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.
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S>
ASSETS <C> <C>
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
-------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
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
<PAGE>
Note 2. Inventories
Inventories were as follows (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------- -------
<S> <C> <C>
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
========= =========
</TABLE>
Note 3. Business Segments
Information on the Company's business segments was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
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
<PAGE>
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
<PAGE>
The following table sets forth the computation of basic and diluted net income
per common share (in millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== =========
</TABLE>
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
<PAGE>
The components of comprehensive income, net of tax, were as follows
(in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
========= ======== ========= =========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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.
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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
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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
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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
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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
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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.
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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.
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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
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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.
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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
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule for Nine Months Ended
September 30, 1998.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0001018963
<NAME> Allegheny Teledyne Incorporated
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 68
<SECURITIES> 0
<RECEIVABLES> 554
<ALLOWANCES> 13
<INVENTORY> 670
<CURRENT-ASSETS> 1,388
<PP&E> 1,819
<DEPRECIATION> 1,013
<TOTAL-ASSETS> 2,985
<CURRENT-LIABILITIES> 541
<BONDS> 370
0
0
<COMMON> 20
<OTHER-SE> 1,319
<TOTAL-LIABILITY-AND-EQUITY> 2,985
<SALES> 2,948
<TOTAL-REVENUES> 2,948
<CGS> 2,249
<TOTAL-COSTS> 2,249
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 272
<INCOME-TAX> 104
<INCOME-CONTINUING> 168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
