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 June 30, 2005

OR

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 incorporation or organization)		(I.R.S. Employer 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 an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

Yes þ                     No o

     At July 29, 2005, the registrant had outstanding 96,701,427 shares of its Common Stock.

 

 

ALLEGHENY TECHNOLOGIES INCORPORATED

SEC FORM 10-Q
QUARTER ENDED JUNE 30, 2005

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			20
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			34
		Item 4.		Controls and Procedures			35
PART II. — OTHER INFORMATION
		Item 1.		Legal Proceedings			36
		Item 2.		Change in Securities, Use of Proceeds And Issuer Purchases of Equity Securities			36
		Item 6.		Exhibits			36
SIGNATURES							37
EXHIBIT INDEX							38
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 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)

		June 30,				December 31,
		2005				2004
		(Unaudited)				(Audited)
ASSETS
Cash and cash equivalents		$	253.2			$	250.8
Accounts receivable, net			435.4				357.9
Inventories, net			628.7				513.0
Prepaid expenses and other current assets			34.6				38.5
Total Current Assets			1,351.9				1,160.2
Property, plant and equipment, net			701.4				718.3
Cost in excess of net assets acquired			203.9				205.3
Deferred pension asset			122.3				122.3
Deferred income taxes			61.6				53.0
Other assets			64.2				56.6
Total Assets		$	2,505.3			$	2,315.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	277.0			$	271.2
Accrued liabilities			203.6				192.2
Short-term debt and current portion of long-term debt			20.2				29.4
Total Current Liabilities			500.8				492.8
Long-term debt			548.1				553.3
Accrued postretirement benefits			468.9				472.7
Pension liabilities			269.9				240.9
Other long-term liabilities			114.7				130.1
Total Liabilities			1,902.4				1,889.8
Stockholders’ Equity:
Preferred stock, par value $0.10: authorized- 50,000,000 shares; issued-none			¾				¾
Common stock, par value $0.10, authorized-500,000,000 shares; issued-98,951,490 shares at June 30, 2005 and December 31, 2004; outstanding-96,544,993 shares at June 30, 2005 and 95,782,011 shares at December 31, 2004			9.9				9.9
Additional paid-in capital			506.2				481.2
Retained earnings			472.4				345.5
Treasury stock: 2,406,497 shares at June 30, 2005 and 3,169,479 shares at December 31, 2004			(60.1	)			(79.4	)
Accumulated other comprehensive loss, net of tax			(325.5	)			(331.3	)
Total Stockholders’ Equity			602.9				425.9
Total Liabilities and Stockholders’ Equity		$	2,505.3			$	2,315.7

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,
		2005				2004				2005				2004
Sales		$	904.2			$	646.5			$	1,783.8			$	1,224.3
Costs and expenses:
Cost of sales			732.5				593.9				1,470.8				1,161.3
Selling and administrative expenses			65.4				57.8				132.2				111.5
Curtailment gain, net of restructuring costs			—				(40.4	)			—				(40.4	)
Income (loss) before interest, other income (expense), and income taxes			106.3				35.2				180.8				(8.1	)
Interest expense, net			(10.6	)			(7.8	)			(21.0	)			(16.0	)
Other income (expense)			(1.0	)			(0.8	)			(1.8	)			0.3
Income (loss) before income tax provision			94.7				26.6				158.0				(23.8	)
Income tax provision			3.0				—				5.3				—
Net income (loss)		$	91.7			$	26.6			$	152.7			$	(23.8	)
Basic net income (loss) per common share		$	0.96			$	0.33			$	1.60			$	(0.30	)
Diluted net income (loss) per common share		$	0.91			$	0.31			$	1.53			$	(0.30	)
Dividends declared per common share		$	0.06			$	0.06			$	0.12			$	0.12

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,
		2005				2004
Operating Activities:
Net income (loss)		$	152.7			$	(23.8	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			37.0				37.9
Non-cash curtailment gain and restructuring charges, net			—				(45.6	)
Deferred income taxes			4.2				—
Capital (gains) losses on sale of property, plant and equipment			—				(1.4	)
Change in operating assets and liabilities:
Inventories			(109.5	)			(33.5	)
Accounts receivable			(71.8	)			(56.9	)
Pension assets and liabilities			29.0				34.8
Postretirement benefits			(3.7	)			19.1
Accounts payable			3.1				56.9
Income tax refunds receivable			—				6.9
Accrued liabilities and other			18.8				27.2
Cash provided by operating activities			59.8				21.6
Investing Activities:
Purchases of property, plant and equipment			(19.8	)			(25.2	)
Purchases of businesses and investment in ventures			(17.7	)			(7.5	)
Asset disposals and other			(1.2	)			1.0
Cash used in investing activities			(38.7	)			(31.7	)
Financing Activities:
Payments on long-term debt and capital leases			(22.3	)			(14.3	)
Borrowings on long-term debt			9.9				10.7
Net borrowings (repayments) under credit facilities			(1.1	)			0.4
Net decrease in debt			(13.5	)			(3.2	)
Exercises of stock options			6.3				2.6
Dividends paid			(11.5	)			(4.9	)
Cash used in financing activities			(18.7	)			(5.5	)
Increase (decrease) in cash and cash equivalents			2.4				(15.6	)
Cash and cash equivalents at beginning of the year			250.8				79.6
Cash and cash equivalents at end of period		$	253.2			$	64.0

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 2004 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.

Stock-based Compensation

     Effective January 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123R”). Under the revised standard, companies may no longer account for share-based compensation transactions, such as stock options, restricted stock, and potential payments under programs such as the Company’s Total Shareholder Return (“TSR”) plans, using the intrinsic value method as defined in APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Instead, companies are required to account for such equity transactions using an approach in which the fair value of an award is estimated at the date of grant and recognized as an expense over the requisite service period. Compensation expense is adjusted for equity awards that do not vest because service or performance conditions are not satisfied. However, compensation expense already recognized is not adjusted if market conditions are not met, such as the Company’s total shareholder return performance relative to a peer group under the Company’s TSR plans, or for stock options which expire “out-of-the-money”. The new standard was adopted using the modified prospective method and beginning with the first quarter 2005, the Company reflects compensation expense in accordance with the SFAS 123R transition provisions. Under the modified prospective method, the effect of the standard is recognized in the period of adoption and in future periods. Prior periods have not been restated to reflect the impact of adopting the new standard.

     Second quarter 2005 compensation expense related to share-based incentive plans was $2.5 million compared to $8.9 million in the second quarter of 2004. For the six months ended June 30, 2005, share-based compensation expense was $5.2 million, compared to $10.1 million for the first six months of 2004. Share-based compensation expense for the first six months of 2005 includes $1.6 million related to expensing of stock options. Net income for the year ended December 31, 2004 would have been $9.6 million higher, at $29.4 million, had share-based compensation expense been accounted for under SFAS 123R, and net income per diluted share for the year ended December 31, 2004 would have been $0.33 under FAS 123R, rather than $0.22. The following table illustrates for each quarter of 2004 the effect on operating results and per share information had the Company accounted for share-based compensation in accordance with SFAS 123R during those periods.

In millions, except per share amounts:

		Quarter Ended																Year Ended
		3/31/04				6/30/04				9/30/04				12/31/04				12/31/04
Net income (loss) as reported		$	(50.4	)		$	26.6			$	8.6			$	35.0			$	19.8
Add: Share-based compensation expense included in net income (loss) under APB 25, net of tax			1.2				8.9				1.8				8.7				20.6
Deduct: Net impact of SFAS 123R, net of tax			(2.4	)			(2.1	)			(2.1	)			(4.4	)			(11.0	)
Pro forma net income (loss)		$	(51.6	)		$	33.4			$	8.3			$	39.3			$	29.4
Net income (loss) per common share:
Basic – as reported		$	(0.63	)		$	0.33			$	0.10			$	0.37			$	0.23
Basic – pro forma		$	(0.64	)		$	0.41			$	0.09			$	0.41			$	0.34
Diluted – as reported		$	(0.63	)		$	0.31			$	0.09			$	0.35			$	0.22
Diluted – pro forma		$	(0.64	)		$	0.39			$	0.09			$	0.39			$	0.33

The Company has provided a full valuation allowance associated with the tax benefits of the adoption of SFAS 123R.

     The Company sponsors three principal share-based incentive compensation programs. The general terms of each arrangement, the method of estimating fair value for each arrangement and 2005 activity is reported below.

Stock option awards: Options to employees were granted with graded vesting in one-third increments over three years, based on term of service. Fair value as calculated under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, is used to recognize expense upon adoption of SFAS 123R. Fair values for each grant were estimated using a Black-Scholes-Merton valuation model which utilized assumptions for stock price volatility, estimated life based on historical option exercise patterns, and projected dividends. The Company has not granted any stock options, other than grants to non-employee directors, since 2003. In the 2005 second quarter, the Company granted options to purchase 9,000 shares of Common Stock to non-employee directors. Compensation expense related to stock option awards was $0.8 million for the second quarter 2005 and $1.6 million for the six months ended June 30, 2005. Approximately $1.1 million of unrecognized compensation expense related to unvested stock option awards will be recognized, in declining amounts, through the first six months of 2006, when all existing grants will have vested.

Nonvested stock awards: Awards of nonvested stock are granted with either performance and/or service conditions. In certain grants, nonvested shares participate in cash dividends during the restriction period. In other grants, dividends are paid in the form of additional shares of nonvested stock, subject to the same vesting conditions and dividend treatment as the underlying shares. Fair value is measured based on the stock price at the grant date, adjusted for non-participating dividends, as applicable, based on the current dividend rate. In the first quarter 2005, the Company granted 151,902 shares of nonvested stock with a grant date fair value per share of $22.175, for a total grant date fair value of $3.4 million. Compensation expense related to all nonvested stock awards was $0.6 million for the 2005 second quarter, and $1.3 million for the first six months of 2005. Compensation expense recognized in the prior year under APB 25 for nonvested stock awards was $0.7 million and $1.1 million for the quarter and year-to-date periods ended June 30, 2004. Approximately $4.8 million of unrecognized fair value compensation expense relating to nonvested stock awards is expected to be recognized through 2007 based on estimates of attaining performance vesting criteria.

TSR plan awards: Awards under the TSR plans are granted at a target number of shares, and vest based on the measured return of the Company’s stock price and dividend performance at the end of three-year periods compared to the stock price and dividend performance of a group of industry peers. The 2003-2005 and 2004-2006 TSR plans performance periods were in effect at the adoption of SFAS 123R. In the first quarter 2005, the Company initiated a 2005-2007 TSR plan, with 166,749 shares as the target level award. The actual number of shares awarded may range from a minimum of zero to a maximum of two times target, in the case of the 2003-2005 TSR plan award, or three times target, in the case of the 2004-2006 and 2005-2007 TSR plans awards. Fair values for the TSR plans awards were estimated using Monte Carlo simulations of historical stock price correlation, projected dividend yields and other variables over three-year time horizons matching the TSR plans’ performance periods. Compensation

expense of $1.1 million was recognized in the second quarter 2005 for the fair value of TSR plan awards, compared to $8.2 million recognized in the second quarter 2004 under APB 25. For the year-to-date periods ended June 30, 2005 and 2004, compensation expense related to TSR plan awards was $2.3 million and $9.0 million, respectively.

     The estimated fair value of each TSR plan award, including the projected shares to be awarded, and compensation expense to be recognized subsequent to the adoption of SFAS 123R for TSR plan awards was as follows:

In millions, except for shares:

		TSR				June 30, 2005
TSR Award		Award				Unrecognized				Minimum				Target				Maximum
Grant		Fair Value				Compensation				Shares				Shares				Shares
2003-2005		$	3.4			$	0.6				0				538,777				1,077,554
2004-2006		$	4.6			$	2.3				0				347,042				1,041,126
2005-2007		$	4.9			$	4.1				0				166,749				500,247
Total						$	7.0				0				1,052,568				2,618,927

Awards earned under share-based incentive compensation programs will be first paid with shares held in treasury with any additional required share payments made by the issuance of shares.

Recent Accounting Pronouncement

     In March 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47, “Accounting for Contingent Asset Retirement Obligations” (“FIN 47”), an interpretation of FASB Statement No. 143, “Asset Retirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated, even if conditional on a future event. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005, or ATI’s fiscal year ending December 31, 2005. For existing contingent asset retirement obligations which are determined to be recognizable under FIN 47, the effect of applying FIN 47 would be recognized as a cumulative effect of a change in accounting principle. The Company is evaluating the status of its conditional asset retirement obligations, and has not determined whether sufficient information exists with regard to the timing and method of settlement to reasonably estimate the obligations.

Note 2. Acquisitions

     On April 5, 2005, ATI acquired U.K.-based Garryson Limited (“Garryson”), a leading producer of tungsten carbide burrs, rotary tooling and specialty abrasive wheels and discs, from Elliott Industries Limited for approximately $18 million in cash. Garryson had sales of over $30 million in 2004. The transaction was accounted for as a purchase business combination. The acquired operations were integrated into the Company’s Metalworking Products operation, which is part of the Company’s Engineered Products business segment. Under the terms of the purchase agreement, the final purchase price is subject to adjustment based on the net working capital acquired.

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)
Acquired assets:
Cash		$	0.2
Accounts receivable			4.8
Inventory			6.2
Other current assets			0.2
Deferred tax assets			12.7
Property, plant and equipment			0.4
Total assets			24.5
Assumed liabilities:
Accounts payable			2.7
Accrued current liabilities			1.6
Other long-term liabilities			1.9
Total liabilities			6.2
Purchase price — net assets acquired		$	18.3

The fair value of the Garryson 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 Company expects to finalize the purchase price allocation in 2005 upon adjustments for the net working capital acquired.

On June 1, 2004, a subsidiary of the Company acquired substantially all of the assets of J&L Specialty Steel, LLC (“J&L”), a producer of flat-rolled stainless steel products with operations in Midland, Pennsylvania and Louisville, Ohio, for $67.7 million in total consideration, including the assumption of certain current liabilities, and which is subject to final adjustment. The acquired operations were integrated into the Allegheny Ludlum operation, which is part of the Company’s Flat-Rolled Products business segment. The purchase price included payment of $7.5 million at closing, the issuance to the seller of a non-interest bearing $7.5 million promissory note that matured, and was paid, on June 1, 2005, and the issuance to the seller of a promissory note in the principal amount of $52.7 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. The purchase price is expected to be finalized in 2005, pending agreement between buyer and seller regarding certain working capital adjustments.

Note 3. Inventories

     Inventories at June 30, 2005 and December 31, 2004 were as follows (in millions):

		June 30,				December 31,
		2005				2004
Raw materials and supplies		$	106.7			$	70.8
Work-in-process			651.7				573.6
Finished goods			133.5				99.1
Total inventories at current cost			891.9				743.5
Less allowances to reduce current cost values to LIFO basis			(256.0	)			(223.9	)
Progress payments			(7.2	)			(6.6	)
Total inventories, net		$	628.7			$	513.0

     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 $26.3 million higher for the 2005 second quarter and $32.0 million higher for the 2005 first six months than would have been recognized if FIFO, rather than LIFO, methodology were utilized to value inventory. Cost of sales expense was $26.1 million higher for the 2004 second quarter and $74.2 million higher for the 2004 first six months than would have been recognized if FIFO, rather than LIFO, methodology were utilized to value inventory.

Note 4. Supplemental Financial Statement Information

     Property, plant and equipment at June 30, 2005 and December 31, 2004 were as follows (in millions):

		June 30,				December 31,
		2005				2004
Land		$	23.8			$	24.1
Buildings			230.0				231.4
Equipment and leasehold improvements			1,544.3				1,562.4
			1,798.1				1,817.9
Accumulated depreciation and amortization			(1,096.7	)			(1,099.6	)
Total property, plant and equipment, net		$	701.4			$	718.3

     Reserves for restructuring charges recorded in prior years involving future payments were approximately $5 million at June 30, 2005 and $6 million at December 31, 2004. The reduction in reserves resulted from cash payments to meet severance and lease payment obligations.

Note 5. Debt

     Debt at June 30, 2005 and December 31, 2004 was as follows (in millions):

		June 30,				December 31,
		2005				2004
Allegheny Technologies $300 million 8.375% Notes due 2011, net (a)		$	307.9			$	308.4
Allegheny Ludlum 6.95% debentures, due 2025			150.0				150.0
Promissory notes for J&L asset acquisition			52.7				59.5
Domestic Bank Group $325 million secured credit agreement			—				—
Foreign credit agreements			33.7				38.6
Industrial revenue bonds, due through 2016			12.6				12.8
Capitalized leases and other			11.4				13.4
			568.3				582.7
Short-term debt and current portion of long-term debt			(20.2	)			(29.4	)
Total long-term debt		$	548.1			$	553.3

     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 June 30, 2005, there had been no borrowings made under the domestic credit facilities, although a portion of the facility is used to support approximately $127 million in letters of credit.

     On August 4, 2005, the Company amended the facility to (1) extend the facility term to August 2010 from its current maturity date of June 2007, (2) enable ATI to execute various corporate actions without the prior consent of the lending group, so long as, after giving effect to such corporate action, the Company maintains a minimum undrawn availability (as described in the facility) of $75 million, (3) reduce the borrowing costs under the facility,

and (4) incorporate a feature that would permit ATI to increase the size of the facility, assuming the Company had sufficient collateral, by up to $150 million. Under the amended facility, corporate actions which may be undertaken without the prior consent of the lending group, as long as the undrawn availability as described in the facility exceeds $75 million, include capital expenditures, acquisitions, sales of assets, dividends, investments in, or loans to corporations, partnerships, joint ventures and subsidiaries, issuance of unsecured indebtedness, leases, and prepayments of indebtedness. If undrawn availability were to decline below $75 million, such corporate actions would be subject to limitations as set forth in the amended facility. The amended facility contains a financial covenant, which is not measured unless the Company’s undrawn availability is less than $75 million. This financial covenant, when measured, requires ATI to prospectively maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to fixed charges of at least 1.0 to 1.0 from the date the covenant is measured. EBITDA is adjusted for non-cash items such as income/loss on investments accounted for under the equity method of accounting, non-cash pension expense/income, and that portion of retiree medical and life insurance expenses paid from the Company’s VEBA trusts. EBITDA is reduced by capital expenditures and cash taxes paid, and increased for cash tax refunds. Fixed charges include gross interest expense, dividends paid and scheduled debt payments. ATI’s ability to borrow under the amended secured credit facility in the future could be adversely affected if the Company fails to maintain the applicable covenants under the agreement governing the facility.

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):