-----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, NA+i9V7tiK04ZeLW+IBUy4UTzor5z9Nz9lMFn+1tJQMQzuOypuk2MAr53psvmi/v Hd6PuoS3DvuesPIM3IUBiQ== 0000950128-04-000283.txt : 20040315 0000950128-04-000283.hdr.sgml : 20040315 20040315152525 ACCESSION NUMBER: 0000950128-04-000283 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 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: 04669326 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 j0498601e10vk.txt ALLEGHENY TECHNOLOGIES ============================================================================== 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, 2003 [ ] 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 8, 2004, the Registrant had outstanding 80,951,282 shares of its Common Stock. The aggregate market value of the Registrant's voting stock held by non-affiliates at June 30, 2003 was approximately $506 million, based on the closing price per share of Common Stock on that date of $6.60 as reported on the New York Stock Exchange, and at March 8, 2004 was approximately $961 million, based on the closing price per share of Common Stock on that date of $12.38 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 2003 Annual Report to Stockholders - Part I, Part II and Part IV of this Report. Selected portions of the Proxy Statement for 2004 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.......................................................13 Item 3. Legal Proceedings................................................15 Item 4. Submission of Matters to a Vote of Security Holders..............15 PART II.....................................................................16 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................................16 Item 6. Selected Financial Data..........................................16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......16 Item 8. Financial Statements and Supplementary Data......................17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................17 Item 9A. Controls and Procedures..........................................17 PART III....................................................................17 Item 10. Directors and Executive Officers of the Registrant...............17 Item 11. Executive Compensation...........................................18 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................18 Item 13. Certain Relationships and Related Transactions...................18 Item 14. Principal Accountant Fees and Services...........................18 PART IV.....................................................................18 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................18 SIGNATURES..................................................................20 EXHIBIT INDEX...............................................................21 2 PART I ITEM 1. BUSINESS THE COMPANY Allegheny Technologies Incorporated ("ATI") 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 carbon alloy steel impression die forgings and large grey and ductile iron castings. We operate in the following three business segments, which accounted for the following percentages of total revenues of $1.94 billion, $1.91 billion, and $2.13 billion for the years ended December 31, 2003, 2002, and 2001 respectively: 2003 2002 2001 ---- ---- ---- Flat-Rolled Products 54% 55% 51% High Performance Metals 33% 33% 36% Engineered Products 13% 12% 13% 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, 2003 is presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" on pages 10 through 14 of the 2003 Annual Report to Stockholders (the "2003 Annual Report") and in Note 10 of the Notes to Consolidated Financial Statements on pages 52 through 54 of the 2003 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", "ATI", 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 materials products. Our high value products accounted for 68% of total sales in 2003 and our commodity products accounted for 32% of total sales in 2003. 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 generation and distribution, 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 Products 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, and Allegheny Ludlum's 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited ("STAL") and our 50% interest in the industrial titanium joint venture known as Uniti LLC. 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. The remaining 50% interest in Uniti LLC is held by VSMPO-AVISMA, a Russian producer of titanium, aluminum, and specialty steel products. 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. For 2003, approximately 69% by volume of our sheet products are sold to independent service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers. Strip and Precision Rolled Strip(R) Products. 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. For 2003, approximately 10% by volume of our strip products are sold to independent service centers, with the remainder sold directly to end-use customers directly or through our own distribution network. 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. For 2003, approximately 74% by volume of our plate products are sold to service centers, with the remainder sold directly to end-use customers. 4 Silicon Electrical Steel. Our grain-oriented silicon electrical steel products are used generally in applications in which electrical conductivity and magnetic properties are important. 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, and long product forms, such as bar, rod, wire, coil and seamless tube. 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-, and cobalt-based alloys and superalloys and our titanium and titanium-based alloys 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. Engineered Products Segment The principal business of our Engineered Products segment (formerly called the Industrial Products segment) includes the production of tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. The segment also produces carbon alloy steel impression die forgings and large grey and ductile iron castings, and provides precision metals processing services. The operations in this segment are Metalworking Products, Portland Forge, Casting Service and Rome Metals. 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. Processing Services. We have precision metals processing capabilities which enable us to provide process services for most metals from ingots to finished product forms, such services include grinding, polishing, blasting, cutting, flattening, and ultrasonic testing. CAPITAL INVESTMENTS Capital expenditures for 2004 are currently expected to be between $60 and $70 million primarily for operational necessities and for completion of capital programs which commenced in earlier periods. 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 who, 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 alloys and product forms, our technological capabilities including our research and development efforts, our marketing strategies and price. We face competition from both domestic and foreign competitors, some 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. 6 Other major producers of products in each of the business segments are as follows: FLAT-ROLLED PRODUCTS SEGMENT Stainless steel o AK Steel Corporation o J&L Specialty Steel, LLC, owned by Arcelor S.A. (France) o North American Stainless (NAS), owned by Acerinox S.A. (Spain) o Nucor Corporation o Outokumpu Stainless Plate Products, owned by Outokumpu Oyj (Finland) o Imports from - Acesita S.A. (Brazil) - Arcelor S.A. (France) - Columbus Stainless (Pty) Ltd (S. Africa) - Mexinox S.A. de C.V., group member of ThyssenKrupp AG - Slater Steel Inc., owns Atlas Stainless (Canada) - ThyssenKrupp AG (Germany) - Ta Chen International Corporation (Taiwan) HIGH PERFORMANCE METALS SEGMENT Nickel-based alloys and specialty steels o Carpenter Technology Corporation o Special Metals Corporation o ThyssenKrupp VDM, a company of ThyssenKrupp Stainless (Germany) Titanium o Titanium Metals Corporation o RMI Titanium, an RTI International Metals Company o VSMPO - AVISMA (Russia) Exotic Alloys o Cezus, a group member of AREVA (France) o HC Stark, a division of the Bayer Group (Germany) o Western Zirconium Plant of Westinghouse Electric Company, part of the Nuclear Utilities Business Group of British Nuclear Fuels (BNFL) ENGINEERED PRODUCTS SEGMENT Tungsten and Tungsten Carbide Products o Kennametal Inc. o Iscar (Israel) o Sandvik AB (Sweden) o Seco Tools AB (Sweden), owned by Sandvik AB (Sweden) 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 our businesses are adequate. The principal raw materials we use in the production of our specialty materials are scrap (including iron-, 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, vanadium and other alloying materials. 7 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 35,000 tons of nickel each year, a hypothetical increase of $1.00 per pound in nickel prices would result in increased costs of approximately $70 million. In addition, we also use in excess of 270,000 tons of ferrous scrap in the production of our flat-rolled products. During 2003 and entering 2004, ferrous scrap prices have increased significantly. A hypothetical increase of $10.00 per ton would result in increased costs of approximately $2.7 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 - Financial Condition and Liquidity - Debt" on pages 18 and 19 of the 2003 Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk and Other Matters -Forward Looking Statements - Volatility of Prices of Critical Raw Materials; Unavailability of Raw Materials" and " - Volatility of Energy Prices; Availability of Energy Resources" on pages 27 through 28 of the 2003 Annual Report. EXPORT SALES AND FOREIGN OPERATIONS International sales represented approximately 23% of our total annual sales in each of 2003, 2002, and 2001. These figures include export sales by U.S. operations to customers in foreign countries, which accounted for approximately 14%, 15%, and 15%, of our total sales in each of 2003, 2002, and 2001, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk and Other Matters - Forward Looking Statements - Export Sales" on page 30 of the 2003 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 52 through 54 of the 2003 Annual Report for more information regarding international sales activity. For 2003, our sales in the United States and Canada represented 77% and 2%, respectively, of total 2003 sales. Within Europe, our sales to the United Kingdom, Germany, and France represented 5%, 4% and 3%, respectively, of total 2003 sales. Within Asia, our 2003 sales to China and Japan represented 2% and 1%, respectively, of total sales. Our Metalworking Products business manufactures and sells 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 8 capabilities in the United Kingdom and enhances service and responsiveness to customers by providing a sales and distribution network for our Allvac-US produced nickel-based, specialty steel and titanium-based alloys. Our 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 $380.1 million at December 31, 2003 and $412.1 million at December 31, 2002. We expect that approximately 92% of confirmed orders on hand at December 31, 2003 will be fulfilled during the year ending December 31, 2004. Backlog of confirmed orders of the Flat-Rolled Products segment was approximately $66.0 million at December 31, 2003 and $76.3 million at December 31, 2002. We expect that approximately 100% of the confirmed orders on hand at December 31, 2003 for this segment will be fulfilled during the year ending December 31, 2004. Backlog of confirmed orders of the High Performance Metals segment was approximately $270.3 million at December 31, 2003 and $300.0 million at December 31, 2002. We expect that approximately 89% of the confirmed orders on hand at December 31, 2003 for this segment will be fulfilled during the year ending December 31, 2004. 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 Disclosures About Market Risk and Other Matters - Forward Looking Statements - Cyclical Demand for Products" on pages 26 through 27 of the 2003 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, 2003, 2002, and 2001 included the following:
(In millions) 2003 2002 2001 ---- ---- ---- Company-Funded: Flat-Rolled Products $ 2.6 $ 4.1 $ 4.5 High Performance Metals 6.7 5.8 5.0 Engineered Products 2.2 2.1 1.8 ----- ----- ----- $11.5 $12.0 $11.3 ----- ----- ----- Customer-Funded: Flat-Rolled Products $ 0.5 $ 0.6 $ -- High Performance Metals 1.9 2.1 2.0 ----- ----- ----- $ 2.4 $ 2.7 $ 2.0 ----- ----- ----- Total Research and Development $13.9 $14.7 $13.3 ===== ===== =====
9 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. Information related to environmental matters is included in four areas in the Annual Report: under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Contingencies" on pages 22 through 23 of the 2003 Annual Report and "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 page 29 of the 2003 Annual Report and in Notes 1 and 14 of the Notes to Consolidated Financial Statements on page 37, and pages 61 through 64, respectively, of the 2003 Annual Report. EMPLOYEES We have approximately 8,800 employees. A portion of our workforce is covered by various collective bargaining agreements, principally with the United Steelworkers of America ("USWA"), including: approximately 3,000 Allegheny Ludlum production, office 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 100 employees at the Casting Service facility in LaPorte, Indiana. 10 See the discussion of related matters under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk and Other Matters - Forward Looking Statements - Labor Matters" on pages 29 through 30 of the 2003 Annual Report. 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. 11 PRINCIPAL OFFICERS OF THE REGISTRANT* Principal officers of the Company as of March 1, 2004 are as follows:
NAME AGE TITLE - ---- --- ----- Robert P. Bozzone 70 Chairman of the Board and Director L. Patrick Hassey 58 President and Chief Executive Officer and Director Richard J. Harshman 47 Executive Vice President, Finance and Chief Financial Officer Douglas A. Kittenbrink 48 Executive Vice President, ATI Business System and Group Vice President, Engineered Products Segment Dale G. Reid 48 Vice President, Controller, Chief Accounting Officer and Treasurer Jack W. Shilling 60 Executive Vice President, Corporate Development and Chief Technical Officer Jon D. Walton 61 Executive Vice President, Human Resources, Chief Legal and Compliance Officer, General Counsel and Corporate Secretary
- ----------------- * 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. Mr. Bozzone plans to retire as Chairman following the Annual Meeting of Stockholders in May 2004, and to remain a Director. L. Patrick Hassey has been President and Chief Executive Officer since October 1, 2003. He succeeded Mr. James L. Murdy, who retired effective September 30, 2003. Mr. Hassey is a member of the Board of Directors, which plans to name Mr. Hassey as Chairman upon retirement of the current Chairman, Mr. Bozzone, following the Annual Meeting of Stockholders in May 2004. Mr. Hassey was Executive Vice President and a member of the corporate executive committee of Alcoa, Inc. from November 2002 until his early retirement in February 2003. He had served as Executive Vice President of Alcoa and Group President of Alcoa Industrial Components from May 2000 to October 2002. Prior to May 2000, he served as Executive Vice President of Alcoa and President of Alcoa Europe, Inc. Richard J. Harshman has served as Executive Vice President, Finance since October 2003 and Chief Financial Officer since December 2000. Mr. Harshman was Senior Vice President, Finance from December 2001 to October 2003 and Vice President, Finance 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. 12 Douglas A. Kittenbrink has served as Executive Vice President, ATI Business System and Group President, Engineered Products Segment since October 2003. Mr. Kittenbrink was Executive Vice President and Chief Operating Officer from July 2001 to October 2003 and served as President of Allegheny Ludlum from April 2000 to November 2002. Previously, he served as Senior Vice President Manufacturing, Engineering, Information Technology and Production Control of Allegheny Ludlum. Dale G. Reid has served as Vice President, Controller, Chief Accounting Officer and Treasurer since December 2003. Mr. Reid was Vice President, Controller and Chief Accounting Officer from December 2000 through November 2003, as well as from May 1997 to September 2000. In the interim he served as Vice President, Finance for Allegheny Ludlum. He had served as Controller of the Company from August 1996 to September 2000. Jack W. Shilling has served as Executive Vice President, Corporate Development and Chief Technical Officer since October 2003. Dr. Shilling was Executive Vice President, Strategic Initiatives and Technology and Chief Technology Officer from July 2001 to October 2003. He served as President of the High Performance Metals Group from April 2000 to July 2001. Previously he served as President of Allegheny Ludlum. Jon D. Walton has been Executive Vice President, Human Resources, Chief Legal and Compliance Officer, General Counsel and Corporate Secretary since October 2003. Mr. Walton was Senior Vice President, Chief Legal and Administrative Officer from July 2001 to October 2003. Previously, he was Senior Vice President, General Counsel and Secretary. ITEM 2. PROPERTIES Our principal domestic facilities as of December 31, 2003 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 and are in sufficient condition for us to carry on our activities. 13
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 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 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 Richburg, SC other specialty steel long products. (owned/leased) 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. 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)
14
APPROXIMATE SQUARE FOOTAGE FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED) ----------------- ------------- -------------- ENGINEERED 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 France, Germany, Switzerland, United Kingdom, 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. 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. Information relating to legal proceedings is included in the Annual Report under Note 14 of the Notes to Consolidated Financial Statements on pages 61 through 64 of the 2003 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 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 67 of the 2003 Annual Report. Equity Compensation Plan Information Information about our equity compensation plans at December 31, 2003 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 7,081 $ 11.80 3,162 Equity Compensation Plans Not Approved by Shareholders 0 $ 0 0 ------ ------ Total 7,081 3,162 ====== ======
(a) Of these shares, a maximum of 410,000 shares are reserved for existing award periods under 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. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is incorporated by reference to "Selected Financial Data" on pages 67 and 68 of the 2003 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 68 of the 2003 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 Disclosures About Market Risk and Other Matters - Forward Looking Statements - Cyclical Demand for Products" and - - "Product Pricing" and - "Volatility of Prices of Critical Raw Materials; Unavailability of Raw Materials" and - "Volatility 16 of Energy Prices; Availability of Energy Resources" and "- Interest Rate Risk" and - "Export Sales" on pages 26 through 30 of the 2003 Annual Report and Note 1, 2 and 3 of the Notes to Consolidated Financial Statements on pages 38, 40, and 41, respectively of the 2003 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 31 through 66 of the 2003 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as of December 31, 2003, and they concluded that these controls and procedures are effective. There are no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to December 31, 2003. 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 and made part hereof by reference to the material appearing under the heading "Our Corporate Governance" and "Election of Directors" in Allegheny Technologies' Proxy Statement for the 2004 Annual Meeting of Stockholders ("the 2004 Proxy Statement"), which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year. Information concerning the Audit Committee and its financial expert required by this item is incorporated and made part hereof by reference to the material appearing under the heading "Committees of the Board of Directors - Audit Committee" in the 2004 Proxy Statement. Information required by this item regarding compliance with Section 16(a) of the Exchange Act is incorporated and made a part hereof by reference to the material appearing under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2004 Proxy Statement. Information concerning the executive officers of Allegheny Technologies is contained in Part I of this Form 10-K under the caption "Principal Officers of the Registrant". Allegheny Technologies has adopted Corporate Guidelines for Business Conduct and Ethics that apply to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Allegheny Technologies will provide a copy free of charge. To obtain a copy, contact the Corporate Secretary, Allegheny Technologies Incorporated, 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479 17 (telephone: 412-394-2836). The Corporate Guidelines for Business Conduct and Ethics are also available through the Company's web site at http://www.alleghenytechnologies.com. 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 2004 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 2004 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference to "Stock Ownership Information" as set forth in the 2004 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 2004 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by this item is incorporated by reference to "Relationship with Independent Public Accountants" as set forth in the 2004 Proxy Statement. 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 31 through 66 of the 2003 Annual Report are incorporated by reference: Consolidated Statements of Income - Years Ended December 31, 2003, 2002, and 2001 Consolidated Balance Sheets at December 31, 2003 and 2002 Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002, and 2001 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2003, 2002, and 2001 Report of Ernst & Young LLP, Independent Auditors Notes to Consolidated Financial Statements 18 (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. (3) EXHIBITS A list of exhibits included in this Report or incorporated by reference is found in the Exhibit Index beginning on page 21 of this Report and incorporated by reference. (B) CURRENT REPORTS ON FORM 8-K AND FORM 8-K/A: DATE NATURE OF REPORT ---- December 19, 2003 Press Release, dated December 19, 2003, regarding 2004 cost reduction plan, fourth quarter 2003 special charges and 2004 outlook. January 21, 2004 Press Release, dated January 21, 2004, regarding fourth quarter 2003 results of operations and financial condition. February 17, 2004 Press Release, dated February 17, 2004, announcing an agreement to acquire the assets of J&L Specialty Steel, LLC and related Asset Purchase Agreement. February 17, 2004 Amends and restates in its entirety the Report on Form 8-K filed earlier on February 17, 2004, regarding the Press Release, dated February 17, 2004, announcing an agreement to acquire the assets of J&L Specialty Steel, LLC and related Asset Purchase Agreement. March 11, 2004 Press Release, dated March 11, 2004, announcing an unfavorable jury verdict in litigation between TDY Industries, Inc., an ATI subsidiary, and the San Diego Unified Port District concerning a lease of property in San Diego, CA. 19 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 15, 2004 By /s/ L. Patrick Hassey ------------------------------------- L. Patrick Hassey 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 15 day of March, 2004. /s/ L. Patrick Hassey /s/ Richard J. Harshman - -------------------------------- -------------------------------------- L. Patrick Hassey Richard J. Harshman President and Chief Executive Executive Vice President, Finance Officer and Director and Chief Financial Officer (Principal Financial Officer) /s/ Dale G. Reid -------------------------------------- Dale G. Reid Vice President, Controller, Chief Accounting Officer and Treasurer (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/ W. Craig McClelland /s/ William G. Ouchi - -------------------------------- -------------------------------------- W. Craig McClelland William G. Ouchi Director Director /s/ Charles J. Queenan, Jr. /s/ James E. Rohr - -------------------------------- -------------------------------------- Charles J. Queenan, Jr. James E. Rohr Director Director 20 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Asset Purchase Agreement, dated February 16, 2004, by and among J&L Specialty Steel, LLC, Arcelor S.A., Jewel Acquisition LLC, and Allegheny Ludlum Corporation (incorporated by reference to Exhibit 99.2 to the Registrant's Report on Form 8-K/A filed on February 17, 2004). 3.1 Certificate of Incorporation of Allegheny Technologies Incorporated, as amended, (incorporated by reference to Exhibit 3.1 to the Registrant's Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12001)). 3.2 Amended and Restated Bylaws of Allegheny Technologies Incorporated (incorporated by reference to Exhibit 3.2 to the Registrant's Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12001)). 4.1 Revolving Credit and Security Agreement dated June 13, 2003 (incorporated by reference to Exhibit 99.1 to the Registrant's Report on Form 8-K dated June 19, 2003 (File No. 1-12001)). 4.2 Indenture dated as of December 18, 2001 between Allegheny Technologies Incorporated and The Bank of New York, as trustee, relating to Allegheny Technologies Incorporated 8.375% Notes due 2011 (incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12001)). 4.3 Form of 8.375% Notes due 2011 (included as part of Exhibit 4.2). 4.4 Indenture dated as of December 15, 1995 between Allegheny Ludlum Corporation and The Chase Manhattan Bank (National Association), as trustee (relating to Allegheny Ludlum Corporation's 6.95% Debentures due 2025) (incorporated by reference to Exhibit 4(a) to Allegheny Ludlum Corporation's Report on Form 10-K for the year ended December 31, 1995 (File No. 1-9498)), and First Supplemental Indenture by and among Allegheny Technologies Incorporated, Allegheny Ludlum Corporation and The Chase Manhattan Bank (National Association), as Trustee, dated as of August 15, 1996 (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K dated August 15, 1996 (File No. 1-12001)). 4.5 Rights Agreement dated March 12, 1998, including Certificate of Designation for Series A Junior Participating Preferred Stock as filed with the State of Delaware on March 13, 1998 (incorporated by reference to Exhibit 1 to the Registrant's 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 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)).* 21 10.3 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)).* 10.4 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)).* 10.5 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)).* 10.6 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)).* 10.7 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)).* 10.8 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)).* 10.9 Employment Agreement dated August 26, 2003 between Allegheny Technologies Incorporated and L. Patrick Hassey (incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q dated November 4, 2003 (File No. 1-12001)).* 10.10 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)).* 10.11 Amendment to the Amended and Restated Change in Control Severance Agreement between James L. Murdy, dated as of September 30, 2003 (filed herewith).* 10.12 Form of Restricted Stock Agreement dated May 15, 2003 (filed herewith).* 10.13 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)).* 10.14 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)). 22 10.15 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)). 10.16 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)).* 10.17 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)).* 10.18 Total Shareholder Return Incentive Compensation Program effective January 1, 2002 (incorporated by reference to Exhibit 10.30 to the Registrant's Report on Form 10-K for the year ended December 31, 2002 (File No. 1-12001)).* 10.19 Total Shareholder Return Incentive Compensation Program effective January 1, 2003 (filed herewith).* 10.20 Amendment to the Allegheny Technologies Incorporated Pension Plan Amendment effective January 1, 2003 (filed herewith).* 13.1 Pages 9 through that part of page 68 referencing financial data, included in the Annual Report of Allegheny Technologies Incorporated for the year ended December 31, 2003 (filed herewith). 21.1 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 31.1 Certification of Chief Executive Officer required by Securities and Exchange Commission Rule 13a - 14(a) or 15d - 14(a) (filed herewith). 31.2 Certification of Chief Financial Officer required by Securities and Exchange Commission Rule 13a - 14(a) or 15d - 14(a) (filed herewith). 32.1 Certification pursuant to 18 U.S.C. Section 1350 (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. 23 EX-10.11 3 j0498601exv10w11.txt CHANGE IN CONTROL SEVERANCE AGREEMENT EXHIBIT 10.11 AMENDMENT TO THE AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT THIS AMENDMENT TO THE AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Amendment") is made and entered into as of the 30th day of September 2003 by and between ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware company (the "Company"), and JAMES L. MURDY, and individual (the "Executive"). WHEREAS, the Company and the executive are parties to an Amended and Restated Change in Control Severance Agreement as initially effective as of February 10, 2000 and as most recently amended as of March 12, 2003 (as amended and in effect, the "Agreement"); WHEREAS, the Agreement provides the Executive with a number of rights and potential payments in the event of a Change in Control of the Company (as defined in the Agreement); WHEREAS, absent this Amendment, the Agreement would expire on October 1, 2003, the first day of the Executive's scheduled retirement; WHEREAS, the Company and the Executive intend to continue into his retirement the protection provided under the Agreement for the Executive with respect to any accrued but then unpaid installment under the Company's Supplemental Retirement Plan (the "SRP") in the event of a Change in Control, namely, that any accrued but then unpaid amount under the SRP would be paid in a single lump sum cash payment; and WHEREAS, the parties intend to evidence that intention by entering into this Amendment. NOW, THEREFORE, intending to be legally bound and in consideration of the mutual promises hereinafter made, the parties agree as follows: 1. Defined Terms. The initially capitalized terms set forth in the Agreement are incorporated into this Amendment as if set forth at length and shall have the meanings in this Amendment ascribed to them in the Agreement. 2. Term of the Amendment. This Amendment shall be and remain in effect until each and all installments under the SRP are paid to the Executive or his beneficiary either in accordance with the terms of the SRP or as provided in Section 3 of the this Amendment. Without limiting the generality of the foregoing, this Amendment is intended to remain in force and effect after the retirement of the Executive and remain in force indefinitely until all SRP payments have been made in full. 3. Payment of SRP Amounts. Upon the occurrence of a Change in Control, the Company shall pay to the Executive in a single, lump sum cash payment within three (3) business days following occurrence of the Change in Control an amount determined by adding together the face amount of all accrued but then unpaid installments due the Executive (and/or his beneficiary if the Executive has died between his retirement date and the date of the Change in Control) under the SRP. The payment of such amount shall not be conditioned upon any event other than a Change in Control and no demand on behalf of the Executive need be made to make such payment due and payable. 4. Effect on Agreement. Except as modified in this Amendment, the Agreement shall remain in effect and shall be enforceable in accordance with its terms. Without limiting the generality of the foregoing, it is understood by the parties that the Executive shall not and cannot become entitled to a Severance Benefit following a Change in Control that occurs after his retirement. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. ALLEGHENY TECHNOLOGIES INCORPORATED /s/ Jon D. Walton -------------------------------- Senior Vice President, Chief Legal and Administrative Officer JAMES L. MURDY /s/ James L. Murdy ------------------------------- EX-10.12 4 j0498601exv10w12.txt RESTRICTED STOCK AGREEMENT EXHIBIT 10.12 FORM OF AGREEMENT RESTRICTED STOCK AGREEMENT This Restricted Stock Agreement (the "Agreement") made this 15th day of May, 2003 by and among ALLEGHENY TECHNOLOGIES INCORPORATED, a Delaware corporation (the "Corporation") and __________ (the "Executive"). WHEREAS, the Corporation sponsors and maintains the Allegheny Technologies Incorporated Stock 2000 Incentive Plan (the "Incentive Plan"); WHEREAS, on March 12, 2003, the Corporation awarded to the Executive _____ shares of restricted shares of the common stock of the Corporation, $0.10 par value per share, under the Incentive Plan subject to the terms and conditions set forth in this Restricted Stock Agreement (the "Restricted Shares"); and WHEREAS, the Corporation and the Executive desire to evidence the award of the Restricted Shares and the terms and conditions applicable thereto in this Restricted Stock Agreement. NOW THEREFORE, in consideration of the mutual promises and covenants contained herein and intending to be legally bound, the Corporation and the Executive agree as follows: 1. Grant of Restricted Shares. The Corporation hereby grants to the Executive, as of the date first written above the Restricted Shares, subject to the restrictions and other terms and conditions set forth herein. Simultaneously with the execution and delivery of this Agreement, the Executive shall deliver to the Corporation a stock power endorsed in blank relating to the Restricted Shares. As soon as practicable after the Date of Grant, the Corporation shall direct that a stock certificate or certificates representing the Restricted Shares be registered in the name of and issued to the Executive. Such certificate or certificates shall be held in the custody of the Corporation or its designee until the expiration of the applicable Restrictions. Upon any forfeiture, in accordance with Paragraph 4, of the Restricted Shares, the certificate or certificates representing the forfeited Restricted Shares shall be canceled. 2. Restrictions. Executive shall have all rights and privileges of a stockholder of the Corporation with respect to the Restricted Shares, except that the following restrictions shall apply: (a) None of the Restricted Shares may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the "Restriction Period" as defined below. (b) The Restricted Shares are subject to forfeiture during the Restriction Period in accordance with Paragraph 4 of this Agreement. (c) The certificate representing the Restricted Shares shall be held in custody of the Corporation or its designee until the expiration of the applicable Restrictions. (d) Any cash dividends paid with respect to the Restricted Shares shall be delivered to the Corporation and applied to the principal balance of any outstanding loan taken by the Executive in connection with the Corporation's Stock Acquisition and Retention Program (SARP). If the Executive has more than one outstanding loan in connection with SARP, cash dividends first will be applied to the principal balance on the oldest of such loans, then to any outstanding accrued interest on the oldest of such loans provided that such loan is in payment status, and then to the principal balance on the second oldest of such loans and so on. If no SARP loans are outstanding, dividends shall be paid to the Executive. The Executive shall sign the appropriate document to assign the cash dividends on the Restricted Shares to the Corporation. 3. Term of Restriction. (a) Subject to the forfeiture provisions of Paragraph 4 of this Agreement, the Restrictions shall lapse upon the occurrence of the earliest of (i) March 13, 2008, if the Executive is then an employee of the Corporation, (ii) the end of the fiscal year of the Corporation for which the Corporation first reports positive earnings on an earnings per share basis calculated in accordance with generally accepted accounting principles or (iii) as provided in the Incentive Plan, upon death, disability or retirement of the Executive or upon a resignation for Good Reason as defined in Section 4(c) below. (b) The period from the Date of Grant until the lapse of all of the Restrictions with respect to the Restricted Shares is the "Restriction Period" for purposes of this Agreement. (c) As soon as administratively practicable following the lapse of the Restrictions without a forfeiture of the applicable Restricted Shares, and upon the satisfaction of all other applicable conditions as to such Restricted Shares, including, but not limited to, the payment by the Executive of all applicable withholding taxes, if any, the Corporation shall deliver or cause to be delivered to the Executive a certificate or certificates for the applicable Restricted Shares, which shall not be subject to the transfer restrictions set forth above. 4. Forfeiture of Restricted Shares. (a) If Executive's employment with the Corporation or any direct or indirect subsidiary of the Corporation is terminated by the Corporation (or its subsidiary) for "Cause" or by the Executive other than for "Good Reasons," (i) all rights of the Executive to the Restricted Shares which remain subject to the Restrictions shall terminate immediately and be forfeited in their entirety, and (ii) the stock certificate or certificates representing the forfeited Restricted Shares shall be canceled. (b) For purposes of this Agreement, the term "Cause" shall mean a termination for any of the following reasons: (i) the Executive's failure to perform the material duties of his position after receipt of a written notice notifying the Executive of such failure (other than as a result of a physical or mental incapacity and excluding unsatisfactory performance despite the Executive's best efforts to perform his duties); (ii) the Executive's engaging in misconduct that is demonstrably injurious to the Corporation or its direct or indirect subsidiary; (iii) the Executive's conviction for an indictable offense (but excluding traffic violations and any other minor infractions) by a court of competent jurisdiction; (iv) the commission of an act of fraud against, or the misappropriation of property belonging to the Corporation or its direct or indirect subsidiary by the Executive resulting in material adverse harm the Corporation or its direct or indirect subsidiary; (v) the breach of fiduciary responsibility by the Executive resulting in material adverse harm the Corporation or its direct or indirect subsidiary; or (vi) the material breach by the Executive of any confidentiality, non-compete or proprietary information agreement between the Executive and the Corporation or its direct or indirect subsidiary. (c) For purposes of this Agreement, the term "Good Reasons" shall mean a resignation by the Executive of his employment with the Corporation or its direct or indirect subsidiary after the occurrence of any of the following events: (i) a reduction in Executive's job grade from the job grade existing on the Date of Grant without the Executive's written consent; provided, however, the parties agree that a mere change in job titles to a position not less than that consistent with his job grade shall not constitute Good Reason for a resignation; (ii) a relocation of Executive's principal place of employment from the Pittsburgh, Pennsylvania metropolitan area; or (iii) a reduction of Executive's base salary during the Restriction Period, except for across-the-board reductions in base compensation applicable to all similarly situated employees. 5. Legend. During the Restriction Period, the share certificate or certificates evidencing the Restricted Shares shall be endorsed with the following legend (in addition to any legend required under applicable securities laws or any agreement by which the Corporation is bound): THE TRANSFERABILITY OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A RESTRICTED STOCK AGREEMENT ENTERED INTO BY AND BETWEEN ALLEGHENY TECHNOLOGIES INCORPORATED AND THE HOLDER OF THIS CERTIFICATE. A COPY OF SUCH AGREEMENT IS ON FILE AT THE OFFICE OF THE CORPORATION. 6. Withholding. The Corporation or its direct or indirect subsidiary may withhold from any cash amount payable hereunder or any other cash payments due to Executive all taxes, including social security taxes, which the Corporation or its direct or indirect subsidiary is required or otherwise authorized to withhold with respect to the Restricted Shares. Executive will be permitted to satisfy his or her tax withholding obligation by payment of cash to the Corporation or 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. Fair Market Value shall be determined on the date that the Restriction Period ends and shall be defined as stated in the Administrative Rules for the SARP. 7. Adjustments to Number of Shares. Any shares issued to Executive with respect to the Restricted Shares in the event of any change in the number of outstanding common stock of the Corporation through the declaration of a stock dividend or a stock split or combination of shares or any other similar capitalization change shall be deemed to be Restricted Shares subject to all the terms set forth in this Agreement. 8. No Right to Continued Employment; Effect on Benefit Plans. This Agreement shall not confer upon Executive any right with respect to continuance of his or her employment or other relationship, nor shall it interfere in any way with the right of the Corporation or its direct or indirect subsidiary to terminate his or her employment or other relationship at any time. Income realized by Executive pursuant to this Agreement shall not be included in Executive's earnings for the purpose of any benefit plan in which Executive may be enrolled or for which Executive may become eligible unless otherwise specifically provided for in such plan. 9. Executive Representations. In connection with the issuance of the Restricted Shares, Executive represents the following: (a) Executive hereby acknowledges that Executive has been informed that, with respect to the issuance of the Restricted Shares, an election may be filed by Executive with the Internal Revenue Service, within thirty (30) days of the issuance of such Shares, electing pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), to be taxed currently on the fair market value of such Shares on the date of purchase. Executive acknowledges that Executive has sought the advice of Executive's own tax advisors in connection with the issuance of the Restricted Shares and the advisability of filing of such election under Section 83(b) of the Code. EXECUTIVE ACKNOWLEDGES THAT IT IS EXECUTIVE'S SOLE RESPONSIBILITY TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) AND THAT NEITHER THE CORPORATION NOR ANY DIRECT OR INDIRECT SUBSIDIARY OF THE CORPORATION HAS ANY OBLIGATIONS WITH RESPECT THERETO. (b) Executive has reviewed with Executive's own tax advisors, the federal, state, local and foreign tax consequences of this Agreement and the transactions contemplated hereby. Executive is relying solely on such advisors and not on any statements or representations of the Corporation or any of its agents. Executive understands that Executive (and not the Corporation) shall be responsible for Executive's own tax liability that may arise as a result of this Agreement and the transactions contemplated hereby. (c) Executive has received, read and understood this Agreement and the Incentive Plan and agrees to abide by and be bound by their respective terms and conditions. 10. Miscellaneous. (a) Governing Law. This Agreement shall be governed and construed in accordance with the domestic laws of the Commonwealth of Pennsylvania without regard to such Commonwealth's principles of conflicts of laws. (b) Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, permitted assigns, heirs, executors and administrators of the parties hereto. Neither this Agreement nor any rights hereunder shall be assignable or otherwise subject to hypothecation without the consent of all parties hereto. (c) Entire Agreement; Amendment. This Agreement contain the entire understanding between the parties hereto with respect to the subject matter of this Agreement and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, with respect to the subject matter of this Agreement. This Agreement may not be amended or modified without the written consent of the Corporation and Executive (d) Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original and all of which together shall constitute one document. IN WITNESS WHEREOF, the parties have executed this Restricted Shares Agreement as of the date first written above. ALLEGHENY TECHNOLOGIES INCORPORATED By: --------------------------------------- Name: Title: EXECUTIVE ------------------------------------------- EX-10.19 5 j0498601exv10w19.txt INFORMATION STATEMENT EXHIBIT 10.19 [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 1, 2003 - ------------------------------------------------------------------------------- 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 Unit Heads 40% 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 2003 - 2005 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 All payouts from the TSRP will be made in Company Common PAYOUT: Stock, as soon as practicable following the award calculation; however, stock may be withheld in order to satisfy tax withholding requirements. 3 CERTAIN TERMINATIONS In the event of a participant's death, disability, or OF EMPLOYMENT: 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 In the event of a termination of employment not OF 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 The number and kind of shares subject to outstanding CAPITALIZATION: 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: o The performance period for measuring the achievement of performance objectives, in whole or in part; o 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 o 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 2003-2005 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: o any listing or registration of the shares of Common Stock; o obtaining any consent or approval of any governmental body; or o 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 27% 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 for 2003 is 38.6%). 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 generally 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: o accepting your cash payment of the amount; o 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 o the Incentive Plan and the Program, o the documents incorporated by reference into the Registration Statement and the Section 10(a) prospectus (other than certain exhibits), o all previously furnished Incentive Plan information documents that constitute part of the Section 10(a) prospectus, and o 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 (2003-2005 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 Steel Dynamics Inco Limited Titanium Metals Corporation IPSCO Steel, Inc. 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 APPENDIX A.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. A.1-2 APPENDIX A.1 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 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. A.1-3 APPENDIX A.1 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. 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. A.1-4 APPENDIX A.1 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. 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 APPENDIX A.1 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. A.1-6 APPENDIX A.1 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) 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. A.1-7 APPENDIX A.1 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 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. A.1-8 APPENDIX A.1 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, 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-10.20 6 j0498601exv10w20.txt PENSION PLAN EXHIBIT 10.20 AMENDMENT TO THE ALLEGHENY TECHNOLOGIES INCORPORATED PENSION PLAN THIS AMENDMENT IS MADE AS OF JANUARY 1, 2003 to the Base Document of the Allegheny Technologies Incorporated Pension Plan (the "Plan") as a new Section 5.4 thereof and is recorded in this document to evidence the amendment as made by the Personnel and Compensation Committee of the Board of Directors of Allegheny Technologies Corporation at its duly called and held meeting on December 12, 2002 with a quorum acting throughout. 5.4 ALTERNATIVE BENEFIT. Notwithstanding any other provision of this Plan or of this Part, the benefits of the following named individuals shall be equal to the greater of (i) the benefit accrued by or on behalf of such individual under the formula applicable to him as of December 31, 2002 and (ii) the benefit accrued under the service provisions and formula introduced by this Amendment as set forth below. For purposes of determining actuarial equivalence for the following benefits, the factors applicable under Part 24, the TDY Retirement Plan for Salaried Employees ("Part 24") shall be used for the respective purposes indicated in Part 24. For purposes of determining Service of the named individuals solely under the formula introduced by this Amendment, each named individual will be credited with Service for his employment with Allegheny Technologies Incorporated, Allegheny Ludlum Corporation and/or Teledyne, Inc. or any member of the controlled group of corporations that included one or more of those corporations at the time of the named individual's employment with such entity, notwithstanding any cessation of service crediting under any one or more parts of the Plan, but not to exceed 30 years of Service for any of the named individuals. The formula introduced by this Amendment (which is the alternative to the formula applicable to the named individual as of December 31, 2002) calculates an accrued benefit payable in monthly installments commencing at age 65 in the normal form of benefit payable under this Plan, but distributable in any optional form of benefit permitted under Part 24 and subject to the rules otherwise applicable under Part 24 for early or 30 year retirements, except that (i) 30 year retirement payments cannot begin until the named individual with respect to whom the 30 year retirement is payable attains the age of 56 and (ii) at the earlier of attainment of age 62 or the completion of 30 years of service, there is no actuarial reduction for commencement prior to normal retirement age. The formula introduced by this amendment is for the respective named individuals: (1) the number of Years of Service determined under the this Amendment multiplied by (2) the highest rate of monthly Compensation (but not to exceed the limitations on Compensation set forth in Section 401(a)(17) of the Code and in this Part 24) paid to the Named Individual in the 60 month period immediately preceding his retirement multiplied by (3) the factor set forth below as applicable to the particular named individual. The named individuals covered by this Amendment and the factors applicable to the named individuals are: James L. Murdy 3.5% Jack Shilling 3.2% Douglas Kittenbrink 3.2% Jon D. Walton 3.4% Richard Harshman 2.5% Dale Reid 2.5% Robert Park 2.5% provided, however, the Plan Administrator shall cause the benefits determined in accordance with the factors above to be reviewed from time to time and any accrual or benefit which violates any limit set forth in the Plan or in the Code shall be reduced to the extent necessary to cause such benefit or accrual to comply with the applicable provisions of the Plan and the Code. Except as set forth in this Amendment the applicable provisions of the Plan and of Part 24 shall apply in all respects. To record the due adoption of this Amendment as of January 1, 2003, Allegheny Technologies Incorporated has caused this Amendment to be executed by its authorized officer. Allegheny Technologies Incorporated By: /s/ Jon D. Walton ------------------------------ Title: Executive Vice President, Human Resources, Chief Legal and Compliance Officer EX-13.1 7 j0498601exv13w1.txt EXHIBIT 13.1 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 Business conditions remained very difficult in 2003 resulting in a net loss before the cumulative effect of a change in accounting principle for 2003 of $313.3 million, or $3.87 per share, which included after-tax restructuring, litigation and tax charges of $190.5 million. Sales increased 2% to $1,937.4 million for 2003 as higher selling prices, primarily due to the effect of raw material surcharges, offset lower shipments for most of our major products resulting from the continued weakness in many of the markets we serve. Operating results were significantly negatively impacted by higher raw material and energy costs, and increased retirement benefit expenses, which offset $117 million in cost reductions. Operating results included $62.4 million of pretax restructuring charges and a $138.5 million charge to record a valuation allowance for a major portion of our net deferred tax assets. Additionally, on March 10, 2004, we received an unfavorable jury verdict concerning a lease of property in San Diego, CA, and recognized litigation expense of $22.5 million in our 2003 operating results. Demand for commodity stainless steel products remained depressed for most of 2003 due to the continued weakness in the U.S. industrial economy, especially in the non-residential construction and most capital goods markets. This weak demand and pricing environment for products of the Flat-Rolled Products segment, the negative effects of rapidly rising raw material costs on our last-in, first-out ("LIFO") inventory accounting methodology and higher energy costs offset the positive effects of cost reductions and resulted in an operating loss of $14.1 million. Sales for the High Performance Metals segment improved 2% primarily due to strong demand for our exotic materials, especially from the government and chemical processing markets. However, operating profit for the High Performance Metals segment declined 16% to $26.2 million due primarily to continued weak demand for products used in commercial aerospace and land-based turbines for power generation, two key markets for our nickel-based alloys and superalloys and titanium alloys, and rising raw material and energy costs, which offset the positive effects of our cost reduction efforts. Results for the Engineered Products segment improved, as sales increased 6%, and operating profit increased 66% to $7.8 million due to improved demand from the oil and gas markets, plus cost reduction initiatives. Retirement benefit expenses increased $112.6 million in 2003 to $134.4 million due to the severe decline in the equity markets for 2000 through 2002, a lower expected return on benefit plan investments, and a lower discount rate assumption for determining liabilities. Substantially all of the increase in expense was non-cash as we were not required to make a contribution to our pension plan in 2003, and we do not expect to be required to make cash contributions to the defined benefit pension plan for at least the next several years. During 2003, we continued to focus on enhancing our leading market positions, reducing costs, and improving liquidity. Our accomplishments from these important efforts included: - - Significant progress toward the completion in 2004 of our two major strategic capital investments, both of which began in 2002. The first of two new electric arc furnaces for our flat-rolled products melt shop located in Brackenridge, PA began operation in November 2003 and the second furnace is scheduled to be completed in the second half of 2004. The second project is a major upgrade and expansion of our high performance metals long products rolling mill facility located in Richburg, SC, which is expected to begin producing product in the second quarter of 2004. We believe these projects will provide state-of-the-art operating capabilities, increased efficiencies, lower operating costs, and expanded capacity. - - Introduction of a number of new alloys to better serve our customers' needs, demonstrating our ongoing commitment to technology and product development. - - Creation of a new joint venture, Uniti LLC, to accelerate growth and expand our participation in global markets for industrial titanium ingot and mill products. - - Realization of $117 million in gross cost reductions, before the effects of inflation, exceeding our initial 2003 goal of $90 million. A significant portion of these cost reductions resulted from our continuing efforts to streamline processes and improve productivity. During 2003, we reduced our salaried workforce across all of our operations, including the corporate office, by approximately 16%. Overall employment was reduced by 9% in 2003. ATI | Annual Report 2003 | 9 - - Continued success in implementing the ATI Business System, which is driving lean manufacturing throughout our operations. For example, even though costs of our major raw materials increased approximately 27% during 2003, gross inventory increased by less than 1%, reflecting our ATI Business System initiatives. At December 31, 2003, managed working capital was 30.7% of annualized sales compared to 32.4% of annualized sales at 2002 year-end. We define managed working capital as accounts receivable and gross inventories less accounts payable. - - Significant improvement in safety. As a result of our continuing focus on and commitment to safety, in 2003 our OSHA Total Recordable Incident Rate improved by 29% and Lost Time Case Rate improved by 38% compared to 2002. - - Improved and more stable financial liquidity. During the 2003 second quarter, we entered into a $325 million four-year senior secured domestic revolving credit facility. The facility, which replaced a $250 million unsecured facility, is secured by all accounts receivable and inventory of our U. S. operations, and includes capacity for up to $150 million in letters of credit. While there were no borrowings under the secured credit facility during 2003, a portion of the letters of credit capacity is being utilized. Cash flow from operations for 2003 was $82.0 million and cash on hand increased to $79.6 million at December 31, 2003, $20.2 million higher than at the end of 2002. As a result of actions taken in 2003, we believe ATI should benefit from improving business conditions in 2004. Our goal is to achieve profitability in our Flat-Rolled Products segment and improve operating earnings in our High Performance Metals and Engineered Products segments in 2004. Reducing costs will remain a focus, and our 2004 cost reduction objective is $104 million. While retirement benefit expense will again be a significant negative to financial results, it will remain largely non-cash. Retiree medical benefits represent a significant portion of our retirement benefit expense and we are exploring ways to reduce these costs. While we are concerned about raw material and energy price volatility, especially for nickel and natural gas, we are taking actions to manage the impact of this volatility internally and we are increasing selling prices for many of our products. Our current 2004 capital expenditures are expected to be between $60 and $70 million, which is within our forecasted depreciation expense of $72 million. RESULTS OF OPERATIONS Sales were $1.94 billion in 2003, $1.91 billion in 2002 and $2.13 billion in 2001. International sales represented approximately 23 percent of total sales for all years. Operating profit was $19.9 million in 2003, $27.3 million in 2002 and $54.3 million in 2001. Losses before taxes were $280.2 million, $103.8 million and $36.4 million, respectively. These results included restructuring charges and litigation expense in 2003 of $84.9 million, and restructuring charge of $42.8 million and $74.2 million in 2002 and 2001, respectively. Our measure of operating profit, which we use to analyze the results of our business segments, excludes corporate expenses, net interest expense, management transition and restructuring costs, other costs net of gains on asset sales, and retirement benefit expense or income. We believe operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level. A severe decline in the equity markets in 2000 through 2002 and higher benefit liabilities from long-term labor contracts negotiated in 2001 resulted in retirement benefit expenses of $134.4 million in 2003 and $21.8 million for 2002, compared to retirement benefit income of $53.1 million for 2001. Net losses, before the cumulative effect of change in accounting principle, were $313.3 million, $65.8 million and $25.2 million for 2003, 2002 and 2001, respectively. The net loss for 2003 included a $138.5 million charge for a valuation allowance on our net deferred tax assets, pretax restructuring charges of $62.4 million relating to asset impairments in the Flat-Rolled Products segment and workforce reductions across all operating segments and the corporate office, and $22.5 million for litigation expense. As a result of recording the deferred tax valuation allowance, results for 2003 include an income tax provision of $33.1 million, whereas 2002 and 2001 pretax losses were reduced by income tax benefits of $38.0 million and $11.2 million, respectively. 2002 included charges of $42.8 million related to the indefinite idling of our Massillon, OH stainless steel plate facility in the Flat-Rolled Products segment, and workforce reductions. 2001 included charges of $74.2 million for the permanent idling of the Houston, PA melt shop in the Flat-Rolled Products segment, workforce reductions and other asset impairments. Operating results for 2003 and 2002 exclude goodwill amortization expense while 2001 included goodwill amortization expense of $5.8 million. We operate in three business segments: Flat-Rolled Products, High Performance Metals and Engineered Products. These segments represented the following percentages of our total revenues for the years indicated:
2003 2002 2001 ---- ---- ---- Flat-Rolled Products 54% 55% 51% High Performance Metals 33% 33% 36% Engineered Products 13% 12% 13%
10 | Annual Report 2003 | ATI 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) 2003 % Change 2002 % Change 2001 - ------------------------------------------------------------------------------------------------------------ Sales to external customers $ 1,043.5 0.3% $1,040.3 (3.7%) $ 1,080.4 - ------------------------------------------------------------------------------------------------------------ Operating loss (14.1) (64.0%) (8.6) 78.5% (40.0) - ------------------------------------------------------------------------------------------------------------ Operating loss as a percentage of sales (1.4%) (0.8%) (3.7%) - ------------------------------------------------------------------------------------------------------------ International sales as a percentage of sales 13.5% 11.8% 12.0% - ------------------------------------------------------------------------------------------------------------
[ATI FLAT-ROLLED PRODUCTS SHIPPED BAR CHART] (thousands of tons) 99 593 00 609 01 498 02 487 03 478
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, Allegheny Ludlum's 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Co., Limited ("STAL"), and our 50% interest in the industrial titanium joint venture known as Uniti LLC. 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 statement of operations as other income or expense. The remaining 50% interest in Uniti LLC is held by VSMPO-AVISMA, a Russian producer of titanium, aluminum and specialty steel products. We account for the results of the Uniti joint venture using the equity method since we do not have a controlling interest. 2003 Compared to 2002 Sales for the Flat-Rolled Products segment for 2003 were $1,043.5 million, essentially the same as 2002, which was due primarily to the effect of raw material surcharges offsetting lower volumes and base selling prices. Weak demand and base pricing for products of the Flat-Rolled Products segment, especially commodity stainless steel, which persisted for most of 2003, plus the negative effects of rapidly rising raw material costs and higher energy costs resulted in an operating loss of $14.1 million for 2003 compared to an operating loss of $8.6 million in 2002. Finished tons shipped in 2003 declined by 2% to 478,353 tons compared to shipments of 487,335 tons for 2002. The average transaction prices to customers increased by 2% to $2,178 per ton in 2003 due primarily to higher raw materials surcharges, which offset a 4% decline in average base selling prices, which exclude the affect of surcharges. Shipments of commodity products (including stainless steel hot roll and cold roll sheet, stainless steel plate and silicon electrical steel, among other products) decreased 2% while average prices for these products increased 3%. The decline in shipments was primarily attributable to continued depressed demand for commodity stainless steel sheet and plate due to the continued weakness in the U.S. industrial economy, especially in the non-residential construction and most capital goods markets. The increase in average prices was primarily due to higher raw material surcharges, principally for nickel. Commodity stainless steel base selling prices, which exclude surcharges, declined 4% in 2003 compared to 2002. During the same period, consumption in the U.S. of stainless steel strip, sheet and plate products was flat according to the Specialty Steel Institute of North America (SSINA). High-value product shipments in the segment (including strip, Precision Rolled Strip(R), super stainless steel, nickel alloy and titanium products) decreased 1%, while average prices for high-value products were flat. 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 continued to be impacted by the weak U.S. economy in the markets we serve, which negatively affected shipments. Operating results for 2003 were adversely affected by higher raw material costs, which increased significantly in 2003, especially during the second half of the year. For example, the cost of nickel, a major raw material in the production of many stainless steel alloys, increased 97% in 2003 from an average cost of $3.26 per pound for the month of December 2002 to an average cost of $6.43 per pound for December 2003, as priced on the London Metals Exchange. While we were able to offset a significant portion of the increase through raw material surcharges in the pricing of our products, these higher costs had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology. For 2003, we incurred approximately $36 million of expense for these cost increases, including LIFO inventory charges of $27 million and cost increases of $9 million for certain raw materials which are not subject to our surcharges. In addition, natural gas and electricity costs for 2003 were approximately $12 million higher than 2002. ATI | Annual Report 2003 | 11 [APPARENT DOMESTIC CONSUMPTION OF STAINLESS STEEL SHEET AND STRIP BAR CHART] (thousands of tons) 98 1,822 99 1,897 00 1,896 01 1,551 02 1,595 03 1,571
(Source: SSINA) We continued to aggressively reduce costs and streamline our operations. In 2003, we achieved gross cost reductions, before the effects of inflation, of $60 million. Major areas of cost reductions, before the effects of inflation, included $19 million from operating efficiencies, $18 million from procurement, $13 million from lower compensation and fringe benefit expenses, and $10 million from reduced depreciation expense and other fixed cost savings. During 2003, we implemented further workforce reductions of approximately 140 salaried employees representing approximately 13% of the salaried workforce. These workforce reductions were substantially complete by the end of 2003 and resulted in a pretax severance charge of $5 million in 2003. In addition, we indefinitely idled our Washington Flat-Rolled coil facility located in Washington, PA and recorded an asset impairment charge related to the remaining assets located at Houston, PA reflecting projected utilization. These actions resulted in a total pretax, non-cash asset impairment charge of $47.5 million in the 2003 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 pretax cost savings of approximately $10 million. Since 2000, the salaried workforce has been reduced by approximately 41%. We continued to invest to enhance our specialty metals capabilities, increase efficiencies and reduce costs. Our strategic capital investment to upgrade the Brackenridge, PA melt shop, which commenced in 2002 and is expected to cost approximately $35 million, is on schedule. The first of the two new electric arc furnaces began operation in November 2003 and the second furnace is scheduled to be completed in the second half of 2004. Cost savings are estimated to be over $20 million annually after completion of the project. 2002 Compared to 2001 Sales for the Flat-Rolled Products segment decreased 3.7% in 2002 resulting in an operating loss of $8.6 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 pretax charge of $3.9 million in the fourth quarter. During 2002 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 continuing poor demand for wide continuous mill plate products. This action resulted in a pretax, 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 pretax severance charge of $4 million, net of a 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. HIGH PERFORMANCE METALS
(In millions) 2003 % Change 2002 % Change 2001 - ------------------------------------------------------------------------------------------------- Sales to external customers $ 641.7 1.9% $630.0 (18.4%) $ 771.8 - ------------------------------------------------------------------------------------------------- Operating profit 26.2 (16.0%) 31.2 (62.0%) 82.0 - ------------------------------------------------------------------------------------------------- Operating profit as a percentage of sales 4.1% 5.0% 10.6% - ------------------------------------------------------------------------------------------------- International sales as a percentage of sales 34.8% 39.3% 36.0% =================================================================================================
12 | Annual Report 2003 | ATI [ATI NICKEL-BASED AND SPECIALTY STEEL ALLOYS SHIPPED BAR CHART] (thousands of lbs.) 99 43,905 00 46,612 01 51,899 02 35,832 03 35,168
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 alloys and metals, primarily in slab, ingot, billet and long products such as bar, rod, wire, coil and seamless tube. The operations in this segment include Allvac, Allvac Ltd (U.K.) and Wah Chang, which also produces and sells zirconium chemicals. 2003 COMPARED TO 2002 Sales for the High Performance Metals segment increased 1.9% to $641.7 million in 2003 primarily due to strong demand for our exotic materials, especially for the government and chemical processing markets, which offset continued weakness in the commercial aerospace and land-based turbine power generation markets. However, operating profit for the High Performance Metals segment declined 16% to $26.2 million because of lower demand and prices for nickel-based alloys and superalloys, specialty steel alloys and titanium-based alloys, which represent approximately 70% of the segment's sales. In addition, rising raw material costs offset cost reduction efforts. Shipments of nickel-based and specialty steel alloys decreased 2%, while average prices increased 3% due primarily to product mix. Titanium mill products shipments decreased 3% and average prices decreased 3%. Shipments for exotic alloys increased 14% and average prices increased 4%. Backlog of confirmed orders for the segment was approximately $270 million at December 31, 2003 and approximately $300 million at December 31, 2002. [ATI TITANIUM MILL PRODUCTS SHIPPED BAR CHART] (thousands of lbs.) 99 22,792 00 24,798 01 23,070 02 19,044 03 18,436
Operating profit for 2003 was adversely affected by higher raw material costs, which increased significantly in 2003, especially during the second half of the year. These higher costs had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology, resulting in $11.7 million of expense for 2003, compared to $7.4 million of LIFO income in 2002. Operating profit in 2002 was adversely impacted by the effects of a seven month labor strike settled in March 2002 at our Wah Chang operation, which produces our exotic alloys. [ATI EXOTIC ALLOYS SHIPPED BAR CHART] (thousands of lbs.) 99 3,756 00 3,691 01 3,457 02 3,712 03 4,245
We continued to aggressively reduce costs in 2003. Gross cost reductions, before the effects of inflation, for 2003 totaled approximately $45 million. Major areas of cost reductions, before the effects of inflation, included $23 million from operating efficiencies, $13 million from procurement, and $9 million from hourly and salary labor cost savings. During 2003, we implemented further workforce reductions, which affected approximately 200 employees, or 19% of the salaried workforce. In connection with these reductions, which were substantially completed by the end of the year, we recorded charges of $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 pretax cost savings of approximately $10 million. We continued to invest to enhance our specialty metals capabilities, increase efficiencies and reduce costs. Our strategic capital investment to upgrade our long products rolling mill facility located in Richburg, SC, which is expected to cost approximately $46 million, began in 2002 and is expected to start producing product in the second quarter of 2004. The project includes mutual conversion agreements with Outokumpu Oyj's U.S. subsidiary, Outokumpu Stainless, giving us access to process our products at Outokumpu Stainless' facility and Outokumpu Stainless access to process their stainless steel long products at our Richburg facility. 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 alloys and superalloys 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, compared to 2001, were primarily the result of favorable changes in 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, which was settled in March 2002, at our Wah Chang operation, which produces our exotic alloys. ATI | Annual Report 2003 | 13 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 remained strong, we expected 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, we recorded 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. ENGINEERED PRODUCTS
(In millions) 2003 % Change 2002 % Change 2001 - ------------------------------------------------------------------------------------------------------------------- Sales to external customers $ 252.2 6.2% $ 237.5 (13.9%) $ 275.8 - ------------------------------------------------------------------------------------------------------------------- Operating profit 7.8 65.5% 4.7 (61.7%) 12.3 - ------------------------------------------------------------------------------------------------------------------- Operating profit as a percentage of sales 3.1% 2.0% 4.5% - ------------------------------------------------------------------------------------------------------------------- International sales as a percentage of sales 31.0% 29.5% 33.4% ===================================================================================================================
Our Engineered 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 impression die forgings, large grey and ductile iron castings, and provides conversion services for titanium and other specialty metals. The companies in this segment are Metalworking Products, Portland Forge, Casting Service and Rome Metals. In the 2003 fourth quarter, as a result of organization changes, Rome Metals became part of this segment, which was formerly the Industrial Products segment. 2003 COMPARED TO 2002 Sales for the Engineered Products segment increased 6.2%, to $252.2 million in 2003, compared to 2002, and operating profit increased 65.5%, to $7.8 million. Demand for our tungsten products from the oil and gas, medical and automotive markets improved during 2003. Demand also improved for forgings and castings. Segment operating profit improved primarily due to higher sales and the impact of cost reductions, which totaled $9 million in 2003. In the second half of 2003, we announced an additional restructuring of the European operations of Metalworking Products. Restructuring charges of approximately $3 million associated with this consolidation are presented as restructuring costs on the 2003 statement of operations and are not included in segment results. These cost reductions are expected to result in $2 million in annual pretax cost savings. 2002 COMPARED TO 2001 Sales and operating profit for the Engineered Products segment decreased 13.9% and 61.7%, respectively, in 2002, compared to 2001 results. 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 resulted in a 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. CORPORATE EXPENSES Corporate expenses were $20.5 million in 2003 compared to $20.6 million in 2002 and $25.5 million in 2001. Cost controls and reductions in the number of corporate employees that were implemented over this period were offset in 2003 by increased compensation expense associated with our long-term, stock-based compensation plan due to the significant increase in our stock price in the 2003 fourth quarter. INTEREST EXPENSE, NET Interest expense, net of interest income, was $27.7 million for 2003, compared to $34.3 million for 2002 and $29.3 million for 2001. The effect of "receive fixed, pay floating" interest rate swap contracts of $150 million, related to our $300 million of 8.375% 10-year Notes issued in December 2001, decreased interest expense by $6.7 million in 2003 and $4.9 million in 2002, compared to the fixed interest expense of the Notes. Interest expense in 2003 was reduced by $2.1 million from interest capitalization on capital projects. Interest expense is presented net of interest income of $6.2 million for 2003, $3.0 million for 2002 and $1.4 million for 2001. The increases in interest income for 2003 and 2002 primarily relate to interest on settlements of prior years' tax liabilities. 14 | Annual Report 2003 | ATI RESTRUCTURING COSTS Restructuring costs were $62.4 million, $42.8 million and $74.2 million in 2003, 2002 and 2001, respectively. In 2003, we recorded charges of $62.4 million, including $47.5 million for impairment of long-lived assets in the Flat-Rolled Products segment, $11.1 million for workforce reductions across all business segments and the corporate office, and $3.8 million for facility closure charges including present-valued lease termination costs, net of forecasted sublease rental income, at the corporate office. In the 2003 fourth quarter, based on existing and projected operating levels at our remaining operations in Houston, PA and at our Washington Flat Roll coil facility located in Washington, PA, we determined that the net book values of these facilities were in excess of their estimated fair market values based on expected future cash flows. Charges for the Houston facility and the Washington Flat Roll coil facility were recorded to write down the net book values of these facilities to their estimated fair market values. These asset impairment charges do not impact current operations at these facilities. The workforce reductions affected approximately 375 employees across all segments and the corporate office. Approximately $5 million of the severance charges will be paid from the Company's pension plan, and at December 31, 2003, approximately $9 million of the workforce reduction and facility closure charges are future cash costs that will be paid over the next ten years. 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 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 pretax 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 continuing weak demand in the markets we serve, we announced workforce reductions of approximately 665 employees. These workforce reductions were substantially complete by the end of the first half of 2003, and resulted in a pretax, primarily cash, severance charge of $8.4 million, net of a retirement benefits curtailment gain. These expenses are presented as restructuring costs on the statement of operations and are not included in segment results. Of the $42.8 million restructuring charge recorded in 2002, $8.4 million resulted in expenditures of cash. 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 total 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 our corporate office, and were substantially complete by the end of 2001. Of the $74.2 million restructuring charges recorded in 2001, approximately $5 million, resulted in expenditures of cash. At December 31, 2003, substantially all cash expenditures related to the 2002 and 2001 restructuring charges had been paid. OTHER EXPENSES, NET OF GAINS ON ASSET SALES Other expenses, net of gains on asset sales includes charges incurred in connection with closed operations, pretax gains and losses on the sale of surplus real estate, non-strategic investments and other assets, operating results from equity-method investees, minority interest and other non-operating income or expense. These items are presented primarily in selling and administrative expenses, and in other income (expense) in the statement of operations and resulted in net charges of $47.7 million, $11.6 million and $14.8 million in 2003, 2002, and 2001, respectively. In 2003, charges for closed companies related to legal, environmental, insurance and other matters were approximately $30 million higher than in 2002. These charges include $22.5 million related to litigation, as more fully described in Note 14, "Commitments and Contingencies", in the Notes to Consolidated Financial Statements, and which is included in selling and administrative expenses in the consolidated statement of operations; and changes in our estimates of our liability for environmental closure costs and for liabilities under retrospectively-rated insurance programs. In 2002, we recognized a pretax 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. In 2001, a pretax 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. ATI | Annual Report 2003 | 15 RETIREMENT BENEFIT (EXPENSE) INCOME Retirement benefit expenses have increased significantly over the past three years due to lower pension investments as a result of severe declines in the equity markets in 2000 through 2002, and higher benefit liabilities from long-term labor contracts negotiated in 2001. Retirement benefit expense was $134.4 million for 2003 and $21.8 million for 2002, compared to pretax retirement benefit income of $53.1 million for 2001. The increases in retirement benefit expenses have negatively effected both cost of sales and selling and administrative expenses. The effect of retirement benefit (expense) income on cost of sales and selling and administrative expenses for the years ended 2003, 2002 and 2001 were as follows:
(In millions) 2003 2002 2001 - --------------------------------------------------------------------------- Cost of sales $ (94.6) $ (9.9) $ 45.9 - --------------------------------------------------------------------------- Selling and administrative expenses (39.8) (11.9) 7.2 - --------------------------------------------------------------------------- Total retirement benefit expense $ (134.4) $ (21.8) $ 53.1 ===========================================================================
Retirement benefit expenses for 2004 are expected to be approximately $143 million, with effects on cost of sales and selling and administrative expenses similar to 2003. Pension expense is expected to decline to approximately $75 million pretax for 2004 from $92 million for 2003 as actual returns on pension assets in 2003 were higher than expected, partially offset by a lower assumed discount rate to value pension benefit liabilities. The projected rise in medical benefit inflation and lower assumed discount rate is expected to result in postretirement medical expenses of approximately $68 million for 2004 compared to $42 million of 2003. The projected 2004 postretirement medical expense does not include the expected favorable impact of the Medicare Prescription Drug, Improvement and Modernization Act, which was signed into law on December 8, 2003. The Act provides for a federal subsidy, with tax-free payments commencing in 2006, to sponsors of retiree health care benefits plans that provide a benefit that is at least actuarially equivalent to the benefit established by the law. Based upon estimates from our actuaries, we expect that the federal subsidy included in the law will result in a reduction in the Other Postretirement Benefits obligation of up to $70 million. This reduction has not been reflected in the 2003 financial statements or in the 2004 estimated expense because authoritative accounting guidance regarding how the reduction in the obligation is to be recognized in the financial statements is pending. Approximately 76%, or $109 million, of the estimated 2004 retirement benefit expense is expected to be non-cash. INCOME TAXES In the 2003 fourth quarter we recorded a $138.5 million valuation allowance on our net deferred tax asset, based upon the results of our quarterly evaluation concerning the estimated probability that the net deferred tax asset would be realizable. This charge did not affect cash or our ability to utilize any of our deferred tax assets on future tax returns. Our income tax provision (benefit) for 2003, 2002, and 2001 was $33.1 million, $(38.0) million and $(11.2) million, respectively. The income tax benefits recognized in 2002 and 2001 include the effects of cash refunds of income taxes paid in prior years. In 2003 and 2002, we received $65.6 million and $45.6 million, respectively, in income tax refunds, and we recognized $7.2 million of income taxes receivable at December 31, 2003, which we expect to receive in the first half of 2004. Under current tax laws we are limited in our ability to carryback any current year or future tax losses to prior periods to obtain cash refunds of taxes paid during those periods. Current year federal tax losses, if any, can be carried forward for up to 20 years and applied against taxes owed in those future years. As of December 31, 2003, we had a federal income tax net operating loss carryforward deferred tax asset of approximately $29 million, which we are able to carryforward until 2023. 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, 2003, we had a net deferred tax asset of $34.3 million, net of a valuation allowance of $178.8 million, including the $138.5 million 2003 fourth quarter deferred tax valuation allowance and previously recorded deferred tax valuation allowances on state income tax net operating loss carryforwards. A significant portion of our deferred tax asset, prior to the valuation allowance, relates to postretirement employee benefit obligations, which have been recorded in the accompanying financial statements 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. No valuation allowance was required on $34.3 million of net deferred tax assets based upon our ability to utilize these assets within the carryback, carryforward period, including consideration of tax planning strategies that we would undertake to prevent an operating loss or tax credit carryforward from expiring unutilized. We intend to maintain a valuation allowance on the net deferred tax assets until a realization event occurs to support the reversal of all or a portion of the reserve. 16 | Annual Report 2003 | ATI FINANCIAL CONDITION AND LIQUIDITY We believe that internally generated funds, current cash on hand and available borrowings under existing secured credit lines will be adequate to meet foreseeable liquidity needs. We have not borrowed funds under our primary credit facilities during 2003 or 2002. However, a portion of the secured credit facility is utilized to support letters of credit. Our ability to access the credit markets in the future to obtain additional financing, if needed, will be influenced by our credit rating. In December 2003, Standard & Poor's Ratings Services lowered its long-term credit ratings for our debt to BB- from BB and we remained on CreditWatch with negative implications. In February 2004, Moody's Investor Service downgraded our senior implied rating to B1 from Ba3, our $300 million senior unsecured Notes to B3 from B2, and our guaranteed $150 million debentures to B1 from Ba3, while continuing to review our credit ratings for possible downgrades. Changes in our credit rating do not impact our access to, or cost of, our existing credit facilities. We have no off-balance sheet financing relationships with variable interest or structured finance entities. Cash Flow and Working Capital In 2003, cash generated by operations of $82.0 million, asset sales of $9.8 million, and proceeds from financing activities of $27.7 million were used to invest $74.4 million in capital equipment, primarily for two major capital projects (in the Flat-Rolled Products and High Performance Metals segments), pay dividends of $19.4 million, and increase cash balances by $20.2 million, to $79.6 million at December 31, 2003. In 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. Working capital decreased $105.1 million to $348.6 million at December 31, 2003, compared to $453.7 million at December 31, 2002. The current ratio, current assets divided by current liabilities, decreased to 1.9 at December 31, 2003 from 2.3 at December 31, 2002 primarily due to a decrease in net inventories, income tax refunds receivable, and deferred income taxes. [MANAGED WORKING CAPITAL BAR CHART] ($ millions) 00 853 01 719 02 564 03 576
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 2003, managed working capital, which we define as gross inventory plus accounts receivable less accounts payable, increased by $11.8 million to $575.5 million at December 31, 2003. This increase in managed working capital resulted from an increase in accounts receivable due to a higher level of sales in the 2003 fourth quarter compared to the fourth quarter of 2002, and a $3.3 million increase in inventory mostly as a result of higher raw material costs, primarily nickel. Since the end of 2000, we have reduced managed working capital by $277 million, or 33%. The components of managed working capital were as follows:
December 31, December 31, December 31, (In Millions) 2003 2002 2001 - ------------------------------------------------------------------------------------- Accounts receivable $ 248.8 $ 239.3 $ 274.6 Inventory 359.7 392.3 488.9 Accounts payable (172.3) (171.3) (155.3) - ----------------------------------------------------------------------------------- Subtotal 436.2 460.3 608.2 Allowance for doubtful accounts 10.2 10.1 12.3 LIFO reserve 111.7 74.7 77.2 Corporate and other 17.4 18.6 21.0 - ----------------------------------------------------------------------------------- Managed working capital $ 575.5 $ 563.7 $ 718.7 =================================================================================== Annualized prior 2 months sales $ 1,874.0 $ 1,741.0 $ 1,956.0 =================================================================================== Managed working capital as a % of sales 30.7% 32.4% 36.7%
ATI | Annual Report 2003 | 17 Capital expenditures for 2003 were $74.4 million compared to $48.7 million in 2002, as spending increased for our two major strategic capital projects: 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. The first electric arc furnace in the Flat-Rolled Products segment commenced operations in the 2003 fourth quarter. The second furnace is expected to be operational in the second half of 2004, and the high performance metals long products facility is expected to be operational in the second quarter of 2004. Capital expenditures in 2002 were 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 for 2004 are expected to be between $60 and $70 million, with a large portion representing carryover investment in the two major 2003 projects. Debt Total debt outstanding increased $13.0 million, to $532.1 million at December 31, 2003, from $519.1 million at December 31, 2002. The increase was primarily related to $14.7 million of project financing for the High Performance Metals segment rolling mill enhancement capital project. Total debt outstanding is impacted by the fair value of interest rate swap contracts. During 2003, we terminated some of these interest rate swap contracts associated with our 8.375%, ten-year Notes due 2011, and received $15.3 million in cash. The value of these interest rate contracts that were sold remains a component of the reported value of the Notes, and is recognized ratably as a reduction to interest expense over the remaining term of the Notes. At December 31, 2003 and 2002, the accounting treatment required to adjust currently outstanding swap contracts to fair value resulted in the recognition of net assets of $1.4 million and $18.7 million, respectively, on the balance sheet, included in other assets, with an offsetting increase in long-term debt. The debt to capitalization ratio increased to 75.3% at December 31, 2003 from 53.6% at December 31, 2002. The higher ratio results primarily from the decline in stockholders' equity arising from 2003 operating results, including the impact of restructuring and litigation charges, and the recognition of a $138.5 million deferred tax valuation allowance, which was partially offset by reductions in our minimum pension liability of $47.0 million. During the 2003 second quarter, we entered into a $325 million four-year senior secured domestic revolving credit facility ("the secured credit facility" or "the facility"). The facility, which replaced a $250 million unsecured facility, is secured by all accounts receivable and inventory of our U. S. operations, and includes capacity for up to $150 million in letters of credit. As of December 31, 2003, there had been no borrowings made under either the secured credit facility or the former unsecured credit facility since the beginning of 2002. Outstanding letters of credit issued under the secured credit facility were approximately $94 million at December 31, 2003. The secured credit facility limits capital expenditures, investments and acquisitions of businesses, new indebtedness, asset divestitures, payment of dividends, and common stock repurchases which we may incur or undertake during the term of the facility without obtaining permission of the lending group. In addition, the secured credit facility contains a financial covenant, which is not measured unless our undrawn availability under the facility is less than $150 million. This financial covenant, when measured, requires us to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to fixed charges of at least 1.0 to 1.0. EBITDA is adjusted for non-cash items such as income/loss on investments accounted for under the equity method of accounting, non-cash pension expense/income, and that portion of retiree medical and life insurance expenses paid from our VEBA trust. EBITDA is reduced by capital expenditures, as defined in the facility, and cash taxes paid, and increased for cash tax refunds. Fixed charges include gross interest expense, dividends paid and scheduled debt payments. At December 31, 2003, our undrawn availability under the facility, which is calculated including outstanding letters of credit, other uses of credit and domestic cash on hand, was $263 million, and the amount that we could borrow at that date prior to requiring the application of a financial covenant test was $113 million. We expect our undrawn availability will decrease by approximately $22 million in connection with our planned appeal of the unfavorable jury verdict we received on March 10, 2004. During at least the first half of 2004, due to rising raw material prices and improving business volumes, we expect to maintain a lower domestic cash balance from 2003 year end levels, and we may borrow funds from the secured facility from time-to-time to support working capital requirements or investment opportunities. We believe that our available borrowing capacity will be sufficient to meet our requirements. Borrowings under the secured credit facility bear interest at our option at either: (1) the one-, two-, three- or six-month LIBOR rate plus a margin ranging from 2.25% to 3.00% depending upon the level of borrowings; or (2) a base rate announced from time-to-time by the lending group (i.e. the Prime lending rate) plus a margin ranging from 0% to 0.75% depending upon the level of borrowings. In addition, the secured credit facility contains a facility fee of 0.25% to 0.50% depending on the level of undrawn availability. The facility also contains fees for issuing letters of credit of 0.125% per annum and annualized fees ranging from 2.25% to 3.00% depending on the level of undrawn availability under the facility. Our overall borrowing costs under the secured credit facility are not affected by changes in our credit ratings. 18 | Annual Report 2003 | ATI In December 2003, Standard & Poor's Ratings Services lowered its long-term credit ratings for our debt to BB-from BB and we remained on CreditWatch with negative implications. In February 2004, Moody's Investor Service downgraded our senior implied rating to B1 from Ba3, our $300 million senior unsecured Notes to B3 from B2, and our guaranteed $150 million debentures to B1 from Ba3, while continuing to review our credit ratings for possible downgrades. Changes in our credit rating do not impact our access to our existing credit facilities. 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 $5.9 million, which are being amortized over the life of the debt. In 2002, we entered into "receive fixed, pay floating" arrangements for $150 million related to the 8.375% ten-year Notes, which effectively converted this portion of the Notes to variable rate debt. In 2003, some of these interest rate swaps were terminated for $15.3 million in cash. Subsequently in 2003, new "receive fixed, pay floating" interest rate swaps were entered into which re-established the $150 million interest rate swap position. The result of the "receive fixed, pay floating" arrangements for the years ended December 31, 2003 and 2002, was a decrease in interest expense of $6.7 million and $4.9 million, respectively, compared to the fixed interest expense of the Notes that would otherwise be applicable. 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 $ 532.1 $ 27.8 $ 10.1 $ 25.4 $ 468.8 Operating Lease Obligations 47.1 11.9 20.6 8.5 6.1 Other Long-term Liabilities (A) 83.4 -- 51.7 7.6 24.1 Unconditional Purchase Obligations Raw materials (B) 353.9 274.8 79.1 -- -- Capital spending 10.7 10.7 -- -- -- Other (C) 15.0 13.3 1.4 0.3 -- - -------------------------------------------------------------------------------------------- OTHER FINANCIAL COMMITMENTS - -------------------------------------------------------------------------------------------- Lines of Credit (D) $ 374.5 $ 21.5 $ -- $ 351.1 $ 1.9 Guarantees 16.6 -- -- -- -- - --------------------------------------------------------------------------------------------
(A) Other long-term liabilities exclude pension liabilities and accrued postretirement benefits. (B) We have contracted for physical delivery for certain of our raw materials to meet a portion of our needs. These contracts are based upon fixed or variable price provisions. We used current market prices as of December 31, 2003 for raw material obligations with variable pricing. (C) We have various contractual obligations that extend through 2011 for services involving production facilities and administrative operations. Our purchase obligation as disclosed represents the estimated termination fees payable if we were to exit these contracts. (D) Drawn amounts are included in total debt. Includes $94.3 million utilized under the $325 million domestic secured credit facility for standby letters of credit, which renew annually and are used to support: $49.2 million of financing outside of the domestic secured credit facility, primarily for our foreign based operations; $26.9 million in workers compensation and general insurance arrangements; $14.9 million related to environmental matters; $2.1 million related to international trade; and $1.2 million for other legal matters. ATI | Annual Report 2003 | 19 Retirement Benefits As of November 30, 2003, our measurement date for pension accounting, the value of the accumulated pension benefit obligation (ABO) exceeded the value of pension investments by approximately $195 million. A minimum pension liability was recognized in 2002 as a result of a severe decline in the equity markets from 2000 through 2002, higher benefit liabilities from long-term labor contracts negotiated in 2001, and a lower assumed discount rate for valuing the pension liabilities. Accounting standards require that a minimum pension liability be recorded 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 previous overfunded portion of the pension plan, and to record a deferred pension asset for unamortized prior service cost relating to prior benefit enhancements. In the fourth quarter 2003, our adjustment of the minimum pension liability resulted in a $47 million increase to stockholders' equity, presented as other comprehensive income (loss). The recognition of the minimum pension liability in 2002, and the adjustment of the minimum pension liability in 2003 does not affect our reported net loss and does not have a cash impact. 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 2003 annual measurement date, the value of pension investments was $1.8 billion and the ABO was $2.0 billion. Based upon current actuarial analyses and forecasts, the ABO is projected to be $2.0 billion at the 2004 annual measurement date, assuming no changes in the discount rate used to value benefit obligations. We do not expect to be required to make contributions to our U.S. defined benefit pension plan for at least 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. Beginning in the second half of 2001, we began funding certain retiree health care benefits for Allegheny Ludlum using investments held in a Voluntary Employee Benefit Association (VEBA) trust. This allows us to recover a portion of the retiree medical costs. In accordance with our labor agreements, during 2003 and 2002, we funded $14.2 million and $12.7 million, respectively, 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 over $100 million as of November 30, 2003. Other We paid a quarterly dividend of $0.06 per share of common stock during each of the four quarters of 2003 and the fourth quarter of 2002. We paid a quarterly dividend of $0.20 per share of common stock in each of the first three quarters of 2002. On March 11, 2004, the Board of Directors declared a regular quarterly dividend of $0.06 per share of common stock. The dividend will be paid on March 30, 2004, to stockholders of record at the close of business on March 22, 2004. The payment of dividends and the amount of such dividends depends upon matters deemed relevant by our Board of Directors, such as our results of operations, financial condition, cash requirements, future prospects, and any limitations imposed by law, credit agreements or senior securities, and other factors deemed relevant and appropriate. 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. 20 | Annual Report 2003 | ATI 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 $10.2 million at December 31, 2003 and $10.1 million at December 31, 2002, which represented 3.9% and 4.1%, respectively, of total gross accounts receivable. During 2003, we recognized expense of $2.2 million to increase the reserve for doubtful accounts and wrote-off $2.1 million of uncollectible accounts, which reduced the reserve. Inventories At December 31, 2003, we had net inventory of $359.7 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. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these material and other costs may have been incurred at significantly different values. In a period when raw material or other costs are extremely volatile, the use of the LIFO inventory method may result in cost of sales expense which is not indicative of cash costs. In a period of rising prices, cost of sales expense is typically higher than the cash costs, and inventory as presented on the balance sheet is typically lower than it would be under most alternative costing 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, 2003, 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. 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. Changes in the expected use of a long-lived asset group, and the financial performance of the long-lived asset group and its operating segment, are evaluated as indicators of possible impairment. Future cash flow value may include appraisals for property, plant and equipment, land and improvements, future cash flow estimates from operating the long-lived assets, and other operating considerations. At December 31, 2003, we had $198 million of goodwill on our balance sheet. Changes in the goodwill balance from 2002 are due to foreign currency translation. Of the total, $112 million related to the Flat-Rolled Products segment, $61 million related to the High Performance Metals segment, and $25 million related to the Engineered 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 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. Subsequent to our adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002, we perform our annual evaluation of goodwill for possible impairment during the fourth quarter. Our evaluation of goodwill for possible impairment includes estimating the fair market value of each of the reporting units which have goodwill associated with their operations using discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any. These valuation methods require us to make estimates and assumptions regarding future operating results, cash flows including changes in working capital and capital expenditures, selling prices, 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. Based upon the transition and annual impairment analyses, no goodwill impairment was determined to exist. ATI | Annual Report 2003 | 21 Income Taxes Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, or differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits (assets) or costs (liabilities) to be recognized when those temporary differences reverse. We evaluate on a quarterly basis whether, based on all available evidence, we believe that our deferred income tax assets will be realizable. Valuation allowances are established when it is estimated that it is probable (more likely than not) that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Future realization of deferred income tax assets ultimately depends upon the existence of sufficient taxable income within the carryback, carryforward period available under tax law. The recognition of a valuation allowance is recorded as a non-cash charge to the income tax provision with an offsetting reserve against the deferred income tax asset. Should we generate pretax losses in future periods, a tax benefit would not be recorded and the valuation allowance recorded would increase. Under these circumstances the net loss recognized and net loss per share for that period would be larger than a comparable period when a favorable tax benefit was recorded. However, tax provisions or benefits would continue to be recognized, as appropriate, on state and local taxes, and taxes related to foreign jurisdictions. The recognition of a valuation allowance does not affect our ability to utilize the deferred tax asset in the future. The valuation allowance could be reduced or increased in future years if the estimated realizability of the deferred income tax asset changes, based upon consideration of all available evidence, including changes in the carryback period available under tax law. At December 31, 2003, we had a net deferred income tax asset, net of deferred income tax liabilities, of $34.3 million. This net deferred income tax asset is presented net of the $138.5 million valuation allowance recognized in the 2003 fourth quarter, and valuation allowances for certain state tax benefits that are not currently expected to be realized. A significant portion of our deferred income tax asset relates to postretirement employee benefit obligations, which have been recognized for financial reporting purposes but are not deductible for income tax reporting purposes until the benefits are paid. These benefit payments are expected to occur over an extended period of years. We have not had a federal net operating loss or tax credit carryforward expire unutilized. Contingencies When it is probable that a liability has been incurred or an asset has been impaired, we recognize a loss 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 33 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 15 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. 22 | Annual Report 2003 | ATI 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, 2003, 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 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 operations. 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 U.S. defined benefit pension plan in more than seven years. We are not required to make a contribution to the U.S. defined benefit pension plan for 2004, and, based upon current actuarial analyses and forecasts, we do not expect to be required to make cash contributions to the U.S. defined benefit pension plan for at least the next several years. We account for our defined benefit pension plans in accordance with SFAS 87, which requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. A significant element in determining our pension (expense) income in accordance with SFAS 87 is the expected investment return on plan assets. In establishing the expected return on plan investments, which is reviewed annually in the fourth quarter, we take into consideration input from our third party pension plan asset managers and actuaries regarding the types of securities the plan investments are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. For 2003, in light of the declines in the equity markets in 2000 through 2002, which comprise a significant portion of our pension plan investments, we lowered our expected return on pension plan investments to 8.75%, from a 9% expected return on pension plan investments which was used in 2002. This assumed rate is applied to the market value of plan assets at the end of the previous year. This produces the expected return on plan assets that is included in annual pension (expense) income for the current year. While the actual return on pension plan investments for 2003 was 13.1%, our expected return on pension plan investments for 2004 remains at 8.75%. The effect of increasing, or lowering, the expected return on pension plan investments by 0.25% results in additional annual income, or expense, of approximately $4 million. The cumulative difference between this expected return and the actual return on plan assets is deferred and amortized into pension income or expense over future periods. The expected return on plan assets can vary significantly from year-to-year since the calculation is dependent on ATI | Annual Report 2003 | 23 the market value of plan assets as of the end of the preceding year. Accounting principles generally accepted in the United States allow companies to calculate the expected return on pension assets using either an average of fair market values of pension assets over a period not to exceed five years, which reduces the volatility in reported pension income or expense, or their fair market value at the end of the previous year. However, the Securities and Exchange Commission currently does not permit companies to change from the fair market value at the end of the previous year methodology, which is the methodology that we use, to an averaging of fair market values of plan assets methodology. As a result, our results of operations and those of other companies, including companies with which we compete, may not be comparable due to these different methodologies in calculating the expected return on pension investments. If the five year average of the fair market values of plan assets had been used to calculate retirement benefit costs, we estimate that retirement benefit expense for 2003 would have been approximately $100 million less than the $134 million expense recognized using the fair market value approach. At the end of November of each year, we determine the discount rate to be used to value pension plan liabilities. In accordance with SFAS 87, the discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we receive input from our actuaries regarding the rates of return on high quality, fixed-income investments with maturities matched to the expected future retirement benefit payments. Based on this assessment at the end of November 2003, we established a discount rate of 6.5% for valuing the pension liabilities as of the end of 2003, and for determining the pension expense for 2004. We had previously assumed a discount rate of 6.75% for 2002, which determined the 2003 expense, and 7% for 2001, which determined the 2002 expense. The effect of lowering the discount rate to 6.5% increased pension liabilities by approximately $62 million at 2003 year-end, and is expected to increase pension expense by $4 million in 2004. The effect on pension liabilities for changes to the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, are deferred and amortized over future periods in accordance with SFAS 87. Accounting standards require a minimum pension liability be recorded when the value of pension assets is less than the accumulated benefit obligation ("ABO") at the annual measurement date. As of November 30, 2003, our measurement date for pension accounting, the value of the accumulated pension benefit obligation (ABO) exceeded the value of pension investments by approximately $195 million. In the 2002 fourth quarter, as a result of a severe decline in the equity markets in 2000 through 2002, higher benefit liabilities from long-term labor contracts negotiated in 2001, and a lower assumed discount rate for valuing the pension liabilities, we recorded a non-cash charge against stockholders' equity of $406 million, net of deferred taxes, to write off our prepaid pension cost representing the previous overfunded portion of the pension plan, and to record a deferred pension asset of $165 million for the unamortized prior service cost relating to prior benefit enhancements. In the fourth quarter of 2003, our adjustment of the minimum pension liability resulted in a $47 million increase to stockholders' equity, presented as Other Comprehensive Income (Loss). The recognition of the minimum pension liability in 2002, and the adjustment of minimum pension liability in 2003 does not affect our reported net loss and does not have a cash impact. In accordance with accounting standards, the charge against stockholders' equity will be adjusted in the fourth quarter of subsequent years to reflect the value of pension assets compared to the ABO as of the end of November. If the level of pension assets exceeds the ABO as of a future measurement date, the full charge against stockholders' equity would be reversed. We also sponsor several 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. For the non-collectively bargained plans, we maintain the right to amend or terminate the plans in the future. We account for these benefits in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), which requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as benefits are paid. We use actuarial assumptions, including the discount rate and the expected trend in health care costs, to estimate the costs and benefits obligations for the plans. The discount rate, which is determined annually at the end of November of each year, is developed based upon rates of return on high quality, fixed-income investments. At the end of 2003, we determined this rate to be 6.5%, a reduction from a 6.75% discount rate in 2002 and a 7% discount rate in 2001. The effect of lowering the discount rate to 6.5% from 6.75% increased 2003 postretirement benefit liabilities by approximately $22 million, and 2004 expenses are expected to increase by approximately $3 million. Based upon significant cost increases quoted by our medical care providers and predictions of continued significant medical cost inflation in future years, the annual assumed rate of increase in the per capita cost of covered benefits for health care plans was 10.4% for 2004 and was assumed to gradually decrease to 5.0% in the year 2014 and remain level thereafter. 24 | Annual Report 2003 | ATI The Other Postretirement Benefits obligation at end of year 2003, does not include the expected favorable impact of the Medicare Prescription Drug, Improvement and Modernization Act, which was signed into law on December 8, 2003. The Act provides for a federal subsidy, with tax-free payments commencing in 2006, to sponsors of retiree health care benefits plans that provide a benefit that is at least actuarially equivalent to the benefit established by the law. Based upon estimates from our actuaries, we expect that the federal subsidy included in the law will result in a reduction in the Other Postretirement Benefits obligation of up to $70 million. This reduction is not reflected in the 2003 financial statements or in estimates of 2004 expense because authoritative accounting guidance regarding how the benefit is to be recognized in the financial statements is pending. Certain of these postretirement benefits are funded using plan investments held in a VEBA trust. The expected return on plan investments is a significant element in determining postretirement benefits expenses in accordance with SFAS 106. In establishing the expected return on plan investments, which is reviewed annually in the fourth quarter, we take into consideration the types of securities the plan investments are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. For 2003, as a result of a reduction in the percentage of the VEBA's private equity investments, we lowered our expected return on investments held in the VEBA trust to 9%. A 15% return on investments was assumed in prior years. This assumed long-term rate of return on investments is applied to the market value of plan investments at the end of the previous year. This produces the expected return on plan investments that is included in annual postretirement benefits expenses for the current year. The effect of lowering the expected return on plan investments resulted in an increase in annual postretirement benefits expense of approximately $7 million for 2003. Our expected return on investments in the VEBA trust remains 9% for 2004. 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, are 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 resulted in a charge of $1.3 million, net of tax, or $0.02 per share, which was recognized in our first quarter 2003 statement of operations as a cumulative change in accounting principle, primarily 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 was effective January 1, 2003 for all exit or disposal activities initiated after that date. We adopted this standard at January 1, 2003. As a result of adopting this standard, our 2003 restructuring charge of $3.8 million related to lease termination costs at the corporate office includes a discounted present value of lease termination costs, net of sublease estimates, as required by SFAS 146. Restructuring expense that will be recognized over the next several years based on present-valued amounts and these assumptions is approximately $0.7 million, in total. 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, 2003, we had no material guarantees as defined in FIN 45. In December 2003, the FASB issued a revised 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. VIEs that are considered to be special purpose entities require recognition under FIN 46 in the 2003 fourth quarter. FIN 46, as revised, is applied to all other VIEs in the 2004 first quarter. As of December 31, 2003, we had no interests in entities qualifying as VIEs, and therefore we were not impacted by any of the recognition provisions of FIN 46. ATI | Annual Report 2003 | 25 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND OTHER MATTERS Board of Directors On May 28, 2003, we announced that Brian P. Simmons resigned from our Board of Directors. On January 6, 2004, we announced that George J. Kourpias resigned from our Board of Directors for health reasons, effective December 31, 2003. On July 10, 2003, L. Patrick Hassey became a member of the Board of Directors. On that date, ATI's Board of Directors selected Mr. Hassey to become President and Chief Executive Officer, effective October 1, 2003, succeeding James. L. Murdy, who retired effective September 30, 2003. Effective upon his retirement on September 30, 2003, Mr. Murdy resigned from our Board of Directors. On January 14, 2004, we announced that Robert P. Bozzone would retire as of Chairman of the Board of Directors, effective after the Annual Meeting of Stockholders in May 2004. Upon Mr. Bozzone's retirement, the Board of Directors plans to name L. Patrick Hassey, 58, Chairman, in addition to his responsibilities as President and Chief Executive Officer. Mr. Bozzone will remain a director of ATI. J&L Specialty Steel Transaction On February 17, 2004, we announced that an Asset Purchase Agreement was signed with Arcelor S. A. ("Arcelor") and J&L Specialty Steel, LLC under which a wholly owned ATI subsidiary will acquire substantially all of the assets of J&L Specialty Steel. The transaction, which is targeted for closing on May 3, 2004, is conditioned upon completion of due diligence, the successful negotiation of new collective bargaining agreements with the USWA at both Allegheny Ludlum and J&L Specialty Steel, approval by ATI's secured lenders, and customary regulatory approvals. J&L Specialty Steel is a leading manufacturer of flat-rolled stainless steel products, and is a wholly owned subsidiary of Arcelor. The purchase price for the assets acquired will be determined under the Asset Purchase Agreement based upon the net working capital of J&L Specialty Steel, and will include $7.5 million in cash at closing, up to $7.5 million payable in one year, and the remaining amount payable in installments through 2011. 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: CYCLICAL DEMAND FOR PRODUCTS. The cyclical nature of the industries in which our customers operate cause demand for our 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. Partly as a result of weak general economic conditions in the markets we serve that have caused demand for our products to decrease, we have experienced operating and net losses, and our financial condition has been adversely affected. These conditions could continue, adversely affecting our ability to produce and sell our products profitably. 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 have been adversely affecting the airline industry have resulted in overall reduced demand 26 | Annual Report 2003 | ATI 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. PRODUCT PRICING. The recent 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. Intense competition and excess manufacturing capacity in the commodity stainless steel industry have resulted in reduced prices, excluding raw material surcharges, for many of our stainless steel products. As a result of these factors, our revenues, operating results and financial condition have been and may continue to be adversely affected. Although inflationary trends in recent years have been moderate, during the same period certain critical raw material costs, such as nickel and scrap containing iron and nickel, have been volatile. We primarily use the LIFO 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 and indices on many of our products to the extent permitted by competitive factors in the marketplace. 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 any price increases may be delayed due to long manufacturing lead times and the terms of existing contracts. 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. While we enter into raw materials futures contracts from time to time to hedge exposure to price fluctuations, such as for nickel, 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 our ability to institute such 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 we generally use in excess of 35,000 tons of nickel each year, a hypothetical change of $1.00 per pound in nickel prices would result in increased costs of approximately $70 million. In addition, we also use in excess of 270,000 tons of ferrous scrap in the production of our Flat-Rolled products. During 2003 and entering into 2004, ferrous scrap prices have increased significantly. A hypothetical change of $10.00 per ton would result in increased costs of approximately $2.7 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. 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 ATI | Annual Report 2003 | 27 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. SUBSTANTIAL DEBT RELATIVE TO EQUITY. We have a substantial amount of debt relative to our equity capitalization, which increases our vulnerability to adverse economic and industry conditions, limits our ability to obtain additional financing, makes it potentially more difficult to pay dividends as we have in the past, limits our flexibility in planning for or reacting to changes in our industry, and places us at a competitive disadvantage when compared to competitors with less relative amounts of debt. RISKS ASSOCIATED WITH RETIREMENT BENEFITS. Our U.S. defined benefit pension plan was funded in accordance with ERISA as of December 31, 2003. Based upon current actuarial analyses and forecasts, we do not expect to be required to make contributions to the defined benefit pension plan for at least the next several years. However, a 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 2001 and prior years, our U.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 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 from 2000 through 2002, the pension funded status at the beginning of 2004 is substantially below the threshold required for reimbursement of retiree medical costs in 2004. The ability to resume reimbursement from pension assets for retiree health care costs in future periods 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 2003, we were able to fund $14.2 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. RISKS ASSOCIATED WITH ACCESSING THE CREDIT MARKETS. Our ability to access the credit markets in the future to obtain additional financing, if needed, is influenced by the Company's credit rating. In December 2003, Standard & Poor's Ratings Services lowered its long-term credit ratings for our debt to BB- from BB and we remained on CreditWatch with negative implications. In February 2004, Moody's Investor Service downgraded our senior implied rating to B1 from Ba3, our $300 million senior unsecured Notes to B3 from B2, and our guaranteed $150 million debentures to B1 from Ba3, while continuing to review our credit ratings for possible downgrades. Changes in our credit rating do not impact our access to our existing credit facilities. CREDIT AGREEMENT COVENANT. The agreement governing our secured 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 a financial ratio when our available borrowing capacity measured under the credit agreement decreases below $150 million. Our ability to comply with the financial covenant may be affected by events beyond our control and, as a result, we may be unable to comply with the covenant, which may adversely affect our ability to borrow under our secured credit facility if the availability level is below $150 million. 28 | Annual Report 2003 | ATI 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, 2003, including the effect of interest rate swap agreements, we have approximately $179 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 $179 million of outstanding floating rate debt would result in increased annual financing costs of $1.8 million. 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 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 33 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 15 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. 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 in our financial statements. 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. 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, 2003, 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 CURRENT OR FUTURE LITIGATION. A number of 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. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us, 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. Also, we can give no assurance that any other matters brought in the future will not have a material effect on our financial condition, liquidity or results of operations. LABOR MATTERS. We have approximately 8,800 employees. A portion of our workforce is covered by various collective bargaining agreements, principally with the United Steelworkers of America ("USWA"), including: approximately 3,000 Allegheny Ludlum production, office 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 100 employees at the Casting Service facility in LaPorte, Indiana. During the 2003 second quarter, we requested the re-opening of labor agreements with the USWA pertaining to the Allegheny Ludlum and Oremet operations. Discussions with the USWA on this matter are ongoing. ATI | Annual Report 2003 | 29 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 have a materially adverse affect on 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. 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 our 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. 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. POLITICAL AND SOCIAL TURMOIL. The war on terrorism and recent political and social turmoil, including terrorist and military actions and the implications of the military actions in Iraq, could continue to put 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. 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. 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. 30 | Annual Report 2003 | ATI ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions except per share amounts)
For the Years Ended December 31, 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------- SALES $ 1,937.4 $ 1,907.8 $ 2,128.0 - --------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 1,873.6 1,744.5 1,862.3 Selling and administrative expenses 248.8 188.3 198.8 Restructuring costs 62.4 42.8 74.2 - --------------------------------------------------------------------------------------------------------------------- Loss before interest, other income and income taxes (247.4) (67.8) (7.3) Interest expense, net 27.7 34.3 29.3 Other income (expense), net (5.1) (1.7) 0.2 - --------------------------------------------------------------------------------------------------------------------- Loss before income tax provision (benefit) and cumulative effect of change in accounting principle (280.2) (103.8) (36.4) Income tax provision (benefit) 33.1 (38.0) (11.2) - --------------------------------------------------------------------------------------------------------------------- Net loss before cumulative effect of change in accounting principle (313.3) (65.8) (25.2) Cumulative effect of change in accounting principle, net of tax (1.3) -- -- - --------------------------------------------------------------------------------------------------------------------- NET LOSS $ (314.6) $ (65.8) $ (25.2) ===================================================================================================================== Basic and diluted net loss per common share before cumulative effect of change in accounting principle $ (3.87) $ (0.82) $ (0.31) Cumulative effect of change in accounting principle (0.02) -- -- - --------------------------------------------------------------------------------------------------------------------- BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (3.89) $ (0.82) $ (0.31) =====================================================================================================================
The accompanying notes are an integral part of these statements. ATI | Annual Report 2003 | 31 ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions except share and per share amounts)
DECEMBER 31, December 31, 2003 2002 - ------------------------------------------------------------------ ASSETS Cash and cash equivalents $ 79.6 $ 59.4 Accounts receivable, net 248.8 239.3 Inventories, net 359.7 392.3 Income tax refunds 7.2 51.9 Deferred income taxes -- 20.8 Prepaid expenses and other current assets 48.0 32.0 - ------------------------------------------------------------------ TOTAL CURRENT ASSETS 743.3 795.7 Property, plant and equipment, net 711.1 757.6 Cost in excess of net assets acquired 198.4 194.4 Deferred pension asset 144.0 165.1 Deferred income taxes 34.3 85.4 Other assets 53.8 95.0 - ------------------------------------------------------------------ TOTAL ASSETS $ 1,884.9 $ 2,093.2 ================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 172.3 $ 171.3 Accrued liabilities 194.6 161.0 Short-term debt and current portion of long-term debt 27.8 9.7 - ------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 394.7 342.0 Long-term debt 504.3 509.4 Accrued postretirement benefits 507.2 496.4 Pension liabilities 220.6 216.0 Other long-term liabilities 83.4 80.6 - ------------------------------------------------------------------ TOTAL LIABILITIES 1,710.2 1,644.4 ================================================================== Stockholders' Equity: Preferred stock, par value $0.10: authorized - 50,000,000 shares; issued - none -- -- Common stock, par value $0.10: authorized - 500,000,000 shares; issued 98,951,490 at 2003 and 2002; outstanding - 80,654,861 shares at 2003 and 80,634,344 shares at 2002 9.9 9.9 Additional paid-in capital 481.2 481.2 Retained earnings 483.8 835.1 Treasury stock: 18,296,629 shares at 2003 and 18,317,146 shares at 2002 (458.4) (469.7) Accumulated other comprehensive loss, net of tax (341.8) (407.7) - ------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 174.7 448.8 - ------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,884.9 $ 2,093.2 ==================================================================
The accompanying notes are an integral part of these statements. 32 | Annual Report 2003 | ATI ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
For the Years Ended December 31, 2003 2002 2001 - ---------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Loss $ (314.6) $(65.8) $(25.2) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of change in accounting principle 1.3 -- -- Depreciation and amortization 74.6 90.0 98.6 Non-cash restructuring costs and asset write-offs 52.6 39.2 79.7 Deferred income taxes 72.7 25.6 24.5 Gains on sales of investments and businesses (0.8) (2.6) (2.8) Change in operating assets and liabilities: Deferred pension asset 67.7 (4.2) (49.0) Accrued income taxes 44.7 (3.4) (48.5) Inventories 32.6 99.4 67.9 Accounts receivable (9.5) 35.6 47.1 Accrued liabilities 31.4 (22.6) (49.9) Accounts payable 2.9 16.5 (12.5) Other 26.4 (3.5) (7.1) - ---------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 82.0 204.2 122.8 - ---------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (74.4) (48.7) (104.2) Disposals of property, plant and equipment 9.8 9.2 4.3 Proceeds from sales of businesses and investments 0.8 2.4 17.9 Other (6.5) (2.7) (3.0) - ---------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (70.3) (39.8) (85.0) - ---------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Borrowings of other long-term debt 28.5 -- 11.5 Payments of long-term debt and capital leases (14.6) (12.4) (0.7) Net repayments under credit facilities (1.5) (73.1) (266.6) Issuance of Allegheny Technologies 8.375% Notes, net -- -- 292.5 - ---------------------------------------------------------------------------------------------- Net borrowings (repayments) 12.4 (85.5) 36.7 Dividends paid (19.4) (53.2) (64.2) Proceeds from interest rate swap settlement 15.3 -- -- Exercises of stock options 0.2 -- 0.2 Purchases of common stock -- -- (3.0) - ---------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8.5 (138.7) (30.3) - ---------------------------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS 20.2 25.7 7.5 Cash and cash equivalents at beginning of year 59.4 33.7 26.2 - ---------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 79.6 $ 59.4 $ 33.7 ==============================================================================================
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 2003 | 33 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' (In millions except per share amounts) Stock Capital Earnings Stock Income (Loss) Equity - ----------------------------------------------------------------------------------------------------------------------- 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 derivatives -- -- -- -- (2.2) (2.2) Change in unrealized losses 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 -- -- -- -- (406.4) (406.4) adjustment Foreign currency translation gains -- -- -- -- 16.6 16.6 Unrealized gains on derivatives -- -- -- -- 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 ======================================================================================================================= Net loss -- -- (314.6) -- -- (314.6) Other comprehensive income (loss), net of tax: Minimum pension liability -- -- -- -- 47.0 47.0 adjustment Foreign currency translation gains -- -- -- -- 14.4 14.4 Unrealized gains on derivatives -- -- -- -- 4.6 4.6 Change in unrealized losses on securities -- -- -- -- (0.1) (0.1) - ----------------------------------------------------------------------------------------------------------------------- Comprehensive loss -- -- (314.6) -- 65.9 (248.7) Cash dividends on common stock ($0.24 per share) -- -- (19.4) -- -- (19.4) Employee stock plans -- -- (17.3) 11.3 -- (6.0) - ----------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2003 $9.9 $ 481.2 $ 483.8 $ (458.4) $ (341.8) $ 174.7 ========================================================================================================================
The accompanying notes are an integral part of these statements. 34 | Annual Report 2003 | 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, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 19, 2004 (except for Note 16, as to which the date is February 17, 2004, and except for Note 14, as to which the date is March 10, 2004) Pittsburgh, Pennsylvania ATI | Annual Report 2003 | 35 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., Limited ("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 statement of operations as other income or expense, and 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," "ATI" 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 (loss). Accounts Receivable Accounts receivable are presented net of a reserve for doubtful accounts of $10.2 million at December 31, 2003 and $10.1 million at December 31, 2002. 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 36 | Annual Report 2003 | ATI 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. 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. 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. Cost in Excess of Net Assets Acquired At December 31, 2003, the Company had $198.4 million of goodwill on its balance sheet. Of the total, $112.1 million related to the Flat-Rolled Products segment, $60.9 million related to the High Performance Metals segment, and $25.4 million related to the Engineered Products segment. Goodwill increased $4.0 million during 2003 as a result of the impact of foreign currency translation on goodwill denominated in functional currencies other than the U.S. dollar. 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. The 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. The evaluation of goodwill for possible impairment includes estimating the fair market value of each of the reporting units which have goodwill associated with their operations using discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any. These valuation methods require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, 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. Subsequent to the adoption of SFAS 142, the Company performs the required annual goodwill impairment evaluation in the fourth quarter of each year. 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 in 2001, or $0.04 per diluted share. Had the Company applied the non-amortization provisions of SFAS 142 in 2001, 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. 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-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. ATI | Annual Report 2003 | 37 Derivative Financial Instruments and Hedging The Company accounts for derivative and hedging contracts in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). 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 natural gas, a significant energy cost for all of the Company's businesses. 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 natural gas payments. The majority of these contracts mature within one year. The Company accounts 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 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. The Company accounts 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 2003 and 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. Sales Recognition Sales are recognized when title passes or as services are rendered. Research and Development Company funded research and development costs were $11.5 million in 2003, $12.0 million in 2002 and $11.3 million in 2001 and were expensed as incurred. Customer funded research and development costs were $2.4 million in 2003, $2.7 million in 2002 and $2.0 million in 2001. Customer funded research and development costs are recognized in the consolidated statement of operations in accordance with revenue recognition policies. Income Taxes The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires 38 | Annual Report 2003 | ATI sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. 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. The evaluation, as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. In the 2003 fourth quarter, based upon this quarterly analysis, the Company recorded a $138.5 million valuation allowance for a portion of its net deferred tax assets. Loss Per Common Share Basic and diluted loss per share are calculated by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the year. The calculation of diluted loss per share excludes the potentially dilutive effect of outstanding stock options since the inclusion in the calculation of loss of per share would result in a lower loss per share and therefore be anti-dilutive. 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 loss and net loss 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"). For comparative presentation purposes, the effect of the 2003 deferred tax valuation allowance is excluded from the 2003 net of tax amounts.
(In millions, except per share amounts) 2003 2002 2001 - --------------------------------------------------------------------------------------------------------- Net loss as reported $ (314.6) $ (65.8) $ (25.2) Add: Stock-based compensation expense included in net loss, net of tax 7.9 0.5 0.8 Deduct: Net impact of SFAS 123, net of tax (11.2) (4.3) (5.8) - --------------------------------------------------------------------------------------------------------- Pro forma loss $ (317.9) $ (69.6) $ (30.2) - --------------------------------------------------------------------------------------------------------- Net loss per common share: Basic and diluted - as reported $ (3.89) $ (0.82) $ (0.31) - --------------------------------------------------------------------------------------------------------- Basic and diluted - pro forma $ (3.93) $ (0.86) $ (0.38) - ---------------------------------------------------------------------------------------------------------
New Accounting Pronouncements Effective January 1, 2003, as required, the Company adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). Under SFAS 143, obligations associated with the retirement of tangible long-lived assets, such as landfill and other facility closure costs, are capitalized and amortized to expense over an asset's useful life using a systematic and rational allocation method. The Company's adoption of SFAS 143 resulted in recognizing a charge of $1.3 million, net of income taxes of $0.7 million, or $0.02 per share, principally for asset retirement obligations related to landfills in the Company's Flat-Rolled Products segment. This charge is reported in the consolidated statement of operations for the year ended December 31, 2003 as a cumulative effect of a change in accounting principle. The pro forma effects of the application of SFAS 143 as if the Statement had been adopted on January 1, 2001 were not material. ATI | Annual Report 2003 | 39 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 was effective January 1, 2003 for all exit or disposal activities initiated after that date. The Company adopted this standard at January 1, 2003. SFAS 146 has no effect on the Company's restructuring charges recorded in 2002 and prior periods. 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, 2003, the Company had no material guarantees as defined in FIN 45. In December 2003, the FASB issued a revised 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. VIEs that are considered to be special purpose entities require recognition under FIN 46 in the 2003 fourth quarter. FIN 46, as revised, is applied to all other VIEs in the 2004 first quarter. At December 31, 2003, the Company had no interests in entities qualifying as VIEs. Reclassifications Certain amounts from prior years have been reclassified to conform with the 2003 presentation. NOTE 2. INVENTORIES --
DECEMBER 31, December 31, (In millions) 2003 2002 - ------------------------------------------------------------------------------------------------- Raw materials and supplies $ 37.5 $ 32.7 Work-in-process 356.2 358.5 Finished goods 84.9 80.4 - ------------------------------------------------------------------------------------------------- Total inventories at current cost 478.6 471.6 Less allowances to reduce current cost values to LIFO basis (111.7) (74.7) Progress payments (7.2) (4.6) - ------------------------------------------------------------------------------------------------- Total inventories $ 359.7 $ 392.3 =================================================================================================
Inventories, before progress payments, determined on the last-in, first-out method were $292.4 million at December 31, 2003 and $327.0 million at December 31, 2002. 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 2003 and 2002, 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 cost of sales by $7.9 million in 2003 and by $3.7 million in 2002. 40 | Annual Report 2003 | ATI NOTE 3. DEBT -- Debt at December 31, 2003 and 2002 was as follows:
(In millions) 2003 2002 - ---------------------------------------------------------------------------------------- Allegheny Technologies $300 million 8.375% Notes due 2011, net (a) $ 309.4 $ 312.3 Allegheny Ludlum 6.95% debentures, due 2025 150.0 150.0 Domestic Bank Group $325 million secured credit agreement -- -- Foreign credit agreements 35.0 26.7 Industrial revenue bonds, due through 2007 20.1 21.5 Capitalized leases and other 17.6 8.6 - ---------------------------------------------------------------------------------------- Total short-term and long-term debt 532.1 519.1 Short-term debt and current portion of long-term debt (27.8) (9.7) - ---------------------------------------------------------------------------------------- Total long-term debt $ 504.3 $ 509.4 ========================================================================================
(a) Includes fair value adjustments for interest rate swap contracts of $15.2 million (including $1.4 million for interest rate swap contracts currently outstanding and $13.8 million for deferred gains on settled interest rate swap contracts) and $18.7 million at December 31, 2003 and December 31, 2002, respectively. Interest expense was $33.9 million in 2003, $37.3 million in 2002 and $30.7 million in 2001. Interest expense in 2003 was reduced by $2.1 million from interest capitalization on capital projects. Interest and commitment fees paid were $39.2 million in 2003, $37.5 million in 2002 and $31.1 million in 2001. Net interest expense includes interest income of $6.2 million in 2003, $3.0 million in 2002 and $1.4 million in 2001. Interest income in 2003 was primarily comprised of $4.0 million related to a Federal income tax refund associated with prior years. Scheduled maturities of borrowings during the next five years are $27.8 million in 2004, $6.6 million in 2005, $3.5 million in 2006, $21.8 million in 2007 and $3.6 million in 2008. In December 2001, the Company issued $300 million of 8.375% Notes due December 15, 2011 which are registered under the Securities Act of 1933. 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 $5.9 million, which are being amortized over the life of the debt. In 2002, Company entered into interest rate swap contracts with respect to a $150 million notional amount related to the Notes, which involved the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the contracts without an exchange of the underlying principal amount. These "receive fixed, pay floating" arrangements were designated as fair value hedges, and effectively converted $150 million of the Notes to variable rate debt. As a result, changes in the fair value of the swap contracts and the notional amount of the underlying fixed rate debt are recognized in the statement of operations. In 2003, the Company terminated the majority of these interest rate swap contracts and received $15.3 million in cash. The $15.3 million gain on settlement remains a component of the reported balance of the Notes, and will be ratably recognized as a reduction to interest expense over the remaining life of the Notes, which is approximately eight years. Subsequent to the interest rate swap terminations, the Company entered into new "receive fixed, pay floating" interest rate swap arrangements related to the Notes which re-established, in total, a $150 million notional amount that effectively converted 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 $6.7 million and $4.9 million for the years ended December 31, 2003 and December 31, 2002, respectively, compared to the fixed interest expense of the ten-year Notes. At December 31, 2003 and December 31, 2002, the adjustments of these swap contracts to fair market value resulted in the recognition of assets of $1.4 million and $18.7 million, respectively, on the balance sheet, included in other assets, with offsetting increases in long-term debt. The Company has the ability to terminate the swaps and receive (pay) the asset (liability) fair value of the swaps. During the 2003 second quarter, the Company entered into a $325 million four-year senior secured domestic revolving credit facility ("the secured credit facility" or "the facility"). The facility, which replaced a $250 million unsecured facility, is secured by all accounts receivable and inventory of the Company's U. S. operations, and includes capacity for up to $150 million of letters of credit. As of December 31, 2003, there had been no borrowings made under either the secured credit facility or the former unsecured credit facility since the beginning of 2002. The Company's outstanding letters of credit issued under the secured credit facility were approximately $94 million at December 31, 2003. ATI | Annual Report 2003 | 41 The secured credit facility limits capital expenditures, investments and acquisitions of businesses, new indebtedness, asset divestitures, payment of dividends, and common stock repurchases which the Company may incur or undertake during the term of the facility without obtaining permission of the lending group. In addition, the secured credit facility contains a financial covenant, which is not measured if the Company's undrawn availability under the facility is equal to or more than $150 million. This financial covenant, when measured, requires the Company to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to fixed charges of at least 1.0 to 1.0. EBITDA is adjusted for non-cash items such as income/loss on investments accounted for under the equity method of accounting, non-cash pension expense/income, and that portion of retiree medical and life insurance expenses paid from the Company's VEBA trust. EBITDA is reduced by capital expenditures, as defined in the facility, and cash taxes paid, and increased for cash tax refunds. Fixed charges include gross interest expense, dividends paid and scheduled debt payments. At December 31, 2003, the Company's undrawn availability under the facility, which is calculated including outstanding letters of credit, other uses of credit and domestic cash on hand, was $263 million, and the amount that the Company could borrow at that date prior to requiring the application of a financial covenant test was $113 million. The Company expects its undrawn availability will decrease by approximately $22 million in connection with the Company's planned appeal of the unfavorable jury verdict received on March 10, 2004. Borrowings under the secured credit facility bear interest at the Company's option at either: (1) the one-, two-, three- or six- month LIBOR rate plus a margin ranging from 2.25% to 3.00% depending upon the level of borrowings; or (2) a base rate announced from time-to-time by the lending group (i.e. the Prime lending rate) plus a margin ranging from 0% to 0.75% depending upon the level of borrowings. In addition, the secured credit facility contains a facility fee of 0.25% to 0.50% depending on the level of undrawn availability. The facility also contains fees for issuing letters of credit of 0.125% per annum and annualized fees ranging from 2.25% to 3.00% depending on the level of undrawn availability under the facility. The Company's overall borrowing costs under the secured credit facility are not affected by changes in the Company's credit ratings. The Company's subsidiaries also maintain credit agreements with various foreign banks, which provide for borrowings of up to approximately $57 million. At December 31, 2003, the Company had approximately $21 million of available borrowing capacity under these foreign credit agreements. These agreements provide for annual facility fees of up to 0.20%. The Company has no off-balance sheet financing relationships with variable interest entities, structured finance entities, or any other unconsolidated entities. At December 31, 2003, the Company has not guaranteed any third-party indebtedness. NOTE 4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION -- Cash and cash equivalents at December 31, 2003 and 2002 were as follows:
(In millions) 2003 2002 - --------------------------------------------------------------------------------------- Cash $ 36.9 $ 16.1 Other short-term investments, at cost which approximates market 42.7 43.3 - --------------------------------------------------------------------------------------- Total cash and cash equivalents $ 79.6 $ 59.4 - ---------------------------------------------------------------------------------------
The estimated fair value of financial instruments at December 31, 2003 and 2002 was as follows:
(In millions) 2003 2002 - -------------------------------------------------------------------------------------------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 79.6 $ 79.6 $ 59.4 $ 59.4 Other assets -- Interest rate swap agreements 1.4 1.4 18.7 18.7 Debt: Allegheny Technologies $300 million 8.375% Notes due 2011, net (a) 309.4 336.2 312.3 315.7 Allegheny Ludlum 6.95% debentures, due 2025 150.0 138.0 150.0 126.0 Foreign credit agreements 35.0 35.0 26.7 26.7 Industrial revenue bonds, due through 2007 20.1 20.1 21.5 21.5 Capitalized leases and other 17.6 17.6 8.6 8.6 - --------------------------------------------------------------------------------------------------------------
(a) Includes fair value adjustments for interest rate swap contracts of $15.2 million and $18.7 million at December 31, 2003 and December 31, 2002, respectively. 42 | Annual Report 2003 | ATI 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 $10.2 million at December 31, 2003 and $10.1 million at December 31, 2002. During 2003, the Company recognized expense of $2.2 million to increase the reserve for doubtful accounts and wrote off $2.1 million of uncollectible accounts, which reduced the reserve. 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 receivable, which reduced the reserve. Property, plant and equipment at December 31, 2003 and 2002 were as follows:
(In millions) 2003 2002 - ------------------------------------------------------------------------- Land $ 26.3 $ 29.5 Buildings 228.2 228.6 Equipment and leasehold improvements 1,494.0 1,521.5 - ------------------------------------------------------------------------- 1,748.5 1,779.6 Accumulated depreciation and amortization (1,037.4) (1,022.0) - ------------------------------------------------------------------------- Total property, plant and equipment $ 711.1 $ 757.6 =========================================================================
Depreciation and amortization for the years ended December 31, 2003, 2002 and 2001 was as follows:
(In millions) 2003 2002 2001 - ------------------------------------------------------------------------------ Depreciation of property, plant and equipment $ 69.4 $ 85.4 $ 88.4 Amortization of goodwill -- -- 5.8 Software and other amortization 5.2 4.6 4.4 - ------------------------------------------------------------------------------ Total depreciation and amortization $ 74.6 $ 90.0 $ 98.6 ==============================================================================
In accordance with SFAS 142, amortization of goodwill was discontinued January 1, 2002. Accrued liabilities included salaries and wages of $27.1 million and $38.4 million at December 31, 2003 and 2002, respectively. NOTE 5.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) -- The components of accumulated other comprehensive income (loss), net of tax, at December 31, 2003, 2002 and 2001 were as follows:
Total Net Unrealized Accumulated Foreign Currency Gains (Losses) On Minimum Pension Net Unrealized Other Translation Derivative Liability Gains (Losses) On Comprehensive (In millions) Adjustments Instruments Adjustments Investments Income (Loss) - ----------------------------------------------------------------------------------------------------------------------------- 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) Amounts arising during the year 14.4 4.6 47.0 (0.1) 65.9 - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2003 $ 7.8 $ 9.8 $(359.4) $ -- $(341.8) ==========================================================================================================================
ATI | Annual Report 2003 | 43 Other comprehensive income (loss) amounts are net of income tax expense (benefit) at the effective tax rate for each year, prior to the recognition of the 2003 deferred tax valuation allowance. 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, 2003, 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. 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") the net loss would have increased by $3.3 million (or $0.04 per diluted share), $3.8 million (or $0.04 per diluted share) and $5.0 million (or $0.07 per diluted share) for the years ended December 31, 2003, 2002 and 2001, 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:
2003 2002 2001 - --------------------------------------------------------------------------------------- Expected dividend yield 7.4% 4.4% 4.7% Expected volatility 51% 35% 39% Risk-free interest rate 3.5% 4.0% 4.8% Expected lives (in years) 8.0 8.0 8.0 Weighted average fair value of options granted during year $1.05 $ 2.95 $ 4.89 - ---------------------------------------------------------------------------------------
Stock option transactions under the Company's employee plans for the years ended December 31, 2003, 2002 and 2001 are summarized as follows:
(shares in thousands) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Weighted NUMBER OF WEIGHTED AVERAGE Number of Average Number of Weighted Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 7,919 $ 20.42 5,077 $ 27.88 4,480 $ 30.26 Granted 2,155 4.29 3,141 9.04 847 17.08 Exercised (72) 7.25 -- -- (28) 14.53 Cancelled (2,921) 29.80 (299) 28.07 (222) 30.75 - ------------------------------------------------------------------------------------------------------------------------------ Outstanding at end of year 7,081 $ 11.80 7,919 $ 20.42 5,077 $ 27.88 - ------------------------------------------------------------------------------------------------------------------------------ Exercisable at end of year 2,792 $ 18.85 4,190 $ 29.38 3,453 $ 32.10 ==============================================================================================================================
44 | Annual Report 2003 | ATI Options outstanding at December 31, 2003 were as follows: (shares in thousands)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Range of Number of Remaining Exercise Number of Exercise Exercise Prices Shares Contractual Life Price Shares Price - ----------------------------------------------------------------------------------------------- $3.63-$7.00 2,120 9.1 $ 4.29 120 $ 6.73 7.01-10.00 2,227 8.8 7.25 695 7.25 10.01-15.00 547 8.0 12.85 294 13.49 15.01-20.00 1,337 7.5 17.38 833 17.77 20.01-30.00 369 5.8 21.92 369 21.92 30.01-40.00 155 4.5 35.95 155 35.95 40.01-50.00 326 3.4 44.05 326 44.05 - ----------------------------------------------------------------------------------------------- 7,081 8.1 $ 11.80 2,792 $ 18.85 ===============================================================================================
The Company sponsors other stock-based compensation programs, which resulted in compensation expense of $12.6 million in 2003, $0.8 million in 2002 and $1.2 million in 2001. 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. As described in the Company's 2003 annual meeting proxy statement, until the effective date of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), the Company maintained a Stock Acquisition and Retention Program ("SARP"). Under the SARP, certain executives could purchase shares of the Company's common stock in exchange for a promissory note payable to the Company, and the Company would match the purchase with a grant of a certain number of shares of non-vested ("restricted") common stock. After the enactment of Sarbanes-Oxley, the Board of Directors effectively terminated the SARP and no further loans or purchases were permitted. In connection with the winding up of the SARP, on September 11, 2003 an aggregate of 691,339 shares, previously purchased under the SARP between 1995 and the effective date of Sarbanes-Oxley, were sold by participants to a financial institution in a market transaction; all net proceeds were used to reduce balances due under SARP promissory notes. In addition, all of the restricted shares granted to the participants under the SARP in prior years, an aggregate of 501,970 shares, as well as options to purchase an aggregate of 836,466 shares of common stock previously granted, were forfeited by SARP participants. In addition, the Company paid the participants a SARP Termination Payment in cash, which was used by each participant, net of individual tax consequences, to repay to the Company all remaining balances owing on the SARP loans. The Board of Directors also determined that no equity compensation would be granted to SARP participants for at least six months from the date of the SARP Termination Payment. As a net result of the termination of the SARP, the Company received approximately $0.5 million in cash and recorded $5.6 million of expenses, which is included in selling and administrative expenses in the statement of operations. In the 2003 third quarter, the Company initiated a stock option repurchase program whereby stock option plan participants, not including statutory insiders and certain other executives, could elect to sell to the Company, for $0.10 per option share, vested stock options with exercise prices in excess of $20.00 per share. Approximately 1.8 million stock option shares were repurchased by the Company under this program, which expired in October 2003. The Board of Directors has also determined that no equity compensation would be granted to participants for at least six months following the stock option repurchase program. In 2003, the Company granted 547,290 shares of restricted stock with an aggregate grant date fair value of $2.3 million. The shares vest over service periods ranging from three to five years. For the year ended December 31, 2003, 176,399 shares of restricted stock relating to the 2003 grants and other prior grants had vesting accelerate due to participant retirements, in accordance with retirement provisions in the Incentive Plan. Compensation expense recognized for this vesting acceleration was $0.5 million. There were 422,800 shares of unvested restricted stock outstanding at December 31, 2003. The Company sponsors a Total Shareholder Return Plan ("TSRP"), which measures the Company's stock price performance compared to a peer group. The TSRP measures stock price performance over cumulative three-year periods. Compensation to participants is payable in the form of stock. Interim measures of stock price performance are recorded quarterly. Based on the Company's 2003 stock price performance, $4.1 million of compensation expense for the TSRP was recognized in the fourth quarter of 2003. At December 31, 2003, approximately 3.2 million shares of common stock were available for future awards under the Incentive Plan. ATI | Annual Report 2003 | 45 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 their becoming exercisable. NOTE 7. INCOME TAXES -- In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), in the 2003 fourth quarter, the Company recorded a $138.5 million charge as part of its income tax provision to establish a valuation allowance for the majority of its net deferred tax assets in recognition of uncertainty regarding full realization. No valuation allowance was required on $34.3 million of net deferred tax assets based upon the Company's ability to utilize these assets within the carryback, carryforward period, including consideration of tax planning strategies that the Company would undertake to prevent an operating loss or tax credit carryforward from expiring unutilized. The Company intends to maintain a valuation allowance on the net deferred tax assets until a realization event occurs to support reversal of all or a portion of the reserve. Income tax provision (benefit) was as follows:
(In millions) 2003 2002 2001 - ---------------------------------------------------------------- Current: Federal $ (36.6) $ (64.1) $ (40.4) State 2.8 0.1 0.5 Foreign 2.6 0.4 2.5 - ---------------------------------------------------------------- Total (31.2) (63.6) (37.4) ================================================================ Deferred: Federal 67.5 21.0 25.9 State (2.6) 4.6 0.3 Foreign (0.6) -- -- - ---------------------------------------------------------------- Total 64.3 25.6 26.2 - ---------------------------------------------------------------- Income tax provision (benefit) $ 33.1 $ (38.0) $ (11.2) ================================================================
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 $3.9 million, $2.0 million and $3.4 million in 2003, 2002 and 2001, respectively. The Company received $65.6 million in federal income tax refunds and $4.4 million in state and foreign income tax refunds in 2003, and has recognized $7.2 million of federal income taxes receivable at December 31, 2003 for refunds to be received in 2004, based upon the carryback character of certain deferred tax assets, 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. Loss before income taxes included loss from domestic operations of $(279.1) million in 2003, $(99.8) million in 2002 and $(45.3) million in 2001. The following is a reconciliation of income taxes computed at the statutory federal income tax rate to the actual effective income tax provision (benefit):
Income Tax Provision (Benefit) (In millions) 2003 2002 2001 - --------------------------------------------------------------------------------------------- Taxes computed at federal tax rate $ (98.1) $ (36.3) $ (12.7) State and local income taxes, net of federal tax benefit (3.4) (0.8) (1.0) Valuation allowance 138.5 -- -- Other (3.9) (0.9) 2.5 - --------------------------------------------------------------------------------------------- Income tax provision (benefit) $ 33.1 $ (38.0) $ (11.2) - ---------------------------------------------------------------------------------------------
46 | Annual Report 2003 | ATI The 2003 effective tax rate includes the effect of establishing a valuation allowance for a majority of the Company's net deferred tax assets. The effective tax rate for 2003, absent the deferred tax valuation allowance, would have been 37.6%. The effective tax rates for 2002 and 2001 were 36.6% and 30.8%, respectively. 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, 2003 and 2002 were as follows:
(In millions) 2003 2002 - ------------------------------------------------------------------------------- Deferred income tax assets: Postretirement benefits other than pensions $ 197.5 $ 192.7 Federal net operating loss tax carryforwards 29.4 -- State operating loss tax carryforwards 40.3 38.0 Deferred compensation and other benefit plans 18.5 20.4 Environmental reserves 16.4 15.9 Vacation accruals 9.3 9.2 Self-insurance reserves 11.8 9.8 Pension 15.2 6.6 Other items 45.4 34.8 - ------------------------------------------------------------------------------- Gross deferred income tax assets 383.8 327.4 Valuation allowance for deferred tax assets (178.8) (38.0) - ------------------------------------------------------------------------------- Total deferred income tax assets 205.0 289.4 - ------------------------------------------------------------------------------- Deferred income tax liabilities: Bases of property, plant and equipment 120.9 141.0 Inventory valuation 19.0 19.7 Other items 30.8 22.5 - ------------------------------------------------------------------------------- Total deferred income tax liabilities 170.7 183.2 - ------------------------------------------------------------------------------- Net deferred income tax asset $ 34.3 $ 106.2 ===============================================================================
Including the $138.5 million deferred tax asset valuation allowance recorded in the 2003 fourth quarter, and $2.3 million of valuation allowances for certain state deferred tax assets recorded in 2003, the Company had $178.8 million and $38.0 million in deferred tax asset valuation allowances at December 31, 2003 and 2002, respectively. Based on current tax law, the $29.4 million federal net operating loss tax carryforward deferred tax asset will expire in 2023. The Company also had state net operating loss tax carryforwards of $40.3 million and $38.0 million at December 31, 2003 and 2002, respectively. For most of these state net operating loss tax carryforwards, expiration will occur in 20 years and utilization of the tax benefit is limited to $2 million per year. A valuation allowance has been established for the full value of these state net operating loss carryforwards since the Company has concluded that it is more likely than not that these tax benefits would not be realized prior to expiration. At December 31, 2003 and 2002, the balance sheet composition of the Company's net deferred tax assets and liabilities was as follows:
(In millions) 2003 2002 - ------------------------------------------------------ Net current asset $ -- $ 20.8 Net noncurrent asset 34.3 85.4 - ------------------------------------------------------ Net deferred income tax asset $ 34.3 $ 106.2 ======================================================
ATI | Annual Report 2003 | 47 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 U.S. 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 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. For the non-collectively bargained plans, the Company maintains the right to amend or terminate the plans at its discretion. 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) 2003 2002 2001 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- Service cost-- benefits earned during the year $ 28.6 $ 26.6 $ 22.9 $ 6.3 $ 7.4 $ 8.4 Interest cost on benefits earned in prior years 126.4 123.7 113.5 44.9 42.7 43.4 Expected return on plan assets (140.1) (174.7) (209.1) (9.4) (19.3) (20.6) Amortization of unrecognized transition asset -- (10.8) (24.1) -- -- -- Amortization of prior service cost 26.8 26.1 19.3 (4.9) (4.3) (4.5) Amortization of net actuarial (gain) loss 50.9 5.1 (0.6) 4.9 (1.5) (1.7) - ------------------------------------------------------------------------------------------------------------------------ Excess pension (income) expense 92.6 (4.0) (78.1) 41.8 25.0 25.0 Curtailment and termination benefits (gain) loss 7.4 -- 9.8 -- (1.7) -- - ------------------------------------------------------------------------------------------------------------------------ Total retirement benefit (income) expense $ 100.0 $ (4.0) $ (68.3) $ 41.8 $23.3 $25.0 ========================================================================================================================
In 2003, the Company recorded termination benefits expense of $7.4 million related to workforce reductions which is included in restructuring costs in the statement of operations. 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 termination benefits 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) 2003 2002 2001 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Discount rate 6.75% 7.0% 7.0% 6.75% 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 8.75% 9.0% 9.0% 9.0% 9%-15% 9%-15% ============================================================================================================================
Actuarial assumptions used for the valuation of pension and postretirement obligations at the end of the respective periods were as follows:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS - ------------------------------------------------------------------------------------------------------------ (In millions) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------ Discount rate 6.5% 6.75% 6.5% 6.75% Rate of increase in future compensation levels 3%-4.5% 3%-4.5% -- -- ============================================================================================================
48 | Annual Report 2003 | ATI For 2004, the expected long-term rate of returns on pension and other postretirement benefits assets will be 8.75% and 9.0%, respectively, and the discount rate used to develop pension and postretirement benefit expense will be 6.5%. In developing the expected long-term rate of return assumptions, the Company evaluated input from its third party pension plan asset managers and actuaries, including reviews of their asset class return expectations and long-term inflation assumptions. A reconciliation of funded status for the Company's pension and postretirement benefit plans at December 31, 2003 and 2002 was as follows:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS - ---------------------------------------------------------------------------------------------------------------------------- (In millions) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 1,945.5 $ 1,816.1 $ 711.3 $ 651.3 Service cost 28.6 26.6 6.3 7.4 Interest cost 126.4 123.7 44.9 42.7 Benefits paid (143.2) (137.4) (45.2) (45.7) Participant contributions 0.8 -- -- -- Effect of currency rates 3.2 -- -- -- Plan amendments 4.0 16.3 -- (9.4) Net actuarial (gains) losses -- discount rate change 62.0 47.2 21.8 10.6 -- other (16.1) 53.0 142.5 56.3 Effect of curtailment and special termination benefits 7.4 -- -- (1.9) - -------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 2,018.6 $ 1,945.5 (A) $ 881.6 $ 711.3 - -------------------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 1,678.7 $ 2,012.0 $ 111.5 $ 134.9 Actual returns (losses) on plan assets and plan expenses 219.6 (199.1) 9.7 (10.7) Participant contributions 0.8 -- -- -- Effect of currency rates 2.8 -- -- -- Benefits paid (139.8) (134.2) (14.2) (12.7) - -------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 1,762.1 $ 1,678.7 $ 107.0 $ 111.5 - -------------------------------------------------------------------------------------------------------------------------- Underfunded status of the plan $ (256.5) $ (266.8) $(774.6) (599.8) Unrecognized net actuarial loss 624.1 709.2 292.0 132.9 Net minimum pension liability (588.2) (658.4) -- -- Unrecognized prior service cost 144.0 165.1 (24.6) (29.5) - -------------------------------------------------------------------------------------------------------------------------- ACCRUED BENEFIT COST $ (76.6) $ (50.9) $(507.2) $(496.4) ==========================================================================================================================
Amounts recognized in the balance sheet consist of:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS - ---------------------------------------------------------------------------------------------------- (In millions) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------- Deferred pension asset $ 144.0 $ 165.1 $ -- $ -- Pension liabilities (220.6) (216.0) -- -- Accrued postretirement benefits -- -- (507.2) (496.4) - ---------------------------------------------------------------------------------------------------- Net amount recognized $ (76.6) $ (50.9) $(507.2) $(496.4) ====================================================================================================
(A) The Other Postretirement Benefits obligation at end of 2003 does not include the expected favorable impact of the Medicare Prescription Drug, Improvement and Modernization Act, which was signed into law on December 8, 2003. The Act provides for a federal subsidy, with tax-free payments commencing in 2006, to sponsors of retiree ATI | Annual Report 2003 | 49 health care benefits plans that provide a benefit that is at least actuarially equivalent to the benefit established by the law. Based upon estimates from the Company's actuaries, the Company expects that the federal subsidy included in the law will result in a reduction in the Other Postretirement Benefits obligation of up to $70 million. This reduction is not reflected in the financial statements, or in the table above, because authoritative accounting guidance regarding how the benefit is to be recognized in the financial statements is pending. The accumulated benefit obligation for all defined benefit pension plans was $1,972.3 million and $1,879.9 million at December 31, 2003 and 2002, respectively. 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. The pension plan asset allocations for the years ended 2003 and 2002, and the target allocation for 2004 are:
Asset Category 2003 2002 TARGET ALLOCATION 2004 - -------------------------------------------------------------------------------- Equity securities 75% 69% 65% -- 75% Fixed Income 25% 30% 25% -- 35% Other 0% 1% 0% -- 10% - -------------------------------------------------------------------------------- Total 100% 100% ================================================================================
The postretirement plan obligation asset allocations for the years ended 2003 and 2002, and the target allocation for 2004 are:
Asset Category 2003 2002 TARGET ALLOCATION 2004 - -------------------------------------------------------------------------------- Equity securities 68% 69% 65% -- 75% Fixed Income 25% 22% 25% -- 35% Other 7% 9% 0% -- 10% - -------------------------------------------------------------------------------- Total 100% 100% ================================================================================
The Company invests in a diversified portfolio consisting of an array of asset classes that attempts to maximize returns while minimizing volatility. These asset classes include U.S. domestic equities, developed market equities, emerging market equities, private equity, global high quality and high yield fixed income. The Company continually monitors the investment results of these asset classes and its fund managers, and explores other potential asset classes for possible future investment. During 2003, the Company entered into a risk reduction program with respect to the pension fund investments in U.S. domestic equities. The goal of the program was to reduce the potential impact to the plan's funded status of a further decline in the U.S. equity markets. The plan assets for the defined benefit pension plan at December 31, 2003 and 2002 include 1.3 million shares of Allegheny Technologies common stock with a fair value of $17.2 million and $8.1 million, respectively. Dividends of $0.3 million and $0.9 million were received by the plan in 2003 and 2002, 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. The Company is not required to make cash contributions to its U.S. defined pension plan for 2004 and, based upon current actuarial studies, does not expect to be required to make cash contributions to its U.S. defined pension plan for at least the next several years. In accordance with labor contracts, the Company funds certain retiree health care benefits for Allegheny Ludlum using plan assets held in a Voluntary Employee Benefit Association (VEBA) trust. During 2003, 2002 and 2001, the Company was able to fund $14.2 million, $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 $100 million as of December 31, 2003. Pension costs for defined contribution plans were $10.5 million in 2003, $12.1 million in 2002, and $14.8 million in 2001. Company contributions to the defined contribution plans are funded with cash. 50 | Annual Report 2003 | ATI 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 2003 and in 2002, and $1.1 million in 2001. 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 10.4% in 2004 and is assumed to gradually decrease to 5.0% in the year 2014 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 (In millions) Point Increase Point Decrease - -------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components for the year Ended December 31, 2003 $ 6.8 $ (5.6) Effect on other postretirement benefit obligation at December 31, 2003 $ 109.1 $(87.0) ==========================================================================================================
The annual measurement date for the Company's retirement benefits is November 30. At November 30, 2003, the value of the accumulated pension benefit obligation (ABO) exceeded the value of pension assets by approximately $195 million. A minimum pension liability was recognized in 2002 as a result of a severe decline in the equity markets from 2000 through 2002, higher benefit liabilities from long-term labor contracts negotiated in 2001, and a lower assumed discount rate for valuing liabilities. 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 cost 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. In the fourth quarter of 2003, the Company's adjustment of the minimum pension liability resulted in a $47 million increase to stockholders' equity, presented as other comprehensive income (loss). These charges and adjustments did not affect the Company's reported net loss and do not have a cash impact. In addition, they do 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 2001 and 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 in 2000 through 2002, the pension funded status at the beginning of 2004 is substantially below the threshold required for reimbursement of retiree medical costs in 2004. The ability to resume reimbursement from pension assets for retiree health care costs beyond 2004 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. NOTE 9.ACQUISITIONS AND DIVESTITURES -- During 2003, the Company announced the formation of Uniti LLC ("Uniti"), a 50% owned joint venture with Russian-based VSMPO AVISMA to produce and market a range of industrial commercially pure titanium products on a worldwide basis. This investment is accounted for under the equity method. Uniti operating results for 2003 were not material. 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. ATI | Annual Report 2003 | 51 NOTE 10. BUSINESS SEGMENTS -- The Company operates in three business segments: Flat-Rolled Products, High Performance Metals and Engineered Products. In the 2003 fourth quarter, the Company reorganized certain operations and management reporting. The Industrial Products segment was renamed Engineered Products and Rome Metals was transferred to this segment from Flat-Rolled Products. Prior periods have been restated to conform to the current organization structure. 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, Allegheny Ludlum's 60% interest in STAL, and the Company's industrial titanium joint venture known as Uniti LLC. 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 alloys and metals, primarily in slab and long products such as ingot, billet, bar, rod, wire, coil and seamless tube. The companies in this segment include Allvac, Allvac Ltd (U.K.) and Wah Chang, which also produces and sells zirconium chemicals. The Engineered Products segment's principal business produces tungsten powder, tungsten carbide materials and carbide cutting tools. This segment also produces carbon alloy steel impression die forgings and large grey and ductile iron castings, and performs conversion services. The companies in this segment are Metalworking Products, Portland Forge, Casting Service and Rome Metals. 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) 2003 2002 2001 - ------------------------------------------------------------------------------- Total sales: Flat-Rolled Products $ 1,060.4 $ 1,050.9 $ 1,110.8 High Performance Metals 685.5 660.1 831.7 Engineered Products 259.9 243.8 285.4 - ------------------------------------------------------------------------------- Total sales 2,005.8 1,954.8 2,227.9 Intersegment sales: Flat-Rolled Products 16.9 10.6 30.4 High Performance Metals 43.8 30.1 59.9 Engineered Products 7.7 6.3 9.6 - ------------------------------------------------------------------------------- Total intersegment sales 68.4 47.0 99.9 - ------------------------------------------------------------------------------- Sales to external customers: Flat-Rolled Products 1,043.5 1,040.3 1,080.4 High Performance Metals 641.7 630.0 771.8 Engineered Products 252.2 237.5 275.8 - ------------------------------------------------------------------------------- Total sales to external customers $ 1,937.4 $ 1,907.8 $ 2,128.0 ===============================================================================
Total international sales were $441.9 million in 2003, $440.0 million in 2002 and $499.5 million in 2001. Of these amounts, sales by operations in the United States to customers in other countries were $270.0 million in 2003, $276.9 million in 2002 and $318.9 million in 2001. 52 | Annual Report 2003 | ATI
(In millions) 2003 2002 2001 - ----------------------------------------------------------------------------------------------- Operating profit (loss): Flat-Rolled Products $ (14.1) $ (8.6) $ (40.0) High Performance Metals 26.2 31.2 82.0 Engineered Products 7.8 4.7 12.3 - ---------------------------------------------------------------------------------------------- Total operating profit 19.9 27.3 54.3 Corporate expenses (20.5) (20.6) (25.5) Interest expense, net (27.7) (34.3) (29.3) Management transition and restructuring costs (69.8) (42.8) (74.2) Other expenses, net of gains on asset sales (47.7) (11.6) (14.8) Retirement benefit (expense) income (134.4) (21.8) 53.1 - ---------------------------------------------------------------------------------------------- Loss before income taxes $(280.2) $(103.8) $ (36.4) ==============================================================================================
In accordance with accounting standards, in 2002, the Company discontinued the amortization of goodwill. For the year ended December 31, 2001 goodwill amortization was $3.5 million, $1.4 million and $0.9 million for the Flat-Rolled Products, High Performance Metals and Engineered Products segments, respectively. Management transition costs, which are classified as selling and administrative expenses on the statement of operations, and restructuring costs, which are classified as restructuring costs in the statement of operations, includes impairments for long-lived assets, charges related to severance and other facility closure charges. For the years ended December 31, 2003, 2002, and 2001, restructuring charges excluded from segment operations were $62.4 million, $42.8 million and $74.2 million, respectively. Costs associated with the termination of a stock-based management incentive program and contractual obligations related to the 2003 CEO transition of $7.4 million are classified as selling and administrative expenses in the statement of operations. Other expenses, net of gains on asset sales includes charges incurred in connection with closed operations, pretax gains and losses on the sale of surplus real estate, non-strategic investments and other assets, operating results from equity-method investees, minority interest and other non-operating income or expense, which are primarily included in selling and administrative expenses, and in other income (expense) in the statement of operations. These items resulted in net charges of $47.7 million, $11.6 million and $14.8 million in 2003, 2002, and 2001, respectively. For 2003, net charges include litigation expense of $22.5 million relating to an unfavorable jury verdict on March 10, 2004 concerning a lease of property in San Diego, CA. Retirement benefit (expense) income represents pension income or expense and other postretirement benefit expenses. Operating profit with respect to the Company's business segments excludes any retirement benefit expense or income.
(In millions) 2003 2002 2001 - --------------------------------------------------------------------------- Depreciation and amortization: Flat-Rolled Products $ 39.0 $ 55.3 $ 63.3 High Performance Metals 22.8 20.9 20.3 Engineered Products 11.7 13.0 14.0 Corporate 1.1 0.8 1.0 - --------------------------------------------------------------------------- Total depreciation and amortization $ 74.6 $ 90.0 $ 98.6 - --------------------------------------------------------------------------- Capital expenditures: Flat-Rolled Products $ 28.2 $ 15.4 $ 19.4 High Performance Metals 44.4 30.8 75.8 Engineered Products 1.1 2.5 8.9 Corporate 0.7 -- 0.1 - --------------------------------------------------------------------------- Total capital expenditures $ 74.4 $ 48.7 $ 104.2 - --------------------------------------------------------------------------- Identifiable assets: Flat-Rolled Products $ 787.9 $ 850.0 $ 1,010.1 High Performance Metals 602.0 594.7 625.0 Engineered Products 178.1 186.5 196.9 Corporate: Pension Asset 144.0 165.1 632.9 Income Taxes 34.3 158.1 82.0 Other 138.6 138.8 96.3 - --------------------------------------------------------------------------- Total assets $ 1,884.9 $ 2,093.2 $ 2,643.2 ===========================================================================
ATI | Annual Report 2003 | 53 Geographic information for external sales, based on country of origin and assets are as follows:
PERCENT Percent Percent (In millions) 2003 OF TOTAL 2002 Of Total 2001 Of Total - ----------------------------------------------------------------------------------------------------- External Sales: United States $ 1,495.5 77% $ 1,468.0 77% $ 1,628.5 77% United Kingdom 97.2 5% 93.2 5% 117.1 5% Germany 82.6 4% 86.9 5% 89.9 4% France 54.3 3% 61.8 3% 90.7 4% Canada 42.4 2% 40.2 2% 55.1 3% China 37.1 2% 21.3 1% 18.4 1% Japan 25.0 1% 28.7 2% 32.0 1% Other 103.3 6% 107.7 5% 96.3 5% - -------------------------------------------------------------------------------------------------- Total External Sales $ 1,937.4 100% $ 1,907.8 100% $ 2,128.0 100% ==================================================================================================
PERCENT Percent Percent (In millions) 2003 OF TOTAL 2002 Of Total 2001 Of Total - ----------------------------------------------------------------------------------------------------- Total Assets: United States $ 1,580.1 84% $ 1,800.7 86% $ 2,357.5 89% United Kingdom 169.1 9% 170.8 8% 157.3 6% China 50.7 3% 49.2 2% 51.6 2% Germany 24.5 1% 18.7 1% 24.2 1% Japan 10.3 1% 7.3 --% 10.8 1% France 9.9 --% 8.2 --% 6.8 --% Canada 3.7 --% 4.9 --% 5.1 --% Other 36.6 2% 33.4 3% 29.9 1% - -------------------------------------------------------------------------------------------------- Total Assets $ 1,884.9 100% $ 2,093.2 100% $ 2,643.2 100% ==================================================================================================
NOTE 11. RESTRUCTURING AND OTHER CHARGES -- Restructuring Charges For the years ended December 31, 2003, 2002 and 2001, the Company recorded restructuring charges of $62.4 million, $42.8 million and $74.2 million, respectively, which are separately classified in the statement of operations and which are not included in segment results. In 2003, the Company recorded charges of $62.4 million, including $47.5 million for impairment of long-lived assets in the Company's Flat-Rolled Products segment, $11.1 million for workforce reductions across all business segments and the corporate office, and $3.8 million for facility closure charges including present-valued lease termination costs, net of forecasted sublease rental income, at the corporate office. In the 2003 fourth quarter, based on existing and projected operating levels at the Company's remaining operations in Houston, PA and its Washington Flat Roll coil facility located in Washington, PA, it was determined that the net book values of these facilities were in excess of their estimated fair market values based on expected future cash flows. Charges for the Houston facility and the Washington Flat Roll coil facility were recorded to write down the book values of these facilities to their estimated fair market values. These asset impairment charges do not impact current operations at these facilities. The workforce reductions affected approximately 375 employees across all segments and the corporate office. Approximately $5 million of the severance charges will be paid from the Company's pension plan, and at December 31, 2003, approximately $9 million of the workforce reduction and facility closure charges are future cash costs that will be paid over the next ten years. 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 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 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 pretax non-cash asset impairment charge of $34.4 54 | Annual Report 2003 | ATI million, representing the book value of the facility in excess of its estimated 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 resulted in a severance charge of $8.4 million, net of a retirement benefits curtailment gain. 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. 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 corporate office. Of the $74.2 million restructuring charge recorded in 2001, approximately $5 million resulted in expenditures of cash. At December 31, 2003, substantially all cash expenditures related to the 2002 and 2001 restructuring charges had been paid. Other Charges In the 2003 fourth quarter, the Company recorded $34.7 million in other charges, including closed company charges of $22.5 million for litigation, $7.6 million for environmental and insurance matters, and $4.6 million for various non-operating asset impairments. Closed company charges were determined based on the status of legal matters including court proceedings, and on updated estimates of the Company's liability for environmental closure costs and for liabilities under retrospectively-rated insurance programs. In the consolidated statement of operations, litigation and environmental charges are classified in selling and administrative expenses and insurance charges are classified in cost of sales. In 2002, the Company recorded $6.5 million in charges relating to its approximately 30% equity interest in New Piper Aircraft, Inc. ("New Piper"), 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) in the consolidated statement of operations. 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. Investments in subsidiaries, which are eliminated in consolidation, are included in other assets on the balance sheets. 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 deferred pension asset, pension liabilities or the related deferred taxes. The pension asset, liabilities and related deferred taxes and pension income or expense are recognized by the Guarantor Parent. Management and royalty fees charged to the Subsidiary and to the non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for purposes of this presentation. ATI | Annual Report 2003 | 55 ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT BALANCE SHEETS December 31, 2003
Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 0.3 $ 42.3 $ 37.0 $ -- $ 79.6 Accounts receivable, net 0.1 89.4 159.3 -- 248.8 Inventories, net -- 147.3 212.4 -- 359.7 Income tax refunds 7.2 -- -- -- 7.2 Prepaid expenses and other current assets -- 11.5 36.5 -- 48.0 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 7.6 290.5 445.2 -- 743.3 Property, plant, and equipment, net -- 326.3 384.8 -- 711.1 Deferred pension asset 144.0 -- -- -- 144.0 Deferred income taxes 34.3 -- -- -- 34.3 Cost in excess of net assets acquired -- 112.1 86.3 -- 198.4 Investments in subsidiaries and other assets 994.4 546.0 326.9 (1,813.5) 53.8 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,180.3 $ 1,274.9 $ 1,243.2 $ (1,813.5) $ 1,884.9 ============================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2.5 $ 92.4 $ 77.4 $ -- $ 172.3 Accrued liabilities 465.6 70.2 181.2 (522.4) 194.6 Short-term debt and current portion of long-term debt -- 9.6 18.2 -- 27.8 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 468.1 172.2 276.8 (522.4) 394.7 Long-term debt 309.4 349.9 45.1 (200.1) 504.3 Accrued postretirement benefits -- 316.8 190.4 -- 507.2 Pension liabilities 220.6 -- -- -- 220.6 Other long-term liabilities 7.5 22.8 53.1 -- 83.4 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,005.6 861.7 565.4 (722.5) 1,710.2 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 174.7 413.2 677.8 (1,091.0) 174.7 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,180.3 $ 1,274.9 $ 1,243.2 $ (1,813.5) $ 1,884.9 =============================================================================================================================
56 | Annual Report 2003 | ATI ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT STATEMENTS OF OPERATIONS For the year ended December 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------- Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------- SALES $ -- $962.1 $ 975.3 $ -- $1,937.4 Cost of sales 94.5 963.9 815.2 -- 1,873.6 Selling and administrative expenses 87.4 19.2 142.2 -- 248.8 Restructuring costs 7.6 49.1 5.7 -- 62.4 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before interest, other income and income taxes and cumulative effect of change in accounting principle (189.5) (70.1) 12.2 -- (247.4) Interest expense (income), net 20.2 10.0 (2.5) -- 27.7 Other income (expense) including equity in income (loss) of unconsolidated subsidiaries (71.8) (7.3) 9.1 64.9 (5.1) - ----------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (281.5) (87.4) 23.8 64.9 (280.2) - ----------------------------------------------------------------------------------------------------------------------------- Income tax provision (benefit) 31.8 (29.1) 140.7 (110.3) 33.1 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) before cumulative effect of change in accounting principle (313.3) (58.3) (116.9) 175.2 (313.3) Cumulative effect of change in accounting principle, net of tax (1.3) -- -- -- (1.3) - ----------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(314.6) $(58.3) $ (116.9) $ 175.2 $ (314.6) =============================================================================================================================
ALLEGHENY TECHNOLOGIES INCORPORATED FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT CONDENSED STATEMENTS OF CASH FLOWS For the year ended December 31, 2003
- --------------------------------------------------------------------------------------------------------------------------------- Non- Guarantor guarantor (In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated ================================================================================================================================= CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (57.5) $ 136.7 $ 24.5 $(21.7) $ 82.0 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES -- (28.2) (46.3) 4.2 (70.3) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 57.6 (109.2) 42.6 17.5 8.5 - -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 0.1 $ (0.7) $ 20.8 $ -- $ 20.2 ================================================================================================================================
ATI | Annual Report 2003 | 57 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 -- 164.9 227.4 -- 392.3 Income tax refunds 51.9 -- -- -- 51.9 Deferred income taxes 20.8 -- -- -- 20.8 Prepaid expenses and other current assets 0.3 8.8 22.9 -- 32.0 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 73.2 299.0 423.5 -- 795.7 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 1,169.8 625.5 347.1 (2,047.4) 95.0 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,493.5 $ 1,419.8 $ 1,227.3 $ (2,047.4) $ 2,093.2 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 1.9 $ 96.3 $ 73.1 $ -- $ 171.3 Accrued liabilities 510.8 52.1 97.9 (499.8) 161.0 Short-term debt and current portion of long-term debt -- 0.6 9.1 -- 9.7 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 512.7 149.0 180.1 (499.8) 342.0 Long-term debt 312.4 441.3 37.2 (281.5) 509.4 Accrued postretirement benefits -- 308.1 188.3 -- 496.4 Pension liabilities 216.0 -- -- -- 216.0 Other long-term liabilities 3.6 23.1 53.9 -- 80.6 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,044.7 921.5 459.5 (781.3) 1,644.4 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 448.8 498.3 767.8 (1,266.1) 448.8 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,493.5 $ 1,419.8 $ 1,227.3 $ (2,047.4) $ 2,093.2 ==================================================================================================================================
58 | Annual Report 2003 | ATI 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 costs -- 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 ========== ========== ========== ========== ==========
ATI | Annual Report 2003 | 59 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 (loss) 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 ========== ========== ========== ========== ==========
60 | Annual Report 2003 | ATI NOTE 13. PER SHARE INFORMATION -- The following table sets forth the computation of basic and diluted net loss per common share: (In millions except per share amounts)
Years ended December 31, 2003 2002 2001 - ------------------------------------------------------------------ ---------- ---------- ---------- Numerator: Basic and diluted net loss per common share before cumulative effect of change in accounting principle $ (313.3) $ (65.8) $ (25.2) Cumulative effect of change in accounting principle, net of tax (1.3) -- -- ---------- ---------- ---------- Numerator for and diluted loss per common share $ (314.6) $ (65.8) $ (25.2) ---------- ---------- ---------- Denominator: Weighted average shares 80.8 80.6 80.2 Contingent issuable stock -- -- 0.1 ---------- ---------- ---------- Denominator for basic and diluted loss per common share 80.8 80.6 80.3 ---------- ---------- ---------- Basic and diluted net loss per common share before cumulative effect of change in accounting principle $ (3.87) $ (0.82) $ (0.31) Cumulative effect of change in accounting principle (0.02) -- -- ---------- ---------- ---------- Basic and diluted net loss per common share $ (3.89) $ (0.82) $ (0.31) ========== ========== ==========
Weighted average shares issuable upon the exercise of stock options which were antidilutive, and thus not included in the calculation, were 7.5 million in 2003, 5.9 million in 2002 and 4.5 million in 2001. NOTE 14. COMMITMENTS AND CONTINGENCIES -- Rental expense under operating leases was $17.5 million in 2003, $15.9 million in 2002 and $22.2 million in 2001. Future minimum rental commitments under operating leases with non-cancelable terms of more than one year at December 31, 2003, were as follows: $11.9 million in 2004, $11.1 million in 2005, $9.5 million in 2006, $4.8 million in 2007, $3.7 million in 2008 and $6.1 million thereafter. 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 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 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. ATI | Annual Report 2003 | 61 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. 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, 2003, the Company's reserves for environmental remediation obligations totaled approximately $40.9 million, of which approximately $20.1 million were included in other current liabilities. The reserve includes estimated probable future costs of $13.7 million for federal Superfund and comparable state-managed sites; $8.8 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $6.5 million for owned or controlled sites at which Company operations have been discontinued; and $11.9 million for sites utilized by the Company in its ongoing operations. The Company continues to evaluate 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 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, 2003, the Company had adequate reserves, including accrued interest, for this matter. In March 1995, Kaiser Aerospace & Electronics Corporation ("Kaiser") filed a civil complaint against Teledyne Industries, Inc. (now TDY Industries, Inc. ("TDY"), a wholly-owned subsidiary of the Company, and Dimeling Schreiber & Park ("DS&P"), DS&P's general partners, and New Piper Aircraft, Inc. in the state court for Miami-Dade County, Florida. The complaint alleged that TDY breached a Cooperation and Shareholder's Agreement with Kaiser under which the 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 requested that the court impose a constructive trust on TDY's equity interest in privately held New Piper Aircraft, Inc., which represented approximately 30% of the equity of New Piper Aircraft, Inc., which interest was terminated in 2003 in a merger transaction involving New Piper. 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") are involved in litigation in State Court in San Diego, California concerning a lease of property located in San Diego, California ("San Diego facility"). 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"). 62 | Annual Report 2003 | ATI 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. TDY alleged 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 Port District filed a cross-complaint against TDY in March 2003. The Complaint alleged breach of contract for failure to pay rent and breach relating to removal of structures from the property. Trial on the state court matter commenced on February 25, 2004 and concluded on March 10, 2004. The jury rendered a verdict in favor of the Port on its claim and awarded damages to the Port District. As a result, ATI's results for 2003 reflect a charge of $22.5 million, which includes the jury award and related costs. The company plans to appeal the verdict. This charge is included in accrued liabilities on the consolidated balance sheet at December 31, 2003. In June 2003, the Port District also commenced a separate action in United States District Court in San Diego against the Company ("Federal Court Complaint") alleging federal, state and common law claims related to alleged environmental contamination on the property. The Federal Court Complaint seeks an unspecified amount of damages and a declaratory judgment as to TDY's liability for contamination on the property. Oral argument on the Company's Motion to Dismiss portions of the Federal Court Complaint is scheduled for March 15, 2004. The Company has denied the remaining allegations in the Federal Court Complaint. In another matter related to the San Diego facility, the Port District requested that the California Department of Toxic Substances Control ("DTSC") evaluate whether the property is regulated as a hazardous waste transportation, storage, or disposal facility under the Resource Conservation and Recovery Act ("RCRA") and similar state laws. In response to the Port District's request, on October 30, 2003 DTSC informed the Company that the closure of the four solid waste management units ("unit") at the San Diego facility is subject to DTSC oversight and that since facility-wide corrective action is proceeding under the oversight of the San Diego Regional Water Quality Control Board ("Regional Board"), DTSC's involvement would be limited, to the extent applicable, to unit closure and post-closure. The Company is evaluating data from the Site to respond to DTSC's positions. The Company conducted an environmental assessment of portions of the San Diego facility at the request of the Regional Board. A report of the assessment was submitted to the Regional Board and at this stage 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. Also, prior to vacating the San Diego facility, the Company was 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 Port District has removed underground storage tanks from the facility, and the Company is no longer awaiting approval of the closure. The Company is evaluating potential claims it has against neighboring property owners and other PRPs related to the environmental condition of the San Diego facility. The Port District has informed the Company that it has commenced a site-wide environmental investigation of the Property. While the outcome of these environmental matters cannot be predicted with certainty, and the Company believes that the claims against it are not meritorious, an adverse resolution of the matters relating to the San Diego facility could have a material adverse affect on the Company's results of operations and financial condition. TDY and another wholly-owned subsidiary of the Company, among others, have been identified by the U.S. Environmental Protection Agency (EPA) as PRPs at the Li Tungsten Superfund Site in Glen Cove, New York. The Company believes that most of the contamination at the Site resulted from work done while the U.S. 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 U.S. Government. No trial date has been scheduled. In March 2003, the Court ordered the parties, including the U.S. Government, to fund a portion of the remediation costs at the Site. TDY and EPA continue discussions to settle this matter. The U.S. Government and two other PRPs have reached a proposed settlement with EPA in 2003 ("the Settlement"), the terms of which may preclude TDY's complaint from proceeding against the U.S. Government. The Settlement is subject to public comment and approval by the Court. The Company submitted comments on the Settlement on the grounds that it is not supported by the facts, and is unfair and unreasonable. The Company expects to oppose entry of the Settlement by the Court. The Company is also seeking contribution from other PRPs at the Site. Based on information presently available, the Company believes its reserves on this matter are adequate. An adverse resolution of this matter could have a material adverse effect on the Company's results of operations and financial condition. ATI | Annual Report 2003 | 63 Since 1990, TDY has been operating under a Corrective Action Order from the EPA for a facility that TDY owns and formerly operated in Hartville, Ohio. TDY operates an interim remediation system at the facility and is preparing a plan for EPA approval to carry out additional remediation activities. At December 31, 2003, the Company had adequate reserves for the continued operation of the interim system and for additional remediation costs it expects to incur for the additional remediation activities. 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 - -------------------------------------------------------- ------------- ------------ ------------ ------------ 2003 - Sales $ 480.5 $ 489.9 $ 482.6 $ 484.4 Gross profit 14.6 20.8 18.2 10.2 Net loss before cumulative effect of change in accounting principle (25.8) (26.0) (28.8) (232.7) Net loss (27.1) (26.0) (28.8) (232.7) ------------- ------------ ------------ ------------ Basic and diluted net loss per common share before cumulative effect of change in accounting principle $ (0.32) $ (0.32) $ (0.36) $ (2.89) ------------- ------------ ------------ ------------ Basic and diluted net loss per common share $ (0.34) $ (0.32) $ (0.36) $ (2.89) ------------- ------------ ------------ ------------ Average shares outstanding 80,708,060 80,961,069 81,077,966 80,642,124 ============= ============ ============ ============ 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 ============= ============ ============ ============
The 2003 fourth quarter includes the effect of a $138.5 million non-cash special charge to establish a valuation allowance for a majority of the Company's net deferred tax assets, as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The 2003 fourth quarter also includes charges of $47.5 million for impairment of long-lived assets in the Company's Flat-Rolled Products segment; $9.9 million for workforce reductions across all business segments and the corporate office; $3.8 million for facility closure charges including present-valued lease termination costs at the corporate office; and $34.7 million for closed company charges and other charges, including $22.5 million for litigation expense. The 2003 third quarter includes a charge of $8.6 million, including $7.4 million for management transition and $1.2 million for workforce reductions. Also included is a $4.0 million in interest income related to a Federal income tax settlement associated with prior years. The 2002 fourth quarter includes a charge of $34.4 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 a charge of $7.2 million, including $5.5 million for workforce reductions and $1.7 million related to the Company's approximately 30% equity in net losses of New Piper Aircraft, Inc. 64 | Annual Report 2003 | ATI NOTE 16. SUBSEQUENT EVENT -- J&L SPECIALTY STEEL TRANSACTION On February 17, 2004, the Company announced that an Asset Purchase Agreement was signed with Arcelor and J&L Specialty Steel, LLC under which a wholly owned ATI subsidiary will acquire substantially all of the assets of J&L Specialty Steel. The transaction, which is targeted for closing on May 3, 2004, is conditioned upon completion of due diligence, the successful negotiation of new collective bargaining agreements with the USWA at both Allegheny Ludlum and J&L Specialty Steel, approval by ATI's secured lenders, and customary regulatory approvals. J&L Specialty Steel is a leading manufacturer of flat-rolled stainless steel products, and is a wholly owned subsidiary of Arcelor. ATI | Annual Report 2003 | 65 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 auditors and conduct operational and special audits. The independent auditors 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 five independent non-employee members. Among its principal duties, the Committee is responsible for recommending the independent auditors to conduct the annual audit of the Company's financial statements and for reviewing the financial reporting and accounting practices. /s/ L. Patrick Hassey /s/ Richard J. Harshman /s/ Dale G. Reid L. Patrick Hassey Richard J. Harshman Dale G. Reid President Executive Vice President, Vice President - Controller, and Chief Executive Officer Finance and Chief Accounting Officer and Chief Financial Officer Treasurer
66 | Annual Report 2003 | ATI COMMON STOCK PRICES The Company's common stock is traded on the New York Stock Exchange (symbol ATI). At December 31, 2003, there were approximately 7,555 record holders of Allegheny Technologies Incorporated common stock. The Company paid a quarterly cash dividend of $0.06 per share on its common stock for the four quarters of 2003 and the 2002 fourth quarter. The Company paid a quarterly cash dividend of $0.20 per share for the first three quarters of 2002. The Company's stock price ranges were as follows:
Quarter Ended -------------------------------------------------- 2003 March 31 June 30 September 30 December 31 - ---- ---------- ---------- ------------ ----------- High $ 6.72 $ 7.28 $ 8.14 $ 13.90 Low $ 2.45 $ 3.00 $ 6.30 $ 6.80
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
SELECTED FINANCIAL DATA
For the Years Ended December 31, 2003 2002 2001 2000 1999 - -------------------------------------------- ------------ ------------ ------------ ------------ ------------ Volume: Flat-Rolled Products (finished tons) 478,353 487,335 498,066 608,601 592,619 Commodity (finished tons) 342,689 350,301 367,894 460,940 475,557 High value (finished tons) 135,664 137,034 130,172 147,661 117,062 High Performance Metals -- nickel-based and specialty steel alloys (000's lbs.) 35,168 35,832 51,899 46,612 43,905 High Performance Metals -- titanium mill products (000's lbs.) 18,436 19,044 23,070 24,798 22,792 High Performance Metals -- exotic alloys (000's lbs.) 4,245 3,712 3,457 3,691 3,756 ------------ ------------ ------------ ------------ ------------ Average Prices: Flat-Rolled Products (per finished ton) $ 2,178 $ 2,134 $ 2,162 $ 2,354 $ 2,081 Commodity (per finished ton) 1,581 1,529 1,527 1,819 1,562 High value (per finished ton) 3,687 3,677 3,956 4,025 4,189 High Performance Metals -- nickel-based and specialty steel alloys (per lb.) 6.57 6.39 6.31 5.86 5.98 High Performance Metals -- titanium mill products (per lb.) 11.50 11.83 11.70 10.87 11.70 High Performance Metals -- exotic alloys (per lb.) 37.64 36.29 33.52 35.56 34.77
(In millions except per share amounts)
For the Years Ended December 31, 2003 2002 2001 2000 1999 - -------------------------------- ------------ ------------ ------------ ------------ ------------ Sales: Flat-Rolled Products $ 1,043.5 $ 1,040.3 $ 1,080.4 $ 1,436.8 $ 1,288.8 High Performance Metals 641.7 630.0 771.8 735.4 722.7 Engineered Products 252.2 237.5 275.8 288.2 284.6 ------------ ------------ ------------ ------------ ------------ Total sales $ 1,937.4 $ 1,907.8 $ 2,128.0 $ 2,460.4 $ 2,296.1 ============ ============ ============ ============ ============ Operating profit (loss): Flat-Rolled Products $ (14.1) $ (8.6) $ (40.0) $ 117.9 $ 80.4 High Performance Metals 26.2 31.2 82.0 66.5 87.0 Engineered Products 7.8 4.7 12.3 23.4 17.0 ------------ ------------ ------------ ------------ ------------ Total operating profit $ 19.9 $ 27.3 $ 54.3 $ 207.8 $ 184.4 ============ ============ ============ ============ ============
ATI | Annual Report 2003 | 67
For the Years Ended December 31, 2003 2002 2001 2000 1999 - -------------------------------------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations Before income tax provision (benefit), extraordinary items and cumulative effect of change in accounting principle $ (280.2) $ (103.8) $ (36.4) $ 208.8 $ 174.2 ========== ========== ========== ========== ========== Income (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting principle $ (313.3) $ (65.8) $ (25.2) $ 132.5 $ 111.0 Income from discontinued operations -- -- -- -- 59.6 Extraordinary gains on sales of operations -- -- -- -- 129.6 Cumulative effect of change in accounting principle (1.3) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (314.6) $ (65.8) $ (25.2) $ 132.5 $ 300.2 ========== ========== ========== ========== ========== Basic net income (loss) per common share: Income (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting principle $ (3.87) $ (0.82) $ (0.31) $ 1.60 $ 1.17 Income from discontinued operations -- -- -- -- 0.62 Extraordinary gains on sales of operations -- -- -- -- 1.36 Cumulative effect of change in accounting principle (0.02) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Basic net income (loss) per common share $ (3.89) $ (0.82) $ (0.31) $ 1.60 $ 3.15 ========== ========== ========== ========== ========== Diluted net income (loss) per common share: Income (loss) from continuing operations before extraordinary items $ (3.87) $ (0.82) $ (0.31) $ 1.60 $ 1.16 Income from discontinued operations -- -- -- -- 0.62 Extraordinary gains on sales of operations -- -- -- -- 1.35 Cumulative effect of change in accounting principle (0.02) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Diluted net income (loss) per common share $ (3.89) $ (0.82) $ (0.31) $ 1.60 $ 3.13 ========== ========== ========== ========== ==========
As of and for the Years Ended December 31, 2003 2002 2001 2000 1999 - ------------------------------------------ ---------- ---------- ---------- ---------- ---------- Dividends declared per common share $ 0.24 $ 0.66 $ 0.80 $ 0.80 $ 1.28 ---------- ---------- ---------- ---------- ---------- Working capital 348.6 453.7 574.0 590.6 475.3 ---------- ---------- ---------- ---------- ---------- Total assets 1,884.9 2,093.2 2,643.2 2,776.2 2,750.6 ========== ========== ========== ========== ========== Long-term debt 504.3 509.4 573.0 490.6 200.3 ========== ========== ========== ========== ========== Total debt 532.1 519.1 582.2 543.8 353.0 ========== ========== ========== ========== ========== Cash and cash equivalents 79.6 59.4 33.7 26.2 50.7 ========== ========== ========== ========== ========== Stockholders' equity 174.7 448.8 944.7 1,039.2 1,200.2 ========== ========== ========== ========== ==========
Net income (loss) was adversely affected by restructuring and litigation charges of $84.9 million and a $138.5 million charge to record a valuation allowance for the majority of the Company's net deferred tax assets in 2003, and restructuring charges of $42.8 million in 2002 and $74.2 million in 2001. Stockholders' equity for 2003 includes the effect of recognizing the $138.5 million valuation allowance on net deferred tax assets and a $47 million adjustment to the minimum pension liability, net of related tax effects. Stockholders' equity for 2002 includes the effect of recognizing a minimum pension liability of $406 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 $130 million, net of $80 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. 68 | Annual Report 2003 | ATI EX-21.1 8 j0498601exv21w1.txt SUBSIDIARIES 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 EX-23.1 9 j0498601exv23w1.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 19, 2004 (except for Note 16, as to which the date is February 17, 2004, and except for Note 14, as to which the date is March 10, 2004), included in the 2003 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 Allegheny Technologies Incorporated of our report dated January 19, 2004 (except for Note 16, as to which the date is February 17, 2004, and except for Note 14, as to which the date is March 10, 2004) 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, 2003. /s/ Ernst & Young LLP ------------------------------ Pittsburgh, Pennsylvania March 12, 2004 EX-31.1 10 j0498601exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATIONS I, L. Patrick Hassey, 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 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ L. Patrick Hassey -------------------------- L. Patrick Hassey President and Chief Executive Officer EX-31.2 11 j0498601exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATIONS I, Richard J. Harshman, Executive 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 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ Richard J. Harshman ----------------------------------- Richard J. Harshman Executive Vice President - Finance and Chief Financial Officer EX-32.1 12 j0498601exv32w1.txt CERTIFICATION EXHIBIT 32.1 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, 2003 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 15, 2004 /s/ L. Patrick Hassey -------------------------------------- L. Patrick Hassey President and Chief Executive Officer Date: March 15, 2004 /s/ Richard J. Harshman -------------------------------------- Richard J. Harshman Executive Vice President, Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----