-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VdKqwMhFwr/G+7gMKvkkePspNp/fwmNOdV1I366Ns/oCiUcoueEw8pGGTNHQZzPS plbRLEPCPjO1NHbREjnhDQ== 0000950128-00-000738.txt : 20000508 0000950128-00-000738.hdr.sgml : 20000508 ACCESSION NUMBER: 0000950128-00-000738 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHENY TECHNOLOGIES INC CENTRAL INDEX KEY: 0001018963 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 251792394 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12001 FILM NUMBER: 620438 BUSINESS ADDRESS: STREET 1: 1000 SIX PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4123942800 MAIL ADDRESS: STREET 1: 100 SIX PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHENY TELEDYNE INC DATE OF NAME CHANGE: 19960716 10-Q 1 ALLEGHENY TECHNOLOGIES FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to _____ Commission File Number 1-12001 ALLEGHENY TECHNOLOGIES INCORPORATED - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 25-1792394 - ---------------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 1000 Six PPG Place Pittsburgh, Pennsylvania 15222-5479 - ---------------------------------------- ---------------------- (Address of Principal Executive Offices) (Zip Code) (412) 394-2800 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- At April 28, 2000, Registrant had outstanding 83,204,001 shares of its Common Stock. 2 ALLEGHENY TECHNOLOGIES INCORPORATED SEC FORM 10-Q QUARTER ENDED MARCH 31, 2000 INDEX Page No. PART I. - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 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 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions except share and per share amounts)
March 31, December 31, 2000 1999 ---- ---- (Unaudited) ASSETS - ------ Cash and cash equivalents $ 53.2 $ 50.7 Accounts receivable 356.5 341.2 Inventories 556.4 558.3 Deferred income taxes 45.9 62.6 Prepaid expenses and other current assets 37.4 20.7 -------- -------- Total Current Assets 1,049.4 1,033.5 Property, plant and equipment 900.4 912.4 Prepaid pension cost 536.3 503.7 Cost in excess of net assets acquired 202.0 204.2 Other assets 84.8 96.8 -------- -------- Total Assets $2,772.9 $2,750.6 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Accounts payable $ 185.3 $ 172.9 Accrued liabilities 214.3 214.4 Short-term debt and current portion of long-term debt 46.1 152.7 -------- -------- Total Current Liabilities 445.7 540.0 Long-term debt 423.2 200.3 Accrued postretirement benefits 541.5 544.8 Other 274.0 265.3 -------- -------- Total Liabilities 1,684.4 1,550.4 -------- -------- STOCKHOLDERS' EQUITY: Preferred value, par value $0.10: authorized- 50,000,000 shares; issued-None -- -- Common stock, par value $0.10, authorized-500,000,000 shares; issued-98,951,490 shares at March 31, 2000 and December 31, 1999; outstanding-83,810,084 shares at March 31, 2000 and 90,368,196 shares at December 31, 1999 9.9 9.9 Additional paid-in capital 481.0 481.0 Retained earnings 1,016.4 994.5 Treasury stock: 15,141,406 shares at March 31, 2000 and 8,583,294 shares at December 31, 1999 (413.4) (288.7) Foreign currency translation losses (5.8) (3.7) Unrealized gains on securities 0.4 7.2 -------- -------- Total Stockholders' Equity 1,088.5 1,200.2 -------- -------- Total Liabilities and Stockholders' Equity $2,772.9 $2,750.6 ======== ========
The accompanying notes are an integral part of these statements. 3 4 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions except per share amounts) (Unaudited)
Three Months Ended March 31, -------------------------- 2000 1999 ------ ------ Sales $625.4 $585.5 Costs and expenses: Cost of sales 510.7 462.9 Selling and administrative expenses 51.0 51.8 Interest expense, net 6.9 9.0 ------ ------ 568.6 523.7 Earnings before other income 56.8 61.8 Other income 8.4 0.4 ------ ------ Income from continuing operations before income taxes 65.2 62.2 Provision for income taxes 23.9 21.8 ------ ------ Income from continuing operations 41.3 40.4 Income from discontinued operations, net of tax -- 20.2 ------ ------ Net income $ 41.3 $ 60.6 ====== ====== Basic net income per common share: Income from continuing operations $ 0.47 $ 0.41 Income from discontinued operations -- 0.21 ------ ------ Basic net income per common share $ 0.47 $ 0.62 ====== ====== Diluted net income per common share: Income from continuing operations $ 0.47 $ 0.41 Income from discontinued operations -- 0.21 ------ ------ Diluted net income per common share $ 0.47 $ 0.62 ====== ====== Dividends declared per common share $ 0.20 $ 0.32 ====== ======
The accompanying notes are an integral part of these statements. 4 5 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)
Three Months Ended March 31, ---------------------- 2000 1999 ------- ------ OPERATING ACTIVITIES: Net income $ 41.3 $ 60.6 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24.8 24.0 Deferred income taxes 15.8 6.6 Gains on sales of investments and businesses (10.5) (0.1) Income from discontinued operations, net of tax -- (20.2) Change in operating assets and liabilities: Prepaid pension cost (32.5) (25.3) Accounts receivable (15.3) (16.0) Accounts payable 12.4 (14.9) Inventories 1.9 29.8 Accrued income taxes -- 6.1 Other (8.1) 4.3 ------- ------ CASH PROVIDED BY OPERATING ACTIVITIES 29.8 54.9 INVESTING ACTIVITIES: Proceeds from the sales of investments and businesses 14.2 5.8 Purchases of property, plant and equipment (12.2) (19.6) Disposals of property, plant and equipment 1.7 0.5 Purchases of businesses and investment in ventures -- (1.1) Other (0.6) (1.5) ------- ------ CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3.1 (15.9) FINANCING ACTIVITIES: Net borrowings under credit agreements 115.6 15.1 Borrowings on long-term debt 2.4 -- Payments on long-term debt and capital leases (0.7) (1.0) ------- ------ Net increase in debt 117.3 14.1 Purchases of treasury stock (130.6) (52.2) Cash dividends (17.3) (31.1) Exercises of stock options 0.2 2.9 ------- ------ CASH USED IN FINANCING ACTIVITIES (30.4) (66.3) CASH PROVIDED BY DISCONTINUED OPERATIONS -- 9.3 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2.5 (18.0) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 50.7 74.2 ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53.2 $ 56.2 ======= ======
Cash provided by operating activities in 2000 is net of payment of taxes on gain on sale of investments of $3.8 million. Excluding this tax payment, cash provided by operating activities was $33.6 million. The accompanying notes are an integral part of these statements. 5 6 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries. Unless the context requires otherwise, "Allegheny Technologies" and the "Company" refer to Allegheny Technologies Incorporated and its subsidiaries. Certain amounts from 1999 have been reclassified to conform with the 2000 presentation, including classification of companies spun-off and sold as discontinued operations. At a stockholders' meeting held on November 11, 1999, the Company's stockholders approved a reduction in the authorized number of shares of the Company's common stock and a one-for-two reverse stock split of the common stock. The reverse stock split was effective immediately following the spin-offs of Teledyne Technologies Incorporated and Water Pik Technologies, Inc. on November 29, 1999. All references in the financial statements and notes to the number of shares and per share amounts, have been restated to reflect this reverse stock split. These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1999 Annual Report. The results of operations for these interim periods are not necessarily indicative of the operating results for a full year. Accounting Pronouncements Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement No. 133" was issued. This statement delays the effective date of FASB Statement No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company is presently evaluating the effect of adopting this statement. NOTE 2. DISCONTINUED OPERATIONS On January 19, 1999, the Company announced its plans to effect a major strategic transformation of the Company that included the sales of several of the Company's businesses and the spin-offs of certain businesses in two of the Company's former business segments into independent, publicly-traded companies (the "spin-offs"). Teledyne Technologies Incorporated ("Teledyne") is comprised of certain businesses in the Company's former Aerospace and 6 7 Electronics segment. Water Pik Technologies, Inc. ("Water Pik") is comprised of the Company's former Consumer segment. Prior to the spin-offs, the Company received a tax ruling from the Internal Revenue Service that the spin-offs would be tax-free to the Company and to the Company's stockholders. On November 29, 1999, the Company distributed all of the common stock of Teledyne and Water Pik to the Company's stockholders of record as of November 22, 1999. Stockholders of record received one share of Teledyne common stock for every seven shares of Allegheny Technologies common stock and one share of Water Pik common stock for every twenty shares of Allegheny Technologies common stock, based on the number of shares of Allegheny Technologies common stock they held prior to the reverse split. Immediately following the spin-offs, the Company effected a one-for-two reverse split of its common stock and changed its name from Allegheny Teledyne Incorporated to Allegheny Technologies Incorporated. In 1999, the Company sold its unmanned aerial vehicle and its pyrotechnic components and systems businesses, known as Ryan Aeronautical and McCormick Selph Ordnance Unit, respectively, as well as the pressure relief valve, vehicle control valve, nitrogen gas springs, consumer drinkware, construction and mining equipment and material handling businesses. The Company recognized extraordinary gains of $129.6 million, net of $79.9 million in taxes, in the 1999 third quarter in connection with the sales of these businesses. Discontinued operations include all companies that were spun-off or have been sold. Results of discontinued operations for the 1999 first quarter were as follows (in millions): Net sales $349.1 ====== Income before taxes 31.0 Provision for income taxes 10.8 ------ Income from discontinued operations $ 20.2 ======
7 8 NOTE 3. INVENTORIES Inventories were as follows (in millions):
March 31, December 31, 2000 1999 --------- ------------ Raw materials and supplies $ 105.0 $108.1 Work-in-process 470.8 437.8 Finished goods 104.7 113.1 ------- ------ Total inventories at current cost 680.5 659.0 Less allowances to reduce current cost values to LIFO basis (115.7) (95.0) Progress payments (8.4) (5.7) ------- ------ Total inventories $ 556.4 $558.3 ======= ======
NOTE 4. BUSINESS SEGMENTS Information on the Company's business segments was as follows (in millions):
Three Months Ended March 31, ------------------------ 2000 1999 ------ ------ Total sales: Flat-Rolled Products $380.6 $315.2 High Performance Metals 197.3 212.8 Industrial Products 71.9 78.3 ------ ------ 649.8 606.3 Intersegment sales: Flat-Rolled Products 6.6 4.6 High Performance Metals 17.8 16.2 ------ ------ 24.4 20.8 Sales to external customers: Flat-Rolled Products 374.0 310.6 High Performance Metals 179.5 196.6 Industrial Products 71.9 78.3 ------ ------ $625.4 $585.5 ====== ======
8 9
Three Months Ended March 31, ---------------------- 2000 1999 ------ ------ Operating Profit: Flat-Rolled Products $36.4 $33.7 High Performance Metals 14.3 25.7 Industrial Products 6.6 7.4 ----- ----- Total operating profit 57.3 66.8 Corporate expenses (8.3) (9.1) Interest expense, net (6.9) (9.0) Gains on asset sales and other 0.5 (1.4) Excess pension income 22.6 14.9 ----- ----- Income from continuing operations before income taxes $65.2 $62.2 ===== =====
Excess pension income represents the amount of pension income in excess of amounts allocated to business segments to offset pension and other postretirement benefit expenses. NOTE 5. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per common share (in millions, except per share amounts):
Three Months Ended March 31, ------------------------- 2000 1999 ----- ----- Numerator: Income from continuing operations $41.3 $40.4 Income from discontinued operations -- 20.2 ----- ----- Numerator for basic and diluted net income per common share - net income available to common stockholders $41.3 $60.6 ===== ===== Denominator: Weighted average shares 87.2 97.1 Contingent issuable stock 0.1 0.2 ----- ----- Denominator for basic net income per common share 87.3 97.3 Effect of dilutive securities: Employee stock options 0.1 0.5 ----- ----- Dilutive potential common shares 0.1 0.5 Denominator for diluted net income per common share - adjusted weighted average shares 87.4 97.8 ===== =====
9 10
Three Months Ended March 31, ------------------------- 2000 1999 ----- ----- Basic net income per common share: Income from continuing operations $0.47 $0.41 Income from discontinued operations -- 0.21 ----- ----- Basic net income per common share $0.47 $0.62 ===== ===== Diluted net income per common share: Income from continuing operations $0.47 $0.41 Income from discontinued operations -- 0.21 ----- ----- Diluted net income per common share $0.47 $0.62 ===== =====
NOTE 6. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, were as follows (in millions):
Three Months Ended March 31, ---------------------- 2000 1999 ------ ------ Net income $41.3 $60.6 Foreign currency translation losses (2.1) (0.2) Unrealized gains (losses) on securities: Unrealized holding gains arising during period 0.6 0.8 Less: realized gains included in net income 7.4 -- ----- ----- (6.8) 0.8 ----- ----- Comprehensive income $32.4 $61.2 ===== =====
NOTE 7. STOCKHOLDERS' EQUITY Allegheny Technologies paid a cash dividend of $0.20 per share of common stock in the 2000 first quarter and $0.32 per share in the 1999 first quarter. On October 1, 1998, the Company's Board of Directors authorized a stock repurchase program to acquire up to 10 million shares of Allegheny Technologies common stock. In December 1999, the Company's Board of Directors increased the number of shares authorized for purchase in the stock repurchase program by 10 million shares. The shares may be purchased from time-to-time in the open market or in negotiated transactions. In the first quarter 2000, the Company had repurchased 6.8 million shares for $130.6 million under this program. From the inception of the share repurchase program through April 28, 2000, the Company has repurchased 16.6 million shares at a cost of $452.1 million. 10 11 NOTE 8. COMMITMENTS AND CONTINGENCIES The Company is subject to various domestic and international environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws. Environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable. In many cases, however, investigations are not yet at a stage where the Company has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss, or certain components thereof. Estimates of the Company's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceed, it is likely that adjustments in the Company's accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company's results of operations in a given period, but the amounts, and the possible range of loss in excess of amounts accrued, are not reasonably estimable. Based on currently available information, however, management does not believe future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or results of operation. 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 operation of that period. In addition, there can be no assurance that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on the Company's financial condition or results of operations. At March 31, 2000, the Company's reserves for environmental remediation obligations totaled approximately $58.0 million, of which approximately $17.3 million was included in other current liabilities. The reserve includes estimated probable future costs of $22.8 million for federal Superfund and comparable state-managed sites; $4.1 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $18.2 million for owned or controlled sites at which Company operations have been discontinued; and $12.9 million for sites utilized by the Company in its ongoing operations. The Company is evaluating whether it may be able to recover a portion of future costs for environmental liabilities from third parties other than participating potentially responsible parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years, and will complete remediation of all sites for which it has identified remediation obligations in up to thirty years. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, principally related to the former operations of Teledyne, Inc., including claims based on business 11 12 practices and cost classifications and actions under the False Claims Act. Although such claims are generally resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. Given the limited extent of the Company's business with the U.S. Government, the Company believes that a suspension or debarment of the Company would not have a material adverse effect on the future operating results and consolidated financial condition of the Company. Although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. The Company learns from time to time that it has been named as a defendant in civil actions filed under seal pursuant to the False Claims Act, principally related to the former operations of Teledyne, Inc. Generally, since such cases are under seal, the Company does not in all cases possess sufficient information to determine whether the Company will sustain a material loss in connection with such cases, or to reasonably estimate the amount of any loss attributable to such cases. In the spin-offs of Teledyne and Water Pik, completed in November 1999, the new companies agreed to assume and to defend and hold the Company harmless against all liabilities (other than certain income tax liabilities) associated with the historical operations of their businesses, including all government contracting, environmental, product liability and other claims and demands, whenever any such claims or demands might arise or be made. If the new companies were unable or otherwise fail to satisfy these assumed liabilities, the Company could be required to satisfy them, which could have a material adverse effect on the Company's results of operations and financial condition. In connection with the spin-offs of Teledyne and Water Pik, the Company received a tax ruling from the Internal Revenue Service stating that the spin-offs will be tax-free to the Company and the Company's stockholders. While the tax ruling relating to the qualification of the spin-offs as tax-free distributions within the meaning of the Internal Revenue Code generally is binding on the Internal Revenue Service, the continuing validity of the tax ruling is subject to certain factual representations and uncertainties that, among other things, require the new companies to take or refrain from taking certain actions. If a spin-off were not to qualify as a tax-free distribution within the meaning of the Internal Revenue Code, the Company would recognize taxable gain generally equal to the amount by which the fair market value of the common stock distributed to the Company's stockholders in the spin-off exceeded the Company's basis in the new company's assets. In addition, the distribution of the new company's common stock to Company stockholders would generally be treated as taxable to the Company's stockholders in an amount equal to the fair market value of the common stock they received. If a spin-off qualified as a distribution within the meaning of the Internal Revenue Code but was disqualified as tax-free to the Company because of certain post-spin-off circumstances, the Company would recognize taxable gain as described in the preceding sentence, but the distribution of the new company's common stock to the Company's stockholders in the spin-off would generally be tax-free to each Company stockholder. In the spin-offs, the new companies executed tax sharing and indemnification agreements in 12 13 which each agreed to be responsible for any taxes imposed on and other amounts paid by the Company, its agents and representatives and its stockholders as a result of the failure of the spin-off to qualify as a tax-free distribution within the meaning of the Internal Revenue Code if the failure or disqualification is caused by post-spin-off actions by or with respect to that company or its stockholders. Potential liabilities under these agreements could exceed the respective new company's net worth by a substantial amount. If either or both of the spin-offs were not to qualify as tax-free distributions to the Company or its stockholders, and either or both of the new companies were unable or otherwise failed to satisfy the liabilities they assumed under the tax sharing and indemnification agreements, the Company could be required to satisfy them without full recourse against the new companies. This 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 product liability, patent infringement, commercial, employment, employee benefits, tax, and stockholder matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Allegheny Technologies is one of the largest and most diversified producers of specialty materials in the world. It operates in the following three business segments which accounted for the following percentages of total sales for the 2000 and 1999 first quarters:
2000 1999 ---- ---- Flat-Rolled Products 60% 53% High Performance Metals 29% 34% Industrial Products 11% 13%
For the first quarter 2000, operating profit was $57.3 million compared to $66.8 million for the same 1999 period. Sales increased 6.8 percent to $625.4 million for the first quarter 2000 compared to $585.5 million for the 1999 period. Income from continuing operations was $41.3 million, or $0.47 per diluted share, for the first quarter 2000, compared to $40.4 million, or $0.41 per diluted share, for the 1999 first quarter. Net income was $41.3 million, or $0.47 per diluted share, for the 2000 first quarter, compared to $60.6 million, or $0.62 per diluted share, for the same 1999 period. Net income in the first quarter 2000 was increased by $5.0 million, or $0.06 per share, which included a gain on the sale of a minority interest in Gul Technologies Singapore Ltd., partially offset by a charge for exiting the tungsten mill products business of Metalworking Products. Sales and operating profit for the Company's three business segments are discussed below. 13 14 FLAT-ROLLED PRODUCTS SEGMENT First quarter 2000 operating profit increased to $36.4 million from $33.7 million in the same year-ago period in spite of significantly higher raw materials costs. Sales increased 20.4 percent to $374.0 million compared to the prior year period. The improvement in sales and operating profit resulted from continued strong demand, combined with the impact of revised raw materials surcharge base levels and a series of price increases. The segment also benefited from ongoing cost reductions. The average price of flat-rolled products increased 13.4 percent in the quarter, to $2,297 per ton from $2,025 per ton in the first quarter 1999, due primarily to the impact of revised raw materials surcharge base levels and a series of price increases. Shipments of 162,800 tons increased 6.1 percent compared to the year-ago period of 153,400 tons shipped. HIGH PERFORMANCE METALS SEGMENT Operating profit decreased 44.4 percent to $14.3 million in the first quarter 2000 compared to $25.7 million in the same period in 1999. Sales decreased 8.7 percent to $179.5 million in the first quarter 2000 compared to the prior year period. The decline in sales and operating profit resulted from continued weak demand and pricing pressure in the aerospace market, primarily related to titanium products, and in the chemical processing market, for zirconium. Costs were also higher in the first quarter 2000 reflecting unfavorable quality and production issues and adjustments for slow-moving inventory in titanium and zirconium. These factors were partially offset by strong demand from the growing market for gas-fired electrical power generation turbines. Comparative information on the segment's major products is provided in the following table:
Three Months Ended March 31, -------------------------- 2000 1999 ------ ------ Volume (000's pounds): Nickel-based and specialty steel alloys 12,223 11,921 Titanium mill products 6,109 5,941 Zirconium and related alloys 930 1,258 Average prices (per pound): Nickel-based and specialty steel alloys $ 5.71 $ 6.11 Titanium mill products $10.98 $12.76 Zirconium and related alloys $30.61 $26.89
INDUSTRIAL PRODUCTS SEGMENT Operating profit for the first quarter 2000 decreased 10.8 percent to $6.6 million from $7.4 million in the same period of 1999. Sales decreased 8.2 percent to $71.9 million compared to the prior year period. Sales and operating profit at Metalworking Products, the largest company in the segment, improved compared to the fourth quarter of 1999 due to stronger industrial demand and cost savings, including previously announced workforce reductions of nearly 14 percent. Compared to the same period last year, first quarter 2000 financial performance at Portland Forge was essentially flat, but lower at Casting Service. 14 15 CORPORATE ITEMS Corporate expenses for the first quarter 2000 decreased to $8.3 million from $9.1 million in the year ago period due to continued strong cost controls, including 20 percent fewer employees. Net interest expense decreased to $6.9 million for the first quarter 2000 from $9.0 million in the prior year. Excess pension income increased to $22.6 million in the first quarter 2000 compared to $14.9 million in the same 1999 period due to higher pension assets as a result of strong investment performance during 1999. SPECIAL ITEMS In the first quarter 2000, special items increased net income by $5.0 million, or $0.06 per share. These items include a gain on the sale of a minority interest in Gul Technologies Singapore Ltd., included in other income, partially offset by a charge for exiting the tungsten mill products business of Metalworking Products included in cost of sales. NEW ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement No. 133" was issued. This statement delays the effective date of FASB Statement No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company is presently evaluating the effect of adopting this statement. INCOME TAXES The Company's effective tax rate from continuing operations was 36.7 percent and 35.0 percent in the 2000 and 1999 first quarters, respectively. The 1999 rate reflects benefits from federal and state tax planning initiatives. FINANCIAL CONDITION AND LIQUIDITY Working capital increased to $603.7 million at March 31, 2000, compared to $493.5 million at December 31, 1999. The current ratio increased to 2.4 from 1.9 in this same period. The increase in working capital was primarily due to the shifting of short-term debt to long-term debt. In the first quarter of 2000, cash generated from operations of $29.8 million, proceeds from the net increase in debt of $117.3 million and proceeds from the sale of investments of $14.2 million were used to repurchase shares for $130.6 million, pay dividends of $17.3 million and invest $12.2 million in capital equipment and business expansion. Cash transactions plus cash on hand at the beginning of the year resulted in a cash position of $53.2 million at March 31, 2000. Capital expenditures for 2000 are expected to approximate $95 million, of which $12.2 million had been expended through March 31, 2000. On October 1, 1998, the Company's Board of Directors authorized a stock repurchase program to acquire up to 10 million shares of Allegheny Technologies common stock. In December 1999, the Company's Board of 15 16 Directors increased the number of shares authorized for purchase in the stock repurchase program by 10 million shares. The shares may be purchased from time-to-time in the open market or in negotiated transactions. In the 2000 first quarter, the Company had repurchased 6.8 million shares for $130.6 million under this program. From the inception of the share repurchase program through April 28, 2000, the Company has repurchased 16.6 million shares at a cost of $452.1 million. At a stockholders' meeting held on November 11, 1999, the Company's stockholders approved a one-for-two reverse split of the Company's stock. The reverse split was effective immediately following the spin-offs of Teledyne and Water Pik on November 29, 1999. Share and per share amounts have been adjusted for all periods presented to reflect this one-for-two reverse stock split. The Company believes that internally generated funds, current cash on hand and borrowing from existing credit lines will be adequate to meet foreseeable needs. The Company may choose, however, to issue additional debt depending on market conditions. OTHER MATTERS Environmental The Company is subject to various domestic and international environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws. The Company's reserves for environmental investigation and remediation totaled approximately $58.0 million at March 31, 2000. Based on currently available information, management does not believe future environmental costs at sites with which the Company has been identified in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity. The resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. With respect to proceedings brought under the federal Superfund laws, or similar state statutes, the Company has been identified as a potentially responsible party at approximately 31 such sites, excluding those at which it believes it has no future liability. The Company's involvement is very limited or de minimus at approximately 12 of these sites, and the potential loss exposure with respect to any of remaining 19 sites is not considered to be material. For additional discussion of environmental matters, see Note 8 to the consolidated financial statements of the Company. Government Contracts One of the Company's operating companies directly performs work on contracts with the U.S. Government. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. Under the False Claims Act, a person may assert the rights of the U.S. Government by initiating a suit under seal against a contractor. For the claim to be successful, the person must have 16 17 information that the contractor falsely submitted a claim to the U.S. Government for payment. If it chooses, the U.S. Government may intervene and assume control of the case. Government contracting claims may be resolved by detailed fact-finding and negotiation. When they are not resolved in that way, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. Given the limited extent of the Company's business with the U.S. Government, the Company believes that a suspension or debarment of the Company would not have a material adverse effect on the future operating results and consolidated financial condition of the Company. Although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to have a material adverse effect on the Company's financial condition or liquidity. The resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. For additional discussion of government contract matters, see Note 8 to the consolidated financial statements of the Company. Forward-Looking Statements From time to time the Company has made and may continue to make forward-looking statements. Certain forward-looking statements are contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 8 to the consolidated financial statements of the Company, including statements concerning: product demand; prices; raw material costs; cash flow; anticipated business and economic conditions; aerospace, oil and gas and other industry trends; cost reductions and cost reduction programs; expected capital expenditures; potential repurchases of the Company's stock; the outcome of any government inquiries, litigation or other proceedings related to government contracts or other matters; and future environmental costs. These statements are based on current expectations that involve a number of risks and uncertainties, including our ability to achieve our growth strategies and cost reduction programs; cyclical demand for our products; volatility of prices for and unavailability of critical raw materials; our ability to implement and maintain raw material surcharges and price increases which may depend on market conditions, including pricing by foreign producers; the effect of market conditions on the performance of pension assets; anticipated effects of acquisitions on earnings, as well as those risks and uncertainties described above under the captions "Other Matters - Environmental" and "Other Matters - Government Contracts" and elsewhere herein. Realization of the anticipated benefits described in the forward-looking statements could take longer than expected and implementation difficulties, market factors and deterioration in domestic or global economic conditions could alter the anticipated benefits. Actual results may differ materially from anticipated results in forward-looking statements. Additional risk factors are described from time to time in the Company's filings with the Securities and Exchange Commission, including its Report on Form 10-K for the year ended December 31, 1999. The Company assumes no duty to update its forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company uses derivative financial instruments from time to time to hedge ordinary business risks regarding foreign currencies on product sales 17 18 and to partially hedge against volatile raw material cost fluctuations in the Flat-Rolled Products and High Performance Metals segments. Foreign currency exchange contracts are used to limit transactional exposure to changes in currency exchange rates. The Company sometimes purchases foreign currency forward contracts that effectively permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts, which are not financially material, are designated as hedges of export sales transactions in which settlement will occur in future periods, which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk. A portion of the Company's operations consists of investments in foreign subsidiaries. As a result, the Company's financial results could be affected by changes in foreign currency exchange rates. To mitigate this foreign currency translation risk, the Company has a practice of recapitalizing operations using local foreign currency debt to replace direct equity investment. The average interest rate to service this foreign debt is favorable to current U.S. interest rates. As part of its risk management strategy, from time to time, the Company purchases exchange-traded futures contracts to manage exposure to changes in nickel prices, a component of raw material cost for some of its flat-rolled and high performance metals products. The nickel futures contracts obligate the Company to make or receive a payment equal to the net change in value of the contract at its maturity. Some of these contracts can be designated as hedges of the Company's firm sales commitments and are short-term in nature to correspond to the commitment period. The gains and losses on these contracts are deferred and recognized in earnings when realized as an adjustment to cost of goods sold. Historically, the Company has not closed any significant contracts prior to the execution of the underlying sales transactions, nor have any of the underlying sales transactions for such significant contracts failed to occur which resulted in a material adverse effect on the Company. The Company guarantees the outstanding Allegheny Ludlum fixed rate 6.95% debentures due in 2025. In a period of declining interest rates, the Company faces the risk of required interest payments exceeding those based on the then current market rate. To mitigate interest rate risk, the Company attempts to maintain a reasonable balance between fixed and variable rate debt to keep financing costs as low as possible. The Company believes that adequate controls are in place to monitor these activities, which are not financially material. However, many factors, including those beyond the control of the Company such as changes in domestic and foreign political and economic conditions, as well as the magnitude and timing of interest rate changes, could adversely affect these activities. 18 19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - 27.1 Financial data schedule - March 31, 2000 27.2 Financial data schedule - Restated March 31, 1999 27.3 Financial data schedule - Restated June 30, 1999 27.4 Financial data schedule - Restated September 30, 1999 (b) Current Reports on Form 8-K filed by the Company - None. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLEGHENY TECHNOLOGIES INCORPORATED - -------------------------------------------------------------------------------- (REGISTRANT) Date: May 5, 2000 By /s/ J.L Murdy ------------------------------------- James L. Murdy Executive Vice President, Finance and Administration and Chief Financial Officer (Duly Authorized Officer) Date: May 5, 2000 By /s/ D.G. Reid ------------------------------------- Dale G. Reid Vice President - Controller and Chief Accounting Officer (Principal Accounting Officer) 20 21 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 27.1 Financial Data Schedule for Three Months Ended March 31, 2000. 27.2 Restated Financial Data Schedule for Three Months Ended March 31, 1999. 27.3 Restated Financial Data Schedule for Six Months Ended June 30, 1999. 27.4 Restated Financial Data Schedule for Nine Months Ended September 30, 1999. 21 EX-27.1 2 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001018963 ALLEGHENY TECHNOLOGIES INCORPORATED 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 53 0 366 9 556 1,049 1,764 864 2,773 446 423 0 0 10 1,079 2,773 625 625 511 511 0 0 7 65 24 41 0 0 0 41 0.47 0.47
EX-27.2 3 EXHIBIT 27.2 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001018963 ALLEGHENY TECHNOLOGIES INCORPORATED 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 56 0 341 8 525 971 1,688 804 2,928 459 379 0 0 10 1,323 2,928 586 586 463 463 0 0 9 62 21 41 20 0 0 61 0.62 0.62
EX-27.3 4 EXHIBIT 27.3 RESTATED FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001018963 ALLEGHENY TECHNOLOGIES INCORPORATED 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 59 0 343 8 574 999 1,727 815 2,977 480 424 0 0 10 1,295 2,977 1,158 1,158 921 921 0 0 17 120 43 77 41 0 0 118 1.22 1.21
EX-27.4 5 EXHIBIT 27.4 RESTATED FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001018963 ALLEGHENY TECHNOLOGIES INCORPORATED 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 49 0 351 9 558 1,008 1,742 837 2,938 486 235 0 0 10 1,408 2,938 1,721 1,721 1,393 1,393 0 0 20 153 55 98 58 129 0 285 2.97 2.95
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