale G. Reid
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
43