-----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, WCR0v8S6BAcpBSgo0f2/PkqQdWkc30hgKPJJcZFo4o72PdmcFUCXzsJTGcZQvF55 vyQmWLHVgLZ4RambX/wakA== 0000950128-03-000412.txt : 20030324 0000950128-03-000412.hdr.sgml : 20030324 20030324163808 ACCESSION NUMBER: 0000950128-03-000412 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHENY TECHNOLOGIES INC CENTRAL INDEX KEY: 0001018963 STANDARD INDUSTRIAL CLASSIFICATION: STEEL PIPE & TUBES [3317] IRS NUMBER: 251792394 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12001 FILM NUMBER: 03614251 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-K 1 j9925901e10vk.txt ALLEGHENY TECHNOLOGIES, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 [ ] 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 incorporation (I.R.S. Employer or organization) Identification Number) 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (412) 394-2800 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: =============================================================================== Title of each class Name of each exchange on which registered - ------------------------------------------------------------------------------- Common Stock, $0.10 Par Value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange =============================================================================== SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No --- --- At March 10, 2003, the Registrant had outstanding 80,643,779 shares of its Common Stock. The aggregate market value of the Registrant's voting stock held by non-affiliates at June 28, 2002 was approximately $1,203 million, based on the closing price per share of Common Stock on that date of $15.80 as reported on the New York Stock Exchange. Shares of Common Stock known by the Registrant to be beneficially owned by directors of the Registrant and officers of the Registrant subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are not included in the computation. The Registrant, however, has made no determination that such persons are "affiliates" within the meaning of Rule 12b-2 under the Exchange Act. Documents Incorporated By Reference Selected portions of the 2002 Annual Report to Stockholders - Part I, Part II and Part IV of this Report. Selected portions of the Proxy Statement for 2003 Annual Meeting of Stockholders - - Part III of this Report. The information included in the Proxy Statement as required by paragraphs (a) and (b) of Item 306 of Regulation S-K and paragraphs (k) and (l) of Item 402 of Regulation S-K is not incorporated by reference in this Form 10-K. =============================================================================== INDEX
PAGE NUMBER ------ PART I.............................................................................................3 Item 1. Business.....................................................................3 Item 2. Properties..................................................................12 Item 3. Legal Proceedings...........................................................14 Item 4. Submission of Matters to a Vote of Security Holders.........................17 PART II...........................................................................................17 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................................17 Item 6. Selected Financial Data.....................................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................18 Item 8. Financial Statements and Supplementary Data.................................18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................18 PART III..........................................................................................18 Item 10. Directors and Executive Officers of the Registrant..........................18 Item 11. Executive Compensation......................................................18 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................................19 Item 13. Certain Relationships and Related Transactions..............................19 Item 14. Controls and Procedures.....................................................19 PART IV...........................................................................................19 Item 15. Exhibits, Financial Statement Schedules, and Report on Form 8-K.............19 SIGNATURES........................................................................................21 CERTIFICATIONS....................................................................................22 EXHIBIT INDEX.............................................................................................26
2 PART I ITEM 1. BUSINESS THE COMPANY Allegheny Technologies Incorporated is one of the largest and most diversified specialty materials producers in the world. We use innovative technologies to offer global markets a wide range of specialty materials. High-value products include super stainless steel, nickel-based and cobalt-based alloys and superalloys, titanium and titanium alloys, specialty steels, tungsten materials, exotic alloys, which include zirconium, hafnium and niobium, and highly engineered strip and Precision Rolled Strip(R) products. In addition, we produce commodity specialty materials such as stainless steel sheet and plate, silicon electrical and tool steels, and forgings and castings. We operate in the following three business segments, which accounted for the following percentages of total revenues of $1.91 billion, $2.13 billion, and $2.46 billion for the years ended December 31, 2002, 2001, and 2000, respectively:
2002 2001 2000 ---- ---- ---- Flat-Rolled Products 55% 51% 59% High Performance Metals 33% 36% 30% Industrial Products 12% 13% 11%
Additional financial information with respect to our business segments, including their contributions to operating profit and their identifiable assets for the three years ended December 31, 2002 is presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" on pages 9 through 14 of the 2002 Annual Report to Stockholders (the "2002 Annual Report") and in Note 10 of the Notes to Consolidated Financial Statements on pages 49 through 51 of the 2002 Annual Report and is incorporated herein by reference. Allegheny Technologies Incorporated is a Delaware corporation with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone number (412) 394-2800. References to "Allegheny Technologies," the "Company", the "Registrant", "we", "our" and "us" and similar terms mean Allegheny Technologies Incorporated and its subsidiaries, unless the context otherwise requires. OUR BUSINESS Specialty materials play a significant role in our lives. Allegheny Technologies is a world leader in the manufacture of both high value and commodity specialty products. Our high value products accounted for 69% of total sales in 2002 and our commodity products accounted for 31% of total sales in 2002. Specialty materials are produced in a variety of forms, including sheet, strip, foil, plate, slab, ingot, billet, bar, rod, wire, coil, tubing, and shapes, and are selected for use in environments that demand materials having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. Common end uses of our products include jet engines, air frames, electrical energy production and generation, automotive, chemical processing, oil and gas, construction and mining, machine and cutting tools, appliances and food equipment, transportation, and medical equipment and implants. 3 Flat-Rolled Products Segment Our Flat-Rolled Product segment produces, converts and distributes stainless steel, nickel-based alloys and superalloys, and titanium and titanium-based alloys, in sheet, strip, plate and foil, and Precision Rolled Strip(R) products, as well as silicon electrical steels and tool steels. The operations in this segment are Allegheny Ludlum, Allegheny Rodney, Rome Metals and Allegheny Ludlum's 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited ("STAL"), which commenced commercial production in 2000. The remaining 40% interest in STAL is owned by the Baosteel Group, a state authorized investment company whose equity securities are publicly traded in the People's Republic of China. Stainless steel and nickel-based alloys contain elements such as chromium, nickel and molybdenum for strength and corrosion and heat resistance; titanium and titanium-based alloys provide higher strength-to-weight ratios and are corrosion-resistant; tool steel alloys include carbon, tungsten, molybdenum and other metals to make them both hard and malleable; and electrical steel contains silicon to minimize electrical energy loss when in use. We offer these flat-rolled products in a broad selection of grades, sizes and finishes designed to meet international specifications. We provide technical support for material selection. Our wide array of alloys and product forms provides customers with choices from which to select the optimum alloy for their application. Sheet. Stainless steel, nickel-based alloy and titanium sheet products are used in a wide variety of consumer and industrial applications such as food preparation, appliance, automotive, aerospace and medical applications that require ease of cleaning and fabrication, as well as corrosion resistance. Approximately 64% by volume of our sheet products are sold to service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers. Strip. Stainless steel, nickel-based alloy and titanium strip products are used in a variety of consumer and industrial products and a wide range of automotive components. We also offer very thin Precision Rolled Strip(R) products which range from 0.015 inch to less than 0.0015 inch (0.38 - 0.038 mm) thick. Our Precision Rolled Strip(R) products include stainless steel, nickel-based alloys, titanium and titanium alloys, and carbon steel that are used by customers to fabricate a variety of different products ranging from automobile components to photographic, computer, building and construction and consumer products. Approximately 45% by volume of our strip products are shipped directly to end-use customers, with the remainder to service centers, including our own distribution network for flat-rolled strip materials. Plate. Stainless steel, nickel-based alloy and titanium plate products are primarily used in industrial equipment that requires ease of cleaning or corrosion-resistant capabilities such as pollution control scrubbers, food processing equipment, pulp and paper equipment, chemical processing equipment, power generation equipment and aerospace applications. We process and distribute stainless steel and nickel alloy plate and titanium and titanium alloy plate products in a wide variety of grades and gauges. Approximately 77% by volume of our plate products are sold to service centers, with the remainder sold directly to end-use customers. Silicon Electrical Steel. Our grain-oriented silicon electrical steel products are used generally in applications in which electrical conductivity and magnetic properties are important. 4 These products are sold directly to end-use customers, including manufacturers of transformers and communications equipment. High Performance Metals Segment Our High Performance Metals segment produces, converts and distributes a wide range of high performance alloys, including nickel- and cobalt-based alloys and superalloys, titanium and titanium-based alloys, exotic alloys such as zirconium, hafnium, niobium, tantalum, and their related alloys, and other specialty materials, primarily in slab, ingot, billet, bar, rod, wire, coil and seamless tube forms. The operations in this segment are Allvac, Allvac Ltd (U.K.) and Wah Chang, which also produces and sells zirconium chemicals. Nickel-, Cobalt- and Titanium-Based Alloys and Superalloys. Our nickel-, iron-, cobalt- and titanium-based alloys and superalloys are engineered to retain exceptional strength and corrosion resistance at temperatures through 2,000 degrees Fahrenheit (1,093 degrees Celsius) and are used in critical, high-stress applications. These products are designed for the high performance requirements of aerospace, oil and gas, power generation, chemical processing, transportation, biomedical, marine and nuclear industries. Exotic Alloys - Zirconium, Hafnium, Niobium and Tantalum. We are a leading global producer of zirconium, a highly corrosion-resistant metal that is transparent to neutrons. Zirconium is used for fuel tubes and structural parts in nuclear power reactors and for corrosion-resistant chemical industry applications, and is also used in the jewelry and personal hygiene industries. Hafnium, derived as a by-product of zirconium, is principally used for control rods in nuclear reactors due to its ability to absorb neutrons, and as an alloying addition in aerospace applications. We also produce niobium, also known as columbium, in various forms and alloys. The higher quality grades of niobium we produce are used as an alloying addition in superalloys for jet engines and for aerospace applications such as rocket and fuel nozzles. Niobium and related alloys also are used in applications requiring superconducting characteristics for high-strength magnets, including in medical devices for body-scanning, accelerators for high-energy physics, and fusion energy projects for the generation of electricity. We also produce tantalum, one of the most corrosion-resistant metals, which is used for medical implants, chemical process equipment and aerospace engine components. Industrial Segment Our Industrial Products segment's principal business includes the production of tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. The segment also produces large grey and ductile iron castings and carbon alloy steel forgings. The operations in this segment are Metalworking Products, Casting Service and Portland Forge. Cutting Tools and Tungsten Carbide Products. We produce a line of sintered tungsten carbide products that approach diamond hardness for the metalworking, mining, oil and gas, and other industries requiring tools with extra hardness. Cemented carbide products, which may be coated or uncoated, are used as super-hard cutters in the high-speed machining and cutting of steel, high temperature alloys and other applications where hardness and wear resistance are important. Technical developments related to ceramics, coatings and other disciplines are incorporated in these products. 5 We also produce tungsten for worldwide markets from numerous and varied tungsten-bearing raw materials to produce tungsten and tungsten carbide powders. Previously used cemented carbide parts are also recycled into tungsten carbide powder. Forgings and Castings. We forge carbon alloy steels into finished forms that are used in a diverse number of industries. With the latest screw-type forging presses, we produce carbon alloy steel forgings in sizes ranging from one pound to more than 200 pounds. We also cast grey and ductile iron metals in sizes ranging from 1,000 pounds to 160,000 pounds and in forms ranging from diesel locomotive engine blocks to housings and parts for power generation equipment, tools, and automobiles. CAPITAL INVESTMENTS The current 2003 capital expenditure plan is approximately $70 million for operational necessities and for completion of capital programs which commenced in 2002. COMPETITION Markets for both our high value and commodity products and services in each of our principal business segments are highly competitive. We compete with many manufacturers which, depending on the product involved, range from large diversified enterprises to smaller companies specializing in particular products. Factors that affect our competitive position are manufacturing costs, industry manufacturing capacity, the quality of our products, services and delivery capabilities, our capabilities to produce a wide range of specialty materials in various unique grades, alloys and product forms, our technology capabilities including our research and development efforts, our marketing strategies and price. We face competition from domestic and foreign competitors, a number of which are government subsidized. In 1999, the United States imposed antidumping and countervailing duties on dumped and subsidized imports of stainless steel sheet and strip in coils and stainless steel plate in coils from companies in ten foreign countries. Current administrative reviews by the U.S. Commerce Department are revising the findings at lower duty rates. We continue to monitor unfairly traded imports from foreign producers for appropriate action. On March 5, 2002, President Bush announced a decision imposing tarriffs on certain steel imports resulting from his June 5, 2001 order for an investigation by the U.S. International Trade Commission ("ITC") under Section 201 of the 1974 Trade Act ("Section 201") related to certain specialty steel products. Section 201 allows the President to restrict imports or impose tariffs on imports that are seriously injuring a domestic industry. Specialty steel products under investigation for the years 1996 through 2000 included stainless steel bar, rod and wire, and tool steel. The Section 201 tariffs imposed on certain steel imports have had minimal impact on our business because of limited applicability to our products. 6 RAW MATERIALS AND SUPPLIES Substantially all parts and materials required in the manufacture of our products are available from more than one supplier and the sources and availability of raw materials essential to its businesses are adequate. The principal raw materials we use in the production of our specialty materials are scrap (including nickel-, chromium-, titanium- and molybdenum-bearing scrap), nickel, titanium sponge, zirconium sand and sponge, ferrochromium, ferrosilicon, molybdenum and molybdenum alloys, ammonium paratungstate, manganese and manganese alloys, cobalt, niobium and other alloying materials. Purchase prices of certain critical raw materials are volatile. As a result, our operating results could be subject to significant fluctuation. For example, since we generally use in excess of 40,000 tons of nickel each year, a hypothetical change of $1.00 per pound in nickel prices would result in increased costs of approximately $80 million. In addition, certain of these raw materials, such as nickel, cobalt, ferrochromium and titanium sponge, can be acquired by us and our specialty materials industry competitors, in large part, only from foreign sources. Some of these foreign sources are located in countries that may be subject to unstable political and economic conditions, which might disrupt supplies or affect the price of these materials. We purchase our nickel requirements principally from producers in Australia, Canada, Norway, Russia, and the Dominican Republic. Zirconium sponge is purchased from a source in France, while zirconium sand is purchased from both U.S. and Australian sources. Cobalt is purchased primarily from producers in Canada. More than 80% of the world's reserves of ferrochromium are located in South Africa, Zimbabwe, Albania, and Kazakhstan. We also purchase titanium sponge from sources in Kazakhstan, Japan and Russia. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk and Other Matters -Forward Looking Statements - Volatility of Energy Prices; Availability of Energy Resources" and " - Volatility of Prices of Critical Raw Materials; Unavailability of Raw Materials" on pages 26 through 27 of the 2002 Annual Report. EXPORT SALES AND FOREIGN OPERATIONS International sales represented approximately 23%, 23%, and 18% of our total sales in 2002, 2001, and 2000, respectively. These figures include export sales by U.S. operations to customers in foreign countries, which accounted for approximately 15%, 15%, and 12% of our total sales in each of 2002, 2001, and 2000, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk and Other Matters - Forward Looking Statements - Export Sales" on page 28 of the 2002 Annual Report. Our overseas sales, marketing and distribution efforts are aided by international marketing offices or representatives located at various locations throughout the world. See Note 10 of the Notes to Consolidated Financial Statements on pages 49 through 51 of the 2002 Annual Report for more information regarding international sales activity. 7 For 2002, our sales in the United States and Canada represented 77% and 2%, respectively, of total 2002 sales. Within Europe, our sales to the United Kingdom, France and Germany represented 5%, 3% and 5%, respectively, of total sales. Our Metalworking Products business manufactures high precision threading, milling, boring and drilling systems for the European market from locations in the United Kingdom, Spain, France, Germany and Switzerland. Our Allvac Ltd business has manufacturing capabilities in the United Kingdom and has enhanced service to customers by improving the sales and distribution network for our nickel-based alloys, specialty steel and titanium in Europe. The STAL joint venture in the People's Republic of China produces Precision Rolled Strip(R) products, which enables us to offer our Precision Rolled Strip(R) products more effectively to markets in China and other Asian countries. BACKLOG, SEASONALITY AND CYCLICALITY Our backlog of confirmed orders was approximately $412.1 million at December 31, 2002 and $488.9 million at December 31, 2001. We expect that approximately 88% of confirmed orders on hand at December 31, 2002 will be fulfilled during the year ending December 31, 2003. Backlog of confirmed orders of the Flat-Rolled Products segment was $76.3 million at December 31, 2002 and $105.2 million at December 31, 2001. We expect that approximately 100% of the confirmed orders on hand at December 31, 2002 for this segment will be fulfilled during the year ending December 31, 2003. Backlog of confirmed orders of the High Performance Metals segment was approximately $300.0 million at December 31, 2002 and $377.9 million at December 31, 2001. We expect that approximately 84% of the confirmed orders on hand at December 31, 2002 for this segment will be fulfilled during the year ending December 31, 2003. Generally, our sales and operations are not seasonal. However, demand for our products are cyclical over longer periods because specialty materials customers operate in cyclical industries and are subject to changes in general economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk and Other Matters - Forward Looking Statements - Cyclical Demand for Products" on page 26 of the 2002 Annual Report. RESEARCH, DEVELOPMENT AND TECHNICAL SERVICES We believe that our research and development capabilities give us an edge in developing new products and manufacturing processes that contribute to the profitable growth potential of our businesses on a long-term basis. We conduct research and development at our various operating locations both for our own account and, on a limited basis, for customers on a contract basis. Estimates of the components of research and development for each of our three segments for the years ended December 31, 2002, 2001, and 2000 included the following: 8
(In millions) 2002 2001 2000 ---- ---- ---- Company-Funded: Flat-Rolled Products $ 4.1 $ 4.5 $ 6.3 High Performance Metals 5.8 5.0 5.0 Industrial Products 2.1 1.8 2.3 ----- ----- ----- $12.0 $11.3 $13.6 ----- ----- ----- Customer-Funded: Flat-Rolled Products $ 0.6 $ -- $ -- High Performance Metals 2.1 2.0 2.0 ----- ----- ----- $ 2.7 $ 2.0 $ 2.0 ----- ----- ----- Total Research and Development $14.7 $13.3 $15.6 ===== ===== =====
With respect to the Flat-Rolled Products and High Performance Metals segments, our research, development and technical service activities are closely interrelated and are directed toward cost reduction, process improvement, process control, quality assurance and control, system development, the development of new manufacturing methods, the improvement of existing manufacturing methods, the improvement of existing products, and the development of new products. We own several hundred United States patents, many of which are also filed under the patent laws of other nations. Although these patents, as well as our numerous trademarks, technical information, license agreements, and other intellectual property, have been and are expected to be of value, we believe that the loss of any single such item or technically related group of such items would not materially affect the conduct of our business. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants into the air or water, and the disposal of hazardous substances, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which we have been identified as a potentially responsible party ("PRP") under the Federal Superfund laws, and comparable state laws. We could incur substantial cleanup costs, fines, and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party locations sites under these laws. With respect to proceedings brought under the Federal Superfund laws, or similar state statutes, we have been identified as a PRP at approximately 31 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 13 of these sites, and the potential loss exposure with respect to any of the remaining 18 individual sites is not considered to be material. We are a party to various cost-sharing arrangements with other PRPs at the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust 9 account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements. At December 31, 2002, our reserves for environmental remediation totaled approximately $41.0 million. Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the matters with which we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Future developments, administrative actions or liabilities relating to environmental matters, however, could have a material adverse effect on our financial condition and results of operation. See the discussion of related matters in Item 3. Legal Proceedings. Additional related information is presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk and Other Matters - Forward Looking Statements - Risks Associated with Environmental Matters" on pages 24 through 25 of the 2002 Annual Report and in Notes 1 and 14 of the Notes to Consolidated Financial Statements on pages 35 through 36, and pages 58 through 60, respectively, of the 2002 Annual Report. EMPLOYEES We have approximately 9,650 employees. A portion of our workforce is covered by various collective bargaining agreements, principally with the United Steelworkers of America ("USWA"), including: approximately 3,450 Allegheny Ludlum production and maintenance employees covered by collective bargaining agreements between Allegheny Ludlum and the USWA, which are effective through June 2007; approximately 165 Oremet employees covered by a collective bargaining agreement with the USWA, which are effective through June 2007; and approximately 600 Wah Chang employees covered by a collective bargaining agreement with the USWA, which continues through March 2008. Negotiations are ongoing for a new collective bargaining agreement with the USWA affecting approximately 140 full and part-time employees at various Allegheny Ludlum facilities in Western Pennsylvania. Also, negotiations are expected to begin for a new collective bargaining agreement with the USWA affecting approximately 104 employees at the Casting Service facility in LaPorte, Indiana. Generally, agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike. A strike by the employees covered by one or more of the collective bargaining agreements could materially adversely effect our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire. See the discussion of related matters under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk and Other Matters - Forward Looking Statements - Labor Matters" on page 27 of the 2002 Annual Report. 10 AVAILABLE INFORMATION Our internet website address is http://www.alleghenytechnologies.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. Our Internet website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. PRINCIPAL OFFICERS OF THE REGISTRANT Principal officers of the Company as of February 28, 2003 are as follows:
NAME AGE TITLE - ---- --- ----- Robert P. Bozzone 69 Chairman of the Board and Director* James L. Murdy 64 President and Chief Executive Officer and Director* Richard J. Harshman 46 Senior Vice President, Finance and Chief Financial Officer* Douglas A. Kittenbrink 47 Executive Vice President and Chief Operating Officer* Robert S. Park 58 Vice President, Treasurer Dale G. Reid 47 Vice President, Controller and Chief Accounting Officer* Jack W. Shilling 59 Executive Vice President, Strategic Initiatives and Technology and Chief Technology Officer* Jon D. Walton 60 Senior Vice President, Chief Legal and Administrative Officer*
- -------------------- * Such officers are subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended. Set forth below are descriptions of the business background for the past five years of the principal officers of the Company. Robert P. Bozzone has been Chairman of the Board since December 2000 and had served as interim President and Chief Executive Officer from December 2000 until July 2001. Mr. Bozzone also served as Vice Chairman beginning August 1996 and was Vice Chairman of Allegheny Ludlum Corporation from August 1994 to August 1996. Previously, he was President and Chief Executive Officer of Allegheny Ludlum Corporation until his retirement from active employment with the Company in July 1994. James L. Murdy has been President and Chief Executive Officer since July 2001. He served as Executive Vice President from September 2000 to July 2001 and as Executive Vice President, Finance and Administration and Chief Financial Officer from December 1996 to September 2000. He served as Senior Vice President - Finance and Chief Financial Officer from August 1996 to December 1996, having previously served as the Senior Vice President-Finance and Chief Financial Officer of Allegheny Ludlum Corporation. 11 Richard J. Harshman has been Senior Vice President, Finance and Chief Financial Officer as announced in December 2001 and served as Vice President, Finance and Chief Financial Officer from December 2000 to December 2001. Between September 2000 and December 2000, Mr. Harshman served as Vice President, Controller and Acting Chief Financial Officer. Previously, he had been Vice President, Investor Relations and Corporate Communications from July 1998, and prior to that served as Senior Vice President, Finance and Administration, at Allvac from 1995. Douglas A. Kittenbrink has been Executive Vice President and Chief Operating Officer since July 2001, and served as President of Allegheny Ludlum Corporation from April 2000 to November 2002. Previously he served as Senior Vice President, Manufacturing Engineering, Information Technology and Production Control of Allegheny Ludlum. He also served as Vice President, Engineering and Information Technology of Allegheny Ludlum from August 1994 to January 1998. Robert S. Park has been Vice President, Treasurer since August 1996. From May 1994 to August 1996, Mr. Park served as Vice President, Treasurer of Allegheny Ludlum Corporation. Previously, he served as Treasurer of Allegheny Ludlum. Dale G. Reid has been Vice President, Controller and Chief Accounting Officer since December 2000. Between September 2000 and December 2000, he served as Vice President, Finance for Allegheny Ludlum Corporation. Previously, he had been Vice President, Controller and Chief Accounting Officer from August 1996 and prior to that served as Chief Accounting Officer and Controller of Teledyne, Inc. Jack W. Shilling has been Executive Vice President, Strategic Initiatives and Technology and Chief Technology Officer since July 2001. He served as President of the High Performance Metals Group from April 2000 to July 2001. Previously he served as President of Allegheny Ludlum Corporation. He also served as Executive Vice President of Allegheny Ludlum from 1996 to 1998. Jon D. Walton has been Senior Vice President, Chief Legal and Administrative Officer since July 2001. He was Senior Vice President, General Counsel and Secretary from August 1997 to July 2001. Previously, he served as Vice President, General Counsel and Secretary from August 1996 to August 1997, and prior to that served in the same capacity as an officer of Allegheny Ludlum Corporation. ITEM 2. PROPERTIES Our principal domestic facilities as of December 31, 2002 are listed below by segment. Of those facilities listed below which are owned, three are subject to mortgages or similar encumbrances securing borrowings under certain industrial development authority financings. Although the facilities vary in terms of age and condition, we believe that these facilities have been well-maintained. 12
APPROXIMATE SQUARE FOOTAGE FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED) ----------------- ------------- -------------- FLAT-ROLLED PRODUCTS SEGMENT Brackenridge Works Manufacturing of stainless steel and other 2,443,000 (owned) Brackenridge and Natrona, PA specialty material strip, sheet, and plate and silicon electrical steel strip and sheet. West Leechburg Works Manufacturing of stainless steel and other 1,415,000 (owned) West Leechburg and specialty material strip and sheet and silicon Bagdad, PA electrical steel strip and sheet. Vandergrift Plant Manufacturing of stainless steel and other 966,000 (owned) Vandergrift, PA specialty material strip and sheet. Washington Plant Manufacturing of specialty material plate. 615,000 (owned) Washington, PA Washington Flat-Roll Plant Manufacturing of stainless steel sheet. 350,000 (owned) Washington, PA Wallingford Plant Manufacturing of stainless steel and other 591,000 (owned) Wallingford and specialty material strip. Waterbury, CT Houston Plant Manufacturing of stainless steel and other 298,000 (owned) Houston, PA specialty material. Latrobe Plant Manufacturing of nickel-based and other specialty 468,000 (owned) Latrobe, PA steel. New Castle Plant Manufacturing of stainless steel sheet. 178,000 (owned) New Castle, IN Massillon Plant Manufacturing of stainless steel and other 165,000 (owned) Massillon, OH specialty material plate on 96-inch wide anneal and pickle line. Allegheny Rodney Strip Plant Manufacturing of stainless steel precision rolled 250,000 (leased) New Bedford, MA thin sheet strip and foil, custom roll-formed and stretch-formed shapes. HIGH PERFORMANCE METALS SEGMENT Monroe Plant Production of nickel and titanium products and 640,000 (owned) Monroe, NC other specialty steel long products. Lockport Plant Manufacturing nickel-based alloy and other 282,000 (leased) Lockport, NY specialty material products. Richburg Plant Production of nickel and titanium product and 221,000 (owned) Richburg, SC other specialty steel long products. Bakers Plant Production of titanium ingot. 60,000 (owned) Monroe, NC Oremet Facility Production of titanium ingot, mill products and 491,000 (owned) Albany, OR castings. Wah Chang Facility Production of zirconium, hafnium, niobium, 917,000 (owned) Albany, OR titanium and tantalum.
13
APPROXIMATE SQUARE FOOTAGE FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED) ----------------- ------------- -------------- Richland Plant Production of titanium ingots, slabs and 103,000 (owned) Richland, WA electrodes. Huntsville Plant Production of exotic alloys and other specialty 91,000 (owned) Huntsville, AL material wire. Frackville, PA Production of titanium wire products. 55,000 (owned) INDUSTRIAL PRODUCTS SEGMENT Waynesboro, PA Production of threading systems. 386,000 (owned) Huntsville, AL Production of tungsten and tungsten carbide 293,000 (owned) powders. Grant, AL Production of primary tungsten sintered parts. 88,000 (leased) Houston, TX Production of tungsten carbide products used in 120,000 (owned) oil and gas drilling applications. Nashville, TN Production of tungsten carbide and cutting tools. 134,000 (owned) La Porte, IN Manufacturing of large ductile and grey iron 453,000 (owned) castings. Portland, IN Manufacturing of carbon and alloy steel forgings. 215,000 (owned) Lebanon, KY Manufacturing of carbon and alloy steel forgings. 100,000 (owned) Gurley, AL Production of tungsten, tungsten carbide and 435,000 (leased) molybdenum powders.
We also own or lease production facilities in a number of foreign countries, including the United Kingdom, Germany, France, Spain, Switzerland, and the People's Republic of China. We own and/or lease and operate 625,000-square foot facilities for melt and remelt, machining and bar mill operations, laboratories and offices located on a 25-acre site in Sheffield, England, and a 40,000-square foot leased facility in Sheffield, England for computer numerically controlled milling and machine operations. Through our STAL joint venture, we operate a 130,000-square foot facility for finishing Precision Rolled Strip(R) products in the Xin-Zhuang Industrial Zone, Shanghai, China. Our executive offices, located at PPG Place in Pittsburgh, Pennsylvania are leased. These facilities are modern and sufficient for us to carry on our current activities. ITEM 3. LEGAL PROCEEDINGS We become involved from time to time in various lawsuits, claims and proceedings relating to the conduct of our business, including those pertaining to environmental, government contracting, product liability, patent infringement, commercial, employment, employee benefits, and stockholder matters. In June 1995, the U.S. Government commenced an action against Allegheny Ludlum in the United States District Court for the Western District of Pennsylvania, alleging multiple violations of the Federal Clean Water Act. The trial of this matter concluded in February 2001. 14 In February 2002, the Court issued a decision imposing a penalty of $8.2 million for incidents at five facilities that occurred over a period of approximately six years which Allegheny Ludlum had reported to the appropriate environmental agencies. We asked the Court to reconsider its decision, which the Court denied in October 2002. We appealed the Court's decision. At December 31, 2002, we had adequate reserves for this matter. Allegheny Ludlum and the United Steelworkers of America ("USWA") are parties to various collective bargaining agreements which set forth a "Profit Sharing Plan". We were involved in litigation with the USWA regarding Profit Sharing Pool calculations for 1996, 1997, 1998 and 1999. The USWA claimed adjustments that alleged we owed to USWA-represented employees approximately $32 million. We maintained that our certified determinations of the Profit Sharing Pool calculations were made as prescribed by the Profit Sharing Plan. On January 13, 2003, we formalized a settlement agreement with the USWA that provided for an aggregate $5 million distribution to eligible employees. At December 31, 2002, we had adequate reserves for this matter. In March 1995, Kaiser Aerospace & Electronics Corporation ("Kaiser") filed a civil complaint against Teledyne Industries, Inc. (now TDY Industries, Inc. ("TDY")), a wholly-owned subsidiary of the Company and Dimeling Schreiber & Park ("DS&P"), DS&P's general partners, and New Piper Aircraft, Inc. in the state court for Miami-Dade County, Florida. The complaint alleged that TDY breached a Cooperation and Shareholder's Agreement with Kaiser under which the parties agreed to cooperate in the filing and promotion of a proposed plan for acquiring out of bankruptcy the assets of Piper Aircraft, a manufacturer of general aviation aircraft. TDY and Kaiser are engaged in discovery and have agreed to participate in a mediation. Kaiser requests that the court impose a constructive trust on TDY's equity interest in privately held New Piper Aircraft, Inc., which represents approximately 30% of the equity of New Piper Aircraft, Inc. In the alternative, Kaiser also seeks unspecified damages in an amount "to be determined at trial." The trial for this matter is not set. While the outcome of the litigation cannot be predicted, and we believe that the claims are not meritorious, an adverse resolution of this matter could have a material adverse effect on our results of operations and financial condition. TDY and the San Diego Unified Port District ("Port District") entered into a lease of property located in San Diego, California ("San Diego facility") on October 1, 1984. TDY operated its Teledyne Ryan Aeronautical division ("Ryan") at the San Diego facility until May 1999, when substantially all the assets and business of Ryan were sold to Northrop Grumman Corporation ("Northrop"). Northrop subleased a portion of the property with the approval of the Port District until early 2001. TDY also entered into three separate sublease arrangements for portions of the property subject to the approval of the Port District, which the Port District refused. After its administrative appeal to the Port District was denied, TDY commenced a lawsuit against the Port District. The complaint, filed in December 2001 in state court in San Diego, alleges breach of contract, inverse condemnation, tortious interference with a prospective economic advantage and other causes of action relating to the Port District's failure to consent to subleases of the space. The Complaint seeks at least $4 million for damages from the Port District and declaratory relief. The trial for this matter is scheduled for October 2003. Despite the Port District's failure to consent to the three subleases, TDY continued its marketing efforts to sublease the San Diego facility. The rental payments and other expenses for the property amounted to approximately $0.4 million per month. At December 31, 2002, we had a reserve of approximately $3 million to cover the costs of occupying the San Diego facility. 15 TDY and the Port District discussed resolution of this matter but did not reach any agreement even after court-sponsored mediation. In June 2002 TDY ceased paying rent on the grounds that the Port District had rescinded the Lease when it refused to allow TDY to sublease the property and that the Port District's condemnation of the property voided the lease. In September 2002, the Port District demanded that rent be paid or possession of the property be returned to the Port District. TDY returned possession to the Port District on October 31, 2002 and denied that any remaining amounts were due under the lease. The Port District filed a cross-complaint against TDY in March 2003. The Complaint alleges breach of contract for failure to pay rent and for certain environmental contamination on the property. The Port District seeks $1.2 million in past rent, along with future rent and an unspecified sum of damages for failure to remedy. The Port District also alleges anticipatory breach relating to removal of structures and debris from the San Diego facility and seeks specific performance or reimbursement to the Port District. The Port District further alleges that it is entitled to indemnity for potential liability related to environmental matters at the San Diego facility, and seeks a declaratory judgment in its favor. TDY has various defenses to the allegations in the Port District's Complaint and denies that it has any obligation to the Port District. In another matter related to the San Diego facility, the Port District requested that the California Department of Toxic Substances Control ("DTSC") evaluate whether the property is regulated as a hazardous waste transportation, storage, or disposal facility under the Resource Conservation and Recovery Act ("RCRA") and similar state laws. DTSC recognizes that the information pertaining to the RCRA permitting status of the property is ambiguous and referred the issue of the property's RCRA permitting status to DTSC's Legal Office for further consideration. TDY discussed this matter directly with DTSC's Legal Office and DTSC agreed to refrain from taking action regarding this issue until after completion of DTSC's Legal Office review. To the extent the facility is subject to RCRA permitting and corrective action is required at the property, DTSC has agreed that the San Diego Regional Water Quality Control Board ("Regional Board") is the appropriate agency to oversee the corrective action work. The Regional Board is currently overseeing other investigative work at the site, the costs of which are included in our environmental reserves. We are conducting an environmental assessment of portions of the San Diego facility at the request of the Regional Board. At this stage of the assessment, we cannot predict if any remediation will be necessary. We remediated in 1998 and continue to monitor a lagoon near the San Diego facility. Also, we are seeking approval from the San Diego Department of Public Health for the 1996 closure of four underground storage tanks at the San Diego facility. We are evaluating potential claims we have against neighboring property owners and other PRPs related to the environmental condition of the San Diego facility. TDY and another wholly-owned subsidiary, among others, have been identified by the U.S. Environmental Protection Agency (EPA) as PRPs at the Li Tungsten Superfund Site in Glen Cove, New York. We believe that most of the contamination at the Site resulted from work done while the United States government either owned or controlled operations at the Site, or from processes done for various agencies of the United States, and that the United States is liable for a substantial portion of the remediation costs at the Site. In November 2000, TDY filed a cost recovery and contribution action against the United States government. Discovery is ongoing but no trial date has been set. In March 2003, the Court ordered the parties, including the United States government, to fund a portion of the remediation costs at the Site. An adverse resolution 16 of this matter could have a material adverse effect on the results of operations and financial condition. A number of other lawsuits, claims and proceedings have been or may be asserted against us relating to the conduct of our business, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters. While the outcome of litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be determined adversely to the Company, we do not believe that the disposition of any such pending matters is likely to have a material adverse effect on our 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 our results of operations for that period. For additional information see Note 14 of the Notes to Consolidated Financial Statements on pages 58 through 60 of the 2002 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference to "Common Stock Prices" on page 64 of the 2002 Annual Report. Equity Compensation Plan Information Information about our equity compensation plans at December 31, 2002 was as follows:
Number of Shares Number of Shares to be Issued Upon Weighted Average Remaining Exercise of Exercise Price of Available for Outstanding Options Outstanding Options Future Issuance (a) -------------------------------------------------------------------- (In thousands, except per share amounts) Equity Compensation Plans Approved by Shareholders 7,919 $ 20.42 4,592 Equity Compensation Plans Not Approved by Shareholders 0 $0 0 ----- ----- Total 7,919 4,592 ===== =====
(a) Of these shares, a maximum of 410,000 shares are reserved for the Total Shareholder Return Incentive Compensation Program. Under this program, participants receive awards of performance share units that are earned based on a comparison of our total shareholder return ("TSR") for a three-year period with the TSR during the same such period of a peer group of companies selected by the Board of Directors. 17 ITEM 6. SELECTED FINANCIAL DATA Information required by this item is incorporated by reference to "Selected Financial Data" on pages 63 and 64 of the 2002 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 64 of the 2002 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this item is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk and Other Matters - Forward Looking Statements - Volatility of Energy Prices; Availability of Energy Resources" and "- Volatility of Prices of Critical Raw Materials; Unavailability of Raw Materials" and "- Interest Rate Risk" on pages 26 through 28 of the 2002 Annual Report and Note 1 of the Notes to Consolidated Financial Statements on pages 34 and 36 of the 2002 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements listed in Item 14(a)(1) are incorporated by reference to pages 29 through 61 of the 2002 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In addition to the information set forth under the caption "Principal Officers of the Registrant" in Part I of this report, the information concerning our directors required by this item is incorporated by reference to "Election of Directors" as set forth in the 2003 Proxy Statement filed by us pursuant to Regulation 14A (the "2003 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to "Director Compensation," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" as set forth in the 2003 Proxy Statement. We do not incorporate by reference in this Form 10-K either the "Report on Executive Compensation" or the "Cumulative Total Stockholder Return" section of the 2003 Proxy Statement. 18 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference to "Stock Ownership Information" as set forth in the 2003 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to "Certain Transactions" as set forth in the 2003 Proxy Statement. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as of December 31, 2002, and they concluded that these controls and procedures are effective. (b) Changes in Internal Controls There are no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to December 31, 2002. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES: (1) FINANCIAL STATEMENTS The following consolidated financial statements included on pages 29 through 61 of the 2002 Annual Report are incorporated by reference: Consolidated Statements of Income - Years Ended December 31, 2002, 2001, and 2000 Consolidated Balance Sheets at December 31, 2002 and 2001 Consolidated Statements of Cash Flows - Years Ended December 31, 2002, 2001, and 2000 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2002, 2001, and 2000 Report of Ernst & Young LLP, Independent Auditors Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULES All schedules set forth in the applicable accounting regulations of the Commission either are not required under the related instructions or are not applicable and, therefore, have been omitted. 19 (3) EXHIBITS A list of exhibits included in this Report or incorporated by reference is found in the Exhibit Index beginning on page 26 of this Report and incorporated by reference. (b) CURRENT REPORT ON FORM 8-K: DATE NATURE OF REPORT ---- ---------------- November 14, 2002 Press Release, dated November 14, 2002, regarding dividends. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLEGHENY TECHNOLOGIES INCORPORATED Date: March 24, 2003 By /s/ James L. Murdy -------------------------------- James L. Murdy President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and as of the 24th day of March, 2003. /s/ James L. Murdy /s/ Richard J. Harshman - ------------------------------------- -------------------------------- James L. Murdy Richard J. Harshman President and Chief Executive Officer Senior Vice President, Finance and Director And Chief Financial Officer (Principal Financial Officer) /s/ Dale G. Reid -------------------------------- Dale G. Reid Vice President-Controller and Chief Accounting Officer (Principal Accounting Officer) /s/ Robert P. Bozzone /s/ Paul S. Brentlinger - ------------------------------------- -------------------------------- Robert P. Bozzone Paul S. Brentlinger Chairman Director /s/ Frank V. Cahouet /s/ Diane C. Creel - ------------------------------------- -------------------------------- Frank V. Cahouet Diane C. Creel Director Director /s/ James C. Diggs /s/ C. Fred Fetterolf - ------------------------------------- -------------------------------- James C. Diggs C. Fred Fetterolf Director Director /s/ George J. Kourpias /s/ W. Craig McClelland - ------------------------------------- -------------------------------- George J. Kourpias W. Craig McClelland Director Director /s/ William G. Ouchi /s/ Charles J. Queenan, Jr. - ------------------------------------- -------------------------------- William G. Ouchi Charles J. Queenan, Jr. Director Director /s/ James E. Rohr /s/ Brian P. Simmons - ------------------------------------- -------------------------------- James E. Rohr Brian P. Simmons Director Director 21 CERTIFICATIONS I, James L. Murdy, President and Chief Executive Officer of Allegheny Technologies Incorporated, certify that: 1. I have reviewed this annual report on Form 10-K of Allegheny Technologies Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 22 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 /s/ James L. Murdy --------------------------------------- James L. Murdy President and Chief Executive Officer 23 CERTIFICATIONS I, Richard J. Harshman, Senior Vice President-Finance and Chief Financial Officer of Allegheny Technologies Incorporated, certify that: 1. I have reviewed this annual report on Form 10-K of Allegheny Technologies Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 24 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 /s/ Richard J. Harshman ---------------------------------------- Richard J. Harshman Senior Vice President-Finance and Chief Financial Officer 25 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Separation and Distribution Agreement dated November 29, 1999 among Allegheny Teledyne Incorporated (now known as Allegheny Technologies Incorporated), TDY Holdings, LLC, Teledyne Industries, Inc., and Teledyne Technologies Incorporated (incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K dated November 29, 1999 (File No. 1-12001)). 2.2 Separation and Distribution Agreement dated November 29, 1999 among Allegheny Teledyne Incorporated (now known as Allegheny Technologies Incorporated), TDY Holdings, LLC, Teledyne Industries, Inc., and Water Pik Technologies, Inc. (incorporated by reference to Exhibit 2.2 to Registrant's Current Report on Form 8-K dated November 29, 1999 (File No. 1-12001)). 3.1 Certificate of Incorporation of Allegheny Technologies Incorporated, as amended, (incorporated by reference to Exhibit 3.1 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)). 3.2 Amended and Restated Bylaws of Allegheny Technologies Incorporated (incorporated by reference to Exhibit 3.2 to the Registrant's Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12001)). 4.1 Credit Agreement dated as of December 21, 2001 (incorporated by reference to Exhibit 4.1 of the Registrant's Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12001)), and First Amendment to Credit Agreement dated as of August 12, 2002 (incorporated by reference to Exhibit 4.1 to the Registrant's Report on Form 10-Q dated August 14, 2002 (File No. 1-12001)), and Second Amendment to Credit Agreement dated as of December 20, 2002 (filed herewith). 4.2 Indenture dated as of December 18, 2001 between Allegheny Technologies Incorporated and The Bank of New York, as trustee, relating to Allegheny Technologies Incorporated 8.375% Notes due 2011 (incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12001)). 4.3 Form of 8.375% Notes due 2011 (included as part of Exhibit 4.2). 4.4 Indenture dated as of December 15, 1995 between Allegheny Ludlum Corporation and The Chase Manhattan Bank (National Association), as trustee (relating to Allegheny Ludlum Corporation's 6.95% Debentures due 2025) (incorporated by reference to Exhibit 4(a) to Allegheny Ludlum Corporation's Report on Form 10-K for the year ended December 31, 1995 (File No. 1-9498)), and First Supplemental Indenture by and among Allegheny Technologies Incorporated, Allegheny Ludlum Corporation and The Chase Manhattan Bank (National Association), as Trustee, dated as of August 15, 1996 (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K dated August 15, 1996 (File No. 1-12001)). 26 4.5 Rights Agreement dated March 12, 1998, including Certificate of Designation for Series A Junior Participating Preferred Stock as filed with the State of Delaware on March 13, 1998 (incorporated by reference to Exhibit 1 to the Registrant's Current report on Form 8-K dated March 12, 1998 (File No. 1-12001)). 10.1 Allegheny Technologies Incorporated 1996 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12001)).* 10.2 Allegheny Technologies Incorporated Stock Acquisition and Retention Plan effective January 1, 1997 (incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-K for the year ended December 31, 1996 (File No. 1-12001)).* 10.3 Allegheny Technologies Incorporated Stock Acquisition and Retention Program effective January 1, 1998, as amended and restated (incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12001)).* 10.4 Allegheny Technologies Incorporated Stock Acquisition and Retention Program effective December 13, 2000 (incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12001)).* 10.5 Allegheny Technologies Incorporated 1996 Non-Employee Director Stock Compensation Plan, as amended December 17, 1998 (incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12001)).* 10.6 Allegheny Technologies Incorporated Fee Continuation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12001)).* 10.7 Supplemental Pension Plan for Certain Key Employees of Allegheny Technologies Incorporated and its subsidiaries (formerly known as the Allegheny Ludlum Corporation Key Man Salary Continuation Plan) (incorporated by reference to Exhibit 10.7 to the Company's Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12001)).* 10.8 Allegheny Technologies Incorporated Benefit Restoration Plan, as amended (incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)).* 10.9 Allegheny Ludlum Corporation 1987 Stock Option Incentive Plan (as amended and restated) (incorporated by reference to Exhibit 10(f) to Allegheny Ludlum Corporation's Report on Form 10-K for the year ended December 31, 1995 (File No. 1-9498)).* 10.10 Allegheny Ludlum Corporation Performance Share Plan (as amended and restated) (incorporated by reference to the Registration Statement on Form S-4 (No. 333-8235) of Allegheny Technologies Incorporated, appears as Appendix F to the Joint Proxy Statement/Prospectus forming part of the Registration Statement).* 27 10.11 Allegheny Ludlum Corporation Stock Acquisition and Retention Plan, as restated effective as of August 15, 1996 (incorporated by reference to Exhibit 10.10 to the Company's Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12001)).* 10.12 Teledyne, Inc. 1990 Stock Option Plan (incorporated by reference to Exhibit 10 to Teledyne, Inc.'s Report on Form 10-K for the year ended December 31, 1990 (File No. 1-5212)).* 10.13 Teledyne, Inc. 1994 Long-Term Incentive Plan (incorporated by reference to Exhibit A to Teledyne, Inc.'s 1994 proxy statement (File No. 1-5212)).* 10.14 Teledyne, Inc. 1995 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit A to Teledyne, Inc.'s 1995 proxy statement (File No. 1-5212)).* 10.15 Employment Agreement dated July 15, 1996 between Allegheny Technologies Incorporated and James L. Murdy (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4 (No. 333-8235)).* 10.16 Employment Agreement dated July 15, 1996 between Allegheny Technologies Incorporated and Jon D. Walton (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 333-8235)).* 10.17 Form of Amended and Restated Change in Control Severance Agreement (Senior Management)(incorporated by reference to Exhibit 10.17 to the Registrant's Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12001)).* 10.18 Employee Benefits Agreement dated November 29, 1999 between Allegheny Technologies Incorporated and Teledyne Technologies Incorporated (incorporated by reference to Exhibit 10.23 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)).* 10.19 Employee Benefits Agreement dated November 29, 1999 between Allegheny Technologies Incorporated and Water Pik Technologies, Inc. (incorporated by reference to Exhibit 10.24 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)).* 10.20 Tax Sharing and Indemnification Agreement dated November 29, 1999 between Allegheny Technologies Incorporated and Teledyne Technologies (incorporated by reference to Exhibit 10.25 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)). 10.21 Tax Sharing and Indemnification Agreement dated November 29, 1999 between Allegheny Technologies Incorporated and Teledyne Technologies Incorporated (incorporated by reference to Exhibit 10.26 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)). 10.22 Allegheny Technologies Incorporated Executive Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10.27 to the Registrant's Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12001)).* 28 10.23 Allegheny Technologies Incorporated Performance Share Program (incorporated by reference to Exhibit 10.22 to the Registrant's Report on Form 10-K for 1998 (File 1-12001)).* 10.24 Allegheny Technologies Incorporated Stock Acquisition and Retention Program effective January 1, 2001, as amended and restated (filed herewith).* 10.25 Allegheny Technologies Incorporated 2000 Incentive Plan (incorporated by reference to Exhibit 10.30 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)).* 10.26 Allegheny Technologies Incorporated Performance Share Program and form of Participant Agreement for the 2000-2002 Award Period (incorporated by reference to Exhibit 10.32 to the Registrant's Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12001)).* 10.27 Allegheny Technologies Incorporated Stock Acquisition and Retention Program effective January 1, 2002 (filed herewith).* 10.28 Allegheny Technologies Incorporated Annual Incentive Plan for the year 2002 (filed herewith).* 10.29 Total Shareholder Return Incentive Compensation Program effective January 1, 2001 (incorporated by reference to Exhibit 10.29 to the Registrant's Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12001)).* 10.30 Total Shareholder Return Incentive Compensation Program effective January 1, 2002 (filed herewith).* 13.1 Pages 9 through that part of page 64 referencing financial data, included in the Annual Report of Allegheny Technologies Incorporated for the year ended December 31, 2002 (filed herewith). 21.1 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). * Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Report. Certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have been omitted from the Exhibits in accordance with Item 601(b)(4)(iii) of Regulation S-K. A copy of any omitted document will be furnished to the Commission upon request. 29 EX-4.1.A 3 j9925901exv4w1wa.txt SECOND AMENDMENT TO CREDIT AGREEMENT EXHIBIT 4.1 SECOND AMENDMENT TO CREDIT AGREEMENT Among ALLEGHENY TECHNOLOGIES INCORPORATED, as the Borrower THE FINANCIAL INSTITUTIONS PARTY HERETO, as the Lenders MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent and PNC CAPITAL MARKETS, INC., as lead arranger Dated as of December 20, 2002 TABLE OF CONTENTS
Page ---- ARTICLE I AMENDMENTS TO ORIGINAL CREDIT AGREEMENT.......................................................3 Section 1.01. Amended Definitions.....................................................................3 Section 1.02. Additional Definitions..................................................................6 Section 1.03. Amendment to Section 2.1Aa..............................................................6 Section 1.04. Amendment to Section 2.1Ba..............................................................6 Section 1.05. Amendment to Section 2.2a...............................................................7 Section 1.06. Amendment to Section 2.2b...............................................................7 Section 1.07. Amendment to Section 2.3a...............................................................8 Section 1.08. Amendment to Section 2.8................................................................8 Section 1.09. Amendment to Section 2.12...............................................................8 Section 1.10. Amendment to Section 5.4...............................................................10 Section 1.11. Amendment to Section 5.5...............................................................11 Section 1.12. Amendment to Lender Signature Pages....................................................11 Section 1.13. Additional Exhibit.....................................................................11 Section 1.14. No Other Amendments....................................................................11 ARTICLE II BORROWER'S SUPPLEMENTAL REPRESENTATIONS......................................................12 Section 2.01. Incorporation by Reference.............................................................12 Section 2.02. Corporate Authority....................................................................12 Section 2.03. Validity of this Second Amendment......................................................12 Section 2.04. Financial Statements...................................................................12 Section 2.05. Absence of Litigation..................................................................13 Section 2.06. Amendment Closing Fee..................................................................13 ARTICLE III CONDITIONS PRECEDENT.........................................................................13 Section 3.01. Conditions Precedent...................................................................13 ARTICLE IV GENERAL PROVISIONS...........................................................................14 Section 4.01. Ratification of Terms..................................................................14 Section 4.02. References.............................................................................15 Section 4.03. Incorporation Into Existing Credit Agreement...........................................15 Section 4.04. Counterparts...........................................................................15 Section 4.05. Capitalized Terms......................................................................15 Section 4.06. Taxes..................................................................................15 Section 4.07. Costs and Expenses.....................................................................15 Section 4.08. Severability...........................................................................16 Section 4.09. Governing Law..........................................................................16 Section 4.10. Headings...............................................................................16 Section 4.11. Acknowledgment of Amendment of the Short Term Revolving Credit Note....................16 Section 4.12. Amendment of Notes.....................................................................16
-i- SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Second Amendment") dated as of December 20, 2002, to that certain Credit Agreement dated as of December 21, 2001 (the Credit Agreement together with the exhibits and schedules thereto and all modifications, amendments, extensions, renewals, substitutions or replacements prior to the date hereof, the "Original Credit Agreement"), among ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation, as the borrower (the "Borrower"), the FINANCIAL INSTITUTIONS listed on the signature pages hereto and each other financial institution which from time to time becomes a party thereto in accordance with Section 9.6a of the Original Credit Agreement (individually a "Lender" and collectively the "Lenders"), MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents (individually a "Syndication Agent" and collectively the "Syndication Agents") and PNC BANK, NATIONAL ASSOCIATION, a national banking association, Documentation and Administrative Agent for the Lenders (in such capacity the "Agent"), as such Original Credit Agreement has been amended by that certain First Amendment to Credit Agreement dated as of August 12, 2002, by and among the Borrower, the Lenders which are parties thereto, the Syndication Agents and the Agent (the Original Credit Agreement, as so amended by such First Amendment to Credit Agreement, is hereinafter referred to as the "Existing Credit Agreement") WITNESSETH: WHEREAS, the Borrower, the Lenders, the Syndication Agents and the Agent have entered into the Existing Credit Agreement pursuant to which the Lenders have made certain financial accommodations available to the Borrower, including a long term revolving credit commitment and a short term revolving credit commitment; WHEREAS, the Borrower has requested an extension of the Short Term Revolving Credit Commitment pursuant to the terms of Section 2.8 of the Existing Credit Agreement; WHEREAS, the Borrower, the Lenders the Syndication Agents and the Agent have agreed pursuant to the terms hereof (i) to extend the Short Term Revolving Credit Commitment until December 19, 2003; (ii) to reduce the aggregate Short Term Revolving Credit Commitment hereunder to $100,000,000; and (iii) to reduce the aggregate Long Term Revolving Credit Commitment hereunder to $150,000,000; WHEREAS, the Borrower, the Required Lenders and the Agent have agreed pursuant to the terms hereof to amend certain additional provisions of the Existing Credit Agreement on the terms set forth below; and WHEREAS, the Borrower, the Syndication Agents, the Agent and the Required Lenders acknowledge that PNC Capital Markets, Inc. ("PNC Capital"), has acted as the lead arranger for this amendment; provided however, PNC Capital is not, and shall not be, a party to this Second Amendment. NOW THEREFORE, in consideration of the mutual premises contained herein and other good and valuable consideration, the Borrower, the Required Lenders, the Syndication Agents and the Agent, with the intent to be legally bound hereby, agree that the Existing Credit Agreement shall be amended as follows: ARTICLE I AMENDMENTS TO ORIGINAL CREDIT AGREEMENT Section 1.01. Amended Definitions. Section 1.1 of the Existing Credit Agreement is hereby amended such that the following definitions shall be amended and restated as set forth below. "Applicable Short Term Revolving Credit LIBOR Margin" means for each LIBOR Portion of the Short Term Revolving Credit Loans, the percentage (expressed in basis points) determined from time to time based upon the Senior Ratings then in effect from Moody's and S&P set forth under the relevant column heading below:
- -------------------------------------------------------------------------------------------------------------- Applicable Short Term Revolving Senior Ratings Credit LIBOR Margin - -------------------------------------------------------------------------------------------------------------- Level I ------- Senior Ratings are equal to or better than A from S&P or A2 from Moody's 32.5 Basis Points - -------------------------------------------------------------------------------------------------------------- Level II -------- Senior Ratings are A- from S&P or A3 from Moody's 40 Basis Points - -------------------------------------------------------------------------------------------------------------- Level III --------- Senior Ratings are BBB+ from S&P or Baa1 from Moody's 45 Basis Points - -------------------------------------------------------------------------------------------------------------- Level IV -------- Senior Ratings are BBB from S&P or Baa2 from Moody's 75 Basis Points - -------------------------------------------------------------------------------------------------------------- Level V ------- Senior Ratings are BBB- from S&P or Baa3 from Moody's 95 Basis Points - -------------------------------------------------------------------------------------------------------------- Level VI -------- Senior Ratings are less than BBB- from S&P and Baa3 from Moody's 142.5 Basis Points - --------------------------------------------------------------------------------------------------------------
provided, however, that (i) in the event the Senior Ratings of S&P and Moody's do not coincide, the Applicable Short Term Revolving Credit LIBOR Margin shall be determined utilizing the higher of such Senior Ratings; and (ii) in the event only one Senior Rating is in effect, the Applicable Short Term Revolving Credit LIBOR Margin set forth opposite such Senior Rating shall apply. -3- "Commitment" means, as to each Lender, the sum of the Dollar amount set forth opposite such Lender's name on its signature page hereto (i) under the heading "Maximum Dollar Amount of Long Term Revolving Credit Commitment" plus (ii) under the heading "Maximum Dollar Amount of Short Term Revolving Credit Commitment" (as the same may be reduced at any time or from time to time pursuant to Subsection 2.1Af, Subsection 2.1Bf, Subsection 2.1Bg and Section 2.12) and, as to all Lenders, the obligation of the Lenders to make Revolving Credit Loans available to the Borrower in a maximum aggregate amount not to exceed (x) $325,000,000 at any time prior to the Second Amendment Effective Date, and (y) $250,000,000 at any time on or after the Second Amendment Effective Date, as set forth in Section 2.1 (as the same may be reduced at any time or from time to time pursuant to Subsection 2.1Af, Subsection 2.1Bf, Subsection 2.1Bg and Section 2.12). "Consolidated EBITDA" means for any period Consolidated Net Income for such period (x) excluding therefrom (A) any extraordinary items of gain or loss (including without limitation those items created by mandated changes in accounting treatment), (B) any gain or loss of any other Person accounted for on the equity method, except to the extent of cash distributions received during the relevant period, (C) any other non-cash non-recurring items of gain or loss not covered in clauses (A) and (B) of this definition, (D) any cash charge in an amount not to exceed Ten Million Dollars ($10,000,000) recorded by the Borrower for its Fiscal Year ending December 31, 2002 for the payment of severance costs incurred in connection with restructuring costs recognized by the Borrower during 2002, and (E) any non-cash pension expense and any non-cash pension income resulting from the application of SFAS 87 and that portion of SFAS 106 expenses equal to the cash payments from the VEBA, (y) plus the aggregate amounts deducted in determining Consolidated Net Income for such period in respect of (i) Consolidated Interest Expense (ii) depreciation expense, (iii) any amortization of goodwill or other intangible assets and (iv) income taxes. "Consolidated Total Indebtedness" means the Indebtedness of the Borrower and its Consolidated Subsidiaries determined on a Consolidated basis in accordance with GAAP, consistently applied, together with the funded amount under any Securitization Contract entered into by a Special Purpose Subsidiary, less the sum of cash and Cash Equivalents on the Consolidated balance sheet of the Borrower in excess of $25,000,000 as of the date of any determination of the Consolidated Total Indebtedness of the Borrower; provided, however, that any Revolving Credit Loans outstanding in excess of $50,000,000 on the date of any determination of Consolidated Total Indebtedness shall be included in the calculation of Consolidated Total Indebtedness on such date regardless of the amount of cash and Cash Equivalents on the Consolidated balance sheet of the Borrower as of such date of determination. "Long Term Revolving Credit Loan" shall mean any Disbursements made by the Lenders under the Long Term Revolving Credit Commitment, which Disbursements in the aggregate shall not exceed more than (x) $195,000,000 at any time outstanding prior to the Second Amendment Effective Date, and (y) $150,000,000 at any time outstanding on or after the Second Amendment Effective Date. -4- "Short Term Revolving Credit Facility Fee Percentage" shall mean the rate per annum (expressed in basis points) determined from time to time based upon the Senior Ratings in effect by S&P and Moody's set forth under the relevant column heading below opposite such Senior Ratings:
- ------------------------------------------------------------------------------------------------------------------ Short Term Revolving Credit Senior Ratings Facility Fee Percentage - ------------------------------------------------------------------------------------------------------------------ Level I ------- Senior Ratings are equal to or better than A from S&P or A2 from Moody's 12.5 Basis Points - ------------------------------------------------------------------------------------------------------------------ Level II -------- Senior Ratings are A- from S&P or A3 from Moody's 15 Basis Points - ------------------------------------------------------------------------------------------------------------------ Level III --------- Senior Ratings are BBB+ from S&P or Baa1 from Moody's 20 Basis Points - ------------------------------------------------------------------------------------------------------------------ Level IV -------- Senior Ratings are BBB from S&P or Baa2 from Moody's 25 Basis Points - ------------------------------------------------------------------------------------------------------------------ Level V ------- Senior Ratings are BBB- from S&P or Baa3 from Moody's 30 Basis Points - ------------------------------------------------------------------------------------------------------------------ Level VI -------- Senior Ratings are less than BBB- from S&P and Baa3 from Moody's 32.5 Basis Points - ------------------------------------------------------------------------------------------------------------------
provided that, in the event that the Senior Ratings of S&P and Moody's do not coincide, the Short Term Revolving Credit Facility Fee Percentage set forth above opposite the higher of such Senior Ratings will apply; and provided further, in the event that one Senior Rating is in effect, the Short Term Revolving Credit Facility Fee Percentage set forth above for such Senior Rating will apply. "Short Term Revolving Credit Loans" shall mean any Disbursements made by the Lenders under the Short Term Revolving Credit Commitment which Disbursements in the aggregate shall not exceed more than (x) $130,000,000 at any time outstanding prior to the Second Amendment Effective Date, and (y) $100,000,000 at any time outstanding on or after the Second Amendment Effective Date. Section 1.02. Additional Definitions. Section 1.1 of the Existing Credit Agreement is hereby amended such that the following definition shall be added thereto in the appropriate alphabetical order: -5- "Second Amendment" means the Second Amendment to Credit Agreement among the Borrower, the Required Lenders, the Syndication Agents and the Agent dated as of December 20, 2002. "Second Amendment Effective Date" means December 20, 2002. "VEBA" means for purposes of this Agreement the Allegheny Ludlum Corporation Bargaining Unit, Voluntary Employee's Benefit Trust. Section 1.03. Amendment to Section 2.1Aa. Section 2.1Aa of the Existing Credit Agreement is hereby amended and restated to read as follows: 2.1Aa LONG TERM REVOLVING CREDIT LOANS. The Lenders hereby severally establish, upon the terms and conditions hereinafter set forth and relying upon the representations and warranties herein set forth, a long term revolving credit commitment in favor of the Borrower in the maximum aggregate amount of (x) ONE HUNDRED NINETY-FIVE MILLION AND NO/100 DOLLARS ($195,000,000.00) at any time prior to the Second Amendment Effective Date, and (y) ONE HUNDRED FIFTY MILLION AND NO/100 DOLLARS ($150,000,000.00) at any time on or after the Second Amendment Effective Date (such commitment to lend as then in effect is herein referred to as the "Long Term Revolving Credit Commitment"). The Borrower shall have the right to borrow, repay and reborrow from the Lenders from the date hereof until the Long Term Revolving Credit Termination Date pursuant to draws upon the Long Term Revolving Credit Commitment the principal amount of which, together with Letters of Credit Outstanding and the principal amount of Bid Rate Loans and Swingline Loans (other than Bid Rate Loans or Swingline Loans allocated to the Short Term Revolving Credit Commitment) then outstanding, shall not exceed (i) $195,000,000 in the aggregate at any one time outstanding prior to the Second Amendment Effective Date, and (ii) $150,000,000 in the aggregate at any one time outstanding on or after the Second Amendment Effective Date. Section 1.04. Amendment to Section 2.1Ba. Section 2.1Ba of the Existing Credit Agreement is hereby amended and restated to read as follows: 2.1Ba SHORT TERM REVOLVING CREDIT LOANS. The Lenders hereby severally establish, upon the terms and conditions hereinafter set forth and relying upon the representations and warranties herein set forth, a short term revolving credit commitment in favor of the Borrower in the maximum aggregate amount of (x) ONE HUNDRED THIRTY MILLION AND NO/100 DOLLARS ($130,000,000.00) at any time prior to the Second Amendment Effective Date, and (y) ONE HUNDRED MILLION AND NO/100 DOLLARS ($100,000,000.00) at any time on or after the Second Amendment Effective Date (such commitment to lend as then in effect is herein referred to as the "Short Term Revolving Credit Commitment"). The Borrower shall have the right to borrow, repay and reborrow from the Lenders from the date hereof until the Short Term Revolving Credit Termination Date pursuant to draws upon the Short Term Revolving Credit Commitment the principal amount of which, together with the principal amount of Bid Rate Loans and Swingline Loans (other than Bid Rate Loans or Swingline Loans allocated to the Long Term Revolving Credit Commitment) then outstanding, shall not -6- exceed (i) $130,000,000 in the aggregate at any one time outstanding prior to the Second Amendment Effective Date, and (ii) $100,000,000 in the aggregate at any one time outstanding on or after the Second Amendment Effective Date. Section 1.05. Amendment to Section 2.2a. Section 2.2a of the Existing Credit Agreement is hereby amended and restated to read as follows: 2.2a BID RATE. Subject to the provisions of this Section 2.2, each Lender severally agrees that the Borrower may request Bid Rate Loans, in an aggregate amount at any one time outstanding not to exceed (i) $325,000,000 at any time prior to the Second Amendment Effective Date, and (ii) $250,000,000 at any time on or after the Second Amendment Effective Date (or the sum of $150,000,000 plus any remaining Short Term Revolving Credit Commitment on and after any Short Term Revolving Credit Termination Date) less the Letters of Credit Outstanding and the aggregate principal amount of all Revolving Credit Loans and Swingline Loans then outstanding, which shall bear interest at the Bid Rate Option. In selecting a Bid Rate Option from any Lender, such Lender may make an advance in excess of such Lender's Commitment. Section 1.06. Amendment to Section 2.2b. Section 2.2b of the Existing Credit Agreement is hereby amended and restated to read as follows: 2.2b LIMITATIONS ON AND EVIDENCE OF BID RATE LOANS. Except as provided under Section 2.2c(vi) hereof, each Bid Rate Loan or repayment of a Bid Rate Loan must be in the minimum principal amount of $5,000,000 or, if in excess of $5,000,000, in integral multiples of $1,000,000. The obligation of the Borrower to repay, on the Long Term Revolving Credit Termination Date (if the Borrower has requested a Disbursement under the Long Term Revolving Credit Commitment), the aggregate unpaid principal amount of such Bid Rate Loans advanced by each Lender shall be evidenced by the Bid Rate Notes substantially in the form of Exhibit "B-1" hereto, one made payable to each Lender in the amount of (i) $195,000,000 at any time prior to the Second Amendment Effective Date, and (ii) $150,000,000 at any time on or after the Second Amendment Effective Date. The obligation of the Borrower to repay, on the Short Term Revolving Credit Termination Date (if the Borrower has requested the Disbursement under the Short Term Revolving Credit Commitment), the aggregate unpaid principal amount of such Bid Rate Loans advanced by each Lender shall be evidenced by the Bid Rate Notes substantially in the form of Exhibit "B-2" hereto, one made payable to each Lender in the amount of (i) $130,000,000 at any time prior to the Second Amendment Effective Date, and (ii) $100,000,000 at any time on or after the Second Amendment Effective Date. The Borrower shall have, with the prior written consent of the Lender making such Bid Rate Loan, the right to prepay any Bid Rate Loan prior to the end of the relevant Bid Rate Interest Period. The Borrower shall repay each individual Bid Rate Loan, together with interest thereon on the last day of the Bid Rate Interest Period applicable to it. The principal amount actually due and owing each Lender shall be the aggregate unpaid principal amount of all Disbursements of Bid Rate Loans made by such Lender, all as shown on the Loan Account established pursuant to Section 2.13 hereof. -7- Section 1.07. Amendment to Section 2.3a. Section 2.3a of the Existing Credit Agreement is hereby amended and restated to read as follows: 2.3a SWINGLINE RATE. Subject to the provisions of this Section 2.3, each Swingline Lender severally agrees that the Borrower may request that Swingline Loans, in an aggregate amount at any one time outstanding not to exceed the lesser of (i) $25,000,000 or (ii) an amount which, when added to the Letters of Credit Outstanding and the aggregate principal amount of all other Loans then outstanding, does not exceed (i) $325,000,000 at any time prior to the Second Amendment Effective Date, and (ii) $250,000,000 at any time on or after the Second Amendment Effective Date (so long as both the Long Term Revolving Credit Commitments and all of the initial Short Term Revolving Credit Commitments are outstanding; the sum of $150,000,000 plus the sum of any remaining Short Term Revolving Credit Commitments if a Short Term Revolving Credit Termination Date has occurred with respect to one or more Lenders plus the outstanding balance of the Term Loans, if any; and the sum of $150,000,000 plus the outstanding Term Loans, if any, in the event that only the Long Term Revolving Credit Commitment is outstanding), which shall bear interest at the Swingline Option. Section 1.08. Amendment to Section 2.8. Section 2.8 of the Existing Credit Agreement is hereby amended to add a new Subsection 2.8c which shall read as follows: 2.8c AGREED TO EXTENSION OF SHORT TERM REVOLVING CREDIT COMMITMENTS. Pursuant to Section 2.8a, as of the Second Amendment Effective Date, the date of the Short Term Revolving Credit Termination Date is extended to December 19, 2003. As of the Second Amendment Effective Date the aggregate Short Term Revolving Credit Commitment is $100,000,000. Each of the Lenders with a Short Term Revolving Credit Commitment as of the date preceding the Second Amendment Effective Date agrees to the extension of the Short Term Revolving Credit Termination Date to December 19, 2003. Section 1.09. Amendment to Section 2.12. Section 2.12 of the Existing Credit Agreement is hereby amended and restated to read as follows: 2.12 REDUCTIONS IN AVAILABILITY. 2.12a VOLUNTARY REDUCTION OF AVAILABILITY. At any time and from time to time upon no less than three (3) Business Days prior written notice to the Agent, the Borrower may terminate, in whole or in part, without penalty, the then unused portion of the Commitments, thereby causing a corresponding abatement of the applicable Facility Fee. Each such reduction shall be in a minimum principal amount of $10,000,000 or in integral multiples thereof. The applicable Facility Fee shall cease to accrue with respect to any unused portion of the commitments so terminated on either (i) the date five (5) Business Days after receipt of such notice or (ii) the date so designated in the written notice if such written notice is given to the Agent more than five (5) Business Days prior to the effective date of such termination. Notice of termination once given shall be irrevocable and the portion of the Commitments so terminated shall not be available for borrowing once such notice has been given under the terms hereof. The Agent shall -8- promptly notify each Lender of its pro rata share of such terminated unused portion and the date of each such termination. On the effective date for the reduction of the Long Term Revolving Credit Commitment, the sum of (i) Letters of Credit Outstanding, plus (ii) Long Term Revolving Credit Loans outstanding hereunder, plus (iii) Bid Rate Loans and Swingline Loans outstanding hereunder and allocated to the Long Term Revolving Credit Commitment may not exceed the Long Term Revolving Credit Commitment as so reduced. On the effective date for the reduction of the Short Term Revolving Credit Commitment, the sum of (i) the Short Term Revolving Credit Loans outstanding hereunder, plus (ii) Bid Rate Loans and Swingline Loans outstanding hereunder and allocated to the Short Term Revolving Credit Commitment may not exceed the Short Term Revolving Credit Commitment as so reduced. 2.12b MANDATORY REDUCTION OF AVAILABILITY. The Commitments shall be automatically and permanently reduced contemporaneously with the closing of any Securitization permitted by Section 5.5 hereof in the amount required by the terms of Section 5.5 for such permitted Securitization. Any such mandatory permanent reduction of the Commitments shall be applied first to the Short Term Revolving Credit Commitments and then to the Long Term Revolving Credit Commitments. To the extent that, at the time of any such mandatory permanent reduction of the Short Term Revolving Credit Commitments, the aggregate amount of (a) the Short Term Revolving Credit Loans outstanding and (b) the Bid Rate Loans and Swingline Loans outstanding hereunder and allocated to the Short Term Revolving Credit Commitments exceeds the Short Term Revolving Credit Commitments, as so reduced, the Borrower, on or before the date on which the mandatory reduction of the Short Term Revolving Credit Commitments becomes effective, shall make a mandatory repayment of Loans outstanding sufficient to reduce (ii) the sum of (x) the Short Term Revolving Credit Loans outstanding hereunder, plus (y) Bid Rate Loans and Swingline Loans outstanding hereunder and allocated to the Short Term Revolving Credit Commitments to an amount equal to or lesser than the Short Term Revolving Credit Commitments, as so reduced. To the extent that, at the time of any such mandatory permanent reduction of the Long Term Revolving Credit Commitments, the aggregate amount of (a) the Letters of Credit Outstanding, (b) the Long Term Revolving Credit Loans outstanding and (c) Bid Rate Loans and Swingline Loans outstanding hereunder and allocated to the Long Term Revolving Credit Commitments exceeds the Long Term Revolving Credit Commitments, as so reduced, the Borrower, on or before the date on which the mandatory reduction of the Long Term Revolving Credit Commitments becomes effective, shall make a mandatory repayment of Loans outstanding sufficient to reduce (i) the sum of (x) Letters of Credit Outstanding, plus (y) Long Term Revolving Credit Loans outstanding hereunder, plus (z) Bid Rate Loans and Swingline Loans outstanding hereunder and allocated to the Long Term Revolving Credit Commitments to an amount equal to or lesser than the Long Term Revolving Credit Commitments, as so reduced. The Agent shall notify each Lender of the reduction of the Commitments and the application of such reduction to the Short Term Revolving Credit Commitments and/or the Long Term Revolving Credit Commitments, as applicable. From and after the effective date of any such reduction of the Short Term Revolving Credit Commitments, the applicable Short Term Revolving Credit Facility Fee set forth in Subsection 2.6b hereof shall be calculated on the basis of each Lender's Short Term Revolving Credit Commitment Percentage of -9- the Short Term Revolving Credit Commitments, as so reduced. From and after the effective date of any such reduction of the Long Term Revolving Credit Commitments, the applicable Long Term Revolving Credit Facility Fee set forth in Subsection 2.6a hereof shall be calculated on the basis of each Lender's Long Term Revolving Credit Commitment Percentage of the Long Term Revolving Credit Commitments, as so reduced. Section 1.10. Amendment to Section 5.4. Section 5.4 of the Existing Credit Agreement is hereby amended and restated to read as follows: 5.4 INTEREST COVERAGE RATIO. (i) At no time prior to or on September 30, 2002, shall the ratio of the Borrower's Consolidated EBITDA for the four (4) most recently completed Fiscal Quarters as of any Fiscal Quarter ended during such period, taken as a single accounting period, to its Consolidated Interest Expense for the same four (4) Fiscal Quarter period, taken as a single accounting period, be less than 2.25 to 1.0; (ii) at no time during the period after September 30, 2002 through December 31, 2003, shall the ratio of the Borrower's Consolidated EBITDA for the four (4) most recently completed Fiscal Quarters as of any Fiscal Quarter ended during such period, taken as a single accounting period, to its Consolidated Interest Expense for the same four (4) Fiscal Quarter period, taken as a single accounting period, be less than 2.00 to 1.0; (iii) at no time during the period after December 31, 2003, through June 30, 2004, shall the ratio of the Borrower's Consolidated EBITDA for the four (4) most recently completed Fiscal Quarters as of any Fiscal Quarter ended during such period, taken as a single accounting period, to its Consolidated Interest Expense for the same four (4) Fiscal Quarter period, taken as a single accounting period, be less than 2.50 to 1.0; (iv) at no time during the period after June 30, 2004 through December 31, 2004 shall the ratio of the Borrower's Consolidated EBITDA for the four (4) most recently completed Fiscal Quarters as of any Fiscal Quarter ended during such period, taken as a single accounting period, to its Consolidated Interest Expense for the same four (4) Fiscal Quarter period, taken as a single accounting period, be less than 3.0 to 1.0; and (v) at no time after December 31, 2004 shall the ratio of the Borrower's Consolidated EBITDA for the four (4) most recently completed Fiscal Quarters as of any Fiscal Quarter ended during such period, taken as a single accounting period, to its Consolidated Interest Expense for the same four (4) Fiscal Quarter period, taken as a single accounting period, be less than 3.50 to 1.0. Section 1.11. Amendment to Section 5.5. Section 5.5 of the Existing Credit Agreement is hereby amended and restated to read as follows: 5.5 SALES OF ASSETS. The Borrower shall not nor shall it permit any Consolidated Subsidiary to enter into any arrangement, direct or indirect, pursuant to which the Borrower or any Consolidated Subsidiary shall sell or otherwise transfer or dispose of any property, real, personal or mixed, whether now owned or hereafter acquired, except (i) sales, transfers or dispositions in the ordinary course of business, (ii) the sale, transfer or other disposition of the stock or assets set forth on Schedule 5.5, (iii) sales, transfers or dispositions not in the ordinary course of business provided that the aggregate proceeds of all such sales, transfers and dispositions permitted by this item (iii) -10- shall not exceed (A) from the date hereof until November 30, 2006, thirty percent (30%) of the Borrower's Consolidated Total Assets as of September 30, 2001, and (B) beginning with the first day of the Borrower's Fiscal Year 2002-2003 and thereafter, more than ten (10%) of the Borrower's Consolidated Total Assets as of the beginning of the Fiscal Year in question, and (iv) any absolute sale or assignment of Receivables in connection with a Securitization with a Special Purpose Subsidiary pursuant to a Securitization Contract, provided that (A) such transaction, except for the customary exceptions, is nonrecourse to the Borrower or any of its Subsidiaries (including the Special Purpose Subsidiary), (B) such Securitization is classified as "off balance sheet" for financial reporting purposes in accordance with GAAP with respect to the Borrower on a Consolidated basis, (C) the only assets of the Special Purpose Subsidiary are Receivables acquired from the Borrower or its other Subsidiaries pursuant to a Securitization Contract, and (D) the aggregate Commitments shall be permanently reduced contemporaneously with the closing of such a Securitization transaction by an amount equal to fifty percent (50%) of the maximum available funding amount under the applicable Securitization Contract entered into by a Special Purpose Subsidiary. Any such permanent reduction of the Commitments shall be applied first to the Short Term Revolving Credit Commitments and then to the Long Term Revolving Credit Commitments. Section 1.12. Amendment to Lender Signature Pages. The Existing Credit Agreement is hereby amended by deleting the information relating to each Lender's respective participation in the various commitments under the Existing Credit Agreement and their respective addresses for notice and LIBOR Rate Loan Funding purposes and substituting in replacement thereof all of the corresponding information set for on each Lender's signature page to this Second Amendment. Section 1.13. Additional Exhibit. The Existing Credit Agreement is amended to include the Exhibits L-1, L-2, L-3 and L-4 attached to this Second Amendment. Section 1.14. No Other Amendments. The amendments to the Existing Credit Agreement set forth in Sections 1.01 through 1.13 inclusive above do not either implicitly or explicitly alter or amend, except as expressly provided in this Second Amendment, the provisions of the Existing Credit Agreement. The amendments set forth in Sections 1.01 through 1.13 hereof do not waive, now or in the future, compliance with any other covenant, term or condition to be performed or complied with nor do they impair any rights or remedies of the Lenders or the Agent under the Existing Credit Agreement with respect to any such violation. Nothing in this Second Amendment shall be deemed or construed to be a release of, or a limitation upon, the Lenders', Syndication Agents' or the Agent's exercise of any of their respective rights and remedies under the Existing Credit Agreement and the other Loan Documents, whether arising as a consequence of any Events of Default which may now exist or otherwise, and all such rights and remedies are hereby expressly reserved. ARTICLE II BORROWER'S SUPPLEMENTAL REPRESENTATIONS Section 2.01. Incorporation by Reference. As an inducement to the Lenders, the Syndication Agents and the Agent to enter into this Second Amendment, (i) the Borrower hereby -11- repeats and remakes herein, for the benefit of the Lenders, the representations and warranties made by the Borrower in Sections 3.1 through 3.16, inclusive, of the Existing Credit Agreement, as amended hereby, except that for purposes hereof such representations and warranties shall be deemed to extend to and cover this Second Amendment and are remade as of the Second Amendment Effective Date, and (ii) the Borrower hereby represents and warrants that on and as the Second Amendment Effective Date that no Potential Default or Event of Default has occurred and is continuing. Section 2.02. Corporate Authority. As an inducement to the Lenders, the Syndication Agents and the Agent to enter into this Second Amendment, the Borrower hereby represents and warrants that the Borrower is duly authorized to execute and deliver this Second Amendment; all necessary corporate action to authorize the execution and delivery of this Second Amendment has been properly taken; and it is and will continue to be duly authorized to borrow under the Existing Credit Agreement, as amended hereby, and to perform all of the other terms and provisions of this Second Amendment and the Existing Credit Agreement, as amended hereby. Section 2.03. Validity of this Second Amendment. As an inducement to the Lenders, the Syndication Agents and the Agent to enter into this Second Amendment, the Borrower hereby represents and warrants that the execution and delivery of this Second Amendment does not, and the borrowings contemplated by the Existing Credit Agreement, as amended hereby, and the performance by the Borrower of its obligations under this Second Amendment and the Existing Credit Agreement, as amended hereby, will not contravene any provision of law, of the Borrower's Certificate of Incorporation or Bylaws, or the provisions of any agreement to which the Borrower is a party or by which the Borrower is bound; this Second Amendment constitutes the legal, valid and binding obligation of the Borrower enforceable in accordance with its terms. Section 2.04. Financial Statements. The Borrower has furnished to the Lenders, the Syndication Agents and the Agent the consolidated balance sheets and the related consolidated statements of income, shareholders' equity and changes in financial position of the Borrower as at Borrower's Fiscal Year ending December 31, 2001 and for its Fiscal Quarter ending September 30, 2002. All such financial statements, including the related notes, have been prepared in accordance with GAAP, except as expressly noted therein, and fairly present the consolidated financial position of the Borrower as at the dates thereof and the results and consolidated results of the operations and the changes in the financial position of the Borrower and its Consolidated Subsidiaries. Other than the Bank Indebtedness there were no material liabilities of the Borrower and its Consolidated Subsidiaries, taken as a whole, contingent or otherwise, not reflected in such financial statements. Section 2.05. Absence of Litigation. Except as set forth in the Forms 10-K, 10-Q, or 8-K most recently filed by the Borrower as of the Second Amendment Effective Date, respectively, there are no actions, suits, investigations, litigation or governmental proceedings pending or, to the Borrower's knowledge, threatened against the Borrower or any Consolidated Subsidiary or any of their respective properties, which would have a Material Adverse Effect on the Borrower and the Consolidated Subsidiaries taken as a whole, or which purport to affect the legality, validity or enforceability of this Second Amendment, the Agreement or the Notes. -12- Section 2.06. Amendment Closing Fee. As an inducement to the Lenders, the Syndication Agents and the Agent to enter into this Second Amendment, the Borrower hereby represents, warrants and agrees to pay to the Agent, on behalf of each Lender that executes and delivers to the Agent this Second Amendment to the Agreement on or before noon on December 18, 2002, an amendment closing fee equal to the sum of (i) the product of fifteen (15) basis points (.15%) times the maximum Long Term Revolving Credit Commitment (as reduced pursuant to the terms of this Second Amendment) of each such Lender under the Agreement, plus (ii) the product of thirty (30) basis points (.30%) times the maximum Short Term Revolving Credit Commitment (as reduced pursuant to the terms of this Second Amendment) of each such Lender under the Agreement (such sum herein referred to as, the "Amendment Closing Fee"). ARTICLE III CONDITIONS PRECEDENT Section 3.01. Conditions Precedent. Each of the following events or conditions shall be a condition precedent to the effectiveness of this Second Amendment. (i) The Agent shall have received duly executed counterpart originals of this Second Amendment executed by the Borrower and the Required Lenders; and with respect to the extension of the Short Term Revolving Credit Termination Date, such extension has been agreed to by Lenders that constitute the Supermajority Lenders; (ii) The Borrower shall have delivered to the Agent the amendments to promissory notes attached hereto as Exhibits L-1, L-2, L-3 and L-4 duly completed for each of the Lenders; (iii) The Borrower shall deliver to the Agent a certificate of the Secretary or assistant secretary of the Borrower certifying: (A) the corporate authority of the Borrower to execute, deliver and perform under this Second Amendment; (B) the names of the persons authorized on behalf of the Borrower to sign this Second Amendment, together with the true signatures of such persons; and (C) that the articles of incorporation and bylaws of the Borrower delivered to the Agent on the Closing Date remain in full force and effect and have not been modified. (iv) The following statements shall be true and correct on the Second Amendment Effective Date and on the date of the execution and delivery of this Second Amendment by the Borrower: (A) except to the extent modified in writing by the Borrower heretofore delivered to the Lenders, the representations and warranties made pursuant to Section 2.01 of this Second Amendment and in the other Loan Documents are true and correct on and as of the Second Amendment Effective Date and as of the date of the execution and -13- delivery of this Second Amendment by the Borrower as though made on and as of such date in all material respects; (B) no Event of Default or event which with the giving of notice or passage of time or both would become an Event of Default has occurred and is continuing, or would result from the execution of or performance under this Second Amendment; (C) the Borrower has in all material respects performed all agreements, covenants and conditions required to be performed on or prior to the date hereof under the Existing Credit Agreement and the other Loan Documents. (v) Payment to the Agent of the Amendment Closing Fee for the benefit of the applicable Lenders in connection with this Second Amendment. (vi) Receipt by the Agent of such other instruments, amendments, promissory notes, documents and opinions of counsel as the Agent shall reasonably require, all of which shall be satisfactory in form and content to the Agent and its counsel. ARTICLE IV GENERAL PROVISIONS Section 4.01. Ratification of Terms. Except as expressly amended or waived by this Second Amendment, the Existing Credit Agreement and each and every representation, warranty, covenant, term and condition contained therein is specifically ratified and confirmed in all material respects. The Borrower expressly ratifies and confirms the waiver of jury trial provisions contained in the Existing Credit Agreement and the other Loan Documents. Section 4.02. References. All notices, communications, agreements, certificates, documents or other instruments executed and delivered after the execution and delivery of this Second Amendment in connection with the Agreement, any of the other Loan Documents or the transactions contemplated thereby may refer to the Existing Credit Agreement without making specific reference to this Second Amendment, but nevertheless all such references shall include this Second Amendment unless the context requires otherwise. After the execution and delivery of this Second Amendment by the Borrower and the effectiveness of this Second Amendment, all references in the Existing Credit Agreement and each of the other Loan Documents to the "Agreement" shall be deemed to be references to the Existing Credit Agreement as amended hereby. Section 4.03. Incorporation Into Existing Credit Agreement. This Second Amendment is deemed incorporated into, is to be construed in connection with and is made a part of, the Existing Credit Agreement as of the Second Amendment Effective Date. To the extent that any term or provision of this Second Amendment is or may be deemed expressly inconsistent with any term or provision of the Existing Credit Agreement, the terms and provisions hereof shall control. For greater certainty, any calculations of the financial covenants under the Existing Credit Agreement for periods ending prior to the Second Amendment Effective Date need only comply with the terms of the Existing Credit Agreement as of the date in question. -14- Section 4.04. Counterparts. This Second Amendment may be executed in different counterparts, and by the different parties hereto on separate counterparts, each of which when so executed shall be regarded as an original, and all such counterparts shall constitute one Second Amendment. Delivery of an executed signature page of a counterpart of this Second Amendment by telecopier shall be as effective as delivery of a manually executed counterpart of this Second Amendment. Section 4.05. Capitalized Terms. Except for proper nouns and as otherwise defined herein, capitalized terms used herein as defined terms shall have the meanings ascribed to them in the Existing Credit Agreement, as amended hereby. Section 4.06. Taxes. The Borrower hereby agrees (i) to pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Second Amendment and (ii) to save the Syndication Agents, the Agent and the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. Section 4.07. Costs and Expenses. The Borrower hereby agrees to pay all costs and expenses of the Agent (including, without limitation, the reasonable fees and the disbursements of the Agent's special counsel, Tucker Arensberg, P.C.) in connection with the preparation, execution and delivery of this Second Amendment and the related documents. Section 4.08. Severability. Any provision of this Second Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or enforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 4.09. Governing Law. THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO THE PROVISIONS THEREOF REGARDING CONFLICTS OF LAW. Section 4.10. Headings The headings of the sections in this Second Amendment are for purposes of reference only and shall not be deemed to be a part hereof. Section 4.11. Acknowledgment of Amendment of the Short Term Revolving Credit Note. Each of the Borrower, the Lenders and the Agent acknowledge, agree and confirm that as of the Second Amendment Effective Date each Short Term Revolving Credit Note executed and delivered by the Borrower to the extending Lenders in connection with the Existing Credit Agreement shall, and hereby is, amended to extend the stated maturity date of such Short Term Revolving Credit Note to December 19, 2003; and a counterpart original of this Second Amendment, or copy thereof, may be attached to the Short Term Revolving Credit Note of an extending Lender as further evidence thereof. Section 4.12. Amendment of Notes. Upon receipt of the duly completed and executed amendments to promissory notes attached hereto as Exhibits L-1, L-2, L-3 and L-4, the Agent is -15- authorized to deliver such amendments to the applicable Lenders and the Lenders agree to attach such amendments to the applicable Notes. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -16- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned parties have caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. BORROWER: ATTEST/WITNESS: ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation By: /s/ John M. Tishok By: /s/ R. S. Park -------------------------- ------------------------------------- Name: Name: Robert S. Park Title: Title: Vice President, Treasurer DOCUMENTATION AND ADMINISTRATIVE AGENT: PNC BANK, NATIONAL ASSOCIATION, as Documentation and Administrative Agent By: /s/ David B. Gookin ------------------------------------- Name: David B. Gookin Title: Vice President SYNDICATION AGENTS: BANK OF AMERICA, N.A., as a Syndication Agent By: /s/ Megan McBride ------------------------------------- Name: Megan McBride Title: Principal [SIGNATURES OF SYNDICATION AGENTS CONTINUED ON NEXT PAGE] -17- [CONTINUATION OF SIGNATURES OF SYNDICATION AGENTS TO SECOND AMENDMENT TO CREDIT AGREEMENT DATED AS OF DECEMBER 20, 2002] MELLON BANK, N.A., as a Syndication Agent By: /s/ John R. Cooper ------------------------------------- Name: John R. Cooper Title: Vice President JPMORGAN CHASE BANK, as a Syndication Agent By: /s/ James H. Ramage ------------------------------------- Name: James H. Ramage Title: Managing Director [SIGNATURES OF LENDERS ON THE FOLLOWING 9 PAGES] -18- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term PNC BANK, NATIONAL ASSOCIATION Revolving Credit Commitment $26,076,923.09 Long Term Revolving Credit Commitment By: /s/ David B. Gookin ---------------------------------- Percentage Name: David B. Gookin 17.3846153844% Title: Vice President Maximum Dollar Amount of Short Term Revolving Credit Commitment $21,192,307.69 Short Term Revolving Credit Commitment Percentage 21.1923076921% Commitment Percentage (Total) 18.9076923166% Addresses for notice purposes: If by United States Mail: If by other means: PNC Bank, National Association PNC Bank, National Association PNC Agency Services PNC Agency Services One PNC Plaza, 22nd Floor One PNC Plaza, 22nd Floor 249 Fifth Avenue 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Pittsburgh, Pennsylvania 15222-2707 Attention: Trina Barkley Attention: Trina Barkley Telephone: (412) 768-0423 Telecopier: (412) 762-8672 With a copy to: With a copy to: PNC Bank, National Association PNC Bank, National Association Metals Group Metals Group One PNC Plaza - 3rd Floor One PNC Plaza - 3rd Floor 249 Fifth Avenue 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Pittsburgh, Pennsylvania 15222-2707 Attention: David B. Gookin Attention: David B. Gookin Vice President Vice President Telephone: (412) 762-4815 Telecopier: (412) 705-3232 Address for LIBOR Loan Funding if different from above: N/A -19- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term BANK OF AMERICA, N.A. Revolving Credit Commitment $20,769,230.77 Long Term Revolving Credit Commitment By: /s/ Megan McBride ---------------------------------- Percentage Name: Megan McBride 13.8461538462% Title: Principal Maximum Dollar Amount of Short Term Revolving Credit Commitment $13,846,153.85 Short Term Revolving Credit Commitment Percentage 13.8461538462% Commitment Percentage (Total) 13.8461538462% Addresses for notice purposes: If by United States Mail: If by other means: Bank of America, N.A. Bank of America, N.A. 231 South LaSalle Street 231 South LaSalle Street Chicago, Illinois 60697 Chicago, Illinois 60697 Attention: Thomas R. Durham Attention: Thomas R. Durham Managing Director Managing Director Telephone: (312) 828-8044 Telecopier: (312) 974-8681 Address for LIBOR Rate Loan Funding if different from above: Bank of America, N.A. 1850 Gateway Boulevard Concord, California 94520 Attention: Gardelyn Jayme Telephone: (925) 675-7184 Telecopier: (888) 969-9232 Telex: -20- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term MELLON BANK, N.A. Revolving Credit Commitment $26,076,923.08 Long Term Revolving Credit Commitment By: /s/ John R. Cooper ---------------------------------- Percentage Name: John R. Cooper 17.3846153846% Title: Vice President Maximum Dollar Amount of Short Term Revolving Credit Commitment $17,384,615.38 Short Term Revolving Credit Commitment Percentage 17.3846153846% Commitment Percentage (Total) 17.3846153846% Addresses for notice purposes: If by United States Mail: If by other means: Mellon Bank, N.A. Mellon Bank, N.A. One Mellon Center, Room 370 One Mellon Center, Room 370 Pittsburgh, Pennsylvania 15258-0001 Pittsburgh, Pennsylvania 15258-0001 Attention: Peter K. Lee Attention: Peter K. Lee Vice President Vice President Telephone: (412) 234-1913 Telecopier: (412) 234-8888 Address for LIBOR Rate Loan Funding if different from above: Mellon Bank, N.A. Three Mellon Center, Room 1203 Pittsburgh, Pennsylvania 15259-0003 Attention: Pinkey Holiday Loan Administrator Telephone: 412-234-7366 Telecopier: 412-209-6114 Telex: 199103 MELBNKPGH -21- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term JPMORGAN CHASE BANK Revolving Credit Commitment $20,769,230.77 Long Term Revolving Credit Commitment By: /s/ James H. Ramage ---------------------------------- Percentage Name: James H. Ramage 13.8461538462% Title: Managing Director Maximum Dollar Amount of Short Term Revolving Credit Commitment $13,846,153.85 Short Term Revolving Credit Commitment Percentage 13.8461538462% Commitment Percentage (Total) 13.8461538462% Addresses for notice purposes: If by United States Mail: If by other means: JPMorgan Chase Bank JPMorgan Chase Bank 270 Park Avenue, 4th Floor 270 Park Avenue, 4th Floor New York, New York 10017 New York, New York 10017 Attention: James H. Ramage Attention: James H. Ramage Managing Director Managing Director Telephone: (212) 270-1373 Telecopier: (212) 270-4584 For operational issues: JPMorgan Chase Bank 1 Chase Manhattan Plaza New York, New York 10081 Attention: Sek Chan, Assistant Treasurer Telephone: (212) 552-7929 Telecopier: (212) 552-7490 Address for LIBOR Rate Loan Funding if different from above: N/A Telephone: Telecopier: Telex: -22- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term CITIBANK, N.A. Revolving Credit Commitment $14,769,230.77 Long Term Revolving Credit Commitment By: /s/ William G. Martens, III ---------------------------------- Percentage Name: William G. Martens, III 9.8461538462% Title: Managing Director Maximum Dollar Amount of Short Term Revolving Credit Commitment $9,846,153.85 Short Term Revolving Credit Commitment Percentage 9.8461538462% Commitment Percentage (Total) 9.8461538462% Addresses for notice purposes: If by United States Mail: If by other means: Citibank, N.A. Citibank, N.A. 388 Greenwich Street, 23rd Floor 388 Greenwich Street, 23rd Floor New York, New York 10013 New York, New York 10013 Attention: Prakash Chonkar Attention: Prakash Chonkar Managing Director Managing Director Telephone: (212) 816-5323 Telecopier: (212) 816-5402 Address for LIBOR Rate Loan Funding if different from above: Citibank, N.A. Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Tony Neville Telephone: (302) 894-6057 Telecopier: (302) 894-6120 Telex: -23- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term THE BANK OF NEW YORK Revolving Credit Commitment $10,384,615.38 Long Term Revolving Credit Commitment By: /s/ Walter C. Parelli ---------------------------------- Percentage Name: Walter C. Parelli 6.9230769231% Title: Vice President Maximum Dollar Amount of Short Term Revolving Credit Commitment $6,923,076.92 Short Term Revolving Credit Commitment Percentage 6.9230769231% Commitment Percentage (Total) 6.9230769231% Addresses for notice purposes: If by United States Mail: If by other means: The Bank of New York The Bank of New York One Wall Street, 21st Floor One Wall Street, 21st Floor New York, New York 10286 New York, New York 10286 Attention: Walter Parelli Attention: Walter Parelli Telephone: (212) 635-6820 Telecopier: (212) 635-7978 Address for LIBOR Rate Loan Funding if different from above: The Bank of New York One Wall Street, 21st Floor New York, New York 10286 Attention: Terry Blackburn Telephone: (212) 635-7938 Telecopier: (212) 635-7970 Telex: -24- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term NATIONAL CITY BANK OF Revolving Credit Commitment PENNSYLVANIA $10,384,615.38 Long Term Revolving Credit Commitment By: /s/ Anthony J. Leone ---------------------------------- Percentage Name: Anthony J. Leone 6.9230769231% Title: Banking Officer Maximum Dollar Amount of Short Term Revolving Credit Commitment $6,923,076.92 Short Term Revolving Credit Commitment Percentage 6.9230769231% Commitment Percentage (Total) 6.9230769231% Addresses for notice purposes: If by United States Mail: If by other means: National City Bank of Pennsylvania National City Bank of Pennsylvania National City Center National City Center 20 Stanwix Street 20 Stanwix Street Pittsburgh, Pennsylvania 15222-4802 Pittsburgh, Pennsylvania 15222-4802 Attention: Debra W. Riefner Attention: Debra W. Riefner Telephone: (412) 644-8880 Telecopier: (412) 471-4883 Address for LIBOR Rate Loan Funding if different from above: National City Bank of Pennsylvania National City Center 20 Stanwix Street Pittsburgh, Pennsylvania 15222-4802 Attention: Nancy L. Karlo Telephone: (412) 644-8120 Telecopier: (412) 471-4883 Telex: -25- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term BANK OF TOKYO-MITSUBISHI TRUST Revolving Credit Commitment COMPANY $10,384,615.38 Long Term Revolving Credit Commitment By: /s/ Spencer Hughes ---------------------------------- Percentage Name: Spencer Hughes 6.9230769231% Title: Vice President Maximum Dollar Amount of Short Term Revolving Credit Commitment $6,923,076.92 Short Term Revolving Credit Commitment Percentage 6.9230769231% Commitment Percentage (Total) 6.9230769231% Addresses for notice purposes: If by United States Mail: If by other means: Bank of Tokyo-Mitsubishi Trust Company Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas, 12th Floor 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 New York, New York 10020-1104 Attention: Heather Zimmermann Attention: Heather Zimmermann Telephone: (212) 782-4220 Telecopier: (212) 782-6440 Address for LIBOR Rate Loan Funding if different from above: Loan Operations Department BTM Information Services, Inc. c/o Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 Attention: Rolando Uv Assistant Vice President Telephone: (201) 413-8570 Telecopier: (201) 521-2304 Telex: -26- IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned Lender has caused this Second Amendment by and among ALLEGHENY TECHNOLOGIES INCORPORATED, as the borrower, the LENDERS PARTY HERETO, as the lenders, MELLON BANK, N.A., JPMORGAN CHASE BANK, and BANK OF AMERICA, N.A., as Syndication Agents, and PNC BANK, NATIONAL ASSOCIATION, as the Documentation and Administrative Agent, to be executed by its duly authorized officers as of the date first above written. Maximum Dollar Amount of Long Term MIZUHO CORPORATE BANK, LTD. Revolving Credit Commitment (as successor to The Industrial Bank of $10,384,615.38 Japan, Limited) Long Term Revolving Credit Commitment Percentage 6.9230769231% By: /s/ Naoki Yamamori ---------------------------------- Maximum Dollar Amount of Short Term Name: Naoki Yamamori Revolving Credit Commitment Title: Deputy General Manager $3,115,384.62 Short Term Revolving Credit Commitment Percentage 3.1153846154% Commitment Percentage (Total) 5.3999999909% Addresses for notice purposes: If by United States Mail: If by other means: Mizuho Corporate Bank, Ltd. Mizuho Corporate Bank, Ltd. 1251 Avenue of the Americas 1251 Avenue of the Americas New York, New York 10020-1104 New York, New York 10020-1104 Attention: Hilary Zhang Attention: Hilary Zhang Assistant Vice President Assistant Vice President Telephone: (212) 282-3467 Telecopier: (212) 282-4488 Address for LIBOR Rate Loan Funding if different from above: Mizuho Corporate Bank, Ltd. 1251 Avenue of the Americas New York, New York 10020-1104 Attention: Hema Dibatia Telephone: (212) 282-4099 Telecopier: (212) 282-4478 Telex: -27- EXHIBIT L-1 FORM OF AMENDMENT NO. 1 TO LONG TERM REVOLVING CREDIT NOTE SEE ATTACHED -28- FORM OF AMENDMENT NO. 1 TO LONG TERM REVOLVING CREDIT NOTE $___________ Pittsburgh, Pennsylvania December 20, 2002 This Amendment No. 1 to Long Term Revolving Credit Note (this "Amendment") to that certain Long Term Revolving Credit Note dated as of December 21, 2001 (the "Existing Date"), in the face amount of _________________________ ($______________) and executed by the undersigned in favor of __________________ (the "Lender"), is executed and delivered under and pursuant to the terms of that certain Credit Agreement dated as of December 20, 2001, as amended (the Credit Agreement together with the exhibits and schedules thereto and all amendments, modifications, extensions, renewals, replacements or restatements thereof and thereto, the "Agreement") by and among ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages thereof (including the Lender) and each other financial institution which, from time to time, may become a party to the Agreement (collectively, the "Lenders"), the syndication agents referred to therein (collectively the "Syndication Agents") and PNC BANK, NATIONAL ASSOCIATION, as documentation and administrative agent for the Lenders (in each capacity the "Agent"). This Amendment is executed to amend on and as of December 20, 2002, the maximum principal amount evidenced by the Existing Note. Such amendment shall read on and as of December 20, 2002 as follows. Amendment of Second Paragraph. The second full paragraph of the Existing Note shall be amended and restated in its entirety to read as follows: FOR VALUE RECEIVED, the Borrower promises to pay to the order of ________________ (the "Lender"), its successors and permitted assignees, at the office of the Agent at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707 on the Long Term Revolving Credit Termination Date the lesser of (i) the principal sum of ______________ MILLION AND NO/100 DOLLARS ($___________) or (ii) the aggregate unpaid principal amount of all outstanding Long Term Revolving Credit Loans made by the Lender to the Borrower on or before the Long Term Revolving Credit Termination Date pursuant to the Agreement together with interest on the unpaid principal balance thereof from time to time outstanding. The Borrower hereby represents and warrants to the Lender that, as of the date of the execution and delivery of this Amendment, the outstanding principal balance under the Existing Note is less than the dollar amount set forth in the previous paragraph of this Amendment. This Amendment shall be construed in connection with and as part of the Existing Note; the Existing Note is hereby modified to include this Amendment; and all terms, conditions, representations, warranties, covenants and agreements set forth in the Existing Note, except as herein modified, are hereby confirmed and ratified and shall remain in full force and effect. To -29- the extent that any term or provision of this Amendment is expressly inconsistent with any term or provision of the Existing Note, the terms and provisions hereof shall control. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania without reference to the principles thereof regarding conflicts of law. WITNESS the due execution of this Amendment No. 1 to Long Term Revolving Credit Note with the intent to be legally bound hereby. ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation By: --------------------------------- Name: Title: -30- EXHIBIT L-2 FORM OF AMENDMENT NO. 1 TO SHORT TERM REVOLVING CREDIT NOTE SEE ATTACHED -31- FORM OF AMENDMENT NO. 1 TO SHORT TERM REVOLVING CREDIT NOTE $___________ Pittsburgh, Pennsylvania December 20, 2002 This Amendment No. 1 to Short Term Revolving Credit Note (this "Amendment") to that certain Short Term Revolving Credit Note dated as of December 21, 2001 (the "Existing Date"), in the face amount of _________________________ ($______________) and executed by the undersigned in favor of __________________ (the "Lender"), is executed and delivered under and pursuant to the terms of that certain Credit Agreement dated as of December 20, 2001, as amended (the Credit Agreement together with the exhibits and schedules thereto and all amendments, modifications, extensions, renewals, replacements or restatements thereof and thereto, the "Agreement") by and among ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages thereof (including the Lender) and each other financial institution which, from time to time, may become a party to the Agreement (collectively, the "Lenders"), the syndication agents referred to therein (collectively the "Syndication Agents") and PNC BANK, NATIONAL ASSOCIATION, as documentation and administrative agent for the Lenders (in each capacity the "Agent"). This Amendment is executed to amend on and as of December 20, 2002, the maximum principal amount evidenced by the Existing Note. Such amendment shall read on and as of December 20, 2002 as follows: Amendment of Second Paragraph. The second full paragraph of the Existing Note shall be amended and restated in its entirety to read as follows: FOR VALUE RECEIVED, the Borrower promises to pay to the order of ________________ (the "Lender"), its successors and permitted assignees, at the office of the Agent at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707 on the Short Term Revolving Credit Termination Date the lesser of (i) the principal sum of ______________ MILLION AND NO/100 DOLLARS ($___________) or (ii) the aggregate unpaid principal amount of all outstanding Short Term Revolving Credit Loans made by the Lender to the Borrower on or before the Short Term Revolving Credit Termination Date pursuant to the Agreement together with interest on the unpaid principal balance thereof from time to time outstanding. The Borrower hereby represents and warrants to the Lender that, as of the date of the execution and delivery of this Amendment, the outstanding principal balance under the Existing Note is less than the dollar amount set forth in the previous paragraph of this Amendment. This Amendment shall be construed in connection with and as part of the Existing Note; the Existing Note is hereby modified to include this Amendment; and all terms, conditions, representations, warranties, covenants and agreements set forth in the Existing Note, except as -32- herein modified, are hereby confirmed and ratified and shall remain in full force and effect. To the extent that any term or provision of this Amendment is expressly inconsistent with any term or provision of the Existing Note, the terms and provisions hereof shall control. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania without reference to the principles thereof regarding conflicts of law. WITNESS the due execution of this Amendment No. 1 to Short Term Revolving Credit Note with the intent to be legally bound hereby. ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation By: --------------------------------- Name: Title: -33- EXHIBIT L-3 FORM OF AMENDMENT NO. 1 TO BID RATE NOTE (LONG TERM) SEE ATTACHED -34- FORM OF AMENDMENT NO. 1 TO BID RATE NOTE (Long Term) $___________ Pittsburgh, Pennsylvania December 20, 2002 This Amendment No. 1 to Bid Rate Note (Long Term) (this "Amendment") to that certain Bid Rate Note (Long Term) dated as of December 21, 2001 (the "Existing Note"), in the face amount of _________________________ ($______________) and executed by the undersigned in favor of __________________ (the "Lender"), is executed and delivered under and pursuant to the terms of that certain Credit Agreement dated as of December 1, 2001, as amended (the Credit Agreement together with the exhibits and schedules thereto and all amendments, modifications, extensions, renewals, replacements or restatements thereof and thereto, the "Agreement") by and among ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages thereof (including the Lender) and each other financial institution which, from time to time, may become a party to the Agreement (collectively, the "Lenders"), the syndication agents referred to therein (collectively the "Syndication Agents") and PNC BANK, NATIONAL ASSOCIATION, as documentation and administrative agent for the Lenders (in such capacity, the "Agent"). This Amendment is executed to amend on and as of December 20, 2002, the maximum principal amount evidenced by the Existing Note. Such amendment shall read on and as of December 20, 2002 as follows. Amendment of Second Paragraph. The second full paragraph of the Existing Note shall be amended and restated in its entirety to read as follows: FOR VALUE RECEIVED, the Borrower promises to pay to the order of ________________ (the "Lender"), its successors and permitted assignees, at the office of the Agent at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707 on the Long Term Revolving Credit Termination Date the lesser of (i) the principal sum of ___________ MILLION AND NO/100 DOLLARS ($___________) or (ii) the aggregate unpaid principal amount of all outstanding Bid Rate Loans made by the Lender to the Borrower on or before the Long Term Revolving Credit Termination Date pursuant to the Agreement together with interest on the unpaid principal balance thereof from time to time outstanding. The Borrower hereby represents and warrants to the Lender that, as of the date of the execution and delivery of this Amendment, the outstanding principal balance under the Existing Note is less than the dollar amount set forth in the previous paragraph of this Amendment. This Amendment shall be construed in connection with and as part of the Existing Note; the Existing Note is hereby modified to include this Amendment; and all terms, conditions, representations, warranties, covenants and agreements set forth in the Existing Note, except as -35- herein modified, are hereby confirmed and ratified and shall remain in full force and effect. To the extent that any term or provision of this Amendment is expressly inconsistent with any term or provision of the Existing Note, the terms and provisions hereof shall control. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania without reference to the principles thereof regarding conflicts of law. WITNESS the due execution of this Amendment No. 1 to Bid Rate Note (Long Term) with the intent to be legally bound hereby. ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation By: --------------------------------- Name: Title: -36- EXHIBIT L-4 FORM OF AMENDMENT NO. 1 TO BID RATE NOTE (SHORT TERM) SEE ATTACHED -37- FORM OF AMENDMENT NO. 1 TO BID RATE NOTE (Short Term) $___________ Pittsburgh, Pennsylvania December 20, 2002 This Amendment No. 1 to Bid Rate Note (Short Term) (this "Amendment") to that certain Bid Rate Note (Short Term) dated as of December 21, 2001 (the "Existing Note"), in the face amount of _________________________ ($______________) and executed by the undersigned in favor of __________________ (the "Lender"), is executed and delivered under and pursuant to the terms of that certain Credit Agreement dated as of December 20, 2001, as amended (the Credit Agreement together with the exhibits and schedules thereto and all amendments, modifications, extensions, renewals, replacements or restatements thereof and thereto, the "Agreement") by and among ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages thereof (including the Lender) and each other financial institution which, from time to time, may become a party to the Agreement (collectively, the "Lenders"), the syndication agents referred to therein (collectively the "Syndication Agents") and PNC BANK, NATIONAL ASSOCIATION, as documentation and administrative agent for the Lenders (in such capacity, the "Agent"). This Amendment is executed to amend on and as of December 20, 2002, the maximum principal amount evidenced by the Existing Note. Such amendment shall read on and as of December 20, 2002 as follows. Amendment of Second Paragraph. The second full paragraph of the Existing Note shall be amended and restated in its entirety to read as follows: FOR VALUE RECEIVED, the Borrower promises to pay to the order of ________________ (the "Lender"), its successors and permitted assignees, at the office of the Agent at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707 on the Short Term Revolving Credit Termination Date the lesser of (i) the principal sum of ___________ MILLION AND NO/100 DOLLARS ($___________) or (ii) the aggregate unpaid principal amount of all outstanding Bid Rate Loans made by the Lender to the Borrower on or before the Short Term Revolving Credit Termination Date pursuant to the Agreement together with interest on the unpaid principal balance thereof from time to time outstanding. The Borrower hereby represents and warrants to the Lender that, as of the date of the execution and delivery of this Amendment, the outstanding principal balance under the Existing Note is less than the dollar amount set forth in the previous paragraph of this Amendment. This Amendment shall be construed in connection with and as part of the Existing Note; the Existing Note is hereby modified to include this Amendment; and all terms, conditions, representations, warranties, covenants and agreements set forth in the Existing Note, except as -38- herein modified, are hereby confirmed and ratified and shall remain in full force and effect. To the extent that any term or provision of this Amendment is expressly inconsistent with any term or provision of the Existing Note, the terms and provisions hereof shall control. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania without reference to the principles thereof regarding conflicts of law. WITNESS the due execution of this Amendment No. 1 to Bid Rate Note (Short Term) with the intent to be legally bound hereby. ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation By: --------------------------------- Name: Title: -39- EX-13 4 j9925901exv13.txt EXHIBIT 13 Exhibit 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Allegheny Technologies Incorporated is one of the largest and most diversified producers of specialty materials in the world. We use innovative technologies to offer global markets a wide range of specialty materials. High-value products include super stainless steel, nickel-based and cobalt-based alloys and superalloys, titanium and titanium alloys, specialty steels, tungsten materials, exotic alloys, which include zirconium, hafnium and niobium, and highly engineered strip and Precision Rolled Strip(R) products. In addition, we produce commodity specialty materials such as stainless steel sheet and plate, silicon electrical and tool steels, and forgings and castings. Unless the content requires otherwise, "we," "our", "us" and similar terms refer to Allegheny Technologies Incorporated and its subsidiaries. Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements. Actual results or performance could differ materially from those encompassed within such forward looking statements as a result of various factors, including those described below. OVERVIEW 2002 was a very difficult year. Business conditions in most of our markets were weak throughout the year, resulting in a net loss for 2002 of $65.8 million, or $0.82 per share. Sales declined 10% in 2002 to $1,907.8 million as weak demand, especially in the commercial aerospace, electrical energy and capital goods markets, adversely affected our business segments. Continued weak demand and pricing for products of the Flat-Rolled Products segment, particularly commodity stainless steel, resulted in a 3.7% decline in this segment's sales as compared to 2001 and an operating loss of $7.9 million. We believe that overall reduced demand for commodity stainless steel products is due to unfavorable general economic conditions, and that pricing for these products has been and in the near term is likely to continue to be adversely affected by those conditions and by industry overcapacity and intense competition. Sales of High Performance Metals segment products declined 18.4% and the segment's operating profit declined by 62% to $31.2 million in 2002, as compared to 2001, largely due to reduced demand for products sold to commercial aerospace and power generation markets. Recovery of the markets for our products will depend, in part, on significant improvement in general economic conditions. The decline in the equity markets over the past three years has had a significant negative impact on our financial results. In the 2002 fourth quarter, in accordance with accounting standards, we recorded a charge against stockholders' equity of $406 million, net of deferred taxes, in recognition of the decline in pension plan investments to a level below that of the accumulated pension benefit obligation ("ABO"). This charge did not affect earnings and does not have a cash impact. In addition, this charge does not affect our compliance with covenants in our unsecured bank credit agreement. In accordance with accounting standards, the full charge against stockholders' equity would be reversed in subsequent years if the value of pension plan investments returns to a level that exceeds the ABO as of a future annual measurement date. We do not expect to be required to make cash contributions to the defined benefit pension plan during the next several years based upon current actuarial analyses and forecasts. However, a further significant decline in the value of plan investments in the future or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. Depending on the timing and amount, a requirement that we fund our defined benefit pension plan could have a material adverse effect on our results of operations and financial condition. The decline in the equity markets has also resulted in a significant increase in retirement benefit expense. Retirement benefit expense was $21.8 million, pre-tax, for 2002 compared to pre-tax income of $53.1 million for 2001 and $99.9 million for 2000. Given the continuing near term uncertainties facing many of our commercial markets, the Board of Directors, in the 2002 fourth quarter, reduced the quarterly dividend paid on shares of our common stock from $0.20 per share to $0.06 per share. We anticipated that 2002 would present challenging conditions in most of our markets. As a result, our top priorities were to enhance our leading market positions while reducing costs, generating cash and reducing debt. Accomplishments in these areas during 2002 include: ATI | Annual Report 2002 | 9 - - We had a number of gains with customers, which should improve our position in key markets beginning in 2003. In the Flat-Rolled Products segment, we improved our 2003 position with major distributors of commodity stainless steel products in large part due to our superior reputation for quality and delivery reliability. We were awarded a new long-term agreement (LTA) with a manufacturer of electrical transformers representing potentially 30,000 new tons annually of silicon electrical steel shipments. In addition, our STAL Precision Rolled Strip(R) products operation in Shanghai, China won several new contracts in that rapidly growing market. In the High Performance Metals segment, we finalized a significant LTA and achieved gains at other customers for our premium nickel-based alloys, superalloys and titanium alloys products. - - Cash flow from operations in 2002 was $204 million. We generated free cash flow (operating cash flow less investing activities and dividend payments) of $111 million. We used this free cash flow to repay $86 million of debt and increase cash on hand by $26 million. There were no borrowings outstanding at the end of 2002 under our $250 million unsecured domestic bank credit facility. - - Managed working capital (gross inventory and accounts receivable less accounts payable) was reduced by $146 million, more than double our full year 2002 reduction goal of $65 million. Over the last two years, we have reduced managed working capital by over $270 million. At the end of 2002, managed working capital was 33% of annualized sales compared to 37% at the end of 2001. - - We realized $135 million in gross cost reductions, before the effects of inflation, exceeding our 2002 goal of $100 million. A significant portion of these cost reductions resulted from our efforts to improve productivity and align the size of our workforce with current business conditions. During 2002, we reduced our workforce by approximately 10%, which is expected to result in annual savings of $37 million. Since 2000, the workforce has been reduced by approximately 1,700 employees, or 15%. - - Over the past three years, we have taken significant steps to restructure our operations. In 2002, we indefinitely idled our Massillon, OH stainless steel plate facility, primarily due to poor demand for wide continuous mill plate products. In 2001, we permanently idled the Flat-Rolled Products melt shop and associated service operations located in Houston, PA after determining that this facility could no longer be operated economically in the highly competitive global stainless steel market. In 2000, we permanently idled the high-cost titanium sponge production assets of the High Performance Metals segment. - - As a result of the Company's continuing focus on safety, in 2002 the OSHA Total Recordable Incident Rate improved 16%, the Lost Day Case Rate improved 14%, and the Lost Time Case Rate improved 17% compared to 2001. - - We continue to invest in our businesses to enhance our specialty materials capabilities, increase efficiencies and reduce costs. During 2002, we announced two major projects; a $35 million investment in two new electric arc furnaces for our Flat-Rolled Products melt shop located in Brackenridge, PA, and a $30 million program to enhance the capabilities of our High Performance Metals long products rolling mill facility located in Richburg, SC. These projects are scheduled to be fully completed in 2004. Business conditions remain very difficult and uncertain as 2003 begins. We are staying focused on improving operating profit in all business segments by enhancing our leading market positions and reducing costs, while conserving cash. In 2003, our initial cost reduction goal is $90 million and we intend to further improve upon the gains we made in reducing managed working capital in 2002. RESULTS OF OPERATIONS Sales were $1.91 billion in 2002, $2.13 billion in 2001 and $2.46 billion in 2000. International sales represented approximately 23 percent of total sales in 2002 and 2001, and 18 percent in 2000. Operating profit was $27.3 million in 2002, $54.3 million in 2001, and $207.8 million in 2000. For 2002 and 2001, losses before taxes were $103.8 million and $36.4 million, respectively. This compares with income before tax of $208.8 million in 2000. A severe decline in the equity markets in both 2000 and 2001 and higher benefit liabilities from long-term labor contracts negotiated in 2001 resulted in a pre-tax retirement benefit expense of $21.8 million for 2002 compared to pre-tax retirement benefit income of $53.1 million for 2001 and $99.9 million for 2000. In accordance with new accounting standards, operating results for 2002 exclude goodwill amortization expense while 2001 and 2000 included goodwill amortization expense of $5.8 million and $5.7 million, respectively. For 2002 and 2001, net losses from operations were $65.8 million and $25.2 million, respectively. In 2000, net income was $132.5 million. The net loss for 2002 included after-tax charges of $27.0 million related to the indefinite 10 | Annual Report 2002 | ATI idling of our Massillon, OH stainless steel plate facility and workforce reductions. In 2001, the permanent idling of the Houston, PA stainless steel melt shop, workforce reductions and other asset impairments resulted in an after-tax charge of $47.8 million. Net income for 2000 included after-tax charges of $20.0 million related to permanently idling the high-cost titanium sponge production assets of the High Performance Metals segment and employee severance costs. We operate in three business segments: Flat-Rolled Products, High Performance Metals and Industrial Products. These segments represented the following percentages of our total revenues for the years indicated:
2002 2001 2000 ---- ---- ---- Flat-Rolled Products 55% 51% 59% High Performance Metals 33% 36% 30% Industrial Products 12% 13% 11%
Information with respect to our business segments is presented below and in Note 10 of the Notes to Consolidated Financial Statements. FLAT-ROLLED PRODUCTS
(In millions) 2002 % Change 2001 % Change 2000 ================================================================================================================= Sales to external customers $1,048.2 (3.7%) $1,088.4 (24.6%) $1,444.1 - ----------------------------------------------------------------------------------------------------------------- Operating profit (loss) (7.9) 79.3% (38.1) 119.6 - ----------------------------------------------------------------------------------------------------------------- Operating profit (loss) as a percentage of sales (0.8%) (3.5%) 8.3% - ----------------------------------------------------------------------------------------------------------------- International sales as a percentage of sales 11.7% 11.9% 7.3% =================================================================================================================
ATI Flat-Rolled Products Shipped (thousands of tons)
98 99 00 01 02 - ---- ---- ---- ---- ---- 538 593 609 498 487
Our Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys and superalloys, and titanium and titanium-based alloys in sheet, strip, plate and Precision Rolled Strip(R) products, as well as silicon electrical steels and tool steels. The operations in this segment include Allegheny Ludlum, Allegheny Rodney, Rome Metals, and Allegheny Ludlum's 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Co., Ltd ("STAL"). The remaining 40% interest in STAL is owned by Baosteel Group, a state authorized investment company whose equity securities are publicly traded in the People's Republic of China. The financial results of STAL are consolidated into the segment's operating results with the 40% interest of our minority partner recognized on the balance sheet in other long-term liabilities. 2002 Compared to 2001 Sales for the Flat-Rolled Products segment decreased 3.7% in 2002 resulting in an operating loss of $7.9 million for the year. Operating results continued to be severely impacted by very low demand and declining prices for most stainless steel products, but improved compared to 2001 results due to on-going efforts to reduce costs. Finished tons shipped in 2002 further declined by 2% to 487,335 tons compared to shipments of 498,066 tons for 2001. The average price of flat-rolled products decreased by 1% to $2,134 per ton in the 2002 period. Shipments of commodity products (including stainless steel hot roll and cold roll sheet, stainless steel plate and silicon electrical steel, among other products) decreased 5% while average prices for these products were flat. The decline in shipments was primarily attributable to continued depressed demand for stainless steel sheet and plate due to the weak U.S. industrial economy. The slight increase in average prices was primarily due to higher raw material surcharges, principally for nickel. High-value product shipments in the segment (including strip, Precision Rolled Strip(R), super stainless steel, nickel alloy and titanium products) increased 5%, while average prices for high-value products decreased 7%. Increased shipments of Precision Rolled Strip(R) products in Europe and Asia were partially offset by the overall decline in shipments of other high-value products. Certain of these high-value products are used in the consumer durables and capital goods markets, both of which were impacted by the weak U.S. economy, which negatively affected prices. Operating results for 2002 were also adversely affected by settlement of a dispute with the United Steelworkers of America ("USWA") regarding profit sharing related to prior years, which resulted in a pre-tax charge of $3.9 million in the fourth quarter. ATI | Annual Report 2002 | 11 During 2002, in light of the poor business conditions, we continued to aggressively reduce costs and achieved gross cost reductions, before the effects of inflation, of $80 million for the full year. We indefinitely idled our Massillon, OH stainless steel plate facility, due primarily to poor demand for wide continuous mill plate products. This action resulted in a pre-tax, non-cash asset impairment charge of $34.4 million in the 2002 fourth quarter. In addition, during the 2002 third quarter, we announced further workforce reductions of approximately 230 salaried employees representing approximately 20% of the salaried workforce. These workforce reductions were substantially complete by the end of the third quarter and resulted in a pre-tax severance charge of $4 million, net of pension curtailment gain, in the 2002 third quarter. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $18 million. Since 2000, the salaried workforce has been reduced by approximately 33%. During the third quarter of 2002, we announced a capital investment designed to significantly reduce operating costs and increase productivity at the Flat-Rolled Products melt shop located in Brackenridge, PA. We plan to install two new high-powered electric arc furnaces and related equipment at a cost of approximately $35 million. Cost savings are estimated to be over $20 million annually after completion of the project. The first furnace is scheduled to be operational in December of 2003, and the second furnace is expected to be operational in December 2004. 2001 Compared to 2000 Sales for the segment decreased 24.6% in 2001 resulting in an operating loss of $38.1 million for the year. During 2001, operating results were severely impacted by very low demand and poor prices for many stainless steel products. Finished tons shipped in 2001 declined by 18% to 498,066 tons compared to shipments of 608,601 tons for 2000. The average price of flat-rolled products in 2001 decreased by 9% to $2,162 per ton compared to $2,354 per ton in the same 2000 period. Commodity 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 20%. Average prices for commodity products decreased 16% during the same period. These decreases were primarily attributable to 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, nickel alloy and titanium products) decreased 12%, while average prices for high-value products decreased 1%. Certain of these high-value products are used largely in the automotive industry and capital goods markets, both of which were impacted by the weak U.S. economy. Increased international sales, primarily of Precision Rolled Strip(R) products, in Europe and Asia were offset by the overall decline in shipments of high-value products in the U.S. Operating results were also adversely affected by $14.3 million in higher energy costs, on a volume-adjusted basis, in 2001 compared to the prior year. In addition, during 2001, accounts receivable reserves were increased by $7.3 million in recognition of the decline in the economy and the reduced availability of credit. The decline in operating results was partially offset by ongoing cost reductions in the segment's Allegheny Ludlum operation, including a 10 percent salaried workforce reduction that was completed in the first quarter of 2001 and a further 5 percent reduction in staff at the end of 2001. Gross cost reductions, before the effects of inflation, for 2001 totaled approximately $80 million. During the 2001 fourth quarter, we permanently idled the melt and associated service operations located at our Houston, PA facility. We had determined that this facility could no longer be operated economically. This cost reduction action affected approximately 225 employees. A pre-tax charge of $70.0 million, primarily non-cash, for the related asset impairments, employee benefits, and other closure costs was recorded in the 2001 fourth quarter. These expenses are presented as restructuring costs on the statements of operations and are not included in the results for the segment. These cost reduction actions resulted in annual pre-tax cost savings of approximately $12 million, beginning in 2002. HIGH PERFORMANCE METALS
(In millions) 2002 % Change 2001 % Change 2000 ========================================================================================================= Sales to external customers $630.0 (18.4%) $771.8 4.9% $735.4 - --------------------------------------------------------------------------------------------------------- Operating profit 31.2 (62.0%) 82.0 23.3% 66.5 - --------------------------------------------------------------------------------------------------------- Operating profit as a percentage of sales 5.0% 10.6% 9.0% - --------------------------------------------------------------------------------------------------------- International sales as a percentage of sales 39.3% 36.0% 34.9% =========================================================================================================
12 | Annual Report 2002 | ATI Our High Performance Metals segment produces, converts and distributes a wide range of high performance alloys including nickel- and cobalt-based alloys and superalloys, titanium and titanium-based alloys, exotic alloys such as zirconium, hafnium, niobium, tantalum and their related alloys, and other specialty materials, primarily in slab, ingot, billet, bar, rod, wire, coil and seamless tube forms. The operations in this segment include Allvac, Allvac Ltd (U.K.) and Wah Chang, which also produces and sells zirconium chemicals. ATI Nickel-Based and Specialty Steel Alloys Shipped (thousands of lbs.)
98 99 00 01 02 ---- ---- ---- ---- ---- 44,182 43,905 46,612 51,899 35,832
2002 Compared to 2001 Sales for the High Performance Metals segment declined 18.4% in 2002 primarily as a result of reduced demand for nickel-based alloys and superalloys, and titanium and titanium-based alloys from the segment's two largest markets, commercial aerospace and power generation. This decrease in sales was partially offset by improved shipments of exotic alloys primarily for the mining, high energy physics, government and corrosion markets. Shipments of nickel-based and specialty steel alloys decreased 31%, while average prices increased 1%. Titanium mill products shipments decreased 17% and average prices increased 1%. Shipments for exotic alloys increased 7% and average prices increased 8%. Increases in prices for 2002 were primarily the result of favorable product mix. Operating profit for 2002 declined 62% primarily as a result of the reduced sales volume, which was partially offset by efforts to reduce costs. Gross cost reductions, before the effects of inflation, for 2002 totaled approximately $42 million. Operating profit in 2002 was also adversely impacted by the effects of a seven month labor strike settled in March 2002 at our Wah Chang operation, which is involved in the production of exotic alloys. Backlog of confirmed orders for the segment was approximately $300 million at December 31, 2002 and approximately $350 million at December 31, 2001. While the backlog for our exotic materials remains strong, we expect demand for products used in commercial aerospace, which historically has been the segment's largest end-use market, to remain depressed in 2003. As a result, in the 2002 third and fourth quarters we announced further workforce reductions which affected approximately 285 employees at the Allvac and Allvac Ltd operations. In connection with these reductions, which will be completed in the first half of 2003, we recorded pre-tax charges of $3.3 million for the related severance costs. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $12 million. ATI Titanium Mill Products Shipped (thousands of lbs.)
98 99 00 01 02 ---- ---- ---- ---- ---- 24,739 22,792 24,798 23,070 19,044
ATI Exotic Alloys Shipped (thousands of lbs.)
98 99 00 01 02 ---- ---- ---- ---- ---- 4,690 3,756 3,691 3,457 3,712
In the 2002 first quarter, we announced a net $30 million capital investment designed to enhance the capabilities of our High Performance Metals Richburg, SC long products rolling mill facility. The project includes mutual conversion agreements with AvestaPolarit's U.S. subsidiary, AvestaPolarit, Inc. The agreement gives us access to process high performance long products at AvestaPolarit's facility and gives AvestaPolarit access to process stainless steel long products at our Richburg facility. The project should be completed in the second half of 2004. 2001 Compared to 2000 Sales for the High Performance Metals segment increased 4.9% in 2001 as a result of continued strong shipments of high-value products to the aerospace, electrical energy, and oil and gas markets due, in part, to the strong order backlog at the end of 2000 and the first half of 2001. Shipments of nickel-based alloys and superalloys and specialty steel alloys increased 11% and prices increased 8%. Titanium mill products shipments decreased 7% and prices increased 8%. Shipments and prices for exotic alloys were down 6%. Operating profit for 2001 increased 23.3% compared to 2000 primarily as a result of higher prices due to strong market conditions, combined with favorable product mix and cost reduction efforts. Gross cost reductions, before the effects of inflation, for 2001 totaled approximately $27 million. However, operating profit was adversely affected by $14.1 million in higher energy costs in the first nine months of 2001 compared to the prior year. During the 2001 third quarter, USWA employees at the Wah Chang facility, located in Albany, Oregon, went on strike after the union membership rejected the previously negotiated tentative contract. After a brief shutdown, and while discussions continued, full operation of the plant was resumed with management, salaried employees and replacement workers. The Wah Chang facility is involved in the production of exotic alloys including zirconium, hafnium and niobium, and the strike did not impact our other operations. During the 2001 fourth quarter, we divested our North American operations of our titanium distribution company, Titanium Industries Inc. Results of operations for this business for 2001 and proceeds from the disposition of this business were not material. ATI | Annual Report 2002 | 13 Backlog of confirmed orders for the segment was approximately $350 million at December 31, 2001 and approximately $375 million at December 31, 2000. Based on expectations of weaker demand for products used in commercial aerospace, which historically has been the segment's largest end-use market, in the 2001 fourth quarter we announced workforce reductions affecting approximately 220 employees at the Allvac and Allvac Ltd operations. In connection with these reductions, which were completed in the 2002 first quarter, we recorded a pre-tax charge of $1.8 million for the severance related costs. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $5 million. INDUSTRIAL PRODUCTS
(In millions) 2002 % Change 2001 % Change 2000 ======================================================================================================== Sales to external customers $ 229.6 (14.3%) $ 267.8 (4.7%) $ 280.9 - -------------------------------------------------------------------------------------------------------- Operating profit 4.0 (61.5%) 10.4 (52.1%) 21.7 - -------------------------------------------------------------------------------------------------------- Operating profit as a percentage of sales 1.7% 3.9% 7.7% - -------------------------------------------------------------------------------------------------------- International sales as a percentage of sales 30.5% 34.4% 28.4% ========================================================================================================
Our Industrial Products segment's principal business consists of the production of tungsten powder, tungsten carbide materials and carbide cutting tools. The segment also produces carbon alloy steel forgings and large grey and ductile iron castings. The companies in this segment are Metalworking Products, Portland Forge and Casting Service. 2002 Compared to 2001 Sales and operating profit for the Industrial Products segment decreased 14.3% and 61.5%, respectively, in 2002. Continued weak demand from most U.S. industrial markets negatively impacted operating results for all businesses in the segment. The decline in operating results was partially offset by ongoing efforts to reduce costs, which totaled approximately $12 million in 2002. During the second half of 2002, we announced workforce reductions of approximately 150 employees primarily at the European operations of Metalworking Products. These workforce reductions will be substantially complete by the end of the first half of 2003 and resulted in a pre-tax severance charge of $1.1 million in the 2002 fourth quarter. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $8 million. 2001 Compared to 2000 Sales and operating profit for the Industrial Products segment decreased 4.7% and 52.1%, respectively, in 2001. Weak demand from most U.S. industrial markets negatively impacted operating results for all businesses in the segment. In addition, during 2001 accounts receivable reserves were increased by $1.7 million in recognition of the decline in the economy and the reduced availability of credit. The decline in operating results was partially offset by ongoing efforts to reduce costs, which totaled approximately $9 million in 2001. RESTRUCTURING AND OTHER COSTS, NET OF GAINS ON ASSET SALES Restructuring Costs Restructuring costs were $42.8 million, $74.2 million, and $29.5 million in 2002, 2001 and 2000, respectively. In 2002, we recorded total charges of $42.8 million related to the indefinite idling of our Massillon, OH stainless steel plate facility, due to continuing poor demand for wide continuous mill plate products, and further workforce reductions across all of our operations. The Massillon, OH stainless steel plate facility was indefinitely idled in the 2002 fourth quarter, and resulted in a pre-tax non-cash asset impairment charge of $34.4 million, representing the excess of the book value of the facility over its estimated fair market value. In addition, during the second half of 2002, and in light of the continuing decline in demand for our products in the markets served, we announced workforce reductions of approximately 665 employees. These workforce reductions, which will be substantially complete by the end of the first half of 2003, resulted in a pre-tax, primarily cash, severance charge of $8.4 million, net of pension curtailment gain. These expenses are presented as restructuring costs on the statement of operations and are not included in segment results. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $38 million when completed. 14 | Annual Report 2002 | ATI Of the $42.8 million restructuring charge recorded in 2002, $6.4 million, net of tax benefits, will result in expenditures of cash, of which $4.3 million remains to be paid in 2003. Cash to meet these obligations is expected to be generated from one or more of the following sources: internally generated funds from operations, current cash on hand, or borrowings under existing credit lines. In 2001, we recorded total charges of $74.2 million related to the permanent idling of the Houston, PA stainless steel melt shop, workforce reductions and other asset impairments. Of this aggregate charge, $55.6 million related to the Houston, PA stainless steel melt shop, which was permanently idled in the 2001 fourth quarter, and other asset impairments; $9.8 million related to pension and termination benefits; $5.8 million related to severance and personnel costs; and $3.0 million related to contractual obligations and other exit costs. The workforce reductions affected approximately 520 employees across all of our business segments and headquarters operations, and were substantially complete by the end of 2001. These cost reduction actions resulted in pre-tax cost savings of approximately $19 million in 2002. Of the $74.2 million restructuring charges recorded in 2001, approximately $3.0 million, net of tax benefits, resulted in expenditures of cash, the majority of which was paid in 2002. Cash to meet these obligations was generated from internally generated funds from operations and cash on hand. In 2000, we recorded total restructuring charges of $29.5 million. The 2000 charges included $13.3 million for asset impairments and $6.7 million for employee termination benefits, primarily severance pay, and other contractual obligations related to the decision in the 2000 fourth quarter to permanently idle the high-cost titanium sponge production assets of the High Performance Metals segment. We ceased titanium sponge production in the first half of 2001, and costs associated with operating the facility in 2001 were included in results of operations as they were incurred. The 2000 charges also included $3.1 million related to a 10% salaried workforce reduction at our Allegheny Ludlum operations. The salaried workforce was notified by management of the planned workforce reduction and of the availability of termination benefits prior to December 31, 2000. The reduction in workforce was completed in the 2001 first quarter, and resulted in approximately $11 million in cost savings in 2001. In addition, restructuring and transformation charges for 2000 included $6.4 million for costs related to changes in the Company's executive management. Two executives left the Company in the 2000 fourth quarter. Both of these executives were parties to employment and severance arrangements with the Company that obligated Allegheny Technologies to make specific payments to them as a result of their departure. At December 31, 2002, substantially all cash expenditures related to the 2001 and 2000 restructuring charges had been paid. Retirement Benefit Expense (Income) Significantly lower pension investments as a result of severe declines in the equity markets in 2000 and 2001, and higher benefit liabilities from long-term labor contracts negotiated in 2001 resulted in a pre-tax retirement benefit expense of $21.8 million for 2002 compared to pre-tax income of $53.1 million for 2001 and $99.9 million for 2000, which had a negative effect on both cost of sales and selling and administrative expenses. As a result of the substantially lower value of pension plan investments, combined with the changes in assumptions (discussed in Critical Accounting Policies - Retirement Benefits) and higher projected retiree healthcare costs, we expect pre-tax retirement benefit expenses to increase significantly in 2003, based upon current actuarial assumptions, to approximately $140 million, compared to $21.8 million in 2002. Approximately 79%, or $110 million, of the estimated 2003 retirement benefit expense will be non-cash. Sales of Assets and Other Gains on sales of assets and other includes pre-tax gains and losses on the sale of surplus real estate, non-strategic investments and other assets, which are primarily included in other income (expense) in the statement of operations, as well as charges incurred in connection with closed operations. These items resulted in net charges of $11.6 million, $14.8 million and $4.4 million in 2002, 2001 and 2000, respectively. In 2002, we recognized a pre-tax charge of $6.5 million for our approximate 30% share of the net losses in New Piper Aircraft ("New Piper"), and for the write-off of the carrying value of this investment. This investment, which is held for sale, is accounted for using the equity method. Based on New Piper's fourth quarter 2002 realization of additional losses, and adverse trends in its liquidity and financial condition, we determined in the 2002 fourth quarter that it was more likely than not that the carrying value of our equity interest in New Piper was not recoverable. In 2001, a pre-tax charge of $5.6 million was recorded to write-off our minority interest in the e-Business site, MetalSpectrum, which terminated operations during the 2001 second quarter. In 2000, we realized a gain of $11.0 million on the sale of a minority interest in Gul Technologies Singapore, Ltd. ATI | Annual Report 2002 | 15 INTEREST EXPENSE, NET Interest expense, net of interest income, was $34.3 million for 2002 compared to $29.3 million for 2001 and $34.4 million for 2000. In 2002, higher interest costs associated with the $300 million of 8.375% 10-year Notes issued in December 2001 more than offset the reduction in overall indebtedness from the repayment of all outstanding commercial paper. During 2002, we entered into "receive fixed, pay floating" interest rate swap contracts for $150 million related to these Notes, which effectively convert this portion of the Notes to variable rate debt. The result of the swap contracts was a decrease in interest expense of $4.9 million in 2002 compared to the fixed interest expense of the Notes. Interest expense is presented net of interest income of $3.0 million for 2002, $1.4 million for 2001, and $3.2 million for 2000. The increase in interest income for 2002 primarily relates to interest receivable on settlement of prior years' tax liabilities. CORPORATE EXPENSES Corporate expenses were $20.6 million in 2002 compared to $25.5 million in 2001 and $30.6 million in 2000. The continued decline in corporate expenses is due to cost controls, reductions in the number of corporate employees and lower incentive compensation accruals. INCOME TAXES The effective income tax rate was (36.6)%, (30.8)%, and 36.5% in 2002, 2001 and 2000, respectively. The negative effective income tax rates for 2002 and 2001 represent tax benefits that will be realized by a refund of income taxes paid in prior years. The effective tax rate for 2002 was a larger benefit than 2001 primarily due to favorable settlement of issues related to prior years' estimated taxes. In 2002, we received $45.6 million in income tax refunds and recognized $51.9 million of income taxes receivable at December 31, 2002, which we expect to receive in the first half of 2003. Deferred taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. At December 31, 2002, we had a net deferred tax asset of $106.2 million, net of valuation allowances for certain state tax benefits which are not expected to be realized. A significant portion of this net deferred tax asset relates to postretirement employee benefit obligations, which have been recognized for book purposes but are not recognized for income tax reporting until the benefits are paid. These benefit payments are expected to occur over an extended period of years. Although realization is not assured, we have concluded that the net deferred tax asset should be realizable based upon our history of earnings, expectations of future earnings, and potential tax planning strategies, including possible asset sales. FINANCIAL CONDITION AND LIQUIDITY We believe that internally generated funds, current cash on hand and available borrowings under existing unsecured credit lines will be adequate to meet foreseeable liquidity needs. We did not borrow funds under our primary unsecured credit facilities during 2002. However, our ability to borrow under existing unsecured credit lines in the future could be negatively affected if we fail to maintain required financial ratios under the agreement governing our primary unsecured credit facilities. Our ability to access the credit markets in the future to renew our unsecured credit facilities or obtain other or additional unsecured financing, if needed, will be influenced by our credit rating. In July 2002, Standard & Poor's Ratings Services lowered its long-term credit ratings for our debt to BBB from BBB+. In October 2002, Moody's Investor Service lowered its long-term corporate credit ratings for our debt to Baa2 from Baa1. Changes in our credit rating do not impact our access to our existing unsecured credit facilities. If we were unable to utilize the existing unsecured credit facility due to failure to comply with existing covenants, and were unable to obtain a waiver or renegotiate the applicable covenants with our creditors, we would seek to obtain credit lines secured by our current assets to satisfy future liquidity needs. We have no off-balance sheet financing relationships with variable interest or structured finance entities. Cash Flow and Working Capital During 2002, cash generated from operations of $204.2 million and net proceeds from asset sales of $9.2 million were used to reduce debt by $85.5 million, invest $48.7 million in capital equipment (primarily in the High Performance Metals segment), pay dividends of $53.2 million, and increase cash balances by $25.7 million. Cash transactions plus cash on hand at the beginning of the year resulted in an ending cash position of $59.4 million at December 31, 2002. 16 | Annual Report 2002 | ATI Working capital decreased $123.0 million to $470.4 million at December 31, 2002, compared to $593.4 million at the end of 2001. The current ratio, current assets divided by current liabilities, decreased to 2.4 in 2002 from 2.8 in 2001 as cash generated from reductions in working capital was used to retire long-term debt. Managed Working Capital ($ millions)
98 99 00 01 02 - ---- ---- ---- ---- ---- 819 835 864 726 580
As part of managing the liquidity of the business, we focus on controlling inventory, accounts receivable and accounts payable. In measuring performance in controlling this managed working capital, we exclude the effects of the LIFO inventory valuation reserves, excess and obsolete inventory reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. During 2002, excluding the effects of operations sold, managed working capital, which is defined as gross inventory plus accounts receivable less accounts payable, was reduced by $146 million, or 20 percent, to $580 million. For 2002, the decline in managed working capital resulted from a $103 million reduction in inventory, a $36 million decline in accounts receivable, and higher accounts payable balances of $7 million. Since the end of 2000, we have reduced managed working capital by $273 million, or 32%. Capital expenditures for 2002 were $48.7 million, which was significantly less than the $104.2 million spent in 2001, as we controlled our investment spending due to the uncertain economy and to preserve liquidity. Capital expenditures currently authorized for 2003 are approximately $70 million and primarily relate to the investment in two new electric arc furnaces at our Flat Rolled Products melt shop located in Brackenridge, PA, and investments to enhance the capabilities at our High Performance metals long products rolling mill facility located in Richburg, SC. Debt Total debt outstanding declined to $519.1 at December 31, 2002 from $582.2 million at the end of 2001, primarily due to the repayment of all outstanding commercial paper. The decline in debt outstanding was partially offset by the recognition of the fair value of interest rate swap contracts. At December 31, 2002, the accounting treatment required to adjust these swap contracts to fair value resulted in the recognition of an $18.7 million asset on the balance sheet, included in other assets, with an offsetting increase in long-term debt. The debt to capitalization ratio increased to 53.6% at December 31, 2002 from 38.1% at December 31, 2001. Our net debt to total capitalization ratio, which reduces debt and capitalization by the amount of cash and cash equivalents and the fair value of interest rate swaps, increased to 49.6% December 31, 2002 from 36.7% December 31, 2001. These higher ratios resulted primarily from the decline in stockholders' equity due to the write-off of the pension asset and the recognition of a minimum pension liability, discussed below. In December 2002, we reached an agreement with a group of banks ("Bank Group") to renew the short-term portion of our unsecured credit facility, revise the amount of available borrowings under the overall credit facility, and revise certain financial covenants. This credit agreement amended a $325 million credit facility established in December 2001, which was subsequently amended in August 2002 to revise financial covenants. As amended, the Bank Group unsecured credit agreement provides for borrowings of up to $250 million on a revolving credit basis, consisting of a $100 million short-term credit facility, which expires in December 2003, and a $150 million credit facility, which expires in December 2006. Interest is payable based upon London Interbank Offered Rates (LIBOR) plus a spread, which can vary depending on our credit rating. We also have the option of using other alternative interest rate bases. The agreement has various covenants that limit our ability to dispose of assets and merge with another corporation. The agreement also contains covenants that require us to maintain various financial statement ratios, including a covenant requiring the maintenance of a specified minimum ratio of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to gross interest expense ("Interest Coverage Ratio"), and a covenant that requires that we not exceed a specified maximum ratio of total consolidated indebtedness to total capitalization ("Leverage Ratio"), both as defined by the agreement. We were compliant with these covenants at December 31, 2002, and the applicable covenants during 2002. Changes in our credit rating do not impact our ability to access these unsecured credit facilities. The following table summarizes the Interest Coverage Ratio requirement which, in accordance with the agreement, is calculated for the preceding twelve month period from the financial statement date: December 31, 2002 through December 31, 2003 2.0 times EBITDA After December 31, 2003 through June 30, 2004 2.5 times EBITDA After June 30, 2004 through December 31, 2004 3.0 times EBITDA Thereafter 3.5 times EBITDA
ATI | Annual Report 2002 | 17 The definition of EBITDA excludes up to $10 million of cash costs related to workforce reductions in 2002, adds back non-cash pension expense or deducts non-cash pension income calculated in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87"), and adds back postretirement benefits expenses that are funded by Voluntary Employee Benefit Association (VEBA) trusts. The Leverage Ratio requires that total consolidated indebtedness be not more than 50% of total capitalization. The Leverage Ratio excludes any changes to capitalization resulting from non-cash balance sheet adjustments due to changes in net pension assets or liabilities recognized in accordance with the minimum liability provisions of SFAS 87. The definitions of total indebtedness and total capitalization deduct up to $50 million of cash and cash equivalent balances held in excess of $25 million. At December 31, 2002, EBITDA (calculated in accordance with the credit agreement), for the prior twelve month period was 2.3 times gross interest expense compared to a required ratio of at least 2.0 times gross interest expense. At December 31, 2002, the Leverage Ratio was 38% compared to a required ratio of not more than 50% of total capitalization. The Leverage Ratio has the effect of limiting the total amount that we may borrow and the amount of dividends which may be paid; at December 31, 2002, the Leverage Ratio would limit the amount of additional borrowings and cash dividends to approximately $300 million. We had no borrowings outstanding under these unsecured revolving credit agreements during 2002 or at December 31, 2002 or 2001. In December 2001, we issued $300 million of 8.375% Notes due December 15, 2011. Interest on the Notes is payable semi-annually, on June 15 and December 15, and is subject to adjustment under certain circumstances. These Notes contain default provisions with respect to default for the following, among other things: nonpayment of interest on the Notes for 30 days, default in payment of principal when due, or failure to cure the breach of a covenant as provided in the Notes. Any violation of the default provision could result in the requirement to immediately repay the borrowings. These Notes are presented on the balance sheet net of issuance costs of $6.4 million, which are being amortized over the life of the debt. At December 31, 2002, we had entered into "receive fixed, pay floating" arrangements for $150 million related to the 8.375% ten-year Notes which effectively convert this portion of the Notes to variable rate debt. The result of the "receive fixed, pay floating" arrangements was a decrease in interest expense of $4.9 million for the year ended December 31, 2002, compared to the fixed interest expense of the ten-year Notes that would otherwise be applicable. At December 31, 2002, the adjustment of these swap contracts to fair market value resulted in the recognition of an asset of $18.7 million on the balance sheet, included in other assets, with an offsetting increase in long-term debt. Some of the swap contracts contain a provision which allows the swap counterparty to terminate the swap contracts in the event our senior unsecured debt credit rating falls below investment grade. We also have the ability to terminate the swaps and receive (pay) the asset (liability) fair value of the swaps. A summary of required payments under financial instruments (excluding accrued interest) and other commitments are presented below.
Less than 1-3 4-5 After 5 (In millions) Total 1 year years years years ============================================================================================== CONTRACTUAL CASH OBLIGATIONS - ---------------------------------------------------------------------------------------------- Total Debt including Capital Leases $519.1 $ 9.7 $ 27.9 $ 10.7 $470.8 Operating Lease Obligations 46.3 8.4 14.1 10.9 12.9 Unconditional Purchase Obligations (A) 33.0 29.8 3.2 -- -- - ---------------------------------------------------------------------------------------------- OTHER FINANCIAL COMMITMENTS - ---------------------------------------------------------------------------------------------- Lines of Credit (B) $307.8 $100.0 $ 57.8 $150.0 $-- Standby Letters of Credit (C) 40.1 40.1 -- -- -- Guarantees 11.5 -- -- -- -- - ----------------------------------------------------------------------------------------------
(A) Contractual commitments related to expenditures for property, plant and equipment. (B) Drawn amounts are included in total debt. (C) These instruments expire and are renewed annually and are used to support: $21.9 million in workers compensation arrangements; $15.2 million related to environmental matters; and $3.0 million related to international trade. 18 | Annual Report 2002 | ATI We use derivative contracts to hedge, in certain circumstances, our exposure to fluctuations in the cost of energy, raw materials, and the value of foreign currencies. As part of certain of these contracts, we have agreed that the net value of the derivative instrument being used as a hedge will become immediately payable, or receivable, if there is deterioration in the our credit rating to non-investment grade. At December 31, 2002, the net value of hedges that would require settlement in the event of a downgrade in our credit to non-investment grade was approximately $8 million after-tax for interest rate swap assets, which would be payable to us. Retirement Benefits As of November 30, 2002, our measurement date for pension accounting, the value of the accumulated pension benefit obligation (ABO) exceeded the value of pension investments by approximately $192 million as a result of a severe decline in the equity markets in 2000, 2001 and 2002, higher benefit liabilities from long-term labor contracts negotiated in 2001, and a lower assumed discount rate for valuing the pension liabilities. As we discussed in last year's annual report, accounting standards require that a minimum pension liability be recorded and the pension asset recorded on the balance sheet be written off if the value of pension investments is less than the ABO at the annual measurement date. Accordingly, in the 2002 fourth quarter, we recorded a charge against stockholders' equity of $406 million, net of deferred taxes, to write off our prepaid pension cost representing the overfunded portion of the pension plan, and to record a deferred pension asset of $165 million for unamortized prior service cost relating to prior benefit enhancements. This charge did not affect earnings and does not have a cash impact. In addition, this charge does not affect our compliance with debt covenants in our bank credit agreement. In accordance with accounting standards, the full charge against stockholders' equity would be reversed in subsequent years if the value of pension plan investments returns to a level that exceeds the ABO as of a future annual measurement date. As of the 2002 annual measurement date, the value of pension investments was $1.68 billion and the ABO was $1.87 billion. Based upon current actuarial analyses and forecasts, the ABO is projected to be $1.89 billion at the 2003 annual measurement date. We do not expect to be required to make contributions to the defined benefit pension plan during the next several years based upon current actuarial analyses and forecasts. However, further significant declines in the value of plan investments in the future or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. Depending on the timing and amount, a requirement that we fund our defined benefit pension plan could have a material adverse effect on our results of operations and financial condition. In prior years, our defined benefit pension plan was fully funded with investments significantly in excess of the projected benefit obligation. Under Internal Revenue Code (Section 420) provisions, certain amounts that we paid for retiree health care benefits could be reimbursed annually from the excess pension plan investments. During the 2001 second quarter, we recovered $35.0 million under these provisions. While not affecting reported operating profit, cash flow from operations increased by the recovered amount. Our ability to be reimbursed for retiree medical costs in future years is dependent upon the level of pension surplus, if any, as computed under regulations of the Internal Revenue Service, as of the beginning of each year. The level of pension surplus (the value of pension investments less pension obligations) changes constantly due to the volatility of pension investments. Due to the decline in the U.S. equities market in 2000, 2001 and 2002, the pension funded status at the beginning of 2003 is substantially below the threshold required for reimbursement of retiree medical costs in 2003. The ability to resume reimbursement from pension investments for retiree health care costs beyond 2003 will depend upon the performance of the pension investments, and any changes in the Internal Revenue Code and regulations pertaining to reimbursement of retiree health care costs from pension surplus. Beginning in the second half of 2001, we began funding certain retiree health care benefits for our Allegheny Ludlum operation using investments held in a Voluntary Employee Benefit Association (VEBA) trust. This allows us to recover a portion of the retiree medical costs that were funded from the pension surplus prior to 2002. In accordance with our labor agreements, during 2002, we funded $12.7 million of retiree medical costs using the investments of the VEBA trust. We may continue to fund certain retiree medical benefits utilizing the investments held in the VEBA if the value of these investments exceed $50 million. The value of the investments held in the VEBA was approximately $112 million as of December 31, 2002. ATI | Annual Report 2002 | 19 Other In November 2002, the Board of Directors reduced the quarterly dividend paid on shares of the Company's common stock from $0.20 per share to $0.06 per share. The reduction in the dividend is expected to save approximately $45 million annually. We paid a quarterly dividend of $0.20 per share of common stock during each of the first three quarters of 2002. On February 13, 2003, the Board of Directors declared a regular quarterly dividend of $0.06 per share of common stock. The dividend was paid on March 11, 2003 to stockholders of record at the close of business on February 24, 2003. The future declaration and payment of dividends and the amount of such dividends will depend upon our results of operations, financial condition, cash requirements, future prospects, any limitations imposed by credit agreements or senior securities, and other factors deemed relevant by the Board of Directors. In October 1998, the Company's Board of Directors authorized up to a total of 25 million shares of Allegheny Technologies common stock to be acquired under the Company's stock repurchase program from time to time in the open market or in negotiated transactions. From the inception of the share repurchase program through December 31, 2001, we repurchased 20.5 million shares at a cost of $531.5 million. We have not repurchased shares under the program since early 2001, and do not expect to resume repurchases under the program in the foreseeable future. CRITICAL ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in our specific circumstances. Application of these accounting principles requires our management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. Inventories At December 31, 2002, the Company had net inventory of $409.0 million. Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO) and average cost methods) or market, less progress payments. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of our inventory is valued utilizing the LIFO costing methodology. Inventory of our non-U.S. operations is valued using average cost or FIFO methods. We evaluate product lines on a quarterly basis to identify inventory values that exceed estimated net realizable value. The calculation of a resulting reserve, if any, is recognized as an expense in the period that the need for the reserve is identified. At December 31, 2002, no such reserves were required. It is our general policy to write-down to scrap value any inventory that is identified as obsolete and any inventory that has aged or has not moved in more than twelve months. In some instances this criterion is up to twenty-four months. Revenue Recognition and Accounts Receivable Revenue is recognized when title passes or as services are rendered. We have no significant unusual sale arrangements with any of our customers. We market our products to a diverse customer base, principally throughout the United States. Trade credit is extended based upon evaluations of each customer's ability to perform its obligations, which are updated periodically. Accounts receivable reserves are based upon an aging of accounts and a review for collectibility of specific accounts. Accounts receivable are presented net of a reserve for doubtful accounts of $10.1 million at December 31, 2002 and $12.3 million at December 31, 2001, which represented 4.1 percent and 4.3 percent, respectively, of total gross accounts receivable. During 2002, in recognition of the decline in the economy and reduced availability of credit, the Company recognized expense of $1.8 million to increase the reserve for doubtful accounts and wrote-off $4.0 million of uncollectible accounts, which reduced the reserve. 20 | Annual Report 2002 | ATI Asset Impairment We monitor the recoverability of the carrying value of our long-lived assets. An impairment charge is recognized when the expected net undiscounted future cash flows from an asset's use (including any proceeds from disposition) are less than the asset's carrying value, and the asset's carrying value exceeds its fair value. At December 31, 2002, we had $194 million of goodwill on our balance sheet. Of the total, $127 million related to the Flat-Rolled Products segment, $57 million related to the High Performance Metals segment, and $10 million related to the Industrial Products segment. Goodwill is required to be reviewed annually, or more frequently if impairment indicators arise. The impairment test for goodwill is a two step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all recognized and unrecognized assets and liabilities. During the 2002 fourth quarter, we completed our annual goodwill impairment evaluation and no impairment was determined to exist. The evaluation of goodwill included estimating the fair market value of each of the reporting units, which have goodwill associated with their operations, using discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any. These valuation methods require us to make estimates and assumptions regarding future cash flows, profitability, and the cost of capital. Although we believe that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions. Contingencies When it is probable that a liability has been incurred or an asset of the Company has been impaired, a loss is recognized if the amount of the loss can be reasonably estimated. We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants into the air or water, and the disposal of hazardous substances, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which we have been identified as a potentially responsible party ("PRP") under the Federal Superfund laws, and comparable state laws. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites under these laws. With respect to proceedings brought under the Federal Superfund laws, or similar state statutes, we have been identified as a PRP at approximately 31 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 13 of these sites, and the potential loss exposure with respect to any of the remaining 18 individual sites is not considered to be material. We are a party to various cost-sharing arrangements with other PRPs at the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements. Environmental liabilities are recorded when our liability is probable and the costs are reasonably estimable. In many cases, investigations are not at a stage where we are able to determine whether we are liable or, if liability is probable, to reasonably estimate the loss, or certain components thereof. Accordingly, as investigation and remediation of these sites proceed and as we receive new information, we expect that we will adjust our accruals to reflect the new information. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. At December 31, 2002, our reserves for environmental matters totaled approximately $41 million. Environmental liabilities are recorded when our liability is probable and the costs are reasonably estimable, but generally not later than the completion of the feasibility study or our recommendation of a remedy or commitment to an appropriate plan of action. The accruals are reviewed periodically and, as investigations and remediations ATI | Annual Report 2002 | 21 proceed, adjustments are made as necessary. Accruals for losses from environmental remediation obligations do not take into account the effects of inflation, and anticipated expenditures are not discounted to their present value. The accruals are not reduced by possible recoveries from insurance carriers or other third parties, but do reflect allocations among PRPs at Federal Superfund sites or similar state-managed sites after an assessment is made of the likelihood that such parties will fulfill their obligations at such sites and after appropriate cost-sharing or other agreements are entered. Our measurement of environmental liabilities is based on currently available facts, present laws and regulations, and current technology. Such estimates take into consideration our prior experience in site investigation and remediation, the data concerning cleanup costs available from other companies and regulatory authorities, and the professional judgment of our environmental experts in consultation with outside environmental specialists, when necessary. Estimates of our liability are further subject to additional uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the participation, number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the matters with which we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Future developments, administrative actions or liabilities relating to environmental matters, however, could have a material adverse effect on our financial condition and results of operation. Retirement Benefits We have defined benefit pension plans and defined contribution plans covering substantially all of our employees. We have not made contributions to the defined benefit pension plan in the past seven years because the plan has remained adequately funded. We account for our defined benefit pension plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87"), which requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. A significant element in determining pension (expense) income in accordance with SFAS 87 is the expected return on plan investments. In establishing the expected return on plan investments, which is reviewed annually, we take into consideration types of securities the plan investments are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. For 2002, 2001 and 2000, we had assumed a 9% long-term expected return on pension investments. For 2003, in light of the declines in the equity markets over the past several years, which comprise a significant portion of our pension plan investments, we have lowered our expected return on pension plan investments to 8.75%. This assumed long-term rate of return on investments is applied to the fair market value of plan investments at the end of the previous year. This produces the expected return on plan investments that is included in annual pension (expense) income for the current year. The effect of lowering the expected return on pension plan investments will result in an increase in annual pension expense of approximately $4 million for 2003. The cumulative difference between this expected return and the actual return on plan investments is deferred and amortized into pension income or expense over future periods. The expected return on plan investments can vary significantly from year to year since the calculation is dependent on the fair market value of plan investments as of the end of the preceding year. U.S. generally accepted accounting principles allow companies to calculate expected return on pension investments using either an average of fair market values of pension investments over a period not to exceed five years, which reduces the volatility in reported pension income or expense, or their fair market value at the end of the previous year. However, the Securities and Exchange Commission currently does not permit companies to change from the fair market value at the end of the previous year methodology, which is the methodology that we use, to an averaging of fair market values of plan investments methodology. As a result, our results of operations and those of other companies, including companies with which we compete, may not be comparable due to other companies using a different methodology in calculating expected return on pension investments. At the end of November each year, we determine the discount rate to be used to value pension plan liabilities. In accordance with SFAS 87, the discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we assess the rates of return on high quality, fixed-income investments. Based on the Moody's average Aa corporate bond yield as of the end of November 2002, we established a 22 | Annual Report 2002 | ATI discount rate of 6.75% for valuing the pension liabilities as of the end of 2002, and for determining pension expense for 2003. We had previously assumed a discount rate of 7% for 2001 and 2000. The effect of lowering the discount rate increased the year-end 2002 projected pension obligation by approximately $50 million, and will increase annual pension expense by approximately $4 million. The effect on pension liabilities for changes to the discount rate, as well as the net effect of other changes in actuarial assumptions, and differences in actual experience compared to that assumed, are deferred and amortized over future periods in accordance with SFAS 87. We also sponsor several defined benefit postretirement plans covering certain hourly and salaried employees and retirees. These plans provide health care and life insurance benefits for eligible employees. In certain plans, our contributions towards premiums are capped based upon the cost as of a certain date, thereby creating a defined contribution. We account for these benefits in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), which requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as benefits are paid. We use actuarial assumptions, including the discount rate, the expected trend in health care costs and the expected return on plan investments, to estimate the costs and benefits obligations for the plans. The discount rate, which is determined annually at the end of each year, is developed based upon rates of return on high quality, fixed-income investments. At the end of 2002, we determined this rate to be 6.75%. In 2001 and 2000, we used a discount rate of 7%. The effect of lowering the discount rate increased the year-end 2002 postretirement benefits obligation by approximately $20 million and will increase 2003 postretirement benefits expenses by approximately $2 million. Based upon cost increases quoted by our medical care providers for 2003 and predictions of continued significant medical cost inflation in future years, the annual assumed rate of increase in the per capita cost of covered benefits for health care plans is estimated at 10.3% in 2003, and is assumed to gradually decrease to 5.0% in the year 2009 and remain level thereafter. Certain of these benefits are funded using plan investments held in a Voluntary Employee Benefit Association (VEBA) trust. The expected return on plan investments is a significant element in determining postretirement benefits expenses in accordance with SFAS 106. In establishing the expected return on plan investments, which is reviewed annually, we take into consideration the types of securities the plan investments are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. For 2002, 2001 and 2000, we had assumed a 15% long-term expected return on investments held in the VEBA trust, when a large percentage of the investments were in private equities. For 2003, as a result of reduction in the percentage of our private equity investments, we have lowered our expected return on investments held in the VEBA trust to 9%. This assumed long-term rate of return on investments is applied to the market value of plan investments at the end of the previous year. This produces the expected return on plan investments that is included in annual postretirement benefits expenses for the current year. Therefore, the effect of lowering the expected return on plan investments will result in an increase in annual postretirement benefits expense of approximately $7 million for 2003. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). Under SFAS 143, obligations associated with the retirement of tangible long-lived assets, such as landfill and other facility closure costs, would be capitalized and amortized to expense over an asset's useful life using a systematic and rational allocation method. This standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 on January 1, 2003 will result in a charge of approximately $1.3 million, net of tax, or $0.02 per share, which will be presented in our first quarter 2003 statement of operations as a cumulative change in accounting, principally for asset retirement obligations related to landfills. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This statement establishes accounting guidelines for the recognition and measurement of liabilities for costs associated with exit or disposal activities initially at fair value in the period in which the liabilities are incurred, rather than at the date of a commitment to an exit or disposal plan. This standard is effective January 1, 2003 for all exit or disposal activities initiated after that date. We adopted this standard at January 1, 2003. Subsequent to adoption, this standard may affect the periods in which costs are recognized for workforce reductions or facility closures, although the ultimate amount of costs recognized would be the same. SFAS 146 has no effect on our previously announced restructuring charges. ATI | Annual Report 2002 | 23 In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others" ("FIN 45"). This interpretation changes the accounting recognition and disclosure requirements for certain guarantees issued on behalf of other parties which represent either a contingent or a non-contingent obligation for the guarantor to make payments or to perform specified activities. Effective January 1, 2003, FIN 45 mandates the separate fair value recognition of guarantees entered into on or after that date. As of December 31, 2002, we had no material guarantees as defined in FIN 45. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS No. 148), which amended SFAS No. 123 to allow multiple methods of reporting the accounting transition for companies electing to adopt the recognition provisions of SFAS 123 for fair valuing stock-based compensation. As permitted by the accounting standards, we have elected to continue the use of the intrinsic value method of accounting for stock-based compensation under APB Opinion No. 25. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is one where the contractual or ownership interests in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. As of the effective date, we had not entered into any VIEs, and therefore are not impacted by the provisions of FIN 46. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND OTHER MATTERS Board of Directors In July 2002, Brian P. Simmons was elected to the Board of Directors. Mr. Simmons is a partner and one of the founders of Code Hennessy & Simmons LLC, a private equity investment firm. He is also the son of Richard P. Simmons, who beneficially owns more than 5% of the Common Stock of the Company and retired as Chairman of the Company in 2000. Forward-Looking 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 statements in this report relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as "anticipates," "believes," "estimates," "expects," "would," "should," "will," "will likely result," "forecast," "outlook," "projects," and similar expressions. Such forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause our actual results or performance to materially differ from any future results or performance expressed or implied by such statements. Various of these factors are described from time to time in the Company filings with the Securities and Exchange Commission, including Reports on Form 10-Q. We assume no duty to update our forward-looking statements. Factors that could cause actual results to differ from those in such forward-looking statements include the following: Risks Associated with Environmental Matters. We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants into the air or water, and disposal of hazardous substances, and which may 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 we have been identified as a potentially responsible party ("PRP") under the Federal Superfund laws, and comparable state laws. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party locations sites under these laws. With respect to proceedings brought under the federal Superfund laws, or similar state statutes, we have been identified as a PRP at approximately 31 of such sites, excluding those at which it believes it has no future liability. Our involvement is limited or de minimis at approximately 13 of these sites, and the potential loss exposure with respect to any of the remaining 18 individual sites is not considered to be material. 24 | Annual Report 2002 | ATI We are a party to various cost-sharing arrangements with other PRPs at the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements. We believe that we operate our businesses in compliance in all material respects with applicable environmental laws and regulations. However, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from environmental laws. When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities on our financial statements. In many cases, investigations are not at a stage where we are able to determine liability, or if liability is probable, to reasonably estimate the loss, or certain components thereof. Estimates of our liability remain subject to additional uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the participation number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. Accordingly, we periodically review the accruals, as investigation and remediation of these sites proceed. As we receive new information, we expect that we will adjust our accruals to reflect new information. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. At December 31, 2002, our reserves for environmental matters totaled approximately $41 million. Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the sites with which the we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Risks Associated with Accessing the Credit Markets. Our ability to access the credit markets in the future to renew the current portion of our unsecured credit facility or obtain additional financing, if needed, is influenced by the Company's credit rating. In July 2002, Standard & Poor's Ratings Services lowered its long-term credit ratings for our debt to BBB from BBB+. In October 2002, Moody's Investor Service lowered its long-term corporate credit ratings for our debt to Baa2 from Baa1. Risks Associated with Retirement Benefits. Our defined benefit pension plan was funded in accordance with ERISA as of December 31, 2002. Based upon current actuarial analyses and forecasts, we do not expect to be required to make contributions to the defined benefit pension plan during the next several years. However, a further significant decline in the value of plan investments in the future or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. Depending on the timing and amount, a requirement that we fund our defined benefit pension plan could have a material adverse effect on our results of operations and financial condition. In prior years, our defined benefit pension plan was fully funded with assets significantly in excess of the projected benefit obligation. Under Internal Revenue Code (Section 420) provisions, certain amounts that we paid for retiree health care benefits could be reimbursed annually from the excess pension plan assets. During the 2001 second quarter, we recovered $35.0 million under these provisions. While not affecting reported operating profit, cash flow from operations increased by the recovered amount. Our ability to be reimbursed for retiree medical costs in future years is dependent upon the level of pension surplus, if any, as computed under regulations 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 and 2002, the pension funded status at the beginning of 2003 is substantially below the threshold required for reimbursement of retiree medical costs in 2003. The ability to resume reimbursement from pension assets for retiree health care costs beyond 2003 will depend upon the performance of the pension investments, and any changes in the Internal Revenue Code and regulations pertaining to reimbursement of retiree health care costs from pension surplus. Beginning in the second half of 2001, we began funding certain retiree health care benefits for Allegheny Ludlum using plan assets held in a Voluntary Employee Benefit Association (VEBA) trust. This allows us to recover a portion of the retiree medical costs that were previously funded from the pension surplus. During 2002, we were able to fund $12.7 million of retiree medical costs using the assets of the VEBA trust. We may continue to fund certain retiree medical benefits utilizing the plan assets held in the VEBA if the value of these plan assets exceed $50 million. ATI | Annual Report 2002 | 25 Cyclical Demand for Products. The cyclical nature of the industries in which our customers operate cause demand for products to be cyclical, creating uncertainty regarding future profitability. Various changes in general economic conditions affect the industries in which our customers operate. These changes include decreases in the rate of consumption or use of our customers' products due to economic downturns. Other factors causing fluctuation in our customers' positions are changes in market demand, lower overall pricing due to domestic and international overcapacity, currency fluctuations, lower priced imports and increases in use or decreases in prices of substitute materials. As a result of these factors, our profitability has been and may in the future be subject to significant fluctuation. Price Deflation. The current trend of price deflation for many commodity products has adversely affected prices for many of our commodity products, including stainless steel, and may continue to do so. Therefore, revenues and operating results have been and may continue to be adversely affected by a deflationary price environment for these products. Although inflationary trends in recent years have been moderate, during the same period certain critical raw material costs, such as nickel and scrap containing nickel, have been volatile. We primarily use the last-in, first-out method of inventory accounting that reflects current costs in the cost of products sold. We consider these costs, the increasing costs of equipment and other costs in establishing our sales pricing policies and have instituted raw material surcharges on certain of our products to the extent permitted by competitive factors in the marketplace. We continue to emphasize cost reductions and cost containment in all aspects of our business. We change prices on certain of our products from time to time. The ability to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors, some of which are beyond our control. The benefits of price increases may be delayed due to long manufacturing lead times and the terms of existing contracts. Volatility of Energy Prices; Availability of Energy Resources. Energy resources markets are subject to conditions that create uncertainty in the prices and availability of energy resources upon which we rely. We rely upon third parties for our supply of energy resources consumed in the manufacture of products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair the ability to manufacture products for customers. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition. We use approximately 10 to 12 million MMBtu's of natural gas annually, depending upon business conditions, in the manufacture of our products. These purchases of natural gas expose us to risk of higher gas prices. For example, a hypothetical $1.00 per MMBtu increase in the price of natural gas would result in increased annual energy costs of approximately $10 to $12 million. As part of our risk management strategy, from time to time, we purchase swap contracts to manage exposure to changes in energy costs. The contracts obligate us to make or receive a payment equal to the net change in value of the contract at its maturity. These contracts are designated as hedges of the variability in cash flows of a portion of our forecasted energy payments. Volatility of Prices of Critical Raw Materials; Unavailability of Raw Materials. We rely to a substantial extent on outside vendors to supply certain raw materials that are critical to the manufacture of products. Purchase prices and availability of these critical raw materials are subject to volatility. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, on price and other terms acceptable, or at all. If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials. The manufacture of some of our products is a complex process and requires long lead times. As a result, we have in the past and may in the future experience delays or shortages in the supply of raw materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions and suffer harm to our reputation. 26 | Annual Report 2002 | ATI While we enter into raw materials, such as nickel, futures contracts from time to time to hedge exposure to price fluctuations, we cannot be certain that our hedge position adequately reduces exposure. We believe that we have adequate controls to monitor these contracts, but we may not be able to accurately assess exposure to price volatility in the markets for critical raw materials. In addition, although we occasionally use raw materials surcharges to offset the impact of increased costs, competitive factors in the marketplace can limit ability to institute surcharges, and there can be a delay between the increase in the price of raw materials and the realization of the benefit of surcharges. For example, since the Company generally uses in excess of 40,000 tons of nickel each year, a hypothetical change of $1.00 per pound in nickel prices would result in increased costs of approximately $80 million. We acquire certain important raw materials that we use to produce specialty materials, including nickel, chrome, cobalt, titanium sponge and ammonia paratungstate, from foreign sources. Some of these sources operate in countries that may be subject to unstable political and economic conditions. These conditions may disrupt supplies or affect the prices of these materials. Credit Agreement Covenants. The agreement governing our unsecured bank credit facility imposes a number of covenants on us. For example, it contains covenants that create limitations on our ability to, among other things, effect acquisitions or dispositions or incur additional debt, and require us to, among other things, maintain various financial ratios and comply with various other financial covenants. Our ability to comply with these covenants may be affected by events beyond our control and, as a result, we may be unable to comply with these covenants. A failure to comply with these covenants could adversely affect our ability to borrow under our unsecured credit facility and could result in an event of default under the existing unsecured credit agreement. Commercial Aerospace Downturn. A significant portion of the sales of our High Performance Metals segment represent products sold to customers in the commercial aerospace industry. Economic and other factors, including the September 11, 2001 terrorist attacks, that are currently adversely affecting the airline industry have resulted in overall reduced demand for the products that we sell to the commercial aerospace market. The downturn in the commercial aerospace industry could continue to adversely affect our results of operations, and our business and financial condition could be materially adversely affected. Political and Social Turmoil. The war on terrorism and recent political and social turmoil, including terrorist and military actions and the implications of war with Iraq, can be expected to put further pressure on economic conditions in the United States and worldwide. These political, social and economic conditions make it difficult for us, our suppliers and our customers to forecast accurately and plan future business activities, and could adversely affect the financial condition of our suppliers and customers and affect customer decisions as to the amount and timing of purchases from us. As a result, the recovery of our industry from weak demand conditions could be delayed, and our business, financial condition and results of operations could be materially adversely affected. Insurance. We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverages contain exclusions and limitations on coverage. In connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles and significantly higher premiums. As a result, in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations. Labor Matters. We have approximately 9,650 employees. A portion of our workforce is covered by various collective bargaining agreements, principally with the United Steelworkers of America ("USWA"), including: approximately 3,500 Allegheny Ludlum production and maintenance employees covered by collective bargaining agreements between Allegheny Ludlum and the USWA, which are effective through June 2007; approximately 165 Oremet employees covered by a collective bargaining agreement with the USWA which is effective through June 2007; and approximately 600 Wah Chang employees covered by a collective bargaining agreement with the USWA which continues through March 2008. Negotiations are ongoing for a new collective bargaining agreement with the USWA affecting approximately 140 full and part-time employees at various Allegheny Ludlum facilities in Western Pennsylvania. Also, negotiations are expected to begin for a new collective bargaining agreement with the USWA affecting approximately 104 employees at the Casting Service facility in LaPorte, Indiana. ATI | Annual Report 2002 | 27 Generally, agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike. A strike by the employees covered by one or more of the collective bargaining agreements could materially adversely affect our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire. Export Sales. We believe that export sales will continue to account for a significant percentage of our future revenues. Risks associated with export sales include: political and economic instability, including weak conditions in the world's economies; accounts receivable collection; export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on export sales when converted into dollars). Any of these factors could materially adversely effect our results for the period in which they occur. Interest Rate Risk. We attempt to maintain a reasonable balance between fixed- and floating-rate debt to keep financing costs as low as possible. At December 31, 2002, including the effect of interest rate swap agreements, we have approximately $176 million of floating rate debt outstanding with an average interest rate of approximately 1.5%. Since the interest rate on this debt floats with the short-term market rate of interest, we are exposed to the risk that these interest rates may increase. For example, a hypothetical 1% in rate of interest on $176 million of outstanding floating rate debt would result in increased annual financing costs of $1.8 million. Risks Associated with Acquisition and Disposition Strategies. We intend to continue to strategically position our businesses in order to improve our ability to compete. We plan to do this by seeking specialty niches, expanding our global presence, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of existing business units. We regularly consider acquisition, joint ventures, and other business combination opportunities as well as possible business unit dispositions. From time to time, management holds discussions with management of other companies to explore such opportunities. As a result, the relative makeup of the businesses comprising the Company is subject to change. Acquisitions, joint ventures, and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions and other transactions could be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions and a deterioration in domestic and foreign economic conditions. Uncertainties Relating to Spin-Offs--General. In November 1999, we completed a major strategic transformation that included the spin-offs of Teledyne Technologies Incorporated ("Teledyne"), which was comprised of certain businesses in our former Aerospace and Electronics segment, and Water Pik Technologies ("Water Pik"), which was comprised of businesses in our former Consumer segment. Upon completion of the spin-offs, we distributed all of the stock of Teledyne and Water Pik to our stockholders of record. Prior to the spin-offs, we received a ruling from the Internal Revenue Service that the spin-offs would be tax-free to Allegheny Technologies and its shareholders. In the spin-offs of Teledyne and Water Pik, the new companies agreed to assume and to defend and hold us 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, we could be required to satisfy them, which could have a material adverse effect on our results of operations and financial condition. Risks Associated with Government Contracts. Some of our operating companies directly perform contractual work for the U.S. Government. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) could be asserted against us related to our U.S. Government contract work. 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. 28 | Annual Report 2002 | ATI ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions except per share amounts)
For the Years Ended December 31, 2002 2001 2000 ========================================================================================================= SALES $ 1,907.8 $ 2,128.0 $ 2,460.4 - --------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 1,744.5 1,862.3 1,998.5 Selling and administrative expenses 188.3 198.8 203.7 Restructuring costs 42.8 74.2 29.5 - --------------------------------------------------------------------------------------------------------- Income (loss) before interest, other income and income taxes (67.8) (7.3) 228.7 Interest expense, net 34.3 29.3 34.4 Other income (expense), net (1.7) 0.2 14.5 - --------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (103.8) (36.4) 208.8 Income tax provision (benefit) (38.0) (11.2) 76.3 - --------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (65.8) $ (25.2) $ 132.5 - --------------------------------------------------------------------------------------------------------- BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.82) $ (0.31) $ 1.60 =========================================================================================================
The accompanying notes are an integral part of these statements. ATI | Annual Report 2002 | 29 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions except share and per share amounts)
DECEMBER 31, December 31, 2002 2001 =============================================================================================================== ASSETS Cash and cash equivalents $ 59.4 $ 33.7 Accounts receivable, net 239.3 274.6 Inventories, net 409.0 508.4 Income tax refunds 51.9 48.5 Deferred income taxes 20.8 33.5 Prepaid expenses and other current assets 32.0 27.4 - --------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 812.4 926.1 Property, plant and equipment, net 757.6 828.9 Cost in excess of net assets acquired 194.4 188.4 Deferred pension asset 165.1 -- Prepaid pension cost -- 632.9 Deferred income taxes 85.4 -- Other assets 78.3 66.9 - --------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,093.2 $2,643.2 =============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 171.3 $ 155.3 Accrued liabilities 161.0 168.2 Short-term debt and current portion of long-term debt 9.7 9.2 - --------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 342.0 332.7 Long-term debt 509.4 573.0 Accrued postretirement benefits 496.4 506.1 Pension liabilities 216.0 35.8 Deferred income taxes -- 153.7 Other long-term liabilities 80.6 97.2 - --------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,644.4 1,698.5 =============================================================================================================== 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 at 2002 and 2001; outstanding - 80,634,344 shares at 2002 and 80,314,624 shares at 2001 9.9 9.9 Additional paid-in capital 481.2 481.2 Retained earnings 835.1 957.5 Treasury stock: 18,317,146 shares at 2002 and 18,636,866 shares at 2001 (469.7) (478.2) Accumulated other comprehensive loss, net of tax (407.7) (25.7) - --------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 448.8 944.7 - --------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,093.2 $2,643.2 ===============================================================================================================
The accompanying notes are an integral part of these statements. 30 | Annual Report 2002 | ATI ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
For the Years Ended December 31, 2002 2001 2000 =============================================================================================== OPERATING ACTIVITIES: Net Income (loss) $ (65.8) $ (25.2) $ 132.5 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 90.0 98.6 99.7 Non-cash restructuring costs and asset write-offs 39.2 79.7 30.8 Deferred income taxes 25.6 24.5 57.8 Gains on sales of investments and businesses (2.6) (2.8) (11.6) Change in operating assets and liabilities: Inventories 99.4 67.9 (20.4) Accounts receivable 35.6 47.1 15.9 Accrued liabilities (22.6) (49.9) (61.5) Accounts payable 16.5 (12.5) (3.6) Deferred pension asset (4.2) (49.0) (89.8) Accrued income taxes (3.4) (48.5) 0.2 Other (3.5) (7.1) (14.5) - ----------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 204.2 122.8 135.5 - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (48.7) (104.2) (60.2) Disposals of property, plant and equipment 9.2 4.3 5.2 Proceeds from sales of businesses and investments 2.4 17.9 17.0 Purchases of businesses and investment in ventures -- (0.5) (28.1) Other (2.7) (2.5) (3.9) - ----------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (39.8) (85.0) (70.0) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings (repayments) under credit facilities (73.1) (266.6) 195.1 Dividends paid (53.2) (64.2) (66.0) Payments of long-term debt and capital leases (12.4) (0.7) (1.4) Issuance of Allegheny Technologies 8.375% Notes, net -- 292.5 -- Borrowings of other long-term debt -- 11.5 -- Purchases of common stock -- (3.0) (221.0) Exercises of stock options -- 0.2 3.3 - ----------------------------------------------------------------------------------------------- CASH USED IN FINANCING ACTIVITIES (138.7) (30.3) (90.0) - ----------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25.7 7.5 (24.5) Cash and cash equivalents at beginning of year 33.7 26.2 50.7 - ----------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 59.4 $ 33.7 $ 26.2 ===============================================================================================
Amounts presented on the Consolidated Statements of Cash Flows may not agree to the corresponding changes in balance sheet items due to the accounting for purchases and sales of businesses and the effects of foreign currency translation. The accompanying notes are an integral part of these statements. ATI | Annual Report 2002 | 31 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In millions except per share amounts)
Accumulated Additional Other Common Paid-In Retained Treasury Comprehensive Stockholders' Stock Capital Earnings Stock Income (Loss) Equity ================================================================================================================================ BALANCE, DECEMBER 31, 1999 $ 9.9 $ 481.0 $ 994.5 $ (288.7) $ 3.5 $1,200.2 - -------------------------------------------------------------------------------------------------------------------------------- Net income -- -- 132.5 -- -- 132.5 Other comprehensive income, net of tax: Foreign currency translation losses -- -- -- -- (19.4) (19.4) Change in unrealized gains on securities -- -- -- -- (3.7) (3.7) - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) -- -- 132.5 -- (23.1) 109.4 Cash dividends on common stock ($0.80 per share) -- -- (66.0) -- -- (66.0) Purchase of common stock -- -- -- (221.0) -- (221.0) Employee stock plans -- 0.2 (11.0) 27.4 -- 16.6 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 9.9 481.2 1,050.0 (482.3) (19.6) 1,039.2 ================================================================================================================================ Net loss -- -- (25.2) -- -- (25.2) Other comprehensive loss, net of tax: Foreign currency translation losses -- -- -- -- (0.2) (0.2) Unrealized losses on energy, raw material and currency hedges -- -- -- -- (2.2) (2.2) Change in unrealized gains on securities -- -- -- -- (3.7) (3.7) - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive loss -- -- (25.2) -- (6.1) (31.3) Cash dividends on common stock ($0.80 per share) -- -- (64.2) -- -- (64.2) Purchase of common stock -- -- -- (3.0) -- (3.0) Employee stock plans -- -- (3.1) 7.1 -- 4.0 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 9.9 481.2 957.5 (478.2) (25.7) 944.7 ================================================================================================================================ Net loss -- -- (65.8) -- -- (65.8) Other comprehensive income (loss), net of tax: Minimum pension liability adjustment -- -- -- -- (406.4) (406.4) Foreign currency translation gains -- -- -- -- 16.6 16.6 Unrealized gains on energy, raw material and currency hedges -- -- -- -- 7.4 7.4 Change in unrealized gains on securities -- -- -- -- 0.4 0.4 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive loss -- -- (65.8) -- (382.0) (447.8) Cash dividends on common stock ($0.66 per share) -- -- (53.2) -- -- (53.2) Employee stock plans -- -- (3.4) 8.5 -- 5.1 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2002 $ 9.9 $ 481.2 $ 835.1 $ (469.7) $ (407.7) $ 448.8 ================================================================================================================================
The accompanying notes are an integral part of these statements. 32 | Annual Report 2002 | ATI REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS ALLEGHENY TECHNOLOGIES INCORPORATED We have audited the accompanying consolidated balance sheets of Allegheny Technologies Incorporated and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Allegheny Technologies Incorporated and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets. /s/ ERNST & YOUNG LLP January 17, 2003 ATI | Annual Report 2002 | 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Principles of Consolidation The consolidated financial statements include the accounts of Allegheny Technologies Incorporated and its subsidiaries, including the Chinese joint venture known as Shanghai STAL Precision Stainless Steel Co., LTD ("STAL"), in which the Company has a 60% interest. The remaining 40% interest in STAL is owned by Baosteel Group, a state authorized investment company whose equity securities are publicly traded in the People's Republic of China. The financial results of STAL are consolidated into the Company's operating results with the 40% interest of the Company's minority partner recognized on the balance sheet in other long-term liabilities. Investments in which the Company exercises significant influence, but which it does not control (generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting. Significant intercompany accounts and transactions have been eliminated. Unless the context requires otherwise, "Allegheny Technologies" and the "Company" refer to Allegheny Technologies Incorporated and its subsidiaries. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates are reasonable. Cash Equivalents and Investments Cash equivalents are highly liquid investments valued at cost, which approximates fair value, acquired with original maturity of three months or less. The Company's investments in debt and equity securities are classified as available-for-sale and are reported at fair values, with net unrealized appreciation and depreciation on investments reported as a component of accumulated other comprehensive income. Accounts Receivable Accounts receivable are presented net of a reserve for doubtful accounts of $10.1 million at December 31, 2002 and $12.3 million at December 31, 2001. The Company markets its products to a diverse customer base, principally throughout the United States. Trade credit is extended based upon evaluations of each customer's ability to perform its obligations, which are updated periodically. Accounts receivable reserves are determined based upon an aging of accounts and a review for collectibility of specific accounts. Inventories Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO), and average cost methods) or market, less progress payments. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of the Company's inventory is valued utilizing the LIFO costing methodology. Inventory of the Company's non-U.S. operations is valued using average cost or FIFO methods. The Company evaluates product lines on a quarterly basis to identify inventory values that exceed estimated net realizable value. The calculation of a resulting reserve, if any, is recognized as an expense in the period that the need for the reserve is identified. It is the Company's general policy to write-down to scrap value any inventory that is identified as obsolete and any inventory that has aged or has not moved in more than twelve months. In some instances this criterion is up to twenty-four months. Long-Lived Assets Property, plant and equipment are recorded at cost. The principal method of depreciation adopted for all property placed into service after July 1, 1996 is the straight-line method. For buildings and equipment acquired prior to July 1, 1996, depreciation is computed using a combination of accelerated and straight-line methods. Significant enhancements that extend the lives of property and equipment are capitalized. Costs related to repairs and maintenance are charged to expense in the year incurred. The cost and related accumulated depreciation of property and equipment retired or disposed of are removed from the accounts and any related gains or losses are included in income. 34 | Annual Report 2002 | ATI The Company monitors the recoverability of the carrying value of its long-lived assets. An impairment charge is recognized when the expected net undiscounted future cash flows from an asset's use (including any proceeds from disposition) are less than the asset's carrying value and the asset's carrying value exceeds its fair value. 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") which superseded the existing accounting standards. Although retaining many of the fundamental recognition and measurement provisions of the existing accounting standards, the new rules significantly changed the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets to be disposed of by sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. SFAS 144 also expands the types of dispositions which qualify for discontinued operations disclosure treatment and requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period in which the losses are incurred, rather than as of a measurement date. Effective January 1, 2002, the Company adopted this statement. Cost in Excess of Net Assets Acquired At December 31, 2002, the Company had $194.4 million of goodwill on its balance sheet. Of the total, $126.6 million related to the Flat-Rolled Products segment, $57.1 million related to the High Performance Metals segment, and $10.7 million related to the Industrial Products segment. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise. In addition, SFAS 142 changes the test for goodwill impairment. The new impairment test for goodwill requires a comparison of the fair value of each reporting unit that has goodwill associated with its operations with its carrying amount, including goodwill. If this comparison reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all recognized and unrecognized assets and liabilities. During the 2002 second quarter, the Company completed its initial impairment evaluation for the January 1, 2002 transition to SFAS 142 and no impairment was determined to exist. The evaluation of goodwill included estimating the fair market value of each of the reporting units which have goodwill associated with their operations using discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any. These valuation methods require the Company to make estimates and assumptions regarding future cash flows, profitability, and the cost of capital. Although the Company believes that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions. In accordance with SFAS 142, the Company evaluates goodwill annually for impairment. The Company will perform this test in the fourth quarter each year, beginning in the 2002 fourth quarter. Based on the 2002 annual evaluation, no impairment of goodwill was determined to exist. Effective January 1, 2002, in accordance with the SFAS 142 pronouncement, the Company discontinued amortizing goodwill. Prior to 2002, cost in excess of net assets acquired related to businesses purchased after November 1970 was amortized on a straight-line basis over periods not exceeding 40 years. Goodwill amortization expense was $5.8 million and $5.7 million in 2001 and 2000, respectively, or $0.04 per diluted share. Had the Company applied the non-amortization provisions of SFAS 142 in prior years, the reported results of operations for the year ended December 31, 2001 would have been a net loss of $21.2 million, or $0.27 per diluted share, and for the year ended December 31, 2000, the reported results of operations would have been net income of $136.1 million, or $1.64 per diluted share. At December 31, 2002 and 2001, accumulated amortization related to goodwill was $34.2 million. Environmental Costs that mitigate or prevent future environmental contamination or extend the life, increase the capacity or improve the safety or efficiency of property utilized in current operations are capitalized. Other costs that relate to current operations or an existing condition caused by past operations are expensed. Environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable, but generally not later than the completion of the feasibility study or the Company's recommendation of a remedy or commitment to an appropriate plan of action. The accruals are reviewed periodically and, as investigations and remediations proceed, adjustments are made as necessary. Accruals for losses from environmental remediation obligations do not take into account the effects of inflation, and anticipated expenditures are not discounted to their present value. The accruals are not reduced by possible recoveries from insurance carriers or other third parties, but do reflect allocations among potentially responsible parties ("PRPs") at Federal Superfund sites or similar state- ATI | Annual Report 2002 | 35 managed sites after an assessment is made of the likelihood that such parties will fulfill their obligations at such sites and after appropriate cost-sharing or other agreements are entered. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations, and current technology. Such estimates take into consideration the Company's prior experience in site investigation and remediation, the data concerning cleanup costs available from other companies and regulatory authorities, and the professional judgment of the Company's environmental experts in consultation with outside environmental specialists, when necessary. Derivative Financial Instruments and Hedging As part of its risk management strategy the Company, from time to time, purchases futures and swap 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, and energy costs. The 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 and energy payments. The majority of these contracts mature within one year. Effective January 1, 2001, the Company began accounting for all of these contracts as hedges under Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). Changes in the fair value of these contracts are recognized as a component of other comprehensive income (loss) in stockholders' equity until the hedged item is recognized in the statement of operations within cost of sales. If a portion of the contract is ineffective as a hedge of the underlying exposure, the change in fair value related to the ineffective portion is immediately recognized as income or expense in the statement of operations within cost of sales. 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 are designated as hedges of the variability in cash flows of a portion of the forecasted future export sales transactions which otherwise would expose the Company to foreign currency risk. Effective January 1, 2001, the Company began accounting for all of these contracts as hedges under SFAS 133. Changes in the fair value of these contracts are recognized as a component of other comprehensive income (loss) in stockholders' equity until the hedged item is recognized in the statement of operations. If a portion of the contract is ineffective as a hedge of the underlying exposure, the change in fair value related to the ineffective portion is immediately recognized as income or expense in the statement of operations. Derivative interest rate contracts are used from time to time to manage the Company's exposure to interest rate risks. For example, in 2002 the Company entered into interest rate swap contracts for the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the contracts without an exchange of the underlying principal amount. These contracts are designated as fair value hedges. As a result, changes in the fair value of these swap contracts and the underlying fixed rate debt are recognized in the statement of operations. In general, hedge effectiveness is determined by examining the relationship between offsetting changes in fair value or cash flows attributable to the item being hedged and the financial instrument being used for the hedge. Effectiveness is measured utilizing regression analysis and other techniques, to determine whether the change in the fair market value or cash flows of the derivative exceeds the change in fair value or cash flow of the hedged item. Calculated ineffectiveness, if any, is immediately recognized on the statement of operations. Foreign Currency Translation Assets and liabilities of international operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Revenue Recognition Revenue is recognized when title passes or as services are rendered. Research and Development Company funded research and development costs were $12.0 million in 2002, $11.3 million in 2001 and $13.6 million in 2000 and were expensed as incurred. Customer funded research and development costs were $2.7 million in 2002, $2.0 million in 2001 and $2.0 million in 2000. Customer funded research and development costs are recognized in the consolidated statement of operations in accordance with revenue recognition policies. 36 | Annual Report 2002 | ATI Income Taxes Deferred income taxes are recognized based upon the future income tax effects (which is based upon enacted tax laws and rates) of the differences that arise in the carrying amount of assets and liabilities for financial reporting and tax purposes. The Company evaluates the realizability of deferred tax assets using historical earnings, estimates of future operating results, and potential tax planning strategies. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized. Net Income (Loss) Per Common Share Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted income per share is calculated by using the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect, if any, of outstanding stock options. Stock-based Compensation The Company accounts for its stock option plans and other stock-based compensation in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under APB Opinion No. 25, for awards which vest without a performance-based contingency, no compensation expense is recognized when the exercise price of the Company's employee stock options equals the market price of the underlying stock at the date of the grant. Compensation expense for fixed stock-based awards, generally awards of non-vested stock, is recognized over the associated employment service period based on the fair value of the stock at the date of the grant. The Company also has performance-based stock award programs which are accounted for under the variable plan rules of APB Opinion No. 25. Compensation expense for these awards of stock, which are earned based on performance-based criteria, is recognized at the measurement date based on the stock price at the end of the performance period, with compensation expense recognized at interim dates based on performance criteria achieved and the Company's stock price at the interim dates. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
(In millions, except per share amounts) 2002 2001 2000 ============================================================================================ Net income (loss) as reported $(65.8) $(25.2) $132.5 Stock-based compensation under SFAS 123 fair value method, net of related tax effects (3.8) (5.0) (7.1) - -------------------------------------------------------------------------------------------- Pro forma net income (loss) $(69.6) $(30.2) $125.4 - -------------------------------------------------------------------------------------------- Net income (loss) per common share: Basic and diluted - as reported $(0.82) $(0.31) $ 1.60 - -------------------------------------------------------------------------------------------- Basic and diluted - pro forma $(0.86) $(0.38) $ 1.51 - --------------------------------------------------------------------------------------------
New Accounting Pronouncements In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). Under SFAS 143, obligations associated with the retirement of tangible long-lived assets, such as landfill and other facility closure costs, would be capitalized and amortized to expense over an asset's useful life using a systematic and rational allocation method. This standard is effective for fiscal years beginning after June 15, 2002. The Company's adoption of SFAS 143 on January 1, 2003 will be reported in the first quarter 2003 statement of operations as a cumulative effect of a change in accounting principle, resulting in a charge of approximately $1.3 million, net of tax, or $0.02 per share, principally for asset retirement obligations related to landfills. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This statement establishes accounting guidelines for the recognition and measurement of liabilities for costs associated with exit or disposal activities initially at fair value in the period in which the liabilities are incurred, rather than at the date of a commitment to an exit or disposal plan. This standard is effective January 1, 2003 for all exit or disposal activities initiated after that date. The Company adopted this standard at January 1, 2003. Subsequent to adoption, this standard may affect the periods in which costs are recognized for workforce reductions or facility closures, although the ultimate amount of costs recognized would be the same. SFAS 146 has no effect on the Company's previously announced restructuring charges. ATI | Annual Report 2002 | 37 In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others" ("FIN 45"). This interpretation changes the accounting recognition and disclosure requirements for certain guarantees issued on behalf of other parties which represent either a contingent or a non-contingent obligation for the guarantor to make payments or to perform specified activities. Effective January 1, 2003, FIN 45 mandates the separate fair value recognition of guarantees entered into on or after that date. At December 31, 2002, the Company has no material guarantees as defined in FIN 45. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amended SFAS 123 to allow multiple methods of reporting the accounting transition for companies electing to adopt the recognition provisions of SFAS 123 for fair valuing stock-based compensation. As permitted by accounting standards, the Company has elected to continue the use of the intrinsic value method of accounting for stock-based compensation under APB Opinion No. 25. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is one where the contractual or ownership interests in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. At the effective date, the Company has not entered into any VIEs. Reclassifications Certain amounts from prior years have been reclassified to conform with the 2002 presentation. NOTE 2. INVENTORIES --
DECEMBER 31, December 31, (In millions) 2002 2001 =================================================================================================== Raw materials and supplies $ 49.4 $ 85.9 Work-in-process 361.0 419.6 Finished goods 77.9 83.0 - --------------------------------------------------------------------------------------------------- Total inventories at current cost 488.3 588.5 Less allowances to reduce current cost values to LIFO basis (74.7) (77.2) Progress payments (4.6) (2.9) =================================================================================================== Total inventories $409.0 $508.4 ===================================================================================================
Inventories, before progress payments, determined on the last-in, first-out method were $343.7 million at December 31, 2002 and $420.2 million at December 31, 2001. The remainder of the inventory was determined using the first-in, first-out and average cost methods. These inventory values do not differ materially from current cost. During 2002 and 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 decrease the net loss by $2.4 million in 2002 and by $6.8 million in 2001. 38 | Annual Report 2002 | ATI NOTE 3. DEBT --
Debt at December 31, 2002 and 2001 was as follows: (In millions) 2002 2001 ============================================================================================= Allegheny Technologies $300 million 8.375% Notes due 2011, net (a) $ 312.3 $ 292.5 Allegheny Ludlum 6.95% debentures, due 2025 150.0 150.0 Domestic Bank Group $250 million unsecured credit agreement -- -- Foreign credit agreements 26.7 25.6 Industrial revenue bonds, due through 2007 21.5 22.5 Commercial paper -- 70.0 Capitalized leases and other 8.6 21.6 - --------------------------------------------------------------------------------------------- Total short-term and long-term debt 519.1 582.2 Short-term debt and current portion of long-term debt (9.7) (9.2) - --------------------------------------------------------------------------------------------- Total long-term debt $ 509.4 $ 573.0 =============================================================================================
(a) Includes fair value adjustments for interest rate swap contracts of $18.7 million at December 31, 2002. Interest expense was $37.3 million in 2002, $30.7 million in 2001 and $37.6 million in 2000. Interest and commitment fees paid were $37.5 million in 2002, $31.1 million in 2001 and $38.0 million in 2000. Scheduled maturities of borrowings during the next five years are $9.7 million in 2003, $27.3 million in 2004, $0.6 million in 2005, $0.6 million in 2006 and $10.1 million in 2007. In December 2001, the Company issued $300 million of 8.375% Notes due December 15, 2011, in a transaction exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. During 2002, holders of the Notes exchanged the outstanding Notes for new Notes with substantially identical terms, but which are registered under the Securities Act. Interest on the Notes is payable semi-annually, on June 15 and December 15, and is subject to adjustment under certain circumstances. These Notes contain default provisions with respect to default for the following, among other things: nonpayment of interest on the Notes for 30 days, default in payment of principal when due, or failure to cure the breach of a covenant as provided in the Notes. Any violation of the default provision could result in the requirement to immediately repay the borrowings. These Notes are presented on the balance sheet net of issuance costs of $6.4 million, which are being amortized over the life of the debt. At December 31, 2002, the Company had entered into "receive fixed, pay floating" arrangements for $150 million related to the 8.375% ten-year Notes which effectively convert this portion of the Notes to variable rate debt. The result of the "receive fixed, pay floating" arrangements was a decrease in interest expense of $4.9 million for the year ended December 31, 2002, compared to the fixed interest expense of the ten-year Notes. At December 31, 2002, the adjustment of these swap contracts to fair market value resulted in the recognition of an asset of $18.7 million on the balance sheet, included in other assets, with an offsetting increase in long-term debt. Some of the swap contracts contain a provision which allows the swap counterparty to terminate the swap contracts in the event the Company's senior unsecured debt credit rating falls below investment grade. The Company also has the ability to terminate the swaps and receive (pay) the asset (liability) fair value of the swaps. In December 2002, the Company reached an agreement with a group of banks ("Bank Group") to renew the short-term portion of its unsecured credit facility, revise the amount of available borrowings under the overall credit facility, and revise related financial covenants. This credit agreement revised a $325 million credit facility established in December 2001, which was subsequently amended in August 2002 to revise financial covenants. As amended, the Bank Group unsecured credit agreement provides for borrowings of up to $250 million on a revolving credit basis, consisting of a $100 million short-term credit facility which expires in December 2003, and a $150 million credit facility which expires in December 2006. The interest is payable based upon London Interbank Offered Rates (LIBOR) plus a spread, which can vary depending on the Company's credit rating. The Company also has the option of using other alternative interest rate bases. The agreement has various covenants that limit the Company's ability to dispose of assets and merge with another corporation. The agreement also contains covenants that require the Company to maintain various financial statement ratios, including a covenant requiring the maintenance of a specified minimum ratio of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to gross interest expense ("Interest Coverage Ratio") and a second covenant that requires the Company to not exceed a specified maximum ratio of total consolidated indebtedness to total capitalization ("Leverage Ratio"), both as defined by the agreement. The Company was compliant with these covenants at December 31, 2002 and the applicable covenants during 2002. ATI | Annual Report 2002 | 39 The following table summarizes the Interest Coverage Ratio requirement which, in accordance with the agreement, is calculated for the preceding twelve month period from the financial statement date: December 31, 2002 through December 31, 2003 2.0 times EBITDA After December 31, 2003 through June 30, 2004 2.5 times EBITDA After June 30, 2004 through December 31, 2004 3.0 times EBITDA Thereafter 3.5 times EBITDA The definition of EBITDA excludes up to $10 million of cash costs related to workforce reductions in 2002, includes the add back of non-cash pension expense or the deduction of non-cash pension income calculated in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87"), and excludes postretirement benefits expenses that are funded by Voluntary Employee Benefit Association (VEBA) trusts. The Leverage Ratio requires that total consolidated indebtedness be not more than 50% of total capitalization. The Leverage Ratio excludes any changes to capitalization resulting from non-cash balance sheet adjustments due to changes in net pension assets or liabilities recognized in accordance with the minimum liability provisions of SFAS 87. The definitions of total indebtedness and total capitalization allow for the deduction of up to $50 million of cash and cash equivalent balances held in excess of $25 million. At December 31, 2002, EBITDA (calculated in accordance with the credit agreement) for the prior twelve month period was 2.3 times gross interest expense compared to a required ratio of at least 2.0 times gross interest expense. At December 31, 2002, the Leverage Ratio was 38% compared to a required ratio of not more than 50% of total capitalization. The Leverage Ratio has the effect of limiting the total amount the Company may borrow as well as the amount of cash dividends which may be paid; at December 31, 2002, the Leverage Ratio would limit the amount of additional borrowings as well as dividends to approximately $300 million. The Company had no borrowings outstanding under these revolving unsecured credit agreements during 2002 or at December 31, 2002 or 2001. During the fourth quarter of 2000, the Company implemented a commercial paper program. There were no borrowings outstanding under the commercial paper program at December 31, 2002. The weighted average interest rate for the outstanding commercial paper was 3.09% at December 31, 2001. In July 2002 Standard & Poor's Ratings Services lowered its long-term and short-term corporate credit ratings for the Company's debt to BBB from BBB+ and to A-3 from A-2, respectively. In October 2002 Moody's Investor Service lowered its long-term corporate credit ratings for the Company's debt to Baa2 from Baa1. The Company's subsidiaries also maintain credit agreements with various foreign banks, which provide for borrowings of up to approximately $57.8 million. At December 31, 2002, the Company had approximately $26 million of available borrowing capacity under these foreign credit agreements. These agreements provide for annual facility fees of up to 0.20%. Borrowings outstanding under the credit agreements are unsecured. Commitments under separate standby letters of credit outstanding were $40.1 million at December 31, 2002 and $49.6 million at December 31, 2001. The Company has no off-balance sheet financing relationships with variable interest entities, structured finance entities, or any other unconsolidated entities. At December 31, 2002, the Company has not guaranteed any third-party indebtedness. NOTE 4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION --
Cash and cash equivalents at December 31, 2002 and 2001 were as follows: (In millions) 2002 2001 ===================================================================================================== Cash $16.1 $19.1 Other short-term investments, at cost which approximates market 43.3 14.6 - ----------------------------------------------------------------------------------------------------- Total cash and cash equivalents $59.4 $33.7 =====================================================================================================
40 | Annual Report 2002 | ATI The estimated fair value of financial instruments at December 31, 2002 and 2001 was as follows:
(In millions) 2002 2001 ==================================================================================================================================== CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value ==================================================================================================================================== Cash and cash equivalents $59.4 $59.4 $33.7 $33.7 Other assets -- Interest rate swap agreements 18.7 18.7 -- -- Debt: Allegheny Technologies $300 million 8.375% Notes due 2011, net (a) 312.3 315.7 292.5 295.3 Allegheny Ludlum 6.95% debentures, due 2025 150.0 126.0 150.0 125.0 Foreign credit agreements 26.7 26.7 25.6 25.6 Industrial revenue bonds, due through 2007 21.5 21.5 22.5 22.5 Commercial paper -- -- 70.0 70.0 Capitalized leases and other 8.6 8.6 21.6 21.6 ====================================================================================================================================
(a) Includes fair value adjustments for interest rate swap contracts of $18.7 million at December 31, 2002. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash and cash equivalents: The carrying amount on the balance sheet approximates fair value. Interest rate swap agreements: The fair values were obtained from the agreement counterparties. Short-term and long-term debt: The fair values of the Allegheny Technologies 8.375% Notes and the Allegheny Ludlum 6.95% debentures were based on quoted market prices. The carrying amounts of the other short-term and long-term debt approximate fair value. Accounts receivable are presented net of a reserve for doubtful accounts of $10.1 million at December 31, 2002 and $12.3 million at December 31, 2001. During 2002, the Company recognized expense of $1.8 million to increase the reserve for doubtful accounts and wrote-off $4.0 million of uncollectible accounts, which reduced the reserve. During 2001, the Company recognized expense of $10.1 million to increase the reserve for doubtful accounts and wrote-off $5.2 million of uncollectible accounts, which reduced the reserve. Property, plant and equipment at December 31, 2002 and 2001 were as follows:
(In millions) 2002 2001 ================================================================================ Land $29.5 $30.6 Buildings 228.6 219.4 Equipment and leasehold improvements 1,521.5 1,534.4 - -------------------------------------------------------------------------------- 1,779.6 1,784.4 Accumulated depreciation and amortization (1,022.0) (955.5) - -------------------------------------------------------------------------------- Total property, plant and equipment $757.6 $828.9 ================================================================================
Depreciation and amortization for the years ended December 31, 2002, 2001 and 2000 was as follows:
(In millions) 2002 2001 2000 ===================================================================================== Depreciation of property, plant & equipment $85.4 $88.4 $89.8 Amortization of goodwill -- 5.8 5.7 Software and other amortization 4.6 4.4 4.2 - ------------------------------------------------------------------------------------- Total depreciation and amortization $90.0 $98.6 $99.7 =====================================================================================
In accordance with SFAS 142, amortization of goodwill was discontinued January 1, 2002. Accrued liabilities included salaries and wages of $38.4 million and $33.8 million at December 31, 2002 and 2001, respectively. ATI | Annual Report 2002 | 41 NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) -- The components of accumulated other comprehensive income (loss), net of tax, at December 31, 2002 and 2001 were as follows:
Total Foreign Net Unrealized Minimum Accumulated Currency Gains (losses) Pension Net Unrealized Other Translation On Derivative Liability Gains (Iosses) Comprehensive (In millions) Adjustments Instruments Adjustments On Investments Income (loss) =================================================================================================================== Balance, December 31, 1999 $(3.6) $-- $ -- $ 7.1 3.5 - ------------------------------------------------------------------------------------------------------------------- Amounts arising during the year (21.7) -- -- 3.8 (17.9) Amounts realized 2.3 -- -- (7.5) (5.2) - ------------------------------------------------------------------------------------------------------------------- Net change (19.4) -- -- (3.7) (23.1) - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 (23.0) -- -- 3.4 (19.6) Amounts arising during the year (0.3) (2.2) -- (1.4) (3.9) Amounts realized 0.1 -- -- (2.3) (2.2) - ------------------------------------------------------------------------------------------------------------------- Net change (0.2) (2.2) -- (3.7) (6.1) - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 (23.2) (2.2) -- (0.3) (25.7) Amounts arising during the year 16.6 7.4 (406.4) 0.4 (382.0) - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 $(6.6) $5.2 $(406.4) $0.1 $(407.7) ===================================================================================================================
Other comprehensive income (loss) amounts are net of income tax expense (benefit) at the effective tax rate for each year. NOTE 6. STOCKHOLDERS' EQUITY -- Preferred Stock Authorized preferred stock may be issued in one or more series, with designations, powers and preferences as shall be designated by the Board of Directors. At December 31, 2002, there were no shares of preferred stock issued. Common Stock During 2000, the Company adopted the Allegheny Technologies Incorporated 2000 Incentive Plan (the "Incentive Plan"). Options granted under the Incentive Plan, and predecessor plans, have been granted at not less than market prices on the dates of grant. Options granted under the Incentive Plan have a maximum term of 10 years. Vesting of stock options granted under the Incentive Plan generally occurs in three annual increments, beginning on the first anniversary of the grant date. At December 31, 2002, approximately 4.2 million shares of common stock were available for future awards under the Incentive Plan. The Company accounts for its stock option plans in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under APB Opinion 25, for awards which vest without a performance-based contingency, no compensation expense for stock option plans is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock at the date of the grant. If compensation cost for these stock option awards had been determined using the fair-value method prescribed by FASB Statement No. 123, "Accounting for Stock-based Compensation," ("SFAS 123") net loss would have increased by $3.8 million (or $0.04 per diluted share), $5.0 million (or $0.07 per diluted share) and net income would have been reduced by $7.1 million (or $0.09 per diluted share) for the years ended December 31, 2002, 2001 and 2000, respectively. Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2002 2001 2000 ====================================================================================================== Expected dividend yield 4.4% 4.7% 4.3% Expected volatility 35% 39% 36% Risk-free interest rate 4.0% 4.8% 5.5% Expected lives 8.0 8.0 8.0 Weighted average fair value of options granted during year $2.95 $4.89 $5.38 ======================================================================================================
42 | Annual Report 2002 | ATI Stock option transactions under the Company's employee plans for the years ended December 31, 2002, 2001 and 2000 are summarized as follows:
(shares in thousands) 2002 2001 2000 ======================================================================================================================== WEIGHTED Weighted Weighted NUMBER OF AVERAGE Number of Average Number of Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price ======================================================================================================================== Outstanding, beginning of year 5,077 $27.88 4,480 $30.26 4,870 $29.66 Granted 3,141 9.04 847 17.08 304 18.59 Exercised -- -- (28) 14.53 (195) 16.95 Cancelled (299) 28.07 (222) 30.75 (499) 27.86 - ------------------------------------------------------------------------------------------------------------------------ Outstanding at end of year 7,919 $20.42 5,077 $27.88 4,480 $30.26 - ------------------------------------------------------------------------------------------------------------------------ Exercisable at end of year 4,190 $29.38 3,453 $32.10 2,318 $33.62 ========================================================================================================================
Options outstanding at December 31, 2002 were as follows:
(shares in thousands) ============================================================================================================== OPTIONS OUTSTANDING OPTIONS EXERCISABLE ============================================================================================================== Weighted Weighted Weighted Average Average Average Value of Stock Options at Range of Number of Remaining Exercise Number of Exercise December 31, 2002 (a) Exercise Prices Shares Contractual Life Price Shares Price Exercisable Unexercisable ============================================================================================================== $7.00-$10.00 2,338 9.8 $ 7.25 -- $-- $ 0 $ 0 10.01-15.00 562 8.9 12.86 130 14.44 0 0 15.01-20.00 1,362 8.5 17.38 403 18.16 0 0 20.01-30.00 1,819 6.7 21.78 1,819 21.78 0 0 30.01-40.00 838 5.0 36.30 838 36.30 0 0 40.01-50.00 1,000 3.9 43.84 1,000 43.84 0 0 - -------------------------------------------------------------------------------------------------------------- 7,919 7.5 $20.42 4,190 $29.38 $ 0 $ 0 ==============================================================================================================
(a) The value of stock options is calculated by subtracting the exercise price per share from $6.13, which was the average of the high and low sales prices of a share of Company Common Stock on the New York Stock Exchange on the last business day of 2002. The Company sponsors other stock-based compensation programs, which resulted in compensation expense of $0.8 million in 2002, $1.2 million in 2001 and $10.2 million in 2000. These recognized amounts included reversals of $1.9 million in 2002 and $2.2 million in 2001 for adjustments to prior years incentive compensation expenses based on changes to estimates of compensation made at interim measurement dates. In 2002, the Company granted 174,418 shares of non-vested stock with an aggregate grant date fair value of $2.7 million which vests over a five year service period. Loans to employees in connection with stock-based compensation programs were $11.2 million at December 31, 2002. Stockholders' Rights Plan Under the Company's stockholder rights plan, each share of Allegheny Technologies common stock is accompanied by one right to purchase two one-hundredths of a share of preferred stock for $100. Each two hundredths of a share of preferred stock would be entitled to dividends and to vote on an equivalent basis with one share of common stock. The rights are neither exercisable nor separately transferable from shares of common stock unless a party acquires or effects a tender offer for more than 15% of Allegheny Technologies common stock. If a party acquired more than 15% of the Allegheny Technologies common stock or acquired the Company in a business combination, each right (other than those held by the acquiring party) would entitle the holder to purchase common stock or preferred stock at a substantial discount. The rights expire on March 12, 2008, and the Company's Board of Directors can amend certain provisions of the plan or redeem the rights at any time prior to heir becoming exercisable. ATI | Annual Report 2002 | 43 NOTE 7. INCOME TAXES -- Income tax provision (benefit) was as follows:
(In millions) 2002 2001 2000 ===================================================================== Current: Federal $ (64.1) $ (40.4) $ 7.8 State 0.1 0.5 5.7 Foreign 0.4 2.5 5.0 - --------------------------------------------------------------------- Total (63.6) (37.4) 18.5 ===================================================================== Deferred: Federal 21.0 25.9 55.1 State 4.6 0.3 2.7 - --------------------------------------------------------------------- Total 25.6 26.2 57.8 ===================================================================== Income tax provision (benefit) $ (38.0) $ (11.2) $ 76.3 =====================================================================
In general, the Company is responsible for filing consolidated U.S., foreign and combined, unitary or separate state income tax returns. The Company is responsible for paying the taxes relating to such returns, including any subsequent adjustments resulting from the redetermination of such tax liability by the applicable taxing authorities. Income taxes paid were $2.0 million, $3.4 million and $20.5 million in 2002, 2001, and 2000, respectively. The Company received $45.6 million of income tax refunds in 2002 and has recognized $51.9 million of income taxes receivable at December 31, 2002 for refunds to be received in 2003, utilizing recent net operating losses to recover income taxes paid in prior years. No provision has been made for U.S., state or additional foreign taxes related to undistributed earnings of foreign subsidiaries which have been or are intended to be permanently re-invested. It is not practical to estimate the income tax expense or benefit that might be incurred if earnings were remitted to the U.S. Income (loss) before income taxes included income (loss) from domestic operations of $(99.8) million in 2002, $(45.3) million in 2001 and $200.1 million in 2000. The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:
Tax Provision (Benefit) 2002 2001 2000 ======================================================================================= Federal tax rate (35.0%) (35.0%) 35.0% State and local income taxes, net of federal tax 0.8 2.7 1.1 benefit Other (2.4) 1.5 0.4 - --------------------------------------------------------------------------------------- Effective income tax rate (36.6%) (30.8%) 36.5% =======================================================================================
The effective tax rate for 2002 was a larger benefit than 2001 primarily due to a favorable settlement of issues related to prior years estimated taxes. Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. The categories of assets and liabilities that have resulted in differences in the timing of the recognition of income and expense at December 31, 2002 and 2001 were as follows: 44 | Annual Report 2002 | ATI
(In millions) 2002 2001 ========================================================================== Deferred income tax assets: Postretirement benefits other than pensions $ 192.7 $ 200.0 Net operating loss state tax carryforwards 38.0 18.2 Deferred compensation and other benefit plans 20.4 30.2 Environmental reserves 15.9 18.9 Vacation accruals 9.2 11.9 Self-insurance reserves 9.8 11.0 Pension 6.6 -- Other items 34.8 21.9 - -------------------------------------------------------------------------- Gross deferred income tax assets 327.4 312.1 Valuation allowance for deferred tax asset (38.0) (18.2) - -------------------------------------------------------------------------- Total deferred income tax assets 289.4 293.9 ========================================================================== Deferred income tax liabilities: Pension -- 245.4 Bases of property, plant and equipment 141.0 150.0 Inventory valuation 19.7 -- Other items 22.5 18.7 - -------------------------------------------------------------------------- Total deferred income tax liabilities 183.2 414.1 ========================================================================== Net deferred income tax asset (liability) $ 106.2 $(120.2) ==========================================================================
At December 31, 2002 and December 31, 2001, the Company had a state deterred tax asset resulting from net operating loss tax carryforwards of $38.0 million and $18.2 million, respectively A valuation allowance was established for the full value of these net operating loss carryforwards since the Company has concluded that it is more likely than not that these tax benefits would not be realized. For most of these net operating loss carryforwards, expiration will occur in 20 years and utilization of the tax benefit is limited to $2 million per year. The increases in the net operating loss tax carryforward and the related valuation allowance in 2002 is due to operating results. Although realization is not assured, the Company has concluded that the remaining deferred tax assets should be realized based upon its history of earnings, expectations of future earnings, and potential tax planning strategies, including possible asset sales. In 2002, a minimum pension liability was recognized due to the value of pension assets declining below the Company's accumulated benefit obligation. In conjunction with this event, the Company reduced its deferred pension asset and recorded deferred taxes of $252.0 million, which changed the deferred taxes for the pension from a deferred tax liability of $245.4 million to a deferred tax asset of $6.6 million. At December 31, 2002 and 2001, the balance sheet composition of the Company's net deferred tax assets and liabilities was as follows:
(In millions) 2002 2001 =================================================================== Net current asset $ 20.8 $ 33.5 Net noncurrent asset 85.4 -- Net noncurrent liability -- 153.7 - ------------------------------------------------------------------- Net deferred income tax asset (liability) $ 106.2 $(120.2) ===================================================================
ATI | Annual Report 2002 | 45 NOTE 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS -- The Company has defined benefit pension plans and defined contribution plans covering substantially all employees. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay. The Company funds the pension plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code. The Company also sponsors several defined benefit postretirement plans covering certain salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In certain plans, Company contributions towards premiums are capped based on the cost as of a certain date, thereby creating a defined contribution. Components of pension expense (income) for the Company's defined benefit plans and components of postretirement benefit expense included the following:
EXPENSE (INCOME) =============================================================================================================================== PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS =============================================================================================================================== (In millions) 2002 2001 2000 2002 2001 2000 =============================================================================================================================== Service cost -- benefits earned during the year $ 26.6 $ 22.9 $ 20.9 $ 7.4 $ 8.4 $ 7.9 Interest cost on benefits earned in prior years 123.7 113.5 114.2 42.7 43.4 42.5 Expected return on plan assets (174.7) (209.1) (228.4) (19.3) (20.6) (17.5) Amortization of unrecognized transition asset (10.8) (24.1) (24.1) -- -- -- Amortization of prior service cost 26.1 19.3 13.7 (4.3) (4.5) (4.7) Amortization of net actuarial (gain) loss 5.1 (0.6) (22.2) (1.5) (1.7) (2.2) - ------------------------------------------------------------------------------------------------------------------------------- Excess pension (income) expense (4.0) (78.1) (125.9) 25.0 25.0 26.0 Curtailment and termination benefits (gain) loss -- 9.8 -- (1.7) -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total retirement benefit (income) expense $ (4.0) $ (68.3) $(125.9) $ 23.3 $ 25.0 $ 26.0 ===============================================================================================================================
In 2002, the Company recorded $1.7 million of non-cash income on the curtailment of postretirement benefits for terminated employees related to work force reductions in the Flat-Rolled Products segment. This amount is included in restructuring costs in the statement of operations. In 2001, the Company recorded curtailment and termination benefits expense of $9.8 million related to employees of the Company's Houston, PA stainless steel melt shop that was permanently idled during the fourth quarter. Of this amount, $8.2 million related to curtailment charges and $1.6 million related to a termination charge recorded in accordance with generally accepted accounting principles. This amount is included in restructuring costs in the statement of operations. Actuarial assumptions used to develop the components of pension expense (income) and postretirement benefit expense were as follows:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS ====================================================================================================================== (In millions) 2002 2001 2000 2002 2001 2000 ====================================================================================================================== Discount rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Rate of increase in future compensation levels 3%-4.5% 3%-4.5% 3%-4.5% -- -- -- Expected long-term rate of return on assets 9.0% 9.0% 9.0% 9%-15% 9%-15% 9%-15% ======================================================================================================================
A discount rate of 6.75% and 7.0% at December 31, 2002 and 2001, respectively, was used for the valuation of pension and postretirement obligations. For 2003, the expected long-term rate of returns on pension and other postretirement benefits assets will be 8.75% and 9.0%, respectively. A reconciliation of funded status for the Company's pension and postretirement benefit plans at December 31, 2002 and 2001 was as follows: 46 | Annual Report 2002 | ATI
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS ======================================================================================================================= (In millions) 2002 2001 2002 2001 ======================================================================================================================= CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $1,816.1 $1,629.1 $ 651.3 $ 638.5 Service cost 26.6 22.9 7.4 8.4 Interest cost 123.7 113.5 42.7 43.4 Benefits paid (137.4) (131.2) (45.7) (43.5) Plan amendments 16.3 108.0 (9.4) 4.5 Net actuarial (gains) losses -- discount rate change 47.2 -- 10.6 -- -- other 53.0 67.2 56.3 (1.1) Effect of curtailment and special termination benefits -- 6.6 (1.9) 1.1 - ----------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 1,945.5 1,816.1 711.3 651.3 - ----------------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 2,012.0 2,388.3 134.9 138.0 Actual returns (losses) on plan assets and plan expenses (199.1) (213.0) (10.7) (4.5) Benefits paid (134.2) (128.3) (12.7) (3.2) Section 420 transfer -- (35.0) -- -- Transfers of assets into plan -- -- -- 4.6 - ----------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 1,678.7 2,012.0 111.5 134.9 - ----------------------------------------------------------------------------------------------------------------------- Overfunded (underfunded) status of the plan (266.8) 195.9 (599.8) (516.4) Unrecognized net actuarial (gain) loss 709.2 236.1 132.9 36.3 Adjustment to recognize minimum liability (658.4) -- -- -- Unrecognized transition asset -- (10.8) -- -- Unrecognized prior service cost 165.1 175.9 (29.5) (26.0) - ----------------------------------------------------------------------------------------------------------------------- PREPAID (ACCRUED) BENEFIT COST $ (50.9) $ 597.1 $ (496.4) $ (506.1) =======================================================================================================================
Amounts recognized in the balance sheet consist of:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS ========================================================================================== (In millions) 2002 2001 2002 2001 ========================================================================================== Deferred pension asset $ 165.1 $ -- $ -- $ -- Prepaid pension cost -- 632.9 -- -- Pension liabilities (216.0) -- -- -- Accrued postretirement benefits -- -- (496.4) (506.1) Other long-term liabilities -- (35.8) -- -- - ------------------------------------------------------------------------------------------ Net amount recognized $ (50.9) $ 597.1 $(496.4) $(506.1) ==========================================================================================
In 2002, the Company entered into a new six-year labor agreement covering Wah Chang employees represented by the United Steelworkers of America ("USWA"). In 2001, the Company entered into new six-year labor agreements covering Allegheny Ludlum and Oremet employees represented by the USWA. These labor agreements included enhancements to pension benefits. The increase in the pension liability resulting from these labor agreements, as well as pension enhancements at other operations of the Company are presented as plan amendments in the tables above. ATI | Annual Report 2002 | 47 The plan assets for the defined benefit pension plan at December 31, 2002 and 2001 include 1.3 million shares of Allegheny Technologies common stock with a fair value of $8.1 million and $21.8 million, respectively. Dividends of $0.9 million and $1.0 million were received by the plan in 2002 and 2001, respectively on the Allegheny Technologies common stock held by the plan. Any reversion of pension plan assets to the Company would be subject to federal and state income taxes, substantial excise tax and other possible claims. Pension costs for defined contribution plans were $12.1 million in 2002 and $14.8 million in both 2001 and 2000. Company contributions to the defined contribution plans are funded with cash. The Company contributes on behalf of its union employees at its Oremet facility to a pension plan which is administered by the USWA and funded pursuant to a collective bargaining agreement. Pension expense and contributions to this plan were $0.6 million in 2002, $1.1 million in 2001 and $1.4 million in 2000. The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans was 10.3% in 2003 and is assumed to gradually decrease to 5.0% in the year 2009 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
One Percentage One Percentage (ln millions) Point Increase Point Decrease ============================================================================================================= Effect on total of service and interest cost components for the year Ended December 31, 2002 $ 6.7 $ (5.4) Effect on other postretirement benefit obligation at December 31, 2002 82.4 $ (68.5) =============================================================================================================
At November 30, 2002, the Company's measurement date for pension accounting, the value of the accumulated pension benefit obligation (ABO) exceeded the value of pension assets by approximately $192 million as a result of a severe decline in the equity markets in 2002, 2001 and 2000, higher benefit liabilities from long-term labor contracts negotiated in 2002 and 2001, and a lower assumed discount rate for valuing the pension liabilities. As discussed in last year's annual report, accounting standards require a minimum pension liability be recorded and the pension asset recorded on the balance sheet be written off if the value of pension assets is less than the ABO at the annual measurement date. Accordingly, in the 2002 fourth quarter, the Company recorded a charge against stockholders' equity of $406 million, net of deferred taxes, to write off the prepaid pension asset representing the overfunded position of the pension plan, and to record a deferred pension asset of $165 million for unamortized prior service cost relating to prior benefit enhancements. This charge did not affect earnings and does not have a cash impact. In addition, this charge does not affect compliance with debt covenants in the Company's bank credit agreement. In accordance with accounting standards, the full charge against stockholders' equity would be reversed in subsequent years if the value of pension plan investments returns to a level that exceeds the ABO as of a future annual measurement date. In prior years the Company's defined benefit pension plan was fully funded with assets significantly in excess of the projected benefit obligation. Under Internal Revenue Code (Section 420) provisions, certain amounts that the Company paid for retiree health care benefits could be reimbursed annually from the excess pension plan assets. During the 2001 second quarter, the Company recovered $35.0 million under these provisions. While not affecting reported operating profit, cash flow from operations increased by the recovered amount. The Company's ability to be reimbursed for retiree medical costs in future years is dependent upon the level of pension surplus, if any, as computed under regulations 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 during the last three years, the pension funded status at the beginning of 2003 is substantially below the threshold required for reimbursement of retiree medical costs in 2003. The ability to resume reimbursement from pension assets for retiree health care costs beyond 2003 will depend upon the performance of the pension investments, and any changes in the Internal Revenue Code and regulations pertaining to reimbursement of retiree health care costs from pension surplus. As a result of labor contracts negotiated in .2001, beginning in the second half of 2001, the Company began funding certain retiree health care benefits for Allegheny Ludlum using plan assets held in a Voluntary Employee Benefit Association (VEBA) trust. This allows the Company to recover a portion of the retiree medical costs that were previously funded from the pension surplus. During 2002 and 2001, the Company was able to fund $12.7 million and $3.2 million, respectively, of retiree medical costs using the assets of the VEBA trust. The Company may continue to fund certain retiree medical benefits utilizing the plan assets held in the VEBA if the value of these plan assets exceed $50 million. The value of the assets held in the VEBA was approximately $112 million as of December 31, 2002. 48 | Annual Report 2002 | ATI NOTE 9. ACQUISITIONS AND DIVESTITURES -- During the 2001 fourth quarter, the Company divested its North American operations of its titanium distribution company, Titanium Industries Inc. Results of operations for this business for 2001 and proceeds from the disposition of this business were not material to the Company. During the 2000 second quarter, the Company purchased the Hughes Metallurgical Products Division, a tungsten carbide products business from Hughes Christensen. Operating results have been included in the Company's consolidated financial statements since the date of acquisition. NOTE 10. BUSINESS SEGMENTS -- The Company operates in three business segments: Flat-Rolled Products, High Performance Metals and Industrial Products. The Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys and superalloys, and titanium and titanium-based alloys in sheet, strip, plate and Precision Rolled Strip(R) products as well as silicon electrical steels and tool steels. The companies in this segment include Allegheny Ludlum, Allegheny Rodney, Rome Metals and Allegheny Ludlum's 60% interest in STAL. The High Performance Metals segment produces, converts and distributes nickel- and cobalt-based alloys and superalloys, titanium and titanium-based alloys, zirconium, hafnium, niobium, tantalum, their related alloys, and other specialty materials, primarily in slab, ingot, billet, bar, rod, wire, coil and seamless tube forms. The companies in this segment include Allvac, Allvac Ltd (U.K.) and Wah Chang, which also produces and sells zirconium chemicals. The Industrial Products segment's principal business produces tungsten powder, tungsten carbide materials and carbide cutting tools. This segment also produces large grey and ductile iron castings and carbon alloy steel forgings. The companies in this segment are Metalworking Products, Portland Forge and Casting Service. Intersegment sales are generally recorded at full cost or market. Common services are allocated on the basis of estimated utilization. Information on the Company's business segments was as follows:
(In millions) 2002 2001 2000 ========================================================================== Total sales: Flat-Rolled Products $1,058.8 $1,118.8 $1,479.9 High Performance Metals 660.1 831.7 800.5 Industrial Products 229.6 267.8 280.9 - -------------------------------------------------------------------------- Total sales 1,948.5 2,218.3 2,561.3 Intersegment sales: Flat-Rolled Products 10.6 30.4 35.8 High Performance Metals 30.1 59.9 65.1 - -------------------------------------------------------------------------- Total intersegment sales 40.7 90.3 100.9 ========================================================================== Sales to external customers: Flat-Rolled Products 1,048.2 1,088.4 1,444.1 High Performance Metals 630.0 771.8 735.4 Industrial Products 229.6 267.8 280.9 - -------------------------------------------------------------------------- Total sales to external customers $1,907.8 $2,128.0 $2,460.4 ==========================================================================
Total international sales were $440.0 million in 2002, $499.5 million in 2001 and $441.9 million in 2000. Of these amounts, sales by operations in the United States to customers in other countries were $276.9 million in 2002, $318.9 million in 2001 and $286.4 million in 2000. ATI | Annual Report 2002 | 49
(In millions) 2002 2001 2000 ================================================================================================== Operating profit (loss): Flat-Rolled Products $ (7.9) $ (38.1) $ 119.6 High Performance Metals 31.2 82.0 66.5 Industrial Products 4.0 10.4 21.7 - -------------------------------------------------------------------------------------------------- Total operating profit 27.3 54.3 207.8 Corporate expenses (20.6) (25.5) (30.6) Interest expense, net (34.3) (29.3) (34.4) Restructuring and other costs, net of gains on asset sales (54.4) (89.0) (33.9) Retirement benefit (expense) income (21.8) 53.1 99.9 - -------------------------------------------------------------------------------------------------- Income (loss) before income taxes $(103.8) $ (36.4) $ 208.8 ==================================================================================================
In accordance with accounting standards, in 2002, the Company discontinued the amortization of goodwill. Goodwill amortization by segment for the years ended December 31, 2001 and 2000 was as follows:
(In millions) 2001 2000 ============================================================= Flat-Rolled Products $ 3.9 $ 3.9 High Performance Metals 1.4 1.4 Industrial Products 0.5 0.4 - ------------------------------------------------------------- Total goodwill amortization expense $ 5.8 $ 5.7 =============================================================
Restructuring and other costs, net of gains on assets sales includes pre-tax gains and losses resulting from the sale of real estate, certain investments and other assets, which are primarily included in other income (expense) on the statement of operations, as well as charges incurred in connection with closed operations. Restructuring and other costs, net of gains on asset sales was as follows for the years ended December 31, 2002, 2001 and 2000.
(In millions) 2002 2001 2000 ==================================================================================================== Restructuring and other costs, net of gains on assets sales: Restructuring costs $ (42.8) $ (74.2) $ (29.5) Other asset impairments and write-offs (6.5) (5.6) -- Closed company expenses, net of asset gains (5.1) (9.2) (4.4) - ---------------------------------------------------------------------------------------------------- Restructuring and other costs, net of gains on asset sales $ (54.4) $ (89.0) $ (33.9) ====================================================================================================
Retirement benefit (expense) income represents pension income net of other postretirement benefit expenses, and related legal and administrative expenses. Operating profit with respect to the Company's business segments excludes any retirement benefit expense or income. 5O | Annual Report 2002 | ATI
(In millions) 2002 2001 2000 ====================================================================================== Depreciation and amortization: Flat-Rolled Products $ 57.0 $ 65.4 $ 65.9 High Performance Metals 20.9 20.3 22.3 Industrial Products 11.3 11.9 10.6 Corporate 0.8 1.0 0.9 - -------------------------------------------------------------------------------------- Total depreciation and $ 90.0 $ 98.6 $ 99.7 amortization ====================================================================================== Capital expenditures: Flat-Rolled Products $ 15.8 $ 20.1 $ 25.6 High Performance Metals 30.8 75.8 21.7 Industrial Products 2.1 8.2 12.7 Corporate -- 0.1 0.2 - -------------------------------------------------------------------------------------- Total capital expenditures $ 48.7 $ 104.2 $ 60.2 ====================================================================================== Identifiable assets: Flat-Rolled Products $ 875.9 $ 1,037.5 $ 1,219.3 High Performance Metals 594.7 625.0 599.9 Industrial Products 160.6 169.5 184.3 Corporate: Pension Asset 165.1 632.9 593.6 Income Taxes 158.1 82.0 61.2 Other 138.8 96.3 117.9 - -------------------------------------------------------------------------------------- Total assets $ 2,093.2 $ 2,643.2 $ 2,776.2 ======================================================================================
Geographic information for external sales, based on country of origin and assets are as follows:
PERCENT Percent Percent (In millions) 2002 OF TOTAL 2001 Of Total 2000 Of Total ================================================================================================ External Sales: United States $ 1,468.0 77% $ 1,628.5 77% $ 2,018.7 82% United Kingdom 93.2 5% 117.1 5% 106.4 4% Germany 86.9 5% 89.9 4% 73.6 3% France 61.8 3% 90.7 4% 79.0 3% Canada 40.2 2% 55.1 3% 50.7 2% Japan 28.7 2% 32.0 1% 26.6 1% China 21.3 1% 18.4 1% 8.6 1% Other 107.7 5% 96.3 5% 97.0 4% - ------------------------------------------------------------------------------------------------ Total External Sales $ 1,907.8 100% $ 2,128.0 100% $ 2,460.6 100% ================================================================================================
PERCENT Percent Percent (In millions) 2002 OF TOTAL 2001 Of Total 2000 Of Total ================================================================================================== Total Assets: United States $ 1,800.7 86% $ 2,357.5 89% $ 2,491.7 90% United Kingdom 170.8 8% 157.3 6% 152.0 5% China 49.2 2% 51.6 2% 49.6 2% Germany 18.7 1% 24.2 1% 19.3 1% France 8.2 --% 6.8 --% 6.9 --% Japan 7.3 --% 10.8 1% 13.5 1% Canada 4.9 --% 5.1 --% 11.0 --% Other 33.4 3% 29.9 1% 32.2 1% - -------------------------------------------------------------------------------------------------- Total Assets $ 2,093.2 100% $ 2,643.2 100% $ 2,776.2 100% ==================================================================================================
ATI | Annual Report 2002 | 51 NOTE 11. RESTRUCTURING AND OTHER CHARGES -- Restructuring Charges For the years ended December 31, 2002, 2001 and 2000, the Company recorded restructuring charges of $42.8 million, $74.2 million and $29.5 million, respectively, which are separately classified in the statement of operations. In 2002, the Company recorded total charges of $42.8 million related to the indefinite idling of the Massillon, OH stainless steel plate facility, due to continuing poor demand for wide continuous mill plate products, and further workforce reductions across all of the Company's operations. The Massillon, OH stainless steel plate facility was indefinitely idled in the 2002 fourth quarter and resulted in a pre-tax non-cash asset impairment charge of $34.4 million, representing the book value of the facility in excess of its fair market value. In addition, during the second half of 2002, and in light of the continuing decline in demand for the Company's products in the markets served, the Company announced workforce reductions of approximately 665 employees. These workforce reductions, which will be substantially complete by the end of the first half of 2003, resulted in a pre-tax, primarily cash, severance charge of $8.4 million, net of pension curtailment gain. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $38 million when completed. These expenses are presented as restructuring costs in the statement of operations and are not included in the results for the segments. Of the $42.8 million restructuring charge recorded in 2002, $5.2 million, net of tax benefits, will result in expenditures of cash, of which $4.3 million remains to be paid in 2003. Cash to meet these obligations is expected to be generated from one or more of the following sources: internally generated funds from operations, current cash on hand, or borrowings under existing credit lines. In 2001, the Company recorded total restructuring charges of $74.2 million related to the permanent idling of the Houston, PA stainless steel melt shop, workforce reductions and other asset impairments was recognized. Of this aggregate charge, $55.6 million related to the Houston, PA stainless steel melt shop, which was permanently idled in the 2001 fourth quarter, and other asset impairments; $9.8 million related to pension and termination benefits; $5.8 million related to severance and personnel costs; and $3.0 million related to contractual obligations and other exit costs. The workforce reductions affected approximately 520 employees across all business segments and headquarters operations, and were substantially complete by the end of 2001. These cost reduction actions resulted in pre-tax cost savings of approximately $19 million in 2002. Of the $74.2 million restructuring charge recorded in 2001, approximately $3.0 million, net of tax benefits, resulted in expenditures of cash, the majority of which was paid in 2002. In 2000, the Company recorded total restructuring charges of $29.5 million. The 2000 charges included $13.3 million for asset impairments, and $6.7 million for employee termination benefits, primarily severance pay, and other contractual obligations related to the decision in the 2000 fourth quarter to permanently idle the high-cost titanium sponge production assets of the High Performance Metals segment. The Company ceased titanium sponge production in the first half of 2001, and costs associated with operating the facility in 2001 were included in results of operations as they were incurred. The 2000 charge also included $3.1 million related to a 10 percent salaried workforce reduction at Allegheny Ludlum. The salaried workforce was notified by management of the planned workforce reduction and of the availability of termination benefits prior to December 31, 2000. The reduction in workforce was completed in the 2001 first quarter, and resulted in approximately $11 million in cost savings in 2001. In addition, restructuring and transformation charges for 2000 included $6.4 million for costs related to changes in the Company's executive management. Two executives left the Company in the 2000 fourth quarter. Both of these executives were parties to employment and severance arrangements with the Company that obligated Allegheny Technologies to make specific payments to them as a result of their departure. At December 31, 2002, substantially all cash expenditures related to the 2001 and 2000 restructuring charges had been paid. Other Charges In 2002, the Company recorded $6.5 million in charges relating to its approximately 30% equity interest in New Piper Aircraft, Inc. ("New Piper"), an investment which is held for sale, including equity in net losses of New Piper and the write-down of the Company's investment to its estimated realizable value. Based on New Piper's fourth quarter 2002 realization of additional losses, and adverse trends in its liquidity and financial condition, the Company determined in the 2002 fourth quarter that it was more likely than not that the carrying value of its equity interest in New Piper was not recoverable. These charges are classified in other income (expense) in the consolidated statements of operations. In 2001, the Company also recorded a non-cash charge of $5.6 million 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 is included in other income (expense) on the consolidated statement of operations. 52 | ANNUAL REPORT 2002 | ATI NOTE 12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS -- 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 sets forth separately financial information with respect to the Subsidiary, the non-guarantor subsidiaries and the Guarantor Parent. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. In 1996, the underfunded defined benefit pension plans of the Subsidiary 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 the Subsidiary 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 the Subsidiary 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 the Subsidiary or the non-guarantor subsidiaries. Management and royalty fees charged to the Subsidiary and to the non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for purposes of this presentation. ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT BALANCE SHEETS
December 31, 2002 ================================================================================================================================ Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ================================================================================================================================ ASSETS Cash and cash equivalents $ 0.2 $ 43.0 $ 16.2 $ -- $ 59.4 Accounts receivable, net -- 82.3 157.0 -- 239.3 Inventories, net -- 181.6 227.4 -- 409.0 lncome tax refunds 51.9 -- -- -- 51.9 Deferred income taxes 20.8 -- -- -- 20.8 Prepaid expenses end other current assets 0.3 8.8 22.9 -- 32.0 ================================================================================================================================ TOTAL CURRENT ASSETS 73.2 315.7 423.5 -- 812.4 Property, plant, and equipment, net -- 383.2 374.4 -- 757.6 Deferred pension asset 165.1 -- -- -- 165.1 Deferred income taxes 85.4 -- -- -- 85.4 Cost in excess of net assets acquired -- 112.1 82.3 -- 194.4 Investments in subsidiaries and other assets 1,169.8 608.8 347.1 (2,047.4) 78.3 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,493.5 $1,419.8 $1,227.3 $(2,047.4) $2,093.2 ================================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 1.9 $ 96.3 $ 73.1 $ -- $ 171.3 Accrued liabilities 510.8 52.1 97.9 (499.8) 161.0 Short-term debt and current portion of long-term debt -- 0.6 9.1 -- 9.7 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 512.7 149.0 180.1 (499.8) 342.0 Long-term debt 312.4 441.3 37.2 (281.5) 509.4 Accrued postretirement benefits -- 308.1 188.3 -- 496.4 Pension liabilities 216.0 -- -- -- 216.0 Other 3.6 23.1 53.9 -- 80.6 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,044.7 921.5 459.5 (781.3) 1,644.4 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 448.8 498.3 767.8 (1,266.1) 448.8 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,493.5 $1,419.8 $1,227.3 $(2,047.4) $2,093.2 ================================================================================================================================
ATI | Annual Report 2002 | 53 ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT STATEMENTS OF OPERATIONS
For the year ended December 31, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ================================================================================================================================== SALES $ -- $ 984.3 $ 923.5 $ -- $1,907.8 Cost of sales 17.6 959.3 767.6 -- 1,744.5 Selling and administrative expenses 40.8 27.5 120.0 -- 188.3 Restructuring and transformation -- 38.5 4.3 -- 42.8 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before interest, other income and income taxes (58.4) (41.0) 31.6 -- (67.8) Interest expense, net 22.0 10.2 2.1 -- 34.3 Other income (expense) including equity in income (loss) of unconsolidated subsidiaries (22.1) 0.1 9.1 11.2 (1.7) ================================================================================================================================== INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (102.5) (51.1) 38.6 11.2 (103.8) Income tax provision (benefit) (36.7) (16.6) 11.2 4.1 (38.0) - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (65.8) $ (34.5) $ 27.4 $ 7.1 $ (65.8) ==================================================================================================================================
ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT CONDENSED STATEMENTS OF CASH FLOWS
For the year December 31, 2002 - ---------------------------------------------------------------------------------------------------------------------------------- Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ================================================================================================================================== CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 13.2 $ 81.3 $ (72.0) $ 181.7 $204.2 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES -- (11.5) (40.7) 12.4 (39.8) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (13.4) (41.1) 109.9 (194.1) (138.7) ================================================================================================================================== INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (0.2) $ 28.7 $ (2.8) $ -- $ 25.7 ==================================================================================================================================
54 | Annual Report 2002 | ATI ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT BALANCE SHEETS
December 31, 2001 ============================================================================================================================= Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ============================================================================================================================= ASSETS Cash and cash equivalents $ 0.4 $ 14.3 $ 19.0 $ -- $ 33.7 Accounts receivable, net 0.1 84.8 189.7 -- 274.6 Inventories, net -- 249.2 259.2 -- 508.4 Income tax refunds 48.5 -- -- -- 48.5 Deferred income taxes 33.5 -- -- -- 33.5 Prepaid expenses and other current assets 0.1 9.9 17.4 -- 27.4 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 82.6 358.2 485.3 -- 926.1 Property, plant, and equipment, net -- 459.7 369.2 -- 828.9 Prepaid pension cost 632.9 -- -- -- 632.9 Cost in excess of net assets acquired -- 112.1 76.3 -- 188.4 Investments in subsidiaries and other assets 1,175.6 539.3 337.4 (1,985.4) 66.9 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,891.1 $ 1,469.3 $ 1,268.2 $ (1,985.4) $2,643.2 ============================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 1.4 $ 77.4 $ 76.5 $ -- $ 155.3 Accrued liabilities 413.2 45.0 222.5 (512.5) 168.2 Short-term debt and current portion of long-term debt -- 0.5 8.7 -- 9.2 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 414.6 122.9 307.7 (512.5) 332.7 Long-term debt 362.5 370.4 40.0 (199.9) 573.0 Accrued postretirement benefits -- 302.4 203.7 -- 506.1 Deferred income taxes 153.7 -- -- -- 153.7 Other 15.6 28.7 88.7 -- 133.0 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 946.4 824.4 640.1 (712.4) 1,698.5 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 944.7 644.9 628.1 (1,273.0) 944.7 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,891.1 $ 1,469.3 $ 1,268.2 $ (1,985.4) $2,643.2 =============================================================================================================================
ATI | Annual Report 2002 | 55 ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT STATEMENTS OF OPERATIONS
For the year ended December 31, 2001 ================================================================================================================================= Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ================================================================================================================================= SALES $ -- $1,062.9 $1,065.1 $ -- $2,128.0 Costs and expenses: Cost of sales (55.4) 1,058.4 859.3 -- 1,862.3 Selling and administrative expenses (3.4) 42.1 160.1 -- 198.8 Restructuring costs 9.8 61.5 2.9 -- 74.2 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before interest, other income and income taxes 49.0 (99.1) 42.8 -- (7.3) Interest expense, net 16.9 10.9 1.5 -- 29.3 Other income (expense) including equity in income 6oss) of unconsolidated subsidiaries (71.2) 8.9 7.6 54.9 0.2 - --------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (39.1) (101.1) 48.9 54.9 (36.4) Income tax provision (benefit) (13.9) (43.9) 29.8 16.8 (11.2) - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (25.2) $ (57.2) $ 19.1 $ 38.1 $ (25.2) =================================================================================================================================
ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT CONDENSED STATEMENTS OF CASH FLOWS
For the year December 31, 2001 =================================================================================================================================== Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated =================================================================================================================================== CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 45.1 $ 131.5 $ 42.7 $ (96.5) $ 122.8 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES -- (17.3) (71.4) 3.7 (85.0) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (44.8) (100.4) 22.1 92.8 (30.3) =================================================================================================================================== INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 0.3 $ 13.8 $ (6.6) $ -- $ 7.5 ===================================================================================================================================
56 | Annual Report 2002 | ATI ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT STATEMENTS OF OPERATIONS
For the year ended December 31, 2000 ================================================================================================================================ Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ================================================================================================================================ SALES $ -- $ 1,432.8 $1,027.6 $ -- $2,460.4 Cost and expenses: Cost of sales (62.3) 1,269.6 791.2 -- 1,998.5 Selling and administrative expenses 13.7 54.5 135.5 -- 203.7 Restructuring costs -- -- 29.5 -- 29.5 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before interest, other income and income taxes 48.6 108.7 71.4 -- 228.7 Interest expense, net 20.6 11.0 2.8 -- 34.4 Other income (expense) including equity in income (loss) of unconsolidated subsidiaries 194.3 13.5 24.2 (217.5) 14.5 - -------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 222.3 111.2 92.8 (217.5) 208.8 Income tax provision (benefit) 89.8 44.2 29.3 (87.0) 76.3 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 132.5 $ 67.0 $ 63.5 $ (130.5) $ 132.5 =================================================================================================================================
ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT CONDENSED STATEMENTS OF CASH FLOWS
For the year December 31, 2000 ================================================================================================================================ Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ================================================================================================================================ CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 106.5 $ 78.3 $ 94.1 $(143.4) $ 135.5 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES (0.9) (20.8) (52.1) 3.8 (70.0) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (105.5) (57.1) (67.0) 139.6 (90.0) - -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 0.1 $ 0.4 $ (25.0) $ -- $ (24.5) ================================================================================================================================
ATI | Annual Report 2002 | 57 NOTE 13. PER SHARE INFORMATION -- The following table sets forth the computation of basic and diluted net income (loss) per common share: (In millions except per share amounts)
Years ended December 31, 2002 2001 2000 =========================================================================================================== Numerator for basic and diluted net income (loss) per common share -- net income (loss) $(65.8) $(25.2) $132.5 - ----------------------------------------------------------------------------------------------------------- Denominator: Weighted average shares 80.6 80.2 82.9 Contingent issuable stock -- 0.1 0.1 - ----------------------------------------------------------------------------------------------------------- Denominator for basic and diluted net income (loss) per common share 80.6 80.3 83.0 - ----------------------------------------------------------------------------------------------------------- Basic and diluted net income (loss) per common share $(0.82) $(0.31) $ 1.60 ===========================================================================================================
Weighted average shares issuable upon the exercise of stock options which were antidilutive thus not included in the calculation were 5.9 million in 2002, 4.5 million in 2001 and 4.0 million 2000. NOTE 14. COMMITMENTS AND CONTINGENCIES -- Rental expense under operating leases was $15.9 million in 2002, $22.2 million in 2001 and $21.9 million in 2000. Future minimum rental commitments under operating leases with non-cancelable terms of more than one year at December 31, 2002, were as follows: $8.4 million in 2003, $7.4 million in 2004, $6.7 million in 2005, $5.9 million in 2006, $5.0 million in 2007 and $12.9 million thereafter. Commitments for expenditures on property, plant and equipment at December 31, 2002 were approximately $33.0 million. When it is probable that a liability has been incurred or an asset of the Company has been impaired, a loss is recognized if the amount of the loss can be reasonably estimated. The Company is subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants into the air or water, and disposal of hazardous substances, and which may 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 PRP under the Federal Superfund laws and comparable state laws. The Company could incur substantial cleanup costs, fines, and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or noncompliance with environmental permits required at its facilities. The Company is currently involved in the investigation and remediation of a number of the Company's current and former sites as well as third party location sites under these laws. In accordance with the Company's accounting policy disclosed in Note 1, 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 remain subject to additional 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, participation, and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. Accordingly, the Company periodically reviews accruals as investigation and remediation of these sites proceed. As the Company receives new information, the Company expects that it will adjust its accruals to reflect the new information. Future adjustments could have a material adverse effect on the Company's results of operations in a given period, but the Company cannot reliably predict the amounts of such future adjustments. Based on currently available information, the Company does not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the sites with which the Company is currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell the Company's securities. 58 | Annual Report 2002 | ATI Additional future developments, administrative actions or liabilities relating to environmental matters however could have a material adverse effect on the Company's financial condition or results of operations. At December 31, 2002, the Company's reserves for environmental remediation obligations totaled approximately $41.0 million, of which approximately $12.9 million were included in other current liabilities. The reserve includes estimated probable future costs of $16.7 million for federal Superfund and comparable state-managed sites; $9.3 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $4.0 million for owned or controlled sites at which Company operations have been discontinued; and $11.0 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 participating PRPs, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years, and will complete remediation of all sites with which it has been identified in up to thirty years. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be 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. Although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. In the spin-offs of Teledyne and Water Pik, completed in November 1999, the new companies agreed to assume and to defend and hold the Company harmless against all liabilities (other than certain income tax liabilities) associated with the historical operations of their businesses, including all government contracting, environmental, product liability and other claims and demands, whenever any such claims or demands might arise or be made. If the new companies were unable or otherwise fail to satisfy these assumed liabilities, the Company could be required to satisfy them, which could have a material adverse effect on the Company's results of operations and financial condition. In June 1995, the U.S. Government commenced an action against Allegheny Ludlum in the United States District Court for the Western District of Pennsylvania, alleging multiple violations of the Federal Clean Water Act. The trial of this matter concluded in February 2001. In February 2002, the Court issued a decision imposing a penalty of $8.2 million for incidents at five facilities that occurred over a period of approximately six years which Allegheny Ludlum had reported to the appropriate environmental agencies. The Company asked the Court to reconsider its decision, which the Court denied in October 2002. The Company has appealed the Court decision. At December 31, 2002, the Company had adequate reserves for this matter. Allegheny Ludlum and the United Steelworkers of America ("USWA") are parties to various collective bargaining agreements which set forth a "Profit Sharing Plan." The Company and the USWA were involved in litigation regarding Profit Sharing Pool calculations for 1996, 1997, 1998 and 1999. The USWA claimed adjustments that alleged the Company owed to USWA represented employees approximately $32 million. The Company maintained that its certified determinations of the Profit Sharing Pool calculations were made as prescribed by the Profit Sharing Plan. On January 13, 2003, the Company formalized a settlement agreement with the USWA that provided for an aggregate $5 million distribution to eligible employees. At December 31, 2002, the Company had adequate reserves for this matter. In March 1995, Kaiser Aerospace & Electronics Corporation ("Kaiser") filed a civil complaint against Teledyne Industries, Inc. (now TDY Industries, Inc. ("TDY"), a wholly-owned subsidiary of the Company, and Dimeling Schreiber & Park ("DS&P"), DS&P's general partners, and New Piper Aircraft, Inc. in the state court for Miami-Dade County, Florida. The complaint alleged that TDY breached a Cooperation and Shareholder's Agreement with Kaiser ATI | Annual Report 2002 | 59 under which the parties agreed to cooperate in the filing and promotion of a proposed plan for acquiring out of bankruptcy the assets of Piper Aircraft, a manufacturer of general aviation aircraft. TDY and Kaiser are engaged in discovery and have agreed to participate in a mediation. Kaiser requests that the court impose a constructive trust on TDY's equity interest in privately held New Piper Aircraft, Inc., which represents approximately 30% of the equity of New Piper Aircraft, Inc. In the alternative, Kaiser also seeks unspecified damages in an amount "to be determined at trial." The trial for this matter is not set. While the outcome of the litigation cannot be predicted, and the Company believes that the claims are not meritorious, an adverse resolution of this matter could have a material adverse effect on the Company's results of operations and financial condition. TDY Industries, Inc. and the San Diego Unified Port District ("Port District") entered into a lease of property located in San Diego, California ("San Diego facility") on October 1, 1984. TDY operated its Teledyne Ryan Aeronautical division ("Ryan") at the San Diego facility until May 1999, when substantially all the assets and business of Ryan were sold to Northrop Grumman Corporation ("Northrop"). Northrop subleased a portion of the property with the approval of the Port District until early 2001. TDY also entered into three separate sublease arrangements for portions of the property subject to the approval of the Port District, which the Port District refused. After its administrative appeal to the Port District was denied, TDY commenced a lawsuit against the Port District. The complaint, filed in December 2001 in state court in San Diego, alleges breach of contract, inverse condemnation, tortious interference with a prospective economic advantage and other causes of action relating to the Port District's failure to consent to subleases of the space. The Complaint seeks at least $4 million for damages from the Port District and declaratory relief. The trial for this matter is scheduled for October 2003. Despite the Port District's failure to consent to the three subleases, TDY continued its marketing efforts to sublease the San Diego facility. The rental payments and other expenses for the property amounted to approximately $0.4 million per month. At December 31, 2002 the Company had a reserve of approximately $3 million to cover the costs of occupying the San Diego facility. TDY and the Port District discussed resolution of this matter but did not reach any agreement even after court-sponsored mediation. In June 2002 TDY ceased paying rent on the grounds that the Port District had rescinded the Lease when it refused to allow TDY to sublease the property and that the Port District's condemnation of the property voided the lease. In September 2002, the Port District demanded that rent be paid or possession of the property be returned to the Port District. TDY returned possession to the Port District on October 31, 2002 and denied that any remaining amounts were due under the lease. The Port District filed a cross-complaint against TDY in March 2003. The Complaint alleges breach of contract for failure to pay rent and for certain environmental contamination on the property. The Port District seeks $1.2 million in past rent, along with future rent and an unspecified sum of damages for failure to remedy. The Port District also alleges anticipatory breach relating to removal of structures and debris from the San Diego facility and seeks specific performance or reimbursement to the Port District. The Port District further alleges that it is entitled to indemnity for potential liability related to environmental matters at the San Diego facility, and seeks a declaratory judgment in its favor. TDY has various defenses to the allegations in the Port District's Complaint and denies that it has any obligation to the Port District. In another matter related to the San Diego facility, the Port District requested that the California Department of Toxic Substances Control ("DTSC") evaluate whether the property is regulated as a hazardous waste transportation, storage, or disposal facility under the Resource Conservation and Recovery Act ("RCRA") and similar state laws. DTSC recognizes that the information pertaining to the RCRA permitting status of the property is ambiguous and referred the issue of the property's RCRA permitting status to DTSC's Legal Office for further consideration. TDY discussed this matter directly with DTSC's Legal Office and DTSC agreed to refrain from taking action regarding this issue until after completion of DTSC's Legal Office review. To the extent the facility is subject to RCRA permitting and corrective action is required at the property, DTSC has agreed that the San Diego Regional Water Quality Control Board ("Regional Board") is the appropriate agency to oversee the corrective action work. The Regional Board is currently overseeing other investigative work at the property, the costs of which are included in the Company's environmental reserves. The Company is conducting an environmental assessment of portions of the San Diego facility at the request of the Regional Board. At this stage of the assessment, the Company cannot predict if any remediation will be necessary. The Company remediated in 1998 and continues to monitor a lagoon near the San Diego facility. The Company is also seeking approval from the San Diego Department of Public Health for the 1996 closure of four underground storage tanks at the San Diego facility. The Company is evaluating potential claims it has against neighboring property owners and other PRPs related to the environmental condition of the San Diego facility. 60 | Annual Report 2002 | ATI TDY Industries, Inc. (TDY) and another wholly-owned subsidiary, among others, have been identified by the U.S. Environmental Protection Agency (EPA) as PRPs at the Li Tungsten Superfund Site in Glen Cove, New York. The Company believes that most of the contamination at the Site resulted from work done while the United States government either owned or controlled operations at the Site, or from processes done for various agencies of the United States, and that the United States is liable for a substantial portion of the remediation costs at the Site. In November 2000, TDY filed a cost recovery and contribution action against the United States government. Discovery is ongoing but no trial date has been set. In March 2003, the Court ordered the United States government to fund a portion of the remediation costs at the Site. An adverse resolution of this matter could have a material adverse effect on the 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, environmental and stockholder matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) --
Quarter Ended ================================================================================================================================== (In millions except share and per share amounts) March 31 June 30 September 30 December 31 ================================================================================================================================== 2002 - Sales $ 493.1 $ 491.2 $ 469.3 $ 454.2 Gross profit 40.4 47.1 49.6 26.2 Net loss (11.1) (7.5) (7.5) (39.7) - ---------------------------------------------------------------------------------------------------------------------------------- Basic and diluted net loss per common share $ (0.14) $ (0.09) $ (0.09) $ (0.49) - ---------------------------------------------------------------------------------------------------------------------------------- Average shares outstanding 80,445,647 80,575,657 80,623,077 80,634,920 ================================================================================================================================== 2001 - Sales $ 542.5 $ 554.7 $ 537.7 $ 493.1 Gross profit 65.6 70.9 67.4 61.8 Net income (loss) 6.4 6.2 8.0 (45.8) - ---------------------------------------------------------------------------------------------------------------------------------- Basic and diluted net income (loss) per common share $ 0.08 $ 0.08 $ 0.10 $ (0.57) - ---------------------------------------------------------------------------------------------------------------------------------- Average shares outstanding 80,162,491 80,209,965 80,237,977 80,264,682 ==================================================================================================================================
The 2002 fourth quarter includes an after-tax charge of $29.0 million, primarily non-cash, related to asset impairments and cost reduction actions, including the indefinite idling of the Massillon, Ohio stainless steel plate facility, charges for settlement of a labor issue, write-off of the Company's investment in New Piper Aircraft, Inc., and other workforce reductions. The 2002 third quarter includes an after-tax charge of $4.5 million, including $3.4 million for workforce reductions and $1.1 million related to the Company's approximately 30% equity in net losses of New Piper Aircraft, Inc., an investment held for sale. The 2001 fourth quarter includes an after-tax charge of $47.8 million, primarily non-cash, related to asset impairments and cost reduction actions, including the permanent idling of the Houston, Pennsylvania stainless steel melt shop and other workforce reductions. The 2001 second quarter includes a non-cash after-tax write-off of $3.4 million related to the Company's minority interest in the e-Business site, MetalSpectrum, which terminated operations during the 2001 second quarter. ATI | Annual Report 2002 | 61 Management's Report The accompanying consolidated financial statements of Allegheny Technologies Incorporated and subsidiaries have been prepared in accordance with generally accepted accounting principles and include some amounts that are based upon Management's best estimates and judgments. Management has the primary responsibility for the information contained in the financial statements and in other sections of this Annual Report and for their integrity and objectivity. The Company has a system of internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded for the preparation of financial information. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal accounting control and that the cost of such systems should not exceed the benefits to be derived. The Company maintains a staff of professional internal auditors, who assist in audit coverage with the independent accountants and conduct operational and special audits. The independent accountants express their opinion on the Company's financial statements based on procedures, including an evaluation of internal controls, which they consider to be sufficient to form their opinion. The Audit Committee of the Board of Directors is composed of four independent non-employee members. Among its principal duties, the Committee is responsible for recommending the independent accountants to conduct the annual audit of the Company's financial statements and for reviewing the financial reporting and accounting practices. /s/James L. Murdy /s/Richard J. Harshman /s/Dale G. Reid James L. Murdy Richard J. Harshman Dale G. Reid President Senior Vice President, Vice President, and Chief Finance and Chief Controller and Executive Officer Financial Officer Chief Accounting Officer 62 | Annual Report 2002 | ATI SELECTED FINANCIAL DATA
For the Years Ended December 31, 2002 2001 2000 1999 1998 =============================================================================================================== Volume: Flat-Rolled Products (finished tons) 487,335 498,066 608,601 592,619 537,807 Commodity (finished tons) 360,301 367,894 460,940 475,557 424,659 High value (finished tons) 137,034 130,172 147,661 117,062 113,148 High Performance Metals -- nickel-based and specialty steel alloys (000's lbs.) 35,832 51,899 46,612 43,905 44,182 High Performance Metals -- titanium mill products (000's lbs.) 19,044 23,070 24,798 22,792 24,739 High Performance Metals -- exotic alloys (000's lbs.) 3,712 3,457 3,691 3,756 4,690 - --------------------------------------------------------------------------------------------------------------- Average Prices: Flat-Rolled Products (per finished ton) $ 2,134 $ 2,162 $ 2,354 $ 2,081 $ 2,194 Commodity (per finished ton) 1,529 1,527 1,819 1,562 1,663 High value (per finished ton) 3,677 3,956 4,025 4,189 4,187 High Performance Metals -- nickel-based and specialty steel alloys (per lb.) 6.39 6.31 5.86 5.98 7.33 High Performance Metals -- titanium mill products (per lb.) 11.83 11.70 10.87 11.70 14.03 High Performance Metals -- exotic alloys (per lb.) 36.29 33.52 35.56 34.77 29.69 - --------------------------------------------------------------------------------------------------------------- (In millions except per share amounts) For the Years Ended December 31, 2002 2001 2000 1999 1998 =============================================================================================================== Sales: Flat-Rolled Products $1,048.2 $1,088.4 $1,444.1 $1,296.7 $1,193.1 High Performance Metals 630.0 771.8 735.4 722.7 860.3 Industrial Products 229.6 267.8 280.9 276.7 349.0 - --------------------------------------------------------------------------------------------------------------- Total sales $1,907.8 $2,128.0 $2,460.4 $2,296.1 $2,402.4 - --------------------------------------------------------------------------------------------------------------- Operating profit (loss): Flat-Rolled Products $ (7.9) $ (38.1) $ 119.6 $ 85.2 $ 126.3 High Performance Metals 31.2 82.0 66.5 87.0 156.0 Industrial Products 4.0 10.4 21.7 12.2 35.8 - --------------------------------------------------------------------------------------------------------------- Total operating profit $ 27.3 $ 54.3 $ 207.8 $ 184.4 $ 318.1 - --------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations become extraordinary items $ (65.8) $ (25.2) $ 132.5 $ 111.0 $ 155.0 Income from discontinued operations -- -- -- 59.6 86.2 Extraordinary gains on sales of operations -- -- -- 129.6 -- - --------------------------------------------------------------------------------------------------------------- Net Income (loss) $ (65.8) $ (25.2) $ 132.5 $ 300.2 $ 241.2 - --------------------------------------------------------------------------------------------------------------- Basic net income (loss) per common share: Income (loss) from continuing operations before extraordinary Items $ (0.82) $ (0.31) $ 1.60 $ 1.17 $ 1.57 Income from discontinued operations -- -- -- 0.62 0.88 Extraordinary gains on sales of operations -- -- -- 1.36 -- - --------------------------------------------------------------------------------------------------------------- Basic net income (loss) per common share $ (0.82) $ (0.31) $ 1.60 $ 3.15 $ 2.45 - --------------------------------------------------------------------------------------------------------------- Diluted net income (loss) per common share: Income (loss) from continuing operations before extraordinary Items $ (0.82) $ (0.31) $ 1.60 $ 1.16 $ 1.56 Income from discontinued operations -- -- -- 0.62 0.87 Extraordinary gains on sales of operations -- -- -- 1.35 -- - --------------------------------------------------------------------------------------------------------------- Diluted net income (loss) per common share $ (0.82) $ (0.31) $ 1.60 $ 3.13 $ 2.43 ===============================================================================================================
ATI | Annual Report 2002 | 63
For the Years Ended December 31, 2002 2001 2000 1999 1998 ========================================================================================================================== Dividends declared $0.66 $0.80 $0.80 $1.28 $1.28 - -------------------------------------------------------------------------------------------------------------------------- Working capital 470.4 593.4 609.3 493.5 574.9 - -------------------------------------------------------------------------------------------------------------------------- Total assets 2,093.2 2,643.2 2,776.2 2,750.6 2,943.5 - -------------------------------------------------------------------------------------------------------------------------- Long-term debt 509.4 573.0 490.6 200.3 430.6 - -------------------------------------------------------------------------------------------------------------------------- Total debt 519.1 582.2 543.8 353.0 498.8 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 59.4 33.7 26.2 50.7 74.2 - -------------------------------------------------------------------------------------------------------------------------- Fair value of interest rate swap assets 18.7 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Net debt (a) 441.0 548.5 517.6 302.3 424.6 - -------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 448.8 944.7 1,039.2 1,200.2 1,339.9 - --------------------------------------------------------------------------------------------------------------------------
(a) Net debt represents total debt less cash and cash equivalents, and interest rate swap assets. Net income (loss) was adversely affected by after-tax transformation, merger and restructuring charges of $27.1 million in 2002, $47.8 million in 2001, $18.7 million in 2000 and $45.8 million in 1998. Stockholders' equity for 2002 includes the effect of recognizing a minimum pension liability of $406.4 million, net of related tax effects. In 1999, the Company completed a strategic transformation in which it spun-off Teledyne Technologies Incorporated and Water Pik, Inc. and sold certain businesses. The results of the companies spun-off and companies sold are reflected as discontinued operations for all periods presented. The Company recognized extraordinary gains of $129.6 million, net of $79.9 million in taxes, in connection with the sales of businesses in 1999. At a stockholders' meeting held in November 1999, the Company's stockholders approved a one-for-two reverse stock split of the Company's stock. The reverse stock split was effective immediately following the spin-offs of Teledyne and Water Pik on November 29, 1999. All references to number of shares and per share amounts have been restated to reflect the reverse stock split. COMMON STOCK PRICES The Company's common stock is traded on the New York Stock Exchange (symbol ATI). At December 31, 2002, there were approximately 7,900 record holders of Allegheny Technologies Incorporated common stock. The Company paid a cash dividend of $0.06 per share on its common stock in the fourth quarter of 2002, and $0.20 per share on its common stock in each of the first three quarters of 2002 and each of the four quarters of 2001. The Company's stock price ranges were as follows:
Quarter Ended ========================================================================= 2002 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------- High $16.95 $18.11 $15.35 $7.52 Low $14.72 $15.54 $ 6.20 $5.30 - -------------------------------------------------------------------------
========================================================================= 2001 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------- High $19.00 $21.07 $19.80 $17.01 Low $13.19 $16.40 $12.55 $12.50 - -------------------------------------------------------------------------
64 | Annual Report 2002 | ATI EX-10.24 5 j9925901exv10w24.txt 2000 INCENTIVE PLAN EXHIBIT 10.24 ALLEGHENY TECHNOLOGIES INCORPORATED 2000 INCENTIVE PLAN ADMINISTRATIVE RULES FOR THE ALLEGHENY TECHNOLOGIES INCORPORATED STOCK ACQUISITION AND RETENTION PROGRAM EFFECTIVE AS OF DECEMBER 13, 2000 (AS AMENDED AND RESTATED) ARTICLE I. ADOPTION AND PURPOSE OF THE PROGRAM 1.01 ADOPTION. These rules are adopted by the Personnel and Compensation Committee and the Stock Incentive Award Subcommittee of the Board of Directors pursuant to the authority reserved in Section 3.01 of the Allegheny Technologies Incorporated 2000 Incentive Plan (the "Plan"). Capitalized terms used but not defined in these rules shall have the same meanings as in the Plan. 1.02 PURPOSE. The purpose of the Allegheny Technologies Incorporated Stock Acquisition and Retention Program (the "SARP") is to assist the Corporation and its subsidiaries in retaining and motivating selected key management employees who will contribute to the success of the Corporation and its subsidiaries. The SARP encourages eligible employees to hold a proprietary interest in the Corporation by offering them an opportunity to receive grants of restricted shares of Stock which, in accordance with the terms and conditions set forth below, will vest only if the employees retain, for a specified period of time, ownership of (i) shares of Stock purchased pursuant to the SARP or (ii) already-owned shares of Stock which such employees identify as being subject to the SARP. Awards under the SARP will act as an incentive to participating employees to achieve long-term objectives which will inure to the benefit of all stockholders of the Corporation. ARTICLE II. DEFINITIONS For purposes of these rules, the capitalized terms set forth below shall have the following meanings: 2.01 AWARD AGREEMENT means a written agreement between the Corporation and a Participant or a written acknowledgment from the Corporation specifically setting forth the terms and conditions of an award of Restricted Stock granted to a Participant pursuant to Article VII of these rules. 2.02 BOARD means the Board of Directors of the Corporation. 2.03 BUSINESS DAY means any day on which the New York Stock Exchange shall be open for trading. 2.04 CAUSE means a determination by the Committee that a Participant has engaged in conduct that is dishonest or illegal, involves moral turpitude or jeopardizes the Corporation's right to operate its business in the manner in which it is now operated. 2.05 CHANGE IN CONTROL means any of the events set forth below: (a) The acquisition in one or more transactions, other than from the Corporation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Corporation Voting Securities in excess of 30% of the Corporation Voting Securities unless such acquisition has been approved by the Board; or (b) Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (i) persons who were members of the Board on January 1, 1998 and (ii) persons who were nominated for election as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on January 1, 1998; provided, however, that any person nominated for election by the Board at a time when at least two-thirds of the members of the Board were persons described in clauses (i) and/or (ii) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (i); or (c) Approval by the stockholders of the Corporation of a reorganization, merger or consolidation, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be; or (d) Approval by the stockholders of the Corporation of (i) a complete liquidation or dissolution of the Corporation or (ii) a sale or other disposition of all or substantially all the assets of the Corporation. 2.06 COMMITTEE means the Stock Incentive Award Subcommittee of the Board, in the case of individuals who are "officers" of the Corporation as defined in Rule 16a-1(f) as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, as such Rule may be amended from time to time, and the Personnel and Compensation Committee of the Board, in the case of individuals who are not such officers of the Corporation. 2.07 CORPORATION means Allegheny Technologies Incorporated, a Delaware corporation, and its successors. 2.08 CORPORATION VOTING SECURITIES means the combined voting power of all outstanding voting securities of the Corporation entitled to vote generally in the election of the Board. 2.09 DATE OF GRANT means the date as of which an award of Restricted Stock is granted in accordance with Article VII of these rules. 2.10 DESIGNATED STOCK means shares of Stock already owned by a Participant that the Participant identifies as being subject to the SARP, thereby triggering the grant of Restricted Stock to such Participant pursuant to Article VII of these rules. 2.11 DESIGNATION NOTICE means a written notice, in a form acceptable to the Committee, by which a Participant designates previously-acquired shares of Stock as Designated Stock. 2.12 DISABILITY means any physical or mental injury or disease of a permanent nature which renders a Participant incapable of meeting the requirements of the employment performed by such Participant immediately prior to the commencement of such disability. The determination of whether a Participant is disabled shall be made by the Committee in its sole and absolute discretion. Notwithstanding the foregoing, if a Participant's employment by the Corporation or an applicable subsidiary terminates by reason of a disability, as defined in an Employment Agreement between such Participant and the Corporation or an applicable subsidiary, such Participant shall be deemed to be disabled for purposes of the SARP. 2.13 EFFECTIVE DATE means December 13, 2000. A-2 2.14 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.15 FAIR MARKET VALUE means, as of any given date, the average of the high and low trading prices of the Stock on such date as reported on the New York Stock Exchange or, if the Stock is not then traded on the New York Stock Exchange, on such other national securities exchange on which the Stock is admitted to trade, or, if none, on the National Association of Securities Dealers Automated Quotation System if the Stock is admitted for quotation thereon; provided, however, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; provided, further, that if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. 2.16 OUTSTANDING STOCK means, at any time, the issued and outstanding Stock. 2.17 PARTICIPANT means any person selected by the Committee, pursuant to Section 5.01 of these rules, as eligible to participate under the SARP. 2.18 PERMITTED TRANSFEREE means a Participant's spouse, or (by blood, adoption or marriage) parent, child, stepchild, descendant or sibling, or the estate, any guardian, custodian, conservator or committee of, or any trust for the benefit of, the Participant or any of the foregoing persons. 2.19 PLAN means the Allegheny Technologies Incorporated 2000 Incentive Plan, as the same may be amended from time to time. 2.20 PURCHASE AMOUNT means the dollar amount that a Participant specifies in a Purchase Notice with respect to a particular Purchase Date. 2.21 PURCHASE DATE means, the date on which the Corporation receives the Purchase Notice or, if such date is not a Business Day, the Business Day immediately preceding the date on which such Notice is received. 2.22 PURCHASED STOCK means Stock purchased by a Participant pursuant to Article VI of these rules, which triggers the grant of Restricted Stock to such Participant pursuant to Article VII of these rules. 2.23 PURCHASE LOAN means a loan provided to a Participant by the Corporation to facilitate the Participant's purchase of Stock pursuant hereto. 2.24 PURCHASE NOTICE means a written notice, in a form acceptable to the Committee, by which a Participant may elect to purchase Stock as of a Purchase Date in accordance with Section 6.01 of these rules. 2.25 RELATED STOCK means, with respect to any three-quarters of a share of Restricted Stock, the one share of Purchased Stock or Designated Stock, as the case may be, which entitles such Participant to receive such three-quarters of a share of Restricted Stock pursuant to Article VII of these rules. 2.26 RESTRICTED STOCK means shares of Stock awarded to a Participant subject to restrictions as described in Article VII of these rules. 2.27 SARP means the Stock Acquisition and Retention Program, as the same may be amended from time to time. 2.28 SARP YEAR means each of the calendar years during the term the SARP remains in effect, or such other period of time as the Committee may establish at the time that the designation of participants for such period are made. 2.29 STOCK means the common stock, par value $0.10 per share, of the Corporation. ARTICLE III. ADMINISTRATION A-3 The SARP shall be administered by the Committee, which shall have exclusive and final authority and discretion in each determination, interpretation or other action affecting the SARP and its Participants. The Committee shall have the sole and absolute authority and discretion to interpret the SARP, to modify these administrative rules for the SARP, to select, in accordance with Section 5.01 of these rules, the persons who will be Participants hereunder, to impose such conditions and restrictions as it determines appropriate and to take such other actions and make such other determinations in connection with the SARP as it may deem necessary or advisable. ARTICLE IV. STOCK ISSUABLE UNDER THE SARP 4.01 SHARES OF STOCK ISSUABLE. The Stock to be offered under the SARP shall be authorized and unissued Stock, or Stock which shall have been reacquired by the Corporation and held in its treasury. 4.02 SHARES SUBJECT TO TERMINATED AWARDS. Shares of Stock forfeited as provided in Section 7.02 of these rules may again be issued under the SARP. ARTICLE V. PARTICIPATION 5.01 DESIGNATION OF PARTICIPANTS. Participants in the SARP shall be such officers and senior executives of the Corporation and its subsidiaries whose actions most directly affect the long-term success of the Corporation as the Committee, in its sole discretion, after consultation with the Chief Executive Officer, may designate as eligible to participate in the SARP. The Committee shall designate the Participants who are eligible to participate in the SARP during a SARP Year which designation will generally be made prior to or within ninety days after the commencement of such SARP Year. The Committee's designation of a Participant with respect to any SARP Year shall not require the Committee to designate such person as a Participant with respect to any other SARP Year. The Committee shall consider such factors as it deems pertinent in selecting Participants. The Committee shall promptly provide to each person selected as a Participant written notice of such selection. The designation of a person as a Participant with respect to a SARP Year shall permit such person to elect to submit one or more Purchase Notices and/or Designation Notices during such SARP Year. 5.02 PARTICIPANT ELECTIONS. A person who is designated as a Participant in accordance with Section 5.01 of these rules shall be entitled to purchase Stock by delivering one or more Purchase Notices in accordance with Article VI of these rules, and such Stock purchases shall result in the award of Restricted Stock to such Participant in accordance with Article VII of these rules. In addition, a Participant shall be entitled to designate as Designated Stock, in one or more Designation Notices delivered to the Corporation at any time during a SARP Year, any number of shares of Stock then owned by the Participant, other than shares of Purchased Stock, shares of Stock credited to the Participant's account under a company-sponsored defined contribution plan and shares of Stock subject to outstanding and as yet unexercised stock options, such that, in accordance with Section 7.01, a whole number of Restricted Stock, and no fractions of a share of Restricted Stock, shall be issuable with respect to such Designated Stock. Such designation of shares as Designated Stock shall result in the award of Restricted Stock to the Participant in accordance with Article VII of these rules. The sum of (i) the aggregate Purchase Amounts elected by a Participant pursuant to one or more Purchase Notices submitted within any one SARP Year and (ii) the Fair Market Value of the Designated Stock designated by the Participant pursuant to one or more Designation Notices submitted within such SARP Year (such Fair Market Value being determined as of the date the applicable Designation Notice is delivered), shall not exceed such Participant's gross annual salary as in effect on the first day of such SARP Year; provided, however, that, for any SARP Year, the Committee may establish such greater or lesser dollar limit as it deems appropriate. ARTICLE VI. STOCK PURCHASES 6.01 STOCK PURCHASE ELECTIONS. A Participant shall have the right to purchase Stock in accordance with the terms of this Article VI of these rules. A Participant may elect to purchase Stock under this SARP by A-4 delivering to the Corporation a Purchase Notice and cash and/or a promissory note executed by the Participant in an amount equal to the purchase price designated in such Participant's Purchase Notice. Such Purchase Notice shall set forth, among other things, the Purchase Amount elected by the Participant. Such promissory note which shall evidence such Participant's Purchase Loan in accordance with Section 6.03 of these rules, shall be in a principal amount equal to the Purchase Amount designated in such Participant's Purchase Notice and shall by its terms become effective as of the applicable Purchase Date. All elections under this Section 6.01 shall be irrevocable. Each election shall take effect as of the Purchase Date. 6.02 ISSUANCE OF AND PAYMENT FOR STOCK. As of each Purchase Date, the Corporation shall credit to each Participant the number of shares of Purchased Stock purchased pursuant to the Purchase Notice submitted by such Participant. The number of shares of Purchased Stock to be so credited shall be determined by dividing the Purchase Amount designated by such Participant in his or her Purchase Notice by a purchase price per share equal to the Fair Market Value on the Purchase Date. As of any Purchase Date, the number of shares that can be purchased by a Participant shall be a number that will result in the issuance of a whole number of shares of Restricted Stock; in no event shall the Corporation be required to issue fractional shares of Purchased Stock or fractional shares of Restricted Stock. The Purchase Amount elected by a Participant, and the principal amount of the related promissory note, shall be automatically reduced (and if the entire Purchase Amount is paid in cash, cash shall be returned to the Participant) to the minimum extent necessary so that only a whole number of shares of Restricted Stock will be issued with respect to the Related Stock. The purchase price for shares of Purchased Stock credited to a Participant as of a Purchase Date shall be paid in cash and/or by means of a Purchase Loan made by the Corporation to the Participant in accordance with Section 6.03 of these rules. The Participant shall have all of the rights of a stockholder with respect to the shares of Purchased Stock credited to him under this Section 6.02 including, but not limited to, the right to vote such shares and the right to receive dividends (or dividend equivalents) paid with respect to such shares. 6.03 TERMS OF PURCHASE LOAN. (a) Purchase Loan. The promissory note delivered to the Corporation by a Participant in accordance with Section 6.01 of these rules shall evidence a Purchase Loan in principal amount equal to such Participant's Purchase Amount reduced by the amount of cash paid, if any. Unless the Committee shall otherwise determine prior to the applicable Purchase Date, each Purchase Loan shall have a term not to exceed ten years, and be secured by the shares of Purchased Stock acquired with such Purchase Loan. (b) Interest on Purchase Loan. Until the Participant's Purchase Loan is paid in full, or otherwise satisfied or discharged in full, interest on the outstanding balance of the Purchase Loan shall accrue at a fixed rate per annum equal to the minimum rate required to avoid imputed interest under the applicable provisions of the Internal Revenue Code of 1986. (c) Repayment of Purchase Loan. No principal or interest payments with respect to a Purchase Loan shall be required prior to the fifth anniversary of the date such Purchase Loan is made; provided, however, that prior to such fifth anniversary, cash dividends on shares of Purchased Stock held as security for such Purchase Loan, and on the related shares of Restricted Stock, shall be applied to pay accrued interest on the Purchase Loan (any non-cash dividends shall remain as part of the collateral securing such Purchase Loan). After such fifth anniversary, level monthly payments of principal and accrued interest with respect to a Purchase Loan shall be required for the remaining term thereof. Unless otherwise determined by the committee, all outstanding principal and interest on a Participant's Purchase Loan shall be immediately due and payable in full upon termination of the Participant's employment with the Corporation and its affiliates. All or any portion of the principal and/or interest with respect to a Purchase Loan may, at the election of the Participant, be paid by the delivery to the Corporation of whole shares of Stock, other than (i) shares of Stock credited to the Participant's account under a company-sponsored defined contribution plan or (ii) shares of Stock subject to outstanding and as yet unexercised stock options. For purposes of the immediately preceding sentence, shares of Stock shall be valued at the Fair Market Value of such shares on the Business Day immediately preceding the date such shares are delivered to the Corporation. A-5 (d) Other Terms. The promissory notes evidencing the Purchase Loans shall contain such other terms and conditions as the Committee may determine, including, without limitation, any special terms relating to the retirement of a Participant prior to the expiration of the term of one or more Purchase Loans. 6.04 STOCK CERTIFICATES. As promptly as administratively feasible after each Purchase Date, the Corporation shall deliver to each Participant one or more stock certificates for the number of shares of Stock purchased by such Participant as of such Purchase Date in accordance with this Article VI. The Participant shall then deliver certificates representing a number of shares with a value equal to the principal amount of the Purchase Loan to the Corporation in pledge for the related Purchase Loan along with an executed security agreement in such form as the Committee shall specify. Upon satisfaction in full of the Purchase Loan, the certificates shall be delivered to the Participant free and clear of any restrictions except for any restrictions that may be imposed by law. ARTICLE VII. RESTRICTED STOCK 7.01 RESTRICTED STOCK AWARDS. Beginning with the 2001 SARP Year, as of each Purchase Date, there shall automatically be granted to any Participant who purchases Purchased Stock as of such Purchase Date pursuant to Article VI of these rules an award of three-fourths of a share of Restricted Stock for each one share of Purchased Stock. The Purchase Date shall be the Date of Grant of such Restricted Stock. Beginning with the 2001 SARP Year, as of any date that a Participant delivers a Designation Notice to the Corporation, in accordance with Section 5.02 of these rules, designating shares of Stock as Designated Stock, there shall automatically be granted to such Participant an award of three-fourths of a share of Restricted Stock for each one share of Designated Stock. The date of delivery of such Designation Notice shall be the Date of Grant of such Restricted Stock. The terms of all such Restricted Stock awards shall be set forth in an Award Agreement between the Corporation and the Participant which shall contain such forfeiture periods and conditions, restrictions and other provisions, not inconsistent with these rules, as shall be determined by the Committee. (a) Issuance of Restricted Stock. As soon as practicable after the Date of Grant of Restricted Stock, the Corporation shall cause to be transferred on the books of the Corporation shares of Stock, registered on behalf of the Participant, evidencing such Restricted Stock, but subject to forfeiture to the Corporation retroactive to the Date of Grant if an Award Agreement delivered to the Participant by the Corporation with respect to the Restricted Stock is not duly executed by the Participant and timely returned to the Corporation. Until the lapse or release of all restrictions applicable to an award of Restricted Stock, the stock certificates representing such Restricted Stock shall be held in custody by the Corporation or its designee. (b) Stockholder Rights. Beginning on the Date of Grant of the Restricted Stock and subject to execution of the Award Agreement as provided in Section 7.01(a) of these rules, the Participant shall become a stockholder of the Corporation with respect to all Stock subject to the Award Agreement and shall have all of the rights of a stockholder, including, but not limited to, the right to vote such Stock and the right to receive dividends (or dividend equivalents) paid with respect to such Stock; provided, however, that any Stock distributed as a dividend or otherwise with respect to any Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock and shall be held as prescribed in Section 7.01(a) of these rules. (c) Restriction on Transferability. None of the Restricted Stock may be assigned, transferred (other than by will or the laws of descent and distribution), pledged, sold or otherwise disposed of prior to lapse or release of the restrictions applicable thereto. A-6 (d) Delivery of Stock Upon Release of Restrictions. Upon expiration or earlier termination of the forfeiture period without a forfeiture, the satisfaction of the Purchase Loan, if any, for the Related Stock and the satisfaction of or release from any other conditions prescribed by the Committee, the restrictions applicable to the Restricted Stock shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of Section 8.02 of these rules, the Corporation shall deliver to the Participant, or, in case of the Participant's death, to the Participant's legal representatives, one or more stock certificates for the appropriate number of shares of Stock, free of all such restrictions, except for any restrictions that may be imposed by law. 7.02 TERMS OF RESTRICTED STOCK. (a) Forfeiture of Restricted Stock. Subject to Section 7.02(b) of these rules, all Restricted Stock shall be forfeited and returned to the Corporation and all rights of the Participant with respect to such Restricted Stock shall cease and terminate in their entirety if during the forfeiture period (i) the Participant transfers, sells or otherwise disposes of the Related Stock other than to a Permitted Transferee or in a transaction constituting a Change in Control or (ii) the employment of the Participant with the Corporation and its affiliates terminates for any reason or (iii) the Participant defaults on the Purchase Loan, if any, for the Related Stock. Unless the Committee, in its sole discretion, provides otherwise in the applicable Award Agreement, the forfeiture period for any shares of Restricted Stock shall be five years from the Date of Grant of such Restricted Stock. Notwithstanding the foregoing, in the event of the discharge by the Corporation and its subsidiaries of a Participant without Cause or termination of a Participant's employment by reason of death, Disability or retirement pursuant to the retirement policy of the Corporation or its applicable subsidiaries, all forfeiture restrictions imposed on Restricted Stock shall immediately and fully lapse. In addition, upon the occurrence of a Change in Control, all forfeiture restrictions imposed on Restricted Stock shall immediately and fully lapse. (b) Waiver of Forfeiture Period. Notwithstanding anything contained in this Article VII to the contrary, the Committee may, in its sole discretion, waive the forfeiture conditions set forth in any Award Agreement under appropriate circumstances and subject to such terms and conditions (including forfeiture of a proportionate number of the shares of Restricted Stock) as the Committee may deem appropriate, provided that the Participant shall at that time have completed at least one year of employment after the Date of Grant. ARTICLE VIII. MISCELLANEOUS 8.01 LIMITATIONS ON TRANSFER. The rights and interest of a Participant under the SARP may not be assigned or transferred other than by will or the laws of descent and distribution. During the lifetime of a Participant, only the Participant personally may exercise rights under the SARP. 8.02 TAXES. The Corporation shall be entitled to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Corporation with respect to any Stock issuable under the SARP, or with respect to any income recognized upon the lapse of restrictions applicable to Restricted Stock, and the Corporation may defer issuance of Stock hereunder until and unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee or its delegate and shall be payable by the Participant at such time as the Committee determines. The Committee shall prescribe in each Award Agreement one or more methods by which the Participant will be permitted to satisfy his or her tax withholding obligation, which methods may include, without limitation, the payment of cash by the Participant to the Corporation and the withholding, at the appropriate time, of shares of Stock otherwise issuable to the Participant in a number sufficient, based upon the Fair Market Value of such Stock, to satisfy such tax withholding requirements. 8.03 LEGENDS. All certificates for Stock delivered under the SARP shall be subject to such transfer restrictions set forth in these rules and such other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities law, and the Committee may A-7 cause a legend or legends to be endorsed on any such certificates making appropriate references to such restrictions. 8.04 AMENDMENT AND TERMINATION. The Committee shall have complete power and authority to amend or terminate these rules at any time it is deemed necessary or appropriate. No termination or amendment of the SARP may, without the consent of the Participant to whom any award shall theretofore have been granted under the SARP, adversely affect the right of such individual under such award; provided, however, that the Committee may, in its sole discretion, make such provision in the Award Agreement for amendments which, in its sole discretion, it deems appropriate. #### A-8 EX-10.27 6 j9925901exv10w27.txt 2000 INCENTIVE PLAN EXHIBIT 10.27 ALLEGHENY TECHNOLOGIES INCORPORATED 2000 INCENTIVE PLAN ADMINISTRATIVE RULES FOR THE ALLEGHENY TECHNOLOGIES INCORPORATED STOCK ACQUISITION AND RETENTION PROGRAM EFFECTIVE AS OF DECEMBER 13, 2000 (AS AMENDED AND RESTATED) ARTICLE I. ADOPTION AND PURPOSE OF THE PROGRAM 1.01 ADOPTION. These rules are adopted by the Personnel and Compensation Committee and the Stock Incentive Award Subcommittee of the Board of Directors pursuant to the authority reserved in Section 3.01 of the Allegheny Technologies Incorporated 2000 Incentive Plan (the "Plan"). Capitalized terms used but not defined in these rules shall have the same meanings as in the Plan. 1.02 PURPOSE. The purpose of the Allegheny Technologies Incorporated Stock Acquisition and Retention Program (the "SARP") is to assist the Corporation and its subsidiaries in retaining and motivating selected key management employees who will contribute to the success of the Corporation and its subsidiaries. The SARP encourages eligible employees to hold a proprietary interest in the Corporation by offering them an opportunity to receive grants of restricted shares of Stock which, in accordance with the terms and conditions set forth below, will vest only if the employees retain, for a specified period of time, ownership of (i) shares of Stock purchased pursuant to the SARP or (ii) already-owned shares of Stock which such employees identify as being subject to the SARP. Awards under the SARP will act as an incentive to participating employees to achieve long-term objectives which will inure to the benefit of all stockholders of the Corporation. ARTICLE II. DEFINITIONS For purposes of these rules, the capitalized terms set forth below shall have the following meanings: 2.01 AWARD AGREEMENT means a written agreement between the Corporation and a Participant or a written acknowledgment from the Corporation specifically setting forth the terms and conditions of an award of Restricted Stock granted to a Participant pursuant to Article VII of these rules. 2.02 BOARD means the Board of Directors of the Corporation. 2.03 BUSINESS DAY means any day on which the New York Stock Exchange shall be open for trading. 2.04 CAUSE means a determination by the Committee that a Participant has engaged in conduct that is dishonest or illegal, involves moral turpitude or jeopardizes the Corporation's right to operate its business in the manner in which it is now operated. 1 2.05 CHANGE IN CONTROL means any of the events set forth below: (a) The acquisition in one or more transactions, other than from the Corporation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Corporation Voting Securities in excess of 30% of the Corporation Voting Securities unless such acquisition has been approved by the Board; or (b) Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (i) persons who were members of the Board on January 1, 1998 and (ii) persons who were nominated for election as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on January 1, 1998; provided, however, that any person nominated for election by the Board at a time when at least two-thirds of the members of the Board were persons described in clauses (i) and/or (ii) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (i); or (c) Approval by the stockholders of the Corporation of a reorganization, merger or consolidation, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be; or (d) Approval by the stockholders of the Corporation of (i) a complete liquidation or dissolution of the Corporation or (ii) a sale or other disposition of all or substantially all the assets of the Corporation. 2.06 COMMITTEE means the Stock Incentive Award Subcommittee of the Board, in the case of individuals who are "officers" of the Corporation as defined in Rule 16a-1(f) as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, as such Rule may be amended from time to time, and the Personnel and Compensation Committee of the Board, in the case of individuals who are not such officers of the Corporation. 2.07 CORPORATION means Allegheny Technologies Incorporated, a Delaware corporation, and its successors. 2.08 CORPORATION VOTING SECURITIES means the combined voting power of all outstanding voting securities of the Corporation entitled to vote generally in the election of the Board. 2.09 DATE OF GRANT means the date as of which an award of Restricted Stock is granted in accordance with Article VII of these rules. 2 2.10 DESIGNATED STOCK means shares of Stock already owned by a Participant that the Participant identifies as being subject to the SARP, thereby triggering the grant of Restricted Stock to such Participant pursuant to Article VII of these rules. 2.11 DESIGNATION NOTICE means a written notice, in a form acceptable to the Committee, by which a Participant designates previously-acquired shares of Stock as Designated Stock. 2.12 DISABILITY means any physical or mental injury or disease of a permanent nature which renders a Participant incapable of meeting the requirements of the employment performed by such Participant immediately prior to the commencement of such disability. The determination of whether a Participant is disabled shall be made by the Committee in its sole and absolute discretion. Notwithstanding the foregoing, if a Participant's employment by the Corporation or an applicable subsidiary terminates by reason of a disability, as defined in an Employment Agreement between such Participant and the Corporation or an applicable subsidiary, such Participant shall be deemed to be disabled for purposes of the SARP. 2.13 EFFECTIVE DATE means December 13, 2000. 2.14 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.15 FAIR MARKET VALUE means, as of any given date, the average of the high and low trading prices of the Stock on such date as reported on the New York Stock Exchange or, if the Stock is not then traded on the New York Stock Exchange, on such other national securities exchange on which the Stock is admitted to trade, or, if none, on the National Association of Securities Dealers Automated Quotation System if the Stock is admitted for quotation thereon; provided, however, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; provided, further, that if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. 2.16 OUTSTANDING STOCK means, at any time, the issued and outstanding Stock. 2.17 PARTICIPANT means any person selected by the Committee, pursuant to Section 5.01 of these rules, as eligible to participate under the SARP. 2.18 PERMITTED TRANSFEREE means a Participant's spouse, or (by blood, adoption or marriage) parent, child, stepchild, descendant or sibling, or the estate, any guardian, custodian, conservator or committee of, or any trust for the benefit of, the Participant or any of the foregoing persons. 2.19 PLAN means the Allegheny Technologies Incorporated 2000 Incentive Plan, as the same may be amended from time to time. 2.20 PURCHASE AMOUNT means the dollar amount that a Participant specifies in a Purchase Notice with respect to a particular Purchase Date. 2.21 PURCHASE DATE means, the date on which the Corporation receives the Purchase Notice or, if such date is not a Business Day, the Business Day immediately preceding the date on which such Notice is received. 3 2.22 PURCHASED STOCK means Stock purchased by a Participant pursuant to Article VI of these rules, which triggers the grant of Restricted Stock to such Participant pursuant to Article VII of these rules. 2.23 PURCHASE LOAN means a loan provided to a Participant by the Corporation to facilitate the Participant's purchase of Stock pursuant hereto. 2.24 PURCHASE NOTICE means a written notice, in a form acceptable to the Committee, by which a Participant may elect to purchase Stock as of a Purchase Date in accordance with Section 6.01 of these rules. 2.25 RELATED STOCK means, with respect to any three-quarters of a share of Restricted Stock, the one share of Purchased Stock or Designated Stock, as the case may be, which entitles such Participant to receive such three-quarters of a share of Restricted Stock pursuant to Article VII of these rules. 2.26 RESTRICTED STOCK means shares of Stock awarded to a Participant subject to restrictions as described in Article VII of these rules. 2.27 SARP means the Stock Acquisition and Retention Program, as the same may be amended from time to time. 2.28 SARP YEAR means each of the calendar years during the term the SARP remains in effect, or such other period of time as the Committee may establish at the time that the designation of participants for such period are made. 2.29 STOCK means the common stock, par value $0.10 per share, of the Corporation. ARTICLE III. ADMINISTRATION The SARP shall be administered by the Committee, which shall have exclusive and final authority and discretion in each determination, interpretation or other action affecting the SARP and its Participants. The Committee shall have the sole and absolute authority and discretion to interpret the SARP, to modify these administrative rules for the SARP, to select, in accordance with Section 5.01 of these rules, the persons who will be Participants hereunder, to impose such conditions and restrictions as it determines appropriate and to take such other actions and make such other determinations in connection with the SARP as it may deem necessary or advisable. ARTICLE IV. STOCK ISSUABLE UNDER THE SARP 4.01 SHARES OF STOCK ISSUABLE. The Stock to be offered under the SARP shall be authorized and unissued Stock, or Stock which shall have been reacquired by the Corporation and held in its treasury. 4.02 SHARES SUBJECT TO TERMINATED AWARDS. Shares of Stock forfeited as provided in Section 7.02 of these rules may again be issued under the SARP. 4 ARTICLE V. PARTICIPATION 5.01 DESIGNATION OF PARTICIPANTS. Participants in the SARP shall be such officers and senior executives of the Corporation and its subsidiaries whose actions most directly affect the long-term success of the Corporation as the Committee, in its sole discretion, after consultation with the Chief Executive Officer, may designate as eligible to participate in the SARP. The Committee shall designate the Participants who are eligible to participate in the SARP during a SARP Year which designation will generally be made prior to or within ninety days after the commencement of such SARP Year. The Committee's designation of a Participant with respect to any SARP Year shall not require the Committee to designate such person as a Participant with respect to any other SARP Year. The Committee shall consider such factors as it deems pertinent in selecting Participants. The Committee shall promptly provide to each person selected as a Participant written notice of such selection. The designation of a person as a Participant with respect to a SARP Year shall permit such person to elect to submit one or more Purchase Notices and/or Designation Notices during such SARP Year. 5.02 PARTICIPANT ELECTIONS. A person who is designated as a Participant in accordance with Section 5.01 of these rules shall be entitled to purchase Stock by delivering one or more Purchase Notices in accordance with Article VI of these rules, and such Stock purchases shall result in the award of Restricted Stock to such Participant in accordance with Article VII of these rules. In addition, a Participant shall be entitled to designate as Designated Stock, in one or more Designation Notices delivered to the Corporation at any time during a SARP Year, any number of shares of Stock then owned by the Participant, other than shares of Purchased Stock, shares of Stock credited to the Participant's account under a company-sponsored defined contribution plan and shares of Stock subject to outstanding and as yet unexercised stock options, such that, in accordance with Section 7.01, a whole number of Restricted Stock, and no fractions of a share of Restricted Stock, shall be issuable with respect to such Designated Stock. Such designation of shares as Designated Stock shall result in the award of Restricted Stock to the Participant in accordance with Article VII of these rules. The sum of (i) the aggregate Purchase Amounts elected by a Participant pursuant to one or more Purchase Notices submitted within any one SARP Year and (ii) the Fair Market Value of the Designated Stock designated by the Participant pursuant to one or more Designation Notices submitted within such SARP Year (such Fair Market Value being determined as of the date the applicable Designation Notice is delivered), shall not exceed such Participant's gross annual salary as in effect on the first day of such SARP Year; provided, however, that, for any SARP Year, the Committee may establish such greater or lesser dollar limit as it deems appropriate. ARTICLE VI. STOCK PURCHASES 6.01 STOCK PURCHASE ELECTIONS. A Participant shall have the right to purchase Stock in accordance with the terms of this Article VI of these rules. A Participant may elect to purchase Stock under this SARP by delivering to the Corporation a Purchase Notice and cash and/or a promissory note executed by the Participant in an amount equal to the purchase price designated in such Participant's Purchase Notice. Such Purchase Notice shall set forth, among other things, the Purchase Amount elected by the Participant. Such promissory note which shall evidence such Participant's Purchase Loan in accordance with Section 6.03 of these rules, shall be in a principal amount equal to the Purchase Amount designated in such Participant's Purchase Notice and shall by its terms become effective as of the applicable Purchase Date. All elections under this Section 6.01 shall be irrevocable. Each election shall take effect as of the Purchase Date. 6.02 ISSUANCE OF AND PAYMENT FOR STOCK. As of each Purchase Date, the Corporation shall credit to each Participant the number of shares of Purchased Stock purchased pursuant to the Purchase Notice submitted by such Participant. The number of shares of Purchased Stock to be so 5 credited shall be determined by dividing the Purchase Amount designated by such Participant in his or her Purchase Notice by a purchase price per share equal to the Fair Market Value on the Purchase Date. As of any Purchase Date, the number of shares that can be purchased by a Participant shall be a number that will result in the issuance of a whole number of shares of Restricted Stock; in no event shall the Corporation be required to issue fractional shares of Purchased Stock or fractional shares of Restricted Stock. The Purchase Amount elected by a Participant, and the principal amount of the related promissory note, shall be automatically reduced (and if the entire Purchase Amount is paid in cash, cash shall be returned to the Participant) to the minimum extent necessary so that only a whole number of shares of Purchased Stock will be issued. The purchase price for shares of Purchased Stock credited to a Participant as of a Purchase Date shall be paid in cash and/or by means of a Purchase Loan made by the Corporation to the Participant in accordance with Section 6.03 of these rules. The Participant shall have all of the rights of a stockholder with respect to the shares of Purchased Stock credited to him under this Section 6.02 including, but not limited to, the right to vote such shares and the right to receive dividends (or dividend equivalents) paid with respect to such shares. 6.03 TERMS OF PURCHASE LOAN. (a) Purchase Loan. The promissory note delivered to the Corporation by a Participant in accordance with Section 6.01 of these rules shall evidence a Purchase Loan in principal amount equal to such Participant's Purchase Amount reduced by the amount of cash paid, if any. Unless the Committee shall otherwise determine prior to the applicable Purchase Date, each Purchase Loan shall have a term not to exceed ten years, and be secured by the shares of Purchased Stock acquired with such Purchase Loan. (b) Interest on Purchase Loan. Until the Participant's Purchase Loan is paid in full, or otherwise satisfied or discharged in full, interest on the outstanding balance of the Purchase Loan shall accrue at a fixed rate per annum equal to the minimum rate required to avoid imputed interest under the applicable provisions of the Internal Revenue Code of 1986. (c) Repayment of Purchase Loan. No principal or interest payments with respect to a Purchase Loan shall be required prior to the fifth anniversary of the date such Purchase Loan is made; provided, however, that prior to such fifth anniversary, cash dividends on shares of Purchased Stock held as security for such Purchase Loan, and on the related shares of Restricted Stock, shall be applied to pay accrued interest on the Purchase Loan (any non-cash dividends shall remain as part of the collateral securing such Purchase Loan). After such fifth anniversary, level monthly payments of principal and accrued interest with respect to a Purchase Loan shall be required for the remaining term thereof. Unless otherwise determined by the committee, all outstanding principal and interest on a Participant's Purchase Loan shall be immediately due and payable in full upon termination of the Participant's employment with the Corporation and its affiliates. All or any portion of the principal and/or interest with respect to a Purchase Loan may, at the election of the Participant, be paid by the delivery to the Corporation of whole shares of Stock (or, in the case of Purchased Stock then held by the Corporation as collateral for a Purchase Loan, by the delivery to the Corporation of a written notice of the Participant's election to use such Purchased Stock for such purpose), other than (i) shares of Stock credited to the Participant's account under a company-sponsored defined contribution plan or (ii) shares of Stock subject to outstanding and as yet unexercised stock options. For purposes of the immediately preceding sentence, shares of Stock shall be valued at the Fair Market Value of such shares on the Business Day immediately preceding the date such shares are delivered to the Corporation (or, in the case of Purchased Stock then held by the 6 Corporation as collateral for a Purchase Loan, the Business Day immediately preceding the date the applicable written notice is delivered to the Corporation). (d) Other Terms. The promissory notes evidencing the Purchase Loans shall contain such other terms and conditions as the Committee may determine, including, without limitation, any special terms relating to the retirement of a Participant prior to the expiration of the term of one or more Purchase Loans. 6.04 STOCK CERTIFICATES. As promptly as administratively feasible after each Purchase Date, the Corporation shall deliver to each Participant one or more stock certificates for the number of shares of Stock purchased by such Participant as of such Purchase Date in accordance with this Article VI. The Participant shall then deliver certificates representing a number of shares with a value equal to the principal amount of the Purchase Loan to the Corporation in pledge for the related Purchase Loan along with an executed security agreement in such form as the Committee shall specify. Upon satisfaction in full of the Purchase Loan, the certificates shall be delivered to the Participant free and clear of any restrictions except for any restrictions that may be imposed by law. ARTICLE VII. RESTRICTED STOCK 7.01 RESTRICTED STOCK AWARDS. Beginning with the 2002 SARP Year, as of each Purchase Date, there shall automatically be granted to any Participant who purchases Purchased Stock as of such Purchase Date pursuant to Article VI of these rules an award of one share of Restricted Stock for each share of Purchased Stock. The Purchase Date shall be the Date of Grant of such Restricted Stock. Beginning with the 2002 SARP Year, as of any date that a Participant delivers a Designation Notice to the Corporation, in accordance with Section 5.02 of these rules, designating shares of Stock as Designated Stock, there shall automatically be granted to such Participant an award of one share of Restricted Stock for each share of Designated Stock. The date of delivery of such Designation Notice shall be the Date of Grant of such Restricted Stock. The terms of all such Restricted Stock awards shall be set forth in an Award Agreement between the Corporation and the Participant which shall contain such forfeiture periods and conditions, restrictions and other provisions, not inconsistent with these rules, as shall be determined by the Committee. (a) Issuance of Restricted Stock. As soon as practicable after the Date of Grant of Restricted Stock, the Corporation shall cause to be transferred on the books of the Corporation shares of Stock, registered on behalf of the Participant, evidencing such Restricted Stock, but subject to forfeiture to the Corporation retroactive to the Date of Grant if an Award Agreement delivered to the Participant by the Corporation with respect to the Restricted Stock is not duly executed by the Participant and timely returned to the Corporation. Until the lapse or release of all restrictions applicable to an award of Restricted Stock, the stock certificates representing such Restricted Stock shall be held in custody by the Corporation or its designee. (b) Stockholder Rights. Beginning on the Date of Grant of the Restricted Stock and subject to execution of the Award Agreement as provided in Section 7.01(a) of these rules, the Participant shall become a stockholder of the Corporation with respect to all Stock subject to the Award Agreement and shall have all of the rights of a stockholder, including, but not limited to, the right to vote such Stock and the right to receive dividends (or dividend equivalents) paid with respect to such Stock; provided, however, that any Stock distributed as a dividend or otherwise with respect to any Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock and shall be held as prescribed in Section 7.01(a) of these rules. 7 (c) Restriction on Transferability. None of the Restricted Stock may be assigned, transferred (other than by will or the laws of descent and distribution), pledged, sold or otherwise disposed of prior to lapse or release of the restrictions applicable thereto. (d) Delivery of Stock Upon Release of Restrictions. Upon expiration or earlier termination of the forfeiture period without a forfeiture, and the satisfaction of or release from any other conditions prescribed by the Committee, the restrictions applicable to the Restricted Stock shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of Section 8.02 of these rules, the Corporation shall deliver to the Participant, or, in case of the Participant's death, to the Participant's legal representatives, one or more stock certificates for the appropriate number of shares of Stock, free of all such restrictions, except for any restrictions that may be imposed by law. Such delivery of certificates shall occur without regard to whether the related Purchase Loan has been paid in full, provided, however, that, as set forth in Section 7.02(a), Restricted Stock shall be forfeited if the Participant defaults on the related Purchase Loan during the forfeiture period of the Restricted Stock. 7.02 TERMS OF RESTRICTED STOCK. (a) Forfeiture of Restricted Stock. Subject to Section 7.02(b) of these rules, all Restricted Stock shall be forfeited and returned to the Corporation and all rights of the Participant with respect to such Restricted Stock shall cease and terminate in their entirety if during the forfeiture period (i) the Participant transfers, sells or otherwise disposes of the Related Stock other than to a Permitted Transferee or in a transaction constituting a Change in Control or (ii) the employment of the Participant with the Corporation and its affiliates terminates for any reason or (iii) the Participant defaults on the Purchase Loan, if any, for the Related Stock. Unless the Committee, in its sole discretion, provides otherwise in the applicable Award Agreement, the forfeiture period for any shares of Restricted Stock shall be five years from the Date of Grant of such Restricted Stock. Notwithstanding the foregoing, in the event of the discharge by the Corporation and its subsidiaries of a Participant without Cause or termination of a Participant's employment by reason of death, Disability or retirement pursuant to the retirement policy of the Corporation or its applicable subsidiaries, all forfeiture restrictions imposed on Restricted Stock shall immediately and fully lapse. In addition, upon the occurrence of a Change in Control, all forfeiture restrictions imposed on Restricted Stock shall immediately and fully lapse. (b) Waiver of Forfeiture Period. Notwithstanding anything contained in this Article VII to the contrary, the Committee may, in its sole discretion, waive the forfeiture conditions set forth in any Award Agreement under appropriate circumstances and subject to such terms and conditions (including forfeiture of a proportionate number of the shares of Restricted Stock) as the Committee may deem appropriate, provided that the Participant shall at that time have completed at least one year of employment after the Date of Grant. ARTICLE VIII. MISCELLANEOUS 8.01 LIMITATIONS ON TRANSFER. The rights and interest of a Participant under the SARP may not be assigned or transferred other than by will or the laws of descent and distribution. During the lifetime of a Participant, only the Participant personally may exercise rights under the SARP. 8 8.02 TAXES. The Corporation shall be entitled to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Corporation with respect to any Stock issuable under the SARP, or with respect to any income recognized upon the lapse of restrictions applicable to Restricted Stock, and the Corporation may defer issuance of Stock hereunder until and unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee or its delegate and shall be payable by the Participant at such time as the Committee determines. The Committee shall prescribe in each Award Agreement one or more methods by which the Participant will be permitted to satisfy his or her tax withholding obligation, which methods may include, without limitation, the payment of cash by the Participant to the Corporation and the withholding, at the appropriate time, of shares of Stock otherwise issuable to the Participant in a number sufficient, based upon the Fair Market Value of such Stock, to satisfy such tax withholding requirements. 8.03 LEGENDS. All certificates for Stock delivered under the SARP shall be subject to such transfer restrictions set forth in these rules and such other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities law, and the Committee may cause a legend or legends to be endorsed on any such certificates making appropriate references to such restrictions. 8.04 AMENDMENT AND TERMINATION. The Committee shall have complete power and authority to amend or terminate these rules at any time it is deemed necessary or appropriate. No termination or amendment of the SARP may, without the consent of the Participant to whom any award shall theretofore have been granted under the SARP, adversely affect the right of such individual under such award; provided, however, that the Committee may, in its sole discretion, make such provision in the Award Agreement for amendments which, in its sole discretion, it deems appropriate. 9 EX-10.28 7 j9925901exv10w28.txt 2002 INCENTIVE PLAN EXHIBIT 10.28 [ALLEGHENY TECHNOLOGIES LOGO] THE ANNUAL INCENTIVE PLAN FOR YEAR 2002
CONTENTS PAGE - -------- ---- At a Glance 1 What is the Annual Incentive Plan? 1 Who is Eligible for This Plan? 1 How Does the Annual Incentive Plan Work? 1 Calculation of the Annual Incentive Plan Award 2 Target Bonus Percentage 2 Performance Goals and the Target Bonus Percentage 2 Financial Performance Goals 3 Individual Performance Goals 3 How the AIP Incentive Award is Calculated When All Goals Are Achieved 4 How the AIP Incentive Award is Calculated for Other Achievement Levels 5 Maximums and Minimums 5 Formulas for Weighting Performance 5 Putting it Together - Two Examples 6 Additional Guidelines for the Annual Incentive Plan 9 Discretionary Adjustments 9 Some Special Circumstances 9 Making Payments 10 Administration Details 10
AT A GLANCE WHAT IS THE ANNUAL INCENTIVE PLAN? The Annual Incentive Plan (the "AIP" or the "Plan") provides key managers of Allegheny Technologies Incorporated ("Allegheny Technologies" or the "Company") and its operating companies with the opportunity to earn an incentive award when certain pre-established goals are met at the corporate and operating company levels and at the individual level. WHO IS ELIGIBLE FOR THIS PLAN? Generally, key managers who have a significant impact on the company's operations will be eligible to participate in the Plan. Individuals eligible for participation are determined annually, based on recommendations of the operating company presidents, if applicable, and the Company's chief executive officer, with the approval of the Personnel and Compensation Committee of the Company's Board of Directors (the "Committee"). HOW DOES THE ANNUAL INCENTIVE PLAN WORK? Under the Plan, key managers may earn an incentive award based on a percentage of their base salary, depending on the extent to which pre-established corporate, operating company and individual performance goals have been achieved. - - For purposes of the Plan, base salary is generally the manager's annual base salary rate as of the end of the year, excluding any commission or other incentive pay. For some special circumstances affecting the amount of base salary used in the Plan, see page 9. - - A target bonus percentage is used in calculating the incentive award. It is explained on the next page. Each participating manager will have a target bonus percentage. - - The target bonus percentage will be adjusted (upward or downward) based on the extent to which various performance goals are achieved. Under the Plan, 80% of the target bonus percentage will be adjusted based on corporate or operating company financial performance, and 20% of the target bonus percentage will be adjusted based on individual performance. Incentive award payments will generally be distributed in cash after the year-end audit is complete. Page 1 CALCULATION OF THE ANNUAL INCENTIVE PLAN AWARD TARGET BONUS PERCENTAGE The Plan establishes an incentive opportunity for each Plan participant, calculated as a percentage of the manager's base salary. Each participant will be provided with an initial percentage, referred to as a "target bonus percentage." Generally, the target bonus percentage is the percentage of base salary that can be earned as an award under the Plan if 100% of the various performance goals are achieved. For 2002, if 100% of the performance goals are achieved, 100% of the target bonus percentage can be earned. If there is a change in the key manager's job position during the year that changes the manager's target bonus percentage, the target bonus percentage used in the award calculation will be determined as follows: - - If the individual has at least six months of service in the new position, the newly adjusted target bonus percentage will be used in calculating the individual's award for the full year. - - If the individual has less than six months of service in the new position, the individual's award for the year will be calculated on a pro-rata basis using the two different target bonus percentages weighted by length of service in each position during the year. Target bonus percentages, performance goals and performance achievements will be communicated to each eligible participant. The Committee may change the goals and objectives for the Plan at any time. PERFORMANCE GOALS AND THE TARGET BONUS PERCENTAGE An AIP award is based on the extent to which specified, preestablished performance objectives are achieved. For 2002, AIP awards will be based on the extent to which: - - Allegheny Technologies and its operating companies achieve specified levels of Operating Profit; Inventory Reductions, measured as improvement in inventory turns; and Cost Reductions, collectively the financial goals, and - - The participant achieves his or her own individual performance objectives. At the end of the year, the Company will measure actual performance against each of the preestablished objectives. As a first step in the calculation, the Company will determine the extent to which pre-established financial performance goals, specifically levels of Operating Profit, Inventory Reductions, and Cost Reductions for 2002 have been achieved. The results achieved will be weighted under a formula, which in turn will impact 80% of the target bonus percentage. The formulas for weighting financial achievements are described on pages 5 to 6. Page 2 For the remaining 20% of the target bonus percentage, the Company will review individual performance against pre-established objectives. The formulas for weighting individual performance achievements are the same as for weighting financial achievements and are described on pages 5 to 6. The weighted percentages attributable to each performance goal as noted above, then will be added together, and that sum will be multiplied by: (i) the individual's target bonus percentage, times (ii) the individual's annual base salary, to produce the amount of the incentive award for 2002. Note that potential adjustments are described on page 9. FINANCIAL PERFORMANCE GOALS The financial performance goals for 2002 consist of three measures: Operating Profit ("OP"), Inventory Reductions, measured as improvement in inventory turns ("IR"), and Cost Reductions ("CR"), which together comprise 80% of the target bonus percentage. For operating company managers, note that 100% of the financial performance goals' overall 80% weight will be based on the performance of the participant's operating company. For corporate staff managers, 100% of the financial performance goals' overall 80% weight will be based upon total ATI performance. More specifically, the financial performance measures comprising 80% of the target bonus percentage will be as follows: - OP achievements 25% - IR achievements 30% - CR achievements 25% --- 80% Each year, financial performance goals will be set at the operating company and corporate level based on the applicable business plan, or other specific goals as determined by the Committee. With the concurrence of the Company's chief executive officer and the Committee, financial performance goals may be further weighted within a particular operating company in accordance with its separate business units ("SBU's") for key managers of those SBU's. INDIVIDUAL PERFORMANCE GOALS 20% of the target bonus percentage is based on the extent to which pre-established individual performance goals are achieved. Each year, managers will establish individual performance goals with their immediate supervisors. The achievement of Individual Performance goals will be weighted under the same formulas as the financial performance goals. Page 3 HOW THE AIP INCENTIVE AWARD IS CALCULATED WHEN ALL GOALS ARE ACHIEVED For the Year 2002, if 100% of the financial performance goals are achieved, then 80% of the target bonus percentage will be credited to the participant:
Goal % of Goal Formula Earned % of Goals Target Achieved% Weighting Target* ----- ------ -------- --------- ------ FINANCIAL Operating Profit ("OP") 25% 100% 100% 25% Inventory Reductions ("IR") 30% 100% 100% 30% Cost Reductions ("CR") 25% 100% 100% 25% --- --- Financial Total 80% 80%
*Earned % of Target = Goal % of Target X Formula Weighting Then, if 100% of the individual performance goals are achieved, an additional 20% of the target bonus percentage will be credited to the participant:
Goal % of Goal Formula Earned % of Goals Target Achieved % Weighting Target* ----- ------ -------- --------- ------- INDIVIDUAL GOALS 20% 100% 100% 20%
*Earned % of Target = Goal % of Target X Formula Weighting The sum of weighting the financial performance and individual performance produces the earned percentages of target as follows: Financial Performance Goals 80% Individual Performance Goals 20% --- Total Earned Percentage of Target 100% In this example, assume that the operating company manager's target bonus percentage is 20%. The target bonus percentage of 20% is then multiplied by 100% to produce a bonus percentage equal to 20% of base salary: Earned Percentage of Target 100% X Target Bonus Percent 20% --- Equals Percentage of Salary for 20% Incentive Award
The sections below discuss the impact of achieving more or less than 100% of various goals, and they also discuss the impact of other potential adjustments. Page 4 HOW THE AIP INCENTIVE AWARD IS CALCULATED FOR OTHER ACHIEVEMENT LEVELS The following section describes maximum and minimum achievement levels, and the formulas used to weight achievements at all levels. MAXIMUMS AND MINIMUMS - - Generally, the maximum percentage used in adjusting or weighting performance achievement is 120%, and the overall maximum incentive award that an individual can earn under the weighting formula is 200% of his or her target bonus percentage. - - Where 75% of a financial or individual performance goal is achieved, only 25% of that goal's share will be allocated to his or her target bonus percentage. - - Where less than 75% of a financial or individual performance goal is achieved, no amount of that goal will be allocated to his or her target bonus percentage. FORMULAS FOR WEIGHTING PERFORMANCE The following formulas will be used to weight financial or individual performance under the Plan: Formula A: If 75% to and including 100% of a goal is achieved, the Percent Allocated for that goal equals the Percentage of Goal Achieved (i.e. Actual Performance divided by Planned Performance) minus 75% (which is the threshold level of performance) times 3, plus 25%. Formula A examples: 1. Assumption: Percentage of Goal Achieved = 90% Weighted Percent for that Goal = [(90% - 75%) x 3] + 25% = [15% x 3] + 25% = 45% + 25% Percent Allocated for Goal = 70% 2. Assumption: Percentage of Goal Achieved = 85% Weighted Percent for that Goal = [(85% - 75%) x 3] + 25% = [10% x 3] + 25% = 30% + 25% Percent Allocated for Goal = 55% Page 5 Formula B: If over 100% of goal is achieved, the Percent Allocated for that goal equals the Percentage of Goal Achieved (i.e. Actual Performance divided by Planned Performance) minus 100% times 5, plus 100%. In all cases, the maximum Percent Earned of 200% results when 120% or more of that goal is achieved. Formula B examples: 1. Assumption: Percentage of Goal Achieved = 130% Weighted Percent for that Goal = [(130% - 100%) x 5] + 100% = [30% x 5] + 100% = 150% + 100% Percent Allocated for Goal = 250% However, the maximum target bonus is capped at 200%. 2. Assumption: Percentage of Goal Achieved = 105% Weighted Percent for that Goal = [(105% - 100%) x 5] + 100% = [5% x 5] + 100% = 25% + 100% Percent Allocated for Goal = 125%
PUTTING IT TOGETHER Here are two examples of how an incentive award might be determined under the Plan. Example One: - ----------- Assume that the operating company manager's annual salary is $80,000 and that the manager's target bonus percentage is 20% of base salary. Also, assume actual performance is: Financial goal achievements - 120% of planned Operating Profit, or OP, goals at the operating company - 90% of planned Inventory Reductions, or IR, goals at the operating company - 100% of planned Cost Reductions, or CR goals at the operating company Individual Performance goal achievements - 90% of planned Individual Performance goals, are met The first step in this example is to calculate the impact of the actual financial performance on 80% of the target bonus percentage. Formula B above would be used for weighting OP at the operating company, because more than 100% of that goal was achieved. Formula A on page 5 would be used for weighting the other financial metrics, because 100% or less of those goals were achieved. Under the formulas, the 80% share of the target bonus percentage is adjusted to 96.00% as follows: Page 6
Goal % of Goal Formula Earned % of Goals Target Achieved % Weighting Target* ----- ------ ---------- --------- ------ OP - Operating Company 25% 120% 200% (B) 50.00% IR - Operating Co. 30% 90% 70% (A) 21.00% CR - Operating Co 25% 100% 100% (A) 25.00% --- ------ Goals Total 80% 96.00%
*Earned % of Target = Goal % of Target X Formula Weighting The next step in this example is to calculate the impact of the actual individual performance on 20% of the target bonus percentage. Formula A on page 5 would be used for individual performance, because less than 100% of those goals were achieved. Following the formula, the 20% individual performance share of the target bonus percentage is adjusted to 14%:
Goal % of Goal Formula Earned % of Goals Target Achieved % Weighting Target* ----- ------ ---------- --------- ------ Individual Performance 20% 90% 70% (A) 14%
*Earned % of Target = Goal % of Target X Formula Weighting The sum of the financial performance and individual performance is: Financial Performance Goals 96.00% Individual Performance Goals 14.00% ------ Total Earned Percentage of Target 110.00% The target bonus percentage of 20% is multiplied by 110.00% to produce an adjusted bonus percentage equal to 22.00% of base salary: Earned Percentage of Target 110.00% X Target Bonus Percent 20% --- Equals Percentage of Salary for 22.00% Incentive Award
With this first example, the incentive award would be calculated as 22.00% of the manager's base salary of $80,000, or $17,600. Example Two: - ----------- Assume that the operating company manager's annual salary is again $80,000 and that the manager's target bonus percentage is 20% of base salary but that actual achievements are: Financial goals - 90% of planned Operating Profit, or OP, goals at the operating company - 100% of planned Inventory Reductions, or IR, goals at the operating company - 95% of planned Cost Reductions, or CR goals at the operating company Page 7 Individual Performance goals - 105% of planned Individual Performance goals, are met The first step in this example is to calculate the impact of the actual financial performance on 80% of the target bonus percentage. Formula A on page 5 would be used for weighting all of the financial goals, because 100% or less of those goals were achieved. Under the formula, the 80% share of the target bonus percentage is adjusted to 68.75% as follows:
Goal % of Goal Formula Earned % of Goals Target Achieved % Weighting Target* ----- ------ ---------- --------- ------ OP - Operating Company 25% 90% 70% (A) 17.50% IR - Operating Co. 30% 100% 100% (A) 30.00% CR - Operating Co 25% 95% 85% (A) 21.25% --- ------ Goals Total 80% 68.75%
*Earned % of Target = Goal % of Target X Formula Weighting The next step in this example is to calculate the impact of the actual individual performance on 20% of the target bonus percentage. Formula B on page 6 would be used for individual performance, because over 100% of those goals were achieved. Following the formula, the 20% individual performance share of the target bonus percentage is adjusted 25.00%:
Goal % of Goal Formula Earned % of Goals Target Achieved % Weighting Target* ----- ------ ---------- --------- ------- Individual Performance 20% 105% 125% (B) 25.00%
*Earned % of Target = Goal % of Target X Formula Weighting The sum of the financial performance and individual performance is: Financial Performance Goals 68.75% Individual Performance Goals 25.00% ------ Total Earned Percentage of Target 93.75% The target bonus percentage of 20% is multiplied by 93.75% to produce an adjusted bonus percentage equal to 18.75% of base salary: Earned Percentage of Target 93.75% X Target Bonus Percent 20% --- Equals Percentage of Salary for 18.75% Incentive Award
With this second example, the incentive award would be calculated as 18.75% of the manager's base salary of $80,000, or $15,000. Page 8 ADDITIONAL GUIDELINES FOR THE ANNUAL INCENTIVE PLAN In any year, no annual incentive will be paid if the overall weighted achievement of all goals for an individual is less than 75%. The total of the incentive awards in any given year cannot exceed the greater of: (i) 5% of the Operating Profit of Allegheny Technologies or the operating company, as the case may be, or (ii) 5% of the operating cash flow of Allegheny Technologies or the operating company. If, in any year, awards exceed the greater of: (i) 5% of the Operating Profit, or (ii) 5% of the operating cash flow, awards of the affected company will be reduced to eliminate the excess. DISCRETIONARY ADJUSTMENTS In some cases, the Plan allows for discretionary adjustments of up to +20% or - -20% of an individual's calculated award. However, the sum of discretionary adjustments for all eligible managers of the affected company cannot exceed +5% of the aggregate calculated awards for that company. SOME SPECIAL CIRCUMSTANCES The above formulas generally determine the amount of the incentive award for the year. Other factors that may affect the actual award follow: - - If a manager leaves the company due to retirement, death, or disability, an award will be calculated based on the actual base salary earned during the year in which the manager left--so long as the manager worked at least six months of that year. - - If a manager leaves the company before the end of the plan year for any other reason, the manager will not receive a bonus award for that year. - - If a manager voluntarily leaves the company after the end of the year but before the award is paid, the manager would receive any bonus due unless the employment is terminated for cause. If employment is terminated for cause, the manager would not be entitled to receive an award under the Plan. - - Managers who are hired mid-year may earn a pro-rated award for that year, based on the salary earned during that year. However, managers with less than two months service in a plan year (i.e. hired after October 31) would not be eligible for an award for that year. - - If the manager received an adjustment in base salary due to a change in job position (i.e. other than a merit increase), the manager's base salary for plan purposes will be the sum of: (i) the product of the number of months prior to the adjustment times the rate of monthly base salary immediately prior to the adjustment, and (ii) the product of the number of months after the adjustment times the rate of monthly base salary as of the end of the Plan Year. Page 9 MAKING PAYMENTS All incentive award payments will generally be paid in cash, less applicable withholding taxes, after the year-end audit is complete. This is expected to occur by no later than March 15. ADMINISTRATION DETAILS This summary relates to the Annual Incentive Plan (AIP) of Allegheny Technologies Incorporated and its subsidiaries. The Plan is administered by the Committee, which has full authority to: - - Interpret the Plan; - - Designate eligible participants and categories of eligible participants; - - Set the terms and conditions of incentive awards; and - - Establish and modify administrative rules for the Plan. Plan participants may obtain additional information about the plan and the Committee from: Senior Vice President, General Counsel and Secretary Allegheny Technologies Incorporated 1000 Six PPG Place Pittsburgh PA 15222 5479 Phone: 412-394-2836 Fax: 412-394-2837 The Plan will remain in effect until terminated by the Committee. The Committee may also amend the plan at its discretion. The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and is not "qualified" under Section 401(a) of the Internal Revenue Code. Page 10 EX-10.30 8 j9925901exv10w30.txt INFORMATION STATEMENT EXHIBIT 10.30 [ALLEGHENY TECHNOLOGIES LOGO] INFORMATION STATEMENT FOR AWARDS GRANTED UNDER THE TOTAL SHAREHOLDER RETURN INCENTIVE COMPENSATION PROGRAM OF THE ALLEGHENY TECHNOLOGIES INCORPORATED 2000 INCENTIVE PLAN ---------------------------------------- This document constitutes part of a Prospectus covering securities that have been registered under the Securities Act of 1933. ---------------------------------------- ------------------------------------------------------------------ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense. ------------------------------------------------------------------ January 8, 2002 - -------------------------------------------------------------------------------- ================================================================================================= NAME OF PROGRAM: Allegheny Technologies Incorporated (the "Company") Total Shareholder Return Incentive Compensation Program ("TSRP" or the "Program"). PURPOSE: The primary purposes of the TSRP are to: (i) reward senior executives for the overall success of the Company as determined by the value created for stockholders relative to peer companies; and (ii) provide a means of encouraging Company stock ownership by senior executives. PERFORMANCE PERIOD: A performance period under the TSRP is three years. The initial performance period began January 1, 2001 and will end December 31, 2003. GRANT FREQUENCY: It is anticipated that a new performance period will begin every year, which will create overlapping performance periods. TSRP STRUCTURE: Each participant will be assigned a target number of shares. Participants can earn from 50% (at threshold) to 200% (at maximum) of their target shares based on performance. Performance below threshold will earn 0%. SIZE OF AWARDS: Target awards will be established for each participant, according to the following schedule: ======================================================================== TARGET AWARDS AS POSITION PERCENT OF SALARY ------------------------------------------------------------------------ CEO 60% Segment Executives, Selected Corporate Officers 50% Other Corporate Officers, Selected Business 40% Unit Heads Selected Business Unit General Managers 30%
Targeted Awards will be calculated according to the following formula: Base Salary at x Target Opportunity / Average Closing Price For = Target Beginning of As a Percent of Salary 30 Trading Days Prior to Number of Performance Period Beginning of Three-Year Shares Performance Period Awarded
- -------------------------------------------------------------------------------- 2 PERFORMANCE MEASURE: Performance under the TSRP is calculated as a function of the percentile ranking of ATI's total shareholder return during the performance period (TSR) versus a peer group composed of Companies selected at the beginning of the performance period. For the 2002 - 2004 performance period, the peer companies shall be the companies identified in Appendix A. TSR is the return that a shareholder realizes through stock price appreciation and dividend reinvestment on an equity instrument throughout a specified period. The return for a period is calculated as the stock price at the end of a period plus the dividends paid during the measurement period divided by the stock price at the beginning of the performance period. TSRP PAYOUTS: TSRP payouts are equal to: Target award x Percent of target earned from peer group percentile ranking in TSR PERFORMANCE GOALS: The following table shows the performance reward relationships for the TSRP:
================================================================================================= OUTCOME RELATIVE TO PEER GROUP TSR ------------------------------------------------------------- THREE-YEAR PERCENTILE PERCENT OF TARGET LEVEL OF PERFORMANCE RANKING IN TSR AWARD EARNED - ------------------------------------------------------------------------------------------------- Below Threshold Below 35th percentile 0% Threshold 35th percentile 50% Target 50th percentile 100% Excellent 75th percentile 200% - -------------------------------------------------------------------------------------------------
NOTE: Interpolation between points will be made on a straight-line basis on each scale. Below the 35th percentile (and above the 75th percentile), there will be no interpolation. DIVIDENDS: No dividends will be paid on shares that are not yet earned. FORM AND TIMING OF PAYOUT: All payouts from the TSRP will be made in Company Common Stock, as soon as practicable following the award calculation; however, stock may be withheld in order to satisfy tax withholding requirements.
- -------------------------------------------------------------------------------- 3 CERTAIN TERMINATIONS OF In the event of a participant's death, disability, EMPLOYMENT: or retirement (when the executive is at least 55 years of age with at least five years of service), pro rata awards based on the number of full months worked during that performance period will be calculated. Such awards will be based on goal achievement over the entire performance period. Awards in these situations will be calculated and paid after the end of the performance period. Amounts paid on account of death will be paid to a beneficiary designated by the participant. If no beneficiary has been designated, amounts will be paid to the participant's estate. OTHER TERMINATIONS OF In the event of a termination of employment not EMPLOYMENT: constituting a disability, death or retirement discussed above, the participant will forfeit any right to any payout for all performance periods in progress under the TSRP. For terminations after the end of a performance period, however, but before payout, payout will be made as though the termination had not occurred. TAX CONSIDERATIONS: The employee must report taxable income in the year in which the award is paid. TAX WITHHOLDING: The Company has the right to deduct any taxes or statutory deductions required by law to be withheld from all payments under the TSRP. See "Certain Federal Income Tax Consequences" below. CHANGE IN CAPITALIZATION: The number and kind of shares subject to outstanding awards will be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the TSRP or the awards granted under the TSRP. The Committee shall have the power and sole discretion to determine the amount of the adjustment to be made in each case. CHANGE IN CONTROL: If a Change in Control (as defined in the TSRP) is deemed to have occurred, then all outstanding award cycles will automatically vest and be paid out (with the consent of the Committee, in cash) at the target level or the actual performance level (as of the Change in Control), whichever is larger. - ------------------------------------------------------------------------------- 4 GENERAL INFORMATION ABOUT THE INCENTIVE PLAN AND THE TSRP The Allegheny Technologies Incorporated 2000 Incentive Plan (the "INCENTIVE PLAN") was adopted by the Company's Board of Directors on January 31, 2000 and was approved by the Company's stockholders on May 11, 2000. The purpose of the Incentive Plan is to help attract and retain key employees and promote their commitment to achieving long-term corporate objectives. The Incentive Plan enables the Company to award various types of stock-based compensation. The following summary covers the terms of the Incentive Plan that relate to awards made by the Committee under the TSRP. Because it is a summary, it may not contain all the information that could be important to you. A copy of the complete text of the TSRP is attached to this Information Statement as Appendix A.1 and incorporated herein by reference. At your request, the Company will provide you with a copy of the complete text of the Incentive Plan without charge. See "Where You Can Find More Information." ADMINISTRATION The Personnel and Compensation Committee of the Company's Board of Directors administers the Incentive Plan with respect to participants in the Incentive Plan other than persons who are subject to the provisions of Section 16 of the Securities and Exchange Act of 1934 ("STATUTORY INSIDERS"). The Stock Incentive Award Subcommittee of the Personnel and Compensation Committee administers the Incentive Plan as it applies to the Company's statutory insiders. (The Stock Incentive Award Subcommittee and the Personnel and Compensation Committee are referred to in this Information Statement as the "COMMITTEE"). The Committee has full authority to interpret the Incentive Plan, designate eligible participants and categories of eligible participants, set the terms and conditions of performance awards and establish and modify administrative rules for the Incentive Plan. In addition, the Board of Directors may exercise any of the powers and authority of the Committee under the Incentive Plan. The Committee is comprised of directors who are appointed by and serve at the pleasure of the Company's Board of Directors. ELIGIBILITY You are eligible to receive awards under the Incentive Plan if you are an officer or key employee of the Company or its subsidiaries who has been designated as a participant by the Committee in its sole discretion. STOCK SUBJECT TO THE INCENTIVE PLAN The Company may issue a maximum of up to 10% of its outstanding shares of Common Stock under the Incentive Plan. The Committee may adjust this number in certain instances. The Common Stock offered under the Incentive Plan may be either authorized and unissued shares or issued shares that the Company has reacquired and holds in its treasury. If for any reason an award terminates or expires, the shares of Common Stock covered by the award will again be available for the grant of new awards under the Incentive Plan. - -------------------------------------------------------------------------------- 5 THE TOTAL SHAREHOLDER RETURN INCENTIVE COMPENSATION PROGRAM The Committee adopted Administrative Rules under the Incentive Plan, effective as of January 1, 2001, that establish the TSRP. PROGRAM ELIGIBILITY The Committee has the sole discretion to designate those executives and senior managers who it believes most directly effect the Company's long-term success as eligible for the Program. The Committee makes these determinations and designations based on the recommendations of the Company's Chief Executive Officer (the "CEO"). AWARD AGREEMENTS The terms and conditions of an Award, as established by the Committee, are set forth in a total shareholder return incentive compensation award agreement between the Company and the participant who has been granted the Award. These agreements need not contain similar provisions with respect to Awards made to different participants or Awards made to the same participant at different times. Each award agreement describes: - - The performance period for measuring the achievement of performance objectives, in whole or in part; - - the performance levels for the TSRP, including the target level of performance, to be achieved during the performance period, and the number of shares of Common Stock available to the participant upon achieving the target level of performance (the "TARGET AWARD"); and - - the applicable percentage of the target award that will be paid depending on the extent to which the target level of performance is fully or partially achieved or surpassed (the "PERCENT OF TARGET AWARD EARNED"). For the 2002-2004 performance period, the maximum Award, equal to 200% of your target award, is payable if the Company's three year percentile ranking in TSR is at or above the 75th percentile of the applicable peer group. No Award is paid if the Company's three-year percentile ranking in TSR is below the 35th percentile. PAYMENT OF AWARDS After the end of the award period, the Committee determines the number of shares of Common Stock, if any, to be paid based on the extent to which the target level of performance was fully or partially achieved or surpassed. All payouts will be made as soon as practicable following the award calculation. Generally, however, you will forfeit your right to payment of any Award under the TSRP unless you are continuously an employee of the Company or any of its affiliates from the date of grant of the Award to the date of payment. There are exceptions, however, in the case of retirement, disability or death, as described above. - -------------------------------------------------------------------------------- 6 You do not have the right to vote or receive dividends on the shares or have any other rights of a stockholder with respect to the shares, unless and until the shares are issued to you. NONASSIGNABILITY Awards under the Program are not transferable other than by will or by laws of descent and distribution. During your lifetime, Awards are payable only to you. AMENDMENT AND TERMINATION The Incentive Plan will remain in effect until terminated by the Board of Directors. The Board may at any time amend or terminate the Incentive Plan or the TSRP. Without your consent, no such action may materially impair your rights with respect to awards previously granted to you. MISCELLANEOUS The Committee has the discretion to suspend the payment of an Award if it determines that any of the following actions are necessary or desirable: - - any listing or registration of the shares of Common Stock; - - obtaining any consent or approval of any governmental body; or - - obtaining any other agreement or consent. In that situation, the Award will be suspended until the Committee is satisfied that the applicable action has been completed in a manner satisfactory to the Committee. Also, neither your selection for participation in the Program nor the execution of an award agreement will require the Company to retain your services for any period of time. CERTAIN FEDERAL INCOME TAX CONSEQUENCES This section summarizes the United States federal income tax consequences as of the date of this Information Statement to a participant who is a United States citizen with respect to shares of Common Stock that may be received as payment of an Award under the Program. THE COMPANY URGES YOU TO CONSULT YOUR PERSONAL TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO YOUR PERSONAL CIRCUMSTANCES, CHANGES IN THESE LAWS, AND THE POSSIBLE EFFECT OF OTHER TAXES. GENERAL INFORMATION Payment of Awards will result in ordinary income to you in the years in which the shares of Common Stock are paid to you. The taxable amount is the fair market value (as defined in the Program) of the shares. If you sell the shares you received in payment of an Award, the difference between any amount realized on the sale and the fair market value of these shares at the time they were paid to you will be taxed as capital gain or loss, which will be short-term or long-term, depending on the length of time you held these shares before sale. The holding period for determining short-term or long-term capital gains or losses begins on the date of payment of an Award. - -------------------------------------------------------------------------------- 7 TAX RATES The Award will be treated as supplemental wages that require a minimum of 28% federal income tax withholding. You should also bear in mind that the federal income tax rate on capital gains from sales of property held for less than 12 months (short-term capital gains) generally is the same as your maximum ordinary income rate (maximum marginal federal rate of 39.6%). Also, the tax rate on capital gains from sales of capital assets held for more than 12 months (long-term capital gains) is generally 20%. The capital gains rate applicable to property acquired after December 31, 2000 and held for more than five years is 18%. State income taxes generally apply to the Award and the subsequent sale of the shares, and local income taxes may also be applicable. TAX WITHHOLDING When payments are made to you of amounts awarded under the Program, the Company will notify you of the amount of withholding taxes, if any, which must be paid under federal, state or local law. The Company may, with the consent of the Committee, arrange for payment of the withholding taxes in any one or combination of the following ways: - - accepting your cash payment of the amount; - - reducing the number of shares to be issued to you under the Program by the whole number of shares having a fair market value (as defined in the Program) equal to or greater than the amount the Company is required to withhold. No shares of Common Stock will be delivered to you under the Program until all applicable taxes have been paid in full. RESELLING SHARES The Program and the Incentive Plan generally do not impose restrictions upon the resale of Common Stock that you acquire under the Program. However, under certain circumstances, the Company may refuse to issue shares in connection with the Incentive Plan until it is satisfied that you have complied with applicable laws. RESELLING BY AFFILIATES Under the federal securities laws, if you are deemed to be an "affiliate" of the Company, you are restricted in the resale of your Common Stock (whether acquired under the Incentive Plan or otherwise). For this purpose, an "affiliate" of the Company is any person who controls the Company, is controlled by the Company, or is under common control with the Company, whether directly or indirectly through one or more intermediaries. A corporation's "affiliates" would usually include all persons whose security holdings are substantial enough to affect the corporation's management. Also, all statutory insiders are presumed to be "affiliates." In general, unless specifically registered for resale, shares owned by affiliates can be sold only in compliance with Rule 144 of the Securities and Exchange Commission or another applicable exemption from registration. Among other things, Rule 144 imposes limitations on the amount of securities sold by an affiliate in any three-month period and requires that sales be conducted through a broker. - -------------------------------------------------------------------------------- 8 SECTION 16 - RESTRICTIONS ON STATUTORY INSIDERS In addition, if you are subject to the provisions of Section 16 of the Securities Exchange Act - a "statutory insider" of the Company - you must comply with the reporting and short-swing profit forfeiture provisions of that Section. Section 16(a) contains reporting requirements applicable to statutory insiders. Section 16(b) sets forth rules concerning short-swing profit forfeiture that may require these persons to disgorge profits realized upon the sale and purchase or purchase and sale of Company securities within any six-month period. If you have any questions about the impact of Rule 144 or Section 16 on Awards granted to you under the Program, you should contact the Company at the address or telephone number set forth under the heading "Where You Can Find More Information" or, if appropriate, personal legal counsel. MISCELLANEOUS The Incentive Plan is not a "qualified" plan within the meaning of Section 401(a) of the Internal Revenue Code and is not subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended. WHERE YOU CAN FIND MORE INFORMATION As required by the Securities and Exchange Commission, the Company has filed a Registration Statement on Form S-8 relating to the Incentive Plan. The Registration Statement incorporates by reference certain other documents that the Company files with the Securities and Exchange Commission. Those documents are also incorporated by reference into the prospectus relating to the Incentive Plan that meets the requirements of Section 10(a) of the Securities Act of 1933. This Information Statement is a part of the Section 10(a) prospectus. This means that the Company can disclose important information to you by referring you to the documents incorporated by reference. The information incorporated by reference is an important part of the Section 10(a) prospectus, and information that the Company files later with the Securities and Exchange Commission will automatically update and supersede this information. You may request a free copy of - - the Incentive Plan and the Program, - - the documents incorporated by reference into the Registration Statement and the Section 10(a) prospectus (other than certain exhibits), - - all previously furnished Incentive Plan information documents that constitute part of the Section 10(a) prospectus, and - - the Company's Annual Report to Stockholders for its latest fiscal year, by writing or telephoning the Office of the Senior Vice President, Chief Legal and Administrative Officer of the Company, at Allegheny Technologies Incorporated, 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, or (412) 394-2800 telephone, or (412) 394-2837 fax. - -------------------------------------------------------------------------------- 9 APPENDIX A: LIST OF PEER COMPANIES (2002-2004 PERFORMANCE PERIOD) AK Steel Corporation Oregon Steel Mills Alcan, Inc. Phelps Dodge Corporation Alcoa Inc. Precision Castparts Corporation Brush Engineered Materials Quanex Corporation Carpenter Technology Corporation Reliance Steel and Aluminum Commercial Metals Company RTI International Metals Freeport McMoran Copper & Gold Ryerson Tull, Inc. Gibraltar Steel Special Metals Corporation Inco Limited Steel Dynamics IPSCO Steel, Inc. Titanium Metals Corporation Kaiser Aluminum & Chemical Corporation UCAR International, Inc. KEMET Corporation USX - U.S. Steel Kennametal Inc. Worthington Industries, Inc. Nucor Corporation - -------------------------------------------------------------------------------- A-1 APPENDIX A.1 ALLEGHENY TECHNOLOGIES INCORPORATED 2000 INCENTIVE PLAN ADMINISTRATIVE RULES FOR THE TOTAL SHAREHOLDER RETURN INCENTIVE COMPENSATION PROGRAM EFFECTIVE AS OF JANUARY 1, 2001 ARTICLE I. ADOPTION AND PURPOSE OF THE PROGRAM 1.01 ADOPTION. These rules are adopted by the Personnel and Compensation Committee and the Stock Incentive Award Subcommittee of the Board of Directors as a part of the Allegheny Technologies Incorporated 2000 Incentive Plan (the "Plan") pursuant to the authority reserved in Section 3.01 of the Plan. The Total Shareholder Return Incentive Compensation Program (the "TSRP") shall be the guidelines for making certain Performance Awards or Other Stock-Based Awards under Article VIII of the Plan. Capitalized terms used but not defined in these rules shall have the same meanings as in the Plan. 1.02 PURPOSE. The purposes of the TSRP are (i) to assist the Corporation in retaining and motivating selected key management employees of the Corporation and its subsidiaries who will contribute to the success of the Corporation, (ii) to reward key management employees for the overall success of the Corporation as determined by the value created for shareholders as measured by the percentile performance of Corporation Common Stock relative to a peer group and (iii) to provide a means of encouraging key management employees to acquire and hold shares of Corporation Common Stock. The TSRP encourages key management employees to acquire and hold shares of Corporation Common Stock by offering them an opportunity to receive shares of Common Stock which, in accordance with the terms and conditions set forth below, will be earned only if the sum of the price and yield of the Common Stock measured against the sums of prices and yields of shares of common stock of a peer group of corporations meets or exceeds the performance reward relationships set at the beginning of an Award Period. Awards under the TSRP are intended to act as an incentive to participating key management employees to achieve long-term objectives that will inure to the benefit of all stockholders of the Corporation measured in terms of relative stock prices. ARTICLE II. DEFINITIONS For purposes of these rules, the capitalized terms set forth below shall have the following meanings: 2.01 AWARD AGREEMENT means a written agreement between the Corporation and a Participant or a written acknowledgment from the Corporation specifically setting forth the terms and conditions of a TSR Target Award granted to a Participant pursuant to Article VI of these rules. - -------------------------------------------------------------------------------- A.1-1 2.02 AWARD TARGETS means the percentage of a TSR Target Award which shall be earned for a particular TSR Performance Period at Threshold, Target and Excellent, respectively. 2.03 BOARD means the Board of Directors of the Corporation. 2.04 BUSINESS DAY means any day on which the New York Stock Exchange shall be open for trading. 2.05 CAUSE means a determination by the Committee that a Participant has engaged in conduct that is dishonest or illegal, involves moral turpitude or jeopardizes the Corporation's right to operate its business in the manner in which it is now operated. 2.06 CHANGE IN CONTROL means any of the events set forth below: (a) The acquisition in one or more transactions, other than from the Corporation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Corporation Voting Securities in excess of 25% of the Corporation Voting Securities unless such acquisition has been approved by the Board; or (b) Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (i) persons who were members of the Board on January 1, 2001 and (ii) persons who were nominated for election as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on January 1, 2001; provided, however, that any person nominated for election by the Board at a time when at least two-thirds of the members of the Board were persons described in clauses (i) and/or (ii) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (i); or (c) Approval by the stockholders of the Corporation of a reorganization, merger or consolidation, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be; or (d) Approval by the stockholders of the Corporation of (i) a complete liquidation or dissolution of the Corporation or (ii) a sale or other disposition of all or substantially all the assets of the Corporation. 2.07 COMMITTEE means the Stock Incentive Award Committee of the Board, in the case of individuals who are executive officers of the Corporation, and the Personnel and - -------------------------------------------------------------------------------- A.1-2 Compensation Committee of the Board, in the case of individuals who are not executive officers of the Corporation. 2.08 CORPORATION means Allegheny Technologies Incorporated, a Delaware corporation, and its successors. 2.09 CORPORATION VOTING SECURITIES means the combined voting power of all outstanding voting securities of the Corporation entitled to vote generally in the election of the Board. 2.10 DATE OF GRANT means the date as of which a TSR Target Award is granted in accordance with Article VI of these rules. 2.11 DISABILITY means any physical or mental injury or disease of a permanent nature which renders a Participant incapable of meeting the requirements of the employment performed by such Participant immediately prior to the commencement of such disability. The determination of whether a Participant is disabled shall be made by the Committee in its sole and absolute discretion. Notwithstanding the foregoing, if a Participant's employment by the Corporation or an applicable subsidiary terminates by reason of a disability, as defined in an Employment Agreement between such Participant and the Corporation or an applicable subsidiary, such Participant shall be deemed to be disabled for purposes of the TSRP. 2.12 EFFECTIVE DATE means January 1, 2001. 2.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.14 EXCELLENT means a relative level of achievement of Performance Reward Criteria at which the TSR for the Corporation for a TSR Performance Period is at a percentile of the TSR for the Peer Group for that Performance Period as determined by the Committee under Section 6.02. Excellent shall be the highest level of performance for which a TSRP Reward will be paid. 2.15 FAIR MARKET VALUE means, as of any given date, the average of the closing trading price of the Common Stock on such date as reported on the New York Stock Exchange or, if the Common Stock is not then traded on the New York Stock Exchange, on such other national securities exchange on which the Common Stock is admitted to trade, or, if none, on the National Association of Securities Dealers Automated Quotation System if the Common Stock is admitted for quotation thereon; provided, however, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; provided, further, that if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. 2.16 OUTSTANDING STOCK means, at any time, the issued and outstanding Common Stock. 2.17 PARTICIPANT means any key management employee selected by the Committee, pursuant to Section 5.01 of these rules, as eligible to participate under the TSRP for any one or more TSR Performance Period. - -------------------------------------------------------------------------------- A.1-4 2.18 PEER GROUP means a group of corporations with publicly traded common stock listed on a national securities exchange(s) deemed comparable to the Corporation as the number and identity of such group is determined by the Committee, in its discretion, for a particular TSR Performance Period. In the event of bankruptcy, delisting, merger, spin-off or other special circumstances affecting members of the Peer Group during a Performance Period, the Committee shall make such adjustments in the Peer Group as the Committee determines appropriate in its discretion. The Committee may select the number and identity of members of the Peer Group separately for each TSR Performance Period. 2.19 PERFORMANCE REWARD CRITERIA means the relative standing of the Corporation TSR, expressed in percentiles and ranked at Threshold, Target and Excellent, as compared to the TSR for the Peer Group, in each case for a particular TSR Performance Period. 2.20 PERFORMANCE LEVEL means the level of actual achievement of Performance Reward Criteria for a particular TSR Performance Period. In determining final Performance Levels, the Committee shall use straight-line interpolation between Threshold and Target, Target and Excellent but there shall be no interpolation above Excellent or below Threshold. 2.21 PLAN means the Allegheny Technologies Incorporated 2000 Incentive Plan, as the same may be amended from time to time. 2.22 RETIREMENT means a termination of employment with the Corporation and each subsidiary of the Corporation at or after (i) attaining age 55 and (ii) completing five years of employment with the Corporation and/or any subsidiary of the Corporation. 2.23 TARGET means a relative level of Performance Reward Criteria at which the Corporation TSR for a particular TSR Performance Period is at a percentile of TSR for the Peer Group for that TSR Performance Period as determined by the Committee under Section 6.02. 2.24 THRESHOLD means a relative level of Performance Reward Criteria at which the Corporation TSR for a particular TSR Performance Period is at a percentile of TSR for the Peer Group for that TSR Performance Period as determined by the Committee under Section 6.02. Threshold shall be the lowest level of Performance Reward Criteria for which a Plan Reward will be earned. 2.25 TSR is the percentile ranking of the sum of stock price appreciation of and dividend reinvestment with respect to a share of Corporation Stock as compared to the comparable amount among the Peer Group for a particular TSR Performance Period as calculated on the Fair Market Value of a share of Stock as of the end of the TSR Performance Period plus dividends paid on a share of stock during the TSR Performance Period divided by the Fair Market Value of a share of Stock at the beginning of the TSR Performance Period using the methodology described in item 402(l) of Regulation S-K as promulgated under the Securities Act, as such act or regulation may be amended from time to time, or any successor to either. 2.26 TSRP means the Total Shareholder Return Incentive Compensation Program as set forth in these rules as the same may be amended from time to time. - -------------------------------------------------------------------------------- A.1-4 2.27 TSR PERFORMANCE PERIOD means a three calendar year period beginning on the January 1st designated by the Committee and continuing until the third December 31st thereafter. 2.28 TSR REWARDS means the number of shares of Stock earned for a particular TSR Performance period after application of the Performance Level. 2.29 TSR TARGET AWARD means an award of an opportunity to earn a number of shares of Stock in a TSR Performance Period. The number of shares for a particular Participant shall be determined by the Committee for each TSR Performance Period by dividing the Participant's base salary at the commencement of the TSR Performance Period by the average Fair Market Value for the 30 Business Days preceding the first Business Day of that TSR Performance Period and multiplying the result by a decimal determined appropriate by the Committee based on the Participant's responsibilities and opportunity to contribute to the success of the Corporation. 2.30 STOCK means Common Stock, par value $0.10 per share, of the Corporation. 2.31 WITHHOLDING OBLIGATIONS means the amount of federal, state and local income and payroll taxes the Corporation determines in good faith must be withheld with respect to a TSR Rewards. Withholding Obligations may be settled by the Participant, as permitted by the Committee in its discretion, in shares of Stock otherwise deliverable under the TRSP, cash, previously owned shares of Stock or any combination of the foregoing. - -------------------------------------------------------------------------------- A.1-5 ARTICLE III. ADMINISTRATION In addition to any power reserved to the Committee under Article III of the Plan, the TSRP shall be administered by the Committee, which shall have exclusive and final authority and discretion in each determination, interpretation or other action affecting the TSRP and its Participants. The Committee shall have the sole and absolute authority and discretion to interpret the TSRP, to modify these administrative rules for the TSRP, to select, in accordance with Section 5.01 of these rules, the persons who will be Participants hereunder, to determine all performance criteria, levels of awards and rewards payable, to impose such conditions and restrictions as it determines appropriate and to take such other actions and make such other determinations in connection with the TSRP as it may deem necessary or advisable. ARTICLE IV. STOCK ISSUABLE UNDER THE TSRP 4.01 NUMBER OF SHARES OF STOCK ISSUABLE. Subject to adjustments as provided in Section 11.07 of the Plan, the maximum number of shares of Stock available for issuance under the TSRP shall be 1,500,000. The Stock to be offered under the TSRP shall be authorized and unissued Stock, or Stock which shall have been reacquired by the Corporation and held in its treasury. 4.02 SHARES SUBJECT TO TERMINATED AWARDS. Shares of Stock forfeited as provided in Section 6.03 of these rules may again be issued under the TSRP. ARTICLE V. PARTICIPATION 5.01 DESIGNATION OF PARTICIPANTS. Participants in the TSRP shall be such key management employees of the Corporation or of its subsidiaries as the Committee, in its sole discretion, may designate as eligible to participate in the TSRP for any one or more TSR Performance Periods. No later than 90 days after the commencement of each TSR Performance Period during the term of the TSRP, the Committee shall designate the Participants who are eligible to participate in the TSRP during such TSR Performance Period. The Committee's designation of a Participant with respect to any TSR Performance Period shall not require the Committee to designate such person as a Participant with respect to any other TSR Performance Period. The Committee shall consider such factors as it deems pertinent in selecting Participants. The Committee shall promptly provide to each person selected as a Participant written notice of such selection. ARTICLE VI. GRANTS UNDER THE TSRP 6.01 ANNUAL DETERMINATION REGARDING TSR PERFORMANCE PERIOD. No later than the 60th day of each calendar year, the Committee shall determine whether to establish a TSR Performance Period, provided, however, for a TSR Performance Period established in calendar year 2001, the Committee may make a determination under this Section 6.01 at any time prior to the 90th day of calendar year 2001. 6.02 DETERMINATION OF GRANTS, AWARDS AND PERFORMANCE CRITERIA. For each TSR Performance Period, the Committee shall take the following actions no later than the 90th day of the first calendar year of that TSR Performance Period: - -------------------------------------------------------------------------------- A.1-6 (a) Identify Participants for that TSR Performance Period; (b) Establish the level of the TSR Target Awards for each Participant; (c) Set the Performance Reward Criteria in terms of percentile ranking among the Peer Group for such period at Threshold, Target and Excellent, respectively; (d) Set the Award Targets for Threshold, Target and Excellent; and (e) Determine the Peer Group for that TSR Performance Period. 6.03 TERMINATION OF EMPLOYMENT. If a Participant terminates employment with the Corporation and each subsidiary of the Corporation during a then uncompleted TSR Performance Period for reasons other than death, Disability or Retirement, any TSR Target Award for any then uncompleted TSR Performance Period shall be forfeited automatically and the shares represented by such TSR Target Awards shall again be eligible for awards under these Rules. If a Participant terminates employment with the Corporation and each subsidiary of the Corporation for reasons of death, Disability or Retirement during a then uncompleted TSR Performance Period, the Participant shall be entitled to receive a pro rata Plan Reward for each then uncompleted TSR Performance Period determined: (a) when the TSR Rewards for all other Participants in such TSR Performance Period(s) are determined; (b) based on the actual level of achievement of Performance Reward Criteria for that TSR Performance Period and the Participant's TSR Target Award; (c) pro rated by multiplying the number of shares of Stock the Participant would have received if the Participant completed the TSR Performance Period multiplied by a fraction, the numerator of which is the number of months of such TSR Performance Period completed before the Participant's termination of employment and the denominator is 36; and (d) certificates representing the number determined above shall be delivered at the same time as all other certificates for such TSR Performance Period are delivered to Participants who completed the TSR Performance Period. ARTICLE VII. DETERMINATION OF PERFORMANCE REWARD CRITERIA AND DELIVERY OF STOCK 7.01 DETERMINATION OF ACTUAL ACHIEVEMENT OF PERFORMANCE REWARD CRITERIA. As promptly as administratively feasible but in no event later than the March 1st of the calendar year following last calendar year of each TSR Performance Period, the Committee shall determine the TSR of the Corporation and the average TSR of each member of the Peer Group and determine the Performance Level, if any, at which the Performance Reward Criteria have been achieved. 7.02 DETERMINATION OF PLAN REWARDS. Plan Rewards for a particular TSR Performance Period for a particular participant shall be the result of multiplying that - -------------------------------------------------------------------------------- A.1-7 Participant's TSR Target Award by the Performance Level for that TSR Performance Period determined under Section 7.01. 7.03 DELIVERY OF STOCK CERTIFICATES. As promptly as administratively feasible after the but in no event later than the March 15th of the calendar year following the last calendar year of a TSR Performance Period, the Corporation shall prepare for each Participant due a Plan Reward under Section 7.02 one or more stock certificates registered in the name(s) indicated by such Participant and shall deliver such certificates to the Participant promptly following the Participant's settlement of the Withholding Obligations by placing such certificates or causing such certificates to be placed in the U.S. mail, postage prepaid, to the address indicated by the Participant. ARTICLE VIII. MISCELLANEOUS 8.01 APPLICATION OF PROVISIONS OF PLAN. Except as set forth in these Rules, the provisions of the Plan, including, but not limited to, Article X, the Terms Applicable Generally to Awards Granted under the Plan, shall apply to these Rules and are incorporated herein as if set forth at length. 8.02 CHANGE IN CONTROL. In the event of a Change in Control, Plan Rewards shall be determined for all then uncompleted TSR Performance Periods as of the date of the Change in Control at the greater of (i) the Performance Level actually attained prior to the Change in Control and projected for the remainder of such uncompleted TSR Performance Periods or (ii) Target for each such uncompleted TSR Performance Period and certificates (or, with the consent of the Committee an amount in cash representing the Fair Market Value of such certificates) representing the Plan Rewards shall be delivered to the Participant as soon after the Change in Control as is administratively feasible. 8.03 SECURITIES LAWS AND SECTION 162(m) RESTRICTIONS. Any TSR Award denominated in Common Stock shall be subject to the requirement that if at any time the Committee shall determine that any listing or registration of the shares of Common Stock or any consent or approval of any governmental body or any other agreement or consent is necessary or desirable as a condition to the granting of a TSR Award or issuance of shares of Common Stock or cash in satisfaction thereof, such grant of an award or issuance of shares of Common Stock may not be consummated unless such requirement is satisfied in a manner acceptable to the Committee. It is intended, unless the Committee determine otherwise, that the TSRP comply with Rule 16b-3 as issued by the Securities and Exchange Commission and Section 162(m) of the Code. All interpretations of the TSRP relating to Statutory Insiders shall be consistent with that Rule 16b-3, the Exchange Act and Section 162(m) of the Code. In order to maintain compliance with any of Rule 16b-3, the Exchange Act or the Code, the Committee may adopt such other rules or provide restrictions on outstanding TSR Awards as it in its discretion shall deem necessary and such rules or restrictions shall apply to outstanding TSR Awards as if set forth in the respective TSR Award Agreements. 8.04 INVESTMENT REPRESENTATION. Each TSR Award Agreement may provide that the Participant shall deliver to the Committee upon demand by the Committee a written representation that the shares of Common Stock to be delivered are acquired by the Participant for investment and not for resale or with a view to the distribution thereof. Upon demand, - -------------------------------------------------------------------------------- A.1-8 delivery of such representation prior to the delivery of shares of Common Stock shall be a condition precedent to the Participant's right to receive such shares of Common Stock. 8.05 NO RIGHTS AS STOCKHOLDERS. Participants shall have no rights as shareholders of the Corporation prior to the actual delivery of shares of Common Stock. The existence of these Rules and/or any TSR Awards then outstanding shall not be a bar or affect in any way the power or authority of the Corporation or any of its then stockholders to take any action regarding the Corporation, its assets or its capital structure. 8.06 NON-UNIFORM DETERMINATIONS. The actions and determinations of the Committee need not be uniform and may be taken or made by the Committee selectively among employees or Participants, whether or not similarly situated. 8.07 AMENDMENT AND TERMINATION OF RULES. The Committee shall have complete power and authority to amend or terminate these Rules at any time it is deemed necessary or appropriate. No termination or amendment of the Rules may, without the consent of the Participant to whom any award shall theretofore have been granted under the TSRP, adversely affect the right of such individual under such award; provided, however, that the Committee may, in its sole discretion, make such provision in the Award Agreement for amendments which, in its sole discretion, it deems appropriate. - -------------------------------------------------------------------------------- A.1-9 EX-21.1 9 j9925901exv21w1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The following lists the subsidiaries of Allegheny Technologies Incorporated, excluding those subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. The subsidiaries listed are all wholly owned, either directly or indirectly.
Name of Subsidiary State of Incorporation ------------------ ---------------------- ATI Funding Corporation Delaware Allegheny Ludlum Corporation Pennsylvania TDY Holdings LLC Delaware TDY Industries, Inc. California Jessop Steel Company Pennsylvania AII Acquisition Corp. Delaware ALC Funding Corporation Delaware Oregon Metallurgical Corporation Oregon
EX-23.1 10 j9925901exv23w1.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Allegheny Technologies Incorporated of our report dated January 17, 2003, included in the 2002 Annual Report to Shareholders of Allegheny Technologies Incorporated. We consent to the incorporation by reference in Registration Statement (as may be amended) Nos. 333-08235, 333-10225, 333-10227, 333-10229, 333-10245, 333-46695, 333-45965, 333-48649, 333-59161, 333-46796, 333-54712, and 333-61210 of our report dated January 17, 2003 with respect to the consolidated financial statements of Allegheny Technologies Incorporated, incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young LLP ----------------------------- Pittsburgh, Pennsylvania March 21, 2003 EX-99.1 11 j9925901exv99w1.txt 906 CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Allegheny Technologies Incorporated (the "Company") on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 24, 2003 /s/ James L. Murdy ------------------------------------- James L. Murdy President and Chief Executive Officer Date: March 24, 2003 /s/ Richard J. Harshman -------------------------------------- Richard J. Harshman Senior Vice President-Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----