UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 1-12001
ALLEGHENY TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 25-1792394
------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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)
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Indicate by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934).
Yes (X) No ( )
At July 28, 2004, including the effects of the July 2004 common stock offering
of 13,800,000 shares, the registrant had outstanding 95,282,975 shares of its
Common Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED JUNE 30, 2004
INDEX
Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 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 26
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 44
Item 4. Controls and Procedures 46
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of
Security Holders 47
Item 6. Exhibits and Reports on Form 8-K 47
SIGNATURES 49
EXHIBIT INDEX 50
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
June 30, December 31,
2004 2003
---- ----
(Unaudited) (Audited)
ASSETS
Cash and cash equivalents $ 64.0 $ 79.6
Accounts receivable, net 337.8 248.8
Inventories, net 451.1 359.7
Income tax refunds 0.3 7.2
Prepaid expenses and other current assets 33.9 48.0
------------ ------------
Total Current Assets 887.1 743.3
Property, plant and equipment, net 733.4 711.1
Cost in excess of net assets acquired 201.3 198.4
Deferred pension asset 144.0 144.0
Deferred income taxes 34.3 34.3
Other assets 58.5 53.8
------------ ------------
TOTAL ASSETS $ 2,058.6 $ 1,884.9
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 245.5 $ 172.3
Accrued liabilities 211.9 194.6
Short-term debt and current portion
of long-term debt 35.9 27.8
------------ ------------
Total Current Liabilities 493.3 394.7
Long-term debt 551.6 504.3
Accrued postretirement benefits 476.2 507.2
Pension liabilities 281.4 220.6
Other long-term liabilities 106.4 83.4
------------ ------------
TOTAL LIABILITIES 1,908.9 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 June 30, 2004 and December 31, 2003;
outstanding-81,381,624 shares at June 30, 2004 and 80,654,861 shares
at December 31, 2003 9.9 9.9
Additional paid-in capital 481.2 481.2
Retained earnings 438.9 483.8
Treasury stock: 17,569,866 shares at
June 30, 2004 and 18,296,629 shares
at December 31, 2003 (440.1) (458.4)
Accumulated other comprehensive
loss, net of tax (340.2) (341.8)
------------ ------------
Total Stockholders' Equity 149.7 174.7
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,058.6 $ 1,884.9
============ ============
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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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Sales $ 646.5 $ 489.9 $ 1,224.3 $ 970.4
Costs and expenses:
Cost of sales 593.9 469.1 1,161.3 935.0
Selling and administrative
expenses 57.8 53.4 111.5 101.1
Curtailment gain, net of
restructuring costs (40.4) -- (40.4) --
--------- --------- --------- ---------
Income (loss) before interest,
other income, and income taxes 35.2 (32.6) (8.1) (65.7)
Interest expense, net 7.8 8.4 16.0 15.8
Other income (expense) (0.8) 0.2 0.3 0.7
--------- --------- --------- ---------
Income (loss) before income tax
benefit and cumulative effect of
change in accounting principle 26.6 (40.8) (23.8) (80.8)
Income tax benefit -- (14.8) -- (29.0)
--------- --------- --------- ---------
Net income (loss) before cumulative
effect of change in accounting
principle 26.6 (26.0) (23.8) (51.8)
Cumulative effect of change in
accounting principle, net of tax -- -- -- (1.3)
--------- --------- --------- ---------
Net income (loss) $ 26.6 $ (26.0) $ (23.8) $ (53.1)
========= ========= ========= =========
Basic net income (loss) per
common share before cumulative
effect of change in accounting
principle $ 0.33 $ (0.32) $ (0.30) $ (0.64)
Cumulative effect of change in
accounting principle, net of tax -- -- -- (0.02)
--------- --------- --------- ---------
Basic net income (loss) per common
share $ 0.33 $ (0.32) $ (0.30) $ (0.66)
========= ========= ========= =========
Diluted net income (loss) per
common share before cumulative
effect of change in accounting
principle $ 0.31 $ (0.32) $ (0.30) $ (0.64)
Cumulative effect of change in
accounting principle, net of tax -- -- -- (0.02)
Diluted net income (loss) per --------- --------- --------- ---------
common share $ 0.31 $ (0.32) $ (0.30) $ (0.66)
========= ========= ========= =========
Dividends declared per common share $ 0.06 $ 0.06 $ 0.12 $ 0.12
========= ========= ========= =========
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The accompanying notes are an integral part of these statements.
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (23.8) $ (53.1)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of change in accounting principle - 1.3
Depreciation and amortization 37.9 37.1
Non-cash curtailment gain and restructuring
charges, net (45.6) -
Deferred income taxes - (26.0)
Capital (gains) losses on sale of PP&E (1.4) (0.8)
Change in operating assets and liabilities:
Accounts receivable (56.9) (35.6)
Accounts payable 56.9 3.8
Pension assets and liabilities 34.8 43.9
Inventories (33.5) (7.6)
Income tax refunds receivable 6.9 48.5
Accrued liabilities and other 46.3 5.6
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 21.6 17.1
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (25.2) (28.8)
Purchases of businesses and investment in ventures (7.5) (0.8)
Asset disposals and other 1.0 7.5
----------- -----------
CASH USED IN INVESTING ACTIVITIES (31.7) (22.1)
FINANCING ACTIVITIES:
Payments on long-term debt and capital leases (14.3) (1.9)
Borrowings on long-term debt 10.7 9.2
Net borrowings (repayments) under credit facilities 0.4 (1.1)
----------- -----------
Net increase (decrease) in debt (3.2) 6.2
Exercises of stock options 2.6 -
Dividends paid (4.9) (9.7)
Proceeds from interest rate swap settlement - 15.3
----------- -----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5.5) 11.8
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15.6) 6.8
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 79.6 59.4
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64.0 $ 66.2
=========== ===========
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SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
On June 1, 2004, a subsidiary of the Company acquired substantially all of the
assets of J&L Specialty Steel, LLC for consideration of $67.2 million. Cash paid
at closing was $7.5 million, with promissory notes payable to the seller of
$59.7 million, one of which is subject to adjustment on the terms set forth in
the asset purchase agreement.
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 income (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 Six Months Ended
June 30, June 30,
------------------------ -----------------------
2004 2003 2004 2003
------ ------ ------ ------
(unaudited) (unaudited)
Net income (loss) as reported $ 26.6 $(26.0) $(23.8) $(53.1)
Add: Stock-based compensation
expense included in net income (loss), net of
tax 8.9 0.7 10.1 1.0
Deduct: Net impact of SFAS 123,
net of tax (9.7) (1.5) (12.1) (2.6)
------ ------ ------ ------
Pro forma net income (loss) $ 25.8 $(26.8) $(25.8) $(54.7)
====== ====== ====== ======
Net income (loss) per common share:
Basic - as reported $ 0.33 $(0.32) $(0.30) $(0.66)
Basic - pro forma $ 0.32 $(0.33) $(0.33) $(0.68)
Diluted - as reported $ 0.31 $(0.32) $(0.30) $(0.66)
Diluted - pro forma $ 0.30 $(0.33) $(0.33) $(0.68)
|
Recent Accounting Pronouncement
On May 19, 2004 the Financial Accounting Standards Board issued FASB Staff
Position (FSP) 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" that
provides guidance on the accounting for the effects of the Act for employers
that sponsor postretirement health care plans that provide drug benefits. The
Act provides the opportunity for a retiree to obtain a prescription drug benefit
under Medicare, or for a Federal subsidy, with tax-free payments commencing in
2006, to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to the benefit established by law. Under
FSP 106-2, the effect of the Federal subsidy shall be accounted for as an
actuarial experience gain. In addition, the effect of the Act is taken into
consideration, as appropriate, in determining an employer's future per capita
claims cost. Based upon estimates from the Company's actuaries, it is expected
that the effect of the Act will result in a reduction in the Accumulated Other
Postretirement Benefits obligation of $46 million. The effect of adopting FSP
106-2 on postretirement benefits expense will be recognized commencing in the
2004 third quarter.
NOTE 2. J&L SPECIALTY STEEL, LLC ASSET ACQUISITION
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. Consideration for the acquisition of $67.2 million consisted
of a payment of $7.5 million at closing, the issuance to the seller of a
non-interest bearing $7.5 million promissory note that matures on June 1, 2005,
the issuance to the seller of a promissory note in the principal amount of $52.2
million, which is secured by the J&L 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, and the assumption of
certain current liabilities. The transaction was accounted for as a purchase
business combination. The acquired operations are being integrated into the
Allegheny Ludlum operation which is part of the Company's Flat-Rolled Products
business segment.
The closing of the acquisition followed the ratification, on May 28, 2004,
of a new labor agreement by the United Steelworkers of America ("USWA")
represented employees at the Company's Allegheny Ludlum subsidiary and at the
former J&L facilities. The new labor agreement expires in June 2007, and
provides for a workforce restructuring through the reduction in the number of
production and maintenance job grades from 34 to five, and the implementation of
flexible work rules. The number of production and maintenance employees at the
pre-acquisition Allegheny Ludlum facilities will be reduced by 650 employees
through an early retirement program over the next two and a half years pursuant
to which the USWA-represented employees are being offered Transition Assistance
Program ("TAP") incentives, to be paid from the Company's defined benefit
pension trust. The new labor agreement also includes a cap on the Company's
retiree medical costs. In the 2004 second quarter, the Company recorded charges
of $25.4 million for the TAP incentives, and also recorded a $5.7 million charge
as a result of other costs associated with the new labor agreement and the J&L
asset acquisition.
The following is a summary of the preliminary purchase price allocation of
the assets acquired and liabilities assumed or recognized in conjunction with
the acquisition based upon their estimated fair market values.
Allocated
Purchase Price
--------------
(in millions)
(unaudited)
Acquired assets:
Accounts receivable $ 32.1
Inventory 57.9
Property, plant and equipment 31.1
Other assets 2.0
------
Total assets 123.1
Assumed liabilities:
Accounts payable 16.3
Accrued current liabilities 9.6
Short term debt 2.4
Long-term debt 2.1
Other post-employment benefits 21.9
Other long-term liabilities 3.6
------
Total liabilities 55.9
------
Purchase price - net assets acquired $ 67.2
======
|
Under the terms of the asset purchase agreement, the final purchase price of the
J&L asset acquisition is subject to adjustment based upon an audit of the net
working capital acquired. This adjustment is expected to be finalized in the
2004 fourth quarter. In the 2003 fourth quarter, J&L recorded a $242 million
asset impairment charge to write off the entire value of its property, plant and
equipment. The purchase price of the J&L asset acquisition is based on the net
working capital acquired, and the fair value of the net assets acquired is in
excess of the purchase price. In accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), the excess
of fair value over the purchase price represents negative goodwill, which has
been allocated as a pro rata reduction to the amounts that would otherwise have
been assigned to the acquired noncurrent assets, principally property, plant and
equipment.
The following unaudited pro forma financial information for the Company
includes the results of operations of the J&L asset acquisition as if it had
been consummated as of the beginning of the periods presented, including the
effects of the new labor agreement as it pertains to the former J&L facilities,
the effects of the assigned fair value under SFAS 141 of property, plant and
equipment acquired, and the effects of the indebtedness incurred to fund the
asset acquisition. In addition, the unaudited pro forma financial information is
based on historical information and does not purport to represent what the
actual consolidated results of operations of the Company would have been had
these transactions occurred on the dates assumed, nor is it necessarily
indicative of future consolidated results of operations. The unaudited pro forma
financial information does not give affect to additional cost savings and
synergies that the Company anticipates achieving following the acquisition.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
(In millions, except per share data) 2004 2003 2004 2003
(unaudited) ------ ------ -------- --------
Sales $721.3 $599.0 $1,427.4 $1,192.6
Net income (loss) before cumulative effect of
change in accounting principle 28.2 (33.2) (15.8) (59.1)
Net income (loss) 28.2 (33.2) (15.8) (60.4)
Basic net income (loss) per common share before
cumulative effect of change in accounting
principle 0.35 (0.41) (0.20) (0.73)
Basic net income (loss) per common share 0.35 (0.41) (0.20) (0.75)
Diluted net income (loss) per common share
before cumulative effect of change in
accounting principle 0.33 (0.41) (0.20) (0.73)
Diluted net income (loss) per common share 0.33 (0.41) (0.20) (0.75)
|
NOTE 3. INVENTORIES
Inventories at June 30, 2004 and December 31, 2003 were as follows (in
millions):
June 30, December 31,
2004 2003
------------ ------------
(unaudited) (audited)
Raw materials and supplies $ 50.5 $ 37.5
Work-in-process 504.1 356.2
Finished goods 92.2 84.9
------------ ------------
Total inventories at current cost 646.8 478.6
Less allowances to reduce current cost
values to LIFO basis (185.9) (111.7)
Progress payments (9.8) (7.2)
------------ ------------
Total inventories, net $ 451.1 $ 359.7
============ ============
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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. Cost of sales expense was $26.1 million higher for
the 2004 second quarter and $74.2 million higher for the 2004 first half than
would have been recognized if FIFO, rather than LIFO, methodology were utilized
to value inventory. Cost of sales expense was $9.3 million higher for the 2003
second quarter and $12.3 million higher for the 2003 first half than would have
been recognized if FIFO, rather than LIFO, methodology were utilized to value
inventory.
In the quarter ended June 30, 2004, the Company changed its method of calculating
LIFO inventories at its Allegheny Ludlum subsidiary by reducing the overall
number of Company-wide inventory pools from 15 to eight, and by changing its
calculation method for LIFO from the double-extension method to the link-chain
method. The Company made the change in order to better match costs with revenues,
to reflect the business structure of Allegheny Ludlum following the J&L
asset acquisition, to provide for a LIFO adjustment more representative of
Allegheny Ludlum's actual inflation on its inventories and to conform LIFO
accounting methods with other ATI operations that use the LIFO inventory method.
The cumulative effect of the change in methods and the pro forma effects of
the change on prior years' results of operations were not determinable. The
effect of the change on the results of operations for interim 2004 periods
was not material.
NOTE 4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Property, plant and equipment at June 30, 2004 and December 31, 2003 were
as follows (in millions):
June 30, December 31,
2004 2003
--------- -----------
(unaudited) (audited)
Land $ 26.4 $ 26.3
Buildings 229.2 228.2
Equipment and leasehold improvements 1,545.9 1,494.0
--------- -----------
1,801.5 1,748.5
Accumulated depreciation and amortization (1,068.1) (1,037.4)
--------- -----------
Total property, plant and equipment, net $ 733.4 $ 711.1
========= ===========
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NOTE 5. DEBT
Debt at June 30, 2004 and December 31, 2003 was as follows (in millions):
June 30, December 31,
2004 2003
--------------- -----------------
(unaudited) (audited)
Allegheny Technologies $300 million
8.375% Notes due 2011, net (a) $ 303.4 $ 309.4
Allegheny Ludlum 6.95% debentures, due 2025 150.0 150.0
Promissory notes for J&L asset acquisition 59.7 -
Foreign credit agreements 44.3 35.0
Industrial revenue bonds, due through 2007 13.8 20.1
Capitalized leases and other 16.3 17.6
--------------- -----------------
587.5 532.1
Short-term debt and current portion of long-term debt (35.9) (27.8)
--------------- -----------------
Total long-term debt $ 551.6 $ 504.3
=============== =================
|
(a) Includes fair value adjustments for interest rate swap contracts of
$9.0 million (including ($4.0) million for interest rate swap contracts currently
outstanding and $13.0 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 June 30, 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, the
Company 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 first
six months of 2003, the Company terminated the majority of these interest rate
swap contracts and received $15.3 million in cash. The gain on settlement remains
a component of the reported balance of the Notes ($303.4 million at June 30,
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 seven and one half 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.
The Company has 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 its U.S. operations,
and includes capacity for up to $175 million in letters of credit. There were
no borrowings under the domestic credit facilities during the first six months
of 2004, or during all of 2003, although a portion of the facility is used
to support letters of credit.
Promissory notes totaling $59.7 million were issued in June 2004 as part
of the consideration for the J&L asset acquisition. These notes included
a non-interest bearing $7.5 million promissory note payable on June 1, 2005,
and a $52.2 million promissory note, secured by the J&L property, plant
and equipment acquired, which is subject to adjustment on the terms set forth
in the J&L asset purchase agreement, payable to the seller in installments
in 2007 through 2011, which bears interest at a London Interbank Offered Rate
plus a 1% margin, with a maximum interest rate of 6%.
NOTE 6. PER SHARE INFORMATION
The following table sets forth the computation of basic and diluted net
income (loss) per common share (in millions, except share and per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
-------- ------ ------ ------
(unaudited) (unaudited)
Numerator:
Net income (loss) per common share
before cumulative effect of
change in accounting principle $ 26.6 $(26.0) $(23.8) $(51.8)
Cumulative effect of change in
accounting principle, net of tax -- -- -- (1.3)
------ ------ ------ ------
Numerator for basic and diluted
net income (loss) per common
share - Net income (loss) $ 26.6 $(26.0) $(23.8) $(53.1)
====== ====== ====== ======
Denominator:
Denominator for basic earnings
per share-weighted average shares 80.6 81.0 80.5 80.8
Effect of dilutive securities:
Option equivalents 1.4 -- -- --
Contingently issuable shares 2.6 -- -- --
------ ------ ------ ------
Denominator for diluted net
income(loss) per common share -
adjusted weighted average
shares and assumed conversions 84.6 81.0 80.5 80.8
====== ====== ====== ======
Basic net income (loss) per common
share before cumulative effect
of change in accounting principal $ 0.33 $(0.32) $(0.30) $(0.64)
Cumulative effect of change in
accounting principle, net of tax -- -- -- (0.02)
------ ------ ------ ------
Basic net income (loss) per common
share $ 0.33 $(0.32) $(0.30) $(0.66)
====== ====== ====== ======
Diluted net income (loss) per
common share before cumulative
effect of change in accounting principal $ 0.31 $(0.32) $(0.30) $(0.64)
Cumulative effect of change in
accounting principle, net of tax -- -- -- (0.02)
------ ------ ------ ------
Diluted net income (loss) per
common share $ 0.31 $(0.32) $(0.30) $(0.66)
====== ====== ====== ======
|
For the six months ended June 30, 2004 and both of the comparable 2003 periods,
the effects of stock options were antidilutive and thus not included in the
calculation of diluted earnings per share.
NOTE 7. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, were as follows
(in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2004 2003 2004 2003
-------- ------- -------- --------
(unaudited) (unaudited)
Net income (loss) $ 26.6 $ (26.0) $ (23.8) $ (53.1)
-------- ------- -------- --------
Foreign currency translation gain (loss) (14.4) 3.1 5.1 7.6
Unrealized gains (losses) on energy, raw
materials and currency hedges, net of tax 4.4 (2.1) (3.5) (2.1)
-------- ------- -------- --------
(10.0) 1.0 1.6 5.5
-------- ------- -------- --------
Comprehensive income (loss) $ 16.6 $ (25.0) $ (22.2) $ (47.6)
======== ======= ======== ========
|
NOTE 8. INCOME TAXES
The three months and six months ended June 2004 results do not include an
income tax provision or benefit due to the uncertainty regarding full utilization
of the Company's net deferred tax assets as a result of cumulative losses
recorded in the 2001 through 2003 period. The Company is required to maintain
a valuation allowance, as recorded in accordance with SFAS No. 109, "Accounting
for Income Taxes", 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 $14.8 million and $29.0 million in the 2003 second quarter and
first six months 2003, respectively. The effective tax rate was a benefit
of 36.3% and 35.9% for the 2003 second quarter and first six months 2003,
respectively.
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 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.
In the 2004 second quarter in conjunction with the new labor agreement at
ATI's Allegheny Ludlum operation, a $25.4 million charge for pension termination
benefits was recognized for the TAPs. The TAP incentive will be paid from
the Company's pension fund over the next two and a half years to 650 employees.
The new labor contract also includes caps on the Company's retiree medical
benefit costs.
Also in the 2004 second quarter, the Company modified retiree medical benefits
for certain non-collectively bargained employees to cap the Company's cost
of benefits, beginning in 2005, and then eliminate the benefits in 2010. As
a result of these actions, a $71.5 million curtailment and settlement gain
was recognized in the 2004 second quarter, comprised of a $72.0 million one-time
reduction of postretirement benefit expense, net of a $0.5 million charge
to pension expense.
The Accumulated Other Postretirement Benefits obligation ("APBO"),
and postretirement benefits expense recognized through June 30, 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, and including
the changes to retiree medical benefits described above, it is expected that
the effect of the Act will result in a reduction in the APBO of $46 million.
As a result of the changes to retiree medical benefits in the 2004 second
quarter and the effects of the Act, the Company's APBO is expected to be reduced
by approximately $331 million.
For the three months and six months ended June 30, 2004 and 2003, the components
of pension expense for the Company's defined benefit plans and components
of postretirement benefit expense included the following (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2004 2003 2004 2003
------ ------ ------ ------
(unaudited) (unaudited)
Pension Benefits:
Service cost - benefits earned
during the year $ 7.0 $ 7.1 $ 14.5 $ 14.3
Interest cost on benefits earned
in prior years 31.7 32.0 63.0 63.1
Expected return on plan assets (36.9) (35.2) (73.7) (69.6)
Amortization of prior service cost 6.3 6.7 12.6 13.4
Amortization of net actuarial loss 10.7 12.7 21.4 25.5
------ ------ ------ ------
18.8 23.3 37.8 46.7
Termination benefits 25.4 -- 25.4 --
Plan design change 0.5 -- 0.5 --
------ ------ ------ ------
Total pension expense $ 44.7 $ 23.3 $ 63.7 $ 46.7
====== ====== ====== ======
|
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2004 2003 2004 2003
------ ------ ------ ------
(unaudited) (unaudited)
Other Postretirement Benefits:
Service cost - benefits earned
during the year $ 1.5 $ 1.4 $ 3.7 $ 3.4
Interest cost on benefits earned
in prior years 13.2 11.0 27.1 22.8
Expected return on plan assets (2.2) (2.3) (4.4) (4.7)
Amortization of prior service cost (4.5) (1.2) (4.5) (2.4)
Amortization of net actuarial loss 7.2 1.2 10.3 2.4
------ ------ ------ ------
15.2 10.1 32.2 21.5
Curtailment and settlement gain (72.0) -- (72.0) --
------ ------ ------ ------
Total postretirement benefit
(income) expense $(56.8) $ 10.1 $(39.8) $ 21.5
====== ====== ====== ======
Total retirement benefit (income)
expense $(12.1) $ 33.4 $ 23.9 $ 68.2
====== ====== ====== ======
|
NOTE 10. RESTRUCTURING CHARGES
In the 2004 second quarter, the Company recorded $5.7 million in restructuring
charges in the Flat-Rolled Products segment related to the new labor agreement
and the J&L asset acquisition. Charges included labor agreement costs
of $4.6 million, severance costs of $0.6 million related to approximately
30 salaried employees, and $0.5 million for asset impairment charges for redundant
equipment following the J&L asset acquisition. Approximately $1.4 million
of the restructuring charges represent future cash payments that are expected
to be paid within one year.
Reserves for restructuring charges recorded in 2003 and prior years involving
future payments were approximately $6 million at June 30, 2004 and $9 million
at December 31, 2003. The reduction in reserves resulted from cash payments
to meet severance and lease payment obligations.
NOTE 11. BUSINESS SEGMENTS
Following is certain financial information with respect to the Company's
business segments for the periods indicated (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
------- ------- -------- -------
(unaudited) (unaudited)
Total sales:
Flat-Rolled Products $ 381.2 $ 263.0 $ 713.2 $ 523.9
High Performance Metals 207.7 180.5 401.4 350.7
Engineered Products 81.2 66.3 153.0 130.3
------- ------- -------- -------
670.1 509.8 1,267.6 1,004.9
Intersegment sales:
Flat-Rolled Products 2.0 4.3 4.4 7.9
High Performance Metals 15.2 13.7 30.2 22.9
Engineered Products 6.4 1.9 8.7 3.7
------- ------- -------- -------
23.6 19.9 43.3 34.5
Sales to external customers:
Flat-Rolled Products 379.2 258.7 708.8 516.0
High Performance Metals 192.5 166.8 371.2 327.8
Engineered Products 74.8 64.4 144.3 126.6
------- ------- -------- -------
$ 646.5 $ 489.9 $1,224.3 $ 970.4
======= ======= ======== =======
Operating profit (loss):
Flat-Rolled Products $ 20.0 $ (6.2) $ 9.0 $ (7.5)
High Performance Metals 12.6 11.6 20.4 19.9
Engineered Products 5.5 3.2 9.3 5.0
------- ------- -------- -------
Total operating profit 38.1 8.6 38.7 17.4
Corporate expenses (8.9) (5.3) (14.5) (10.1)
Interest expense, net (7.8) (8.4) (16.0) (15.8)
Curtailment gain, net of
restructuring costs 40.4 - 40.4 -
Other expenses, net
of gains on asset sales (1.2) (2.3) (2.4) (4.1)
Retirement benefit expense (34.0) (33.4) (70.0) (68.2)
------- ------- -------- -------
Income (loss) before income
tax benefit and cumulative
effect of change in
accounting principle $ 26.6 $ (40.8) $ (23.8) $ (80.8)
======= ======= ======== =======
|
Curtailment gain, net of restructuring costs, includes the $71.5 million curtailment
and settlement gain, the $25.4 million pension termination benefit charge, and
the $5.7 million restructuring charges.
Segment retirement benefit expense represents pension expense and other
postretirement benefit expenses, excluding the curtailment and settlement
gain, and pension termination benefits. Operating profit with respect to the
Company's business segments excludes any retirement benefit expense.
NOTE 12. 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 12 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. Subsidiary results in
2004 include the effects of the J&L asset acquisition, including indebtedness
incurred in conjunction with the acquisition.
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 12. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent Balance Sheets
June 30, 2004
(unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
------------------------------ --------- ---------- ------------ ------------ ------------
Assets:
Cash and cash equivalents $ 0.2 $ 24.6 $ 39.2 $ - $ 64.0
Accounts receivable, net 0.2 152.5 185.1 - 337.8
Inventories, net - 216.3 234.8 - 451.1
Income tax refunds 0.3 - - - 0.3
Prepaid expenses and other
current assets 0.2 8.4 25.3 - 33.9
-------- -------- -------- ---------- ---------
Total current assets 0.9 401.8 484.4 - 887.1
Property, plant and
equipment, net - 347.8 385.6 - 733.4
Cost in excess of net
assets acquired - 112.1 89.2 - 201.3
Deferred pension asset 144.0 - - - 144.0
Deferred income taxes 34.3 - - - 34.3
Investments in subsidiaries
and other assets 1,113.8 416.0 603.9 (2,075.2) 58.5
-------- -------- -------- ---------- ---------
Total assets $1,293.0 $1,277.7 $1,563.1 $ (2,075.2) $ 2,058.6
======== ======== ======== ========== =========
Liabilities and
stockholders' equity:
Accounts payable $ 2.7 $ 128.0 $ 114.8 $ - $ 245.5
Accrued liabilities 538.8 91.9 335.8 (754.6) 211.9
Short-term debt and current
portion of long-term debt - 8.5 27.4 - 35.9
-------- -------- -------- ---------- ---------
Total current liabilities 541.5 228.4 478.0 (754.6) 493.3
Long-term debt 303.4 404.4 43.8 (200.0) 551.6
Accrued postretirement
benefits - 272.6 203.6 - 476.2
Pension liabilities 281.4 - - - 281.4
Other long-term liabilities 17.0 29.5 59.9 - 106.4
-------- -------- -------- ---------- ---------
Total liabilities 1,143.3 934.9 785.3 (954.6) 1,908.9
-------- -------- -------- ---------- ---------
Total stockholders' equity 149.7 342.8 777.8 (1,120.6) 149.7
-------- -------- -------- ---------- ---------
Total liabilities and
stockholders' equity $1,293.0 $1,277.7 $1,563.1 $ (2,075.2) $ 2,058.6
======== ======== ======== ========== =========
|
NOTE 12. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent Statements of Operations
For the six months ended June 30, 2004 (unaudited)
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
--------------------------- -------- ---------- ------------ ------------ ------------
Sales $ - $ 648.6 $ 575.7 $ - $1,224.3
Cost of sales 51.1 633.7 476.5 - 1,161.3
Selling and administrative
expenses 47.7 11.4 52.4 - 111.5
Curtailment gain, net of
restructuring costs - (40.4) - - (40.4)
Interest expense, net 11.0 4.2 0.8 - 16.0
Other income(expense)
including equity in income
of unconsolidated
subsidiaries 86.0 0.6 2.4 (88.7) 0.3
-------- -------- -------- -------- --------
Income (loss) before income
tax provision (benefit) (23.8) 40.3 48.4 (88.7) (23.8)
Income tax provision
(benefit) - - - - -
-------- -------- -------- -------- --------
Net income (loss) $ (23.8) $ 40.3 $ 48.4 $ (88.7) $ (23.8)
======== ======== ======== ======== ========
|
NOTE 12. CONTINUED
Condensed Statements of Cash Flows
For the six months ended June 30, 2004 (unaudited)
Non-
Guarantor guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
-------------------------- --------- ---------- ------------ ------------ ------------
Cash flows provided by
(used in) operating
activities $ 8.5 $ 114.9 $ (39.9) $ (61.9) $ 21.6
Cash flows provided by
(used in) investing
activities - (15.6) (17.4) 1.3 (31.7)
Cash flows provided by
(used in) financing
activities (8.6) (117.0) 59.5 60.6 (5.5)
-------- --------- ---------- ----------- ------------
Increase (decrease) in
cash and cash equivalents $ (0.1) $ (17.7) $ 2.2 $ - $ (15.6)
======== ========= ========== =========== ============
|
NOTE 12. 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 12. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent Statements of Operations
For the six months ended June, 30 2003 (unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
-------------------------------- --------- ---------- ------------- ------------ ------------
Sales $ - $ 476.7 $ 493.7 $ - $ 970.4
Cost of sales 47.6 479.7 407.7 - 935.0
Selling and administrative
expenses 33.5 12.0 55.6 - 101.1
Interest expense, net 10.2 5.2 0.4 - 15.8
Other income(expense)
including equity in income of
unconsolidated subsidiaries 11.0 (1.8) 7.0 (15.5) 0.7
------ --------- -------- ---------- --------
Income (loss) before income
tax provision (benefit)
and cumulative effect of
change in accounting
principle (80.3) (22.0) 37.0 (15.5) (80.8)
Income tax provision
(benefit) (28.5) (8.6) 13.6 (5.5) (29.0)
------ --------- -------- ---------- --------
Net income (loss) before
cumulative effect of
change in accounting
principle (51.8) (13.4) 23.4 (10.0) (51.8)
Cumulative effect of change
in accounting principle,
net of tax (1.3) - - - (1.3)
------ --------- -------- ---------- --------
Net income (loss) $(53.1) $ (13.4) $ 23.4 $ (10.0) $ (53.1)
====== ========= ======== ========== ========
|
NOTE 12. CONTINUED
Condensed Statements of Cash Flows
For the six months ended June 30, 2003 (unaudited)
Guarantor Non-guarantor
(In millions) Parent Subsidiary Subsidiaries Eliminations Consolidated
-------------------------------- ------- ---------- ------------ ------------ ------------
Cash flows provided by (used in)
operating activities $ 1.9 $ 137.7 $ 48.2 $ (170.7) $ 17.1
Cash flows provided by (used in)
investing activities - (13.8) (13.7) 5.4 (22.1)
Cash flows provided by (used in)
financing activities (2.1) (126.9) (24.5) 165.3 11.8
------- ------- -------- -------- ---------
Increase (decrease) in cash and
cash equivalents $ (0.2) $ (3.0) $ 10.0 $ -- $ 6.8
======= ======= ======== ======== =========
|
NOTE 13. 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 June 30, 2004, the Company's reserves for environmental remediation obligations
totaled approximately $36.5 million, of which approximately $16.0 million
were included in other current liabilities. The reserve includes estimated
probable future costs of $11.1 million for federal Superfund and comparable
state-managed sites; $9.0 million for formerly owned or operated sites for
which the Company has remediation or indemnification obligations; $6.3 million
for owned or controlled sites at which Company operations have been discontinued;
and $10.1 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.
In June 1995, the U.S. Government commenced an action against Allegheny Ludlum
in the United States District Court for the Western District of Pennsylvania
alleging multiple violations of the Federal Clean Water Act. The trial of this
matter concluded in February 2001. In February 2002, the Court issued a decision
imposing a penalty of $8.2 million for incidents at five facilities that occurred
over a period of approximately six years which Allegheny Ludlum had reported
to the appropriate environmental agencies. The Company appealed the Court decision
and on April 28, 2004, the Third Circuit vacated and remanded the case to the
District Court for further consideration. At June 30, 2004, the Company had
adequate reserves for this matter.
As described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, TDY Industries, Inc. ("TDY") and the San Diego
Unified Port District ("Port District") have been involved in litigation
in State Court in San Diego, California concerning a lease of property located
in San Diego, California ("San Diego facility"). Following trial
of this state court matter, the jury rendered a verdict in favor of the Port
and judgment was entered in the amount of $22.7 million, which includes the
jury award, attorneys' fees and related costs and prejudgment interest. The
Company appealed the verdict to the California State Court of Appeals in July
2004. At June 30, 2004, the Company had adequate reserves for this matter.
In June 2003, the Port District also commenced a separate action in the
United States District Court in San Diego against the Company ("Federal
Court Complaint") alleging Federal, state and common law claims related
to alleged environmental contamination on the property. The Federal Court
Complaint seeks an unspecified amount of damages and a declaratory judgment
as to TDY's liability for contamination on the property. In the second quarter
2004, the Federal Court granted in part the Company's Motion to Dismiss portions
of the Federal Court Complaint relating to alleged violations of state law.
The Port filed an amended Complaint, which the Company has answered, essentially
denying all claims and asserting a counterclaim.
In another matter related to the San Diego facility, the Port District requested
that the California Department of Toxic Substances Control ("DTSC")
evaluate whether the property is regulated as a hazardous waste transportation,
storage, or disposal facility under the Resource Conservation and Recovery
Act ("RCRA") and similar state laws. In response to the Port District's
request, on October 30, 2003, DTSC informed the Company that the closure of
the four solid waste management units ("unit") at the San Diego
facility is subject to DTSC oversight and that since facility-wide corrective
action is proceeding under the oversight of the San Diego Regional Water Quality
Control Board ("Regional Board"), DTSC's involvement would be limited
to, to the extent applicable, to unit closure and post-closure. The Port District
is addressing the DTSC's issues in connection with its investigation of the
site.
The Company conducted an environmental assessment of portions of the San
Diego facility at the request of the Regional Board. A report of the assessment
was submitted to the Regional Board and at this stage of the assessment, the
Company cannot predict if any remediation will be necessary beyond that contemplated
by the Port District.
TDY and another wholly-owned subsidiary of the Company, among others, have
been identified by the U.S. Environmental Protection Agency ("EPA")
as PRPs at the Li Tungsten Superfund Site in Glen Cove, New York. The Company
believes that most of the contamination at the Site resulted from work done
while the
U.S. Government either owned or controlled operations at the Site, or from processes
done for various agencies of the United States, and that the United States is
liable for a substantial portion of the remediation costs at the Site. In November
2000, TDY filed a cost recovery and contribution action against the U.S. Government.
The U.S. Government and two other PRPs reached a proposed settlement with EPA
in 2003 ("the Settlement"), the terms of which could have precluded
TDY's complaint from proceeding against the U.S. Government. The Company submitted
comments on the Settlement on the grounds that it was not supported by the facts,
and was unfair and unreasonable, and was granted intervention by the Court.
In July 2004, TDY, the U.S. Government and EPA entered an Interim Agreement.
Under the Interim Agreement, the U.S. Government will fund $20.9 million and
TDY will fund $1 million of the remediation costs at the Site, EPA will undertake
the remediation, the Settlement will be withdrawn and TDY and the U.S. Government
will mediate the cost recovery and contribution action. In addition, EPA agreed
that TDY will not be required to perform additional work at the Site and will
not be subject to enforcement action, if any, prior to February 18, 2005 unless
the mediation ends earlier than that date. TDY also expects to seek contribution
from other PRPs at the Site. Based on information presently available, the Company
believes its reserves on this matter are adequate. An adverse resolution of
this matter could have a material adverse effect on the Company's results of
operations and financial condition.
A number of other lawsuits, claims and proceedings have been or may be asserted
against the Company relating to the conduct of its business, including those
pertaining to product liability, patent infringement, commercial, employment,
employee benefits, 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.
NOTE 14. SUBSEQUENT EVENT - COMMON STOCK OFFERING
On July 28, 2004, the Company completed the sale of 13.8 million shares
of its common stock in a public offering, including 1.8 million shares to
cover overallotments, at $17.50 per share. Net proceeds were $230 million,
after underwriting costs and other expenses. At July 28, 2004, shares outstanding
after the offering were 95,282,975. The 13.8 million shares were re-issued
from treasury stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We believe 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.
We operate in the following three business segments, which accounted for
the following percentages of total external sales for the first six months
of 2004 and 2003:
2004 2003
---- ----
Flat-Rolled Products 58% 53%
High Performance Metals 30% 34%
Engineered Products 12% 13%
|
On June 1, 2004, our Allegheny Ludlum operation, the largest business in
our Flat-Rolled Products segment, completed the acquisition of 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 $67.2 million in total consideration
and the assumption of certain current liabilities. The purchase price is subject
to final audit adjustment and included $7.5 million cash paid at closing,
the issuance of a non-interest bearing $7.5 million promissory note to the
seller payable on June 1, 2005, and the issuance to the seller of a promissory
note in the principal amount of $52.2 million secured by the J&L property,
plant and equipment acquired, payable in installments in 2007 through 2011,
which bears interest at a London Interbank Offered Rate plus a 1% margin,
with a maximum interest rate of 6%.
In connection with the J&L asset acquisition, we reached a new labor
agreement with the United Steelworkers of America ("USWA") covering
both Allegheny Ludlum and former J&L employees. The new agreement provides
for a workforce restructuring through which we expect to achieve productivity
improvements. Through a reduction in the number of job classifications and
the implementation of flexible work rules, employees are being given broader
responsibilities and the opportunity to become more involved in the business.
The number of production and maintenance employees at the pre-acquisition
Allegheny Ludlum facilities will be reduced by 650 employees through an early
retirement program over the next two and a half years pursuant to which the
employees are being offered transition incentives. We expect over 40% of these
retirements to be effective by the end of 2004, and over 70% of the program
to be completed by the end of 2005 and 100% of these retirements to be effective
by June 2006.
With the addition of the J&L assets, we estimate that our Allegheny
Ludlum operation will be capable of annual shipments in excess of 700,000
tons of flat-rolled specialty metals with approximately 2,650 production and
maintenance employees. By comparison, Allegheny Ludlum shipped 478,000 tons
of these metals in 2003 with over 3,000 production and maintenance employees.
The acquisition of the J&L assets and the negotiation of the new labor
agreement with the USWA are expected to improve the performance of our Allegheny
Ludlum business. We expect the new labor agreement, combined with the integration
of the J&L operations, to generate annual cost structure improvements
relative to the combined performance of the former J&L Specialty and Allegheny
Ludlum operations of approximately $200 million when workforce restructuring
and synergies are fully implemented in the second half of 2006. We anticipate
these cost structure improvements to come from reduced labor costs, operating
synergies, improved product mix, and reduced fixed costs. In the aggregate,
we expect these initiatives to result in a competitive cost structure for
our stainless steel business.
On July 28, 2004, we completed the sale of 13.8 million shares of our common
stock in a public offering, including 1.8 million shares to cover overallotments,
and received $230 million in net proceeds. The 13.8 million shares were reissued
from treasury stock. We intend to use a portion of the net proceeds from this
offering to enhance our abilities to make growth-oriented investments, including
capital investments and acquisitions that we believe will offer attractive
returns. We also intend to use a portion of the net proceeds to strengthen
our balance sheet by reducing our outstanding liabilities, which may include
making voluntary contributions to our U.S. defined benefit trust or the repayment
or repurchase of our long-term debt securities. We may also use a portion
of the net proceeds for other general corporate purposes.
RESULTS OF OPERATIONS
Sales for the second quarter 2004 were $646.5 million, up 32% compared to
the second quarter 2003. Sales were up 47% in the Flat-Rolled Products segment,
15% in the High Performance Metals segment, and 16% in the Engineered Products
segment. During the quarter, we increased base-selling prices for most of
our products and implemented additional surcharges for certain raw materials
for many of our products. Approximately $18 million of sales relating to less
than one month of the former J&L operations are included in second quarter
2004 results.
Operating profit for the second quarter 2004 increased to $38.1 million
compared to $8.6 million for the same period of 2003 as a result of improved
performance across all of our business segments. This improvement was led
by the Flat-Rolled Products segment with an operating profit of $20.0 million,
the first operating profit for this segment since the 2002 third quarter.
Results for 2004 included a LIFO (last-in, first-out) inventory valuation
reserve charge of $26.1 million, due primarily to an increase in costs in
the second quarter 2004 compared to the fourth quarter 2003 for most of the
major raw materials that we use, especially chromium, molybdenum, and scrap.
For the same 2003 period, the LIFO inventory valuation reserve charge was
$9.3 million.
Net income for the second quarter 2004 was $26.6 million, or $0.31 per share,
and included a net gain of $40.4 million comprised of a curtailment and settlement
gain related to retiree medical benefit changes of $71.5 million, net of pension
termination benefits of $25.4 million, and other costs associated with Allegheny
Ludlum's new labor agreement and the J&L asset acquisition of $5.7 million.
Retirement benefit expense, which is presented in our segment results excluding
the settlement and curtailment gain and the pension termination benefits,
was $34.0 million in the quarter and was primarily non-cash. 2004 results
do not include an income tax provision or benefit as a result of cumulative
losses recorded in the 2001 through 2003 period.
In the second quarter 2003, we reported a net loss of $26.0 million, or
$0.32 per share.
For the first six months of 2004, sales increased 26.2% to $1,224.3 million,
and operating profit increased to $38.7 million compared to $17.4 million
for the same 2003 period, as a result of improved performance across all of
the business segments. The results for the six months ended June 30, 2004
also included a LIFO inventory valuation reserve charge of $74.2 million,
primarily due to the effects of rapidly rising raw material costs. The first
six months of 2003 results included a LIFO inventory valuation reserve charge
of $12.3 million. Cost reductions, before the effects of inflation, totaled
$63.2 million through the six months ended June 30, 2004. Our initial cost
reduction goal for 2004 was $104 million.
Business conditions in most of our end markets reflected increased demand for
many of our products during the first six months of 2004. These improved market
conditions were offset by higher raw material costs and by retirement benefit
expenses, which resulted in a net loss of $23.8 million, or $0.30 per diluted
share, for the first six months of 2004 compared to a net loss before cumulative
effect of a change in accounting principle of $51.8 million, or $0.64 per diluted
share, for the first six months of 2003. As discussed above, 2004 results do
not include an income tax provision or benefit. For the first six months of
2003, results included an income tax benefit of $29.0 million, or $0.36 per
share. Retirement benefit expense was $70.0 million for the first six months
of 2004, compared to $68.2 million in the comparable year ago period. This retirement
benefit expense comparison excludes the 2004 curtailment and settlement gain
and the pension termination benefits.
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
Second quarter 2004 sales increased 47% to $379.2 million, compared to the
second quarter 2003, primarily due to improved demand from capital goods markets,
the impact of higher raw material surcharges and base-selling price increases,
and the J&L asset acquisition. Demand continued to be strong from the
residential construction and remodeling markets, demand remained good from
the automotive and Asian infrastructure markets, and demand improved in the
transportation and construction machinery markets. The benefits of additional
surcharges, higher base-selling prices, and cost reduction initiatives more
than offset higher raw material and energy costs, resulting in operating income
of $20.0 million for the quarter, compared to an operating loss of $6.2 million
in the comparable 2003 period. Higher raw material costs resulted in a LIFO
inventory valuation reserve charge of $15.2 million in the second quarter
2004 compared to a LIFO inventory valuation reserve charge of $9.1 million
in the comparable 2003 period. Energy costs increased by $3.5 million compared
to 2003, net of approximately $1.0 million in gains from natural gas derivatives,
as a result of higher natural gas and electricity prices. Results for 2004
benefited from $21 million in gross cost reductions, before the effects of
inflation.
The J&L asset acquisition was completed June 1, 2004, and second quarter
2004 results include less than one month of sales, approximately $18 million,
related to this transaction. However, since the acquisition was accounted
for as a purchase, second quarter results essentially did not include any
operating profit on sales of the purchased J&L inventory. In addition,
results for the third quarter will not include any operating profit on sales
of purchased inventory until this inventory is depleted, which is expected
to occur in the second half of the 2004 third quarter.
Comparative information on the segment's products for the three months ended
June 30, 2004 and 2003 is provided in the following table:
Three Months Ended
June 30,
--------------------- %
2004 2003 Change
-------- -------- ------
Volume (finished tons):
Commodity 92,838 87,337 6
High Value 40,920 33,217 23
-------- --------
Total 133,758 120,554 11
Average prices (per finished ton):
Commodity $ 2,189 $ 1,550 41
High Value $ 4,291 $ 3,708 16
Combined Average $ 2,738 $ 2,144 28
|
For the six months ended June 30, 2004, Flat-Rolled Products sales increased
37.4%, to $708.8 million, and operating profit was $9.0 million, compared
to an operating loss of $7.5 million for the prior year-to-date period. Segment
results for the 2004 year-to-date period included a LIFO inventory reserve
charge of $52.8 million due to increasing raw material costs, compared to
a prior year LIFO inventory reserve charge of $13.0 million, or approximately
a $40 million cost of sales increase in 2004. Energy costs, net of hedging
activities, were $6 million higher in the first six months of 2004 compared
to the comparable 2003 period. Raw material surcharges, base price increases,
and year-to-date 2004 cost reductions of $34 million more than offset the
raw material cost and energy cost increases.
Comparative information on the segment's products for the six months ended
June 30, 2004 and 2003 is provided in the following table:
Six Months Ended
June 30,
--------------------- %
2004 2003 Change
-------- -------- ------
Volume (finished tons):
Commodity 179,854 170,829 5
High Value 78,891 68,689 15
-------- --------
Total 258,745 239,518 8
Average prices (per finished ton):
Commodity $ 2,101 $ 1,557 35
High Value $ 4,190 $ 3,630 15
Combined Average $ 2,738 $ 2,151 27
|
HIGH PERFORMANCE METALS SEGMENT
Sales increased 15% to $192.5 million in the second quarter 2004, compared
to the second quarter 2003, due primarily to improved demand for spare parts
from the commercial aerospace market and continued strong demand from the
military aerospace market. Our exotic alloys business continued to benefit
from sustained high demand from government, high energy physics and medical
markets, and corrosion markets, particularly in Asia. Operating profit in
the quarter increased to $12.6 million, or 6.5% of sales, compared to $11.6
million, or 7.0% of sales, in the year-ago period. Higher sales and cost reduction
initiatives offset the impact of higher raw material costs, and production
inefficiencies and start-up costs associated with the Richburg, South Carolina
rolling mill following the completion of an extensive upgrade. Higher raw
material costs resulted in a LIFO inventory valuation reserve charge of $6.1
million in the second quarter 2004 compared to a LIFO inventory valuation
reserve charge of $0.2 million in the comparable 2003 period. Results for
2004 benefited from $12 million of gross cost reductions, before the effects
of inflation.
Certain comparative information on the segment's major products for the
three months ended June 30, 2004 and 2003 is provided in the following table:
Three Months Ended
June 30,
---------------------- %
2004 2003 Change
------ ------ ------
Volume (000's pounds):
Nickel-based and specialty steel alloys 8,644 9,457 (9)
Titanium mill products 5,656 4,617 23
Exotic alloys 1,082 1,160 (7)
Average prices (per pound):
Nickel-based and specialty steel alloys $ 8.15 $ 6.47 26
Titanium mill products $11.20 $11.16 -
Exotic alloys $41.41 $38.10 9
|
For the six months ended June 2004, segment sales increased 13.3% to $371.2
million. Operating profit was $20.4 million for the six months ended June
2004, or 5.5% of sales, compared to $19.9 million, or 6.1% of sales for the
comparable prior year to date period. The effect of the LIFO inventory valuation
reserve charge was $14.7 million in 2004, compared to $1.2 million in 2003.
Year-to-date 2004 cost reductions of $22 million were largely offset by higher
raw material costs, and production inefficiencies and start-up costs related
to the Richburg, South Carolina rolling mill upgrade.
Comparative information on the segment's products for the six months ended
June 30, 2004 and 2003 is provided in the following table:
Six Months Ended
June 30,
---------------------- %
2004 2003 Change
------- ------- ------
Volume (000's pounds):
Nickel-based and specialty steel alloys 17,588 18,149 (3)
Titanium mill products 10,679 9,232 16
Exotic alloys 2,267 2,092 8
Average prices (per pound):
Nickel-based and specialty steel alloys $ 7.94 $ 6.59 20
Titanium mill products $ 11.30 $ 12.00 (6)
Exotic alloys $ 38.75 $ 37.94 2
|
ENGINEERED PRODUCTS SEGMENT
Sales for the second quarter 2004 increased 16% to $74.8 million. Operating
profit in the quarter improved to $5.5 million, or 7.4% of sales, compared
to $3.2 million, or 5.0% of sales, in the second quarter 2003. Higher sales
volumes, improved pricing, and benefits from cost reductions more than offset
higher raw material costs. The rise in raw material costs resulted in a LIFO
inventory valuation reserve charge of $4.8 million in the second quarter 2004,
compared to no effect in the comparable 2003 period. Results for 2004 benefited
from $3 million in gross cost reductions, before the effects of inflation.
Demand for tungsten products in our Metalworking Products operation remained
strong from the oil and gas market and demand improved from the automotive
and transportation markets. Demand remained strong for forged products from
the Class 8 truck market and for cast products from the improving manufacturing
sector and transportation and wind energy markets.
For the six months ended June 2004, sales increased 14.0% to $144.3 million,
and operating profit was $9.3 million, or 6.4% of sales, compared to $5.0
million, or 3.9% of sales in 2003. Cost of sales in 2004 included a $6.7 million
LIFO inventory valuation reserve charge, compared to a LIFO valuation reserve
benefit of $1.9 million for the six months ended June 2003. Higher sales volumes,
improved pricing and 2004 gross cost reductions of approximately $5 million
more than offset rising raw material and other cost increases.
CORPORATE ITEMS
Net interest expense decreased to $7.8 million for the second quarter 2004
from $8.4 million for the same period last year. For the six months ended
June 2004, net interest expense was $16.0 million compared to $15.8 million
in 2003. Interest expense for the quarter and year to date periods ended June
2003 included costs of $1.2 million to recognize the unamortized costs associated
with the former unsecured credit facility that was replaced with the secured
facility 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 year-to-date interest expense by $3.0 million in 2004,
and $3.4 million in 2003, compared to the fixed interest expense of the Notes
that would otherwise be applicable.
Retirement benefit expense was $34.0 million in the second quarter 2004,
compared to $33.4 million in the second quarter 2003. Pension expense decreased
to $18.8 million for the 2004 second quarter from $23.3 million for same period
of last year as actual returns on pension assets in 2003 were higher than
expected. This was 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 second quarter to $15.2 million from
$10.1 million in the comparable 2003 period as a result of a projected rise
in the medical cost inflation rate and a lower assumed discount rate. Second
quarter 2004 postretirement benefit expense includes one month of favorable
effects from the new Flat-Rolled Products segment labor agreement. Approximately
$27.2 million of the second quarter 2004 retirement benefit expense was non-cash.
In the second quarter 2004 and 2003, retirement benefit expense increased
cost of sales by $25.3 million and $23.5 million, respectively, and increased
selling and administrative expenses by $8.7 million and $9.9 million, respectively.
For the year to date periods, 2004 retirement benefit expense was $70.0
million, compared to $68.2 million in 2003. Approximately 81% of the year
to date 2004 retirement benefit expense was non-cash. Retirement benefit expense
increased cost of sales for the six months ended June 2004 by $52.9 million,
and increased selling and administrative expenses by $17.1 million. For the
six months ended June 2003, retirement benefit expenses increased cost of
sales by $47.9 million and increased selling and administrative expenses by
$20.3 million.
The 2004 retirement benefit expense discussed above does not include the
effects of the $71.5 million curtailment and settlement gain related to the
elimination of retiree medical benefits for certain non-collectively bargained
employees beginning in 2010, nor does this expense include the $25.4 million
charge related to the Transition Assistance Program ("TAP") incentives
associated with the new labor agreement at Allegheny Ludlum, which will be
paid from the ATI pension trust. Additionally, retirement benefit expense
recognized through June 2004 does not include the favorable impact on our
postretirement medical expense from the enactment of the Federal Medicare
prescription drug benefit program in December 2003.
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.
Corporate expenses increased to $8.9 million for the second quarter of 2004
compared to $5.3 million for the second quarter of 2003. For the six months
ended June 2004, corporate expenses were $14.5 million compared to $10.1 million
for the comparable prior year period. These increases are due primarily to
non-cash expenses associated with our stock-based long-term incentive compensation
programs, which more than offset savings associated with reductions in staffing
and other efforts to control costs at the corporate office. Excluding the
effects of retirement benefit expense and an increase of $7.0 million in non-cash
stock-based compensation expense compared to the prior year period, selling
and administrative expenses as a percentage of sales declined to 6.5% in the
2004 second quarter from 8.6% in the same period of 2003. Excluding the effects
of retirement benefit expense and an increase of $13.1 million in non-cash
stock-based compensation expense compared to the prior year period, selling
and administrative expenses as a percentage of sales declined to 6.9% in the
first half 2004 from 8.6% in the same period of 2003.
CURTAILMENT GAIN, NET OF RESTRUCTURING COSTS
Curtailment gain, net of restructuring costs of $40.4 million includes the
$71.5 million curtailment and settlement gain and the $25.4 million pension
termination benefit charge discussed in Corporate Items, above, and $5.7 million
of restructuring charges. The restructuring charges related to the new labor
agreement and the J&L asset acquisition, and included labor agreement
costs of $4.6 million, severance costs of $0.6 million related to approximately
30 salaried employees, and $0.5 million for asset impairment charges for redundant
equipment following the J&L asset acquisition.
INCOME TAXES
The 2004 second quarter and first six months 2004 results do not include
an income tax provision or benefit due to the uncertainty regarding full utilization
of our net deferred tax assets as a result of cumulative losses recorded in
the 2001 through 2003 period. A 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 36.3% and 35.9% for the 2003 second quarter and first six months 2003,
respectively. 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 Federal 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 first six months ended June 30, 2004, cash generated from operations
was $21.6 million as improved operating results for 2004 and the receipt of
a $6.9 million Federal income tax refund pertaining to our 2003 tax return
offset a $110.9 million increase in managed working capital. The increase
in managed working capital was primarily due to a $89 million increase in
accounts receivable resulting from a higher level of sales in the second quarter
of 2004 compared to the fourth quarter of 2003, and a $91.4 million increase
in inventory as a result of higher raw material costs, partially offset by
a $73.2 million increase in accounts payable. Investing activities included
the initial cash consideration for the J&L asset acquisition of $7.5 million
and capital expenditures of $25.2 million. At June 30, 2004, cash and cash
equivalents totaled $64.0 million, a decrease of $15.6 million from December
31, 2003.
On July 28, 2004, we completed the sale of 13.8 million shares of our common
stock in a public offering, including 1.8 million shares to cover overallotments,
and received $230 million in net proceeds. The 13.8 million shares were reissued
from treasury stock. We intend to use a portion of the net proceeds from this
offering to enhance our abilities to make growth-oriented investments, including
capital investments and acquisitions that we believe will offer attractive
returns. We also intend to use a portion of the net proceeds to strengthen
our balance sheet by reducing our outstanding liabilities, which may include
making voluntary contributions to our U.S. defined benefit trust or the repayment
or repurchase of our long-term debt securities. We may also use a portion
of the net proceeds for other general corporate purposes.
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. Managed
working capital at June 2004 excludes the effect of the J&L asset acquisition,
which added $73.8 million of managed working capital. At June 30, 2004, excluding
the J&L asset acquisition, managed working capital was 26.9% of annualized
sales compared to 30.7% of annualized sales at December 31, 2003. During the
first six months of 2004, managed working capital increased by $110.9 million,
to $686.4 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 second 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. While inventory
and accounts receivable balances increased during the 2004 first half, gross
inventory turns, which excludes the effect of LIFO inventory valuation reserves,
improved to 3.8 turns at June 30, 2004 from 3.6 turns at December 31, 2003,
and days sales outstanding, which measures actual collection timing for accounts
receivable, continued to improve.
The components of managed working capital were as follows: