<PAGE>
1993
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 fee required for the fiscal year ended
January 2, 1994 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 no fee required for the transition period
from _____________ to ___________
Commission file number 1-9498
ALLEGHENY LUDLUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 25-1364894
(State of Incorporation) (I.R.S. Employer
Identification No.)
1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: 412 - 394-2800
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
==============================================================================================
<CAPTION>
Title of each class Name of each exchange on which registered
- ----------------------------------------------------------------------------------------------
<S> <C>
Common Stock, Par Value $0.10 Per Share New York Stock Exchange, Inc.
5 7/8% Convertible Subordinated Debentures Due
March 15, 2002 New York Stock Exchange, Inc.
==============================================================================================
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1994: $748,774,684. The amount shown is based on the
closing price of the registrant's common stock on the New York Stock Exchange on
that date. Shares of common stock known by the registrant to be beneficially
owned by officers or directors of the registrant or persons who have filed a
report on Schedule 13D or 13G are not included in the computation. The
registrant, however, has made no determination that such persons are
"affiliates" within the meaning of Rule 12b-2 under the Securities Exchange Act
of 1934.
Number of shares of Common Stock outstanding at March 1, 1994: 70,917,480
Documents Incorporated by Reference:
Selected portions of the 1993 Annual Report--Part I, Part II and Part IV of
this Report.
Selected portions of the 1994 Proxy Statement--Part III of this Report.
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<PAGE>
INDEX
<TABLE>
<S> <C> <C>
PART I
THE COMPANY............................................................................................ 3
Item 1. BUSINESS................................................................................... 3
Item 2. PROPERTIES................................................................................. 9
Item 3. LEGAL PROCEEDINGS.......................................................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS....................... 11
Item 6. SELECTED FINANCIAL DATA.................................................................... 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................ 11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 11
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................... 11
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 11
Item 11. EXECUTIVE COMPENSATION..................................................................... 11
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................................................... 11
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 11
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.................................................................. 12
SIGNATURES.................................................................................................. 13
</TABLE>
2
<PAGE>
PART I
The Company
The Company is a Pennsylvania corporation formed in 1979 with its principal
executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania
15222-5479, telephone (412)394-2800. References to the "Company" mean Allegheny
Ludlum Corporation and its subsidiaries and predecessors, unless the context
otherwise requires.
The Company is one of the world's leading manufacturers of specialty
materials and one of the largest domestic producers of stainless steel. The
Company manufactures stainless steel sheet, strip, plate, foil, welded tubing
and stampings; grain-oriented silicon electrical steel sheet and strip; and
other specialty steel and specialty metals alloys, including tool steels,
magnetic, thermostatic and electronic sheet and strip, and high-temperature
alloys.
Item 1. BUSINESS
Industry Overview
The industry in which the Company operates is generally referred to as the
specialty steel industry, which represents a small but distinct segment of the
steel industry. The term "specialty steel" refers to stainless steels, high
speed and tool steels, high temperature alloys (super alloys), electronic and
thermostatic alloys and electrical steels. As compared with carbon steel,
stainless steel alloys contain elements such as chromium, nickel and molybdenum
to make them corrosion-and heat-resistant; electrical steel contains silicon to
minimize energy loss; and tool steel alloys, which contain more carbon than
stainless steel, include tungsten, molybdenum and other metals to make them both
hard and malleable. Most high temperature alloys, electronic alloys and
thermostatic alloys are not steel by definition and are more properly referred
to as specialty metals.
Unlike high-volume carbon steel producers, specialty steelmakers produce
smaller quantities with special equipment. Because of the need to meet more
exacting technical and metallurgical requirements, stainless and other specialty
steels are made with special processing techniques and generally utilize
different alloying elements such as nickel, ferrochromium, molybdenum, niobium,
titanium and cobalt.
Specialty steel is produced in a variety of forms (sheet, strip, plate,
wire, rod, bar and tubing) and is selected for use in environments that demand
materials having exceptional hardness, toughness, strength, resistance to heat,
corrosion or abrasion or a combination of these characteristics. Common end uses
of specialty steel include automobiles, appliances, communications and
electronics equipment, marine equipment, electric power generating and
distribution equipment, environmental equipment, home utensils and cutlery,
construction products, tools, dies, food and chemical processing equipment,
medical and health equipment and aircraft and defense equipment.
While other materials such as carbon steel, titanium, composites, ceramics,
aluminum and plastic compete in various applications with stainless steel, the
largest part of the specialty steel industry, the Company believes that the
domestic market for stainless steel has been growing over the past ten years as
a result of the less rapid growth in the price of stainless steel relative to
competitive products and the increasing demand for higher quality products with
greater durability.
Acquisition
On November 10, 1993, the Company completed its acquisition of Athlone
Industries, Inc., a Delaware corporation ("Athlone"), by means of the merger
(the "Merger") of a wholly owned subsidiary of the Company into Athlone. In the
Merger, Athlone shareholders received .84726 of a share of Common Stock of the
Company, with any fractional share sold for cash. A total of 5,153,376 shares of
Company Common Stock was issued in the Merger. Athlone, through its Jessop Steel
Company ("Jessop") operations, was primarily a manufacturer of specialty metals,
primarily tool steel and stainless steel and nickel alloy plate mill plate. See
Note 11 of the Notes to the Consolidated Financial
3
<PAGE>
Statements of the Company on page 36 of the 1993 Annual Report to Shareholders
which is incorporated herein by reference.
General
The Company operates in a single business segment, specialty steel. The
Company has three principal product lines, consisting of stainless steel,
grain-oriented silicon electrical steel and other specialty steel alloys
(including tool steels and other specialty metals), which are produced at eleven
facilities located in five states. Stainless steel products are marketed
principally in the form of sheet, strip and plate as well as stampings and
welded tubing. Silicon electrical steel is marketed in the form of sheet and
strip. Other specialty steel alloys are marketed principally as sheet, strip and
plate.
The following table sets forth certain information concerning sales of the
Company's principal product lines for the past five fiscal years.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
(in millions)
<S> <C> <C> <C> <C> <C>
Stainless Steel..................................... $ 892.3 $ 831.4 $ 771.2 $ 798.4 $ 886.6
Silicon Electrical Steel............................ 156.0 161.1 172.2 205.8 216.3
Other Specialty Alloys.............................. 51.9 43.5 61.2 80.7 77.3
---------- ---------- ---------- ---------- ----------
Total Sales.................................... $ 1,100.2 $ 1,036.0 $ 1,004.6 $ 1,084.9 $ 1,180.2
========== ========== ========== ========== ==========
</TABLE>
For 1993, the table reflects the inclusion of Jessop sales beginning in November
1993.
Additional information concerning the Company's sales and operating profit
is set forth under the heading "Selected Financial Data" on page 39 of the
Company's 1993 Annual Report to Shareholders which is incorporated herein by
reference.
The Company's products are sold primarily to customers within the United
States who further process such materials into end products for resale to
others. The Company's backlog of firm orders at the end of 1993 was $249.4
million (nearly all of which are expected to be filled within the year), as
compared to $228.9 million at the end of 1992.
Stainless Steel
Stainless steel products have represented the largest share of the
Company's total sales. In 1993 stainless steel represented approximately 80% of
total sales. Sheet and strip represent the most rapidly growing products in
stainless steel.
Stainless steel sheet (24 inches and wider) accounts for the largest
portion of the Company's sales. It is used in a wide variety of consumer and
industrial applications that require easy cleaning and corrosion resistance and
the ability to be fabricated easily. Approximately 60% of the Company's
stainless steel sheet is sold to service centers which have slitting, cutting
and other processing facilities.
Stainless steel strip (less than 24 inches wide) is used in a variety of
consumer products and a wide range of automotive components. The Company's
products include its very thin Precision Rolled Strip (TM) products which range
in thickness from 0.0015 inch up to 0.015 inch. Approximately 75% of the
Company's stainless steel strip is sold directly to end-use customers, with the
remainder sold to service centers, including the Company's own distributor
outlet for stainless steel strip, ALstrip, Inc., a subsidiary with locations in
Skokie, Illinois; Exton, Pennsylvania; Brea, California; and Springfield,
Tennessee.
Stainless steel plate (at least .1875 inch thick and 10 inches wide) has a
variety of applications, primarily in industrial equipment that requires
cleanliness or corrosion-resistant capabilities such as pollution control
scrubbers and other equipment, food processing equipment, pulp and paper
equipment, chemical equipment and power generation equipment. The Company's
plate products are sold in both coil and cut-to-length ("plate mill plate")
form. Coil plate is sold to service center customers who further process the
material by roller leveling and cutting to length before final use or sale. The
Company's Washington, Pennsylvania plant, which was acquired in the Jessop
acquisition, converts a substantial amount of the Company's slabs and ingots
into plate mill plate. A subsidiary of Lukens Inc. continues to convert
stainless steel slabs which cannot be processed by the Washington plant. See
"Competition
4
<PAGE>
and Imports of Specialty Steel" on page 6. Approximately
80% of the Company's stainless steel plate is sold to service centers.
Silicon Electrical Steel
The Company's grain-oriented silicon electrical steel products are used
primarily in applications in which electrical conductivity and magnetic
properties are important and are sold directly to end-use customers. Users of
the Company's silicon electrical steel products include manufacturers of
transformers and communications equipment.
Other Specialty Alloys
The Company also produces high temperature alloys, electronic and
thermostatic alloys, tool steel, and other specialty alloys in flat-rolled form.
These specialty alloys are used primarily in applications that require high
strength, hardness, heat resistance and special magnetic, electronic or
expansion characteristics. Other specialty alloy sales are expected to increase
due to the acquisition of Jessop Steel.
Raw Materials
The principal materials used by the Company in the production of its
specialty steel are scrap (including nickel-, chromium-and molybdenum-bearing
scrap), nickel and nickel alloys, ferrochromium, ferrosilicon, molybdenum and
molybdenum alloys, manganese and manganese alloys and other alloying materials.
Certain of these raw materials, such as ferrochromium and nickel, can be
acquired by the Company and its specialty steel industry competitors, in large
part, only from foreign sources. The Company purchases its nickel requirements
principally from producers in Australia, Canada, Norway and the Dominican
Republic. Ferrochromium is purchased primarily from producers in South Africa,
Zimbabwe, Turkey and Finland. Some of these foreign sources are located in
countries that may be subject to unstable political and economic conditions
which might disrupt supplies or affect the price of these materials. More than
80% of the world's reserves of ferrochromium are located in South Africa,
Zimbabwe, Albania and Kazakhstan. The Company also uses large amounts of
electricity particularly in the melt shop in the Company's Brackenridge Works
and natural gas in the manufacture of its products; energy costs currently
represent approximately 6% of the Company's revenue dollars.
Research, Development and Technical Services
The Company's research, development and technical service activities are
closely interrelated and are directed toward cost reduction, process
improvement, process control, quality assurance and control, system development,
the development of new manufacturing methods, the improvement of existing
manufacturing methods, the improvement of existing products and the development
of new products where a proprietary position is possible. The Company conducts
its primary research activities at its Technical Center in Natrona Heights,
Pennsylvania.
Expenditures for research, development and technology totaled $41.9 million
in 1993, $40.7 million in 1992, and $35.5 million in 1991. Research and
development expenses related to activities conducted at the Technical Center
were $9.2 million, $10.0 million, and $7.4 million in 1993, 1992, and 1991,
respectively.
The recent acquisition of the Washington, Pennsylvania plate facility (formerly
Jessop Steel) enhances the Company's technological capabilities in stainless
steel and tool steel plate products. The products produced at this plant
include K-12(R) Armor Plate, Minimiser (TM) Stainless Steel Plate and Jessop
Econo-miser(R) Tool Steel.
In 1992, the Company and Voest-Alpine Industrieanlagenbau GesmbH,
headquartered in Linz, Austria, completed construction of the first
COILCAST(TM) commercial-size prototype thin strip direct casting machine to
produce stainless and carbon steel flat products directly from molten steel,
using technology developed by them as joint venture partners. If successful,
the new technology to direct cast
- ---------
(TM)Trademark of the Company.
5
<PAGE>
sheet and strip steel could eliminate the need for conventional slab or ingot
casting and hot strip rolling practices used for certain products, thus
significantly advancing the state-of-the-art of steelmaking. The COILCAST
prototype machine, installed by Voest-Alpine, is owned and is being operated by
the Company at its Lockport, New York Plant. While it is difficult to predict
whether or when this project will succeed, the COILCAST joint venture aims to
market the new technology as soon as commercial viability is established which
may be the mid-to late-1990s. Under licensing and royalty agreements with the
Company, Voest-Alpine will have exclusive worldwide marketing rights. Test casts
were performed from time to time in 1993 and are continuing as is developmental
work at Voest Alpine's facilities in Linz, Austria and at the Company's
Technical Center.
The Company owns over 200 United States patents, many of which are also
filed under the patent laws of other nations, but does not consider its business
to be materially dependent on any patent or patent rights.
Competition and Imports of Specialty Steel
The Company is a leading producer of specialty steel. There are at least
six domestic producers of stainless steel sheet, strip and plate. The Company's
principal domestic competitors are J&L Specialty Steel, Inc. ("J&L", formerly
known as J&L Specialty Products Corporation), whose majority stockholder is
France's Ugine, S.A. ("Ugine"), a subsidiary of Usinor Sacilor, which is
Europe's largest steelmaker and is controlled by the French government; Armco
Inc. ("Armco"), which acquired Cyclops Industries Inc. in 1992; Lukens Inc.
("Lukens"), which acquired Washington Steel Company in 1992; and North American
Stainless, a joint venture between Armco Inc. ("Armco") and Acerinox, S.A. (a
Spanish stainless steel producer), which has begun shipments from a new
finishing facility in Kentucky that reportedly will have the capability of
producing up to 150,000 tons of flat rolled stainless steel per year. With
respect to grain-oriented silicon electrical steel (used in electrical
transformers), the Company believes that it and Armco Inc. are the only two U.S.
producers. The Company believes that there are several other domestic producers
of other specialty alloys in flat-rolled form.
In the fourth quarter of 1993, Lukens' Washington Steel Group began to
manufacture and sell stainless steel plate mill products; previously, Washington
Steel produced stainless sheet, strip and coil plate products and Lukens
produced stainless plate mill plate only on a conversion basis. Lukens has also
announced its plans to start up its new sheet and plate processing systems, and
expects a new steckel mill and stainless steel refining systems on line, in the
next two years. In the fourth quarter of 1993, J&L made an initial public
offering of common stock which reduced the ownership of Ugine from 100 percent
to approximately 54 percent; J&L has announced that it is undertaking a five
year $175 million to $225 million capital investment plan to increase capacity,
expand the company's product line and improve productivity. In January 1994,
Armco announced plans to leave carbon steel and focus on its specialty steel
business.
In 1993, Nucor Corp., a carbon steel minimill with $1.6 billion of sales,
announced plans to enter the stainless steel market and produce stainless steel
products used primarily in automotive exhaust systems.
The Company faces active competition in the sale of all of its products
from both domestic and foreign competitors. A number of foreign competitors are
government owned and/or subsidized. The principal methods of competition in
specialty steel are price, service and product quality.
Voluntary Restraint Agreements (VRAs) that limit certain imported products
expired on March 31, 1992. While imports have increased in 1993, the long-term
effects of the expiration of the VRAs are unclear.
The level of stainless and silicon steel imports increased significantly in
the 1993 fiscal year. Import penetration in 1993 for stainless steel sheet and
strip increased 62% to 25.2% of the domestic market following an increase in
1992 to 17.8%. Import penetration of stainless steel plate increased 26.0% to
16.0% in 1993 as compared to 14.5% in 1992.
Imports of silicon electrical steel increased to 16.5% in 1991, 17.5% in
1992 and increased 40% to 23.0% of the domestic market in 1993. In August 1993,
the Company and others filed trade cases
6
<PAGE>
charging that dumping and unfairly priced and subsidized silicon electrical
steel imports are undermining the U.S. market. In October 1993, the
International Trade Commission ruled that imports of grain-oriented silicon
steel from Italy and Japan injure or threaten injury to domestic producers.
Beginning in February 1994, importers from these nations must post either cash
or bonds of approximately 30% on the value of imported silicon electrical steel
products. Silicon electrical steel also faces competition from amorphous metals,
currently produced in the United States only by Allied Signal Corporation.
Multilateral steel consensus agreements which are aimed at eliminating
foreign subsidies and foreign market access barriers have not yet been reached.
The Company believes the U.S. government must take action to protect domestic
markets from unfair trade practices by any company or nation which does not have
to meet a profit or capital formation discipline. Therefore, the Company is
urging the U.S. government to reach agreements with foreign governments to
accomplish these objectives.
In addition to competition from other stainless steel producers, other
materials such as carbon steel, titanium, composites, ceramics, aluminum and
plastic compete in various applications with stainless steel.
Exports
Revenues from export sales were $79 million, $69 million, and $112 million
in fiscal years 1993, 1992, and 1991, respectively. Political unrest and
economic problems in some important export markets and the volatility of foreign
exchange rates make it difficult to predict whether export sales will continue
at the levels reached in the last three years.
Executive Officers of the Registrant
Executive officers of the Company as of February 28, 1994:
<TABLE>
<CAPTION>
Title and Year Elected
Name Age to Present Position
- ---- --- -------------------
<S> <C> <C>
Richard P. Simmons............................... 62 Chairman of the Board ........................... 1986
Robert P. Bozzone................................ 60 President and Chief Executive Officer ........... 1990
Arthur H. Aronson................................ 58 Executive Vice President
and Chief Operating Officer ................... 1990
James L. Murdy................................... 55 Senior Vice President-Finance and
Chief Financial Officer ....................... 1988
Douglas A. Kittenbrink........................... 38 Vice President-Engineering ...................... 1992
Bruce A. McGillivray............................. 60 Vice President-Human Resources .................. 1986
Carl M. Moulton.................................. 45 Group Vice President ............................ 1993
Robert S. Park................................... 49 Treasurer ....................................... 1986
Richard R. Roeser................................ 47 Controller ...................................... 1986
Robert W. Rutherford............................. 53 Vice President-Commercial ....................... 1986
Jack W. Shilling................................. 50 Vice President-Technical ........................ 1989
David G. Vietmeier............................... 49 Vice President-Purchasing ....................... 1988
Harry R. Wagner.................................. 49 Vice President-Production ....................... 1988
Jon D. Walton.................................... 51 Vice President-General Counsel
and Secretary ................................. 1990
</TABLE>
Mr. Simmons served as Chairman of the Board and Chief Executive Officer of
the Company from 1986 to 1990. Mr. Bozzone served as Chief Operating Officer
from 1985 to 1990. Mr. Aronson has been Executive Vice President of the Company
since 1988 and Chief Operating Officer since 1990.
Mr. Kittenbrink was employed in various high level engineering management and
professional positions for over 5 years with Inland Steel Industries, Inc.
before joining the Company in May 1992.
Mr. Moulton was President of Jessop Steel Company from 1988 until he joined the
Company upon the Company's acquisition of Jessop in November, 1993. Mr. Walton
had been General Counsel and Secretary of the Company prior to 1990. Each of the
other executive officers of the Company has held high level managerial or
professional positions with the Company for more than the past five years,
except as noted above.
7
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Employees
As of January 2, 1994, the Company had approximately 6,100 employees
(including 670 at the Company's Washington operations) of whom approximately
2,100 were salaried employees (including approximately 70 salaried production
employees) and approximately 5,600 retirees.
Substantially all of the production and maintenance employees are covered
by a four-year labor contract between the Company and the United Steelworkers of
America ("USWA") which was agreed upon in February, 1990 and is effective
through March 31, 1994. The Company is in the process of negotiating with the
USWA and cannot predict the outcome of the negotiations. The Company believes
that it enjoys a good relationship with the USWA and expects that the Company
and the USWA will be able to achieve a mutually satisfactory contract.
Environmental, Health and Safety Matters
The Company (and the industry in which it competes) is subject to
environmental laws and regulations concerning emissions to the air, discharges
to waterways, and the generation, handling, storage, transportation, treatment
and disposal of waste materials, and is also subject to other federal and state
laws and regulations regarding health and safety matters. Each of the Company's
production facilities has permits and licenses allowing and regulating air
emissions and water discharges. The Company believes that it is in substantial
compliance with environmental laws and regulations. The Company estimates that
its capital expenditures for fiscal year 1994 will include $6 million for
additional or upgraded pollution control equipment.
The Company, like most corporations in the steel and metals-producing
industries, expects to spend additional funds to meet the lower levels of
emissions mandated by the Clean Air Act Amendments of 1990 (the "CAA
Amendments"). The Company continues to study the impact of the CAA Amendments on
its business and operations. The extent of the costs to the Company in meeting
the lower emissions levels is not yet known since many clarifying regulations
and standards are yet to be promulgated. The Company continues to believe that
it will be able to meet the new requirements while continuing its capital
programs.
The Company believes that the CAA Amendments may indirectly increase
certain costs of doing business over the long term. The provisions of the CAA
Amendments dealing with acid rain are likely to increase electricity rates by
10% or more over the next several years with the probability of additional
increases in following years. However, many of the production improvements the
Company has made and will continue to make are designed to reduce the amount of
energy consumed in its manufacturing processes. Energy costs currently represent
approximately 6% of the Company's revenue dollars.
Limited Partnership Investment
The Company, through its wholly owned subsidiaries, has made commitments to
invest as a limited partner in two Code, Hennessy & Simmons limited partnership
leveraged buyout funds and in the entities that serve as the general partners of
the funds. Investors made commitments to invest approximately $82.5 million when
the first fund was formed in 1989, including $25 million invested or to be
invested by the Company's subsidiary. In December 1993, investors made
commitments to invest $107.5 million in the second fund, including $30 million
to be invested by the Company's subsidiary. Both funds have been formed to
originate and lead investments in middle market companies that are undergoing an
ownership transition. The first fund's portfolio includes, and the second funds'
portfolio is expected to include, companies that design, manufacture and
distribute consumer and industrial products for a variety of end use
applications and are based primarily in the midwest.
As of January 2, 1994, the Company's subsidiaries had invested a total of
$22.3 million in the first fund and had received in total cash distributions of
$24.1 million through January 2, 1994. The subsidiaries' remaining investment in
the first fund, representing their proportionate ownership of the Fund's six
portfolio company holdings, had a valuation of $22.8 million on the Company's
January 2, 1994 balance sheet. The Company cannot predict the magnitude or
timing of any future gains or losses related to the investment.
8
<PAGE>
Item 2. PROPERTIES
The name, location and area of each of the Company's principal
manufacturing plants together with the principal products which they are
equipped to produce as of January 2, 1994, are as follows:
<TABLE>
<CAPTION>
Area in
Plant and Location Square Feet Principal Products
- ------------------ ----------- ------------------
<S> <C> <C>
Brackenridge Works 2,443,000 Stainless steel and specialty metals strip, sheet and plate,
Brackenridge and Natrona, silicon electrical steel strip and sheet, and other specialty
Pennsylvania steel strip and sheet.
West Leechburg Works 1,415,000 Stainless steel and specialty metals strip and sheet, silicon
West Leechburg and Bagdad, electrical steel strip and sheet, and other specialty steel
Pennsylvania strip and sheet.
Vandergrift Plant 966,000 Stainless steel strip and sheet.
Vandergrift, Pennsylvania
Washington Plant 615,000 Stainless steel and tool steel plate products.
Washington, PA
Wallingford Plant 591,000 Stainless steel and specialty metals strip and sheet and other
Wallingford and specialty steel strip and sheet.
Waterbury, Connecticut
Lockport Plant 282,000 Stainless steel and other specialty metals products.
Lockport, New York
New Castle Plant 178,000 Stainless steel sheet.
New Castle, Indiana
Claremore Plant 135,000 Stainless steel tubular products.
Claremore, Oklahoma
</TABLE>
The Brackenridge Plant utilizes four electric furnaces, an argon-oxygen
decarburization (A.O.D.) unit, a continuous caster and rolling mills in its
production. The Natrona Plant has three coreless induction furnaces, two basic
oxygen furnace vessels and ingot casting facilities. The Lockport Plant has
three electric arc furnaces, a vacuum induction melting furnace, electroslag and
vacuum arc remelting equipment, and A.O.D. and rolling facilities.
The Vandergrift, Wallingford, West Leechburg, Bagdad and New Castle Plants
have annealing, rolling and slitting facilities. The Claremore Plant utilizes
electric welding facilities in producing tubular products.
The Washington Plant which was obtained in the acquisition of Jessop Steel
has melting, rolling, annealing and finishing facilities utilized in the
production of plate products. The Company has announced plans to close the
melting facilities at the Washington Plant effective April 29, 1994.
The Company owns all of the foregoing plants, each of which, with the
exception of the Waterbury Plant, is subject to mortgages or similar
encumbrances securing borrowings under certain industrial development authority
financings. See Note 4 of the Notes to the Consolidated Financial Statements in
the 1993 Annual Report.
While the plants have been constructed at various times over a long period,
many of the buildings have been replaced, remodeled or expanded and additional
buildings have been constructed from time to time. Much of the equipment at the
various plants has likewise been replaced or remodeled and new equipment has
been added at various times. The Company believes that the plants have been
well-maintained and are technologically advanced.
Ongoing process and equipment modifications have resulted in incremental
capacity gains each year since 1980. The Brackenridge primary melting and
continuous slab casting facilities have operated at high levels for the past
five years. In 1994, the Company's primary melt shop is operating at capacity
and the Company is making arrangements to purchase slabs from other
manufacturers of
9
<PAGE>
stainless steel to meet sales demand. The stainless steel finishing plants have
operated at approximately 85% to 95% of capacity during the same time period.
The Company has increased stainless steel finishing capacity through process and
equipment improvements, computer-assisted scheduling plans, the installation of
new equipment at the Vandergrift Plant and the purchase of the Waterbury Plant
in August, 1990. The Company's plants producing silicon electrical steels have
operated at approximately 50% to 90% of capacity since 1980 and are currently
operating at a rate of approximately 75%.
The Company conducts its primary research activities at its Technical
Center in Natrona Heights, Pennsylvania. The facility contains state-of-the-art
equipment for a variety of testing and analytical activities relating to the
Company's products and processes. The Company owns this 139,000 sq. ft.
facility.
The Coatesville and Santa Fe Processing Centers, located near Philadelphia,
Pennsylvania and Los Angeles, California, respectively, are warehouses used in
the distribution of the Company's Jessop plate products. The Coatesville
facility is owned while the Santa Fe facility is leased from a third party.
The Company has had a long-term arrangement with an unaffiliated steel
producer to cut and finish stainless steel plate. The Company intends to
continue this arrangement to convert stainless steel slabs which cannot be
processed by the Washington Plant.
The Company's subsidiary, ALstrip, Inc., operates stainless steel strip
distribution centers in Skokie, Illinois, Exton, Pennsylvania, Brea, California
and Springfield, Tennessee. ALstrip owns all its slitting and cutting equipment
and the Skokie and Springfield facilities outright and leases its other
facilities from third parties.
The Company's executive offices, located in Pittsburgh, Pennsylvania, and
Western Regional Sales Office, located in Schaumburg, Illinois, are leased from
third parties. The Eastern Regional Sales Office is located at the Wallingford
Plant. These facilities are modern and sufficient for the Company to carry on
its activities.
Item 3. LEGAL PROCEEDINGS
As previously reported, on November 18, 1988, a civil action was commenced
in the Court of Common Pleas of Allegheny County, Pennsylvania, by two retired
former employees of the Company, Richard D. Mercer and Edward R. Lipski, against
the Company and Richard P. Simmons. The plaintiffs' complaint alleged that in
November 1986, pursuant to a Buy-Sell Arrangement, the Company repurchased their
shares of Company common stock, and that the defendants did not disclose to the
plaintiffs certain material information relating to the Company and management's
future plans and made certain misrepresentations. On August 6, 1991, a jury
reached a verdict in the suit in favor of the Company and Mr. Simmons. On March
6, 1992, the trial judge entered a judgment in favor of the Company and Mr.
Simmons from which the plaintiffs appealed. On July 9, 1993, the Pennsylvania
Superior Court entered an order affirming the trial court's ruling in favor of
the Company and Mr. Simmons. The plaintiffs' petition to the Pennsylvania
Supreme Court to review the Superior Court's ruling was denied on November 29,
1993, thus concluding the lawsuit in favor of the Company and Mr. Simmons.
In addition, the Company is involved in various lawsuits from time to time
arising in the ordinary course of business and otherwise. In management's
opinion, the outcome of these matters will not have a material adverse effect on
the Company's financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 1993.
10
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information required by this item is incorporated by reference from "Common
Stock Data" on page 40 of the 1993 Annual Report.
Item 6. SELECTED FINANCIAL DATA
Information required by this item is incorporated by reference from
"Selected Financial Data" on page 39 of the 1993 Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this item is incorporated by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 21 to 24 of the 1993 Annual Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements listed in Item 14(a)(1) are incorporated by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to the information set forth under the caption "Executive
Officers of the Registrant" in Part I of this report, the information concerning
the directors of the Company required by this item is incorporated by reference
from "Nominees for Director" and "Continuing Directors" as set forth in the 1994
Proxy Statement filed by the registrant pursuant to Regulation 14A.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from
"Compensation of Directors," "Executive Compensation and Other Information,"
"Employment Agreements with Certain Executive Officers," "Cumulative Total
Shareholder Return," and "Board Compensation Committee Report on Executive
Compensation" as set forth in the 1994 Proxy Statement filed by the registrant
pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from
"Security Ownership" as set forth in the 1994 Proxy Statement filed by the
registrant pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from
"Certain Transactions" as set forth in the 1994 Proxy Statement filed by the
registrant pursuant to Regulation 14A.
11
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules:
(1) Financial Statements
The following consolidated financial statements included on pages 25
through 38 of the 1993 Annual Report are incorporated by reference:
Consolidated Statement of Income--Years Ended
January 2, 1994, January 3, 1993, and December 29, 1991
Consolidated Balance Sheets at January 2, 1994, and January 3, 1993
Consolidated Statement of Cash Flows--Years Ended
January 2, 1994, January 3, 1993 and December 29, 1991
Notes to Consolidated Financial Statements
Report of Ernst & Young, Independent Accountants
The consent to incorporate the Auditors' Report is included herein on page
14.
(2) Financial Statement Schedules
The following Consolidated Statement Schedules are included herein:
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
Schedules: Years Ended January 2, 1994, January 3, 1993 and December 29, 1991
I. Marketable Securities--Other Investments.............................................. 15
V. Property, Plant and Equipment......................................................... 16
VI. Accumulated Depreciation, Depletion and Amortization
of Property, Plant and Equipment...................................................... 17
VIII. Valuation and Qualifying Accounts..................................................... 18
IX. Short-Term Borrowings................................................................. 19
</TABLE>
All other schedules set forth in the applicable accounting regulations of
the Securities and Exchange Commission either are not required under the related
instructions or are not applicable and, therefore, have been omitted.
(3) Exhibits
A list of exhibits included in this Report or incorporated by reference is
found in the Exhibit Index beginning on page 20 of this Report and incorporated
by reference.
(b) Reports on Form 8-K filed in the fourth fiscal quarter of 1993:
The Company filed a report on Form 8-K dated October 26, 1993, regarding a
news release of the Company's 1993 fiscal third quarter results.
The Company filed a report on Form 8-K regarding the Company's acquisition
of Athlone Industries, Inc. on November 10, 1993, which was amended by a report
on Form 8-K/A-1 filed January 12, 1994.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ALLEGHENY LUDLUM CORPORATION
/s/ ROBERT P. BOZZONE
March 14, 1994
By....................................
Robert P. Bozzone
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ RICHARD P. SIMMONS /s/ C. FRED FETTEROLF
By..................................... By.....................................
Richard P. Simmons C. Fred Fetterolf
Chairman of the Board Director
and Director
/s/ THOMAS MARSHALL
/s/ ROBERT P. BOZZONE By.....................................
By..................................... Thomas Marshall
Robert P. Bozzone Director
President and Chief Executive Officer
and Director /s/ W. CRAIG MCCLELLAND
By.....................................
/s/ ARTHUR H. ARONSON W. Craig McClelland
By..................................... Director
Arthur H. Aronson
Executive Vice President /s/ RICHARD K. PITLER
and Chief Operating Officer By.....................................
and Director Richard K. Pitler
Director
/s/ JAMES L. MURDY
By..................................... /s/ CHARLES J. QUEENAN, JR.
James L. Murdy By.....................................
Senior Vice President-Finance Charles J. Queenan, Jr.
and Chief Financial Officer Director
and Director
/s/ JAMES E. ROHR
/s/ RICHARD R. ROESER By.....................................
By..................................... James E. Rohr
Richard R. Roeser Director
Controller
/s/ GEORGE W. TIPPINS
/s/ ROBERT S. PARK By.....................................
By..................................... George W. Tippins
Robert S. Park Director
Treasurer
/s/ STEVEN C. WHEELWRIGHT
/s/ PAUL S. BRENTLINGER By.....................................
By..................................... Steven C. Wheelwright
Paul S. Brentlinger Director
Director
</TABLE>
13
<PAGE>
CONSENT TO INCORPORATE AUDITORS REPORT ON FINANCIAL STATEMENTS
We consent to the incorporation by reference in this Form 10-K of Allegheny
Ludlum Corporation of our report dated January 31, 1994, included in the 1993
Annual Report to Shareholders of Allegheny Ludlum Corporation.
Our audits also included the financial statement schedules of Allegheny
Ludlum Corporation listed in item 14(a). These schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG
Pittsburgh, Pennsylvania
January 31, 1994
14
<PAGE>
SCHEDULE I--MARKETABLE SECURITIES--OTHER INVESTMENTS
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
Amount at
Which Each
Portfolio of
Equity
Security
Number of Issues and
Shares or Market Value Each Other
Units--Principal of Each Issue Security Issue
Name of Issuer and Amounts of Bonds Cost of at Balance Carried in the
Title of Each Issue and Notes Each Issue Sheet Date Balance Sheet
------------------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year Ended January 2, 1994:
U.S. Government Notes................................. 48,461 $ 49,501 $ 49,705 $ 49,501
Corporate Notes....................................... 1,000 965 998 965
--------------
$ 50,466
==============
Year Ended January 3, 1993:
U.S. Government Notes................................. 59,373 $ 60,496 $ 60,320 $ 60,320
Corporate Notes....................................... 11,962 11,946 11,795 11,795
--------------
$ 72,115
==============
</TABLE>
15
<PAGE>
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
Balance at Balance
beginning Additions Other changes--add at end
CLASSIFICATION of period at cost Retirements (deduct)--describe(1) of period
-------------- --------- ------- ----------- --------------------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended January 2, 1994:
Land.......................................... $ 7,530 $ -- $ -- $ 700 $ 8,230
Buildings..................................... 54,381 796 (12) 7,300 62,465
Machinery and equipment....................... 435,643 49,650 (194) 57,314 542,413
----------- --------- ----------- -------------------- -----------
TOTALS................................ $ 497,554 $ 50,446 $ (206) $ 65,314 $ 613,108
=========== ========= =========== ==================== ===========
Year Ended January 3, 1993:
Land.......................................... $ 7,472 $ 58 $ -- $ -- $ 7,530
Buildings..................................... 52,199 2,182 -- -- 54,381
Machinery and equipment....................... 413,544 23,747 (1,648) -- 435,643
----------- --------- ----------- -------------------- -----------
TOTALS................................ $ 473,215 $ 25,987 $ (1,648) $ -- $ 497,554
=========== ========= =========== ==================== ===========
Year Ended December 29, 1991:
Land.......................................... $ 7,472 $ -- $ -- $ -- $ 7,472
Buildings..................................... 50,650 1,549 -- -- 52,199
Machinery and equipment....................... 378,947 34,907 (310) -- 413,544
----------- --------- ----------- -------------------- -----------
TOTALS................................ $ 437,069 $ 36,456 $ (310) $ -- $ 473,215
=========== ========= =========== ==================== ===========
</TABLE>
- ---------
(1) Represents assets acquired with purchase of Jessop Steel.
16
<PAGE>
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
Balance at Additions Balance
beginning charged to costs Other changes--add at end
CLASSIFICATION of period and expenses Retirements (deduct)--describe of period
-------------- --------- ------------ ----------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
Year Ended January 2, 1994:
Buildings.............................. $ 13,200 $ 2,468 $ (12) $ -- $ 15,656
Machinery and equipment................ 122,218 27,572 (280) -- 149,510
----------- ---------------- ------------- ----------------------- -----------
TOTALS......................... $ 135,418 $ 30,040 $ (292) $ -- $ 165,166
=========== ================ ============= ======================= ===========
Year Ended January 3, 1993:
Buildings.............................. $ 10,842 $ 2,358 $ -- $ -- $ 13,200
Machinery and equipment................ 97,607 25,220 (609) -- 122,218
----------- ---------------- ------------- ----------------------- -----------
TOTALS......................... $ 108,449 $ 27,578 $ (609) $ -- $ 135,418
=========== ================ ============= ======================= ===========
Year Ended December 29, 1991:
Buildings.............................. $ 8,514 $ 2,328 $ -- $ -- $ 10,842
Machinery and equipment................ 73,798 23,896 (87) -- 97,607
----------- ---------------- ------------- ----------------------- -----------
TOTALS......................... $ 82,312 $ 26,224 $ (87) $ -- $ 108,449
=========== ================ ============= ======================= ===========
</TABLE>
17
<PAGE>
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
Balance at ADDITIONS Balance
beginning Charged to costs Charged to other at end
DESCRIPTION of period and expenses accounts--describe Deductions--describe of period
------------ --------- ------------ ------------------ -------------------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended
January 2, 1994:
Allowance for doubtful
accounts..................... $ 3,235 $ 696 $ 300(1) $ (440)(2) $ 3,791
=========== ================= ==================== ===========
Year Ended
January 3, 1993:
Allowance for doubtful
accounts..................... $ 3,547 $ 110 -- $ (422)(2) $ 3,235
=========== ================= ==================== ===========
Year Ended
December 29, 1991:
Allowance for doubtful
accounts..................... $ 3,571 $ 2,518 -- $ (2,542)(2) $ 3,547
=========== ================= ==================== ===========
</TABLE>
- ---------
(1) Balance acquired with the purchase of the Jessop Steel operations.
(2) Uncollectible accounts written off, net of recoveries.
18
<PAGE>
SCHEDULE IX--SHORT-TERM BORROWINGS
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
Weighted Maximum Average Weighted
Balance average amount amount average
CATEGORY OF AGGREGATE at end interest outstanding outstanding interest rate
SHORT-TERM BORROWINGS of period rate during the period during the period (1) during the period (2)
--------------------- --------- ---- ----------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Year Ended January 2, 1994:
Revolving credit agreement... $ -- -- $ -- $ -- --
=========== =========== ================= ==================== =======================
Year Ended January 3, 1993:
Revolving credit agreement... $ -- -- $ 38,000 $ 9,200 5.3%
=========== =========== ================= ==================== =======================
Year Ended December 29, 1991:
Revolving credit agreement... $ 17,000 5.3% $ 49,000 $ 23,534 7.0%
=========== =========== ================= ==================== =======================
</TABLE>
- ---------
(1) The average amount outstanding under the Company's revolving credit
agreement was computed by multiplying the various balances outstanding by
the number of days outstanding and dividing the product by 365 days.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense by average short-term debt
outstanding.
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Reference
------ ----------- ---------
<S> <C> <C>
3(a) Restated and Amended Articles of Incorporation of the Company.......................... (a)
3(b) By-Laws, as amended.................................................................... (i)
4(a) Indenture dated as of March 1, 1992, between Allegheny Ludlum
Corporation and The First National Bank of Boston, as Trustee (relating to
$100,000,000 5 7/8% Convertible Subordinated Debentures due
March 15, 2002)...................................................................... (b)
4(b) Industrial Revenue Bonds/Capitalized Leases:
(i) Allegheny County Industrial Development Authority, 1977 Series A, 6-1/4%
Pollution Control Revenue Bonds, $13,000,000, due
2/1/07 (relating to plants in West Leechburg, Brackenridge and Natrona,
Pennsylvania);.............................................................. (c)
(ii) Allegheny County Industrial Development Authority, 1978 Series A, 7.20%
Pollution Control Revenue Bonds, $1,700,000, due
12/1/03 (relating to plants in West Leechburg, Brackenridge and Natrona,
Pennsylvania);.............................................................. (c)
(iii) Niagara County Industrial Development Agency, 1984, Variable Rate Industrial
Development Revenue Bonds, $10,000,000, due
10/1/02 (relating to plant in Lockport, New York);.......................... (c)
(iv) Allegheny County Industrial Development Authority, 1973 Series A, 6%
Industrial Revenue Bonds, $2,700,000, due 2/1/98 (relating to plants in
Brackenridge, Natrona, West Leechburg and Bagdad, Pennsylvania);............ (c)
(v) Allegheny County Industrial Development Authority, 1974 Series B, 6.5%
Industrial Revenue Bonds, $1,000,000, due 2/1/98 (relating to plants in
Brackenridge, Natrona and Bagdad, Pennsylvania);............................ (c)
(vi) City of New Castle Economic Development Revenue Bonds,
1974 Series, 6.25%, $1,000,000, due 7/1/94 (relating to plant
in New Castle, Indiana);.................................................... (c)
(vii) Allegheny Valley Development Corporation, 1976 Series A, 4% Industrial
Revenue Bonds, $2,024,000, due 5/1/97 (relating to plant in Brackenridge,
Pennsylvania);.............................................................. (c)
(viii) Claremore Industrial Development Authority, 1977 Series A, 6.3%
Industrial Development Revenue Bonds, $4,150,000, due 11/1/07 (relating to
plant in Claremore, Oklahoma);.............................................. (c)
(ix) Connecticut Development Authority, 1981 Series, Variable Rate, $950,000, due
10/1/94 (relating to plant in Wallingford, Connecticut);.................... (c)
(x) Claremore Industrial Development Authority, 1982 Series, Variable Rate
Industrial Development Revenue Bonds, $550,000, due 2/1/94 (relating to
plant in Claremore, Oklahoma);.............................................. (c)
(xi) Westmoreland County Industrial Development Authority, 1986, Variable Rate
Urban Development Action Grant, $775,000, due 1991 through 1996 (relating to
plant in West Leechburg, Pennsylvania);..................................... (c)
(xii) Pennsylvania Industrial Development Authority, 1988, 3% Loan, $2,000,000,
due 1989 through 2004 (relating to plant in Vandergrift, Pennsylvania);..... (c)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Reference
------ ----------- ---------
<S> <C> <C>
(xiii) Pennsylvania Sunny Day Fund, 1989, 3% Loan, $3,750,000, due 1989 through
2004 (relating to plant in Vandergrift, Pennsylvania);....................... (c)
(xiv) Westmoreland County Industrial Development Authority, 1989, 3% Loan,
$3,000,000, due 1989 through 1999 (relating to plant in
Vandergrift, Pennsylvania);.................................................. (c)
(xv) Financing Agreement dated as of December 20, 1988 between Green River
Steel Corporation and the Commonwealth of Kentucky, acting through the
State Property and Buildings Commission and the Economic Development
Cabinet (relating to Green River Plant)........................................ (c)
(xvi) Washington County Industrial Development Authority, Series 1984,
13.125% Bond, $4,500,000, due 2004 (relating to Jessop Steel Company
Project)...................................................................... (c)
10(a) Amended and Restated Credit Agreement dated December 28, 1990, as amended................... (d)
10(b) Additional Compensation Plan*............................................................... (a)
10(c) Key Man Salary Continuation Program (1)*.................................................... (a)
10(d) Benefit Restoration Plan*................................................................... (e)
10(e) Employment Agreement between the
Company and R. P. Simmons, as amended*.................................................... (f)
10(f) 1987 Stock Option Incentive Plan*........................................................... (a)
10(g) Performance Share Plan*..................................................................... (a)
10(h) Employment Agreement between the Company and A. H. Aronson*................................. (j)
10(i) Fee Continuation Plan for Non-Employee Directors*........................................... (g)
10(j) Employment Agreement between the Company and R. P. Bozzone*................................. (h)
10(k) Director Share Incentive Plan*.............................................................. (i)
13 Pages 21 through 40 inclusive of the Annual Report for the year ended January 2, 1994 (2)... (j)
21 Subsidiaries of the Registrant.............................................................. (j)
24 Consent of Ernst & Young.................................................................... (j)
</TABLE>
- ---------
(a) Copies of these documents, filed as Exhibits to the Company's
Registration Statement on Form S-1 Number 33-12940 as heretofore filed
with the Securities and Exchange Commission, are incorporated by
reference, the Additional Compensation Plan being filed as Exhibit 10(c)
to such Registration Statement, the Key Man Salary Continuation Plan
being filed as Exhibit 10(e) to such Registration Statement, the Stock
Option Incentive Plan of 1987 being filed as Exhibit 10(i) to such
Registration Statement and the Performance Share Plan being filed as
Exhibit 10(j) to such Registration Statement.
(b) A copy of this document, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 29, 1992, is hereby
incorporated herein by reference.
(c) Copies of these documents are not filed as an Exhibit to this Report
pursuant to Item 601(b)(4)(iii). The Company will furnish such copies to
the Commission upon request.
(d) Copies of the Credit Agreement and the First Amendment to Credit
Agreement, Second Amendment to Credit Agreement, Third Amendment to
Credit Agreement and Fourth Amendment to Credit Agreement filed as
Exhibits to the Company's Annual Report on Form 10-K for the year ended
December 30, 1990 and the Company's Quarterly Report on Form 10-
21
<PAGE>
Q for the quarter ended September 29, 1991, the Company's Annual Report
on Form 10-K for the year ended December 29, 1991, the Company's
quarterly report on Form 10-Q for the quarter ended June 28, 1992, and
the Company's quarterly report on Form 10-Q for the quarter ended
July 4, 1993, respectively, are hereby incorporated by reference.
(e) A copy of this document, filed as Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the year ended December 30, 1990, is hereby
incorporated by reference.
(f) A copy of this document and amendments, filed as Exhibit 19 to the
Company's Current Report on Form 8-K, as heretofore filed with the
Securities and Exchange Commission on June 5, 1990, is hereby
incorporated by reference.
(g) A copy of this document, filed as Exhibit 10(j) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1989, is hereby
incorporated by reference.
(h) A copy of this document, filed as Exhibit (10)(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 1, 1990, is
hereby incorporated by reference.
(i) Copies of these documents, filed as exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended July 4, 1993, are hereby
incorporated by reference, the Director Share Incentive Plan being
filed as Exhibit 10(b) to such report.
(j) Filed herewith.
(1) Presently known as the Supplemental Pension Plan for certain key
employees of the Company.
(2) Except for those provisions specifically incorporated by reference in
this report, the 1993 Annual Report shall not be deemed to be "filed"
with the Securities and Exchange Commission.
*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this form pursuant to Item 14(c) of this report.
22
<PAGE>
EXHIBIT 10(H)
EMPLOYMENT AGREEMENT
by and between
ALLEGHENY LUDLUM CORPORATION
and
ARTHUR H. ARONSON
March 1, 1994
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT, made and entered into as of this 1st day of
March, 1994, by and between Allegheny Ludlum Corporation (hereinafter called the
"Corporation"), a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania with principal offices headquartered in Pittsburgh,
Pennsylvania
a
n
d
ARTHUR H. ARONSON, an individual residing in Butler County, Pennsylvania
(hereinafter called "the Executive").
WITNESSETH THAT:
WHEREAS, the Executive has been employed by the Corporation since 1988 as
its Executive Vice President and Chief Operating Officer pursuant to the terms
of an Employment Agreement dated as of the month of November, 1988; and
WHEREAS, the Executive and the Corporation are mutually desirous that such
satisfactory employment relationship shall continue under the terms and
conditions hereinafter provided; and
WHEREAS, the term "Affiliate" as used herein shall mean any corporation at
least fifty percent of the outstanding stock of which is owned directly or
indirectly by the Corporation; and
WHEREAS, the execution of this Employment Agreement has been duly
authorized by the Personnel and Compensation Committee of the Board of Directors
of the Corporation and ratified by the Board of Directors of the Corporation;
<PAGE>
NOW, THEREFORE, the Corporation and the Executive, each intending to be
legally bound, hereby mutually covenant and agree as follows:
1. The Corporation hereby employs the Executive in a full time capacity
for the term commencing on the date of this Employment Agreement and extending
to February 28, 1997, and the Executive hereby accepts such employment, subject
to earlier termination at such date as may be mutually agreed upon by the
Executive and the Corporation, or, in the event of the Executive's death, as of
the date of such death, or, in the event of the permanent disability of the
Executive as such may be determined by and in the judgment of the Corporation's
Board of Directors, as of the date of such permanent disability. Such term
shall be extended automatically for one additional year as of March 1, 1997, and
on the first day of March of each calendar year thereafter unless, no later than
sixty (60) days prior to any such renewal date, either the Board of Directors of
the Corporation, on behalf of the Corporation, or the Executive gives written
notice or the other, in accordance with paragraph 8, that the term shall not be
so extended.
2. During the period of his full time employment as provided in paragraph
1 hereof the Executive shall:
(a) Serve the Corporation or any one or more of its Affiliates
at offices located in Allegheny County, Pennsylvania, in
capacity as Executive Vice President until the retirement of
Robert P. Bozzone, and thereafter in capacity as President
and Chief Executive Officer of the Corporation and with such
related duties as
<PAGE>
may be assigned to him from time to time by the Board of
Directors of the Corporation; and
(b) If elected, serve as a member of the Board of Directors (and
of any committees thereof) of the Corporation or any one or
more of its Affiliates.
3. For his services performed pursuant to this Employment Agreement,
during the period of full time employment as provided in paragraph 1 hereof, the
Corporation shall pay the Executive a base salary at the rate of at least
$250,000 per year, payable in equal monthly installments. Any compensation
which may be paid to the Executive under any additional compensation or
incentive plan of the Corporation or which may be otherwise authorized from time
to time by its Board of Directors (or an appropriate Committee thereof) shall be
in addition to the base salary to which the Executive may be entitled under this
Employment Agreement.
4. During the period of employment hereunder the salary of the
Executive shall be periodically reviewed by the Corporation (acting through its
Board of Directors or an appropriate Committee thereof) to determine whether or
not the same should be increased considering the duties and responsibilities of
the Executive and his performance thereof, and, if it is determined that an
increase is merited, such increase shall be promptly put into effect and the
salary of the Executive as so increased shall constitute the salary of the
Executive hereunder.
5. In addition to the base salary to be paid to the Executive
pursuant to the terms hereof, the Executive shall also be
<PAGE>
eligible for participation in any bonus or similar plan now in effect or
hereafter established by the Corporation in the same manner and to the same
extent pertaining to other senior executives of the Corporation. The Executive
shall also continue to participate in the various benefit plans maintained in
force by the Corporation from time to time, including its various pension,
supplemental pension, disability, medical, insurance, sick leave, and other
similar benefit and retirement arrangements.
6. The Executive shall disclose and assign, and does hereby assign,
to the Corporation all inventions, discoveries and developments made by him,
either alone or jointly with others, during the period of his employment with
the Corporation, or any of its Affiliates, which are in any manner related to or
useful in connection with the business of the Corporation or any of its
Affiliates. The Executive shall not, without the prior written consent of the
Corporation, disclose to any person, other than the Corporation, or use for his
own or any such person's benefit any confidential information, technical or
otherwise, acquired or developed by him during his employment with the
Corporation or any of its Affiliates. The Executive shall cooperate fully, and
sign any instruments requested by the Corporation or any of its Affiliates, to
obtain, maintain in force and vest in the Corporation Letters Patent in the
United States and elsewhere covering all such inventions.
7. This Employment Agreement constitutes and expresses the entire
agreement of the parties with respect to the subject
<PAGE>
matter hereof and supersedes and cancels all prior negotiations, discussions,
agreements and understandings relating to such subject matter.
8. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand or mailed within the continental United States by first class certified
mail, return receipt requested, postage prepaid, addressed as follows:
(a) if to the Board of Directors or the
Corporation, to:
Allegheny Ludlum Corporation
1000 Six PPG Place
Pittsburgh, PA 15222
Attention: Chairman, Personnel
Compensation Committee
(b) to the Executive, to:
Arthur H. Aronson
136 Hamel Road
Renfrew, PA 16053
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
9. This Employment Agreement is not assignable by either party and
no payment to be made hereunder shall be subject to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance or other charge.
10. This Employment Agreement may be executed by the parties hereto
in counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the
<PAGE>
same instrument, and all signatures need not appear on any one counterpart.
11. Jurisdiction over disputes with regard to this Employment
Agreement shall be exclusively in the courts of the Commonwealth of
Pennsylvania, and this Employment Agreement shall be construed and interpreted
in accordance with and governed by the laws of the Commonwealth of Pennsylvania
other than the conflict of laws provisions of such laws.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Employment Agreement as of the day and year first above written.
ALLEGHENY LUDLUM CORPORATION
By /s/ R.P. Simmons
-------------------------
Chairman of the Board
Attest:
/s/ Jon D. Walton
- ------------------------
Secretary
/s/ A.H. Aronson
----------------------------
Arthur H. Aronson
<PAGE>
EXHIBIT 13
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL OVERVIEW
Sales and earnings increased in fiscal 1993 reflecting higher demand for
stainless steel products and improved product mix despite sales price pressure
in most product lines and higher costs from a planned third quarter production
outage. Earnings were also impacted favorably by lower prices for raw
materials, gains from an investment in a limited partnership fund, lower
production costs and a settlement related to a patent infringement case.
Financial results include the results of Jessop Steel Company beginning
November 10, 1993 which was the date on which the Company acquired Athlone
Industries, Inc., the parent of Jessop Steel.
This financial review covers certain developments during the past three years
relating to the results of operations and financial condition of the Company.
RESULTS OF OPERATIONS
Net Sales by product line were as follows:
<TABLE>
<CAPTION>
Fiscal Year (dollars in millions) 1993 % 1992 % 1991 %
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stainless Steel $ 892.3 81.1 $ 831.4 80.2 $ 771.2 76.8
Silicon Electrical Steel 156.0 14.2 161.1 15.6 172.2 17.1
Other Specialty Alloys 51.9 4.7 43.5 4.2 61.2 6.1
- -----------------------------------------------------------------------------------------
Total Net Sales $1,100.2 100.0 $1,036.0 100.0 $1,004.6 100.0
- -----------------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR 1993 COMPARED WITH FISCAL YEAR 1992
NET SALES
Net sales increased 6% in 1993 while shipments increased 8% to
518,000 tons in 1993 from 479,100 tons in 1992. The increases were due to
increased shipments of stainless steel and specialty alloy products which were
partially offset by slightly lower shipments of silicon electrical steel
products. Sales price pressures were encountered in 1993, particularly in
commodity stainless steel products in the fourth quarter of the year.
Stainless steel sales increased 7% in 1993 due to higher demand, especially
for emission control stainless steel for the automotive industry, and the
inclusion of Jessop sales beginning in November 1993.
Silicon electrical steel sales decreased 3% in 1993 due to lower domestic
demand and increased imports, which were partially offset by increased shipments
of finished export products.
Other specialty alloy sales increased 19% primarily as a result of including
sales of Jessop tool steels beginning in November 1993.
Export sales increased to $79 million in 1993 compared to $69 million in 1992
due primarily to increased shipments of finished stainless steel and finished
silicon electrical steel products.
The Company's primary melt shop is currently operating at capacity. The
Company anticipates that it will need to purchase slabs from other manufacturers
of stainless steel to meet sales demand and believes that it will be able to do
so on reasonable terms and conditions.
Selling prices for grain-oriented silicon electrical steel were increased 5%
effective January 3, 1994. Price increases have also been announced on stainless
steel plate mill plate products effective February 28, 1994 and on stainless
steel sheet, strip and continuous mill plate products effective May 2, 1994, in
part to reflect price increases for certain raw materials.
21
<PAGE>
The level of stainless and silicon steel imports increased significantly in
the 1993 fiscal year. In August 1993, the Company and others filed trade cases
charging that dumping and unfairly priced and subsidized silicon electrical
steel imports are undermining the U.S. market. In October 1993, the
International Trade Commission ruled that imports of grain-oriented silicon
steel from Italy and Japan injure or threaten injury to domestic producers.
Beginning in February 1994, importers from these nations must post either cash
or bonds of approximately 30% on the value of imported silicon electrical steel
products.
COST AND EXPENSES
COST OF PRODUCTS SOLD includes raw material costs, labor costs, energy costs
(primarily electricity and natural gas), and other operating and support
costs related to the manufacturing process. Cost of products sold as a
percentage of sales decreased 2.3 percentage points in 1993 compared to 1992
reflecting lower raw material costs, lower per net ton labor costs, and lower
energy costs. These improvements were partially offset by additional costs
related to the planned production outages at certain of the Company's
Pennsylvania locations to upgrade certain melting and hot rolling facilities.
Raw material costs decreased 12% in 1993 compared to 1992 on a per net ton
shipped basis, primarily due to lower nickel costs.
Labor costs per net ton shipped decreased 3% in 1993 compared to 1992. The
decrease in labor costs reflected productivity improvements which were partially
offset by scheduled contractual wage increases. The labor contract between the
Company and the United Steelworkers of America ("USWA") is effective through
March 31, 1994. The Company is in the process of negotiating with the USWA and
cannot predict the outcome of the negotiations. The Company believes that it
enjoys a good relationship with the USWA and expects that the Company and the
USWA will be able to achieve a mutually satisfactory contract.
Energy costs per net ton shipped decreased 5% in 1993 compared to 1992
primarily as a result of decreased usage which offset higher energy prices.
Depreciation and amortization increased due to the Company's capital project
additions and the addition of Jessop assets and costs in excess of net assets
acquired as a result of the acquisition.
RESEARCH, DEVELOPMENT AND TECHNOLOGY COSTS relate to efforts to develop new
products and product applications, improved or new manufacturing methods,
process improvements, quality assurance methods and cost reductions. The slight
increase in costs in 1993 is primarily due to increased technical support of
manufacturing processes, increased expense for compensation plans related to
Company financial results or common stock values, and expenses for certain
projects under development.
COMMERCIAL AND ADMINISTRATIVE EXPENSES include salaries and benefits of sales,
executive and other non-manufacturing administrative personnel and related
corporate support expenditures. Increases in 1993 compared to 1992 reflect the
inclusion of Jessop expenditures, normal salary increases and higher benefit
costs, and increased expense for compensation plans related to Company financial
results or common stock values.
INTEREST EXPENSE-NET decreased in 1993 primarily due to increased interest
income from higher cash balances which partially offset increased interest
expense resulting from the full year impact of the $100 million of convertible
subordinated debentures issued in March of 1992.
GAIN FROM LIMITED PARTNERSHIP was the result of recording equity income from a
subsidiary's investment in Code, Hennessy & Simmons, a limited partnership fund.
The fund distributed $22.8 million in cash to the subsidiary. The Company cannot
predict the magnitude or timing of any future gains or losses related to the
investment.
OTHER INCOME-NET increased significantly due to the favorable settlement of
the patent infringement lawsuit against Nippon Steel Corporation.
22
<PAGE>
FISCAL YEAR 1992 COMPARED WITH FISCAL YEAR 1991
NET SALES
Net sales increased 3% in 1992. Shipments of 479,100 tons in 1992 were virtually
the same as the 478,900 tons shipped in 1991. The increase in shipments and
sales dollars occurred in the third and fourth quarters of 1992 as compared to
the 1991 periods. The increase in sales in 1992 was due primarily to improved
demand for stainless steel products partially offset by lower sales of
semi-finished silicon steel and lower sales of specialty alloys.
Stainless steel sales increased 8% in 1992 reflecting increased domestic
demand partially offset by lower selling prices and reduced export sales.
Selling prices declined despite a modest price increase in June of 1992 which
restored part of the price decline.
Silicon electrical steel sales decreased 6% in 1992 primarily because of
decreased demand for semi-finished export products.
Other specialty alloys sales declined 29% in 1992 especially in the first and
second quarters primarily due to lower demand in the aerospace and related
industries and lower selling prices for most products.
Export sales decreased to $69 million compared to $112 million in 1991
reflecting a decrease in sales of semi-finished silicon export products and a
general decline in the European markets.
COST AND EXPENSES
Cost of products sold as a percentage of sales decreased slightly in 1992
reflecting improved product mix and reduced raw material costs which were
partially offset by lower selling prices and increased charges related to
inventory quantity liquidations of higher-priced material.
In 1992 raw material costs decreased 4% from 1991 on a per net ton shipped
basis despite the higher costs related to inventory quantity liquidations.
Labor costs per net ton shipped increased 13% in 1992 compared to l991. The
increase primarily reflected higher labor and related premium costs as a result
of producing and selling more stainless steel products, and scheduled
contractual wage increases.
Energy costs per net ton shipped increased 6%. In 1992 more stainless steel
products were produced and sold in a finished state resulting in a higher
overall energy usage per net ton shipped. In addition, energy unit prices
increased slightly in 1992.
Research, development and technology costs increased in 1992 reflecting higher
expenses for certain projects under development, increased compensation expense
reflecting salary increases, higher profit sharing and increases tied to Company
financial results or common stock prices.
Commercial and administrative expenses in 1992 increased slightly over 1991
levels primarily due to higher salaries, benefits and costs for compensation
plans tied to Company financial results or common stock prices. These increases
were offset in part by lower legal costs.
Interest expense-net decreased in 1992 primarily due to increased interest
income from invested funds and lower average short-term borrowings which offset
the increased interest expense resulting from the issuance of $100 million of
convertible subordinated debentures in the first quarter of 1992.
Gain from limited partnership was the result of recording equity income from
the investment in Code, Hennessy & Simmons, a limited partnership fund.
Other income-net decreased in 1992 compared to 1991 period as a result of a
cash payment the Company received in 1991 in settlement of a lawsuit for patent
infringement against Nippon Steel Corporation.
The effective tax rate of 40.5% in 1992 was lower than the 1991 rate of 43.2%
primarily due to the one-time effect of the increased Pennsylvania state income
tax rate in 1991 on the deferred tax liability.
The cumulative effect of accounting change, which resulted in an after-tax
charge of $125.2 million, reflected the adoption of FAS No. 106. This
accounting change did not affect cash flows.
FINANCIAL CONDITION
In 1993 cash from operations of $104.2 million, cash on hand and short-term
investments from the prior year of $123.6, and cash distributions of $22.8
million from limited partnership investments were used to invest $50.4 million
in capital equipment, repay $7.5 million of long-term debt, pay $31.6 million
in dividends, and make $57.8 million in payments primarily for debt repayment
related to the Athlone acquisition. Cash and short-term investments were $98.6
million at the end of the year.
23
<PAGE>
Working capital of $258.9 million at January 2, 1994 compares to $299.4
million at the end of 1992. The current ratios for 1993 and 1992 were 2.2 and
2.9, respectively. The debt to total capitalization ratio of 26% at the end of
1993 compares to 36% at the end of 1992 and excludes $25 million of Athlone debt
paid off in January of 1994.
Capital expenditures of $50.4 million were made in 1993 for equipment
throughout the plants. Capital expenditures in 1994 are expected to approximate
$65 million including $6 million for pollution abatement equipment. Many of the
applicable regulations have not been issued under the Clean Air Act Amendments
of 1990. When issued, such regulations may affect the Company's operations and
plans for capital expenditures in the future. The Company continues to believe
that it will be able to meet the new requirements while continuing its capital
programs.
Internally generated funds, the availability of borrowings from existing
credit arrangements and current cash on hand should be adequate to meet
foreseeable needs.
In addition to its capital expenditure program, in December 1993, a subsidiary
of the Company committed to invest $30 million in a second Code, Hennessy &
Simmons limited partnership fund over a five-year period. The first limited
partnership investment, representing the proportionate ownership of the
Company's subsidiaries in the fund's six portfolio company holdings, had a
valuation of $22.8 million on the Company's January 2, 1994 balance sheet,
following $22.8 million of cash distributions by the fund as previously noted.
The Company cannot predict the magnitude or timing of any future gains or losses
related to these investments.
The Company expects its deferred tax assets to be realized in future periods
due to the reversal of other offsetting temporary tax differences and the
favorable profitability outlook. The Company and its predecessor realized
profits (except for cumulative effect of accounting changes) for each year since
becoming a stand-alone company in 1980.
Assets held for sale include assets of Green River Steel Corporation and
Reynolds Fasteners, Inc., net of liabilities assumed and reserves for losses.
These businesses do not meet the Company's strategic objectives, and, therefore,
they are held for sale.
For liabilities related to pension and postretirement benefits, in 1993, the
Company reduced the discount rates from 8.5% and 8.75%, respectively, to 7.5%.
This change did not affect the cash flow of the Company and is not expected to
have a material effect on operating results.
OTHER MATTERS
Although inflationary trends in recent years have been moderate, during the same
period certain critical raw material costs have been volatile. The Company uses
the last-in, first-out method of inventory accounting which reflects current
costs in the cost of products sold. The Company considers these costs, the
increasing costs of equipment and other costs in establishing its sales pricing
policies and, in the past, has instituted raw material surcharges to the extent
permitted by competitive factors in the marketplace. The Company continues to
emphasize cost containment in all aspects of its business and, as in 1993, will
continue concentrated efforts to further reduce inventories relative to sales in
the current year.
In 1992, the Company, through its joint venture partner, Voest-Alpine
Industrieanlagenbau GmbH, completed construction of the first COILCAST (TM)
commercial-size prototype thin strip direct casting machine to produce stainless
and carbon steel flat products directly from molten steel. Trial casts began in
mid-1992 and are continuing. Although the results of this developmental work are
uncertain, the COILCAST joint venture now aims to commercialize the new
technology in the mid- to late-1990s.
ACQUISITION
On November 10, 1993, the Company completed the purchase of Athlone Industries,
Inc. See Note 11 of the Notes to the Consolidated Financial Statements for the
effect of the acquisition on the Company's financial statements.
ACCOUNTING PRONOUNCEMENTS
In 1992, FAS Statement No. 112 was issued which relates to "Employers'
Accounting for Postemployment Benefits." The statement is effective for fiscal
years beginning after December 15, 1993. The Company's current accounting
practices are in full compliance with provisions of the statement.
FAS Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was issued in 1993 and is effective for fiscal years beginning
after December 15, 1993. The statement is not expected to have a material impact
on the Company.
24
<PAGE>
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
JANUARY 2, January 3, December 29,
Fiscal Year Ended 1994 (1) 1993 (2) 1991 (3)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Net Sales $1,100,187 $1,036,029 $1,004,622
Costs and expenses:
Cost of products sold 877,662 850,180 828,516
Research, development and technology 41,901 40,729 35,538
Commercial and administrative 46,048 41,089 40,677
Depreciation and amortization 30,708 27,578 26,224
- -------------------------------------------------------------------------------------------------------------------
996,319 959,576 930,955
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 103,868 76,453 73,667
Other income (expense):
Interest expense - net (2,638) (3,774) (4,784)
Gain from limited partnership 15,740 8,808
Other income - net 1,996 (2,688) 3,508
- -------------------------------------------------------------------------------------------------------------------
15,098 2,346 (1,276)
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 118,966 78,799 72,391
INCOME TAXES 48,206 31,942 31,281
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 70,760 46,857 41,110
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
(LESS INCOME TAX BENEFIT OF $85,596) -- (125,231) --
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 70,760 $(78,374) $ 41,110
- -------------------------------------------------------------------------------------------------------------------
Per Common Share:
Income before cumulative effect of accounting
change $ 1.06 $ .71 $ .62
Cumulative effect of accounting change -- (1.90) --
- -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1.06 $ (1.19) $ .62
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
(1) Reflects acquisition of Athlone Industries, Inc. on November 10, 1993.
(2) After adoption of FAS No. 106
(3) Before adoption of FAS No. 106
25
<PAGE>
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------
JANUARY 2, January 3,
1994 (1) 1993
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48,107 $ 51,437
Short-term investments 50,466 72,115
Trade receivables, less allowances for doubtful accounts
of $3,791 and $3,235 110,962 95,538
Inventories 254,764 235,259
Prepaid expenses and other current assets 5,489 5,161
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 469,788 459,510
Properties, plants and equipment - net 447,942 362,136
Cost in excess of net assets acquired 144,132 --
Investment in limited partnership 22,764 24,409
Deferred income taxes 54,220 21,586
Assets acquired from Athlone and held for sale 29,117 --
Other assets 6,086 3,544
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,174,049 $871,185
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,158 $ 7,494
Senior secured notes assumed in Athlone acquisition 25,000 --
Accounts payable 83,752 72,037
Accrued compensation and benefits 50,864 40,535
Deferred income taxes 13,472 13,515
Income taxes 7,162 12,353
Other accrued expenses 27,469 14,220
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 210,877 160,154
Long-term debt, less current portion 138,870 138,070
Pensions 106,227 67,054
Postretirement benefit liability 285,122 223,849
Other 29,531 25,114
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 770,627 614,241
- ---------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $1: authorized--50,000,000 shares; issued--none
Common stock, par value $.10: authorized--100,000,000 shares;
issued--72,878,242 and 67,724,866 shares 7,288 6,772
Additional capital 269,112 160,876
Retained earnings 152,258 113,169
Equity adjustment related to minimum liability for pension plans (2,353) --
Common stock in treasury at cost--1,844,381 and 1,988,588 shares (22,883) (23,873)
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 403,422 256,944
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,174,049 $871,185
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
(1) Reflects acquisition of Athlone Industries, Inc.
26
<PAGE>
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------------------------------------------------
JANUARY 2, January 3, December 29,
Fiscal Year Ended 1994 (1) 1993 1991
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before cumulative effect of accounting change $ 70,760 $ 46,857 $ 41,110
Adjustments to reconcile income before cumulative
effect of accounting change to cash flow from
operating activities:
Depreciation and amortization 30,708 27,578 26,224
Gain from limited partnership investment (15,740) (8,808) --
Deferred taxes (3,143) (5,255) 3,921
Change in operating assets and liabilities:
Long-term pension liability (10,840) (5,985) (4,846)
Long-term postretirement liability 18,236 13,022 --
Deferred employee benefits 4,185 1,312 (433)
Trade receivables 359 (2,768) 9,565
Inventories 15,441 49,254 30,280
Trade payables 1,047 (19,917) (21,201)
Income taxes payable (5,191) 9,619 1,833
Net change in other current assets
and current liabilities (1,265) (1,906) (7,902)
Other changes (339) 606 889
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 104,218 103,609 79,440
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of properties, plants and equipment (50,446) (25,987) (36,456)
Disposals of properties, plants and equipment 242 1,039 222
Sales (purchases) of short-term investments 21,649 (72,115) --
Increase in limited partnership investment (5,437) (5,188) (4,000)
Limited partnership distribution 22,822 1,252 --
Increase in notes receivable (892) (414) (377)
Payments related to Athlone acquisition
primarily debt payment (57,800) -- --
- -----------------------------------------------------------------------------------------------------------
CASH USED BY INVESTING ACTIVITIES (69,862) (101,413) (40,611)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt -- (17,000) 2,000
Issuance of convertible subordinated debentures -- 100,000 --
Payments on long-term debt (7,495) (7,236) (14,933)
Dividends paid (31,571) (28,960) (28,960)
Purchases of treasury stock (1,307) (1,845) (1,264)
Employee stock plans 2,687 1,637 1,243
- -----------------------------------------------------------------------------------------------------------
CASH (USED BY) FROM FINANCING ACTIVITIES (37,686) 46,596 (41,914)
- -----------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,330) 48,792 (3,085)
Balance of cash and cash equivalents at beginning of year 51,437 2,645 5,730
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,107 $ 51,437 $ 2,645
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
(1) Reflects Allegheny Ludlum balance sheet changes for the year plus
Jessop Steel balance sheet changes since the acquisition in November 1993.
27
<PAGE>
ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
Business Segment
The Company operates in a single business segment, specialty steel.
Cash and Cash Equivalents
Cash includes currency on hand and demand deposits with financial institutions.
Cash equivalents are short-term, highly liquid investments both readily
convertible to known amounts of cash and so near maturity, three months or less,
that there is insignificant risk of fluctuations in value because of changes in
interest rates and thus the carrying amounts approximate market.
Short-term Investments
Short-term investments are carried at the lower of aggregate cost or market and
include short-term to intermediate-term investments managed by a third party
portfolio manager.
Accounts Receivable
The Company markets its products to a diverse customer base, principally
throughout the United States. Trade credit is extended based upon evaluations of
each customer's ability to perform its obligations, which are updated
periodically. Credit losses are provided for in the financial statements and
have been within management's expectations. Export sales customers generally are
required to provide bank letters of credit except when considered unnecessary.
Inventories
Inventories are valued at the lower of cost or market. Cost for most inventories
is determined by the last-in, first-out (LIFO) method. Inventories not on LIFO
(1993--$55,266,000; 1992--$23,373,000) are determined using the average cost
method.
Properties, Plants and Equipment
Properties, plants and equipment are carried at cost. Depreciation is computed
using the straight-line method at rates considered sufficient to amortize the
costs over the estimated service lives. Depreciation for income tax purposes is
computed principally using accelerated methods.
Investment in Limited Partnership
Investment in limited partnership is stated at the pro rata share of the limited
partnership's equity held by a subsidiary company. The limited partnership's net
income includes realized and unrealized gains and losses on portfolio
investments. The Chairman of Allegheny Ludlum Corporation serves on an Advisory
Board of the limited partnership.
Taxes on Income
Provisions for income taxes include deferred taxes resulting from temporary
differences in income for financial and tax purposes using the liability method.
Such temporary differences result primarily from differences in the carrying
value of assets and liabilities.
Fiscal Year-End
The Company's fiscal year ends on the Sunday nearest to December 31.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to
conform to 1993 presentation.
28
<PAGE>
Net Income per Share of Common Stock
Net income per share is based upon the weighted average number of shares of
common stock outstanding. The weighted average number of shares was 66,614,353
for this fiscal year ended January 2, 1994, 65,823,496 for the fiscal year ended
January 3, 1993, and 65,806,190 for the fiscal year ended December 29, 1991. The
weighted average number of shares of common stock outstanding and all per share
amounts have been restated for the 2-for-1 stock split effected in July, 1993.
At March 1, 1994, 70,917,480 shares of common stock were outstanding.
NOTE 2--INVENTORIES
<TABLE>
<CAPTION>
JANUARY 2, January 3,
(In thousands of dollars) 1994 1993
<S> <C> <C>
- ----------------------------------------------------------------------------------
Raw materials $ 55,647 $ 53,326
Work-in-process and finished products 208,648 212,152
Supplies 16,609 11,837
- ----------------------------------------------------------------------------------
Total inventories at current cost 280,904 277,315
Less allowance to reduce current cost values to LIFO basis 26,140 42,056
- ----------------------------------------------------------------------------------
TOTAL INVENTORIES $254,764 $235,259
- ----------------------------------------------------------------------------------
</TABLE>
Total inventories included $33,834,000 of Jessop inventories resulting from
the acquisition of Athlone Industries, Inc.
Certain LIFO inventory quantities were reduced, resulting in a liquidation of
items carried at costs that prevailed in prior years. The effect of the
liquidations was to increase net income in 1993 by approximately $1,531,000 and
in 1991 by approximately $890,000 and to decrease net income in 1992 by
approximately $4,252,000.
NOTE 3--PROPERTIES, PLANTS AND EQUIPMENT
<TABLE>
<CAPTION>
JANUARY 2, January 3,
(In thousands of dollars) 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C>
Land $ 8,230 $ 7,530
Buildings 62,465 54,381
Machinery and equipment 542,413 435,643
- ----------------------------------------------------------------------------------
613,108 497,554
Less allowance for depreciation and amortization 165,166 135,418
- ----------------------------------------------------------------------------------
TOTAL PROPERTIES, PLANTS AND EQUIPMENT $447,942 $362,136
- ----------------------------------------------------------------------------------
</TABLE>
Total properties, plants and equipment includes $65,314,000 of Jessop assets.
NOTE 4--CREDIT AGREEMENT AND LONG-TERM DEBT
CREDIT AGREEMENT
The Company's Credit Agreement, dated December 28, 1990, as amended, with a
group of banks, provides for borrowings of up to $100,000,000 on a revolving
credit basis. Interest is payable at prime or other alternative interest rate
bases, at the Company's option. Annual commitment fees range from l/8% to 1/4%
on the unused portion of the credit line. The revolving credit facility was not
used in 1993.
The Credit Agreement has various covenants which limit the Company's ability
to purchase its own stock, dispose of properties and merge with another
corporation. The Company is also required to maintain certain financial ratios
as defined in the agreement which also limits the amount of dividend payments.
Under the most restrictive requirement, 100% of retained earnings is free of
restrictions pertaining to cash dividend distributions. Borrowings outstanding
under the Credit Agreement are unsecured.
29
<PAGE>
DEBENTURES
In March 1992, the Company issued $100 million of 5-7/8% convertible
subordinated debentures due in a single maturity on March 15, 2002. The
debentures can be converted into the Company's common stock at a conversion
price of $20.25 per share. The debentures can be called at a premium after
three years have elapsed from date of issue.
OTHER
The industrial revenue bonds and capital lease obligations consist of 15
separate issues at January 2, 1994. Ten issues (aggregating $31,567,000) have
an average interest rate of 5.1%, three issues ($100,000) have interest rates
at the tax-free equivalent of the prime rate plus 1.0% or 1.5%, and two issues
($10,361,000) have variable interest rates, ranging from 1.8% to 4.0%. The
average interest rate for all outstanding issues was 4.6% in 1993, 4.8% in
1992, and 5.5% in 1991. The variable rate obligations are subject to
remarketing agreements, which provide that the bondholder may present the bonds
to a remarketing agent for purchase prior to the stated maturity date. Bonds
presented to the remarketing agent are then resold in the bond market.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 2, January 3,
(In thousands of dollars) 1994 1993
<S> <C> <C>
- ----------------------------------------------------------------------------------
5-7/8% convertible subordinated debentures $100,000 $100,000
Industrial revenue bonds due 1994 through 2007 24,873 27,939
Capital lease obligations under industrial revenue bonds
due 1994 through 2007 17,155 17,625
- ----------------------------------------------------------------------------------
142,028 145,564
Less current portion 3,158 7,494
- ----------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $138,870 $138,070
- ----------------------------------------------------------------------------------
</TABLE>
Long-term debt includes one industrial revenue bond from the acquisition of
Jessop Steel and excludes the $25,000,000 of senior secured notes of Jessop
Steel which were paid in January 1994 and classified as a current liability at
year end. The total amount of the industrial revenue bond is $3,960,000 of which
$180,000 is classified as current.
Properties, plants and equipment include the following amounts for leases that
have been capitalized:
<TABLE>
<CAPTION>
JANUARY 2, January 3,
(In thousands of dollars) 1994 1993
<S> <C> <C>
- ----------------------------------------------------------------------------------
Land and buildings $ 2,693 $ 2,693
Machinery 18,054 18,054
- ----------------------------------------------------------------------------------
20,747 20,747
Less allowance for amortization 8,067 7,075
- ----------------------------------------------------------------------------------
TOTAL LEASES $12,680 $13,672
- ----------------------------------------------------------------------------------
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
Scheduled maturities of long-term obligations for the five years succeeding
January 2, 1994 are $3,158,000 in 1994, excluding the senior secured notes
assumed in Athlone acquisition and paid in January 1994, $1,993,000 in 1995,
$1,940,000 in 1996, $1,914,000 in 1997 and 1,974,000 in 1998.
Interest expense was $8,668,000 in 1993, $8,000,000 in 1992 and $5,424,000 in
1991. Interest and commitment fees paid amounted to $8,149,000 in 1993,
$6,090,000 in 1992, and $5,500,000 in 1991.
30
<PAGE>
NOTE 5--PENSION PLANS AND OTHER POSTEMPLOYMENT BENEFITS
The Company and its subsidiaries have several defined benefit pension plans and
several defined contribution plans, which cover substantially all of their
employees. Benefits under the defined benefit pension plans are generally based
on years of service and the employee's average annual compensation in the five
consecutive years of the ten years prior to retirement in which such earnings
were the highest. The Company funds at least the amount necessary to meet the
minimum funding requirements of ERISA and the Internal Revenue Code.
The following table sets forth the funded status and amount recognized for the
Company's defined benefit pension plans in the consolidated balance sheets:
<TABLE>
<CAPTION>
JANUARY 2, January 3,
(In thousands of dollars) 1994 1993
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Actuarial present value of accumulated benefit obligations, including
vested benefits of $489,933 in 1993 and $360,880 in 1992 $524,008 $379,840
- ---------------------------------------------------------------------------------------------------------------
Actuarial present value of projected benefit obligations for services
rendered to date $568,362 $410,741
Less plan assets at fair value, primarily listed stocks, government
securities and pooled investment funds 416,790 324,999
- ---------------------------------------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS 151,572 85,742
Unrecognized net gain (loss) from past experience different from assumed (34,752) (3,501)
Unrecognized prior service costs (9,468) (10,407)
Additional minimal liability 5,327 --
- ---------------------------------------------------------------------------------------------------------------
PENSION LIABILITIES $112,679 $ 71,834
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Pension liabilities are included in the balance sheets as follows:
<TABLE>
<CAPTION>
JANUARY 2, January 3,
(In thousands of dollars) 1994 1993
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Accrued compensation and benefits $ 6,452 $ 4,780
Pensions 106,227 67,054
- ---------------------------------------------------------------------------------------------------------------
TOTAL PENSION LIABILITIES $112,679 $ 71,834
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the net pension cost for the defined benefit pension plans is as
follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1993 1992 1991
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Service cost--benefits earned during the period $ 4,751 $ 4,271 $ 4,508
Interest cost on projected benefit obligations 33,916 32,450 32,751
Actual return on plan assets (28,935) (29,423) (34,516)
Net amortization and deferral 1,058 3,391 10,190
- ---------------------------------------------------------------------------------------------------------------
NET PENSION COST $ 10,790 $ 10,689 $ 12,933
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Total pension liabilities in 1993 include $46,400,000 related to the
acquisition of Athlone Industries, Inc. The acquisition did not have a
significant effect on net pension cost.
The average discount rate used in determining the actuarial present value of
the projected benefit obligations was 7.5% in 1993 and 8.5% at January 3, 1993.
The rates of increase of future years' compensation levels ranged from 3% to 4%
in 1993, 1992, and 1991. The expected long-term rate of return on plan assets
was 9% in 1993, 1992 and 1991.
On November 10, 1988, the Board of Directors amended the salaried defined
benefit pension plan to provide that no benefits would accrue thereunder on or
after January 1, 1989. At the same time, the Board also adopted, effective
January 1, 1989, a defined contribution plan. Pension costs for this plan were
$4,746,000 in 1993, $4,407,000 in 1992, and $4,346,000 in 1991.
The Company has guaranteed employees who meet certain age and service criteria
that at retirement their aggregate benefit from the salaried defined benefit
pension plan and the defined contribution plan will not be less than the benefit
which would have been payable from the salaried defined benefit pension plan if
such plan had not been amended.
31
<PAGE>
Other Postretirement Benefit Plans
The Company sponsors several unfunded defined benefit postretirement plans
covering most salaried and hourly employees. The plans provide health care and
life insurance benefits for eligible retirees. The basic health care plans are
noncontributory, and the major medical options are contributory, with retiree
contributions adjusted periodically. The life insurance plans are generally
noncontributory.
The following table sets forth the postretirement benefit plans' combined
status reconciled with the amounts recognized in the balance sheet:
<TABLE>
<CAPTION>
Health Life
(In thousands of dollars) January 2, 1994 Care Insurance Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $134,386 $13,928 $148,314
Fully eligible active participants 38,032 3,075 41,107
Other active participants 97,706 3,833 101,539
- -----------------------------------------------------------------------------------------
270,124 20,836 290,960
Unrecognized net loss (4,168) (1,670) (5,838)
- -----------------------------------------------------------------------------------------
Accrued postretirement benefit cost $265,956 $19,166 $285,122
- -----------------------------------------------------------------------------------------
<CAPTION>
Health Life
(In thousands of dollars) January 3, 1993 Care Insurance Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $114,553 $10,459 $125,012
Fully eligible active participants 29,614 3,483 33,097
Other active participants 74,113 3,030 77,143
- -----------------------------------------------------------------------------------------
218,280 16,972 235,252
Unrecognized net loss (10,810) (593) (11,403)
- -----------------------------------------------------------------------------------------
Accrued postretirement benefit cost $207,470 $ 16,379 $223,849
- -----------------------------------------------------------------------------------------
</TABLE>
The discount rate used in determining the APBO was 7.5% at January 2, 1994 and
8.75% at January 3, 1993. Net postretirement benefit expenses included the
following components:
<TABLE>
<CAPTION>
Health Life
(In thousands of dollars) 1993 Care Insurance Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 4,700 $ 206 $ 4,906
Interest cost 18,679 1,424 20,103
- -----------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $23,379 $1,630 $25,009
- -----------------------------------------------------------------------------------------
<CAPTION>
Health Life
(In thousands of dollars) 1992 Care Insurance Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 4,026 $ 189 $ 4,215
Interest cost 17,069 1,353 18,422
- -----------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $21,095 $1,542 $22,637
- -----------------------------------------------------------------------------------------
</TABLE>
Accrued postretirement benefit cost in 1993 includes $45,500,000 related to
the acquisition of Athlone Industries, Inc. The acquisition did not have a
significant effect on net periodic postretirement benefit expense.
32
<PAGE>
The annual assumed rate of increase in the per capita cost of covered benefits
(the health care cost trend rate) for health care plans is 11.5% for 1994 and is
assumed to decrease to 5.25% by 2002 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. If the assumed health care cost trend rates were increased by one
percentage point in each year, this would increase the APBO for health care
plans as of January 2, 1994 by $40,846,000 and the aggregate of service and
interest cost components of net periodic postretirement benefit expense for 1993
by $4,442,000.
The actual cash payments of retiree health care and life insurance benefits
totaled approximately $9,295,000 in 1993, $9,615,000 in 1992, and $8,512,000 in
1991.
NOTE 6--SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional Retained Treasury
(In thousands of dollars except per share amounts) Stock Capital Earnings Shares
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 30, 1990 $6,772 $160,780 $208,414 $(23,700)
- --------------------------------------------------------------------------------------------------
Net income 41,110
Dividends on common stock at $.44 per share (28,960)
Employee stock plans 28 (20) 1,329
Purchase of 115,200 treasury shares at cost (1,264)
- --------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 29, 1991 6,772 160,808 220,544 (23,635)
- --------------------------------------------------------------------------------------------------
Net loss (78,374)
Dividends on common stock at $.44 per share (28,960)
Employee stock plans 68 (41) 1,607
Purchase of 123,200 treasury shares at cost (1,845)
- --------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 3, 1993 6,772 160,876 113,169 (23,873)
- --------------------------------------------------------------------------------------------------
Net income 70,760
Dividends on common stock at $.47 per share (31,571)
Common stock issued 516 107,746
Employee stock plans 490 (100) 2,297
Purchase of 65,500 treasury shares at cost (1,307)
- --------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 2, 1994 $7,288 $269,112 $152,258 $(22,883)
- --------------------------------------------------------------------------------------------------
</TABLE>
In July 1993, the Company effected a 2-for-1 common stock split in the form
of a stock dividend and all amounts related thereto were restated.
Preferred Stock
The authorized preferred stock may be issued in one or more series, with
designations, powers and preferences as shall be designated by the Board of
Directors. At January 2, 1994, there were no shares of preferred stock issued.
Common Stock
The Board of Directors adopted and the shareholders approved the 1987 Stock
Option Incentive Plan ("Plan") in March, 1987. The Plan, which expires January
1, 1997, provides for the granting of stock options and stock appreciation
rights ("Awards") of up to 2,700,000 shares of common stock to key employees.
Awards may be granted under the Plan at a price not less than the fair market
value of the stock as determined by the Personnel and Compensation Committee
("Committee") on the date the Awards are granted. Awards will not be immediately
exercisable and vesting of the Awards will be established at the date of each
grant but generally will not be more rapid than the rate of one-third of the
number of shares on each of the third, fourth, and fifth anniversaries of the
Award. Upon exercise of a stock appreciation right ("SAR"), the holder will
receive cash, common stock or a combination thereof, as determined by the
Committee, equal to the increase in fair market value over the underlying option
price times the number of shares to which the right applies.
33
<PAGE>
Transactions under the Plan are summarized as follows.
<TABLE>
<CAPTION>
Stock
Appreciation
Stock Options Rights Price Range
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 30, 1990 1,115,000 15,936
Granted 22,670 -- $11.88
Exercised (18,188) (3,124) 8.33
Cancelled (21,258) (1,562) 8.33-10.75
- ---------------------------------------------------------------------------------
Balance at December 29, 1991 1,098,224 11,250
Granted 22,340 -- 16.50
Exercised (52,920) -- 8.33-11.08
Cancelled (68,492) -- 8.33-10.75
- ---------------------------------------------------------------------------------
Balance at January 3, 1993 999,152 11,250
Granted 620,400 -- 22.94
Exercised (153,489) (11,250) 8.33-11.08
Cancelled (14,601) -- 10.75
- ---------------------------------------------------------------------------------
Balance at January 2, 1994 1,451,462 --
---------------------------------------------------------------------------------
</TABLE>
At January 2, 1994 there were 453,722 options for shares exercisable under the
Plan.
In March 1987, the Board of Directors adopted and the shareholders approved a
Performance Share Plan for Key Employees, which provides that the Chief
Executive Officer may establish certain performance objectives for a period
established by the Board. The Personnel and Compensation Committee, with the
advice of the Chief Executive Officer, may grant performance units payable in
common stock and/or cash to key employees. Up to 900,000 shares of common stock
have been reserved for the plan. Upon full or partial achievement of the
performance objectives for the period, the dollar amount and/or the number of
shares of common stock credited to an employee's account will be distributed to
the employee in three equal annual installments.
A three-year award period under the Performance Share Plan began in 1991 and
97% of the performance objectives to be achieved during this award period were
achieved. Payments equal to 92.5% of the base value of awarded units began in
1994. Forty-three key employees hold an aggregate of 69,050 performance units.
The base value of each unit consists of $50 in cash and four shares of common
stock.
In addition, in February 1994, the Board of Directors established the 1994-
1996 award period under the Performance Share Plan. The performance objectives
to be achieved during the 1994-1996 award period have been set, and 51
employees hold an aggregate of 83,250 performance units. The base value of each
unit consists of $50 in cash and four shares of common stock.
In 1993, the Board of Directors adopted and the shareholders approved a
Director Share Incentive Plan, which provides for the annual delivery to non-
employee directors of the Company of shares of common stock (rounded to the
nearest whole share) with a fair market value equal to $5,000. A total of
200,000 shares have been reserved for the plan. Pursuant to the plan, on May 21,
1993, and on January 3, 1994, each of the Company's nine non-employee directors
received 230 shares and 209 shares of common stock, respectively.
NOTE 7--FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
financial instruments.
Cash and cash equivalents
The carrying amount approximates fair value because of the short maturity of
those instruments.
Short-term investments
The fair values are based on quoted market prices or other fair value
estimates as provided by third party portfolio managers.
Debentures
The fair value of the 5-7/8% convertible subordinated debentures is based on
quoted market prices.
Long-term debt
The fair values of long-term debt obligations are established from the market
value of each issue if available or from market values of similar issues.
34
<PAGE>
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
January 2, 1994 January 3, 1993
(In thousands of dollars) Carrying Amount Fair Value Carrying Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 48,107 $ 48,107 $ 51,437 $ 51,437
Short-term investments 50,466 50,703 72,115 72,115
5-7/8% convertible subordinated debentures 100,000 125,500 100,000 103,000
Long-term debt 42,028 42,692 45,564 45,232
Senior secured notes acquired in Athlone acquisition 25,000 25,000 -- --
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8--TAXES ON INCOME
Income taxes (credits) consist of the following:
<TABLE>
<CAPTION>
(In thousands of dollars) 1993 1992 1991
<S> <C> <C> <C>
- --------------------------------------------------------------------
Current:
Federal $40,653 $28,442 $20,928
State 10,696 8,755 6,432
- --------------------------------------------------------------------
Subtotal current expense 51,349 37,197 27,360
- --------------------------------------------------------------------
Deferred:
Federal (1,828) (3,393) (388)
State (1,315) (1,862) 4,309
- --------------------------------------------------------------------
Subtotal deferred expense (3,143) (5,255) 3,921
- --------------------------------------------------------------------
Total income tax expense $48,206 $31,942 $31,281
- --------------------------------------------------------------------
Income taxes paid $56,649 $27,379 $25,434
- ----------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
<TABLE>
<CAPTION>
Percent of pretax income 1993 1992 1991
<S> <C> <C> <C>
- --------------------------------------------------------------------
Federal tax rate 35.0% 34.0% 34.0%
State and local income taxes,
net of federal tax benefit 5.1 5.8 9.8
Other 0.4 0.7 (0.6)
- --------------------------------------------------------------------
Total effective income tax rate 40.5% 40.5% 43.2%
- --------------------------------------------------------------------
</TABLE>
Deferred tax assets and/or liabilities result from temporary differences in
the recognition of income and expense for financial and income tax reporting
purposes, and differences between the fair value of assets acquired in business
combinations accounted for as purchases for financial reporting purposes and
their corresponding tax bases. They represent future tax benefits or costs to
be recognized when those temporary differences reverse. The categories of
assets and liabilities which have resulted in differences in the timing of the
recognition of income and/or expense are as follows:
<PAGE>
<TABLE>
<CAPTION>
Deferred Tax Assets
(In thousands of dollars) 1993 1992
- ----------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits other than pensions $ 99,850 $ 89,976
Deferred compensation and other benefit plans 45,209 40,813
Other items 12,800 11,709
- ----------------------------------------------------------------------
Total deferred tax assets 157,859 142,498
Deferred Tax Liabilities
- ----------------------------------------------------------------------
Basis of property, plant and equipment - net 71,358 97,086
Inventory valuation - net 32,759 29,788
Other items 12,994 7,553
- ----------------------------------------------------------------------
Total deferred tax liabilities 117,111 134,427
- ----------------------------------------------------------------------
Net deferred tax asset $ 40,748 $ 8,071
- ----------------------------------------------------------------------
</TABLE>
35
<PAGE>
NOTE 9--SUPPLEMENTAL OPERATING INFORMATION
Export sales were $79,000,000 in 1993, $69,000,000 in 1992, and $112,000,000 in
1991.
Direct research and development expenditures aggregated $9,170,000 in 1993,
$10,016,000 in 1992, and $7,447,000 in 1991. ``Research, development and
technology'' in the income statement covers a broad range of activities
throughout the Company.
NOTE 10--LITIGATION
The Company is involved in various lawsuits from time to time arising in the
ordinary course of business and otherwise. In July 1988, two retired former
employee/shareholders filed suit against the Company and R. P. Simmons
alleging damages resulting from the sale of their common stock in the Company
in 1986, allegedly without being fully informed about the Company's and
management's future plans. On August 6, 1991, a jury reached a verdict in the
suit in favor of the Company and R. P. Simmons. On March 6, 1992, the trial
court judge entered a judgment in favor of the Company and Mr. Simmons which
the plaintiffs appealed. On July 9, 1993, the Pennsylvania Superior Court
entered an order affirming the trial court's ruling in favor of the Company
and R. P. Simmons. On August 9, 1993, the plaintiffs petitioned the
Pennsylvania Supreme Court to review the Superior Court's ruling. On
December 2, 1993, the suit was concluded in favor of the Company and Mr.
Simmons when the Pennsylvania Supreme Court denied the plaintiffs' petition.
In September 1993, the Board of Appeals of the U. S. Patent and Trademark
Office upheld the validity of a Company patent concerning a process for
manufacturing grain-oriented silicon electrical steel which was the subject of
an earlier lawsuit against Nippon Steel Corporation. This action reversed a
previous decision of the U. S. Patent and Trademark Office which had rejected
the Company patent. As a result of this decision, Nippon Steel paid the Company
$5 million. Under a settlement agreement, in 1991, Nippon Steel had already paid
$5 million to the Company.
NOTE 11--ACQUISITION
On November 10, 1993, the Company completed the acquisition of Athlone
Industries, Inc. Athlone, through its subsidiary, Jessop Steel Company, was
primarily a manufacturer of specialty steels in plate form. Athlone
shareholders received .84726 of a share of the Company's common stock for
each share of Athlone common stock as specified in the merger agreement. The
Company issued 5,153,376 shares of common stock in the transaction valued at
the average price of $21.01 per share or $108,262,430. The transaction is
being accounted for as a purchase. The excess of the purchase price paid over
the value of net assets acquired will be amortized over 40 years on a
straight-line basis. The preliminary purchase price valuation is subject to
change when additional information concerning assets and liability values is
obtained. The results of Jessop are included in the consolidated financial
statements from the date of purchase.
Pro forma results, as if the transaction were completed at the beginning of
the year, are as follows:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Sales $l,215,039,000 $1,171,209,000
Net income before cumulative effect of accounting change 77,126,000 56,224,000
Earnings per share $l.09 $.79
</TABLE>
The pro forma presentation is not necessarily indicative of either the results
of operations that would have occurred had the acquisition taken place at the
beginning of the period or of future results of the combined companies.
In addition to Jessop Steel, Athlone owns Green River Steel Corporation and
Reynolds Fasteners, Inc. The Company has determined that these businesses do
not meet its strategic objectives and, therefore, has decided that they would
be held for sale. The recorded value for assets held for sale represents
management's estimate of net realizable value and includes a reserve for
estimated losses until disposition which is not material in relation to the
Company's results of operations.
Cash flows for 1993 do not include non-cash items related to the acquisition.
36
<PAGE>
NOTE 12--QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands of dollars except per share amounts) Fiscal Quarter Ended
- -----------------------------------------------------------------------------------------------------------
Fiscal 1993 April 4 July 4 October 3 January 2
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $289,942 $279,547 $262,323 $268,375
Cost of products sold 263,894 245,171 239,821 247,433
Operating income 26,048 34,376 22,502 20,942
Net income 18,272 18,601 16,559 17,328
Net income per share:
Primary $.28 $.28 $.25 $.25
Fully Diluted $.27 $.27 $.24 $.24
Weighted average common
shares outstanding 65,829,070 65,874,150 65,834,659 68,919,532
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
(In thousands of dollars except per share amounts) Fiscal Quarter Ended
- -----------------------------------------------------------------------------------------------------------
Fiscal 1992 March 29 June 28 September 27 January 3
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $264,397 $260,665 $254,337 $256,630
Cost of products sold 217,411 213,505 212,371 206,893
Operating income 20,507 20,925 15,385 19,636
- -----------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 11,343 11,529 12,760 11,225
Cumulative effect of accounting change net of tax (125,231) -- -- --
- -----------------------------------------------------------------------------------------------------------
Net (loss) income (113,888) 11,529 12,760 11,225
Per common share:
- -----------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change .17 .17 .20 .17
Cumulative effect of accounting change (1.90) -- -- --
- -----------------------------------------------------------------------------------------------------------
Net (Loss) Income $(1.73) $.17 $.20 $.17
- -----------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 65,819,880 65,840,860 65,852,806 65,783,512
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Note: Share information in the above tables has been adjusted for the 2-for-1
stock split effected in July 1993.
37
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
ALLEGHENY LUDLUM CORPORATION
We have audited the accompanying consolidated balance sheets of Allegheny Ludlum
Corporation and subsidiaries as of January 2, 1994 and January 3, 1993, and the
related consolidated statements of income and cash flows for each of the three
fiscal years in the period ended January 2, 1994. These financial statements are
the responsibility of Allegheny Ludlum Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Allegheny Ludlum Corporation and subsidiaries at January 2, 1994 and
January 3, 1993, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended January 2, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 5 to the financial statements, in 1992, the Corporation
changed its method of accounting for postretirement benefits other than
pensions.
/s/ Ernst & Young
Pittsburgh, Pennsylvania
January 31, 1994
38
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(In millions of dollars except
per share amounts) 1993 1992 1991* 1990* 1989* 1988* 1987*
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For Fiscal Year
Income statement data:
Net Sales $l,100.2 $l,036.0 $l,004.6 $1,084.9 $1,180.2 $1,207.5 $866.6
Operating income 103.9 76.4 73.7 111.0 208.9 175.0 91.0
Income before
cumulative
effect of
accounting
change 70.8 46.9 41.1 68.9 133.8 108.6 46.2
- ------------------------------------------------------------------------------------------------------------------
Cumulative effect
of accounting
change -- (125.2) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 70.8 $ (78.3) $ 41.1 $ 68.9 $ 133.8 $ 108.6 $ 46.2
- ------------------------------------------------------------------------------------------------------------------
Per common share:
Income before
cumulative effect
of accounting
change $ 1.06 $ .71 $ .62 $ 1.04 $ 1.98 $ 1.60 $ .76
Cumulative effect
of accounting
change -- (1.90) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.06 $ (1.19) $ .62 $ 1.04 $ 1.98 $ 1.60 $ .76
- ------------------------------------------------------------------------------------------------------------------
Dividends declared $ .47 $ .44 $ .44 $ .43 $ .35 $ 1.37 $ .07
- ------------------------------------------------------------------------------------------------------------------
At Year End
Balance sheet data:
Working capital $ 258.9 $ 299.4 $ 192.9 $ 198.2 $ 237.3 $ 163.0 $159.5
Total assets 1,174.0 871.2 764.5 793.2 784.6 703.9 649.0
Long-term debt
due after one year 138.9 138.1 48.5 52.8 67.8 76.0 83.2
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
*Amounts related to postretirement benefits are not comparable.
Per share amounts have been adjusted for the 3-for-2 stock split effected in
July of 1990 and for the 2-for-1 stock split effected in July of 1993.
39
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK DATA
Fiscal Quarter Ended
- -----------------------------------------------------------------------------------------------
Fiscal 1993 April 4 July 4 October 3 January 2
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price range of common stock:
High $21.188 $23.188 $24.25 $24.375
Low 17.00 19.875 19.25 19.625
Dividends declared .11 .12 .12 .12
- -----------------------------------------------------------------------------------------------
<CAPTION>
Fiscal Quarter Ended
- -----------------------------------------------------------------------------------------------
Fiscal 1992 March 29 June 28 September 27 January 3
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price range of common stock:
High $17.875 $18.313 $18.00 $17.438
Low 13.75 15.50 15.00 14.75
Dividends declared .11 .11 .11 .11
- -----------------------------------------------------------------------------------------------
</TABLE>
The principal market on which the Company's common stock is traded is the New
York Stock Exchange, using the symbol ALS. As of March 1, 1994, there were
70,917,480 shares of common stock outstanding held by 2,470 shareholders of
record. The amounts in the table have been adjusted for the 2-for-1 stock split
effected in July of 1993.
MANAGEMENT'S REPORT
The accompanying consolidated financial statements of Allegheny Ludlum
Corporation and subsidiaries have been prepared in accordance with generally
accepted accounting principles and include some amounts that are based upon
Management's best estimates and judgments. Management has the primary
responsibility for the information contained in the financial statements and in
other sections of this Annual Report and for their integrity and objectivity.
The Company has a system of internal controls designed to provide reasonable
assurance that assets are safeguarded and transactions are properly executed and
recorded for the preparation of financial information. The concept of reasonable
assurance is based on the recognition that there are inherent limitations in all
systems of internal accounting control and that the cost of such systems should
not exceed the benefits to be derived.
The Company maintains a staff of professional internal auditors, who assist in
audit coverage with the independent accountants and conduct operational and
special audits. The independent accountants express their opinion on the
Company's financial statements based on procedures, including an evaluation of
internal controls, which they consider to be sufficient to form their opinion.
The Audit and Finance Committee of the Board of Directors is composed of four
non-employee members. Among its principal duties, the Committee is responsible
for recommending the independent accountants to conduct the annual audit of the
Company's financial statements and for reviewing the financial reporting and
accounting practices.
/s/ R. P. BOZZONE
R. P. Bozzone
President and
Chief Executive Officer
/s/ J. L. MURDY
J. L. Murdy
Senior Vice Prestdent--
Finance and
Chief Financial Officer
/s/ R. R. ROESER
R. R. Roeser
Controller
40
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Name of Subsidiary State of Incorporation
---------------------- -----------------------
AII Acquisition Corp. Delaware
ALC Funding Corporation Delaware
Jessop Steel Company Pennsylvania
<PAGE>
Exhibit 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Number 33-18510 on Form S-8 dated November 13, 1987, Registration Statement
Number 33-20884 on Form S-8 dated April 4, 1988, and Registration Statement
Number 33-27921 on Form S-8 dated April 10, 1989 of our reports dated January
31, 1994, with respect to the consolidated financial statements and schedules
included in the Annual Report on Form 10-K of Allegheny Ludlum Corporation for
the year ended January 2, 1994.
ERNST & YOUNG
Pittsburgh, Pennsylvania
March 15, 1994
