ITEM 1. FINANCIAL STATEMENTS
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
March 31, December 31,
2004 2003
---- ----
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 67.3 $ 79.6
Accounts receivable, net 311.0 248.8
Inventories, net 366.9 359.7
Income tax refunds 0.3 7.2
Prepaid expenses and other current assets 37.3 48.0
-------- --------
Total Current Assets 782.8 743.3
Property, plant and equipment, net 711.2 711.1
Cost in excess of net assets acquired 206.3 198.4
Deferred pension asset 144.0 144.0
Deferred income taxes 34.3 34.3
Other assets 62.7 53.8
-------- --------
TOTAL ASSETS $1,941.3 $1,884.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 219.4 $ 172.3
Accrued liabilities 207.5 194.6
Short-term debt and current portion
of long-term debt 21.8 27.8
-------- --------
Total Current Liabilities 448.7 394.7
Long-term debt 512.4 504.3
Accrued postretirement benefits 518.0 507.2
Pension liabilities 238.6 220.6
Other long-term liabilities 87.3 83.4
-------- --------
TOTAL LIABILITIES 1,805.0 1,710.2
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10: authorized-
50,000,000 shares; issued-none -- --
Common stock, par value $0.10, authorized-500,000,000
shares; issued-98,951,490 shares at March 31, 2004 and December 31, 2003;
outstanding-81,247,476 shares at March 31, 2004 and 80,654,861 shares
at December 31, 2003 9.9 9.9
Additional paid-in capital 481.2 481.2
Retained earnings 418.9 483.8
Treasury stock: 17,704,014 shares at
March 31, 2004 and 18,296,629 shares
at December 31, 2003 (443.5) (458.4)
Accumulated other comprehensive
loss, net of tax (330.2) (341.8)
-------- --------
Total Stockholders' Equity 136.3 174.7
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,941.3 $1,884.9
======== ========
|
The accompanying notes are an integral part of these statements.
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share amounts)
(Unaudited)
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Sales $ 577.8 $ 480.5
Costs and expenses:
Cost of sales 567.4 465.9
Selling and administrative expenses 53.7 47.7
---------- ----------
Loss before interest, other income and income taxes (43.3) (33.1)
Interest expense, net (8.2) (7.4)
Other income, net 1.1 0.5
---------- ----------
Loss before income tax benefit and cumulative effect
of change in accounting principle (50.4) (40.0)
Income tax benefit -- (14.2)
---------- ----------
Net loss before cumulative effect of change in
accounting principle (50.4) (25.8)
Cumulative effect of change in accounting principle,
net of tax -- (1.3)
---------- ----------
Net loss $ (50.4) $ (27.1)
========== ==========
Basic and diluted net loss per common share before
cumulative effect of change in accounting principle $ (0.63) $ (0.32)
Cumulative effect of change in accounting principle -- (0.02)
---------- ----------
Basic and diluted net loss per common share $ (0.63) $ (0.34)
========== ==========
Dividends declared per common share $ 0.06 $ 0.06
========== ==========
|
The accompanying notes are an integral part of these statements.
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended
March 31,
--------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (50.4) $ (27.1)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Cumulative effect of change in accounting principle - 1.3
Depreciation and amortization 18.8 18.0
Gains on sales of assets (1.6) -
Deferred income taxes - (13.3)
Change in operating assets and liabilities:
Accounts receivable (62.2) (21.2)
Accounts payable 47.0 6.8
Accrued liabilities and other 31.0 13.0
Pension assets and liabilities 17.5 22.4
Inventories (7.2) (3.0)
Income tax refunds receivable 6.9 48.3
--------- ---------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (0.2) 45.2
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (12.1) (11.8)
Asset disposals and other 1.2 5.9
--------- ---------
CASH USED IN INVESTING ACTIVITIES (10.9) (5.9)
FINANCING ACTIVITIES:
Payments on long-term debt and capital leases (12.8) (0.2)
Borrowings on long-term debt 8.5 3.1
Net borrowings under credit facilities 1.2 -
--------- ---------
Net increase (decrease) in debt (3.1) 2.9
Exercises of stock options 1.9 -
Proceeds from interest rate swap settlement - 14.6
Dividends paid - (4.8)
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1.2) 12.7
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12.3) 52.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 79.6 59.4
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67.3 $ 111.4
========= =========
|
The accompanying notes are an integral part of these statements.
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The interim consolidated financial statements include the accounts of
Allegheny Technologies Incorporated and its subsidiaries. Unless the context
requires otherwise, "Allegheny Technologies" and "the Company" refer to
Allegheny Technologies Incorporated and its subsidiaries.
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States for complete financial statements. In management's
opinion, all adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation have been included. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
2003 Annual Report on Form 10-K. The results of operations for these interim
periods are not necessarily indicative of the operating results for any future
period. Certain amounts from prior periods have been reclassified to conform
with the current presentation.
Stock-based Compensation
The Company accounts for its stock option plans and other stock-based
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. The following table illustrates the
effect on net loss and per share information if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123").
(in millions, except per share amounts)
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
(unaudited)
Net loss as reported $ (50.4) $ (27.1)
Add: Stock-based compensation
expense included in net loss, net of tax 1.2 0.3
Deduct: Net impact of SFAS 123,
net of tax (2.4) (1.1)
---------- ----------
Pro forma net loss $ (51.6) $ (27.9)
========== ==========
Net loss per common share:
Basic and diluted--as reported $ (0.63) $ (0.34)
========== ==========
Basic and diluted--pro forma $ (0.66) $ (0.35)
========== ==========
|
NOTE 2. INVENTORIES
Inventories at March 31, 2004 and December 31, 2003 were as follows (in
millions):
March 31, December 31,
2004 2003
--------- ------------
(unaudited) (audited)
Raw materials and supplies $ 43.6 $ 37.5
Work-in-process 397.8 356.2
Finished goods 96.1 84.9
--------- ---------
Total inventories at current cost 537.5 478.6
Less allowances to reduce current cost
values to LIFO basis (159.8) (111.7)
Progress payments (10.8) (7.2)
--------- ---------
Total inventories, net $ 366.9 $ 359.7
========= =========
|
NOTE 3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Property, plant and equipment at March 31, 2004 and December 31, 2003
were as follows (in millions):
March 31, December 31,
2004 2003
----------- ------------
(unaudited) (audited)
Land $ 26.9 $ 26.3
Buildings 228.5 228.2
Equipment and leasehold improvements 1,513.6 1,494.0
---------- ----------
1,769.0 1,748.5
Accumulated depreciation and amortization (1,057.8) (1,037.4)
---------- ----------
Total property, plant and equipment, net $ 711.2 $ 711.1
========== ==========
|
Reserves for restructuring charges recorded in 2003 and prior years
involving future payments were approximately $8 million at March 31, 2004 and $9
million at December 31, 2003. The reduction in reserves resulted from cash
payments to meet severance and lease payment obligations.
NOTE 4. DEBT
Debt at March 31, 2004 and December 31, 2003 was as follows (in
millions):
March 31, December 31,
2004 2003
--------- ------------
(unaudited) (audited)
Allegheny Technologies $300 million 8.375% Notes
due 2011, net (a) $ 313.1 $ 309.4
Allegheny Ludlum 6.95% debentures, due 2025 150.0 150.0
Foreign credit agreements 44.2 35.0
Industrial revenue bonds, due
through 2007 10.6 20.1
Capitalized leases and other 16.3 17.6
--------- ---------
534.2 532.1
Short-term debt and current portion of long-term debt (21.8) (27.8)
--------- ---------
Total long-term debt $ 512.4 $ 504.3
========= =========
|
(a) Includes fair value adjustments for interest rate swap contracts
of $18.8 million (including $5.4 million for interest rate swap
contracts currently outstanding and $13.4 million for deferred
gains on settled interest rate swap contracts) and $15.2 million
(including $1.4 million for interest rate swap contracts
currently outstanding and $13.8 million for deferred gains on
settled interest rate swap contracts) at March 31, 2004 and
December 31, 2003, respectively.
Interest rate swap contracts are used from time-to-time to manage the
Company's exposure to interest rate risks. At the end of the 2002 first quarter,
ATI entered into interest rate swap contracts with respect to a $150 million
notional amount related to its $300 million, 8.375% ten-year Notes, due December
15, 2011, which involved the receipt of fixed rate amounts in exchange for
floating rate interest payments over the life of the contracts without an
exchange of the underlying principal amount. These contracts were designated as
fair value hedges. As a result, changes in the fair value of the swap contracts
and the underlying fixed rate debt are recognized in the statement of
operations. In the 2003 first quarter, the Company terminated the majority of
these interest rate swap contracts and received $14.6 million in cash. The gain
on settlement remains a component of the reported balance of the Notes ($313.1
million at March 31, 2004 including fair value adjustments), and is being
ratably recognized as a reduction to interest expense over the remaining life of
the Notes, which is approximately eight years. In the 2003 first quarter, the
Company entered into new "receive fixed, pay floating" interest rate swap
arrangements related to the 8.375% ten-year Notes which re-established, in
total, the $150 million notional amount which effectively converted this portion
of the Notes to variable rate debt.
NOTE 5. PER SHARE INFORMATION
The following table sets forth the computation of basic and diluted net
loss per common share (in millions, except share and per share amounts):
Three Months Ended
March 31,
--------------------------
2004 2003
---------- ----------
(unaudited)
Numerator:
Basic and diluted net loss per common
share before cumulative effect of
change in accounting principle $ (50.4) $ (25.8)
Cumulative effect of change
in accounting principle, net of tax - (1.3)
---------- ----------
Numerator for basic and diluted net loss per common
share $ (50.4) $ (27.1)
========== ==========
Denominator for basic and diluted net loss per common share -
adjusted weighted average shares 80.4 80.7
========== ==========
Basic and diluted net loss per common share before cumulative
effect of change in accounting principle $ (0.63) $ (0.32)
Cumulative effect of change in
accounting principle - (0.02)
---------- ----------
Basic and diluted net loss per common
share $ (0.63) $ (0.34)
========== ==========
|
For the 2004 and 2003 periods, the effects of stock options were
antidilutive and thus not included in the calculation of dilutive earnings per
share.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, were as
follows (in millions):
Three Months Ended
March 31,
---------------------
2004 2003
------- -------
(unaudited)
Net loss $ (50.4) $ (27.1)
------- -------
Foreign currency translation gains 19.5 4.5
Unrealized losses on energy, raw
materials and currency hedges (7.9) -
------- -------
11.6 4.5
------- -------
Comprehensive loss $ (38.8) $ (22.6)
======= =======
|
NOTE 7. INCOME TAXES
First quarter 2004 results do not include an income tax benefit as a
result of a deferred tax valuation allowance recorded in the fourth quarter
2003. The valuation allowance was recorded in accordance with SFAS No. 109,
"Accounting for Income Taxes", due to the uncertainty regarding full utilization
of the Company's net deferred tax assets. The Company is required to maintain a
valuation allowance until a realization event occurs to support reversal of all,
or a portion of, the allowance. The Company recorded a tax benefit on the loss
before income taxes and the cumulative effect of a change in accounting
principle of $14.2 million in the first quarter 2003, using a tax rate of 35.5%.
NOTE 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has defined benefit pension plans and defined contribution
plans covering substantially all employees. Benefits under the defined benefit
pension plans are generally based on years of service and/or final average pay.
The Company funds the U.S. pension plans in accordance with the Employee
Retirement Income Security Act of 1974, as amended, and the Internal Revenue
Code.
The Company also sponsors several postretirement plans covering certain
salaried and hourly employees. The plans provide health care and life insurance
benefits for eligible retirees. In certain plans, Company contributions towards
premiums are capped based on the cost as of a certain date, thereby creating a
defined contribution. For the non-collectively bargained plans, the Company
maintains the right to amend or terminate the plans at its discretion.
For the 2004 and 2003 first quarters, the components of pension expense
for the Company's defined benefit plans and components of postretirement benefit
expense included the following (pretax, in millions):
Three Months Ended
March 31,
--------------------------
2004 2003
------ ------
(unaudited)
Pension Benefits:
Service cost - benefits earned during the year $ 7.5 $ 7.2
Interest cost on benefits earned in prior years 31.3 31.1
Expected return on plan assets (36.8) (34.4)
Amortization of prior service cost 6.3 6.7
Amortization of net actuarial loss 10.7 12.8
------ ------
Net pension expense $ 19.0 $ 23.4
====== ======
|
Three Months Ended
March 31,
------------------------
2004 2003
----- -----
(unaudited)
Other Postretirement Benefits:
Service cost - benefits earned during the year $ 2.2 $ 2.0
Interest cost on benefits earned in prior years 13.9 11.8
Expected return on plan assets (2.2) (2.4)
Amortization of prior service cost - (1.2)
Amortization of net actuarial loss 3.1 1.2
----- -----
Net postretirement benefit expense $17.0 $11.4
===== =====
Total retirement benefit expense $36.0 $34.8
===== =====
|
The Other Postretirement Benefits obligation, and postretirement benefits expense
recognized through March 31, 2004, does not include the expected favorable impact
of the Medicare Prescription Drug, Improvement and Modernization Act, which
was enacted on December 8, 2003. The Act provides for a federal subsidy, with
tax-free payments commencing in 2006, to sponsors of retiree health care benefits
plans that provide a benefit that is at least actuarially equivalent to the
benefit established by the law. Based upon estimates from the Company's actuaries,
it is expected that the federal subsidy included in the law will result in a
reduction in the Other Postretirement Benefits obligation of up to $70 million.
This reduction is not reflected in the financial statements or in estimates
of 2004 expense because final authoritative accounting guidance regarding how
the benefit is to be recognized in the financial statements is pending.
NOTE 9. BUSINESS SEGMENTS
Following is certain financial information with respect to the
Company's business segments for the periods indicated (in millions):
Three Months Ended
March 31,
--------------------------
2004 2003
------ ------
(unaudited)
Total sales:
Flat-Rolled Products $332.0 $260.9
High Performance Metals 193.7 170.2
Engineered Products 71.8 64.0
------ ------
597.5 495.1
Intersegment sales:
Flat-Rolled Products 2.4 3.6
High Performance Metals 15.0 9.2
Engineered Products 2.3 1.8
------ ------
19.7 14.6
Sales to external customers:
Flat-Rolled Products 329.6 257.3
High Performance Metals 178.7 161.0
Engineered Products 69.5 62.2
------ ------
$577.8 $480.5
====== ======
Operating profit(loss):
Flat-Rolled Products $(11.0) $ (1.3)
High Performance Metals 7.8 8.3
Engineered Products 3.8 1.8
------ ------
Total operating profit 0.6 8.8
Corporate expenses (5.6) (4.8)
Interest expense, net (8.2) (7.4)
Other expenses, net of
gains on asset sales (1.2) (1.8)
Retirement benefit expense (36.0) (34.8)
------ ------
Loss before income tax
benefit and cumulative
effect of change in
accounting principle $(50.4) $(40.0)
====== ======
|
Retirement benefit expense represents pension expense and other
postretirement benefit expenses. Operating profit with respect to the Company's
business segments excludes any retirement benefit expense.
NOTE 10. FINANCIAL INFORMATION FOR SUBSIDIARY AND GUARANTOR PARENT
The payment obligations under the $150 million 6.95% debentures due
2025 issued by Allegheny Ludlum Corporation (the "Subsidiary") are fully and
unconditionally guaranteed by Allegheny Technologies Incorporated (the
"Guarantor Parent"). In accordance with positions established by the Securities
and Exchange Commission, the financial information in this Note 10 sets forth
separately financial information with respect to the Subsidiary, the
non-guarantor subsidiaries and the Guarantor Parent. The principal elimination
entries eliminate investments in subsidiaries and certain intercompany balances
and transactions. Investments in subsidiaries, which are eliminated in
consolidation, are included in other assets on the balance sheets.
In 1996, the defined benefit pension plans of the Subsidiary were
merged with the defined benefit pension plans of Teledyne, Inc. and Allegheny
Technologies became the plan sponsor. As a result, the balance sheets presented
for the Subsidiary and the non-guarantor subsidiaries do not include the
Allegheny Technologies deferred pension asset, pension liabilities or the
related deferred taxes. The pension assets, liabilities and the related deferred
taxes and pension income or expense are recognized by the Guarantor Parent.
Management and royalty fees charged to the Subsidiary and to the non-guarantor
subsidiaries by the Guarantor Parent have been excluded solely for purposes of
this presentation.
NOTE 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
March 31, 2004 (unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
---------- ---------- ------------- ------------ ------------
Assets:
Cash and cash equivalents $ 0.1 $ 27.4 $ 39.8 $ - $ 67.3
Accounts receivable, net 0.2 123.1 187.7 - 311.0
Inventories, net - 143.6 223.3 - 366.9
Income tax refunds 0.3 - - - 0.3
Prepaid expenses and other
current assets 0.2 10.0 27.1 - 37.3
---------- ---------- ---------- ---------- ----------
Total current assets 0.8 304.1 477.9 - 782.8
Property, plant, and
equipment, net - 321.0 390.2 - 711.2
Cost in excess of net
assets acquired - 112.1 94.2 - 206.3
Deferred pension asset 144.0 - - - 144.0
Deferred income taxes 34.3 - - - 34.3
Investments in subsidiaries and
other assets 1,015.4 450.4 546.3 (1,949.4) 62.7
---------- ---------- ---------- ---------- ----------
Total assets $ 1,194.5 $ 1,187.6 $ 1,508.6 $ (1,949.4) $ 1,941.3
========== ========== ========== ========== ==========
Liabilities and
stockholders' equity:
Accounts payable $ 3.4 $ 110.7 $ 105.3 $ - $ 219.4
Accrued liabilities 495.2 80.5 351.5 (719.7) 207.5
Short-term debt and current portion
of long-term debt - - 21.8 - 21.8
---------- ---------- ---------- ---------- ----------
Total current liabilities 498.6 191.2 478.6 (719.7) 448.7
Long-term debt 313.1 350.0 49.3 (200.0) 512.4
Accrued postretirement
benefits - 319.4 198.6 - 518.0
Pension liabilities 238.6 - - - 238.6
Other long-term liabilities 7.9 25.5 53.9 - 87.3
---------- ---------- ---------- ---------- ----------
Total liabilities 1,058.2 886.1 780.4 (919.7) 1,805.0
---------- ---------- ---------- ---------- ----------
Total stockholders' equity 136.3 301.5 728.2 (1,029.7) 136.3
---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity $ 1,194.5 $ 1,187.6 $ 1,508.6 $ (1,949.4) $ 1,941.3
========== ========== ========== ========== ==========
|
NOTE 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the three months ended March 31, 2004 (unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Sales $ - $ 301.7 $ 276.1 $ - $ 577.8
Cost of sales 26.6 310.0 230.8 - 567.4
Selling and administrative
expenses 21.1 5.4 27.2 - 53.7
Interest expense, net 5.1 2.7 0.4 - 8.2
Other income(expense)
including equity in income of
unconsolidated subsidiaries 2.4 0.3 2.2 (3.8) 1.1
------- -------- -------- ------ --------
Income (loss) before income
tax provision (benefit) (50.4) (16.1) 19.9 (3.8) (50.4)
Income tax provision (benefit) - - - - -
------- -------- -------- ------ --------
Net income (loss) $ (50.4) $ (16.1) $ 19.9 $ (3.8) $ (50.4)
======= ======== ======== ====== ========
|
NOTE 10. CONTINUED
Condensed Statements of Cash Flows
For the three months ended March 31, 2004 (unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows provided by (used in)
operating activities $ (15.2) $ 93.7 $ (26.4) $ (52.3) $ (0.2)
Cash flows provided by (used in)
investing activities - (3.5) (9.1) 1.7 (10.9)
Cash flows provided by (used in)
financing activities 15.0 (105.1) 38.3 50.6 (1.2)
------- -------- ------- ------- ------
Increase (decrease) in
cash and cash equivalents $ (0.2) $ (14.9) $ 2.8 $ - $(12.3)
======= ======== ======= ======= ======
|
NOTE 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2003 (audited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Assets:
Cash and cash equivalents $ 0.3 $ 42.3 $ 37.0 $ - $ 79.6
Accounts receivable, net 0.1 89.4 159.3 - 248.8
Inventories, net - 147.3 212.4 - 359.7
Income tax refunds 7.2 - - - 7.2
Prepaid expenses, and other
current assets - 11.5 36.5 - 48.0
-------- --------- --------- ---------- ---------
Total current assets 7.6 290.5 445.2 - 743.3
Property, plant, and
equipment, net - 326.3 384.8 - 711.1
Cost in excess of net
assets acquired - 112.1 86.3 - 198.4
Deferred pension asset 144.0 - - - 144.0
Deferred income taxes 34.3 - - - 34.3
Investment in subsidiaries
and other assets 994.4 546.0 326.9 (1,813.5) 53.8
-------- --------- --------- ---------- ---------
Total assets $1,180.3 $ 1,274.9 $ 1,243.2 $ (1,813.5) $ 1,884.9
======== ========= ========= ========== =========
Liabilities and
stockholders' equity:
Accounts payable $ 2.5 $ 92.4 $ 77.4 $ - $ 172.3
Accrued liabilities 465.6 70.2 181.2 (522.4) 194.6
Short-term debt and current portion of
long-term debt - 9.6 18.2 - 27.8
-------- --------- --------- ---------- ---------
Total current liabilities 468.1 172.2 276.8 (522.4) 394.7
Long-term debt 309.4 349.9 45.1 (200.1) 504.3
Accrued postretirement
benefits - 316.8 190.4 - 507.2
Pension liabilities 220.6 - - - 220.6
Other long-term liabilities 7.5 22.8 53.1 - 83.4
-------- --------- --------- ---------- ---------
Total liabilities 1,005.6 861.7 565.4 (722.5) 1,710.2
-------- --------- --------- ---------- ---------
Total stockholders' equity 174.7 413.2 677.8 (1,091.0) 174.7
-------- --------- --------- ---------- ---------
Total liabilities and
stockholders' equity $1,180.3 $ 1,274.9 $ 1,243.2 $(1,813.5) $ 1,884.9
======== ========= ========= ========= =========
|
NOTE 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Operations
For the three months ended March 31, 2003 (unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Sales $ - $ 237.2 $ 243.3 $ - $ 480.5
Cost of sales 25.1 239.5 201.3 - 465.9
Selling and administrative
expenses 12.7 6.0 29.0 - 47.7
Interest expense, net 4.7 2.6 0.1 - 7.4
Other income(expense)
including equity in income of
unconsolidated subsidiaries 1.8 (0.2) 3.5 (4.6) 0.5
-------- --------- --------- ---------- ---------
Income (loss) before income
tax provision (benefit) and cumulative
effect of change in accounting
principle (40.7) (11.1) 16.4 (4.6) (40.0)
Income tax provision (benefit) (14.9) (3.3) 5.5 (1.5) (14.2)
-------- --------- --------- ---------- ---------
Net income (loss) before cumulative
effect of change in accounting
principle (25.8) (7.8) 10.9 (3.1) (25.8)
Cumulative effect of change in accounting
principle, net of tax (1.3) - - - (1.3)
-------- --------- --------- ---------- ---------
Net income (loss) $ (27.1) $ (7.8) $ 10.9 $ (3.1) $ (27.1)
======== ========= ========= ========== =========
|
NOTE 10. CONTINUED
Condensed Statements of Cash Flows
For the three months ended March 31, 2003 (unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows provided by (used in)
operating activities $ 1.8 $ 158.2 $ 22.2 $ (137.0) $ 45.2
Cash flows provided by (used in)
investing activities - (5.9) (3.4) 3.4 (5.9)
Cash flows provided by (used in)
financing activities (2.1) (111.8) (7.0) 133.6 12.7
-------- --------- --------- ---------- ---------
Increase (decrease) in cash and
cash equivalents $ (0.3) $ 40.5 $ 11.8 $ - $ 52.0
======== ========= ========= ========== =========
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NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company is subject to various domestic and international
environmental laws and regulations that govern the discharge of pollutants into
the air or water and disposal of hazardous substances, which may require that it
investigate and remediate the effects of the release or disposal of materials at
sites associated with past and present operations, including sites at which the
Company has been identified as a potentially responsible party ("PRP") under the
Federal Superfund laws and comparable state laws. The Company could incur
substantial cleanup costs, fines, and civil or criminal sanctions, third party
property damage or personal injury claims as a result of violations or
liabilities under these laws or noncompliance with environmental permits
required at its facilities. The Company is currently involved in the
investigation and remediation of a number of the Company's current and former
sites as well as third party sites under these laws.
Environmental liabilities are recorded when the Company's liability is
probable and the costs are reasonably estimable. In many cases, however,
investigations are not at a stage where the Company has been able to determine
whether it is liable or, if liability is probable, to reasonably estimate the
loss or range of loss, or certain components thereof. Estimates of the Company's
liability remain subject to additional uncertainties regarding the nature and
extent of site contamination, the range of remediation alternatives available,
evolving remediation standards, imprecise engineering evaluations and estimates
of appropriate cleanup technology, methodology and cost, the extent of
corrective actions that may be required, and the number, participation, and
financial condition of other PRPs, as well as the extent of their responsibility
for the remediation. Accordingly, the Company periodically reviews accruals as
investigation and remediation of these sites proceed. As the Company receives
new information, the Company expects that it will adjust its accruals to reflect
the new information. Future adjustments could have a material adverse effect on
the Company's results of operations in a given period, but the Company cannot
reliably predict the amounts of such future adjustments.
Based on currently available information, the Company does not believe
that there is a reasonable possibility that a loss exceeding the amount already
accrued for any of the sites with which the Company is currently associated
(either individually or in the aggregate) will be an amount that would be
material to a decision to buy or sell the Company's securities.
Additional future developments, administrative actions or liabilities
relating to environmental matters however could have a material adverse effect
on the Company's financial condition or results of operations. At March 31,
2004, the Company's reserves for environmental remediation obligations totaled
approximately $39.8 million, of which approximately $19.1 million were included
in other current liabilities. The reserve includes estimated probable future
costs of $12.9 million for federal Superfund and comparable state-managed sites;
$9.1 million for formerly owned or operated sites for which the Company has
remediation or indemnification obligations; $5.9 million for owned or controlled
sites at which Company operations have been discontinued; and $11.9 million for
sites utilized by the Company in its ongoing operations. The Company continues
to evaluate whether it may be able to recover a portion of future costs for
environmental liabilities from third parties other than participating
potentially responsible parties.
The timing of expenditures depends on a number of factors that vary by site,
including the nature and extent of contamination, the number of participating
PRPs, the timing of regulatory approvals, the complexity of the investigation
and remediation, and the standards for remediation. The Company expects that
it will expend present accruals over many years, and will complete remediation
of all sites with which it has been identified in up to thirty years.
A number of lawsuits, claims and proceedings have been or may be asserted
against the Company relating to the conduct of its business, including those
pertaining to product liability, patent infringement, commercial, employment,
employee benefits, environmental and stockholder matters. Certain of such
lawsuits, claims and proceedings are described in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003. While the outcome of litigation
cannot be predicted with certainty, and some of these lawsuits, claims or
proceedings may be determined adversely to the Company, management does not
believe that the disposition of any such pending matters is likely to have
a material adverse effect on the Company's financial condition or liquidity,
although the resolution in any reporting period of one or more of these matters
could have a material adverse effect on the Company's results of operations
for that period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Allegheny Technologies Incorporated is one of the largest and most diversified
producers of specialty materials in the world. Unless the context requires
otherwise, "we", "our" and "us" refer to Allegheny
Technologies Incorporated and its subsidiaries.
RESULTS OF OPERATIONS
We operate in the following three business segments, which accounted for
the following percentages of total external sales for the first three months
of 2004 and 2003:
2004 2003
---- ----
Flat-Rolled Products 57% 54%
High Performance Metals 31% 34%
Engineered Products 12% 12%
|
For the first three months of 2004, operating profit decreased to $0.6 million
compared to $8.8 million for the same 2003 period, primarily due to higher
raw material costs. Results included a LIFO inventory valuation reserve increase
of $48.1 million, primarily due to the effects of rapidly rising raw materials
costs, which increased approximately 30% in the first quarter 2004 compared
to the fourth quarter 2003. The higher raw material costs more than offset
the benefits of additional surcharges, higher base selling prices and cost
reduction initiatives. Cost reductions, before the effects of inflation, totaled
$26.6 million in the first quarter 2004. First quarter 2003 results included
a LIFO inventory valuation reserve increase of $3.0 million. Sales increased
20% to $577.8 million for the first three months of 2004 compared to $480.5
million for the same 2003 period. During the first quarter 2004, we increased
base selling prices for most of our products and implemented additional surcharges
for certain raw materials for many of our products.
Business conditions in most of our end markets reflected increased demand
for many of our products during the first quarter of 2004. These improved
market conditions were offset by higher raw material and retirement benefit
expenses, which resulted in a net loss of $50.4 million, or $0.63 per diluted
share, for the first three months of 2004 compared to a net loss before cumulative
effect of a change in accounting principle of $25.8 million, or $0.32 per
diluted share, for the first three months of 2003. First quarter 2004 results
do not include an income tax benefit as a result of a deferred tax valuation
allowance recorded in the fourth quarter 2003. First quarter 2003 results
included an income tax benefit of $14.2 million, or $0.18 per share. Retirement
benefit expense was $36.0 million in the first quarter of 2004, compared to
$34.8 million in the comparable year ago period. Essentially all of this $1.2
million increase in expense is non-cash.
On January 1, 2003, we adopted Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143"). The adoption of SFAS 143 resulted in an after-tax charge of $1.3
million or $0.02 per diluted share. This charge is reported as a cumulative
effect of a change in accounting principle.
Sales and operating profit (loss) for our three business segments are discussed
below.
FLAT-ROLLED PRODUCTS SEGMENT
Sales increased 28% to $329.6 million in the 2004 first quarter, compared
to the prior year period, primarily due to improved demand from capital goods
markets, and the impact of higher raw material surcharges and base selling
price increases. Higher raw material and energy costs more than offset the
benefits of additional surcharges, higher base selling prices and cost reduction
initiatives, resulting in an operating loss of $11.0 million for the quarter,
compared to an operating loss of $1.3 million in the comparable 2003 period.
Higher raw material costs resulted in a LIFO inventory valuation reserve increase
of $37.6 million in the first quarter 2004 compared to a LIFO inventory valuation
reserve increase of $3.9 million in the comparable 2003 period. Energy costs
increased by $2.4 million compared to 2003, net of approximately $0.4 million
in gains from natural gas derivatives, as a result of higher natural gas and
electricity prices. Results for 2004 benefited from $13 million in gross cost
reductions, before the effects of inflation.
For the first quarter of 2004, total tons shipped increased 5% compared
to the same period of 2003. For the comparable periods, shipments of commodity
products increased 4% and shipments of high-value products increased 7%. Average
transaction prices for the comparable periods, which include raw material
surcharges, were 22% higher. Average base selling prices for the first quarter
of 2004, which exclude surcharges, increased by approximately 3% compared
to the first quarter of 2003.
Comparative information on the segment's products is provided in the following
table (unaudited):
Three Months Ended
March 31,
------------------- %
2004 2003 Change
------- ------- ------
Volume (finished tons):
Commodity 87,016 83,492 4
High Value 37,971 35,472 7
------- -------
Total 124,987 118,964 5
Average prices (per finished ton):
Commodity $ 2,006 $ 1,563 28
High Value $ 4,081 $ 3,557 15
Combined Average $ 2,636 $ 2,158 22
|
HIGH PERFORMANCE METALS SEGMENT
Sales increased 11% to $178.7 million due primarily to improved demand from
the commercial aerospace market for nickel-based superalloys and titanium
alloys. Our exotic alloys business continued to benefit from sustained high
demand from government and high energy physics markets and corrosion markets,
particularly in Asia. Operating profit declined to $7.8 million compared to
$8.3 million in the year-ago period because the impact of higher raw material
costs offset increased sales and the benefits of cost reduction initiatives.
The rise in raw material costs resulted in a LIFO inventory valuation reserve
increase of $8.6 million in 2004, compared to $1.0 million in the first quarter
2003. Results for 2004 benefited from $10 million of gross cost reductions,
before the effects of inflation.
Shipments were up 3% for nickel-based and specialty steel alloys, 9% for
titanium alloys, and 27% for exotic alloys compared to the same period of
2003.
Certain comparative information on the segment's major products is provided
in the following table (unaudited):
Three Months Ended
March 31,
------------------ %
2004 2003 Change
------ ------- ------
Volume (000's pounds):
Nickel-based and specialty steel alloys 8,944 8,692 3
Titanium mill products 5,023 4,615 9
Exotic alloys 1,185 932 27
Average prices (per pound):
Nickel-based and specialty steel alloys $ 7.73 $ 6.73 15
Titanium mill products $11.41 $ 12.85 (11)
Exotic alloys $36.32 $ 37.75 (4)
|
ENGINEERED PRODUCTS SEGMENT
Sales improved 12% to $69.5 million. Operating profit improved to $3.8 million
for the first quarter of 2004 compared to $1.8 million in the prior year quarter.
Higher sales volumes, improved pricing, and the benefits from cost reductions
offset higher raw material costs. The rise in raw material costs resulted
in an increase to the LIFO inventory valuation reserve of $1.9 million in
2004, compared to a decrease of $1.9 million in 2003. Gross cost reductions,
before the effects of inflation, totaled $2 million in the first quarter 2004.
Demand for tungsten products in our Metalworking Products operation remained
strong from the oil and gas market and demand improved for tungsten carbide
products and cutting tools due to a pickup in overall manufacturing activity.
Demand improved considerably for forged products from the Class 8 truck market
and for cast products from the improving manufacturing sector and transportation
and wind energy markets.
CORPORATE ITEMS
Corporate expenses increased to $5.6 million for the first quarter of 2004
compared to $4.8 million for the first quarter of 2003. This increase is due
primarily to non-cash expenses associated with our stock-based long-term incentive
compensation programs, which offset savings associated with reductions in
staffing and other efforts to control costs at the corporate office. Net interest
expense increased to $8.2 million for the first quarter of 2004 from $7.4
million for the same period last year. The increase was primarily due to higher
costs associated with the secured credit facility we entered into in June
2003. Our "receive fixed, pay floating" interest rate swap contracts
for $150 million related to the $300 million, 8.375%, ten-year Notes, which
effectively convert this portion of the Notes to variable rate debt, decreased
interest expense by $1.7 million in both periods, compared to the fixed interest
expense of the Notes that would otherwise be applicable.
Retirement benefit expense was $36.0 million in the first quarter 2004,
compared to $34.8 million in the first quarter 2003. Pension expense decreased
to $19.0 million for the 2004 first quarter from $23.4 million for same period
of last year as actual returns on pension assets in 2003 were higher than
expected, partially offset by the use in 2004 of a lower assumed discount
rate to value pension benefit liabilities. However, other postretirement benefit
expense increased for the 2004 first quarter to $17.0 million from $11.4 million
in the comparable 2003 period as a result of a projected rise in medical cost
inflation and a lower assumed discount rate. Approximately $29.7 million of
the first quarter 2004 retirement benefit expense was non-cash. The 2004 retirement
benefit expense does not include the expected favorable impact on our postretirement
medical expense from the enactment of the Federal Medicare prescription drug
benefit program in December 2003, pending final authoritative accounting guidance
regarding how the benefit is to be recognized in the financial statements.
For the first quarter 2004, retirement benefit expense increased cost of sales
by $27.6 million, and selling and administrative expenses by $8.4 million.
For the first quarter 2003, retirement benefit expense increased cost of sales
by $24.4 million, and selling and administrative expenses by $10.4 million.
We are not required to make cash contributions to the defined benefit pension
plan for 2004 and, based upon current actuarial studies, we do not expect
to be required to make cash contributions to the defined benefit pension plan
during the next several years.
INCOME TAXES
First quarter 2004 results do not include an income tax benefit as a result
of a deferred tax valuation allowance recorded in the fourth quarter 2003.
The valuation allowance was recorded in accordance with SFAS No. 109, "Accounting
for Income Taxes", based upon the results of our quarterly evaluation
concerning the estimated probability that the net deferred tax asset would
be realizable. We are required to maintain a valuation allowance until a realization
event occurs to support reversal of all or a portion of the allowance. Our
effective tax rate was a benefit of 35.5% for the 2003 first quarter. We received
federal income tax refunds of $6.9 million and $48.3 million in the 2004 and
2003 first quarters, respectively. Under current tax laws we are substantially
unable to carry-back any current year or future year tax losses to prior periods
to obtain cash refunds of taxes paid during those periods. Current year tax
losses, if any, can be carried forward for up to 20 years and applied against
any taxes owed in those future years.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2003, as required, we adopted Statement of Financial
Accounting Statement No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143"). Under SFAS 143, obligations associated with the retirement
of tangible long-lived assets, such as landfill and other facility closure
costs, are capitalized and amortized to expense over an asset's useful life
using a systematic and rational allocation method.
Our adoption of SFAS 143 resulted in recognizing a charge of $1.3 million,
net of income taxes of $0.7 million, or $0.02 per share, principally for asset
retirement obligations related to landfills in our Flat-Rolled Products segment.
This charge is reported in the statement of operations for the quarter ended
March 31, 2003 as a cumulative effect of a change in accounting principle.
FINANCIAL CONDITION AND LIQUIDITY
CASH FLOW AND WORKING CAPITAL
During the three months ended March 31, 2004, cash used by operations was
$0.2 million, due primarily to a $75.4 million increase in managed working
capital in the quarter, partially offset by the receipt of a $6.9 million
Federal income tax refund pertaining to our 2003 tax return. Capital expenditures
of $12.1 million, and $3.1 million of net debt repayments were the principal
investing and financing activities, respectively. At March 31, 2004, cash
and cash equivalents totaled $67.3 million, a decrease of $12.3 million from
December 31, 2003.
As part of managing the liquidity of our business, we focus on controlling
managed working capital, which is defined as gross accounts receivable and
gross inventories, less accounts payable. In measuring performance in controlling
this managed working capital, we exclude the effects of LIFO inventory valuation
reserves, excess and obsolete inventory reserves, and reserves for uncollectible
accounts receivable which, due to their nature, are managed separately. At
March 31, 2004, managed working capital was 26.4% of annualized sales compared
to 30.7% of annualized sales at December 31, 2003. During the first three
months of 2004, managed working capital increased by $75.4 million, to $650.9
million. The increase in managed working capital from December 31, 2003 was
due to increased accounts receivable, which reflects the higher level of sales
in the first quarter 2004 compared to the fourth quarter 2003, and increased
inventory, mostly as a result of higher raw material costs, which was partially
offset by increased accounts payable. The majority of the increase in raw
material costs should be recovered through surcharges.
The components of managed working capital were as follows:
(Unaudited, in millions) March 31, December 31,
2004 2003
-------- ------------
Accounts receivable $ 311.0 $ 248.8
Inventories 366.9 359.7
Accounts payable (219.4) (172.3)
-------- --------
Subtotal 458.5 436.2
Allowance for doubtful accounts 11.0 10.2
LIFO reserves 159.8 111.7
Corporate and other 21.6 17.4
-------- --------
Managed working capital $ 650.9 $ 575.5
======== ========
Annualized prior 2 months sales $2,463.0 $1,874.0
======== ========
Managed working capital as a
% of annualized sales 26.4% 30.7%
|
Capital expenditures for 2004 are expected to be between $60 and $70 million,
of which $12.1 million had been expended in the 2004 first quarter. Capital
expenditures primarily relate to the upgrade of our flat-rolled products melt
shop located in Brackenridge, PA and investments to enhance the high performance
metals capabilities of our high performance metals long products rolling mill
facility located in Richburg, SC.
A regular quarterly dividend of $0.06 per share of common stock was declared
on March 11, 2004, payable to stockholders of record at the close of business
on March 22, 2004. The payment of dividends and the amount of such dividends
depends upon matters deemed relevant by our Board of Directors, such as our
results of operations, financial condition, cash requirements, future prospects,
any limitations imposed by law, credit agreements or senior securities, and
other factors deemed relevant and appropriate.
DEBT
At March 31, 2004, we had $534.2 million in total outstanding debt, largely
unchanged from the $532.1 million at December 31, 2003. The increase in debt
was due to fair value adjustments related to interest rate swap contracts
on our $300 million, 8.375% ten year Notes, due December 15, 2011, which offset
a net decrease in other debt of $3.1 million. We repaid $9.5 million in industrial
revenue bonds, and borrowed $6.5 million, net, at our STAL joint venture.
Interest rate swap contracts are used from time-to-time to manage our exposure
to interest rate risks. At the end of the 2002 first quarter, we entered into
interest rate swap contracts with respect to a $150 million notional amount
related to our Notes, which involved the receipt of fixed rate amounts in
exchange for floating rate interest payments over the life of the contracts
without an exchange of the underlying principal amount. These contracts were
designated as fair value hedges. As a result, changes in the fair value of
the swap contracts and the underlying fixed rate debt are recognized in the
statement of operations. In the 2003 first quarter, we terminated the majority
of these interest rate swap contracts and received $14.6 million in cash.
The gain on settlement remains a component of the reported balance of the
Notes ($313.1 million at March 31, 2004, including fair value adjustments),
and is being ratably recognized as a reduction to interest expense over the
remaining life of the Notes, which is approximately eight years.
In the 2003 first quarter, we entered into new "receive fixed, pay
floating" interest rate swap arrangements related to the Notes which
re-established, in total, the $150 million notional amount which effectively
converted this portion of the Notes to variable rate debt. Including accretion
of the gain on termination of the swap contracts described above, the result
of the "receive fixed, pay floating" arrangements was a decrease
in interest expense of $1.7 million for both the 2004 and 2003 first quarters,
compared to the fixed interest expense of the Notes that would otherwise have
been realized. At March 31, 2004, the adjustment of these swap contracts to
fair market value resulted in the recognition of an asset of $5.4 million
on the balance sheet, included in other assets, with an offsetting increase
in long-term debt.
We did not borrow funds under our domestic credit facilities during the
2004 first quarter, or during all of 2003 or 2002. We have a $325 million
four-year senior secured domestic revolving credit facility ("the facility"),
which expires in June 2007, and which is secured by all accounts receivable
and inventory of our U.S. operations, and includes capacity for up to $150
million in letters of credit. Outstanding letters of credit issued under the
facility at March 31, 2004 were approximately $94 million. The secured credit
facility limits capital expenditures, investments and acquisitions of businesses,
new indebtedness, asset divestitures, payment of dividends, and common stock
repurchases which we may incur or undertake during the term of the facility
without obtaining permission of the lending group. In addition, the secured
credit facility contains a financial covenant, which is not measured unless
our undrawn availability under the facility is less than $150 million. This
financial covenant, when measured, requires us to maintain a ratio of consolidated
earnings before interest, taxes,
depreciation and amortization ("EBITDA") to fixed charges of at least
1.0 to 1.0. EBITDA is adjusted for non-cash items such as income/loss on investments
accounted for under the equity method of accounting, non-cash pension expense/income,
and that portion of retiree medical and life insurance expenses paid from the
our VEBA trust. EBITDA is reduced by capital expenditures and cash taxes paid,
and increased for cash tax refunds. Fixed charges include gross interest expense,
dividends paid and scheduled debt payments. Our ability to borrow under the
secured credit facility in the future could be adversely affected if we fail
to maintain the applicable covenants under the agreement governing the facility.
At March 31, 2004, our undrawn availability under the facility, which is calculated
including outstanding letters of credit and domestic cash on hand, was $259
million, and the amount that we could borrow at that date prior to requiring
the application of a financial covenant test was $109 million. We expect our
undrawn availability will decrease by up to $33 million in connection with the
planned appeal of an unfavorable jury verdict received on March 10, 2004 concerning
litigation between our wholly-owned subsidiary TDY Industries, Inc. and the
San Diego Unified Port District involving a lease of property. This matter is
more fully described in our Report on Form 10-K for the year ended December
31, 2003.
During the next several months, due to rising raw material prices and improving
business volumes, we expect to maintain a lower domestic cash balance from
2003 year end levels, and we may borrow funds from the secured facility from
time-to-time to support working capital requirements or investment opportunities.
We believe that internally generated funds, current cash on hand and capacity
provided from our secured credit facility will be adequate to meet our foreseeable
liquidity needs.
CRITICAL ACCOUNTING POLICIES
INVENTORY
Inventories are stated at the lower of cost (last-in, first-out (LIFO),
first-in, first-out (FIFO) and average cost methods) or market, less progress
payments. Costs include direct material, direct labor and applicable manufacturing
and engineering overhead, and other direct costs. Most of our inventory is
valued utilizing the LIFO costing methodology. Inventory of our non-U.S. operations
is valued using average cost or FIFO methods. Under the LIFO inventory valuation
method, changes in the cost of raw materials and production activities are
recognized in cost of sales in the current period even though these material
and other costs may have been incurred at significantly different values.
In a period when raw material or other costs are extremely volatile, the use
of the LIFO inventory method may result in cost of sales expense which is
not indicative of cash costs during that period. In a period of rising prices,
cost of sales expense is typically higher than the cash costs, and inventory
as presented on the balance sheet is typically lower than it would be under
most alternative costing methods.
Selling prices for the majority of our stainless products include surcharges
for raw materials. These surcharges have been effective in helping to offset
the impact of increased raw material costs we have experienced in the 2004
first quarter on a cash basis. The majority of raw material surcharges, which
prevail throughout the stainless steel industry, are structured to recover
cash costs for the raw materials incurred to produce the products shipped.
For example the surcharge for nickel, which is a significant raw material
used in the production of stainless steel, is included in current month's
selling price based upon the average cost for nickel as priced on the London
Metals Exchange (plus a margin for handling and delivery) for the period two
months prior to shipment. This two-month lag convention is used to align the
cost of the raw material melted to the transaction price to the customer.
While the surcharge formula is effective in recovering the cash costs for
raw materials, it by design approximates the production cycle.
We evaluate product lines on a quarterly basis to identify inventory values
that exceed estimated net realizable value. The calculation of a resulting
reserve, if any, is recognized as an expense in the period that the need for
the reserve is identified. It is our general policy to write-down to scrap
value any inventory that is identified as obsolete and any inventory that
has aged or has not moved in more than twelve months. In some instances this
criterion is up to twenty-four months.
INCOME TAXES
Deferred income taxes result from temporary differences in the recognition
of income and expense for financial and income tax reporting purposes, or
differences between the fair value of assets acquired in business combinations
accounted for as purchases for financial reporting purposes and their corresponding
tax bases. Deferred income taxes represent future tax benefits (assets) or
costs (liabilities) to be recognized when those temporary differences reverse.
We evaluate on a quarterly basis whether, based on all available evidence,
we believe that our deferred income tax assets will be realizable. Valuation
allowances are established when it is estimated that it is probable (more
likely than not) that the tax benefit of the deferred tax asset will not be
realized. The evaluation, as prescribed by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," includes the consideration
of all available evidence, both positive and negative, regarding historical
operating results including recent years with reported losses, the estimated
timing of future reversals of existing taxable temporary differences, estimated
future taxable income exclusive of reversing temporary differences and carryforwards,
and potential tax planning strategies which may be employed to prevent an
operating loss or tax credit carryforward from expiring unused. Future realization
of deferred income tax assets ultimately depends upon the existence of sufficient
taxable income within the carryback, carryforward period available under tax
law.
The recognition of a valuation allowance is recorded as a non-cash charge
to the income tax provision with an offsetting reserve against the deferred
income tax asset. Should we generate pretax losses in future periods, a tax
benefit would not be recorded and the valuation allowance recorded would increase.
Under these circumstances the net loss recognized and net loss per share for
that period would be larger than a comparable period when a favorable tax
benefit was recorded. However, tax provisions or benefits would continue to
be recognized, as appropriate, on state and local taxes, and taxes related
to foreign jurisdictions. The recognition of a valuation allowance does not
affect our ability to utilize the deferred tax asset in the future. The valuation
allowance could be reduced or increased in future years if the estimated realizability
of the deferred income tax asset changes, based upon consideration of all
available evidence, including changes in the carryback period available under
tax law.
At March 31, 2004, we had a net deferred income tax asset, net of deferred
income tax liabilities, of $34.3 million. This net deferred income tax asset
is presented net of a valuation allowance for certain tax benefits that are
not currently expected to be realized. A significant portion of our deferred
income tax asset relates to postretirement employee benefit obligations, which
have been recognized for financial reporting purposes but are not deductible
for income tax reporting purposes until the benefits are paid. These benefit
payments are expected to occur over an extended period of years. We have not
had a federal net operating loss or tax credit carryforward expire unutilized.
RETIREMENT BENEFITS
We have defined benefit pension plans and defined contribution plans covering
substantially all of our employees. We have not made contributions to the
U.S. defined benefit pension plan in the past several years. We are not required
to make a contribution to the U.S. defined benefit pension plan for 2004,
and, based upon current actuarial analyses and forecasts, we do not expect
to be required to make cash contributions to the U.S. defined benefit pension
plan for at least the next several years.
We account for our defined benefit pension plans in accordance with Statement
of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions" ("SFAS 87"), which requires that amounts recognized
in financial statements be determined on an actuarial basis, rather than as
contributions are made to the plan. A significant element in determining our
pension (expense) income in accordance with SFAS 87 is the expected investment
return on plan assets. In establishing the expected return on plan investments,
which is reviewed annually in the fourth quarter, we take into consideration
types of securities the plan investments are invested in, how those investments
have performed historically, and expectations for how those investments will
perform in the future. For 2004 and 2003, our expected return on pension plan
investments is 8.75%. The cumulative difference between this expected return
and the actual return on plan assets is deferred and amortized into pension
income or expense over future periods. The expected return on plan assets
can vary significantly from year-to-year since the calculation is dependent
on the market value of plan assets as of the end of the preceding year. Accounting
principles generally accepted in the United States allow companies to calculate
the expected return on pension assets using either an average of fair market
values of pension assets over a period not to exceed five years, which reduces
the volatility in reported pension income or expense, or their fair market
value at the end of the previous year. However, the Securities and Exchange
Commission currently does not permit companies to change from the fair market
value at the end of the previous year methodology, which is the methodology
that we use, to an averaging of fair market values of plan assets methodology.
As a result, our results of operations and those of other companies, including
companies with which we compete, may not be comparable due to these different
methodologies in calculating the expected return on pension investments.
At the end of November each year, we determine the discount rate to be used
to value pension plan liabilities. In accordance with SFAS 87, the discount
rate reflects the current rate at which the pension liabilities could be effectively
settled. In estimating this rate, we receive input from our actuaries regarding
the rates of return on high quality, fixed-income investments with maturities
matched to the expected future retirement benefit payments. Based on this
assessment at the end of November 2003, we established a discount rate of
6.5% for valuing the pension liabilities as of the end of 2003, and for determining
the pension expense for 2004. We had previously assumed a discount rate of
6.75% for 2002, which determined the 2003 expense. The effect of lowering
the discount rate will increase annual pension expense by approximately $4
million in 2004. The effect on pension liabilities for changes to the discount
rate, as well as the net effect of other changes in actuarial assumptions
and experience, are deferred and amortized over future periods in accordance
with SFAS 87.
Accounting standards require a minimum pension liability be recorded when
the value of pension assets is less than the accumulated benefit obligation
("ABO") at the annual measurement date. As of November 30, 2003,
our measurement date for pension accounting, the value of the accumulated
pension benefit obligation (ABO) exceeded the value of pension investments
by approximately $195 million. In accordance with accounting standards, the
charge against stockholders' equity is adjusted in the fourth quarter to reflect
the value of pension assets compared to the ABO as of the end of November.
If the level of pension assets exceeds the ABO as of a future measurement
date, the full charge against stockholders' equity would be reversed.
We also sponsor several postretirement plans covering certain hourly and
salaried employees and retirees. These plans provide health care and life
insurance benefits for eligible employees. In certain plans, our contributions
towards premiums are capped based upon the cost as of a certain date, thereby
creating a defined contribution. For the non-collectively bargained plans,
we maintain the right to amend or terminate the plans in the future. We account
for these benefits in accordance with SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" ("SFAS 106"),
which requires that amounts recognized in financial statements be determined
on an actuarial basis, rather than as benefits are paid. We use actuarial
assumptions, including the discount rate and the expected trend in health
care costs, to estimate the costs and benefits obligations for the plans.
The discount rate, which is determined annually at the end of November of
each year, is developed based upon rates of return on high quality, fixed-income
investments. At the end of 2003, we determined this rate to be 6.5%, a reduction
from a 6.75% discount rate in 2002. The effect of lowering the discount rate
to 6.5% from 6.75% increased 2003 postretirement benefit liabilities by approximately
$22 million, and 2004 expenses are expected to increase by approximately $3
million. Based upon significant cost increases quoted by our medical care
providers and predictions of continued significant medical cost inflation
in future years, the annual assumed rate of increase in the per capita cost
of covered benefits for health care plans was 10.4% for 2004 and was assumed
to gradually decrease to 5.0% in the year 2014 and remain level thereafter.
The Other Postretirement Benefits obligation, and postretirement benefit
expense recognized through March 31, 2004, does not include the expected favorable
impact of the Medicare Prescription Drug, Improvement and Modernization Act,
which was enacted on December 8, 2003. The Act provides for a federal subsidy,
with tax-free payments commencing in 2006, to sponsors of retiree health care
benefits plans that provide a benefit that is at least actuarially equivalent
to the benefit established by the law. Based upon estimates from our actuaries,
we expect that the federal subsidy included in the law will result in a reduction
in the Other Postretirement Benefits obligation of up to $70 million. This
reduction is not reflected in the financial statements or in estimates of
2004 expense because final authoritative accounting guidance regarding how
the benefit is to be recognized in the financial statements is pending.
Certain of these postretirement benefits are funded using plan investments
held in a VEBA trust. The expected return on plan investments is a significant
element in determining postretirement benefits expenses in accordance with
SFAS 106. In establishing the expected return on plan investments, which is
reviewed annually in the fourth quarter, we take into consideration the types
of securities the plan investments are invested in, how those investments
have performed historically, and expectations for how those investments will
perform in the future. For 2003, as a result of a reduction in the percentage
of the VEBA's private equity investments, we lowered our expected return on
investments held in the VEBA trust to 9%. A 15% return on investments was
assumed in prior years. This assumed long-term rate of return on investments
is applied to the market value of plan investments at the end of the previous
year. This produces the expected return on plan investments that is included
in annual postretirement benefits expenses for the current year. The effect
of lowering the expected return on plan investments resulted in an increase
in annual postretirement benefits expense of approximately $7 million for
2003. Our expected return on investments in the VEBA trust remains 9% for
2004.
ASSET IMPAIRMENT
We monitor the recoverability of the carrying value of our long-lived assets.
An impairment charge is recognized when the expected net undiscounted future
cash flows from an asset's use (including any proceeds from disposition) are
less than the asset's carrying value, and the asset's carrying value exceeds
its fair value. Changes in the expected use of a long-lived asset group, and
the financial performance of the long-lived asset group and its operating
segment, are evaluated as indicators of possible impairment. Future cash flow
value may include appraisals for property, plant and equipment, land and improvements,
future cash flow estimates from operating the long-lived assets, and other
operating considerations.
Goodwill is required to be reviewed annually, or more frequently if impairment
indicators arise. The impairment test for goodwill is a two-step process.
The first step is a comparison of the fair value of the reporting unit with
its carrying amount, including goodwill. If this comparison reflects impairment,
then the loss would be measured as the excess of recorded goodwill over its
implied fair value. Implied fair value is the excess of the fair value of
the reporting unit over the fair value of all recognized and unrecognized
assets and liabilities.
Our evaluation of goodwill for possible impairment includes estimating the
fair market value of each of the reporting units which have goodwill associated
with their operations using discounted cash flow and multiples of cash earnings
valuation techniques, plus valuation comparisons to recent public sale transactions
of similar businesses, if any. These valuation methods require us to make
estimates and assumptions regarding future operating results, cash flows including
changes in working capital and capital expenditures, selling prices, profitability,
and the cost of capital. Although we believe that the estimates and assumptions
used were reasonable, actual results could differ from those estimates and
assumptions.
OTHER
A summary of other significant accounting policies is discussed in Note
1 in our Annual Report on Form 10-K for the year ended December 31, 2003.
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States requires us to make judgments,
estimates and assumptions regarding uncertainties that affect the reported
amounts of assets and liabilities. Significant areas of uncertainty that require
judgments, estimates and assumptions include the accounting for derivatives,
retirement plans, income taxes, environmental and other contingencies as well
as asset impairment, inventory valuation and collectibility of accounts receivable.
We use historical and other information that we consider to be relevant to
make these judgments and estimates. However, actual results may differ from
those estimates and assumptions that are used to prepare our financial statements.
OTHER MATTERS
J&L Specialty Steel Transaction
On February 17, 2004, we announced that an Asset Purchase Agreement was
signed with Arcelor S. A. ("Arcelor") and J&L Specialty Steel,
LLC under which a wholly owned ATI subsidiary will acquire substantially all
of the assets of J&L Specialty Steel. J&L Specialty Steel is a leading
manufacturer of flat-rolled stainless steel products, and is a wholly owned
subsidiary of Arcelor. Since that date, we announced that several conditions
to the acquisition have been successfully completed. These conditions included
completion of integration trials which tested the combined operational capabilities
of Allegheny Ludlum and J&L Specialty Steel, completion of business and
legal due diligence, the grant by the U.S. Department of Justice of our request
for early termination of its review of the acquisition under the Hart-Scott-Rodino
Antitrust Improvements Act, and the consent to the acquisition by our lenders
under our senior secured domestic revolving credit facility. The lenders'
consent is set forth in an amendment to the credit facility, which will become
effective upon the closing of the purchase of the J&L assets. The transaction,
which is targeted for closing on May 3, 2004, remains subject to negotiation
and ratification of new collective bargaining agreements with the United Steelworkers
of America ("USWA"). The purchase price for the assets acquired
will be determined under the Asset Purchase Agreement based upon the net working
capital of J&L Specialty Steel, and will include $7.5 million in cash
at closing, up to $7.5 million payable in one year, and the remaining amount
payable in installments through 2011.
Product Pricing
Intense competition and excess manufacturing capacity in the commodity stainless
steel industry have resulted in reduced prices over the last few years, excluding
raw material surcharges, for many of our stainless steel products. As a result
of these factors, our revenues, operating results and financial condition
have been and may continue to be adversely affected.
Although inflationary trends in recent years have been moderate, during
the same period certain critical raw material costs, such as nickel and scrap
containing iron and nickel, have been volatile. While we are able to mitigate
some of the adverse impact of rising raw material costs through surcharges
to customers, rapid increases in raw material costs adversely affect our results
of operations.
We change prices on certain of our products from time to time. The ability
to implement price increases is dependent on market conditions, economic factors,
raw material costs and availability, competitive factors, operating costs
and other factors, some of which are beyond our control. The benefits of any
price increases may be delayed due to long manufacturing lead times and the
terms of existing contracts.
Volatility of Prices of Critical Raw Materials; Unavailability
of Raw Materials
We rely to a substantial extent on outside vendors to supply certain raw
materials that are critical to the manufacture of products. Purchase prices
and availability of these critical raw materials are subject to volatility.
At any given time, we may be unable to obtain an adequate supply of these
critical raw materials on a timely basis, on price and other terms acceptable,
or at all.
If suppliers increase the price of critical raw materials, we may not have
alternative sources of supply. In addition, to the extent that we have quoted
prices to customers and accepted customer orders for products prior to purchasing
necessary raw materials, we may be unable to raise the price of products to
cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and requires
long lead times. As a result, we have in the past and may in the future experience
delays or shortages in the supply of raw materials. If unable to obtain adequate
and timely deliveries of required raw materials, we may be unable to timely
manufacture sufficient quantities of products. This could cause us to lose
sales, incur additional costs, delay new product introductions and suffer
harm to our reputation.
We acquire certain important raw materials that we use to produce specialty
materials, including nickel, chrome, cobalt, titanium sponge and ammonia paratungstate,
from foreign sources. Some of these sources operate in countries that may
be subject to unstable political and economic conditions. These conditions
may disrupt supplies or affect the prices of these materials.
Volatility of Energy Prices; Availability of Energy Resources
Energy resources markets are subject to conditions that create uncertainty
in the prices and availability of energy resources. We rely upon third parties
for our supply of energy resources consumed in the manufacture of products.
The prices for and availability of electricity, natural gas, oil and other
energy resources are subject to volatile market conditions. These market conditions
often are affected by political and economic factors beyond our control. Disruptions
in the supply of energy resources could temporarily impair the ability to
manufacture products for customers. Further, increases in energy costs, or
changes in costs relative to energy costs paid by competitors, have and may
continue to adversely affect our profitability. To the extent that these uncertainties
cause suppliers and customers to be more cost sensitive, increased energy
prices may have an adverse effect on our results of operations and financial
condition.
Labor Matters
We have approximately 8,800 employees. A portion of our workforce is represented
under various collective bargaining agreements, principally with the USWA,
including: approximately 3,000 Allegheny Ludlum production, office and maintenance
employees covered by collective bargaining agreements between Allegheny Ludlum
and the USWA, which are effective through June 2007; approximately 165 Oremet
employees covered by a collective bargaining agreement with the USWA which
is effective through June 2007; and approximately 600 Wah Chang employees
covered by a collective bargaining agreement with the USWA which continues
through March 2008. Negotiations are ongoing for a new collective bargaining
agreement with the USWA affecting approximately 100 employees at the Casting
Service facility in LaPorte, IN. We have requested the re-opening of labor
agreements with the USWA pertaining to the Allegheny Ludlum and Oremet operations,
and the successful negotiation and ratification of new labor agreements with
Allegheny Ludlum is a pre-condition of closing the J&L Specialty Steel
acquisition. Discussions with the USWA on this matter are ongoing.
Generally, agreements that expire may be terminated after notice by the
union. After termination, the union may authorize a strike. A strike by the
employees covered by one or more of the collective bargaining agreements could
materially adversely affect our operating results. There can be no assurance
that we will succeed in concluding collective bargaining agreements with the
unions to replace those that expire.
Environmental
When it is probable that a liability has been incurred or an asset has been
impaired, we recognize a loss if the amount of the loss can be reasonably
estimated.
We are subject to various domestic and international environmental laws
and regulations that govern the discharge of pollutants into the air or water
and the disposal of hazardous substances, which may require that we investigate
and remediate the effects of the release or disposal of materials at sites
associated with past and present operations, including sites at which we have
been identified as a potentially responsible party ("PRP") under
the Federal Superfund laws, and comparable state laws. We could incur substantial
cleanup costs, fines and civil or criminal sanctions, third party property
damage or personal injury claims as a result of violations or liabilities
under these laws or non-compliance with environmental permits required at
our facilities. We are currently involved in the investigation and remediation
of a number of our current and former sites as well as third party sites under
these laws.
With respect to proceedings brought under the Federal Superfund laws, or
similar state statutes, we have been identified as a PRP at approximately
33 of such sites, excluding those at which we believe we have no future liability.
Our involvement is limited or de minimis at approximately 15 of these sites,
and the potential loss exposure with respect to any of the remaining 18 individual
sites is not considered to be material.
We are a party to various cost-sharing arrangements with other PRPs at the
sites. The terms of the cost-sharing arrangements are subject to non-disclosure
agreements as confidential information. Nevertheless, the cost-sharing arrangements
generally require all PRPs to post financial assurance of the performance
of the obligations or to pre-pay into an escrow or trust account their share
of anticipated site-related costs. In addition, the Federal government, through
various agencies, is a party to several such arrangements.
Environmental liabilities are recorded when our liability is probable and
the costs are reasonably estimable. In many cases, investigations are not
at a stage where we are able to determine whether we are liable or, if liability
is probable, to reasonably estimate the loss, or certain components thereof.
Accordingly, as investigation and remediation of these sites proceed and as
we receive new information, we expect that we will adjust our accruals to
reflect the new information. Future adjustments could have a material adverse
effect on our results of operations in a given period, but we cannot reliably
predict the amounts of such future adjustments. At March 31, 2004, our reserves
for environmental matters totaled approximately $39.8 million.
Environmental liabilities are recorded when our liability is probable and
the costs are reasonably estimable, but generally not later than the completion
of the feasibility study or our recommendation of a remedy or commitment to
an appropriate plan of action. The accruals are reviewed periodically and,
as investigations and remediations proceed, adjustments are made as necessary.
Accruals for losses from environmental remediation obligations do not take
into account the effects of inflation, and anticipated expenditures are not
discounted to their present value. The accruals are not reduced by possible
recoveries from insurance carriers or other third parties, but do reflect
allocations among PRPs at Federal Superfund sites or similar state-managed
sites after an assessment is made of the likelihood that such parties will
fulfill their obligations at such sites and after appropriate cost-sharing
or other agreements are entered. Our measurement of environmental liabilities
is based on currently available facts, present laws and regulations, and current
technology. Such estimates take into consideration our prior experience in
site investigation and remediation, the data concerning cleanup costs available
from other companies and regulatory authorities, and the professional judgment
of our environmental experts in consultation with outside environmental specialists,
when necessary. Estimates of our liability are further subject to additional
uncertainties regarding the nature and extent of site contamination, the range
of remediation alternatives available, evolving remediation standards, imprecise
engineering evaluations and estimates of appropriate cleanup technology, methodology
and cost, the extent of corrective actions that may be required, and the participation,
number and financial condition of other PRPs, as well as the extent of their
responsibility for the remediation.
Based on currently available information, we do not believe that there is
a reasonable possibility that a loss exceeding the amount already accrued
for any of the matters with which we are currently associated (either individually
or in the aggregate) will be an amount that would be material to a decision
to buy or sell our securities. Future developments, administrative actions
or liabilities relating to environmental matters, however, could have a material
adverse effect on our financial condition and results of operations.
FORWARD-LOOKING AND OTHER STATEMENTS
From time to time, we have made and may continue to make "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Certain statements in this report relate to future events and
expectations and, as such, constitute forward-looking statements. Forward-looking
statements include those containing such words as "anticipates,"
"believes," "estimates," "expects," "would,"
"should," "will," "will likely result," "forecast,"
"outlook," "projects," and similar expressions. Such forward-looking
statements are based on management's current expectations and include known
and unknown risks, uncertainties and other factors, many of which we are unable
to predict or control, that may cause our actual results or performance to
materially differ from any future results or performance expressed or implied
by such statements. Various of these factors are described from time to time
in our filings with the Securities and Exchange Commission, including our
Report on Form 10-K for the year ended December 31, 2003. We assume no duty
to update our forward-looking statements.