<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, 2000
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 TECHNOLOGIES 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 July 31, 2000, the Registrant had outstanding 81,305,923 shares of its Common
Stock.
<PAGE> 2
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED JUNE 30, 2000
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
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 13
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 18
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote
of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 41.5 $ 50.7
Accounts receivable 347.1 341.2
Inventories 619.4 558.3
Deferred income taxes 47.4 62.6
Prepaid expenses and other current assets 19.6 20.7
-------- --------
Total Current Assets 1,075.0 1,033.5
Property, plant and equipment 904.6 912.4
Prepaid pension cost 567.5 503.7
Cost in excess of net assets acquired 196.0 204.2
Other assets 90.6 96.8
-------- --------
Total Assets $2,833.7 $2,750.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable $ 192.4 $ 172.9
Accrued liabilities 212.6 214.4
Short-term debt and current portion of long-term
debt 28.7 152.7
-------- --------
Total Current Liabilities 433.7 540.0
Long-term debt 529.7 200.3
Accrued postretirement benefits 537.7 544.8
Other 275.2 265.3
-------- --------
Total Liabilities 1,776.3 1,550.4
-------- --------
STOCKHOLDERS' EQUITY:
Preferred value, par value $0.10: authorized-
50,000,000 shares; issued-None -- --
Common stock, par value $0.10, authorized-500,000,000
shares; issued-98,951,490 shares at June 30, 2000
and December 31, 1999; outstanding-81,665,235 shares
at June 30, 2000 and 90,368,196 shares at
December 31, 1999 9.9 9.9
Additional paid-in capital 481.1 481.0
Retained earnings 1,041.3 994.5
Treasury stock: 17,286,255 shares at June 30, 2000
and 8,583,294 shares at December 31, 1999 (459.5) (288.7)
Foreign currency translation losses (16.9) (3.7)
Unrealized gains on securities 1.5 7.2
-------- --------
Total Stockholders' Equity 1,057.4 1,200.2
-------- --------
Total Liabilities and Stockholders' Equity $2,833.7 $2,750.6
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ALLEGHENY TECHNOLOGIES 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,
-------------------- ----------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $638.3 $572.7 $1,263.7 $1,158.2
Costs and expenses:
Cost of sales 514.8 458.4 1,025.5 921.3
Selling and administrative expenses 53.0 50.6 104.0 102.4
Interest expense, net 7.4 8.4 14.3 17.4
------ ------ -------- --------
575.2 517.4 1,143.8 1,041.1
Earnings before other income 63.1 55.3 119.9 117.1
Other income 5.5 2.8 13.9 3.2
------ ------ -------- --------
Income from continuing operations
before income taxes 68.6 58.1 133.8 120.3
Provision for income taxes 24.9 21.5 48.8 43.3
------ ------ -------- --------
Income from continuing operations 43.7 36.6 85.0 77.0
Income from discontinued operations,
net of tax -- 20.7 -- 40.9
------ ------ -------- --------
Net income $ 43.7 $ 57.3 $ 85.0 $ 117.9
====== ====== ======== ========
Basic net income per common share:
Income from continuing operations $ 0.53 $ 0.38 $ 1.00 $ 0.80
Income from discontinued operations -- 0.22 -- 0.42
------ ------ -------- --------
Basic net income per common share $ 0.53 $ 0.60 $ 1.00 $ 1.22
====== ====== ======== ========
Diluted net income per common share:
Income from continuing operations $ 0.53 $ 0.38 $ 1.00 $ 0.79
Income from discontinued operations -- 0.21 -- 0.42
------ ------ -------- --------
Diluted net income per common share $ 0.53 $ 0.59 $ 1.00 $ 1.21
====== ====== ======== ========
Dividends declared per common share $ 0.20 $ 0.32 $ 0.40 $ 0.64
====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 85.0 $ 117.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 49.9 47.2
Deferred income taxes 13.7 (2.0)
Gains on sales of investments and businesses (11.4) (0.2)
Income from discontinued operations, net of tax -- (40.9)
Change in operating assets and liabilities:
Prepaid pension cost (63.7) (51.2)
Inventories (54.9) 10.0
Accounts payable 19.5 5.1
Accounts receivable (5.9) (20.8)
Accrued income taxes 0.1 11.6
Other 2.5 2.0
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 34.8 78.7
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (28.0) (42.8)
Purchases of businesses and investment in ventures (25.4) (1.7)
Proceeds from the sales of investments and businesses 16.7 6.0
Disposals of property, plant and equipment 4.0 7.3
Other (3.0) 2.0
------- -------
CASH USED IN INVESTING ACTIVITIES (35.7) (29.2)
FINANCING ACTIVITIES:
Net borrowings under credit agreements 206.1 48.2
Borrowings on long-term debt 2.4 --
Payments on long-term debt and capital leases (0.9) (1.2)
------- -------
Net increase in debt 207.6 47.0
Purchases of treasury stock (183.7) (108.6)
Cash dividends (33.8) (61.8)
Exercises of stock options 1.6 3.5
------- -------
CASH USED IN FINANCING ACTIVITIES (8.3) (119.9)
CASH PROVIDED BY DISCONTINUED OPERATIONS -- 55.4
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (9.2) (15.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 50.7 74.2
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41.5 $ 59.2
======= =======
</TABLE>
Cash provided by operating activities in 2000 is net of payment of taxes on gain
on sale of investments of $4.2 million. Excluding this tax payment, cash
provided by operating activities was $39.0 million.
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
ALLEGHENY TECHNOLOGIES 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 Technologies Incorporated and its subsidiaries. Unless the context
requires otherwise, "Allegheny Technologies" and the "Company" refer to
Allegheny Technologies Incorporated and its subsidiaries.
Certain amounts from 1999 have been reclassified to conform with the
2000 presentation, including classification of companies spun-off and sold as
discontinued operations.
At a stockholders' meeting held on November 11, 1999, the Company's
stockholders approved a reduction in the authorized number of shares of the
Company's common stock and a one-for-two reverse stock split of the common
stock. The reverse stock split was effective immediately following the spin-offs
of Teledyne Technologies Incorporated and Water Pik Technologies, Inc. on
November 29, 1999. All references in the financial statements and notes to the
number of shares and per share amounts, have been restated to reflect this
reverse stock split.
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 1999 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 ("FASB") Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June 1998, and amended in June 2000, pursuant to FASB Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities:
an amendment of FASB No. 133." These statements establish accounting and
reporting standards for derivative instruments and hedging activities. They
require 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, FASB 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 FASB
Statement No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company is presently evaluating the effect of adopting these
statements as they relate to derivative instruments and hedging activities.
6
<PAGE> 7
NOTE 2. DISCONTINUED OPERATIONS
On January 19, 1999, the Company announced its plans to effect a major
strategic transformation of the Company that included the sales of several of
the Company's businesses and the spin-offs of certain businesses in two of the
Company's former business segments into independent, publicly-traded companies
(the "spin-offs"). Teledyne Technologies Incorporated ("Teledyne") is comprised
of certain businesses in the Company's former Aerospace and Electronics segment.
Water Pik Technologies, Inc. ("Water Pik") is comprised of the Company's former
Consumer segment.
Prior to the spin-offs, the Company received a tax ruling from the
Internal Revenue Service that the spin-offs would be tax-free to the Company and
to the Company's stockholders.
On November 29, 1999, the Company distributed all of the common stock
of Teledyne and Water Pik to the Company's stockholders of record as of November
22, 1999. Stockholders of record received one share of Teledyne common stock for
every seven shares of Allegheny Technologies common stock and one share of Water
Pik common stock for every twenty shares of Allegheny Technologies common stock,
based on the number of shares of Allegheny Technologies common stock they held
prior to the reverse split. Immediately following the spin-offs, the Company
effected a one-for-two reverse split of its common stock and changed its name
from Allegheny Teledyne Incorporated to Allegheny Technologies Incorporated.
In 1999, the Company sold its unmanned aerial vehicle and its
pyrotechnic components and systems businesses, known as Ryan Aeronautical and
McCormick Selph Ordnance Unit, respectively, as well as the pressure relief
valve, vehicle control valve, nitrogen gas springs, consumer drinkware,
construction and mining equipment and material handling businesses. The Company
recognized extraordinary gains of $129.6 million, net of $79.9 million in taxes,
in the 1999 third quarter in connection with the sales of these businesses.
Discontinued operations include all companies that were spun-off or
sold.
Results of discontinued operations were as follows (in millions):
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
Net sales $345.3 $694.4
====== ======
Income before taxes 32.9 63.9
Provision for income taxes 12.2 23.0
------ ------
Income from discontinued operations $ 20.7 $ 40.9
====== ======
NOTE 3. INVENTORIES
Inventories were as follows (in millions):
June 30, December 31,
2000 1999
------- -------
Raw materials and supplies $ 122.0 $108.1
Work-in-process 537.8 437.8
Finished goods 105.1 113.1
------- ------
Total inventories at current cost 764.9 659.0
Less allowances to reduce current cost
values to LIFO basis (137.0) (95.0)
Progress payments (8.5) (5.7)
------- ------
Total inventories $ 619.4 $558.3
======= ======
7
<PAGE> 8
NOTE 4. 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,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total sales:
Flat-Rolled Products $393.3 $326.5 $ 773.9 $ 641.7
High Performance Metals 200.9 202.9 398.2 415.7
Industrial Products 71.1 68.7 143.0 147.0
------ ------ -------- --------
665.3 598.1 1,315.1 1,204.4
Intersegment sales:
Flat-Rolled Products 10.0 6.2 16.6 10.8
High Performance Metals 17.0 19.2 34.8 35.4
------ ------ -------- --------
27.0 25.4 51.4 46.2
Sales to external customers:
Flat-Rolled Products 383.3 320.3 757.3 630.9
High Performance Metals 183.9 183.7 363.4 380.3
Industrial Products 71.1 68.7 143.0 147.0
------ ------ -------- --------
$638.3 $572.7 $1,263.7 $1,158.2
====== ====== ======== ========
Operating Profit:
Flat-Rolled Products $ 32.6 $ 28.2 $ 69.0 $ 61.9
High Performance Metals 17.4 23.5 31.7 49.2
Industrial Products 7.4 1.0 14.0 8.4
------ ------ -------- --------
Total operating profit 57.4 52.7 114.7 119.5
Corporate expenses (7.6) (7.9) (15.9) (17.0)
Interest expense, net (7.4) (8.4) (14.3) (17.4)
Gains on asset sales and other 3.5 7.3 4.0 5.9
Excess pension income 22.7 14.4 45.3 29.3
------ ------ -------- --------
Income from continuing
operations before income
taxes $ 68.6 $ 58.1 $ 133.8 $ 120.3
====== ====== ======== ========
</TABLE>
Excess pension income represents the amount of pension income in excess of
amounts allocated to business segments to offset pension and other
postretirement benefit expenses.
8
<PAGE> 9
NOTE 5. 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,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations $43.7 $36.6 $85.0 $ 77.0
Income from discontinued
operations -- 20.7 -- 40.9
----- ----- ----- ------
Numerator for basic and diluted
net income per common share -
net income available to common
stockholders $43.7 $57.3 $85.0 $117.9
===== ===== ===== ======
Denominator:
Weighted average shares 82.8 96.1 85.0 96.6
Contingent issuable stock 0.1 0.1 0.1 0.1
----- ----- ----- ------
Denominator for basic net
income per common share 82.9 96.2 85.1 96.7
Effect of dilutive securities:
Employee stock options 0.1 0.6 0.1 0.6
----- ----- ----- ------
Dilutive potential common
shares 0.1 0.6 0.1 0.6
Denominator for diluted net
income per common share -
adjusted weighted average shares 83.0 96.8 85.2 97.3
===== ===== ===== ======
Basic net income per common share:
Income from continuing operations $0.53 $0.38 $1.00 $ 0.80
Income from discontinued
operations -- 0.22 -- 0.42
----- ----- ----- ------
Basic net income per common share $0.53 $0.60 $1.00 $ 1.22
===== ===== ===== ======
Diluted net income per common share:
Income from continuing operations $0.53 $0.38 $1.00 $ 0.79
Income from discontinued
operations -- 0.21 -- 0.42
----- ----- ----- ------
Diluted net income per common share $0.53 $0.59 $1.00 $ 1.21
===== ===== ===== ======
</TABLE>
9
<PAGE> 10
NOTE 6. 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,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 43.7 $57.3 $ 85.0 $117.9
Foreign currency translation losses (11.1) (4.9) (13.2) (5.1)
Unrealized gains (losses) on securities:
Unrealized holding gains arising
during period 1.1 3.8 1.7 4.6
Less: realized gains included in
net income -- -- 7.4 --
------ ----- ------ ------
1.1 3.8 (5.7) 4.6
------ ----- ------ ------
Comprehensive income $ 33.7 $56.2 $ 66.1 $117.4
====== ===== ====== ======
</TABLE>
NOTE 7. STOCKHOLDERS' EQUITY
Allegheny Technologies paid a cash dividend of $0.20 per share of
common stock in each of the 2000 first and second quarters and paid a cash
dividend of $0.32 per share of common stock in each of the 1999 first and second
quarters.
On October 1, 1998, the Company's Board of Directors authorized a stock
repurchase program to acquire up to 10 million shares of Allegheny Technologies
common stock. In December 1999, the Company's Board of Directors increased the
number of shares authorized for purchase in the stock repurchase program by 10
million shares. The shares may be purchased from time-to-time in the open market
or in negotiated transactions. In the first six months of 2000, the Company had
repurchased 9.2 million shares for $183.7 million under this program. From the
inception of the share repurchase program through July 31, 2000, the Company has
repurchased 18.7 million shares at a cost of $497.6 million.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is subject to various domestic and international
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
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<PAGE> 11
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 proceed, 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 results of operation. 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 operation of that period. In addition, 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, 2000, the Company's reserves for environmental remediation
obligations totaled approximately $57.0 million, of which approximately $15.8
million was included in other current liabilities. The reserve includes
estimated probable future costs of $21.9 million for federal Superfund and
comparable state-managed sites; $4.0 million for formerly owned or operated
sites for which the Company has remediation or indemnification obligations;
$18.3 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 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, principally related to the former
operations of Teledyne, Inc., including claims based on business practices and
cost classifications. The Company also 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, principally related to the former operations of Teledyne, Inc.
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
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<PAGE> 12
operating divisions or units, can also be suspended or debarred from government
contracts based on the results of investigations. Given the limited extent of
the Company's business with the U.S. Government, the Company believes that a
suspension or debarment of the Company would not have a material adverse effect
on the future operating results and consolidated financial condition of the
Company. Although the outcome of these matters cannot be predicted with
certainty, management does not believe there is any audit, review or
investigation currently pending against the Company of which management is aware
that is likely to have a material adverse effect on the Company's financial
condition or liquidity, although the resolution in any reporting period of one
or more of these matters could have a material adverse effect on the Company's
results of operations for that period. Generally, since False Claims Act 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.
In the spin-offs of Teledyne and Water Pik, completed in November 1999,
the new companies agreed to assume and to defend and hold the Company harmless
against all liabilities (other than certain income tax liabilities) associated
with the historical operations of their businesses, including all government
contracting, environmental, product liability and other claims and demands,
whenever any such claims or demands might arise or be made. If the new companies
were unable or otherwise fail to satisfy these assumed liabilities, the Company
could be required to satisfy them, which could have a material adverse effect on
the Company's results of operations and financial condition.
In connection with the spin-offs of Teledyne and Water Pik, the Company
received a tax ruling from the Internal Revenue Service stating that the
spin-offs will be tax-free to the Company and the Company's stockholders. While
the tax ruling, as supplemented, relating to the qualification of the spin-offs
as tax-free distributions within the meaning of the Internal Revenue Code
generally is binding on the Internal Revenue Service, the continuing validity of
the tax ruling, as supplemented, is subject to certain factual representations
and uncertainties that, among other things, require the new companies to take or
refrain from taking certain actions. If a spin-off were not to qualify as a
tax-free distribution within the meaning of the Internal Revenue Code, the
Company would recognize taxable gain generally equal to the amount by which the
fair market value of the common stock distributed to the Company's stockholders
in the spin-off exceeded the Company's basis in the new company's assets. In
addition, the distribution of the new company's common stock to Company
stockholders would generally be treated as taxable to the Company's stockholders
in an amount equal to the fair market value of the common stock they received.
If a spin-off qualified as a distribution within the meaning of the Internal
Revenue Code but was disqualified as tax-free to the Company because of certain
post-spin-off circumstances, the Company would recognize taxable gain as
described in the preceding sentence, but the distribution of the new company's
common stock to the Company's stockholders in the spin-off would generally be
tax-free to each Company stockholder. In the spin-offs, the new companies
executed tax sharing and indemnification agreements in which each agreed to be
responsible for any taxes imposed on and other amounts paid by the Company, its
agents and representatives and its stockholders as a result of the failure of
the spin-off to qualify as a tax-free distribution within the meaning of the
Internal Revenue Code if the failure or disqualification is caused by
post-spin-off actions by or with
12
<PAGE> 13
respect to that company or its stockholders. Potential liabilities under these
agreements could exceed the respective new company's net worth by a substantial
amount. If either or both of the spin-offs were not to qualify as tax-free
distributions to the Company or its stockholders, and either or both of the new
companies were unable or otherwise failed to satisfy the liabilities they
assumed under the tax sharing and indemnification agreements, the Company could
be required to satisfy them without full recourse against the new companies.
This could have a material adverse effect on the Company's results of operations
and financial condition.
A number of other lawsuits, claims and proceedings have been or may be
asserted against the Company relating to the conduct of its business, including
those pertaining to product liability, patent infringement, commercial,
employment, employee benefits, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Allegheny Technologies is one of the largest and most diversified
producers of specialty materials in the world. It operates in the following
three business segments which accounted for the following percentages of total
sales for the 2000 and 1999 six months:
2000 1999
------ ------
Flat-Rolled Products 60% 54%
High Performance Metals 29% 33%
Industrial Products 11% 13%
For the 2000 six months, operating profit was $114.7 million compared
to $119.5 million for the same 1999 period. Sales increased 9.1 percent to
$1,263.7 million for the 2000 six months compared to $1,158.2 million for the
same 1999 period.
Income from continuing operations was $85.0 million, or $1.00 per
diluted share, for the 2000 six months, compared to $77.0 million, or $0.79 per
diluted share, for the 1999 six months. Net income was $85.0 million, or $1.00
per diluted share for the 2000 six months, compared to $117.9 million, or $1.21
per diluted share, for the same 1999 period. Net income in the first six months
of 2000 was increased by $5.0 million, or $0.06 per share, which included a gain
on the sale of a minority interest in Gul Technologies Singapore Ltd., partially
offset by a charge for exiting the tungsten mill products business of
Metalworking Products.
Sales and operating profit for the Company's three business segments
are discussed below.
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<PAGE> 14
FLAT-ROLLED PRODUCTS SEGMENT
Second quarter 2000 operating profit increased to $32.6 million from
$28.2 million in the same year-ago period in spite of significantly higher raw
materials costs. Sales increased 19.7 percent to $383.3 million compared to the
prior year second quarter. For the six-month period, operating profit increased
to $69.0 million and sales increased 20.0 percent to $757.3 million from the
comparable 1999 period. The overall improvement in sales and operating profit
resulted from the segment's diversified product mix and markets as well as
flexible production capabilities. Strong demand in the 2000 second quarter for
standard strip, high-value Precision Rolled Strip(R), pipe and tube, emission
control and silicon steel products offset lower demands for some commodity
stainless steel products sold to service centers and the impact of increased
imports of these products during 2000. The segment continued to benefit from
on-going cost reduction efforts.
The average prices of flat-rolled products in the second quarter and
six months of 2000 were $2,403 and $2,350 per ton, respectively, compared to
$2,019 and $2,022 per ton in the same 1999 periods. This increase was due
primarily to the impact of revised raw materials surcharge base levels, price
increases and a favorable product mix. Tons shipped in the second quarter and
six month periods of 2000 were 159,535 tons and 322,344 tons respectively,
compared to 158,687 tons and 312,061 tons for the same periods of 1999.
HIGH PERFORMANCE METALS SEGMENT
Operating profit decreased 35.6 percent and 26.0 percent compared to
the 1999 six months and second quarter, respectively. Sales for the 2000 six
months decreased 4.4% compared to the 1999 six months and was relatively
unchanged for the second quarter 2000 compared to the 1999 period. The declines
in sales and operating profit resulted from continued pricing pressure related
to titanium products and an unfavorable $6.5 million swing in the net effect of
LIFO changes, resulting primarily from higher nickel costs in the second quarter
2000. These factors were partially offset by continued strong demand for
nickel-based superalloys and specialty steel alloys from the growing markets for
electrical power generation turbines and biomedical products. In addition,
shipments were strong for niobium-titanium alloys for superconducting
applications, nickel-titanium shape memory alloys for cellular phones and
nickel-titanium super-elastic alloys for the medical industry.
Comparative information on the segment's major products is provided in
the following table:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Volume (000's pounds):
Nickel-based and specialty steel alloys 11,671 11,051 23,894 22,972
Titanium mill products 5,849 6,246 11,958 12,187
Zirconium and related alloys 1,046 1,016 1,976 2,274
Average prices (per pound):
Nickel-based and specialty steel alloys $ 5.80 $ 5.89 $ 5.76 $ 6.00
Titanium mill products $ 10.79 $ 11.27 $ 10.89 $ 11.99
Zirconium and related alloys $ 32.58 $ 30.76 $ 31.65 $ 28.62
</TABLE>
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<PAGE> 15
INDUSTRIAL PRODUCTS SEGMENT
Operating profit for the 2000 second quarter was $7.4 million compared
to $1.0 million for the same quarter of 1999, and sales increased 3.5 percent to
$71.1 million compared to the same prior period. For the 2000 six months,
operating profit increased 66.7 percent to $14.0 million while sales decreased
2.7 percent to $143.0 million. Sales and operating profit at Metalworking
Products, the largest company in the segment, improved compared to the same 1999
periods due to stronger industrial demand and cost savings, including previously
announced workforce reductions. On June 20, 2000, the Company announced its
intention to sell Portland Forge and Casting Service.
CORPORATE ITEMS
Corporate expenses decreased to $7.6 million for the 2000 second
quarter and decreased to $15.9 million for the 2000 six months, compared to the
respective 1999 periods, due to continued cost controls including 25 percent
fewer employees. Net interest expense decreased to $7.4 million for the second
quarter 2000 from $8.4 million for the second quarter 1999. Net interest expense
decreased to $14.3 million for the 2000 six months compared to $17.4 million for
the 1999 six months due to a decrease in the average debt outstanding. Excess
pension income increased to $22.7 million for the 2000 second quarter and
increased to $45.3 million 2000 six months compared to $14.4 million and $29.3
million, respectively, in the same 1999 periods due to higher pension assets as
a result of strong investment performance during 1999.
SPECIAL ITEMS
Six months 2000 results include first quarter special items of $5.0
million, or $0.06 per share. These items include a gain on the sale of a
minority interest in Gul Technologies Singapore Ltd., included in other income,
partially offset by a charge for exiting the tungsten mill products business of
Metalworking Products included in cost of sales. Net income in the second
quarter 2000 and 1999 was not impacted by special items.
NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board ("FASB") Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June 1998, and amended in June 2000, pursuant to FASB Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities:
an amendment of FASB No. 133. These statements establish accounting and
reporting standards for derivative instruments and hedging activities. They
require 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, FASB 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 FASB
Statement No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company is presently evaluating the effect of adopting these
statements as they relate to derivative instruments and hedging activities.
15
<PAGE> 16
INCOME TAXES
The Company's effective tax rate from continuing operations was 36.3
percent and 36.5 percent, respectively, for the 2000 second quarter and six
months, compared to 37.0 percent and 36.0 percent, respectively, for the same
periods in 1999. The 2000 and 1999 rates reflect benefits from federal and state
tax planning initiatives.
FINANCIAL CONDITION AND LIQUIDITY
Working capital increased to $641.3 million at June 30, 2000, compared
to $493.5 million at December 31, 1999. The current ratio increased to 2.5 from
1.9 in this same period. The increase in working capital was primarily due to
the shifting of short-term debt to long-term debt and higher inventory resulting
partially from increased costs for nickel.
In the first six months of 2000, cash generated from operations of
$34.8 million, proceeds from the net increase in debt of $207.6 million and
proceeds from the sale of investments of $16.7 million were used to repurchase
shares for $183.7 million, pay dividends of $33.8 million and invest $28.0
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 $41.5
million at June 30, 2000.
Capital expenditures for 2000 are expected to approximate $80.0
million, of which $28.0 million had been expended through June 30, 2000.
On October 1, 1998, the Company's Board of Directors authorized a stock
repurchase program to acquire up to 10 million shares of Allegheny Technologies
common stock. In December 1999, the Company's Board of Directors increased the
number of shares authorized for purchase in the stock repurchase program by 10
million shares. The shares may be purchased from time-to-time in the open market
or in negotiated transactions. In the first six months of 2000, the Company had
repurchased 9.2 million shares for $183.7 million under this program. From the
inception of the share repurchase program through July 31, 2000, the Company has
repurchased 18.7 million shares at a cost of $497.6 million.
At a stockholders' meeting held on November 11, 1999, the Company's
stockholders approved a one-for-two reverse split of the Company's stock. The
reverse split was effective immediately following the spin-offs of Teledyne and
Water Pik on November 29, 1999. Share and per share amounts have been adjusted
for all periods presented to reflect this one-for-two reverse stock split.
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
Growth Strategy Analysis
In June 2000, the Company announced the results of its growth strategy
analysis. The Company's objective is to reach an annualized sales rate that is
at least 75 percent higher by the end of 2003 than in 1999, while maintaining
the Company's historically high level of return on capital employed.
Environmental
The Company is subject to various domestic and international
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
16
<PAGE> 17
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 $57.0 million at June 30, 2000. 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 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. 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 33 such sites, excluding those at which it
believes it has no future liability. The Company's involvement is very limited
or de minimis at approximately 13 of these sites, and the potential loss
exposure with respect to any of remaining 20 sites is not considered to be
material.
For additional discussion of environmental matters, see Note 8 to the
consolidated financial statements of the Company.
Government Contracts
One of the Company's operating companies directly performs work on
contracts with the U.S. Government. 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. Under the False Claims Act, a person may
assert the rights of the U.S. Government by initiating a suit under seal against
a contractor. For the claim to be successful, the person must 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.
Government contracting claims may be resolved by detailed fact-finding
and negotiation. When they are not resolved in that way, 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 limited extent of the Company's business with the U.S.
Government, the Company believes that a suspension or debarment of the Company
would not have a material adverse effect on the future operating results and
consolidated financial condition of the Company. Although the outcome of these
matters cannot be predicted with certainty, management does not believe there is
any audit, review or investigation currently pending against the Company of
which management is aware that is likely to have a material adverse effect on
the Company's financial condition or liquidity. 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.
17
<PAGE> 18
For additional discussion of government contract matters, see Note 8 to
the consolidated financial statements of the Company.
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 8 to the consolidated financial statements of the Company,
including statements concerning: the results of its growth strategy analysis,
increased sales and earnings, financial performance and growth, product demand;
prices; raw material availability and costs; working capital; cash flow;
anticipated business, economic and market conditions; aerospace, oil and gas and
other industry trends; cost reductions and cost reduction programs; expected
capital expenditures; potential repurchases of the Company's stock; the outcome
of any government inquiries, litigation or other proceedings related to
government contracts or other matters; and future environmental costs. These
forward-looking statements are based on management's current expectations and
include known and unknown risks, uncertainties and other factors, many of which
the Company is unable to predict or control, that may cause the Company's actual
results or performance to materially differ from any future results or
performance expressed or implied by such statements. Factors that could cause
actual results to differ materially from those projected in forward-looking
statements, include, but are not limited to, our ability to achieve our growth
strategies and cost reduction programs; cyclical demand for our products;
volatility of prices for and unavailability of critical raw materials; our
ability to implement and maintain raw material surcharges and price increases
which may depend on market conditions, including pricing by foreign producers;
the effect of market conditions on the performance of pension assets;
anticipated effects of acquisitions on earnings, as well as those risks and
uncertainties described above under the captions "Other Matters - Environmental"
and "Other Matters - Government Contracts" and elsewhere herein. Realization of
anticipated benefits described in forward-looking statements could take longer
than expected and implementation difficulties, market factors and deterioration
in domestic or global economic conditions could alter anticipated benefits.
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, 1999 and its Reports on Form 10-Q. 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
Flat-Rolled Products and High Performance Metals segments.
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
18
<PAGE> 19
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, from time to time, the Company
purchases exchange-traded futures contracts to manage exposure to changes in
nickel prices, a component of raw material cost for some of its flat-rolled and
high performance metals products. 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 sales transactions, nor have any of the underlying
sales transactions for such significant contracts 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 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.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 27, 2000, the Company received written confirmation from the
U.S. Department of Justice that the previously disclosed grand jury
investigation of the nickel alloy industry has been terminated with respect to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2000 annual meeting of stockholders was held on May 11,
2000. Proxies for the meeting were solicited by Allegheny Technologies
Incorporated pursuant to Regulation 14A under the Securities Exchange Act of
1934. At that meeting, the four 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
---- ---------- -------
Thomas A. Corcoran 74,922,049 723,994
Diane C. Creel 74,882,996 763,047
C. Fred Fetterolf 74,909,110 736,933
James E. Rohr 74,924,085 721,958
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
2000 fiscal year and also voted on and approved a new Incentive Plan. The number
of votes cast for the ratification of the selection of the independent auditors
was 75,162,469, against approval was 176,270 and to abstain was 307,305. There
were no broker no-votes in connection with the ratification of the selection of
Ernst & Young LLP. In the matter related to the new Incentive Plan, the number
of votes cast for approval was 48,181,645, against approval was 20,120,428 and
to abstain was 560,776. There were no broker no-votes in connection with the
ratification of the new Incentive plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27.1 Financial data schedule - June 30, 2000
(b) Current Reports on Form 8-K filed by the Company -
None.
20
<PAGE> 21
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 TECHNOLOGIES INCORPORATED
(REGISTRANT)
Date: August 7, 2000 By /s/ J.L Murdy
-----------------------------------------
James L. Murdy
Executive Vice President, Finance and
Administration and Chief Financial
Officer
(Duly Authorized Officer)
Date: August 7, 2000 By /s/ D.G. Reid
-----------------------------------------
Dale G. Reid
Vice President - Controller and Chief
Accounting Officer
(Principal Accounting Officer)
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<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule for Six Months Ended June 30, 2000.
22
