UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From
to
Commission File Number 1-12001
ALLEGHENY TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
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25-1792394
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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1000 Six PPG Place
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Pittsburgh, Pennsylvania
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15222-5479
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(Address of Principal Executive Offices)
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(Zip Code)
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(412) 394-2800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act: (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
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No
þ
At
October 31, 2007, the registrant had outstanding 102,260,259 shares of its Common Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED September 30, 2007
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
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September 30,
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December 31,
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2007
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2006
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(Unaudited)
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(Audited)
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ASSETS
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Cash and cash equivalents
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$
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663.6
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$
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502.3
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Accounts receivable, net
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648.1
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610.9
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Inventories, net
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970.8
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798.7
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Deferred income taxes
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26.4
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26.6
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Prepaid expenses and other current assets
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39.4
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49.4
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Total Current Assets
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2,348.3
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1,987.9
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Property, plant and equipment, net
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1,096.5
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871.7
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Cost in excess of net assets acquired
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209.8
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206.5
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Deferred income taxes
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125.1
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119.0
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Prepaid pension cost
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19.7
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— |
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Other assets
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117.4
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95.4
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Total Assets
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$
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3,916.8
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$
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3,280.5
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Accounts payable
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$
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337.7
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$
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355.1
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Accrued liabilities
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257.4
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241.6
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Accrued income taxes
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92.1
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22.7
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Short-term debt and current portion of long-term debt
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16.5
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23.7
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Total Current Liabilities
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703.7
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643.1
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Long-term debt
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513.0
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529.9
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Retirement benefits
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452.3
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464.4
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Other long-term liabilities
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174.9
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140.2
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Total Liabilities
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1,843.9
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1,777.6
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Stockholders’ Equity: |
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Preferred stock, par value $0.10: authorized-
50,000,000 shares; issued-none
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— |
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Common stock, par value $0.10, authorized-500,000,000
shares; issued-102,404,256 shares at September 30, 2007 and
101,201,411 at December 31, 2006; outstanding-102,243,834 shares at
September 30, 2007 and 101,201,328 shares at December 31, 2006 |
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10.2
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10.1
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Additional paid-in capital
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663.3
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637.0
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Retained earnings
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1,701.6
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1,166.6
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Treasury stock: 160,422 shares at September 30, 2007 and
83 shares at December 31, 2006 |
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(15.9
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)
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— |
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Accumulated other comprehensive loss, net of tax
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(286.3
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)
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(310.8
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)
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Total Stockholders’ Equity |
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2,072.9
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1,502.9
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Total Liabilities and Stockholders’ Equity |
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$
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3,916.8
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$
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3,280.5
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The accompanying notes are an integral part of these statements.
3
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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Sales
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$
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1,335.0
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$
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1,288.4
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$
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4,178.9
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$
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3,539.7
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Costs and expenses:
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Cost of sales
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968.1
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966.1
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3,024.0
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2,677.2
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Selling and administrative expenses
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73.5
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72.8
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224.3
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221.1
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Income before interest, other
income (expense), and income taxes
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293.4
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249.5
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930.6
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641.4
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Interest expense, net
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(0.1
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)
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(4.3
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)
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(7.0
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)
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(17.6
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)
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Other income (expense)
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0.7
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(1.4
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)
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0.9
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(3.9
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)
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Income before income tax provision
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294.0
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243.8
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924.5
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619.9
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Income tax provision
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100.1
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83.6
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326.3
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208.9
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Net income
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$
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193.9
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$
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160.2
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$
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598.2
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$
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411.0
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Basic net income per common share
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$
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1.90
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$
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1.60
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$
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5.88
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$
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4.13
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Diluted net income per common share
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$
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1.88
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$
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1.56
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$
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5.81
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$
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4.02
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Dividends declared per common share
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$
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0.13
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$
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0.10
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$
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0.39
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$
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0.30
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The accompanying notes are an integral part of these statements.
4
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
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Nine Months Ended
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September 30,
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2007
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2006
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Operating Activities:
|
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|
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Net income
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$
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598.2
|
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$
|
411.0
|
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
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Depreciation and amortization
|
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75.2
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61.9
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Deferred income taxes
|
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2.0
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7.1
|
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Change in operating assets and liabilities:
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Inventories
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(172.1
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)
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(437.3
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)
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Accrued income taxes, net of tax benefits on share-based compensation
|
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69.4
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20.2
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Accounts receivable
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(37.2
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)
|
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(189.4
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)
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Accounts payable
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(17.4
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)
|
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265.8
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Retirement benefits
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4.2
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39.4
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Accrued liabilities and other
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(41.6
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)
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2.8
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Cash provided by operating activities
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480.7
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181.5
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Investing Activities:
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Purchases of property, plant and equipment
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(281.0
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)
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(162.1
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)
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Acquisition of business
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(9.7
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)
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— |
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Asset disposals and other
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5.9
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1.8
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Cash used in investing activities
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(284.8
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)
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(160.3
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)
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Financing Activities:
|
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Payments on long-term debt and capital leases
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(15.1
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)
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(7.1
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)
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Net borrowings (repayments) under credit facilities |
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(9.7
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)
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0.9
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Net decrease in debt
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(24.8
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)
|
|
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(6.2
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)
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Dividends paid
|
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(39.8
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)
|
|
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(30.0
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)
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Tax benefits on share-based compensation
|
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24.6
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30.0
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Exercises of stock options
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5.4
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28.2
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Cash provided by (used in) financing activities
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(34.6
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)
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22.0
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|
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Increase in cash and cash equivalents
|
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161.3
|
|
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43.2
|
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Cash and cash equivalents at beginning of the year
|
|
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502.3
|
|
|
|
362.7
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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$
|
663.6
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$
|
405.9
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The accompanying notes are an integral part of these statements.
5
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Accounting Policies
Basis of Presentation
The interim consolidated financial statements include the accounts of Allegheny Technologies
Incorporated and its subsidiaries. Unless the context requires otherwise, “Allegheny
Technologies”, “ATI” and “the Company” refer to Allegheny Technologies Incorporated and its
subsidiaries.
These unaudited consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and note disclosures required by U.S. generally accepted accounting principles
for complete financial statements. In management’s opinion, all adjustments (which include only
normal recurring adjustments) considered necessary for a fair presentation have been included.
These unaudited consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on
Form 10-K. The results of operations for these interim periods are not necessarily indicative of
the operating results for any future period.
Recent Accounting Pronouncements
In the 2007 first quarter, as required, the Company adopted Financial Accounting Standards
Board (“FASB”) Staff Position (“FSP”) titled “Accounting for Planned Major Maintenance Activities”
(“FSP PMMA”). This FSP amends an AICPA Industry Audit guide and is applicable to all industries
that accrue for planned major maintenance activities. The FSP PMMA prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance activities, which was the
policy the Company previously used to record planned plant outage costs on an interim basis within
a fiscal year, and also to record the costs of major equipment rebuilds which extend the life of
capital equipment. The FSP PMMA was effective as of the beginning of ATI’s 2007 fiscal year, with
retrospective application to all prior periods presented. Under the FSP PMMA, the Company reports
results using the deferral method whereby major equipment rebuilds are capitalized as costs are
incurred and amortized to expense over the estimated useful lives, and planned plant outage costs
are fully recognized in the interim period of the outage. The adoption of the FSP PMMA on January
1, 2007, resulted in an increase in net property, plant and equipment of $4.1 million, a decrease
in non-current deferred income tax assets of $5.8 million, a decrease in accrued liabilities of
$2.4 million, a decrease in long-term liabilities of $9.6 million, and an increase to retained
earnings of $10.3 million, net of related taxes. As required by the FSP PMMA, the Company’s
financial statements have been restated to reflect this FSP as if this standard had been applied to
the earliest period presented. As a result, net income for the three and nine months ended
September 30, 2006 decreased $1.7 million, or $0.02 per share, and increased $6.2 million, or $0.06
per share, respectively.
In the 2007 first quarter, as required, the Company also adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No.
109, “Accounting for Income Taxes”. FIN 48 prescribes recognition and measurement standards for a
tax position taken or expected to be taken in a tax return. The evaluation of a tax position in
accordance with FIN 48 is a two step process. The first step is the determination of whether a tax
position should be recognized in the financial statements. Under FIN 48, a tax position taken or
expected to be taken in a tax return is to be recognized only if the Company determines that it is
more-likely-than-not that the tax position will be sustained upon examination by the tax
authorities based upon the technical merits of the position. In step two, for those tax positions
which should be recognized, the measurement of a tax position is determined as being the largest
amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. FIN
48 was effective for the beginning of ATI’s 2007 fiscal year, with adoption treated as a
cumulative-effect type reduction to retained earnings of $5.6 million as of the beginning of 2007.
Upon adoption of FIN 48, the Company made an accounting policy election to classify interest and
penalties on estimated liabilities for uncertain tax positions as components of the provision for
income taxes.
6
Note 2. Inventories
Inventories at September 30, 2007 and December 31, 2006 were as follows (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Raw materials and supplies
|
|
$
|
202.9
|
|
|
$
|
190.7
|
|
|
Work-in-process
|
|
|
1,036.7
|
|
|
|
931.7
|
|
|
Finished goods
|
|
|
181.5
|
|
|
|
148.0
|
|
|
|
|
|
|
|
|
|
|
Total inventories at current cost
|
|
|
1,421.1
|
|
|
|
1,270.4
|
|
|
Less allowances to reduce current cost
values to LIFO basis
|
|
|
(448.1
|
)
|
|
|
(466.7
|
)
|
|
Progress payments
|
|
|
(2.2
|
)
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
970.8
|
|
|
$
|
798.7
|
|
|
|
|
|
|
|
|
|
Inventories are stated at the lower of cost (last-in, first-out (“LIFO”), first-in, first-out
(“FIFO”), and average cost methods) or market, less progress payments. Most of the Company’s
inventory is valued utilizing the LIFO costing methodology. Inventory of the Company’s non-U.S.
operations is valued using average cost or FIFO methods. The effect of using the LIFO methodology
to value inventory, rather than FIFO, reduced cost of sales by $61.2 million for the 2007 third
quarter and $18.6 million for the first nine months of 2007, compared to increasing cost of sales
by $54.0 million for the 2006 third quarter and $106.4 million for the first nine months of 2006.
The LIFO inventory valuation reserve charge for the first nine months of 2007 includes $23 million
associated with the effects of projected liquidations of LIFO inventory quantities carried at the
lower costs prevailing in prior years as compared to current costs.
Note 3. Supplemental Financial Statement Information
Property, plant and equipment at September 30, 2007 and December 31, 2006 were as follows (in
millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
24.3
|
|
|
$
|
23.9
|
|
|
Buildings
|
|
|
251.3
|
|
|
|
242.1
|
|
|
Equipment and leasehold improvements
|
|
|
1,965.0
|
|
|
|
1,690.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,240.6
|
|
|
|
1,956.3
|
|
|
Accumulated depreciation and amortization
|
|
|
(1,144.1
|
)
|
|
|
(1,084.6
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
1,096.5
|
|
|
$
|
871.7
|
|
|
|
|
|
|
|
|
|
7
Note 4. Debt
Debt at September 30, 2007 and December 31, 2006 was as follows (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Allegheny Technologies $300 million 8.375% Notes due
2011, net (a) |
|
$
|
305.7
|
|
|
$
|
306.5
|
|
|
Allegheny Ludlum 6.95% debentures, due 2025
|
|
|
150.0
|
|
|
|
150.0
|
|
|
Promissory note for J&L asset acquisition |
|
|
43.7
|
|
|
|
54.0
|
|
|
Domestic Bank Group $400 million unsecured credit
agreement |
|
|
— |
|
|
|
— |
|
|
Foreign credit agreements
|
|
|
15.6
|
|
|
|
24.2
|
|
|
Industrial revenue bonds, due through 2020
|
|
|
10.1
|
|
|
|
10.9
|
|
|
Capitalized leases and other
|
|
|
4.4
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term debt
|
|
|
529.5
|
|
|
|
553.6
|
|
|
Short-term debt and current portion of long-term debt
|
|
|
(16.5
|
)
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
513.0
|
|
|
$
|
529.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes fair value adjustments for settled interest rate swap contracts of $9.2
million at September 30, 2007 and $10.5 million at December 31, 2006. |
Net interest expense was $7.0 million and $17.6 million for the nine months ended September
30, 2007 and 2006, respectively. Net interest expense includes interest income of $18.2 million
and $10.1 million for the nine months ended September 30, 2007 and 2006, respectively. Net
interest expense was reduced by $6.0 million and $4.4 million for the nine months ended September
30, 2007 and 2006, respectively, for interest capitalization on capital projects.
Effective July 31, 2007, the Company replaced its then-existing $325 million senior secured
domestic revolving credit facility with a new five-year $400 million senior unsecured domestic
revolving credit facility. The unsecured facility includes a $200 million sublimit for the
issuance of letters or credit. Under the unsecured facility, the Company may increase the size of
the credit facility by up to $100 million without seeking the further approval of the lending
group. The unsecured facility requires the Company to maintain a leverage ratio (consolidated
total indebtedness divided by consolidated earnings before interest, taxes and depreciation and
amortization) of not greater than 3.25, and maintain an interest coverage ratio (consolidated
earnings before interest and taxes divided by interest expense) of not less than 2.0.
Borrowings or letter of credit issuance under the unsecured facility bear interest at the
Company’s option at either: (1) the one-, two-, three- or six-month LIBOR rate plus a margin
ranging from 0.625% to 1.25% depending upon the value of the leverage
ratio as defined by the unsecured facility agreement; or (2) a base rate announced from time-to-time by the lending group
(i.e. the Prime lending rate). In addition, the unsecured facility contains a facility fee of
0.15% to 0.30% depending upon the value of the leverage ratio, and a letter of credit issuance fee
of 0.125%. The Company’s overall borrowing costs under the unsecured facility are not affected by
changes in the Company’s credit ratings.
As of September 30, 2007, there had been no borrowings made under the unsecured credit
facility, although a portion was used to support approximately $55 million in letters of credit.
In August 2007, STAL, the Company’s Chinese joint venture company in which ATI has a 60%
interest, entered into a five-year revolving credit facility with a group of banks. Under the
credit facility, STAL may borrow up to 741 million renminbi (approximately $99 million) at an
interest rate equal to 90% of the applicable lending rate published by the People’s Bank of China.
The credit facility is supported solely by STAL’s financial capability without any guarantees from
the joint venture partners, and is intended to be utilized in the future for the expansion of
STAL’s operations, which are located in Shanghai, China. The credit facility requires STAL to
maintain a minimum level of shareholders’ equity, and certain financial ratios. As of September
30, 2007, there had been no borrowings made under the credit facility.
8
STAL had approximately $21 million in letters of credit outstanding as of September 30, 2007.
These letters of credit are supported solely by STAL’s financial capability without any guarantees
from the joint venture partners.
Note 5. Per Share Information
The following table sets forth the computation of basic and diluted net income per common
share (in millions, except share and per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30,
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Numerator for basic and diluted
net income per common share — net
income |
|
$
|
193.9
|
|
|
$
|
160.2
|
|
|
$
|
598.2
|
|
|
$
|
411.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
per common share-weighted average
shares
|
|
|
101.8
|
|
|
|
100.1
|
|
|
|
101.7
|
|
|
|
99.5
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option equivalents
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
1.3
|
|
|
Contingently issuable shares
|
|
|
0.7
|
|
|
|
1.5
|
|
|
|
0.7
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
per common share – adjusted
weighted average shares and
assumed conversions |
|
|
103.1
|
|
|
|
102.6
|
|
|
|
103.0
|
|
|
|
102.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
1.90
|
|
|
$
|
1.60
|
|
|
$
|
5.88
|
|
|
$
|
4.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
1.88
|
|
|
$
|
1.56
|
|
|
$
|
5.81
|
|
|
$
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Comprehensive Income
The components of comprehensive income, net of tax, were as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30,
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
193.9
|
|
|
$
|
160.2
|
|
|
$
|
598.2
|
|
|
$
|
411.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains
|
|
|
3.1
|
|
|
|
0.5
|
|
|
|
14.2
|
|
|
|
22.3
|
|
|
Unrealized losses on energy, raw
material and currency hedges, net of
tax
|
|
|
(5.0
|
)
|
|
|
(3.8
|
)
|
|
|
(12.9
|
)
|
|
|
(10.2
|
)
|
|
Retirement benefits
|
|
|
5.6
|
|
|
|
— |
|
|
|
23.8
|
|
|
|
— |
|
|
Unrealized gains (losses) on securities |
|
|
(0.1
|
)
|
|
|
0.6
|
|
|
|
(0.6
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
|
|
(2.7
|
)
|
|
|
24.5
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
197.5
|
|
|
$
|
157.5
|
|
|
$
|
622.7
|
|
|
$
|
423.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Income Taxes
Results for the third quarter 2007 included a provision for income taxes of $100.1 million, or
34.0% of income before tax, compared to an income tax provision of $83.6 million, or 34.3% of
income before tax, for the comparable 2006 quarter. The third quarter 2007 included benefits of
$8.1 million primarily related to a reduction of deferred tax asset valuation allowances with
respect to certain state tax credits expected to be realized in future periods. The income tax
provision for the nine months ended September 30, 2007 was $326.3 million, or 35.3% of income
before tax, compared to an income tax provision of $208.9 million, or 33.7% of tax for the
comparable prior year period. The nine months ended September 30, 2007 and 2006
benefited $12.1 million and $10.2 million, respectively, due to reductions in state deferred tax
asset valuation allowances due to increased state taxable income and the probability of realizing
the corresponding state deferred tax assets.
9
As required, the Company adopted FIN 48 on January 1, 2007. As a result of implementing this
Interpretation, the Company recognized a $19.4 million increase in the long-term liability for
unrecognized tax benefits, and a $13.8 million increase in deferred tax assets for tax positions
for which the ultimate deductibility is highly certain, but for which there is uncertainty about
the timing of such deductibility. Because of the impact of deferred tax accounting, other than
interest and penalties, the disallowance of the shorter deductibility period would not affect the
annual effective tax rate but would accelerate the payment of cash to the taxing authority to an
earlier period. The net result of these recognized assets and liabilities was a reduction to
beginning retained earnings of $5.6 million. Including liabilities recognized in the FIN 48
adoption, the Company’s total liabilities for unrecognized tax benefits at January 1, 2007 were
$26.3 million. Interest and penalties recognized at the FIN 48 adoption were $3.5 million. It is
the Company’s policy to classify interest and penalties recognized on underpayment of income taxes
as income tax expense. For the nine months ended September 30, 2007, the Company’s income tax
provision included $6.2 million of expense related to uncertain tax positions including $1.8
million of interest and penalties, which increased the long-term liability to $32.2 million, which
included $5.1 million of inter