ALLEGHENY TECHNOLOGIES INC (Form: 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 1-12001

ALLEGHENY TECHNOLOGIES INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware		25-1792394

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1000 Six PPG Place
Pittsburgh, Pennsylvania		15222-5479

(Address of Principal Executive Offices)		(Zip Code)

(412) 394-2800

(Registrant’s telephone number, including area code)

Indicate by check mark whether 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

At April 28, 2006, the registrant had outstanding 100,266,955 shares of its Common Stock.

ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 2006

INDEX


	Page No.
PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets		3

Consolidated Statements of Income		4

Consolidated Statements of Cash Flows		5

Notes to Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		25

Item 4. Controls and Procedures		25

PART II. — OTHER INFORMATION

Item 1. Legal Proceedings		26

Item 1A. Risk Factors		26

Item 2. Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		26

Item 6. Exhibits		26

SIGNATURES		27

EXHIBIT INDEX		28
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)


	March 31,			December 31,
	2006			2005
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	359.1		$	362.7
Accounts receivable, net		512.2			442.1
Inventories, net		701.7			607.1
Deferred income taxes		27.7			22.8
Prepaid expenses and other current assets		34.3			49.3

Total Current Assets		1,635.0			1,484.0

Property, plant and equipment, net		742.9			704.9
Cost in excess of net assets acquired		200.6			199.7
Deferred income taxes		156.9			155.3
Deferred pension asset		100.6			100.6
Other assets		88.1			87.1

Total Assets	$	2,924.1		$	2,731.6

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	368.0		$	312.9
Accrued liabilities		220.8			216.1
Accrued income taxes		49.6			18.5
Short-term debt and current portion of long-term debt		18.0			13.4

Total Current Liabilities		656.4			560.9

Long-term debt		540.9			547.0
Accrued postretirement benefits		459.2			461.5
Pension liabilities		257.8			242.9
Other long-term liabilities		109.8			119.4

Total Liabilities		2,024.1			1,931.7

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-100,043,616 shares at March 31, 2006 and 98,951,490 at December 31, 2005; outstanding-100,042,562 shares at March 31, 2006 and 98,200,561 shares at December 31, 2005		10.0			9.9
Additional paid-in capital		542.1			535.6
Retained earnings		724.4			642.6
Treasury stock: 1,054 shares at March 31, 2006 and 750,929 shares at December 31, 2005		¾			(18.8	)
Accumulated other comprehensive loss, net of tax		(376.5	)		(369.4	)

Total Stockholders’ Equity		900.0			799.9

Total Liabilities and Stockholders’ Equity	$	2,924.1		$	2,731.6

The accompanying notes are an integral part of these statements.

ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In millions except per share amounts)

(Unaudited)


	Three Months Ended
	March 31,
	2006			2005
Sales	$	1,040.5		$	879.6

Costs and expenses:
Cost of sales		798.6			738.3
Selling and administrative expenses		72.9			66.8

Income before interest, other income (expense), and income taxes		169.0			74.5

Interest expense, net		(7.5	)		(10.4	)
Other income (expense)		(1.3	)		(0.8	)


Income before income tax provision		160.2			63.3

Income tax provision		57.7			2.3


Net income	$	102.5		$	61.0


Basic net income per common share	$	1.04		$	0.64


Diluted net income per common share	$	1.00		$	0.61


Dividends declared per common share	$	0.10		$	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,
	2006			2005
Operating Activities:
Net income	$	102.5		$	61.0
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		18.8			17.8
Deferred income taxes		(2.0	)		(0.4	)
Change in operating assets and liabilities:
Inventories		(94.6	)		(55.1	)
Accounts receivable		(70.1	)		(67.7	)
Accounts payable		55.2			10.2
Accrued income taxes, net of tax benefits on share-based compensation		31.1			—
Pension assets and liabilities		14.5			14.7
Postretirement benefits		(2.3	)		(2.2	)
Accrued liabilities and other		(17.9	)		17.0

Cash provided by (used in) operating activities		35.2			(4.7	)

Investing Activities:
Purchases of property, plant and equipment		(52.3	)		(7.2	)
Asset disposals and other		(0.2	)		(0.6	)

Cash used in investing activities		(52.5	)		(7.8	)

Financing Activities:
Payments on long-term debt and capital leases		(1.9	)		(12.5	)
Borrowings on long-term debt		—			5.2
Net borrowings under credit facilities		0.3			1.5

Net decrease in debt		(1.6	)		(5.8	)
Exercises of stock options		16.9			4.5
Tax benefits on share-based compensation		8.3			—
Dividends paid		(9.9	)		(5.8	)

Cash provided by (used in) financing activities		13.7			(7.1	)

Decrease in cash and cash equivalents		(3.6	)		(19.6	)
Cash and cash equivalents at beginning of the year		362.7			250.8

Cash and cash equivalents at end of period	$	359.1		$	231.2

The accompanying notes are an integral part of these statements.

ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

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”, “ATI” and “the Company” refer to Allegheny Technologies Incorporated and its subsidiaries.

These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles 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 2005 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.

Note 2. Acquisitions

On June 1, 2004, a subsidiary of the Company acquired substantially all of the assets of J&L Specialty Steel, LLC (“J&L”), a producer of flat-rolled stainless steel products with operations in Midland, Pennsylvania and Louisville, Ohio, for $69 million in total consideration, including the assumption of certain current liabilities, and which is subject to final adjustment. The acquired operations were integrated into the Allegheny Ludlum operation, which is part of the Company’s Flat-Rolled Products business segment. The purchase price included payment of $7.5 million at closing, the issuance to the seller of a non-interest bearing $7.5 million promissory note that matured, and was paid, on June 1, 2005, and the issuance to the seller of a promissory note in the principal amount of $54 million, which is secured by the property, plant and equipment acquired, and which is subject to adjustment on the terms set forth in the asset purchase agreement and has a final maturity of July 1, 2011. The purchase price will be finalized upon agreement between buyer and seller regarding certain working capital adjustments.

Note 3. Inventories

Inventories at March 31, 2006 and December 31, 2005 were as follows (in millions):


	March 31,			December 31,
	2006			2005
Raw materials and supplies	$	136.9		$	111.1
Work-in-process		699.0			645.4
Finished goods		147.9			128.5

Total inventories at current cost		983.8			885.0

Less allowances to reduce current cost values to LIFO basis		(276.6	)		(269.7	)
Progress payments		(5.5	)		(8.2	)

Total inventories, net	$	701.7		$	607.1

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. Most of the Company’s inventory is valued utilizing the LIFO costing methodology. Inventory of the Company’s non-U.S. operations is valued using average cost or FIFO methods. The effect of using the LIFO methodology to value inventory, rather than FIFO, increased cost of sales by $6.9 million for the first three months of 2006 compared to $5.7 million for the first three months of 2005.

Note 4. Supplemental Financial Statement Information

Property, plant and equipment at March 31, 2006 and December 31, 2005 were as follows (in millions):


	March 31,			December 31,
	2006			2005
Land	$	23.6		$	23.5
Buildings		227.2			230.8
Equipment and leasehold improvements		1,586.1			1,580.1

		1,836.9			1,834.4
Accumulated depreciation and amortization		(1,094.0	)		(1,129.5	)

Total property, plant and equipment, net	$	742.9		$	704.9

Note 5. Debt

Debt at March 31, 2006 and December 31, 2005 was as follows (in millions):


	March 31,			December 31,
	2006			2005
Allegheny Technologies $300 million 8.375% Notes due 2011, net (a)	$	307.2		$	307.5
Allegheny Ludlum 6.95% debentures, due 2025		150.0			150.0
Promissory note for J&L asset acquisition		54.0			54.0
Domestic Bank Group $325 million secured credit agreement		—			—
Foreign credit agreements		22.8			23.7
Industrial revenue bonds, due through 2020		11.8			11.8
Capitalized leases and other		13.1			13.4

Total short-term and long-term debt		558.9			560.4
Short-term debt and current portion of long-term debt		(18.0	)		(13.4	)

Total long-term debt	$	540.9		$	547.0


(a)		Includes fair value adjustments for settled interest rate swap contracts of $11.8 million at March 31, 2006 and $12.2 million at December 31, 2005.

The Company has a $325 million senior secured domestic revolving credit facility (“the facility”), which is secured by all accounts receivable and inventory of its U.S. operations, and includes capacity for up to $175 million in letters of credit. As of March 31, 2006, there had been no borrowings made under the facility, although a portion of the facility is used to support approximately $93 million in letters of credit.

Note 6. Per Share Information

The following table sets forth the computation of basic and diluted net income per common share (in millions, except share and per share amounts):


	Three Months Ended
	March 31,
	2006		2005
Numerator for basic and diluted net income per common share — net income	$	102.5	$	61.0

Denominator:
Denominator for basic net income per common share-weighted average shares		98.7		95.4
Effect of dilutive securities:
Option equivalents		1.5		1.9
Contingently issuable shares		2.5		2.6

Denominator for diluted net income per common share – adjusted weighted average shares and assumed conversions		102.7		99.9

Basic net income per common share	$	1.04	$	0.64


Diluted net income per common share	$	1.00	$	0.61

For the quarter ended March 31, 2006, there were no weighted average shares issuable upon the exercise of stock options which were antidilutive. For the quarter ended March 31, 2005, 0.4 million weighted average shares issuable upon the exercise of stock options were antidilutive, and thus not included in the calculation.

Note 7. Comprehensive Income

The components of comprehensive income, net of tax, were as follows (in millions):


	Three Months Ended
	March 31,
	2006			2005
Net income	$	102.5		$	61.0

Foreign currency translation gains		3.7			0.4
Unrealized gains (losses) on energy, raw material and currency hedges, net of tax		(10.8	)		18.5

		(7.1	)		18.9

Comprehensive income	$	95.4		$	79.9

Note 8. Income Taxes

The first quarter 2006 includes a provision for income taxes of $57.7 million, or 36% of income before tax, for U.S. Federal, foreign and state income taxes. The first quarter 2005 included a provision of $2.3 million, or 3.6% of income before tax, principally related to foreign and state income taxes. Prior to the fourth quarter 2005, the Company maintained a valuation allowance for a major portion of its U.S. Federal deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, due to uncertainty regarding full utilization of the net deferred tax asset, including the 2003 and 2004 unutilized net operating losses.

Note 9. 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 most 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 three months ended March 31, 2006 and 2005, the components of pension expense for the Company’s defined benefit plans and components of other postretirement benefit expense included the following (in millions):


	Three Months Ended
	March 31,
	2006			2005
Pension Benefits:
Service cost — benefits earned during the year	$	7.1		$	7.0
Interest cost on benefits earned in prior years		32.1			31.4
Expected return on plan assets		(40.6	)		(38.4	)
Amortization of prior service cost		4.8			5.4
Amortization of net actuarial loss		12.6			10.5

Total pension expense	$	16.0		$	15.9


	Three Months Ended
	March 31,
	2006			2005
Other Postretirement Benefits:
Service cost — benefits earned during the year	$	0.7		$	0.8
Interest cost on benefits earned in prior years		8.1			8.1
Expected return on plan assets		(1.6	)		(2.0	)
Amortization of prior service cost		(6.6	)		(6.6	)
Amortization of net actuarial loss		4.0			4.0

Total other postretirement benefit expense	$	4.6		$	4.3

Total retirement benefit expense	$	20.6		$	20.2

Note 10. 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,
	2006			2005
Total sales:
High-Performance Metals	$	431.3		$	279.2
Flat-Rolled Products		538.8			530.2
Engineered Products		115.1			97.1

		1,085.2			906.5
Intersegment sales:
High-Performance Metals		19.2			16.5
Flat-Rolled Products		21.6			5.3
Engineered Products		3.9			5.1

		44.7			26.9
Sales to external customers:
High-Performance Metals		412.1			262.7
Flat-Rolled Products		517.2			524.9
Engineered Products		111.2			92.0

	$	1,040.5		$	879.6


Operating profit:
High-Performance Metals	$	142.7		$	63.5
Flat-Rolled Products		48.0			39.2
Engineered Products		17.6			11.2

Total operating profit		208.3			113.9

Corporate expenses		(13.9	)		(10.3	)
Interest expense, net		(7.5	)		(10.4	)
Other expense, net of gains on asset sales		(6.1	)		(9.7	)
Retirement benefit expense		(20.6	)		(20.2	)

Income before income taxes	$	160.2		$	63.3

Retirement benefit expense represents pension expense and other postretirement benefit expense. Operating profit with respect to the Company’s business segments excludes any retirement benefit expense.

Corporate expenses for the first three months of 2006 were $13.9 million, compared to $10.3 million for the first three months of 2005. This increase is due primarily to expenses associated with annual and long-term performance-based incentive compensation programs.

Other expense, net of gains on asset sales, includes charges incurred in connection with closed operations, pretax gains and losses on the sale of surplus real estate and other assets, and other non-operating income or expense. These items are presented primarily in selling and administrative expenses and in other expense in the statement of income. These items resulted in net charges of $6.1 million for the first three months of 2006 and $9.7 million for the first three months of 2005. Other expense for the first three months of 2005 includes litigation expense of $5.3 million relating to an unfavorable court judgment concerning a commercial dispute with a raw materials supplier.

Note 11. 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 11 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.

Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
March 31, 2006


		Guarantor				Non-guarantor
(In millions)		Parent		Subsidiary		Subsidiaries		Eliminations			Consolidated

Assets:
Cash and cash equivalents		$	0.8	$	34.3	$	324.0	$	—		$	359.1
Accounts receivable, net			0.5		199.2		312.5		—			512.2
Inventories, net			—		281.8		419.9		—			701.7
Deferred income taxes			27.7		—		—		—			27.7
Prepaid expenses and other current assets			0.9		6.1		27.3		—			34.3

Total current assets			29.9		521.4		1,083.7		—			1,635.0
Property, plant and equipment, net			0.1		298.0		444.8		—			742.9
Cost in excess of net assets acquired			—		112.1		88.5		—			200.6
Deferred income taxes			156.9		—		—		—			156.9
Deferred pension asset			100.6		—		—		—			100.6
Investments in subsidiaries and other assets			2,205.5		714.7		839.5		(3,671.6	)		88.1

Total assets	&n