-----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, Cml6VeZwkqgMmeU1YNq67irVT31mVCWAZAMgCpSuha8/uyuQAyt9ZLUvEru3Vovw 4CcMG8XD8U6Z4p6wgq69QQ== 0001018963-98-000015.txt : 19981118 0001018963-98-000015.hdr.sgml : 19981118 ACCESSION NUMBER: 0001018963-98-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHENY TELEDYNE INC CENTRAL INDEX KEY: 0001018963 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 251792394 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12001 FILM NUMBER: 98752326 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 10-Q 1 THIRD QUARTER 1998 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to _____ Commission File Number 1-12001 ALLEGHENY TELEDYNE INCORPORATED ______________________________________________________________________ (Exact Name of Registrant as Specified in its Charter) Delaware 25-1792394 _______________________________________ ____________________________ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 1000 Six PPG Place Pittsburgh, Pennsylvania 15222-5479 _______________________________________ ____________________________ (Address of Principal Executive Offices) (Zip Code) (412) 394-2800 ___________________________________________________ (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At November 6, 1998, the Registrant had outstanding 196,182,548 shares of its common stock. ALLEGHENY TELEDYNE INCORPORATED SEC FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1998 INDEX Page No. PART I. - FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions except share and per share amounts) (Unaudited)
September 30, December 31, 1998 1997 ---- ---- ASSETS Cash and cash equivalents $ 68.4 $ 53.7 Short-term investments available for sale -- 34.4 Accounts receivable 540.9 576.0 Inventories 670.1 697.9 Deferred income taxes 65.3 40.3 Tax refund 8.5 9.4 Prepaid expenses and other current assets 35.1 32.3 ---------- ---------- Total Current Assets 1,388.3 1,444.0 Property, plant and equipment 806.2 753.8 Prepaid pension cost 422.9 379.7 Cost in excess of net assets acquired 257.4 186.5 Other assets 110.3 134.2 ---------- ---------- Total Assets $ 2,985.1 $ 2,898.2 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 214.0 $ 267.9 Accrued liabilities 325.0 328.8 Current portion of long-term debt 2.4 4.7 Total Current Liabilities 541.4 601.4 Long-term debt 369.6 330.4 Accrued postretirement benefits 575.6 574.5 Other 159.9 147.3 ---------- ---------- Total Liabilities 1,646.5 1,653.6 ---------- ---------- Stockholders' Equity: Preferred stock, par value $0.10: authorized- 50,000,000 shares; issued-None -- -- Common stock, par value $0.10: authorized-600,000,000 shares; issued-197,937,664 shares at September 30, 1998 and 197,730,720 shares at December 31, 1997; outstanding-197,131,264 shares at September 30, 1998 and 195,713,604 shares at December 31, 1997 19.8 19.8 Additional paid-in capital 467.0 463.5 Retained earnings 883.2 822.6 Treasury stock: 806,400 shares at September 30, 1998 and 2,017,116 shares at December 31, 1997 (24.0) (60.2) Foreign currency translation losses (8.9) (2.4) Unrealized gains on securities 1.5 1.3 ---------- ---------- Total Stockholders' Equity 1,338.6 1,244.6 ---------- ---------- Total Liabilities and Stockholders' Equity $ 2,985.1 $ 2,898.2 ========== ==========
The accompanying notes are an integral part of these statements. 3 ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Sales $ 927.1 $ 984.2 $2,948.4 $3,038.6 Costs and expenses: Cost of sales 707.8 752.7 2,248.8 2,304.3 Selling and administrative expenses 117.9 119.4 359.3 370.4 Merger and restructuring costs -- -- 67.8 10.4 Interest expense, net 4.0 5.1 12.7 14.1 --------- --------- --------- --------- 829.7 877.2 2,688.6 2,699.2 Earnings before other income 97.4 107.0 259.8 339.4 Other income 9.7 9.2 11.8 46.8 --------- --------- --------- --------- Income before income taxes 107.1 116.2 271.6 386.2 Provision for income taxes 41.6 42.6 103.7 146.9 --------- --------- --------- --------- Net income $ 65.5 $ 73.6 $ 167.9 $ 239.3 ========= ========= ========= ========= Basic net income per common share $ 0.33 $ 0.37 $ 0.85 $ 1.22 ======== ======== ========= ========= Diluted net income per common share $ 0.33 $ 0.37 $ 0.85 $ 1.19 ======== ======== ========= =========
The accompanying notes are an integral part of these statements. 4 ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)
Nine Months Ended September 30, ------------------- 1998 1997 -------- --------- Operating Activities: Net income $ 167.9 $ 239.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 81.2 80.5 Non-cash restructuring costs 50.8 -- Deferred income taxes 1.7 -- Gains on sales of businesses and investments (0.2) (53.7) Change in operating assets and liabilities: Accounts payable (70.3) (33.0) Prepaid pension cost (66.1) (41.3) Accounts receivable 55.0 (29.9) Inventories 39.7 (30.5) Accrued income taxes (28.6) 8.4 Accrued liabilities and other 7.0 10.1 --------- --------- Cash provided by operating activities 238.1 149.9 Investing Activities: Short-term investments - sales 34.4 31.6 Short-term investments - purchases -- (2.5) --------- --------- 34.4 29.1 Purchases of businesses and investment in ventures (129.3) (37.5) Purchases of property, plant and equipment (118.3) (76.5) Proceeds from the sale of businesses and investments 27.2 58.4 Disposals of property, plant and equipment 12.5 13.4 Other (6.9) (4.7) --------- --------- Cash used by investing activities (180.4) (17.8) Financing Activities: Increase in long-term debt 47.0 2.5 Payments on long-term debt (8.1) (28.0) --------- --------- Net increase (decrease) in long-term debt 38.9 (25.5) Cash dividends paid (91.0) (84.3) Exercises of stock options 9.1 34.6 Purchases of treasury stock -- (86.7) Other -- 1.1 --------- --------- Cash used in financing activities (43.0) (160.8) Increase (decrease) in cash and cash equivalents 14.7 (28.7) Cash and cash equivalents at beginning of the year 53.7 64.0 --------- --------- Cash and cash equivalents at end of period $ 68.4 $ 35.3 ========= =========
The accompanying notes are an integral part of these statements. 5 ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Accounting Policies Basis of Presentation - --------------------- The interim consolidated financial statements include the accounts of Allegheny Teledyne Incorporated and its subsidiaries ("Allegheny Teledyne" or the "Company"). As described in Note 6, on March 24, 1998, Allegheny Teledyne acquired the stock of Oregon Metallurgical Corporation ("OREMET"). The merger was accounted for under the pooling of interests method of accounting and these unaudited consolidated financial statements reflect the combined financial position, operating results and cash flows of Allegheny Teledyne and OREMET as if they had been combined for all periods presented. These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1997 Annual Report. The results of operations for these interim periods are not necessarily indicative of the operating results for a full year. Accounting Pronouncements - ------------------------- Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997. This statement has been adopted by the Company in 1998, and did not have a material effect on the consolidated financial statements. Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued in February 1998. This statement revises employers' disclosures about pension and postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt this statement beginning with its 1998 Annual Report. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is presently evaluating the effect of adopting this statement. 6 Note 2. Inventories Inventories were as follows (in millions):
September 30, December 31, 1998 1997 ------- ------- Raw materials and supplies $ 180.7 $ 212.8 Work-in-process 520.8 561.2 Finished goods 143.0 145.5 --------- --------- Total inventories at current cost 844.5 919.5 Less allowances to reduce current cost values to LIFO basis (165.4) (206.4) Progress payments (9.0) (15.2) --------- --------- Total inventories $ 670.1 $ 697.9 ========= =========
Note 3. Business Segments Information on the Company's business segments was as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ----------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Sales: Specialty metals $ 486.9 $ 531.8 $ 1,559.4 $ 1,634.7 Aerospace and electronics 244.4 221.7 739.4 688.9 Industrial 119.7 121.7 390.0 383.8 Consumer 59.5 60.2 171.2 181.5 --------- -------- --------- --------- Total continuing operations 910.5 935.4 2,860.0 2,888.9 Operations sold or held for sale 16.6 48.8 88.4 149.7 --------- -------- --------- --------- Total sales $ 927.1 $ 984.2 $ 2,948.4 $ 3,038.6 ========= ======== ========= ========= Operating Profit: Specialty metals $ 59.6 $ 77.5 $ 208.8 $ 248.2 Aerospace and electronics 25.0 20.0 74.5 65.8 Industrial 10.9 12.3 43.5 46.7 Consumer 5.9 8.1 13.7 22.9 --------- -------- --------- --------- Total operating profit 101.4 117.9 340.5 383.6 Merger and restructuring costs -- -- (67.8) (10.4) Corporate expenses (8.9) (9.4) (27.3) (31.3) Interest expense, net (4.0) (5.1) (12.7) (14.1) Investments and operations sold or held for sale 8.0 9.0 7.1 47.0 Excess pension income 10.6 3.8 31.8 11.4 -------- -------- --------- --------- Income before income taxes $ 107.1 $ 116.2 $ 271.6 $ 386.2 ========= ========= ========= =========
In the 1998 nine months, merger and restructuring costs included deal costs of $10.3 million related to the acquisition of OREMET, along with pretax charges of $5.8 million for a planned salaried workforce reduction related to integrating the operations of OREMET and Wah Chang. Allegheny Ludlum also recorded a $19.3 million pretax charge due to a reduction in salaried workforce. In addition, pretax charges of $32.4 million were recorded for 7 equipment write-offs and other reserves at Allegheny Ludlum and reserves for asset sales at other specialty metals units. In the 1997 third quarter, investments and operations sold or held for sale included an $8.4 million gain on the sale of Teledyne Economic Development. In the 1997 second quarter, investments and operations sold or held for sale included a pretax gain of $27.6 on the sale of the Company's investment in Semtech Corporation common stock and a $3.1 million pretax gain on other investments. These gains were partially offset by a pretax charge of $6.8 million for a legal settlement of an U.S. government contract dispute related to a unit divested in 1995. The 1997 first quarter included a pretax gain of $15.3 million on the sale of the Company's investment in Nitinol Development Corporation and a pretax charge of $5.3 million to write-off a research and development venture. Pension income in excess of amounts allocated to business segments to offset pension and other postretirement benefit expenses is presented separately. Note 4. Net Income Per Share In 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share." Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is computed in a manner similar to fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to Statement No. 128 requirements. 8 The following table sets forth the computation of basic and diluted net income per common share (in millions, except per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Numerator: Numerator for basic and diluted net income per common share - net income available to common stockholders $ 65.5 $ 73.6 $ 167.9 $ 239.3 ======== ======== ======== ========= Denominator: Weighted average shares 197.0 196.8 196.6 196.6 Contingent issuable stock 0.4 0.2 0.3 0.2 -------- -------- -------- --------- Denominator for basic net income per common share 197.4 197.0 196.9 196.8 Effect of dilutive securities: Employee stock options 1.0 3.1 1.6 3.6 -------- -------- -------- --------- Dilutive potential common shares 1.0 3.1 1.6 3.6 Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 198.4 200.1 198.5 200.4 ======== ======== ======== ========= Basic net income per common share $ 0.33 $ 0.37 $ 0.85 $ 1.22 ======== ======== ======== ========= Diluted net income per common share $ 0.33 $ 0.37 $ 0.85 $ 1.19 ======== ======== ======== =========
Note 5. Comprehensive Income As of January 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. Statement No. 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation gains or losses, which are reported separately in stockholders' equity, to be included in other comprehensive income. The adoption of this statement had no impact on the Company's net income or stockholders' equity. 9 The components of comprehensive income, net of tax, were as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Net income $ 65.5 $ 73.6 $ 167.9 $ 239.3 Foreign currency translation losses (2.9) (1.5) (6.5) (4.9) Unrealized gains (losses) on securities: Unrealized holding gains arising during period 0.6 0.5 0.2 11.3 Less: realized gain included in net income -- -- -- (17.0) --------- -------- --------- --------- 0.6 0.5 0.2 (5.7) Comprehensive income $ 63.2 $ 72.6 $ 161.6 $ 228.7 ========= ======== ========= =========
Note 6. Acquisition of OREMET On March 24, 1998, Allegheny Teledyne completed its acquisition of the stock of OREMET. Under the terms of the merger agreement, OREMET shareholders received 1.296 shares of Allegheny Teledyne common stock in a tax-free exchange for each share of OREMET common stock. There were 21.6 million shares of Allegheny Teledyne stock issued in connection with the merger. The merger was accounted for under the pooling of interests accounting method. Revenues and net income for the year ended December 31, 1997 (the most recent period prior to the pooling) were $3,745.1 million and $297.6 million, respectively, for Allegheny Teledyne and $285.0 million and $31.2 million, respectively, for OREMET. Intercompany transactions prior to the merger were not material. The effect of conforming accounting policies was not material. The Company recorded merger and restructuring costs of $16.1 million ($13.8 million net of tax) in the 1998 first quarter for financial advisory, legal, accounting, severance and other costs associated with the merger. OREMET is an integrated producer and distributor of titanium sponge, ingot, mill products and castings for use in the aerospace, industrial, recreational and military markets. It operates manufacturing and finishing facilities in Oregon and Pennsylvania and has nine service centers in the United States, with additional centers in the United Kingdom, Germany, Singapore and Canada. Note 7. Aerospace Division of Sheffield Forgemasters In February 1998, the Company acquired the assets of the aerospace division of Sheffield Forgemasters Limited, a private company in the United Kingdom, for approximately $110 million in an all-cash transaction. This acquisition is being accounted for under the purchase method of accounting. The financial statements reflect results since the date of acquisition. Sheffield Forgemasters' aerospace division, now known as Allvac-SMP, produces high integrity vacuum melted and remelted steel and nickel alloys in various forms and non-magnetic drill collars and downhole components for the oil and gas industry. It also offers high technology testing services to the steel and related metals manufacturing industries. 10 Note 8. Agreements with Bethlehem Steel Corporation In January 1998, Bethlehem Steel Corporation ("Bethlehem") and the Company jointly announced that they had entered into three agreements that would become effective after Bethlehem closed its previously announced acquisition of Lukens Inc. ("Lukens"). Bethlehem completed its acquisition of Lukens on May 29, 1998. Under these agreements, Bethlehem would provide the Company with conversion services for stainless steel and specialty metal hot bands and coiled plate wider than the Company can currently produce; the Company would purchase certain assets that Lukens uses in the manufacture of specialty metals; and the Company would supply hot roll bands to Bethlehem for further processing on the stainless steel coil finishing facilities that Lukens currently owns. Under the conversion agreement, Bethlehem has agreed, for a 20-year period, to provide the Company with up to 15 percent of the available time on Lukens' Coatesville, Pennsylvania electric furnace melt shop and caster and Lukens' Conshohocken, Pennsylvania Steckel mill for the melting, casting and rolling of the Company's requirements for wide stainless steel and specialty metals. Under the asset sales agreement, the Company would acquire certain assets of Lukens for $175 million. These assets include the Houston, Pennsylvania plant of Lukens' Washington Steel Division, which is used by Lukens for the melting, casting and rolling of stainless steel hot bands; the wide anneal and pickle line recently installed at the Lukens' Massillon, Ohio plant; and the vacuum-oxygen decarburization unit used in the refining of stainless steel at Lukens' Coatesville, Pennsylvania plant. Under the hot band supply agreement, the Company would supply Bethlehem with up to 150,000 tons of stainless bands for further processing at Lukens' stainless cold finishing facilities at its Washington, Pennsylvania and Massillon, Ohio plants until Bethlehem sells these facilities, as previously announced. The agreements are subject to the satisfactory completion of the Company's due diligence and transition planning. The Company currently anticipates that the Company's due diligence will be completed during the fourth quarter of 1998 and that the agreements will be effective and that asset purchases will be consummated soon thereafter. Note 9. Stockholders' Equity Allegheny Teledyne paid a cash dividend of $0.16 per share of common stock in each of the 1998 and 1997 first, second and third quarters. OREMET did not pay any dividends during these quarters. The Company's Board of Directors has declared a regular quarterly dividend of $0.16 per share of common stock. The dividend is payable on December 15, 1998 to stockholders of record at the close of business on November 30, 1998. On March 12, 1998, the Company's Board of Directors unanimously adopted a stockholder rights plan under which preferred share purchase rights were distributed as a dividend on shares of Allegheny Teledyne common stock. The rights will be exercisable only if a person or group acquires 15 percent or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock. Each right will entitle stockholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $100. The dividend distribution was made on March 23, 1998, payable to stockholders of record on that date. The rights will expire on March 12, 2008, subject to earlier redemption or exchange by Allegheny Teledyne as described in the plan. The rights distribution is not taxable to stockholders. 11 On October 1, 1998, the Company's Board of Directors authorized a stock repurchase program to acquire up to 20 million shares of Allegheny Teledyne's common stock. The shares may be purchased from time-to-time in the open market. As of November 6, 1998, the Company had purchased 997,500 shares under this program. Note 10. Commitments and Contingencies The Company is subject to federal, state and local environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws. Environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable. In many cases, however, investigations are not yet at a stage where the Company has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss, or certain components thereof. Estimates of the Company's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceeds, it is likely that adjustments in the Company's accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company's results of operations in a given period, but the amounts, and the possible range of loss in excess of amounts accrued, are not reasonably estimable. Based on currently available information, however, management does not believe future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on the Company's financial condition or results of operations. At September 30, 1998, the Company's reserves for environmental remediation obligations totaled approximately $38.2 million, of which approximately $8.8 million was included in other current liabilities. The reserve includes estimated probable future costs of $12.3 million for federal Superfund and comparable state-managed sites; $5.4 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $7.7 million for owned or controlled sites at which Company operations have been discontinued; and $12.8 million for sites utilized by the Company in its ongoing operations. The Company is evaluating whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties other than participating potentially responsible parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years, and will complete remediation of all sites for which it has identified remediation obligations in up to thirty years. 12 Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. Although such claims are generally resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. However, 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 result in suspension or debarment of the Company, or that is otherwise likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. The Company learns from time to time that it has been named as a defendant in civil actions filed under seal pursuant to the False Claims Act. Generally, since such cases are under seal, the Company does not in all cases possess sufficient information to determine whether the Company will sustain a material loss in connection with such cases, or to reasonably estimate the amount of any loss attributable to such cases. A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its business, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, tax, and stockholder matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the information in the Company's consolidated financial statements and notes to the consolidated financial statements contained herein and in the Company's 1997 Annual Report and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1997 Annual Report. Results of Operations - --------------------- Allegheny Teledyne Incorporated is a group of technology-based manufacturing businesses with significant concentration in specialty metals, complemented by aerospace and electronics, industrial, and consumer products. The Company's specialty metals business segment accounted for 54 percent of the Company's total sales from continuing operations of $2,860.0 million for the nine months ended September 30, 1998. Its aerospace and electronics, industrial and consumer business segments accounted for 26 percent, 14 percent and 6 percent, respectively, of total sales from continuing operations for the first nine months of 1998. Such percentages were approximately the same for the first nine months of 1997, where total sales from continuing operations were $2,888.9 million. For the nine months ended September 30, 1998, operating profit was $340.5 million compared to $383.6 million for the same 1997 period. Sales from continuing operations declined 1 percent to $2,860.0 million for the first nine months of 1998 compared to $2,888.9 million for the 1997 period. The results reflect the continuing softness in titanium and commodity stainless steel prices, the effects of the Boeing-Timet supply arrangements, reduced demand for titanium products, continuing inventory adjustments and leveling off of production associated with commercial aerospace and the impacts of the Asian financial crisis. Strong cost controls, lower raw material costs, and the diversification of the Company's businesses partially offset the negative economic impacts experienced in some businesses. Net income was $167.9 million, or $0.85 per diluted share, for the nine months ended September 30, 1998, compared to $239.3 million, or $1.19 per diluted share, for the same 1997 period. Net income for the nine month 1998 period was adversely affected by merger and restructuring charges of $45.8 million after-tax, while net income for the same period of 1997 included gains on the sales of investments and Teledyne Economic Development offset by merger, restructuring and other charges, resulting in a net after-tax gain of $19.6 million. The Company continues to be cautious of the uncertain business outlook in the United States and concerned about the global economic outlook. During the fourth quarter of 1998, the Company plans to further conserve its financial resources by reinforcing cost reduction efforts, maintaining tighter controls on working capital and lowering capital spending plans. Sales and operating profit for the Company's four business segments are discussed below. Specialty Metals Third quarter 1998 operating profit declined to $59.6 million from $77.5 million in the same year-ago period and sales decreased 8 percent to $486.9 million. For the 1998 nine months compared to the same period in 1997, operating profit declined 16 percent to $208.8 million and sales declined 5 percent to $1,559.4 million. 14 Flat-Rolled Products -------------------- Combined operating profit for Allegheny Ludlum and Rodney Metals, whose products consist primarily of flat-rolled products, remained essentially level for the 1998 third quarter compared with the 1997 third quarter, and combined sales declined 9 percent. For the 1998 nine months compared to the 1997 nine months, combined operating profit declined 17 percent and combined sales decreased 10 percent. These declines are due to the continuing impact of European and Asian pricing pressure and increased imports into the U.S. market of commodity stainless steel products. The third quarter 1998 operating profit shows the best quarter-to-quarter comparison for flat-rolled products since the second quarter of 1996, and was achieved despite the negative impact of lower sales and start-up costs associated with entering the titanium flat-roll business. Tons of flat-rolled specialty materials shipped in the third quarter and nine months of 1998 were 130,000 tons and 402,000 tons, respectively, compared to 130,000 tons and 413,000 tons for the same periods of 1997. The average price of flat-rolled specialty materials in the third quarter and nine months of 1998 was $2,181 and $2,230 per ton, respectively, compared to $2,400 and $2,408 per ton in the same 1997 periods. Tight cost controls and cost reduction efforts continue. The Company expects that the previously announced salaried workforce reduction at Allegheny Ludlum that was completed in the third quarter of 1998 will result in annualized net pre-tax savings of $16 million. Raw material costs were lower for flat-rolled products in 1998, as compared to the same year-ago periods. Costs of nickel, a key raw material in the manufacture of stainless steel, continued to decline during the first nine months of 1998. In June 1998, Allegheny Ludlum and other domestic producers of flat-rolled stainless steel sheet and strip products filed petitions with the International Trade Commission ("ITC") and the U.S. Department of Commerce ("DOC") charging eight foreign countries with violations of U.S. trade laws. In response, on July 7, 1998, the DOC formally initiated antidumping and countervailing duty cases. On July 24, 1998, the ITC found preliminarily that imports of stainless steel sheet and strip from certain countries are materially injuring the domestic industry. As a result, the DOC is conducting countervailing duty and antidumping investigations of imports of certain stainless steel sheet and strip. These investigations were extended 30 days at the request of U.S. producers, and the DOC is now expected to announce preliminary antidumping margins on December 17, 1998. In addition, on October 30, 1998, U.S. producers requested that the DOC apply the "critical circumstances" provision of the U.S. trade laws to combat recent import surges. An affirmative finding would impose antidumping duties retroactively to September 18, 1998. On November 10, 1998, the DOC announced preliminary countervailing duty rates on stainless steel sheet and strip imports from France, Italy and South Korea. By statute, the ITC and the DOC must conclude their investigations and announce final orders by March 24, 1999. On August 5, 1998, the Company announced that it would be increasing prices for stainless steel hot rolled and cold rolled sheet, strip and coiled plate effective with shipments October 5, 1998. These price increases range from 4 to 6 percent depending on the product, and are intended to support additional investment in the flat-rolled products business to further improve product quality and continue the Company's position as a low-cost world-class supplier of specialty steels. While the ability to maintain these price increases depends in part on market pricing pressures, including pricing by foreign producers, these price increases appear to be holding. 15 High Performance Metals ----------------------- Operating profit for high performance metals such as nickel-based superalloys, titanium and zirconium declined 36 percent in the 1998 third quarter over the 1997 third quarter and sales declined 8 percent. For the 1998 nine months compared to the 1997 nine months, operating profit for high performance metals declined 15 percent and sales increased 4 percent. The decline in operating results in both 1998 periods occurred primarily in titanium products as aircraft and jet engine manufacturers continued to adjust inventory and level off production rates. Production inefficiencies and equipment outages also negatively affected operating margins for titanium products in the 1998 nine month period. In addition, third quarter 1998 titanium sales at Oremet-Wah Chang and Allvac were negatively affected by the Boeing-Timet supply agreements, and reduced demand in chemical process and recreational markets. Start-up costs associated with Oremet-Wah Chang's new electron beam furnace negatively impacted operating margins for titanium products as well. These developments were partially offset by strong performance at Wah Chang, especially in zirconium and niobium products, and at Allvac and Allvac-SMP, a nickel-based superalloys producer acquired in the 1998 first quarter. Lower costs, including lower raw material costs, benefited all of these businesses. Operating results for high performance metals include the results of two acquisitions: OREMET, which was accounted for using the pooling of interests method of accounting; and Allvac-SMP, acquired for $110 million in an all-cash transaction in February 1998. Aerospace and Electronics Segment Operating profit increased 25 percent to $25.0 million for the 1998 third quarter from $20.0 million in the same 1997 period, and sales increased 10 percent to $244.4 million. For the 1998 nine months compared to the 1997 nine months, operating profit increased 13 percent to $74.5 million and sales increased 7 percent to $739.4 million. Sales and operating profit improved in both 1998 periods for most companies in the segment compared to the comparable 1997 periods. Margins on higher sales and lower new product development costs, particularly for electronic components, contributed to the strong results. In addition, the 1998 periods benefited from lower product liability costs, primarily for piston engines, improved results for instrumentation products and increased systems engineering efforts on defense programs. However, operating results for the 1998 nine months in the unmanned aerial vehicle business did not match the strong nine months results of 1997 which included the results of a major unmanned aerial target and vehicles program which concluded in 1997. The third quarter 1998 results benefited from higher sales and improved margins at Ryan Aeronautical on the Global Hawk development program and increased sales during the closing months of helicopter airframe production. In 1998, The Boeing Company terminated its agreement with the Company to fabricate this product. The Asian financial situation has negatively affected sales of certain electronic products during the third quarter of 1998. Industrial Segment Operating profit for the 1998 third quarter was $10.9 million compared to $12.3 million for the same quarter of 1997, and sales decreased 2 percent to $119.7 million. For the 1998 nine months compared to the same 1997 period, operating profit decreased 7 percent to $43.5 million while sales increased 2 percent to $390.0 million. The decline in sales in the 1998 third quarter and operating profit in both 1998 periods resulted from reduced demand for tungsten, tungsten carbide and 16 carbide cutting tools due to weaker economic conditions and increased marketing costs for business expansion affecting Metalworking Products. The residual impact of the General Motors strike also negatively affected sales and operating profit during the 1998 third quarter. These negative developments were partially offset by continued improvement in sales and operating profit at Casting Service and Portland Forge. Improved sales of forged products resulted in increased segment sales for the 1998 nine months. Consumer Segment Operating profit decreased to $5.9 million in the third quarter from $8.1 million in the same 1997 period and sales declined 1 percent to $59.5 million. For the 1998 nine months, operating profit decreased to $13.7 million from $22.9 million and sales decreased 6 percent to $171.2 million from the comparable 1997 period. Sales and operating profit decreased compared to both of the 1997 periods when the segment benefited from strong demand for a new showerhead product. Operating results for the 1998 periods were adversely affected by development and product costs related to new water filtration products. These negative developments were partially offset in the 1998 third quarter as compared to the same 1997 period by stronger sales and improved margins on Laars swimming pool products. In relation to the businesses in the consumer segment, consisting of Water Pik and Laars, the Company is continuing to pursue the possibility of a limited public offering of shares of a new stand-alone company and/or its tax-free spin-off to the Company's stockholders. As previously announced, on October 5, 1998, Michael P. Hoopis joined the Company as president and chief executive officer of the consumer segment. Corporate Expenses Corporate expenses continued to decline and were 5.3 and 12.8 percent lower in the 1998 third quarter and 1998 nine months, respectively, compared to the comparable 1997 periods. Net interest expense in the 1998 third quarter and 1998 nine months declined $1.1 million and $1.4 million, respectively, from the 1997 third quarter and 1997 nine months. Excess pension income increased in both 1998 periods compared to the same 1997 periods as a result of strong investment performance. Special Items No special items occurred in the third quarter of 1998. Merger and restructuring costs resulted in an after-tax charge of $45.8 million, or $0.23 per diluted share in the 1998 nine months. These events included deal costs of $10.3 million, or $0.05 per diluted share, related to the acquisition of OREMET, along with charges of $3.5 million, or $0.02 per diluted share, for a planned salaried workforce reduction related to integrating the operations of OREMET and Wah Chang. Allegheny Ludlum also recorded a $12.3 million, or $0.06 per diluted share, charge due to a reduction in salaried workforce. In addition, charges of $19.7 million, or $0.10 per diluted share, were recorded for equipment write-offs and other reserves at Allegheny Ludlum and reserves for asset sales at other specialty metals units. In the 1997 third quarter, special items resulted in a net after-tax gain of $3.9 million, or $0.02 per diluted share. This net after-tax gain included a gain on the sale of the Company's Economic Development business, partially offset by charges relating to legal matters. The nine months ended September 30, 1997 included an after-tax gain of $15.7 million, or $0.08 per diluted share. This after-tax gain included a $17.0 million gain on the sale of the Company's investment in Semtech Corporation common stock and a $9.2 million 17 gain on the sale of the Company's investment in Nitinol Development Corporation that was partially offset by $10.5 million from merger and restructuring costs and the write-off of a research and development venture. New Accounting Pronouncements Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997. This statement has been adopted by the Company in 1998, and did not have a material effect on the consolidated financial statements. Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued in February 1998. This statement revises employers' disclosures about pension and postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt this statement beginning with its 1998 Annual Report. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is presently evaluating the effect of adopting this statement. Income Taxes The Company's effective tax rate increased to 38.8 percent and 38.2 percent, respectively, for the 1998 third quarter and nine months from 36.7 percent and 38.0 percent, respectively, for the same periods in 1997. The increase in the 1998 third quarter effective tax rate as compared to the same 1997 period is primarily due to the net effect of favorable adjustments in 1997 to prior years' tax liabilities. Financial Condition and Liquidity - --------------------------------- Working capital increased to $846.9 million at September 30, 1998, compared to $842.6 million at December 31, 1997. The current ratio increased to 2.6 from 2.4 in this same period. The increase in working capital was primarily due to working capital acquired in acquisitions, deferred tax asset adjustments and lower accounts payable offset by lower accounts receivable and inventory balances and reduced cash and short-term investments. In the first nine months of 1998, cash generated from operations of $238.1 million, proceeds from the sale of short-term investments of $34.4 million, proceeds from the increase in long-term debt of $38.9 million, proceeds from the sale of businesses and investments of $27.2 million and proceeds from the exercise of stock options of $9.1 million were used to invest $247.6 million in capital equipment and business expansion and to pay dividends of $91.0 million. Cash transactions plus cash on hand at the beginning of the year resulted in a cash position of $68.4 million at September 30, 1998. Capital expenditures for 1998 are expected to approximate $150 million, of which $118.3 million were spent during the first nine months. In the third quarter of 1998, the Company entered into uncommitted short-term line of credit facilities aggregating $185 million, none of which has been advanced as of the date of this filing. On October 1, 1998, the Company's Board of Directors authorized a stock repurchase program to acquire up to 20 million shares of Allegheny Teledyne's common stock. The shares may be purchased from time-to-time in the open 18 market. As of November 6, 1998, the Company had repurchased 997,500 shares on the open market for a cost of $19.2 million at per share prices ranging from $17.45 to $21.94. The Board of Directors has declared a regular quarterly dividend of $0.16 per share of common stock. The dividend is payable on December 15, 1998 to stockholders of record at the close of business on November 30, 1998. The Company believes that internally generated funds, current cash on hand and borrowing from existing credit lines will be adequate to meet foreseeable needs. The Company may choose, however, to issue additional debt depending on market conditions. Other Matters - ------------- Environmental ------------- The Company is subject to federal, state and local environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws. The Company's reserves for environmental investigation and remediation totaled approximately $38.2 million at September 30, 1998. Based on currently available information, management does not believe future environmental costs at sites with which the Company has been identified in excess of those accrued are 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. With respect to proceedings brought under the federal Superfund laws, or similar state statutes, the Company has been identified as a potentially responsible party at approximately 37 such sites, excluding those at which it believes it has no future liability. The Company's involvement is very limited or de minimus at approximately 16 of these sites, and the potential loss exposure with respect to any of remaining 21 sites is not considered to be material. For additional discussion of environmental matters, see Note 10 to the consolidated financial statements of the Company. Government Contracts -------------------- A number of the Company's operating companies perform work on contracts with the U.S. government. Many of these contracts include price redetermination clauses, and most are terminable at the convenience of the government. Certain of these contracts are fixed-price or fixed-price incentive development contracts which involve a risk that costs may exceed those expected when the contracts were negotiated. Absent modification of these contracts, any costs incurred in excess of the fixed or ceiling prices must be borne by the Company. In addition, virtually all defense programs are subject to curtailment or cancellation due to the year-to-year nature of the government appropriations and allocations process. A material reduction in U.S. Government appropriations may have an adverse effect on the Company's business, depending upon the specific programs affected by any such reduction. Since certain contracts extend over a long period of time, all revisions in cost and funding estimates during the progress of work have the effect of adjusting the current period earnings on a cumulative catch-up basis. When the current contract estimate indicates a loss, provision is made for the total 19 anticipated loss. The Company obtains many U.S. Government contracts through the process of competitive bidding. There can be no assurance that the Company will continue to be successful in having its bids accepted. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. The False Claims Act permits a person to assert the rights of the U.S. Government by initiating a suit under seal against a contractor if such person purports to have information that the contractor falsely submitted a claim to the U.S. Government for payment. If it chooses, the U.S. Government may intervene and assume control of the case. Although government contracting claims may be resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. Given the extent of the Company's business with the U.S. Government, a suspension or debarment of the Company could have a material adverse effect on the future operating results and consolidated financial condition of the Company. However, 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 result in suspension or debarment of the Company, or that is otherwise 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. For additional discussion of government contract matters, see Note 10 to the consolidated financial statements of the Company. Impact of the Introduction of the Euro -------------------------------------- The Company has initiated an internal analysis to determine effects of the January 1, 1999 conversion and related transition by 11 member states of the European Union to a common currency, the "euro". The United Kingdom, where a significant portion of the Company's European operations is located, is not currently a participating country. Based on preliminary findings, the Company does not expect the euro conversion to have a material impact on the Company's results of operation or financial condition. Like other companies with European sales and operations, the Company anticipates that it will face wage and product pricing transparency issues in participating countries; however, the Company does not expect the resolution of these issues to have a material adverse effect on the Company. Additionally, while the Company expects to encounter some technical challenges to adapt information technology and other systems to accommodate euro-denominated transactions, it does not anticipate associated costs to be material. Mostly due to evolving business needs and continuing technological advances, the Company has been modifying and replacing its computer software and hardware at its European operations. 20 Year 2000 Readiness Disclosure - Impact of Year 2000 on Computer Systems --------------------------------------- Over the past several years, the Company has put in place committees at its operating companies to identify whether its computer systems, which include business computers, mill equipment and process control computers and other devices using a microprocessor, as well as telecommunication and payroll and employee benefit processing systems, would function properly with respect to dates in the Year 2000 and thereafter. These committees report to the Executive Resource Information Committee, a senior management committee charged with reviewing and establishing priorities for information technology-related matters, including Year 2000 issues, and which reports to the Audit and Finance Committee of the Company's Board of Directors. Through these committees' efforts, Year 2000 identification, solution development, testing and implementation initiatives, and more recently contingency planning initiatives, are in process at Allegheny Teledyne and each of the operating companies and are included in the Company's integration plans for OREMET and Allvac-SMP. In part as a result of its Year 2000 initiatives, but mostly due to evolving business needs and continuing technological advancements, the Company has been modifying and replacing portions of its computer software and hardware systems. The Company currently targets having substantially all internal solutions relating to Year 2000 functionality of its computer systems developed and implemented by June 1999. This targeted completion date depends, however, on numerous assumptions, including continued availability of trained personnel in this area. In addition, efforts continue to be made to identify and resolve customer- and supplier-based Year 2000 issues that could affect the Company and its operating and support systems. The Company believes that it has identified substantially all material customer- and supplier-based Year 2000 issues. Efforts also continue to be made to identify whether products produced and sold by Allegheny Teledyne's operating companies have Year 2000 issues. The Company believes that it has identified substantially all products that have Year 2000 issues and is working to resolve such issues. Excluding expenditures necessitated by ordinary business needs and continuing technological advancements in the computer industry, the Company anticipates spending approximately $11 million in 1998 and another estimated $7 million in 1999 to address Year 2000 issues. These expenditures do not include expenditures that may be required to address Year 2000 issues associated with some products. Substantially all costs related to the Company's Year 2000 initiatives are expensed as incurred and funded through operating cash flows. Additional amounts may be spent in subsequent years. Based upon internal assessments, formal communications with suppliers and customers with which the Company exchanges electronic data, and work completed to date, the Company believes that Year 2000 issues should not pose significant operational problems or have a material impact on the Company's consolidated financial position, results of operations or cash flow. A failure of third party vendors or customers to be Year 2000 ready, however, could adversely affect these beliefs and is not quantifiable. Such failure could have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow in a given period, but probably not over the long-term. The most reasonably likely worse case scenario of failure by the Company or its suppliers or customers to resolve Year 2000 problems would be a temporary slowdown or cessation of manufacturing operations at one or more of the Company's facilities and a temporary inability on the part of the Company to timely process orders and to deliver finished products to customers. Delays in meeting customers' orders would affect the timing of billings to and payments received from customers in respect of orders and could result in other liabilities. Customers' Year 2000 problems could also delay the timing of payments to the Company for orders. 21 While the Company has been conducting a comprehensive Year 2000 review of its computer systems, there may be Year 2000-related matters that have not been identified. Actual dollar amounts spent by the Company to address Year 2000 issues could materially differ from the estimates for a number of reasons, including changes in the availability or costs of personnel trained in this area, changes made to the Company's remediation plans, the ability of the Company's significant suppliers, customers and others with which it conducts business, including governmental agencies, to identify and resolve their own Year 2000 issues or identification of other Year 2000-related matters. Forward-Looking Statements From time to time the Company has made and may continue to make forward-looking statements. Certain forward-looking statements are contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 to the consolidated financial statements of the Company, including statements concerning the expected adequacy of available funds to meet foreseeable needs, proposed divestitures, proposed and completed acquisitions, further cost reduction efforts, capital spending plans, anticipated effects of the euro conversion, anticipated expenditures to address and the impact of Year 2000-computer-systems issues, the Company's use of financial derivative instruments, the outcome of any government inquiries, litigation or other future proceedings related to government contract or other matters, and environmental costs. These statements are based on current expectations that involve a number of risks and uncertainties, including those described above under the captions "Other Matters - Environmental" and "Other Matters - Government Contracts" and elsewhere herein. In addition, realization of the anticipated benefits of the acquisition of OREMET and other acquisitions could take longer than expected and implementation difficulties, market factors and further deterioration in domestic or global economic conditions could alter the anticipated benefits. Realization of the anticipated benefits of the Company's international sales and manufacturing expansion initiatives could be affected by export controls, exchange rate fluctuations, the euro conversion and domestic and foreign political conditions, as well as further deterioration in domestic and foreign economic conditions, among other factors. Actual results may differ materially from the results anticipated in the forward-looking statements. Additional risk factors are described from time to time in the Company's filings with the Securities and Exchange Commission, including its Report on Form 10-K for the year ended December 31, 1997. The Company assumes no duty to update its forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company uses derivative financial instruments from time to time to hedge ordinary business risks regarding foreign currencies on product sales and to partially hedge against volatile raw material cost fluctuations in the specialty metals segment. Foreign currency exchange contracts are used to limit transactional exposure to changes in currency exchange rates. The Company sometimes purchases foreign currency forward contracts that effectively permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts, which are not financially material, are designated as hedges of export sales transactions in which settlement will occur in future periods, which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk. A portion of the Company's operations consists of investments in foreign 22 subsidiaries. As a result, the Company's financial results could be affected by changes in foreign currency exchange rates. To mitigate this foreign currency translation risk, the Company has a practice of recapitalizing operations using local foreign currency debt to replace direct equity investment. The average interest rate to service this foreign debt is favorable to current U.S. interest rates. As part of its risk management strategy, the Company purchases exchange-traded futures contracts to manage exposure to changes in nickel prices, a component of raw material cost for some of the specialty metals companies. The nickel futures contracts obligate the Company to make or receive a payment equal to the net change in value of the contract at its maturity. Some of these contracts can be designated as hedges of the Company's firm sales commitments and are short-term in nature to correspond to the commitment period. The gains and losses on these contracts are deferred and recognized in earnings when realized as an adjustment to cost of goods sold. Historically, the Company has not closed any significant contracts prior to the execution of the underlying sale transaction, nor have any of the underlying sales transactions failed to occur. The Company guarantees the outstanding Allegheny Ludlum fixed rate 6.95% debentures due in 2025. In a period of declining interest rates, the Company faces the risk of required interest payments exceeding those based on the then current market rate. To mitigate interest rate risk, the Company attempts to maintain a reasonable balance between fixed and variable rate debt to keep financing costs as low as possible. The Company believes that adequate controls are in place to monitor these activities, which are not financially material. However, many factors, including those beyond the control of the Company such as changes in domestic and foreign political and economic conditions, as well as the magnitude and timing of interest rate changes, could adversely affect these activities. The Company believes that the euro conversion will not have a material adverse effect on its foreign currency activities. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - Exhibit No. Description ------- ----------- 27 Financial Data Schedule for Nine Months Ended September 30, 1998. (b) Registrant did not file any Form 8-K reports during the quarter for which this report is filed. 23 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Allegheny Teledyne Incorporated (Registrant) /s/ James L. Murdy Date: November 16, 1998 By _____________________________________ James L. Murdy Executive Vice President, Finance and Administration and Chief Financial Officer (Duly Authorized Officer) /s/ Dale G. Reid Date: November 16, 1998 By _____________________________________ Dale G. Reid Vice President - Controller and Chief Accounting Officer (Principal Accounting Officer) 24 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule for Nine Months Ended September 30, 1998. EX-27 2 FDS--
5 The schedule contains summary financial information extracted from the registrant's consolidated statement of income for the nine months ended September 30, 1998 and consolidated balance sheet as of September 30, 1998 and is qualified in its entirety by reference to such financial statements. 0001018963 Allegheny Teledyne Incorporated 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 68 0 554 13 670 1,388 1,819 1,013 2,985 541 370 0 0 20 1,319 2,985 2,948 2,948 2,249 2,249 0 0 13 272 104 168 0 0 0 168 0.85 0.85
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