ALLEGHENY TECHNOLOGIES INC.

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, 2007


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 27, 2007, the registrant had outstanding 102,151,601 shares of its Common Stock.

ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 2007

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		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		26

Item 4. Controls and Procedures		26

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		27

Item 6. Exhibits		27

SIGNATURES		28

EXHIBIT INDEX		29
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
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,
	2007			2006
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents	$	518.0		$	502.3
Accounts receivable, net		686.8			610.9
Inventories, net		954.7			798.7
Deferred income taxes		13.3			26.6
Prepaid expenses and other current assets		63.1			49.4

Total Current Assets		2,235.9			1,987.9

Property, plant and equipment, net		909.1			871.7
Cost in excess of net assets acquired		208.5			206.5
Deferred income taxes		116.1			119.0
Other assets		114.4			95.4

Total Assets	$	3,584.0		$	3,280.5

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	442.1		$	355.1
Accrued liabilities		225.9			241.6
Accrued income taxes		86.7			22.7
Short-term debt and current portion of long-term debt		20.7			23.7

Total Current Liabilities		775.4			643.1

Long-term debt		522.1			529.9
Retirement benefits		447.5			464.4
Other long-term liabilities		147.1			140.2

Total Liabilities		1,892.1			1,777.6

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-102,404,256 shares at March 31, 2007 and 101,201,411 at December 31, 2006; outstanding-102,142,517 shares at March 31, 2007 and 101,201,328 shares at December 31, 2006		10.2			10.1
Additional paid-in capital		650.0			637.0
Retained earnings		1,335.8			1,166.6
Treasury stock: 261,739 shares at March 31, 2007 and 83 shares at December 31, 2006		(25.9	)		—
Accumulated other comprehensive loss, net of tax		(278.2	)		(310.8	)

Total Stockholders’ Equity		1,691.9			1,502.9

Total Liabilities and Stockholders’ Equity	$	3,584.0		$	3,280.5

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,
	2007			2006
Sales	$	1,372.6		$	1,040.5

Costs and expenses:
Cost of sales		986.1			792.4
Selling and administrative expenses		78.1			72.9

Income before interest, other income (expense), and income taxes		308.4			175.2

Interest expense, net		(4.3	)		(7.5	)
Other income (expense)		0.5			(1.3	)


Income before income tax provision		304.6			166.4

Income tax provision		106.8			59.9

Net income	$	197.8		$	106.5


Basic net income per common share	$	1.95		$	1.08


Diluted net income per common share	$	1.92		$	1.04


Dividends declared per common share	$	0.13		$	0.10

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,
	2007			2006
Operating Activities:
Net income	$	197.8		$	106.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23.6			19.3
Deferred income taxes		14.2			0.3
Change in operating assets and liabilities:
Inventories		(156.0	)		(94.6	)
Accounts payable		87.0			55.2
Accounts receivable		(75.9	)		(70.1	)
Accrued income taxes, net of tax benefits on share-based compensation		64.0			31.1
Retirement benefits		0.1			12.2
Accrued liabilities and other		(80.1	)		(23.9	)

Cash provided by operating activities		74.7			36.0

Investing Activities:
Purchases of property, plant and equipment		(57.7	)		(53.1	)
Asset disposals and other		—			(0.2	)

Cash used in investing activities		(57.7	)		(53.3	)

Financing Activities:
Payments on long-term debt and capital leases		(5.7	)		(1.9	)
Net borrowings (repayments) under credit facilities		(5.3	)		0.3

Net decrease in debt		(11.0	)		(1.6	)
Exercises of stock options		3.7			16.9
Tax benefits on share-based compensation		19.2			8.3
Dividends paid		(13.2	)		(9.9	)

Cash provided by (used in) financing activities		(1.3	)		13.7


Increase (decrease) in cash and cash equivalents		15.7			(3.6	)
Cash and cash equivalents at beginning of the year		502.3			362.7

Cash and cash equivalents at end of period	$	518.0		$	359.1

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 2006 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.

Recent Accounting Pronouncements

In the 2007 first quarter, as required, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) titled “Accounting for Planned Major Maintenance Activities” (“FSP PMMA”). This FSP amends an AICPA Industry Audit guide and is applicable to all industries that accrue for planned major maintenance activities. The FSP PMMA prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities, which was the policy the Company previously used to record planned plant outage costs on an interim basis within a fiscal year, and also to record the costs of major equipment rebuilds which extend the life of capital equipment. The FSP PMMA was effective as of the beginning of ATI’s 2007 fiscal year, with retrospective application to all prior periods presented. Under the FSP PMMA, the Company reports results using the deferral method whereby major equipment rebuilds are capitalized as costs are incurred and amortized to expense over the estimated useful lives, and planned plant outage costs are fully recognized in the interim period of the outage. The adoption of the FSP PMMA on January 1, 2007, resulted in an increase in net property, plant and equipment of $4.1 million, a decrease in non-current deferred income tax assets of $5.8 million, a decrease in accrued liabilities of $2.4 million, a decrease in long-term liabilities of $9.6 million, and an increase to retained earnings of $10.3 million, net of related taxes. As required by the FSP PMMA, the Company’s financial statements have been restated to reflect this FSP as if this standard had been applied to the earliest period presented. As a result, net income for the three months ended March 31, 2006 increased $4.0 million, or $0.04 per share.

In the 2007 first quarter, as required, the Company also adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes recognition and measurement standards for a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with FIN 48 is a two step process. The first step is the determination of whether a tax position should be recognized in the financial statements. Under FIN 48, a tax position taken or expected to be taken in a tax return is to be recognized only if the Company determines that it is more-likely-than-not that the tax position will be sustained upon examination by the tax authorities based upon the technical merits of the position. In step two, for those tax positions which should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. FIN 48 was effective for the beginning of ATI’s 2007 fiscal year, with adoption treated as a cumulative-effect type reduction to retained earnings of $5.6 million as of the beginning of 2007. Upon adoption of FIN 48, the Company made an accounting policy election to classify interest and penalties on estimated liabilities for uncertain tax positions as components of the provision for income taxes.

Note 2. Inventories

Inventories at March 31, 2007 and December 31, 2006 were as follows (in millions):


	March 31,			December 31,
	2007			2006
Raw materials and supplies	$	241.4		$	190.7
Work-in-process		1,042.2			931.7
Finished goods		163.0			148.0

Total inventories at current cost		1,446.6			1,270.4
Less allowances to reduce current cost values to LIFO basis		(487.6	)		(466.7	)
Progress payments		(4.3	)		(5.0	)

Total inventories, net	$	954.7		$	798.7

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 $20.9 million for the first three months of 2007 compared to $6.9 million for the first three months of 2006.

Note 3. Supplemental Financial Statement Information

Property, plant and equipment at March 31, 2007 and December 31, 2006 were as follows (in millions):


	March 31,			December 31,
	2007			2006
Land	$	24.1		$	23.9
Buildings		244.3			242.1
Equipment and leasehold improvements		1,744.2			1,690.3

		2,012.6			1,956.3
Accumulated depreciation and amortization		(1,103.5	)		(1,084.6	)

Total property, plant and equipment, net	$	909.1		$	871.7

Note 4. Debt

Debt at March 31, 2007 and December 31, 2006 was as follows (in millions):


	March 31,			December 31,
	2007			2006
Allegheny Technologies $300 million 8.375% Notes due 2011, net (a)	$	306.2		$	306.5
Allegheny Ludlum 6.95% debentures, due 2025		150.0			150.0
Domestic Bank Group $325 million secured credit agreement		—			—
Promissory note for J&L asset acquisition		48.8			54.0
Foreign credit agreements		19.4			24.2
Industrial revenue bonds, due through 2020		10.9			10.9
Capitalized leases and other		7.5			8.0

Total short-term and long-term debt		542.8			553.6
Short-term debt and current portion of long-term debt		(20.7	)		(23.7	)

Total long-term debt	$	522.1		$	529.9


(a)		Includes fair value adjustments for settled interest rate swap contracts of $10.1 million at March 31, 2007 and $10.5 million at December 31, 2006.

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, 2007, there had been no borrowings made under the facility, although a portion of the facility is used to support approximately $89 million in letters of credit.

In addition, STAL, the Company’s Chinese joint venture company in which ATI has a 60% interest, has approximately $17 million in letters of credit outstanding as of March 31, 2007, related to the expansion of its operations in Shanghai, China. These letters of credit are supported solely by STAL’s financial capability without any guarantees from the joint venture partners.

Note 5. 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,
	2007		2006
Numerator for basic and diluted net income per common share — net income	$	197.8	$	106.5


Denominator:
Denominator for basic net income per common share-weighted average shares		101.4		98.7
Effect of dilutive securities:
Option equivalents		0.7		1.5
Contingently issuable shares		0.7		2.5

Denominator for diluted net income per common share — adjusted weighted average shares and assumed conversions		102.8		102.7

Basic net income per common share	$	1.95	$	1.08


Diluted net income per common share	$	1.92	$	1.04

For the quarters ended March 31, 2007 and 2006, there were no weighted average shares issuable upon the exercise of stock options which were antidilutive.

Note 6. Comprehensive Income

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


	Three Months Ended
	March 31,
	2007		2006
Net income	$	197.8	$	106.5

Foreign currency translation gains		8.0		3.7
Unrealized gains (losses) on energy, raw material and currency hedges		11.6		(10.8	)
Retirement benefits		12.6		—
Unrealized gains on securities		0.4		—

		32.6		(7.1	)

Comprehensive income	$	230.4	$	99.4

Note 7. Income Taxes

Results for the first quarter 2007 included a provision for income taxes of $106.8 million, or 35.1% of income before tax, compared to an income tax provision of $59.9 million, or 36.0% of income before tax, for the comparable 2006 quarter. The first quarter 2007 benefited from a lower income tax provision due to a $4.2 million non-recurring reduction in the valuation allowances associated with state deferred tax assets.

As required, the Company adopted FIN 48 on January 1, 2007. As a result of implementing this Interpretation, the Company recognized a $19.4 million increase in the long-term liability for unrecognized tax benefits, and a $13.8 million increase in deferred tax assets for tax positions which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The net result of these recognized assets and liabilities was a reduction to beginning retained earnings of $5.6 million. Including liabilities recognized in the FIN 48 adoption, the Company’s total liabilities for unrecognized tax benefits at January 1, 2007 were $26.3 million. Interest and penalties recognized at the FIN 48 adoption were $3.5 million. It is the Company’s policy to classify interest and penalties recognized on underpayment of income taxes as income tax expense. For the quarter ended March 31, 2007, the Company’s income tax provision included an additional $2.3 million of expense related to uncertain tax positions, which increased the long-term liability to $28.6 million.

Including tax positions for which the Company determined that the tax position would not meet the more-likely-than-not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect the Company’s effective tax rate was approximately $12 million. At this time, the Company does not believe that it is reasonably possible that there will be a material change in the estimated unrecognized tax benefits within the next twelve months.

The Company, and/or one of its subsidiaries, files income tax returns in the U.S. Federal jurisdiction and in various states and foreign jurisdictions. A summary of tax years that remain subject to examination, by major tax jurisdiction, is as follows:


	Earliest Year
	Open to
Jurisdiction	Examination
U.S. Federal		2003
States:
Pennsylvania		2003
North Carolina		2001
Texas		2002
Foreign:
Germany		2000
United Kingdom		2005

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 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, 2007 and 2006, 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,
	2007			2006
Pension Benefits:
Service cost — benefits earned during the year	$	6.9		$	7.1
Interest cost on benefits earned in prior years		31.9			32.1
Expected return on plan assets		(46.7	)		(40.6	)
Amortization of prior service cost		4.4			4.8
Amortization of net actuarial loss		7.8			12.6

Total pension expense	$	4.3		$	16.0


	Three Months Ended
	March 31,
	2007			2006
Other Postretirement Benefits:
Service cost — benefits earned during the year	$	0.8		$	0.7
Interest cost on benefits earned in prior years		7.7			8.1
Expected return on plan assets		(1.8	)		(1.6	)
Amortization of prior service cost (credit)		(6.2	)		(6.6	)
Amortization of net actuarial loss		2.8			4.0

Total other postretirement benefit expense	$	3.3		$	4.6

Total retirement benefit expense	$	7.6		$	20.6

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,
	2007			2006
Total sales:
High Performance Metals	$	518.7		$	431.3
Flat-Rolled Products		810.7			538.8
Engineered Products		117.8			115.1

		1,447.2			1,085.2

Intersegment sales:
High Performance Metals		41.3			19.2
Flat-Rolled Products		27.0			21.6
Engineered Products		6.3			3.9

		74.6			44.7

Sales to external customers:
High Performance Metals		477.4			412.1
Flat-Rolled Products		783.7			517.2
Engineered Products		111.5			111.2

	$	1,372.6		$	1,040.5


Operating profit:
High Performance Metals	$	167.5		$	145.2
Flat-Rolled Products		160.2			51.5
Engineered Products		12.6			17.8

Total operating profit		340.3			214.5

Corporate expenses		(21.0	)		(13.9	)
Interest expense, net		(4.3	)		(7.5	)
Other expense, net of gains on asset sales		(2.8	)		(6.1	)
Retirement benefit expense		(7.6	)		(20.6	)

Income before income taxes	$	304.6		$	166.4

The adoption of FSP PMMA on January 1, 2007 resulted in restating prior periods as if this standard had been applied to the earliest period presented. For the quarter ended March 31, 2006, the restatement had the following effect on operating profit by business segment: High Performance Metals increased $2.5 million, Flat-Rolled Products increased $3.5 million, and Engineered Products increased $0.2 million. Segment operating profit and income before income taxes for the quarter ended March 31, 2006 increased $6.2 million.

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.

In March 2007, the Company reached early resolution on new labor agreements for ATI Allegheny Ludlum and ATI’s Allvac Albany, OR employees. Operating profit for the High Performance Metals and Flat-Rolled Products segments was negatively impacted by $0.7 million and $5.9 million, respectively, of pre-tax, one-time costs related to the new labor agreements.

Corporate expenses for the first three months of 2007 were $21.0 million, compared to $13.9 million for the first three months of 2006. 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 $2.8 million for the first three months of 2007 and $6.1 million for the first three months of 2006.

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 “Subs