<PAGE> 1
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 June 30, 1999
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 of Organization) Identification Number)
1000 Six PPG Place
Pittsburgh, Pennsylvania 15222-5479
------------------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
(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 August 6, 1999, the Registrant had outstanding 190,519,637 shares of its
Common Stock.
<PAGE> 2
ALLEGHENY TELEDYNE INCORPORATED
SEC FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. - FINANCIAL INFORMATION
<S> <C>
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 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to Vote of 23
Security Holders
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 60.0 $ 74.8
Accounts receivable 549.5 534.7
Inventories 653.4 659.9
Deferred income taxes 58.7 59.3
Tax refund 3.5 5.9
Prepaid expenses and other current assets 27.8 29.9
---------- ----------
Total Current Assets 1,352.9 1,364.5
Property, plant and equipment 1,023.1 1,003.6
Prepaid pension cost 474.2 418.6
Cost in excess of net assets acquired 250.1 256.0
Other assets 105.8 132.8
---------- ----------
Total Assets $ 3,206.1 $ 3,175.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 238.5 $ 227.0
Accrued liabilities 297.0 327.1
Short-term debt and current portion
of long-term debt 128.1 68.2
---------- ----------
Total Current Liabilities 663.6 622.3
Long-term debt 439.1 446.8
Accrued postretirement benefits 582.0 582.6
Other 216.8 183.9
---------- ----------
Total Liabilities 1,901.5 1,835.6
---------- ----------
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 June 30, 1999
and December 31, 1998; outstanding-190,706,077
shares at June 30, 1999 and 194,873,151 shares
at December 31, 1998 19.8 19.8
Additional paid-in capital 469.0 467.3
Retained earnings 974.6 923.9
Treasury stock: 7,231,587 shares at June 30, 1999
and 3,064,513 shares at December 31, 1998 (154.8) (67.6)
Foreign currency translation losses (11.0) (5.9)
Unrealized gains on securities 7.0 2.4
---------- ----------
Total Stockholders' Equity 1,304.6 1,339.9
---------- ----------
Total Liabilities and Stockholders' Equity $ 3,206.1 $ 3,175.5
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
1999 1998 1999 1998
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 917.9 $ 1,019.1 $ 1,852.5 $ 2,021.3
Costs and expenses:
Cost of sales 701.9 767.7 1,418.8 1,541.0
Selling and administrative expenses 116.1 122.5 231.0 244.0
Transformation, merger and
restructuring costs 3.4 7.2 4.3 67.8
Interest expense, net 8.4 4.8 17.3 8.7
--------- ----------- ----------- -----------
829.8 902.2 1,671.4 1,861.5
Earnings before other income 88.1 116.9 181.1 159.8
Other income 2.9 1.9 3.1 4.7
--------- ----------- ----------- -----------
Income before income taxes 91.0 118.8 184.2 164.5
Provision for income taxes 33.7 43.3 66.3 62.1
--------- ----------- ----------- -----------
Net income $ 57.3 $ 75.5 $ 117.9 $ 102.4
========= =========== =========== ===========
Basic net income per common share $ 0.30 $ 0.38 $ 0.61 $ 0.52
========= =========== =========== ===========
Diluted net income per common share $ 0.30 $ 0.38 $ 0.61 $ 0.52
========= =========== =========== ===========
Dividends declared per common share $ 0.16 $ 0.16 $ 0.32 $ 0.32
========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating Activities:
Net income $ 117.9 $ 102.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 62.3 55.2
Deferred income taxes 3.8 5.2
Non-cash restructuring costs -- 51.7
Gains on sales of businesses and investments -- (0.2)
Change in operating assets and liabilities:
Prepaid pension cost (55.1) (45.0)
Accrued liabilities (13.9) (9.3)
Accrued income taxes 11.8 (38.7)
Accounts payable 11.4 (38.3)
Accounts receivable (9.0) 16.9
Inventories 7.5 6.6
Other 9.3 14.1
-------- --------
Cash provided by operating activities 146.0 120.6
Investing Activities:
Purchases of property, plant and equipment (52.8) (76.9)
Disposals of property, plant and equipment 7.6 3.1
Proceeds from the sale of businesses and investments 6.0 16.4
Purchases of businesses and investment in ventures (1.7) (118.3)
Sale of short-term investments -- 34.4
Other -- (4.5)
-------- --------
Cash used by investing activities (40.9) (145.8)
Financing Activities:
Net borrowings under credit agreements 48.2 119.6
Payments on long-term debt and capital leases (1.2) (4.4)
-------- --------
Net increase in debt 47.0 115.2
Purchases of treasury stock (108.6) --
Cash dividends (61.8) (59.4)
Exercises of stock options 3.5 5.5
-------- --------
Cash provided (used) by financing activities (119.9) 61.3
Increase (decrease) in cash and cash equivalents (14.8) 36.1
Cash and cash equivalents at beginning of the year 74.8 53.7
-------- --------
Cash and cash equivalents at end of period $ 60.0 $ 89.8
======== ========
Non-cash transactions:
Assets sold under promissory note $ 1.3 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
Basis of Presentation
- ---------------------
These interim consolidated financial statements include the accounts of
Allegheny Teledyne Incorporated and its subsidiaries ("Allegheny Teledyne" or
the "Company"). 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 1998 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. 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. In June 1999, Financial
Accounting Standards Board Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities: Deferral of the Effective Date of FASB
Statement No. 133" was issued. This statement delays the effective date of
Statement No. 133 to all fiscal quarters beginning after June 15, 2000. The
Company is presently evaluating the effect of adopting these statements.
Note 2. Inventories
Inventories were as follows (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials and supplies $ 150.4 $ 196.1
Work-in-process 492.3 471.6
Finished goods 143.3 133.4
-------- --------
Total inventories at current cost 786.0 801.1
Less allowances to reduce current cost
values to LIFO basis (115.4) (128.7)
Progress payments (17.2) (12.5)
-------- --------
Total inventories $ 653.4 $ 659.9
======== ========
</TABLE>
6
<PAGE> 7
Note 3. Business Segments
Information on the Company's business segments was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
1999 1998 1999 1998
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales:
Specialty metals $ 504.0 $ 527.7 $ 1,011.2 $ 1,072.5
Aerospace and electronics 195.3 203.6 400.3 404.1
Industrial 115.3 138.4 237.4 270.3
Consumer 64.9 56.8 118.5 105.5
-------- ---------- ---------- ----------
Total continuing
Operations 879.5 926.5 1,767.4 1,852.4
Operations sold or held
for sale 38.4 92.6 85.1 168.9
-------- ---------- ---------- ----------
Total sales $ 917.9 $ 1,019.1 $ 1,852.5 $ 2,021.3
======== ========== ========== ==========
Operating Profit:
Specialty metals $ 51.8 $ 78.8 $ 111.1 $ 149.2
Aerospace and electronics 18.5 23.4 37.9 42.9
Industrial 8.3 18.3 20.9 32.6
Consumer 5.8 5.5 8.1 7.4
-------- ---------- ---------- ----------
Total operating profit 84.4 126.0 178.0 232.1
Transformation, merger
and restructuring
costs (3.4) (7.2) (4.3) (67.8)
Corporate expenses (7.8) (8.1) (17.0) (18.4)
Interest expense, net (8.4) (4.8) (17.3) (8.7)
Investments and
operations sold or held
for sale 10.5 2.3 13.0 6.1
Excess pension income 15.7 10.6 31.8 21.2
-------- ---------- ---------- ----------
Income before income
Taxes $ 91.0 $ 118.8 $ 184.2 $ 164.5
======== ========== ========== ==========
</TABLE>
In the 1999 second quarter, transformation, merger and restructuring costs
included pre-tax costs of $3.4 million related to the previously announced
proposed spin-offs of the Aerospace and Electronics and the Consumer segments
into two freestanding public companies.
In the 1999 first quarter, transformation, merger and restructuring costs
included pre-tax costs of $0.9 million related to the proposed transformation of
the Company.
In the 1998 second quarter, transformation, merger and restructuring costs
included a $7.2 million pre-tax charge, primarily attributable to the
salaried workforce reduction at Allegheny Ludlum.
7
<PAGE> 8
In the 1998 first quarter, transformation, merger and restructuring costs
included deal costs of $10.3 million related to the acquisition of OREMET, along
with pre-tax charges of $5.8 million for a salaried workforce reduction related
to integrating the operations of OREMET and Wah Chang. Allegheny Ludlum also
recorded a $12.1 million pre-tax charge due to a planned salaried workforce
reduction. In addition, pre-tax charges of $32.4 million were recorded for costs
associated with exiting certain product lines and asset impairments resulting
from capital expenditure programs completed in 1998.
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
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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
net income per common share -
net income available to common
stockholders $ 57.3 $ 75.5 $ 117.9 $ 102.4
========= ========= ========= =========
Denominator:
Weighted average shares 192.1 196.7 193.2 196.4
Contingent issuable stock 0.1 0.1 0.1 0.1
--------- --------- --------- ---------
Denominator for basic net income
per common share 192.2 196.8 193.3 196.5
Effect of dilutive securities:
Employee stock options 1.0 1.6 1.0 1.9
--------- --------- --------- ---------
Dilutive potential common shares 1.0 1.6 1.0 1.9
Denominator for diluted net
income per common share -
adjusted weighted average shares 193.2 198.4 194.3 198.4
========= ========= ========= =========
Basic net income per common share $ 0.30 $ 0.38 $ 0.61 $ 0.52
========= ========= ========= =========
Diluted net income per common share $ 0.30 $ 0.38 $ 0.61 $ 0.52
========= ========= ========= =========
</TABLE>
8
<PAGE> 9
Note 5. Comprehensive Income
The components of comprehensive income, net of tax, were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 57.3 $ 75.5 $ 117.9 $ 102.4
Foreign currency translation losses (4.9) (2.3) (5.1) (3.6)
Unrealized holding gains (losses)
arising during period 3.8 (1.1) 4.6 (0.4)
------- ------- -------- --------
Comprehensive income $ 56.2 $ 72.1 $ 117.4 $ 98.4
======= ======= ======== ========
</TABLE>
Note 6. Stockholders' Equity
Allegheny Teledyne paid a cash dividend of $0.16 per common share in each of
the 1999 and 1998 first and second quarters. On August 12, 1999, the Company's
Board of Directors declared a regular quarterly dividend of $0.16 per share of
common stock. The dividend is payable on September 14, 1999 to stockholders of
record at the close of business on August 30, 1999.
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
or in negotiated transactions. In the first six months of 1999, the Company had
purchased 5.2 million shares for $108.6 million under this program. In the 1999
second quarter, the Company had purchased 2.6 million shares for $56.4 million
under this program. From the inception of the share repurchase program through
August 6, 1999, the Company has repurchased approximately 8.1 million shares at
an aggregate cost of $168.2 million.
Note 7. 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
9
<PAGE> 10
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 June 30, 1999, the Company's reserves for environmental remediation
obligations totaled approximately $33.2 million, of which approximately $8.0
million was included in other current liabilities. The reserve includes
estimated probable future costs of $12.9 million for federal Superfund and
comparable state-managed sites; $4.3 million for formerly owned or operated
sites for which the Company has remediation or indemnification obligations; $7.2
million for owned or controlled sites at which Company operations have been
discontinued; and $8.8 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.
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
10
<PAGE> 11
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.
Note 8. Subsequent Events
In July 1999, the Company completed the previously announced sales of Ryan
Aeronautical, the McCormick Selph Ordnance business unit and the Drinkware
business unit of Water Pik. Also in July 1999, the Company announced definitive
agreements for the sale of Fluid Systems. In August 1999, the Company completed
the sale of Teledyne Specialty Equipment's Construction and Mining business
unit.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Allegheny Teledyne Incorporated is a diversified manufacturing company
serving global markets with specialty metals, aerospace, electronic, industrial,
and consumer products. The Company is one of the largest and most diversified
specialty metals producers in the world. The Company's Specialty Metals business
segment accounted for 57 percent of the Company's total sales from continuing
operations of $1,767.4 million for the six months ended June 30, 1999. Its
Aerospace and Electronics, Industrial and Consumer business segments accounted
for 23 percent, 13 percent and 7 percent, respectively, of total sales from
continuing operations. Such percentages were approximately the same for the
first six months of 1998, where total sales from continuing operations were
$1,852.4 million.
For the 1999 six months, operating profit was $178.0 million compared to
$232.1 million for the same 1998 period. Sales from continuing operations
declined 4.6 percent to $1,767.4 million for the 1999 six months compared to
$1,852.4 million for the 1998 period. The lower results were due mainly to
continuing difficult pricing conditions in stainless steel, titanium and
tungsten carbide markets, reduced demand for high performance metals in the
commercial aerospace and oil and gas markets and reduced demand for tungsten,
tungsten carbide and tungsten carbide-cutting tools due to weak global market
conditions. 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 $117.9 million, or $0.61 per diluted share, for the 1999 six
months, compared to $102.4 million, or $0.52 per diluted share, for the same
1998 period. Net income was $57.3 million, or $0.30 per diluted share, for the
1999 second quarter, compared to $75.5 million, or $0.38 per diluted share, for
the same 1998 period. Net income in the second quarter 1999 was impacted by $6.4
million, or $0.03 per diluted share, relating to costs associated with the
previously announced proposed spin-offs of the Aerospace and Electronics and
Consumer segments, and facility consolidations, workforce reductions and
start-up costs. Net income in the second quarter of 1998 was reduced by $4.9
million, or $0.02 per diluted share, primarily relating to a salaried workforce
reduction at Allegheny Ludlum.
Sales and operating profit for the Company's four business segments are
discussed below.
Specialty Metals
Second quarter 1999 operating profit decreased to $51.8 million from $78.8
million in the same year-ago period. Sales decreased 4 percent to $504.0 million
compared to the prior year period due to lower prices for commodity stainless
steel and titanium, and reduced demand in aerospace and oil and gas markets.
Operating profit in the 1999 second quarter included $1.8 million in start-up
costs relating to Oremet-Wah Chang's new electron beam furnace and Allegheny
Ludlum's joint venture in China, as well as costs related to a workforce
reduction at Allvac's operations in the United Kingdom. For the 1998 six months,
operating profit declined 26 percent to $111.1 million and sales declined 6
percent to $1,011.2 million.
12
<PAGE> 13
Allegheny Ludlum
- ----------------
Combined sales and operating profits for Allegheny Ludlum, whose products
consist primarily of flat-rolled products, increased 7 percent and declined 18
percent, respectively, for the 1999 second quarter from the 1998 second quarter
and increased 3 percent and declined 1 percent, respectively, for the 1999
six-month period from the 1998 six-month period. Sales increased due to higher
shipments compared to 1998, as a result of strong demand and the utilization and
capability of new strategic assets, which include the Houston, PA melt shop, the
Massillon, OH wide anneal and pickle line and the 60-inch wide Sendzimir mill in
Vandergrift, PA. Operating profit declined due to lower prices for commodity
stainless steel products and product mix, as well as start-up costs relating
to Allegheny Ludlum's joint venture in China.
With rising raw material costs, principally nickel, increased demand and
lower imports reflecting the impact of favorable trade cases, Allegheny Ludlum
put into effect a price increase of approximately 7 percent for most stainless
steel sheet, strip and coiled plate products effective July 19, 1999. On August
12, 1999, Allegheny Ludlum further announced that it is increasing prices for
stainless steel hot rolled and cold rolled sheet and strip and coiled plate by
approximately 6 to 7 percent, effective with shipments August 23, 1999. It also
announced that it is increasing prices for all nickel alloy hot rolled and cold
rolled sheet and strip, mill plate and coiled plate by 10 percent, effective
with shipments August 12, 1999. In addition, Allegheny Ludlum announced that,
effective October 4, 1999, it will change the raw material surcharge base levels
for both nickel and chromium for all stainless steel sheet, strip, continuous
mill plate, plate mill plate, and tool steels. The ability to maintain price
increases and surcharges will depend on market conditions, including pricing by
foreign producers.
Tons of flat-rolled specialty materials shipped in the second quarter and six
months of 1999 were 158,700 tons and 312,100 tons, respectively, compared to
132,700 tons and 272,000 tons for the same periods of 1998. The average prices
of flat-rolled specialty materials in the second quarter and six months of 1999
were $2,019 and $2,022 per ton, respectively, compared to $2,255 and $2,254 per
ton in the same 1998 periods. The declines were due primarily to lower prices
for commodity stainless steel sheet and strip and the effect of product mix.
High Performance Metals
- -----------------------
Operating profit and sales for high performance metals declined 48 percent
and 20 percent, respectively, over the 1998 second quarter and declined 44
percent and 17 percent, respectively, in the 1999 six months over the 1998 six
months. The decline in operating results in 1999 occurred due to lower prices
and volume for nickel alloy and titanium products resulting from continuing weak
demand in aerospace and oil and gas markets. This weakness was partially offset
by strong demand for nickel-based superalloys for large land-based power
generation turbines. Results for the 1999 second quarter reflect start-up costs
associated with Oremet-Wah Chang's new electron beam melt facility and costs
related to a workforce reduction at Allvac's operations in the United Kingdom.
The results for the 1999 six months also reflect start-up costs associated with
Allvac's new vacuum induction furnace.
Aerospace and Electronics Segment
Operating profit decreased 21 percent to $18.5 million for the 1999
13
<PAGE> 14
second quarter from $23.4 million in the same 1998 period, and sales decreased 4
percent to $195.3 million. For the 1999 six months, operating profit decreased
12 percent to $37.9 million and sales decreased 1 percent to $400.3 million.
Product recall costs at Teledyne Continental Motors and a continuing slow
economic recovery in Asian markets negatively impacted the segment's
performance. Results have been restated to exclude Ryan Aeronautical and the
McCormick Selph Ordnance business unit, which are now reported in investments
and operations sold or held for sale.
While sales at Teledyne Continental Motors improved in the 1999 second
quarter and six months compared to the same periods in 1998, sales and operating
profit were negatively impacted by a recall of piston engines. Efforts
associated with the recall resulted in a $3.0 million charge and impacted sales
during the 1999 second quarter. Sales and operating results for Teledyne
Continental Motors' turbine engines increased in both the 1999 second quarter
and the 1999 six-month period. At Teledyne Electronic Technologies, increased
demand for business and commuter aircraft systems and medical devices partially
offset lower sales for microelectronics, relays, and lighting and display
products for both the 1999 second quarter and six months. These results were
also impacted by costs related to a workforce reduction at Teledyne Electronic
Technologies. At Teledyne Brown Engineering, increased 1999 second quarter and
1999 six months sales in defense and environmental programs partially offset
lower sales for instrumentation products for offshore oil and gas exploration.
Industrial Segment
Operating profit for the 1999 second quarter was $8.3 million compared to
$18.3 million for the same quarter of 1998, and sales decreased 17 percent to
$115.3 million. For the 1999 six months, operating profit decreased 36 percent
to $20.9 million while sales decreased 12 percent to $237.4 million. The decline
in sales and operating profit in both 1999 periods resulted primarily from
reduced demand for tungsten, tungsten carbide, and carbide-cutting tools due to
continued weak global market conditions. Metalworking Products' 1999 second
quarter results also reflect $1.5 million in costs related to a workforce
reduction.
Consumer Segment
Operating profit increased to $5.8 million in the 1999 second quarter from
$5.5 million in the same 1998 period and sales increased 14 percent to $64.9
million. For the 1999 six-month period, operating profit increased to $8.1
million from $7.4 million and sales increased 12 percent to $118.5 million from
the comparable 1998 period. Operating profit in the 1999 second quarter includes
a $1.0 million charge for the consolidation of manufacturing facilities.
In August 1999, the Company completed the purchase of substantially all of
the assets of Les Agences Claude Marchand, Inc., a pool accessories manufacturer
and distributor, based in Montreal, Quebec, and doing business in Canada as
Olympic Pool Accessories.
Corporate Items
Corporate expenses decreased by 4 percent to $7.8 million for the 1999 second
quarter and decreased 8 percent to $17.0 million for the 1999 six months,
compared to the respective 1998 periods. Net interest expense increased $3.6
million and $8.6 million in the 1999 second quarter and 1999 six-month period
from the 1998 second quarter and 1998 six-month period,
14
<PAGE> 15
respectively, due to higher levels of debt resulting from the expenditure of
more than $400 million to purchase businesses and complete capital investments
in 1998. Excess pension income increased to $15.7 million in the 1999 second
quarter and $31.8 million in the 1999 six-month period compared to $10.6 million
in the 1998 second quarter and $21.2 million in the 1998 six-month period due to
higher pension assets as a result of strong investment performance during 1998.
Investments and operations sold or held for sale, which includes Ryan
Aeronautical and the McCormick Selph Ordnance business unit, realized income
before taxes of $10.5 million in the 1999 second quarter and $13.0 million in
the 1999 six-month period, compared to $2.3 million in the 1998 second quarter
and $6.1 million in the 1998 six-month period.
Special Items
In the 1999 second quarter special items reduced net income by $6.4 million,
or $0.03 per diluted share. These after-tax items include costs related to the
previously announced proposed transformation of Allegheny Teledyne, facility
consolidations or workforce reductions at Metalworking Products, Water Pik,
Laars, Teledyne Electronic Technologies and Allvac's United Kingdom operations,
as well as start-up costs at Oremet-Wah Chang and Allegheny Ludlum's joint
venture in China.
In the 1999 first quarter, special items reduced net income by $4.4 million,
or $0.02 per diluted share. These items, net of taxes, included start-up costs
of $2.2 million, or $0.01 per share, in the Specialty Metals segment associated
with recently completed strategic capital investments, operating losses on
businesses sold during the quarter of $1.6 million, or $0.01 per share, and
costs of $0.6 million related to the proposed transformation of Allegheny
Teledyne.
In the 1998 second quarter special items resulted in an after-tax charge of
$4.9 million, or $0.02 per diluted share, primarily due to a salaried workforce
reduction at Allegheny Ludlum.
Non-recurring events resulted in an after-tax charge of $40.9 million, or
$0.21 per diluted share, in the 1998 first quarter. These events included deal
costs of $10.3 million, or $0.05 per share, related to the acquisition of
OREMET, along with charges of $3.5 million, or $0.02 per share, for a salaried
workforce reduction related to integrating the operations of OREMET and Wah
Chang. Also, Allegheny Ludlum recorded a $7.4 million charge, or $0.04 per
share, due to a salaried workforce reduction. In addition, charges of $19.7
million, or $0.10 per share, relating to the Specialty Metals segment were
recorded associated with exiting certain product lines and asset impairments
resulting from capital expenditure programs completed in 1998.
15
<PAGE> 16
Transformation Initiatives
In July 1999, as the Company proceeds toward implementing its transformation
initiatives, the Company announced three executive appointments in the Consumer
segment and one in the Aerospace and Electronics segment as follows:
Consumer:
Robert A. Shortt Executive Vice President Sales, Marketing &
Business Development
Victor C. Streufert Vice President-Finance and Chief Financial Officer
Richard P. Bisson Vice President-Operations
Aerospace and Electronics:
Stefan C. Riesenfeld Executive Vice President and Chief Financial Officer
Allegheny Teledyne's management believes that it should be able to complete the
proposed spin-offs in the 1999 fourth quarter, subject to legal, tax, financial
and other considerations being resolved successfully.
In July 1999, the Company completed the previously announced sales of Ryan
Aeronautical, the McCormick Selph Ordnance business unit and the Drinkware
business unit of Water Pik. Also in July 1999, the Company announced definitive
agreements for the sale of Fluid Systems. In August 1999, the Company completed
the sale of Teledyne Specialty Equipment's Construction and Mining business
unit. Total proceeds from these transactions, plus two smaller asset sales
completed in the first quarter of 1999, are expected to be over $340 million.
Discussions with potential buyers are ongoing concerning the sale of Teledyne
Specialty Equipment's Material Handling business unit.
New Accounting Pronouncements
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. In June 1999, Financial
Accounting Standards Board Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities: Deferral of the Effective Date of FASB
Statement No. 133" was issued. This statement delays the effective date of
Statement No. 133 to all fiscal quarters beginning after June 15, 2000. The
Company is presently evaluating the effect of adopting these statements.
Income Taxes
The Company's effective tax rate was 37.0 percent and 36.0 percent,
respectively, for the 1999 second quarter and six months, compared to 36.4
percent and 37.8 percent, respectively, for the same periods in 1998. The second
quarter 1999 effective tax rate reflects the effect of certain non-deductible
costs recorded in the second quarter of 1999. The 1998 six month effective tax
rate reflects the effect of non-deductible business combination costs associated
with the merger with OREMET recorded in the 1998 first quarter.
Financial Condition and Liquidity
- ---------------------------------
Working capital decreased to $689.3 million at June 30, 1999, compared to
$742.2 million at December 31, 1998. The current ratio decreased to 2.0 from
16
<PAGE> 17
2.2 in this same period. The decrease in working capital was primarily due to
higher short-term debt and current portion of long-term debt and accounts
payable balances and lower cash balances offset by higher accounts receivable
and lower accrued liabilities balances.
In the first six months of 1999, cash generated from operations of $146.0
million, proceeds from the net increase in debt of $47.0 million, proceeds from
the sale of businesses and investments and disposals of property, plant and
equipment of $13.6 million and proceeds from the exercise of stock options of
$3.5 million were used to repurchase common stock for $108.6 million, pay
dividends of $61.8 million and to invest $54.5 million in capital equipment and
business expansion. Cash transactions plus cash on hand at the beginning of the
year resulted in a cash position of $60.0 million at June 30, 1999. Capital
expenditures for 1999 are expected to approximate $128 million, of which $52.8
million were spent during the first six months.
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 repurchased from time-to-time in the open
market. During the second quarter of 1999, the Company repurchased 2.6 million
shares at a cost of $56.4 million. During the 1999 six months, the Company
repurchased 5.2 million shares at a cost of $108.6 million. From the inception
of the share repurchase program through August 6, 1999, the Company has
repurchased a total of approximately 8.1 million shares at a cost of $168.2
million.
On August 12, 1999, the Board of Directors declared a regular quarterly
dividend of $0.16 per share of common stock. The dividend is payable on
September 14, 1999 to stockholders of record at the close of business on August
30, 1999.
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 $33.2 million
at June 30, 1999. 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
17
<PAGE> 18
responsible party at approximately 36 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 14 of these sites, and the potential loss
exposure with respect to any of these 36 sites is not considered to be material.
For additional discussion of environmental matters, see Note 7 to the
consolidated financial statements of the Company.
Government Contracts
- --------------------
A number of the Company's subsidiaries 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 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
18
<PAGE> 19
have a material adverse effect on the Company's results of operations for that
period.
For additional discussion of government contract matters, see Note 7 to the
consolidated financial statements of the Company.
Impact of the Introduction of the Euro
- --------------------------------------
The Company has continued to evaluate 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 its evaluation, the Company currently 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, associated costs to date have not been 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. The Company believes that the Euro conversion will not
have a material adverse effect on its foreign currency activities described
below.
Year 2000 Readiness Disclosure
- ------------------------------
Over the past several years, the Company has put in place management task
forces 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 task forces 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, which reports to the
Audit and Finance Committee of the Company's Board of Directors. Through these
efforts, Year 2000 identification, solution development, testing and
implementation initiatives and contingency planning initiatives have proceeded
at Allegheny Teledyne and each of the operating companies.
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 estimates, based on dollars expended, that installation of solutions
to identified Year 2000 issues relating to its information technology systems is
over 95 percent complete. While the Company estimates that based on dollars
expended, approximately 90 percent of the solutions have been implemented for
its non-information technology systems, the Company continues to work to resolve
various manufacturing-related Year 2000 issues. The Company believes that a
substantial portion of its internal solutions relating to Year 2000
functionality of its computer systems have been completed, and currently targets
having substantially all such internal solutions developed and implemented by
September 30, 1999. This targeted completion date depends, however, on numerous
assumptions, including continued availability of trained personnel in this
function.
19
<PAGE> 20
Efforts have continued 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 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, primarily a limited number of products
of Teledyne Electronic Technologies and Teledyne Brown Engineering, and is
working to resolve such issues. The Company believes that there are no
significant product-related Year 2000 issues. The Company has not conducted any
review of products manufactured and sold by discontinued businesses or
businesses that it has sold.
Excluding expenditures necessitated by ordinary business needs and continuing
technological advancements in the computer industry, the Company spent
approximately $11 million in 1998 and anticipates spending another estimated $7
million in 1999 to address Year 2000 issues, of which approximately $5 million
were spent during the first half of 1999. These expenditures do not include
expenditures relating to Year 2000 issues associated with the products
identified above. 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 to orders and could result in other
liabilities. Customers' Year 2000 problems could also delay the timing of
payments to the Company for orders. Efforts continue to be underway to identify
contingency plans should unplanned situations arise as a result of January 1,
2000.
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.
20
<PAGE> 21
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 7 to the consolidated financial statements of the Company,
including statements concerning cost savings, raw material costs, capital
spending plans, the adequacy of available funds to meet foreseeable needs,
anticipated effects of the euro conversion, anticipated expenditures to address
Year 2000-computer-systems issues, the impact of Year 2000-computer-systems
issues, the Company's use of 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. Completion of the proposed spin-offs and public offerings and achieving
anticipated results involve inherent uncertainties, including those related to
whether legal, tax, financial and other considerations can be successfully
resolved. Realization of the anticipated benefits of the proposed transformation
could take longer than expected and implementation difficulties, market factors
and further deterioration in domestic or global economic conditions could alter
the anticipated benefits. 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, 1998. The Company assumes no duty to update its forward-looking
statements.
21
<PAGE> 22
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
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.
These contracts can also be designated as hedges of the Company' firm sales
commitments, are short-term in nature to correspond to the commitment period,
and are effective in hedging the Company's exposure to changes in nickel prices
during the cycle. 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 which resulted in a material adverse effect
on the Company.
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
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.
22
<PAGE> 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The Company's 1999 annual meeting of stockholders was held on May 13, 1999.
At that meeting, the five nominees for directors named in the proxy statement
for the meeting were elected, having received the following number of votes:
Number of Votes Number of Votes
Name For Withheld
- -------------------- --------------- ----------------
Robert P. Bozzone 169,311,197 1,369,585
Frank V. Cahouet 169,296,729 1,389,053
Frank J. Lucchino 169,303,077 1,382,705
W. Craig McClelland 169,355,218 1,330,564
Charles J. Queenan, Jr. 169,291,603 1,394,179
In addition, the stockholders voted on and approved the ratification of the
selection of Ernst & Young LLP as independent auditors of the Company for the
1999 fiscal year. The number of votes casts for approval was 169,937,335,
against approval was 302,589 and to abstain was 445,858. There were no broker
non-votes in connection with the ratification of the selection of Ernst & Young
LLP.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
4 Fourth Amendment to Credit Agreement and Waiver dated as of
August 6, 1999, to certain Credit Agreement dated as of August
30, 1996, as amended by the First Amendment dated as of August
31, 1997, the Second Amendment dated as of March 24, 1998, and
the Third Amendment dated as of March 30, 1999.
27 Financial Data Schedule for Six Months Ended June 30, 1999.
(b) The Registrant did not file any Current Reports on Form 8-K during the
quarter for which this report is filed.
23
<PAGE> 24
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)
Date: August 13, 1999 By /s/ James L. Murdy
---------------------------------
James L. Murdy
Executive Vice President, Finance and
Administration and Chief Financial
Officer
(Duly Authorized Officer)
Date: August 13, 1999 By /s/ Dale G. Reid
---------------------------------
Dale G. Reid
Vice President - Controller and Chief
Accounting Officer
(Principal Accounting Officer)
24
<PAGE> 25
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
4 Fourth Amendment to Credit Agreement and Waiver dated as of August
6, 1999, to certain Credit Agreement dated as of August 30, 1996,
as amended by the First Amendment dated as of August 31, 1997, the
Second Amendment dated as of March 24, 1998, and the Third
Amendment dated as of March 30, 1999.
27 Financial Data Schedule for Six Months Ended June 30, 1999.
25
<PAGE> 1
EXHIBIT 4
FOURTH AMENDMENT TO
CREDIT AGREEMENT AND WAIVER
Among
ALLEGHENY TELEDYNE INCORPORATED
as the Borrower
THE FINANCIAL INSTITUTIONS PARTY THERETO
as the Lenders
BANK OF AMERICA, N.A. (FORMERLY BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION)
THE CHASE MANHATTAN BANK
MELLON BANK, N.A.
and
PNC BANK, NATIONAL ASSOCIATION
as Managing Agents
and
PNC BANK, NATIONAL ASSOCIATION
as the Documentation and Administrative Agent
Dated as of
August 6, 1999
<PAGE> 2
FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER (the "Fourth
Amendment") made as of August 6, 1999, to that certain Credit Agreement dated as
of August 30, 1996 as amended by the First Amendment to Credit Agreement dated
as of August 31, 1997, the Second Amendment to Credit Agreement dated as of
March 24, 1998, and the Third Amendment to Credit Agreement dated as of March
30, 1999 (the Credit Agreement together with the exhibits and schedules thereto
and all modifications, amendments, extensions, renewals, substitutions or
replacements prior to the date hereof, the "Existing Agreement"), among
ALLEGHENY TELEDYNE INCORPORATED as the Borrower (the "Borrower"), the FINANCIAL
INSTITUTIONS listed on the signature pages hereto and each other financial
institution which from time to time becomes a party hereto in accordance with
Section 9.6a (individually a "Lender" and collectively the "Lenders"), BANK OF
AMERICA, N.A. (formerly Bank of America National Trust and Savings Association),
THE CHASE MANHATTAN BANK, MELLON BANK, N.A. and PNC BANK, NATIONAL ASSOCIATION
as Managing Agents (individually a "Managing Agent" and collectively the
"Managing Agents") and PNC BANK, NATIONAL ASSOCIATION, a national banking
association, Documentation and Administrative Agent for the Lenders (in such
capacity the "Agent").
WITNESSETH:
WHEREAS, the Borrower and the initial Lenders, the Managing Agents and
the Agent entered into the Existing Agreement pursuant to which the Lenders made
certain financial accommodations available to the Borrower including a Revolving
Credit Commitment;
WHEREAS, the Borrower and the Lenders, the Managing Agents and the
Agent desire to amend the Existing Agreement as set forth herein.
NOW THEREFORE, in consideration of the mutual premises contained herein
and other good and valuable consideration, the Borrower and the Lenders with the
intent to be legally bound hereby, agree that the Existing Agreement shall be
amended as follows:
ARTICLE I
AMENDMENTS TO EXISTING AGREEMENT
SECTION 1.01. ADDITIONAL DEFINITIONS. Section 1.1 of the Existing
Agreement is hereby amended such that the following definition shall be added
thereto in the appropriate alphabetical order:
"Aerospace and Electronics Assets" means the assets of Subsidiaries of
TI which are directly related to TI's aerospace and electronics line of
business.
"Aerospace Credit Agreement" shall have the meaning ascribed to it in
Article II of the Fourth Amendment.
"Aerospace Subsidiary" means a corporation to be formed by Teledyne
Industries on or before the Reorganization Date to which shall be contributed
the Aerospace and Electronics Assets.
1
<PAGE> 3
"Consumer Products Assets" means the assets of Subsidiaries of TI which
are directly related to TI's consumer products line of business.
"Consumer Products Credit Agreement" shall have the meaning ascribed to
it in Article II of the Fourth Amendment.
"Consumer Products Subsidiary" means a corporation to be formed by
Teledyne Industries on or before the Reorganization Date to which shall be
contributed the Consumer Products Assets.
"Fourth Amendment" means the Fourth Amendment to Credit Agreement and
Waiver among the Borrower, the Lenders, the Managing Agents and the Agent dated
as of August 6, 1999.
"Fourth Amendment Effective Date" shall mean August 6, 1999.
"Newco LLC" means the Delaware limited liability company to be formed
by the Borrower and having as its sole member the Borrower.
"Reorganization Date" means the date on which the Spin-off occurs.
"Spin-off" means the series of transactions in which (i) Teledyne
Industries will create two wholly-owned Subsidiaries: (A) Aerospace Subsidiary
which ultimately shall own, directly or indirectly, the Aerospace and
Electronics Assets and (B) Consumer Products Subsidiary which ultimately shall
own, directly or indirectly, the Consumer Products Assets, (ii) the Borrower
will contribute TI to Newco LLC, (iii) TI will be dissolved into Newco LLC, (iv)
Newco LLC or Teledyne Industries (A) shall contribute the Aerospace and
Electronics Assets to Aerospace Subsidiary and (B) shall contribute the Consumer
Products Assets to Consumer Products Subsidiary, and (v) the shares of Aerospace
Subsidiary and Consumer Products Subsidiary shall be distributed to the existing
stockholders of the Borrower in a tax free reorganization under Section 355 of
the Internal Revenue Code.
SECTION 1.02. AMENDMENT TO SECTION 4.11. Section 4.11 of the Existing
Agreement is amended and restated in its entirety to read as follows:
On and after the Fourth Amendment Effective Date (i) the
Borrower (x) shall be the legal and beneficial owner of and
shall retain all voting rights relating to all of the issued
and outstanding capital stock of ATI Funding and (y) shall be
the legal and beneficial owner of and shall retain all voting
rights relating to all of the issued and outstanding capital
stock of TI prior to the contribution of the capital stock of
TI to Newco LLC described below, and (ii) ATI Funding shall be
the legal and beneficial owner of and shall retain all voting
rights relating to all of the issued and outstanding capital
stock of each of ALC and OREMET. After the Fourth Amendment
Effective Date and on or prior to the Reorganization Date, (i)
the Borrower shall contribute the outstanding capital stock of
TI to Newco LLC, which shall be a wholly owned limited
liability company of the Borrower, and (ii) TI shall be
dissolved into Newco LLC and the stock of Aerospace Subsidiary
and Consumer Products Subsidiary shall be distributed to the
stockholders of the Borrower, as a result of which the
Borrower shall be the legal and beneficial owner of and shall
retain all voting rights relating to all of the issued and
2
<PAGE> 4
outstanding limited liability interests in Newco LLC and Newco
LLC shall be the legal and beneficial owner of all of the
issued and outstanding capital stock of Teledyne Industries
and thereafter during the term hereof shall retain all voting
rights relating to all of the issued and outstanding capital
stock of Teledyne Industries.
SECTION 1.03. NO OTHER AMENDMENTS. The amendments to the Existing
Agreement set forth in Sections 1.01 and 1.02 inclusive above do not either
implicitly or explicitly alter or amend, except as expressly provided in this
Fourth Amendment, the provisions of the Existing Agreement. The amendments set
forth in Sections 1.01 and 1.02 hereof do not waive, now or in the future,
compliance with any other covenant, term or condition to be performed or
complied with nor do they impair any rights or remedies of the Lenders or the
Agent under the Existing Agreement with respect to any such violation. Nothing
in this Fourth Amendment shall be deemed or construed to be a release of, or a
limitation upon, the Lenders' or the Agents' exercise of any of their respective
rights and remedies under the Existing Agreement and the other Loan Documents,
whether arising as a consequence of any Events of Default which may now exist or
otherwise, and all such rights and remedies are hereby expressly reserved.
ARTICLE II
WAIVER
SECTION 2.01. In order to allow the Spin-off to occur, the Lenders
hereby waive certain provisions of Section 5.1 of the Existing Agreement to
allow the following:
(a) Incurrence of Indebtedness (Aerospace). The Borrower may
enter into a credit agreement with a group of lenders (the "Aerospace
Credit Agreement"), the terms and conditions of which may be more
restrictive than the terms and conditions of the Agreement, and incur
Indebtedness under the Aerospace Credit Agreement, provided that:
(i) the maximum amount of Indebtedness that may be
incurred under the Aerospace Credit Agreement shall not exceed
$200,000,000.
(ii) all of the Borrower's liability under the
Aerospace Credit Agreement shall be fully assumed by Aerospace
Subsidiary on the Reorganization Date, and thereafter the
Borrower shall have no liability under the Aerospace Credit
Agreement; and
(iii) if the Spin-off does not occur on or before
March 31, 2000, the Borrower shall terminate the Aerospace
Credit Agreement and pay all amounts due thereunder.
(b) Incurrence of Indebtedness (Consumer Products). The
Borrower may enter into a credit agreement with a group of lenders (the
"Consumer Products Credit Agreement"), the terms and conditions of
which may be more restrictive than the terms and conditions of the
Agreement, and incur Indebtedness under the Consumer Products Credit
Agreement, provided that:
(i) the maximum amount of Indebtedness that may be
incurred under the Consumer Products Credit Agreement shall
not exceed $80,000,000;
3
<PAGE> 5
(ii) all of the Borrower's liability under the
Consumer Products Credit Agreement shall be fully assumed by
Consumer Products Subsidiary on the Reorganization Date, and
thereafter the Borrower shall have no liability under the
Consumer Products Credit Agreement; and
(iii) if the Spin-off does not occur on or before
March 31, 2000, the Borrower shall terminate the Consumer
Products Credit Agreement and pay all amounts due thereunder.
ARTICLE III
BORROWER'S SUPPLEMENTAL REPRESENTATIONS
SECTION 3.01 INCORPORATION BY REFERENCE. As an inducement to the
Lenders to enter into this Fourth Amendment, the Borrower hereby repeats herein,
for the benefit of the Lenders, the representations and warranties made by the
Borrower in Sections 3.1 through 3.15, inclusive, of the Existing Agreement, as
amended hereby, except that for purposes hereof such representations and
warranties shall be deemed to extend to and cover this Fourth Amendment.
ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.01. CONDITIONS PRECEDENT. Each of the following shall be a
condition precedent to the effectiveness of this Fourth Amendment:
(i) The Lenders shall have received, on or before the Fourth Amendment
Effective Date, duly executed counterpart originals of this Fourth Amendment.
(ii) The following statements shall be true and correct on the Fourth
Amendment Effective Date:
(A) except to the extent modified in writing by the Borrower
heretofore delivered to the Lenders, the representations and warranties made
pursuant to Section 3.01 of this Fourth Amendment and in the other Loan
Documents are true and correct on and as of the Fourth Amendment Effective Date
as though made on and as of such date in all material respects;
(B) no Event of Default or event which with the giving of
notice or passage of time or both would become an Event of Default has occurred
and is continuing, or would result from the execution of or performance under
this Fourth Amendment;
(C) the Borrower has in all material respects performed all
agreements, covenants and conditions required to be performed on or prior to the
date hereof under the Existing Agreement and the other Loan Documents.
4
<PAGE> 6
ARTICLE V
GENERAL PROVISIONS
SECTION 5.01. RATIFICATION OF TERMS. Except as expressly amended or
waived by this Fourth Amendment, the Existing Agreement and each and every
representation, warranty, covenant, term and condition contained therein is
specifically ratified and confirmed in all material respects.
SECTION 5.02. REFERENCES. All notices, communications, agreements,
certificates, documents or other instruments executed and delivered after the
execution and delivery of this Fourth Amendment in connection with the
Agreement, any of the other Loan Documents or the transactions contemplated
thereby may refer to the Existing Agreement without making specific reference to
this Fourth Amendment, but nevertheless all such references shall include this
Fourth Amendment unless the context requires otherwise. From and after the
Fourth Amendment Effective Date, all references in the Existing Agreement and
each of the other Loan Documents to the "Agreement" shall be deemed to be
references to the Existing Agreement as amended hereby.
SECTION 5.03. COUNTERPARTS. This Fourth Amendment may be executed in
different counterparts, each of which when executed by the Borrower and a Lender
shall be regarded as an original, and all such counterparts shall constitute one
Fourth Amendment.
SECTION 5.05. CAPITALIZED TERMS. Except for proper nouns and as
otherwise defined herein, capitalized terms used herein as defined terms shall
have the meanings ascribed to them in the Existing Agreement, as amended hereby.
SECTION 5.05. GOVERNING LAW. THIS FOURTH AMENDMENT AND THE RIGHTS AND
OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO THE PROVISIONS
THEREOF REGARDING CONFLICTS OF LAW.
SECTION 5.06. HEADINGS. The headings of the sections in this Fourth
Amendment are for purposes of reference only and shall not be deemed to be a
part hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Fourth Amendment to be duly executed by their proper
and duly authorized officers the day first above written.
<TABLE>
<S> <C>
PNC BANK, NATIONAL ASSOCIATION, as ALLEGHENY TELEDYNE INCORPORATED
Lender, Managing Agent and Agent
By: /s/ DAVID B. GOOKIN (SEAL) By: /s/ R. S. PARK (SEAL)
------------------------------ --------------------------------
Name: David B. Gookin Name: R. S. Park
------------------------------------ --------------------------------------
Title: Vice President Title: Vice President, Treasurer
------------------------------------ --------------------------------------
THE CHASE MANHATTAN BANK, as Lender BANK OF AMERICA, N.A. (formerly Bank of
and Managing Agent America National Trust and Savings
Association), as Lender and Managing Agent
and as successor in interest to NationsBank,
N.A.
By: /s/ JAMES H. RAMAGE (SEAL) By: /s/ GRETCHEN SPOO (SEAL)
------------------------------ --------------------------------
Name: James H. Ramage Name: Gretchen Spoo
------------------------------------ --------------------------------------
Title: Vice President Title: Vice President
------------------------------------ --------------------------------------
THE BANK OF NEW YORK MELLON BANK, N.A., as Lender and
Managing Agent
By: /s/ DOUGLAS OBER (SEAL) By: /s/ ROBERT J. RUCHENBACH (SEAL)
------------------------------ --------------------------------
Name: Douglas Ober Name: Robert J. Ruchenbach
------------------------------------ --------------------------------------
Title: Senior Vice President Title: Assistant Vice President
------------------------------------ --------------------------------------
BANK OF TOKYO-MITSUBISHI TRUST MORGAN GUARANTY TRUST COMPANY
COMPANY OF NEW YORK
By: (SEAL) By: /s/ ROBERT BOTTAMEDI (SEAL)
------------------------------ --------------------------------
Name: Name: Robert Bottamedi
------------------------------------ --------------------------------------
Title: Title: Vice President
------------------------------------ --------------------------------------
THE FIRST NATIONAL BANK OF CHICAGO THE TORONTO-DOMINION BANK
By /s/ GARY C. WILSON (SEAL) By: (SEAL)
------------------------------ --------------------------------
Name: Gary C. Wilson Name:
------------------------------------ --------------------------------------
Title: First Vice President Title:
------------------------------------ --------------------------------------
</TABLE>
[SIGNATURES CONTINUED ON NEXT PAGE]
6
<PAGE> 8
[CONTINUATION OF SIGNATURE PAGE]
<TABLE>
<S> <C>
THE FUJI BANK LIMITED, NEW YORK FIRST UNION NATIONAL BANK, successor
BRANCH by merger to CoreStates Bank, NA
By /s/ RAYMOND VENTURA (SEAL) By: /s/ DONNA J. EMHART (SEAL)
------------------------------ --------------------------------
Name: Raymond Ventura Name: Donna J. Emhart
------------------------------------ --------------------------------------
Title: Vice President and Manager Title: Vice President
------------------------------------ --------------------------------------
UNION BANK OF SWITZERLAND, NEW YORK BRANCH NATIONAL CITY BANK OF PENNSYLVANIA
By (SEAL) By: /s/ MICHAEL A. HEINRICHER (SEAL)
------------------------------ --------------------------------
Name: Name: Michael A. Heinricher
------------------------------------ --------------------------------------
Title: Title: Assistant Vice President
------------------------------------ --------------------------------------
</TABLE>
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 564
<ALLOWANCES> 14
<INVENTORY> 653
<CURRENT-ASSETS> 1,353
<PP&E> 2,068
<DEPRECIATION> 1,045
<TOTAL-ASSETS> 3,206
<CURRENT-LIABILITIES> 664
<BONDS> 439
0
0
<COMMON> 20
<OTHER-SE> 1,285
<TOTAL-LIABILITY-AND-EQUITY> 3,206
<SALES> 1,853
<TOTAL-REVENUES> 1,853
<CGS> 1,419
<TOTAL-COSTS> 1,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 184
<INCOME-TAX> 66
<INCOME-CONTINUING> 118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.61
</TABLE>
