10-Q 1 j9134901e10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to _____ Commission File Number 1-12001 ALLEGHENY TECHNOLOGIES INCORPORATED -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 25-1792394 ------------------------------- --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 1000 Six PPG Place Pittsburgh, Pennsylvania 15222-5479 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (412) 394-2800 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- At October 31, 2001, the Registrant had outstanding 80,260,713 shares of its Common Stock. ALLEGHENY TECHNOLOGIES INCORPORATED SEC FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 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 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 28 SIGNATURES 29 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)
September 30, December 31, 2001 2000 ---- ---- (Unaudited) (Audited) ASSETS Cash and cash equivalents $ 37.8 $ 26.2 Accounts receivable 310.5 325.3 Inventories 548.2 585.7 Deferred income taxes 77.2 61.2 Prepaid expenses and other current assets 27.5 24.4 --------- --------- Total Current Assets 1,001.2 1,022.8 Property, plant and equipment, net 883.5 872.0 Prepaid pension cost 624.4 593.6 Cost in excess of net assets acquired 191.1 194.5 Other assets 74.7 93.3 --------- --------- TOTAL ASSETS $ 2,774.9 $ 2,776.2 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 176.3 $ 169.3 Accrued liabilities 190.1 191.0 Short-term debt and current portion of long-term debt 384.2 53.2 --------- --------- Total Current Liabilities 750.6 413.5 Long-term debt 200.5 490.6 Accrued postretirement benefits 513.4 525.9 Deferred income taxes 170.9 158.7 Other 136.9 148.3 --------- --------- TOTAL LIABILITIES 1,772.3 1,737.0 --------- --------- 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 September 30, 2001 and December 31, 2000; outstanding-80,260,713 shares at September 30, 2001 and 80,339,957 shares at December 31, 2000 9.9 9.9 Additional paid-in capital 481.2 481.2 Retained earnings 1,020.0 1,050.0 Treasury stock: 18,690,777 shares at September 30, 2001 and 18,611,533 shares at December 31, 2000 (479.6) (482.3) Accumulated other comprehensive loss, net of tax (28.9) (19.6) --------- --------- Total Stockholders' Equity 1,002.6 1,039.2 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,774.9 $ 2,776.2 ========= =========
The accompanying notes are an integral part of these statements. 3 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ------------------------- 2001 2000 2001 2000 -------- ------- --------- --------- Sales $ 537.7 $ 612.0 $ 1,634.9 $ 1,875.7 Costs and expenses: Cost of sales 470.3 490.5 1,431.0 1,516.0 Selling and administrative expenses 45.3 45.0 146.2 149.0 -------- ------- --------- --------- Income before interest, other income(expense) and income taxes 22.1 76.5 57.7 210.7 Interest expense, net 7.1 11.0 22.7 25.3 Other income (expense) (0.5) 0.8 0.5 14.7 -------- ------- --------- --------- Income before income taxes 14.5 66.3 35.5 200.1 Provision for income taxes 6.5 24.2 14.9 73.0 -------- ------- --------- --------- Net income $ 8.0 $ 42.1 $ 20.6 $ 127.1 ======== ======= ========= ========= Basic and diluted net income per common share $ 0.10 $ 0.52 $ 0.26 $ 1.52 ======== ======= ========= ========= Dividends declared per common share $ 0.20 $ 0.20 $ 0.60 $ 0.60 ======== ======= ========= =========
4 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)
Nine Months Ended September 30, ---------------------- 2001 2000 ------- --------- OPERATING ACTIVITIES: Net income $ 20.6 $ 127.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 74.7 75.6 Non-cash write-off of MetalSpectrum investment 5.5 - Gains on sales of investments (2.7) (11.1) Deferred income taxes (0.8) 51.6 Change in operating assets and liabilities: Inventories 37.5 (43.2) Prepaid pension cost (30.8) (96.7) Accounts receivable 14.8 (3.8) Accounts payable 7.0 (7.5) Accrued liabilities and other (31.4) (41.3) ------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES 94.4 50.7 INVESTING ACTIVITIES: Purchases of property, plant and equipment (78.3) (45.1) Proceeds from the sale of investments 7.2 16.7 Disposals of property, plant and equipment 2.6 4.5 Purchases of businesses and investment in ventures (0.5) (25.4) Other (1.9) (8.0) ------- ---------- CASH USED IN INVESTING ACTIVITIES (70.9) (57.3) FINANCING ACTIVITIES: Net borrowings under credit facilities 35.0 251.4 Borrowings on long-term debt 4.5 4.8 Payments on long-term debt and capital leases (0.5) (1.1) ------- ---------- Net increase in debt 39.0 255.1 Dividends paid (48.1) (50.0) Purchases of common stock (3.0) (207.3) Exercises of stock options 0.2 1.7 ------- ---------- CASH USED IN FINANCING ACTIVITIES (11.9) (0.5) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11.6 (7.1) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 26.2 50.7 ------- ---------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 37.8 $ 43.6 ======= ==========
The accompanying notes are an integral part of these statements. 5 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries. Unless the context requires otherwise, "Allegheny Technologies" and the "Company" refer to Allegheny Technologies Incorporated and its subsidiaries. Certain amounts from 2000 have been reclassified to conform with the 2001 presentation. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States for complete financial statements. In 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 2000 Annual Report on Form 10-K. The results of operations for these interim periods are not necessarily indicative of the operating results for any future period. New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement is effective for fiscal years beginning after December 15, 2001. This statement supercedes SFAS 121, while retaining many of the requirements of that statement. Under SFAS 144, assets held for sale will be included in discontinued operations if the operations and cash flows will be or have been eliminated from continuing operations of the entity and the entity will not have any significant continuing involvement in the operations of the Company. The Company intends to adopt this new statement effective January 1, 2002. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). These statements change the accounting for business combinations, goodwill, and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. SFAS 141 supersedes Accounting Principles Board Opinion No. 16 ("APB 16"); however, certain purchase accounting guidance in APB 16, as well as certain of its amendments and interpretations, have been carried forward to SFAS 141. SFAS 141 changes the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives, with no maximum life. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and 6 intangible assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. Because of the different transition dates for goodwill and intangible assets acquired on or before June 30, 2001, and those acquired after that date, pre-existing goodwill and intangibles will be amortized during this transition period until adoption, whereas new goodwill and indefinite lived intangible assets acquired after June 30, 2001 will not. The Company is currently evaluating adoption of SFAS 142 and has not yet determined the impact on the overall financial condition of the Company, if any, that may result. Amortization of existing goodwill is $5.8 million annually. NOTE 2. INVENTORIES Inventories were as follows (in millions):
September 30, December 31, 2001 2000 ------------- ----------- (unaudited) (audited) Raw materials and supplies $ 87.1 $ 110.3 Work-in-process 470.7 488.4 Finished goods 93.1 99.1 ------- -------- Total inventories at current cost 650.9 697.8 Less allowances to reduce current cost values to LIFO basis (98.9) (108.7) Progress payments (3.8) (3.4) ------- -------- Total inventories $ 548.2 $ 585.7 ======= ========
During 2001, inventory usage resulted in liquidations of last-in, first-out inventory quantities. These inventories were carried at the lower costs prevailing in prior years as compared with the cost of current purchases. The effect of these last-in, first-out liquidations was to increase net income by $4.8 million in 2001. NOTE 3. SUPPLEMENTAL BALANCE SHEET INFORMATION Property, plant and equipment were as follows (in millions):
September 30, December 31, 2001 2000 ------------- ----------- (unaudited) (audited) Land $ 31.0 $ 31.7 Buildings 214.8 216.2 Equipment and leasehold improvements 1,586.5 1,507.9 --------- --------- 1,832.3 1,755.8 Accumulated depreciation and amortization (948.8) (883.8) --------- --------- Total property, plant and equipment, net $ 883.5 $ 872.0 ========= =========
7 NOTE 4. BUSINESS SEGMENTS Information on the Company's business segments was as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------------- 2001 2000 2001 2000 ------- ------- --------- --------- Total sales: Flat-Rolled Products $ 290.0 $ 366.6 $ 865.2 $ 1,144.3 High Performance Metals 205.0 201.0 634.3 595.4 Industrial Products 67.2 69.8 211.0 212.8 ------- ------- --------- --------- 562.2 637.4 1,710.5 1,952.5 Intersegment sales: Flat-Rolled Products 8.1 10.1 24.8 26.7 High Performance Metals 16.4 15.3 50.8 50.1 ------- ------- --------- --------- 24.5 25.4 75.6 76.8 Sales to external customers: Flat-Rolled Products 281.9 356.5 840.4 1,117.6 High Performance Metals 188.6 185.7 583.5 545.3 Industrial Products 67.2 69.8 211.0 212.8 ------- ------- --------- --------- $ 537.7 $ 612.0 $ 1,634.9 $ 1,875.7 ======= ======= ========= ========= Operating Profit(Loss): Flat-Rolled Products $ (6.0) $ 32.4 $ (22.7) $ 103.8 High Performance Metals 22.9 23.4 56.4 52.7 Industrial Products 2.5 4.7 12.0 18.7 ------- ------- --------- --------- Total operating profit 19.4 60.5 45.7 175.2 Corporate expenses (5.7) (6.6) (19.7) (22.5) Interest expense, net (7.1) (11.0) (22.7) (25.3) Other costs, net of gains on asset sales (2.2) (3.9) (10.8) 0.1 Excess pension income 10.1 27.3 43.0 72.6 ------- ------- --------- --------- Income before income taxes $ 14.5 $ 66.3 $ 35.5 $ 200.1 ======= ======= ========= =========
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. At September 30, 2001, there were no significant remaining unexpended reserves related to previously disclosed transformation, merger and restructuring costs. 8 NOTE 5. NET INCOME PER COMMON 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 Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Numerator for basic and diluted net income per common share - net income $ 8.0 $ 42.1 $ 20.6 $ 127.1 ======== ======== ======== ======== Denominator: Weighted average shares 80.2 81.1 80.2 83.7 Contingent issuable stock 0.1 0.1 0.1 0.1 -------- -------- -------- -------- Denominator for basic net income per common share 80.3 81.2 80.3 83.8 Effect of dilutive securities: Employee stock options 0.2 0.1 0.2 0.1 -------- -------- -------- -------- Dilutive potential common shares 0.2 0.1 0.2 0.1 Denominator for diluted net income per common share - adjusted weighted average shares 80.5 81.3 80.5 83.9 ======== ======== ======== ======== Basic and diluted net income per common share $ 0.10 $ 0.52 $ 0.26 $ 1.52 ======== ======== ======== ========
NOTE 6. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, were as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income $ 8.0 $ 42.1 $ 20.6 $ 127.1 Foreign currency translation gains(losses) 1.6 0.3 2.9 (12.9) Unrealized derivative instrument gains (losses) 0.1 - (8.6) - Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period (1.9) 2.1 (2.3) 3.8 Less: realized gains included in net income - - 1.3 7.4 -------- -------- -------- -------- (1.9) 2.1 (3.6) (3.6) -------- -------- -------- -------- Comprehensive income $ 7.8 $ 44.5 $ 11.3 $ 110.6 ======== ======== ======== ========
9 NOTE 7. STOCKHOLDERS' EQUITY Allegheny Technologies paid cash dividends of $0.20 per share of common stock in each of the 2001 and 2000 first, second and third quarters. The Company's Board of Directors has authorized up to a total of 25 million shares of Allegheny Technologies common stock to be acquired under the Company's stock repurchase program. These shares may be purchased from time-to-time in the open market or in negotiated transactions. In the first nine months of 2001, the Company repurchased 0.2 million shares for $3.0 million under this program. There were no repurchases made during the second and third quarters of 2001. From the inception of the share repurchase program on October 1, 1998 through October 31, 2001, the Company has repurchased 20.5 million shares at a cost of $531.1 million. On January 1, 2001, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" was adopted by the Company. This statement establishes accounting and reporting standards requiring that the fair value of derivative instruments be recognized as either assets or liabilities in the statement of financial position. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Based upon the Company's derivative positions at September 30, 2001, the Company had recognized an unrealized net loss of $8.6 million net of income taxes in stockholders' equity as a component of other comprehensive income. Derivative instruments are principally used by the Company to hedge certain raw material price, energy price and foreign exchange risks. The Company continually monitors the effectiveness of its derivative instruments. For the first nine months of 2001, the Company's loss from hedge ineffectiveness recognized in the statement of net income was immaterial. 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 following financial information illustrates separately the composition of the Subsidiary, the non-guarantor subsidiaries and the Guarantor Parent. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum Corporation were merged with the overfunded defined benefit pension plans of Teledyne, Inc. and Allegheny Technologies became the plan sponsor. As a result, the balance sheets presented for Allegheny Ludlum Corporation and the non-guarantor subsidiaries do not include the Allegheny Technologies net prepaid pension asset or the related deferred taxes. Solely for purposes of this presentation, pension income has been allocated to Allegheny Ludlum Corporation and the non-guarantor subsidiaries to offset pension and postretirement expenses which may be funded with pension assets. This allocated pension income has not been recorded in the financial statements of Allegheny Ludlum Corporation or the non-guarantor subsidiaries. In addition, solely for this presentation, the balance sheets presented for Allegheny Ludlum Corporation and the non-guarantor subsidiaries do not include the 10 post-retirement liabilities or the related deferred taxes. Additionally, management and royalty fees charged to Allegheny Ludlum Corporation and to the non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for purposes of this presentation. Allegheny Technologies Incorporated Financial Information for Subsidiary and Guarantor Parent Balance Sheets September 30, 2001 (unaudited)
-------------------------------------------------------------------------------------------------------------------- Guarantor Non-guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated -------------------------------------------------------------------------------------------------------------------- Assets: Cash $ 1.3 $ 12.0 $ 24.5 $ - $ 37.8 Accounts receivable - 119.1 191.4 - 310.5 Inventories - 269.1 279.1 - 548.2 Deferred income taxes 77.2 - - - 77.2 Prepaid expenses and other current assets 1.0 9.0 17.5 - 27.5 --------------------------------------------------------------------------- Total current assets 79.5 409.2 512.5 - 1,001.2 Property, plant, and equipment, net - 525.7 357.8 - 883.5 Prepaid pension cost 624.4 - - - 624.4 Cost in excess of net assets acquired - 113.0 78.1 - 191.1 Other assets 1,773.8 541.5 340.4 (2,581.0) 74.7 --------------------------------------------------------------------------- Total assets $2,477.7 $1,589.4 $ 1,288.8 $ (2,581.0) $ 2,774.9 =========================================================================== Liabilities and stockholders' equity: Current Liabilities: Accounts payable $ 1.1 $ 91.2 $ 84.0 $ - $ 176.3 Accrued liabilities 399.1 58.7 245.5 (513.2) 190.1 Short-term debt 375.0 0.5 8.7 - 384.2 --------------------------------------------------------------------------- Total current liabilities 775.2 150.4 338.2 (513.2) 750.6 Long term debt - 370.6 29.8 (199.9) 200.5 Accrued post-retirement benefits 513.4 - - - 513.4 Deferred income taxes 170.9 - - - 170.9 Other long-term liabilities 15.6 26.4 94.9 - 136.9 --------------------------------------------------------------------------- Total liabilities 1,475.1 547.4 462.9 (713.1) 1,772.3 --------------------------------------------------------------------------- Total stockholders' equity 1,002.6 1,042.0 825.9 (1,867.9) 1,002.6 --------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,477.7 $1,589.4 $ 1,288.8 $ (2,581.0) $ 2,774.9 ===========================================================================
11 Allegheny Technologies Incorporated Financial Information for Subsidiary and Guarantor Parent Statements of Income For the nine months ended September 30, 2001 (unaudited)
-------------------------------------------------------------------------------------------------------------------- Guarantor Non-guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated -------------------------------------------------------------------------------------------------------------------- Sales $ - $823.6 $811.3 $ - $ 1,634.9 Cost of sales (24.0) 814.1 640.9 - 1,431.0 Selling and administrative expenses 6.2 30.1 109.9 - 146.2 Interest expense (income) 27.2 (0.6) (3.9) - 22.7 Other income(expense) including equity in income of unconsolidated subsidiaries 53.2 - 0.6 (53.3) 0.5 ---------------------------------------------------------------------------- Income (loss) before income taxes 43.8 (20.0) 65.0 (53.3) 35.5 Income tax provision (benefit) 23.2 (4.5) 22.5 (26.3) 14.9 ---------------------------------------------------------------------------- Net income (loss) $ 20.6 $(15.5) $ 42.5 $ (27.0) $ 20.6 ============================================================================
Condensed Statement of Cash Flows For the nine months ended September 30, 2001 (unaudited)
-------------------------------------------------------------------------------------------------------------------- Guarantor Non-guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated -------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities $ 3.5 $106.2 $ 85.7 $(101.0) $ 94.4 ---------------------------------------------------------------------------- Cash flows from investing activities 7.4 (14.5) (61.2) (2.6) (70.9) ---------------------------------------------------------------------------- Cash flows from financing activities $(9.7) $(80.2) $(25.6) $ 103.6 $ (11.9) ============================================================================
(This space intentionally left blank) 12 Allegheny Technologies Incorporated Financial Information for Subsidiary and Guarantor Parent Balance Sheets December 31, 2000 (unaudited)
-------------------------------------------------------------------------------------------------------------------- Guarantor Non-guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated -------------------------------------------------------------------------------------------------------------------- Assets: Cash $ 0.1 $ 0.5 $ 25.6 $ - $ 26.2 Accounts receivable - 133.8 191.5 - 325.3 Inventories - 321.1 264.6 - 585.7 Deferred income taxes 61.2 - - - 61.2 Prepaid expenses and other current assets 1.9 8.2 14.3 - 24.4 ---------------------------------------------------------------------------- Total current assets 63.2 463.6 496.0 - 1,022.8 Property, plant, and equipment, net - 556.6 315.4 - 872.0 Prepaid pension cost 593.6 - - - 593.6 Cost in excess of net assets acquired - 115.7 78.8 - 194.5 Other assets 1,811.8 509.1 349.3 (2,576.9) 93.3 ---------------------------------------------------------------------------- Total assets $2,468.6 $1,645.0 $ 1,239.5 $ (2,576.9) $ 2,776.2 ============================================================================ Liabilities and stockholders' equity: Current Liabilities: Accounts payable $ 2.6 $ 83.8 $ 82.9 $ - $ 169.3 Accrued liabilities 385.4 55.4 199.0 (448.8) 191.0 Short-term debt 50.0 0.5 2.7 - 53.2 ---------------------------------------------------------------------------- Total current liabilities 438.0 139.7 284.6 (448.8) 413.5 Long term debt 287.0 403.0 32.7 (232.1) 490.6 Accrued post-retirement benefits 525.9 - - - 525.9 Deferred income taxes 158.7 - - - 158.7 Other long-term liabilities 19.8 28.2 100.3 - 148.3 ---------------------------------------------------------------------------- Total liabilities 1,429.4 570.9 417.6 (680.9) 1,737.0 ---------------------------------------------------------------------------- Total stockholders' equity 1,039.2 1,074.1 821.9 (1,896.0) 1,039.2 ---------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,468.6 $1,645.0 $ 1,239.5 $ (2,576.9) $ 2,776.2 ============================================================================
13 Allegheny Technologies Incorporated Financial Information for Subsidiary and Guarantor Parent Statements of Income For the nine months ended September 30, 2000 (unaudited)
-------------------------------------------------------------------------------------------------------------------- Guarantor Non-guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated -------------------------------------------------------------------------------------------------------------------- Sales $ - $ 1,112.8 $ 762.9 $ - $ 1,875.7 Cost of sales (42.1) 979.2 578.9 - 1,516.0 Selling and administrative expenses 10.7 35.6 102.7 - 149.0 Interest expense (income) 31.5 (1.9) (4.3) 25.3 Other income(expense) including equity in income of unconsolidated subsidiaries 207.8 - 14.7 (207.8) 14.7 ---------------------------------------------------------------------------- Income (loss) before income taxes 207.7 99.9 100.3 (207.8) 200.1 Income tax provision (benefit) 80.6 40.1 32.3 (80.0) 73.0 ---------------------------------------------------------------------------- Net income $127.1 $ 59.8 $ 68.0 $(127.8) $ 127.1 ============================================================================
Condensed Statement of Cash Flows For the nine months ended September 30, 2000 (unaudited)
-------------------------------------------------------------------------------------------------------------------- Guarantor Non-guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated -------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities $ 22.6 $ 132.8 $ 213.6 $(318.3) $ 50.7 ---------------------------------------------------------------------------- Cash flows from investing activities (2.9) (19.4) (27.0) (8.0) (57.3) ---------------------------------------------------------------------------- Cash flows from financing activities $(19.6) $(105.7) $(201.5) $ 326.3 $ (0.5) ----------------------------------------------------------------------------
NOTE 9. 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 14 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, adjustments in the Company's accruals are made 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. Based on currently available information, management does not believe that future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or results of operations. 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 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 September 30, 2001, the Company's reserves for environmental investigation and remediation obligations totaled approximately $49.1 million, of which approximately $8.0 million was included in other current liabilities. The reserve includes estimated probable future costs of $21.4 million for federal Superfund and comparable state-managed sites; $3.5 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $14.5 million for owned or controlled sites at which Company operations have been discontinued; and $9.7 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 of these accrued amounts 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 within approximately 30 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 practices, cost classifications, and the False Claims Act. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. Given the limited extent of the Company's business with the U.S. Government, the Company believes that a suspension or debarment of the Company would not have a material adverse effect on the future operating results and consolidated financial condition of the Company. Although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. 15 In the spin-offs of Teledyne Technologies Incorporated ("Teledyne") and Water Pik Technologies, Inc. ("Water Pik") completed in November 1999, each of these 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 these 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 would be tax-free to the Company and the Company's stockholders. While the tax ruling, as supplemented, 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, as supplemented, is subject to certain factual representations and uncertainties that, among other things, require the spun-off 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 spun-off company's assets. In addition, the distribution of the spun-off 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 above, but the distribution of the spun-off 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 spun-off companies executed tax sharing and indemnification agreements in which each agreed to be responsible for any taxes imposed on and other amounts paid by the Company, its agents and representatives and its stockholders as a result of the failure of the spin-off to qualify as a tax-free distribution within the meaning of the Internal Revenue Code if the failure or disqualification is caused by post-spin-off actions by or with respect to that company or its stockholders. Potential liabilities under these agreements could exceed either spun-off 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 spun-off 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 spun-off 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. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Allegheny Technologies Incorporated is one of the largest and most diversified producers of specialty materials in the world. It operates in the following three business segments, which accounted for the following percentages of total sales for the first nine months of 2001 and 2000: 2001 2000 ---- ---- Flat-Rolled Products 51% 60% High Performance Metals 36% 29% Industrial Products 13% 11% For the first nine months of 2001, operating profit was $45.7 million compared to $175.2 million for the same 2000 period. Sales decreased 13 percent to $1,634.9 million for the first nine months of 2001 compared to $1,875.7 million for the same 2000 period. Net income was $20.6 million, or $0.26 per diluted share, for the first nine months of 2001 compared to $127.1 million, or $1.52 per diluted share, for the first nine months of 2000. Net income for the first nine months of 2001 included an after-tax write-off of $3.4 million, or $0.04 per share, for the Company's minority investment in the e-Business site, MetalSpectrum, which terminated operations during the second quarter of 2001. Net income for the first nine months of 2000 was increased by $5.0 million, or $0.06 per share, due to a gain recognized 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. The Company realized $79.1 million in cost reductions during the first nine months of 2001, including $35.0 million in the 2001 third quarter. The Company has targeted $110.0 million of cost reductions for 2001. Sales and operating profit for the Company's three business segments are discussed below. FLAT-ROLLED PRODUCTS SEGMENT Flat-Rolled Products segment sales for the third quarter declined 21 percent to $281.9 million, compared to $356.5 million in the third quarter of 2000. The segment also reported a third quarter 2001 operating loss of $6.0 million compared to an operating profit of $32.4 million in the same year-ago period. Higher energy costs on a volume-adjusted basis reduced operating profit by $5.4 million during the third quarter compared to the third quarter of 2000. Operating profit was reduced by $3.4 million in the quarter as accounts receivable reserves were adjusted due to the uncertain economy and reduced availability of credit. For the first nine months of 2001, the segment reported an operating loss of $22.7 million compared to an operating profit of $103.8 million for the first nine months of 2000. Sales decreased 25 percent to $840.4 million for the first nine months of 2001 from the comparable 2000 period. The decrease in sales and operating profit was primarily due to weak demand and lower prices. The impact to operating profit was partially offset by ongoing cost reductions in the segment's Allegheny Ludlum ("Allegheny Ludlum") operation, including a 10 percent salaried workforce reduction that was completed in the first quarter of 2001. The average price of flat-rolled products in the third quarter 2001 decreased by 10 percent to $2,151 per ton compared to $2,380 per ton in the 17 same 2000 period. Total tons shipped in the third quarter of 2001 declined by 13% to 129,978 tons compared to shipments of 149,080 tons for the same period of 2000. General-purpose product shipments in the segment (including stainless steel hot roll and cold roll sheet, stainless steel plate and silicon electrical steel, among other products) decreased 13 percent compared to the third quarter 2000. Average prices for general-purpose products decreased 15 percent during the same period. This decrease was primarily due to continued weak demand for stainless steel sheet and plate due to the weak U.S. industrial economy. High-value product shipments in the segment (including strip, Precision Rolled Strip(R), super stainless steel, and high temperature alloy products) decreased 12 percent compared to the 2000 third quarter, while average prices for high-value products decreased 3 percent. Certain of these high-value products, particularly Precision Rolled Strip(R) products, are used largely in the automotive industry, which has also been impacted by the weak U.S. economy. The average price of flat-rolled products for the first nine months of 2001 decreased by 8 percent to $2,194 per ton compared to $2,372 per ton in the same 2000 period. Total tons shipped in the first nine months of 2001 declined by 19% to 382,091 tons compared to shipments of 472,256 tons for the same period of 2000. General-purpose product shipments in the segment decreased 22 percent compared to the first nine months of 2000. Average prices for general-purpose products decreased 15 percent during the same period. High-value product shipments in the segment decreased 11 percent compared to the first nine months of 2000, while average prices for high-value products decreased 1 percent during the same period. On October 22, 2001, the Company announced that it would indefinitely idle the melt and associated service operations located at its Houston, PA facility. The idling is expected to be completed by December 31, 2001, and will impact approximately 220 employees. The Company plans to continue to operate the Steckel mill located at this facility. The Company is currently evaluating whether to permanently idle this facility and such a decision, if made, may result in a special charge that would be material to the Company's operations in the quarter the charge is taken. HIGH PERFORMANCE METALS SEGMENT Third quarter results benefited from continued strong shipments for high-value products to the aerospace, electrical energy, and oil and gas markets. Sales increased nearly 2 percent to $188.6 million and operating profit was essentially flat compared to the same period last year due to $3.2 million in higher energy costs and the labor strike at Wah Chang. On September 4, 2001, the USWA employees at the Wah Chang facility, located in Albany, Oregon, called a strike after the union membership failed to ratify the proposed contract. While the Company and the USWA continue discussions, the Company has implemented a phased-in restart of the plant with management and salaried employees and replacement workers. The Wah Chang facility is involved in the production of exotic alloys including zirconium and niobium and the strike does not impact other Company operations. Shipments of nickel-based and specialty steel products grew 15 percent and average prices increased 5 percent compared to the prior-year period. Shipments of titanium products decreased 1 percent, but prices increased 6 percent. Due in part to the labor strike, shipments of exotic alloys declined 37 percent; however, average prices were 2 percent higher. Operating profit for the first nine months of 2001 increased 7 percent to $56.4 million from $52.7 million in the same year-ago period. Sales for the first nine months of 2001 increased 7 percent to $583.5 million compared to the prior year period. For the first nine months of 2001, shipments of nickel-based and specialty steel products grew by 12 percent and average 18 prices increased 8 percent compared to the prior year period. Shipments of titanium products for the first nine months of 2001 increased 6 percent and prices increased 2 percent. Higher energy costs in 2001 particularly affected the segment's Wah Chang facility located in Oregon where the Company has constructed an electrical power cogeneration system to help alleviate this cost issue. This system, which cost $14.6 million, began operating in late June 2001. As a result of this system and overall lower purchased electricity costs, the Company expects to realize lower and less volatile energy costs. Certain comparative information on the segment's major products is provided in the following table:
Three Months Ended September 30, -------------------------- Percent 2001 2000 Change -------------------------------------- Volume (000's pounds): Nickel-based and specialty steel alloys 12,783 11,147 15 Titanium mill products 5,960 6,027 (1) Exotic alloys 632 1,002 (37) Average prices (per pound): Nickel-based and specialty steel alloys $ 6.23 $ 5.92 5 Titanium mill products $ 11.53 $ 10.88 6 Exotic alloys $ 38.66 $ 37.95 2
Nine Months Ended September 30, -------------------------- Percent 2001 2000 Change -------------------------------------- Volume (000's pounds): Nickel-based and specialty steel alloys 39,040 34,906 12 Titanium mill products 17,851 17,410 3 Exotic alloys 2,493 2,887 (14) Average prices (per pound): Nickel-based and specialty steel alloys $ 6.29 $ 5.81 8 Titanium mill products $ 11.69 $ 11.22 4 Exotic alloys $ 34.04 $ 34.59 (2)
INDUSTRIAL PRODUCTS SEGMENT As a result of generally weak demand, sales decreased 4 percent and operating profit decreased 47 percent to $2.5 million compared to the same period for 2000. For the first nine months of 2001, operating profit decreased to $12.0 million compared to $18.7 million for the first nine months of 2000. Sales for the first nine months of 2001 were flat compared to the prior year. CORPORATE ITEMS Corporate expenses decreased 14 percent to $5.7 million for the 2001 third quarter and decreased 12 percent to $19.7 million for the first nine months of 2001, compared to the respective 2000 periods, due to continued cost reductions. Net interest expense decreased to $7.1 million for the 2001 third quarter from $11.0 million for the 2000 third quarter. Net interest expense decreased to $22.7 million for the first nine months of 2001 compared to $25.3 million for the first nine months of 2000. The decrease in interest expense primarily was due to lower interest rates and lower debt. Excess 19 pension income decreased to $10.1 million for the 2001 third quarter and decreased to $43.0 million for the first nine months of 2001 compared to $27.3 million and $72.6 million in the same 2000 periods, respectively, reflecting the carry-forward impact of lower investment returns in 2000 and increased liabilities as a result of pension benefit enhancements, primarily associated with new labor agreements that went into effect at the end of June 2001. Non-cash excess pension income is expected to be approximately $10 million in fourth quarter of 2001 and approximately $53 million for 2001. With the decline in the U.S. equities market in 2001 to date, it is anticipated that non-cash excess pension income for 2002 will be substantially lower than excess pension income in 2001 and could result in an overall non-cash pension expense, including retiree health care benefit expenses for 2002. SPECIAL ITEMS The 2001 second quarter results include an after-tax special item of $3.4 million, or $0.04 per share, related to the write-off of the Company's minority investment in the e-Business site, MetalSpectrum, which terminated operations during the second quarter of 2001. This amount was included in other income (expense). There were no special items in the third quarter of 2001. The 2000 first quarter results include after-tax special items of $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. There were no special items in the third quarter of 2000. INCOME TAXES The Company's effective tax rate was 42.0 percent and 44.8 percent for the first nine months of 2001 and for the 2001 third quarter, respectively, compared to 36.5 percent and 36.5 percent for the same periods in 2000. The increase in the effective tax rate was primarily due to a change in the deferred state tax rate affecting cumulative temporary differences and the impact of lower income before income taxes. FINANCIAL CONDITION AND LIQUIDITY During the nine months ended September 30, 2001, cash generated from operations of $94.4 million and proceeds from the net increase in debt of $39.0 million were used to pay dividends of $48.1 million, invest $78.3 million in capital equipment and business expansion, primarily in the High Performance Metals Segment, and repurchase shares of $3.0 million. The Company had a cash position of $37.8 million at September 30, 2001. Working capital decreased to $250.6 million at September 30, 2001 compared to $609.3 million at December 31, 2000. The current ratio decreased to 1.3 from 2.5 in this same period. The change in working capital and current ratio at September 30, 2001 compared to December 31, 2000 was primarily due to the reclassification of long-term borrowings under the Company's commercial paper program to short-term, as these borrowings, and the Company's primary bank credit facility, will mature in less than one year. The Company's defined benefit pension plan is fully funded with assets in excess of the projected benefit obligation. Under current Internal Revenue Code provisions, certain amounts that the Company pays for retiree health care benefits may be reimbursed annually from the excess pension plan assets. During the 2001 second quarter, the Company recovered $35.0 million under 20 these provisions. While not affecting reported operating profit, cash flow from operations increased by the recovered amount. The ability for the Company to be reimbursed for retiree medical costs in future years is dependent upon the level of pension surplus, as computed under the code provisions of the Internal Revenue Service, as of the beginning of each year. The level of pension surplus, the value of pension assets less pension obligations, changes constantly due to the volatility of pension asset investments. Due to the decline in the U.S. equities market in 2001 to date, it is uncertain if the Company will be able to be reimbursed for retiree medical costs in 2002. Accounting standards require a minimum pension liability be recorded if the value of pension assets are less than the accumulated pension benefit obligation (ABO) at the end of the year. Based upon the value of pension assets as of September 30, 2001, the Company would not be required to record such a minimum pension liability. However, if the value of pension assets were to decline to level below the ABO, the Company would record a minimum pension liability and record a charge to shareholders' equity for the value of the prepaid pension asset, currently recognized on the balance sheet, and the required minimum pension liability, net of deferred taxes. Capital expenditures for 2001 are expected to approximate between $100.0 million to $110.0 million, of which $78.3 million had been expended through September 30, 2001. On September 11, 2001, a regular quarterly dividend of $0.20 per share of common stock was paid to stockholders of record at the close of business on August 27, 2001. On November 8, 2001, the Board of Directors declared a regular quarterly dividend of $0.20 per share of common stock. The dividend will be paid on December 11, 2001 to stockholders of record at the close of business on November 26, 2001. The Company's Board of Directors has authorized up to a total of 25 million shares of Allegheny Technologies common stock to be acquired under the Company's stock repurchase program. The shares may be purchased from time-to-time in the open market or in negotiated transactions. In the first nine months of 2001, the Company repurchased approximately 0.2 million shares for $3.0 million under this program. There were no repurchases made during the second and third quarters of 2001. From the inception of the share repurchase program on October 1, 1998 through October 31, 2001, the Company has repurchased 20.5 million shares at a cost of $531.5 million. The Company believes that internally generated funds, current cash on hand and borrowings from existing credit lines and its commercial paper program will be adequate to meet foreseeable needs. The Company may choose, however, to issue additional debt depending on market conditions. NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement is effective for fiscal years beginning after December 15, 2001. This statement supercedes SFAS 121, while retaining many of the requirements of that statement. Under SFAS 144, assets held for sale will be included in discontinued operations if the operations and cash flows will be or have been eliminated from continuing operations of the entity and the entity will not have any significant continuing involvement in the operations of the Company. The Company intends to adopt this new statement effective January 1, 2002. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 21 142"). These statements change the accounting for business combinations, goodwill, and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. SFAS 141 supersedes Accounting Principles Board Opinion No. 16 ("APB 16"); however, certain purchase accounting guidance in APB 16, as well as certain of its amendments and interpretations, have been carried forward to SFAS 141. SFAS 141 changes the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives, with no maximum life. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. Because of the different transition dates for goodwill and intangible assets acquired on or before June 30, 2001, and those acquired after that date, pre-existing goodwill and intangibles will be amortized during this transition period until adoption whereas new goodwill and indefinite lived intangible assets acquired after June 30, 2001 will not. The Company is currently evaluating adoption of SFAS 142 and has not yet determined the impact on the overall financial condition of the Company, if any, that may result. Amortization of existing goodwill is $5.8 million annually. OTHER MATTERS Management Effective July 1, 2001, James L. Murdy was elected President and Chief Executive Officer by the Company's Board of Directors. Mr. Murdy succeeds Robert P. Bozzone, who remains Chairman of the Board. Mr. Murdy has been an Executive Vice President since 1996 and was Chief Financial Officer from August 1996 through August 2000. Mr. Murdy has also served as a director of the Company since 1999. Additionally, during the second quarter, the Company announced assignments establishing the executive management team reporting to James L. Murdy. Douglas A. Kittenbrink assumed the position of Executive Vice President, Chief Operating Officer, and Jack W. Shilling became Executive Vice President, Strategic Initiatives and Technology and Chief Technology Officer. Completing the executive management team are Jon D. Walton, who is Senior Vice President, Chief Legal and Administrative Officer, and Richard J. Harshman, Vice President, Finance and Chief Financial Officer. Board of Directors On July 19, 2001, the Company announced the election of James C. Diggs, Senior Vice President and General Counsel of PPG Industries, Inc., to the Company's Board of Directors. September 11 Events According to published reports, the terrorist attack on September 11, 2001 has had an adverse effect on the U.S. and other economies and other acts of violence or war could further exacerbate prevailing recessionary trends. As a result, demand for our products, and our profitability, could decline, 22 perhaps significantly. In particular, the September 11 hijacked commercial airline attacks have resulted in sharply reduced air travel, which has led to curtailed or delayed new plane orders and the idling of large portions of the fleets of commercial airlines. A significant portion of the sales of our High Performance Metals Group products are made to customers in the aerospace industry, and we expect that reduced orders from those customers are likely to adversely affect our results of operations. Energy Costs Prices and availability of energy resources are subject to market conditions. These market conditions are often affected by political and economic factors that are outside of the Company's control. While the volatile energy markets have begun to stabilize, energy costs remain a risk for the Company. These factors, among other things, may contribute to increased production costs that could have a material impact on the results of operations of the Company. The Company is evaluating energy factors with regard to production costs, including cost containment and control of energy consumption. The Company has completed construction of an electrical power cogeneration system designed to reduce costs and cost volatility at the Wah Chang facility located in Oregon. The Company may also periodically apply natural gas surcharges to certain of its products. The Company's ability to implement or maintain energy surcharges depends on market conditions, including pricing by foreign competitors. 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. The Company primarily uses the last-in, first-out method of inventory accounting that reflects current costs in the cost of products sold. The Company considers these costs, the increasing costs of equipment and other costs in establishing its sales pricing policies and has instituted raw material surcharges on certain of its products to the extent permitted by competitive factors in the marketplace. The Company continues to emphasize cost reductions and containment in all aspects of its business. The Company periodically announces price increases on certain of its products. The ability of the Company to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors that are beyond the Company's control. Furthermore, the benefits of price increases may be delayed due to long manufacturing lead times and the terms of existing contracts. Labor Matters The Company has more than 11,000 employees. Approximately 48 percent of the Company's workforce is represented under various collective bargaining agreements, principally with the United Steelworkers of America ("USWA"), including: approximately 4,000 Allegheny Ludlum production and maintenance employees covered by collective bargaining agreements between Allegheny Ludlum and the USWA, which are effective through June 2007; approximately 300 Oremet employees covered by a collective bargaining agreement with the USWA which are effective through June 2007; and approximately 700 Wah Chang employees covered by a collective bargaining agreement with the USWA which the USWA terminated as of January 28, 2001. On September 4, 2001, the USWA employees at the Wah Chang facility, located in Albany, Oregon, called a strike after the union membership failed 23 to ratify the proposed contract. While the Company and the USWA continue discussions, the Company has implemented a phased-in restart of the plant with management and salaried employees and replacement workers. The Wah Chang facility is involved in the production of exotic alloys including zirconium and niobium and the strike does not impact other Company operations. Generally, agreements that expire may be terminated after notice by the USWA. After termination, the USWA may authorize a strike. A strike by the employees covered by one or more of the collective bargaining agreements could materially adversely affect the Company's operating results. There can be no assurance that the Company will succeed in concluding collective bargaining agreements with the USWA or other unions to replace those that expire. The costs associated with new ratified labor agreements covering Allegheny Ludlum and Oremet employees represented by the USWA including the effect on excess pension income are reflected in results of operations commencing with the third quarter of 2001. On October 22, 2001, the Company announced that it would indefinitely idle the melt and associated service operations located at its Houston, PA facility. The idling is expected to be completed by December 31, 2001, and will impact approximately 220 employees. The Company plans to continue to operate the Steckel mill located at this facility. The Company is currently evaluating whether to permanently idle this facility and such a decision, if made, may result in a special charge that would be material to the Company's operations in the quarter the charge is taken. 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 remediation totaled approximately $49.1 million at September 30, 2001. Based on currently available information, management does not believe that future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or 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. 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. 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 of such sites, excluding those at which it believes it has no future liability. The Company's involvement is very limited or de minimis at approximately 12 of these sites, and the potential loss exposure with respect to any of the remaining 19 individual sites is not considered to be material. For additional discussion of environmental matters, see Note 9 to the consolidated financial statements of the Company. 24 Government Contracts One of the Company's operating companies directly performs contractual work for 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, 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 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. In addition, 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 9 of the consolidated financial statements of the Company. FORWARD-LOOKING AND OTHER STATEMENTS From time to time, the Company has made and may continue to make "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements are contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 9 to the consolidated financial statements of the Company, which represent the Company's expectations or beliefs concerning various future events, unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control. Forward-looking statements include those statements related to anticipated business, economic, and market conditions, including energy market conditions and actions taken to respond to these conditions, product demand, sales, shipments, prices and price competitiveness, operating profit and earnings, financial performance and growth, energy costs and energy conservation, cost reductions and anticipated cost savings, the effects of the cogeneration system constructed at Wah Chang, sale of excess power, working capital reductions, cash conservation, dividends, commodity stainless steel service center inventory levels, financial strength, cash flow and initiatives to improve cash flow, capital expenditures and other investments, the benefits and effects of new and tentative labor agreements, ongoing labor strike, the idling of the Houston facility, projected pension income, including non-cash excess pension income and reimbursement of retiree health care expenditures. Such forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company's actual results or performance to materially differ from any future results or performance expressed or implied by such statements. These statements are based on current expectations that involve a number of risks and uncertainties, including those described under the captions: "Other Matters - September 11 Events," "Other Matters - Energy Costs," "Other Materials - Costs and Pricing," "Other Matters - Labor Matters," "Other 25 Matters - Environmental" and "Other Matters - Government Contracts." Actual results or performance may differ materially from any future results or performance anticipated based on management's current expectations contained in such forward-looking statements. Additional risk factors are described from time to time in the Company's filings with the Securities and Exchange Commission, including its Report on Form 10-K for the year ended December 31, 2000 and its quarterly reports on Form 10-Q. 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 for product sales denominated in foreign currencies and to partially hedge against volatile energy and 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 permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts, which are not financially material, are designated as hedges of the variability in cash flows of a portion of the Company's forecasted export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk. Effective January 1, 2001, the Company began accounting for these contracts as hedges under FASB Statement 133. Changes in the fair value of the Company's foreign currency derivatives will be recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. 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. These contracts are designated as hedges of the variability in cash flows of a portion of the Company's forecasted purchases of nickel. Effective January 1, 2001, the Company began accounting for these contracts as hedges under FASB Statement 133. Changes in the fair value of the Company's nickel derivatives will be recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company also enters into energy swap contracts as part of its overall risk management strategy. The swap contracts are used to manage exposure to changes in energy prices, a component of production costs for its operating units. The energy swap contracts obligate the Company to make or receive a payment equal to the net change in value of the contract at its maturity. These contracts are designated as hedges of the variability in cash flows of a portion of the Company's forecasted energy payments. Effective January 1, 2001, the Company began accounting for these contracts as hedges under FASB 26 Statement 133. Changes in the fair value of the Company's energy derivatives will be recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Allegheny Technologies has guaranteed the outstanding $150 million Allegheny Ludlum fixed rate 6.95 percent 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 hedging 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, energy price and nickel price changes, could adversely affect these activities. 27 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Current Reports on Form 8-K filed by the Company - None. 28 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: November 14, 2001 By /s/ R.J. Harshman --------------------------------- Richard J. Harshman Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) Date: November 14, 2001 By /s/ D.G. Reid --------------------------------- Dale G. Reid Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) 29