We are offering to exchange our outstanding notes described above for the new, registered notes described above. The terms of the new notes are identical in all material respects to the terms of the outstanding notes, except for certain transfer restrictions, registration rights and additional interest payment provisions relating to the outstanding notes. In this document we refer to the outstanding notes as the "old notes" and to our new notes as the "registered notes." We sometimes refer to the old notes and the registered notes collectively as the "notes."
The principal features of the exchange offer are as follows:
- The only conditions to completing the exchange offer are that the exchange offer not violate applicable law or applicable interpretations of the staff of the Securities and Exchange Commission and that no injunction, order or decree has been issued which would prohibit, prevent or materially impair our ability to proceed with the exchange offer.
- All old notes that are validly tendered and not validly withdrawn will be exchanged.
- Tenders of old notes may be withdrawn at any time prior to the expiration of the exchange offer.
- We will not receive any cash proceeds from the exchange offer.
We are primarily a holding company and most of our operations are conducted by our subsidiaries. The notes will be effectively subordinated to any of our existing or future secured debt and to all liabilities of our subsidiaries, including indebtedness of our subsidiaries. As of March 31, 2002, aggregate indebtedness of our subsidiaries was approximately $213 million. As of that date, we had total consolidated indebtedness, including the notes, of approximately $525 million and the ability to borrow up to $325 million under our revolving credit facility.
FOR A DISCUSSION OF CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE PARTICIPATING IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PAGE
----
Prospectus Summary................... 1
Risk Factors......................... 11
Forward-Looking Statements........... 16
Use of Proceeds...................... 16
Capitalization....................... 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
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PAGE
----
Business............................. 31
Management........................... 37
The Exchange Offer................... 39
Description of the Registered
Notes.............................. 47
Material Federal Income Tax
Considerations..................... 53
Plan of Distribution................. 53
Legal Matters........................ 54
Experts.............................. 54
Where You Can Find More
Information........................ 54
Incorporation of Certain Documents by
Reference.......................... 55
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Allegheny Technologies Incorporated is a Delaware corporation. Our principal executive offices are located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, and our telephone number at that address is (412) 394-2800.
In this prospectus "Allegheny Technologies," "the Company," "we," "us" and "our" refer to Allegheny Technologies Incorporated and its subsidiaries, unless the context requires otherwise. However, for purposes of the section entitled "Description of the Registered Notes," whenever we refer to "Allegheny Technologies" or to "us," or use the terms "we" or "our," we are referring only to Allegheny Technologies Incorporated and not to any of our subsidiaries.
This prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, any of the notes offered hereby by any person in any
jurisdiction in which it is unlawful for such person to make such an offering or
solicitation.
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM SECURITIES ACT ("RSA 421-B") WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAN AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
This summary may not contain all of the information that may be important to you. You should read the entire prospectus, including "Risk Factors" and the financial data and related notes included or incorporated by reference in this prospectus, before making an investment decision.
We are one of the largest and most diversified specialty materials producers in the world. We use innovative technologies to offer growing global markets a wide range of specialty materials. High-value products include super stainless steel, nickel-based and cobalt-based alloys and superalloys, titanium and titanium alloys, specialty steels, tungsten materials, exotic alloys, which include zirconium, hafnium and niobium, and highly engineered strip and Precision Rolled Strip(R) products. In addition, we produce general purpose specialty materials such as stainless steel sheet and plate, silicon and tool steels, and forgings and castings. We operate in the following three business segments, which accounted for the following percentages of total revenues of $2.13 billion, $2.46 billion and $2.30 billion, for the years ended December 31, 2001, 2000 and 1999 respectively:
2001 2000 1999
---- ---- ----
Flat-Rolled Products........................................ 51% 59% 56%
High Performance Metals..................................... 36% 30% 32%
Industrial Products......................................... 13% 11% 12%
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We are a world leader in the manufacture of high value and commodity specialty materials. Our high value products accounted for 71 percent of total sales in 2001 and our commodity products accounted for 29 percent of total sales in 2001. Specialty materials are produced in a variety of forms, including sheet, strip, foil, plate, slab, ingot, billet, bar, rod, wire, coil, tubing and shapes, and are selected for use in environments that demand materials having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. Common end markets of our products include jet engines, air frames, electrical energy, automotive, chemical processing, oil and gas, construction and mining, machine and cutting tools, appliances and food equipment, transportation and medical.
On March 22, 2002, we announced that our Wah Chang facility and the United Steelworkers of America reached a new six-year labor agreement ending a seven-month strike, which began on September 4, 2001. The new agreement covers approximately 660 employees. The new agreement became effective on April 1, 2002 and expires on March 31, 2008. The anticipated increase in labor costs as a result of the new agreement is less than one percent of our overall labor costs and is not material. Our retirement benefit expense was $5.7 million in the first quarter of 2002, and is expected to increase to approximately $6.8 million per quarter for the remainder of 2002 as a result of the new agreement.
On April 17, 2002, we announced the following financial results:
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - DOLLARS IN MILLIONS)
THREE MONTHS ENDED
------------------------------
MARCH 31,
--------------- DECEMBER 31,
2002 2001 2001
------ ------ ------------
Sales....................................................... $493.1 $542.5 $493.1
Costs and expenses:
Cost of sales............................................. 452.7 476.9 431.3
Selling and administrative expenses....................... 50.5 48.4 52.6
Restructuring costs......................................... -- -- 74.2
------ ------ ------
Income (loss) before interest, other income (expense) and
income taxes.............................................. (10.1) 17.2 (65.0)
Interest expense, net....................................... 9.9 8.0 6.6
Other income (expense), net................................. 2.0 1.2 (0.3)
------ ------ ------
Income (loss) before income taxes........................... (18.0) 10.4 (71.9)
Income tax provision (benefit).............................. (6.9) 4.0 (26.1)
------ ------ ------
Net income (loss)........................................... $(11.1) $ 6.4 $(45.8)
====== ====== ======
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SALES AND OPERATING PROFIT BY BUSINESS SEGMENT
(UNAUDITED - DOLLARS IN MILLIONS)
THREE MONTHS ENDED
------------------------------
MARCH 31,
--------------- DECEMBER 31,
2002 2001 2001
------ ------ ------------
Sales:
Flat-Rolled Products........................................ $262.1 $282.5 $248.0
High Performance Metals..................................... 172.9 187.3 188.3
Industrial Products......................................... 58.1 72.7 56.8
------ ------ ------
Total Sales............................................... $493.1 $542.5 $493.1
------ ------ ------
Operating Profit (Loss):
Flat-Rolled Products........................................ $ (0.4) $ (4.5) $(15.4)
Operating profit (loss) as a % of Sales..................... (0.2%) (1.6%) (6.2%)
High Performance Metals..................................... 4.3 11.0 25.6
Operating Profit as a % of Sales............................ 2.5% 5.9% 13.6%
Industrial Products......................................... (0.7) 4.1 (1.6)
Operating profit (loss) as a % of Sales..................... (1.2%) 5.6% (2.8%)
------ ------ ------
Operating Profit.......................................... $ 3.2 $ 10.6 $ 8.6
Operating Profit as a % of Sales............................ 0.6% 2.0% 1.7%
Corporate expenses.......................................... (5.7) (7.0) (5.8)
Interest expense, net....................................... (9.9) (8.0) (6.6)
Restructuring costs and other costs, net of gains on asset
sales..................................................... 0.1 (1.7) (78.2)
Retirement benefit income (expense)......................... (5.7) 16.5 10.1
------ ------ ------
Income (loss) before income taxes........................... $(18.0) $ 10.4 $(71.9)
====== ====== ======
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CONSOLIDATED BALANCE SHEETS
(Current period unaudited - Dollars in millions)
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 30.5 $ 33.7
Accounts receivable, net of allowances for doubtful accounts
of $12.0 and $12.3 at March 31, 2002 and December 31,
2001, respectively........................................ 291.2 274.6
Inventories, net............................................ 461.2 508.4
Income tax refunds.......................................... 5.3 48.5
Deferred income taxes and other............................. 69.3 60.9
-------- --------
Total current assets................................... 857.5 926.1
Property, plant and equipment, net.......................... 821.5 828.9
Prepaid pension cost........................................ 636.0 632.9
Cost in excess of net assets acquired....................... 188.5 188.4
Other assets................................................ 64.1 66.9
-------- --------
Total Assets................................................ $2,567.6 $2,643.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 155.0 $ 155.3
Accrued liabilities......................................... 167.3 168.2
Short-term debt and current portion of long-term debt....... 16.4 9.2
-------- --------
Total current liabilities.............................. 338.7 332.7
Long-term debt.............................................. 509.0 573.0
Accrued postretirement benefits............................. 505.5 506.1
Deferred income taxes and other............................. 284.5 286.7
-------- --------
1,637.7 1,698.5
-------- --------
Total stockholders' equity.................................. 929.9 944.7
-------- --------
Total Liabilities and Stockholders' Equity.................. $2,567.6 $2,643.2
======== ========
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited -- Dollars in millions)
THREE MONTHS ENDED
-------------------------------
MARCH 31, 2002 MARCH 31, 2001
-------------- --------------
Operating Activities:
Net income (loss)......................................... $(11.1) $ 6.4
Depreciation and amortization............................. 22.8 24.8
Income tax refunds........................................ 43.2 --
Change in managed working capital......................... 40.9 41.4
Non-cash pension income, net.............................. (3.1) (23.9)
Other..................................................... (10.8) (21.7)
------ ------
Cash provided by operating activities....................... 81.9 27.0
Cash used in investing activities........................... (12.7) (24.6)
Cash used in financing activities (debt reduction $56.3
million).................................................. (72.4) (5.1)
------ ------
Decrease in cash and cash equivalents....................... (3.2) (2.7)
Cash and cash equivalents at beginning of period............ 33.7 26.2
------ ------
Cash and cash equivalents at end of period.................. $ 30.5 $ 23.5
====== ======
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Managed working capital includes gross accounts receivable and gross inventories excluding LIFO reserves less accounts payable.
SELECTED OPERATING DATA
(Unaudited)
THREE MONTHS ENDED
----------------------------------
MARCH 31,
------------------- DECEMBER 31,
2002 2001 2001
-------- -------- ------------
Volume:
Flat-Rolled Products -- commodity (finished tons)........ 87,431 89,764 89,285
Flat-Rolled Products - high value (tons)................. 34,362 34,212 29,920
-------- -------- --------
Total Flat-Rolled Products (finished tons)....... 121,793 123,976 119,205
High Performance Metals - nickel-based and specialty
steel alloys (000's lbs.)............................. 10,765 12,864 12,859
High Performance Metals - titanium mill products (000's
lbs.)................................................. 4,949 6,139 5,219
High Performance Metals - exotic alloys (000's lbs.)..... 869 741 964
Average Prices:
Flat-Rolled Products - commodity (per finished ton)...... $ 1,487 $ 1,592 $ 1,444
Flat-Rolled Products - high value (per ton).............. $ 3,761 $ 4,017 $ 3,897
High Performance Metals - nickel-based and specialty
steel alloys (per lb.)................................ $ 6.46 $ 6.29 $ 6.40
High Performance Metals - titanium mill products (per
lb.).................................................. $ 12.11 $ 11.36 $ 11.73
High Performance Metals - exotic alloys (per lb.)........ $ 35.03 $ 35.80 $ 32.16
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Certain amounts for prior periods have been reclassified to conform with the 2002 presentation.
On December 13, 2001, we issued in a private placement $300.0 million in aggregate principal amount of our 8.375% notes due 2011 which we refer to in this prospectus as the "old notes." We refer to this private placement in this prospectus as the "original note offering." We entered into a registration rights agreement with the initial purchasers of the old notes in which we agreed to deliver to you this prospectus. You are entitled to exchange your old notes in the exchange offer for registered notes with substantially identical terms, except that the registered notes have been registered under the Securities Act of 1933 and will not bear legends restricting their transfer. Unless you are a broker-dealer or unable to participate in the exchange offer, we believe that the notes to be issued in the exchange offer may be resold by you without compliance with the registration and prospectus delivery requirements of the Securities Act. You should read the discussions under the headings "The Exchange Offer" and "Description of the Registered Notes" for further information regarding the registered notes.
REGISTRATION RIGHTS
AGREEMENT..................... You are entitled under the registration rights
agreement to exchange your old notes for
registered notes with substantially identical
terms. The exchange offer is intended to
satisfy these rights. After the exchange offer
is complete, except as set forth in the next
paragraph, you will no longer be entitled to
any exchange or registration rights with
respect to your old notes.
The registration rights agreement requires us
to file a registration statement for a
continuous offering in accordance with Rule 415
under the Securities Act of 1933 (the
"Securities Act") for your benefit if, under
applicable law, you would not receive freely
tradeable registered notes in the exchange
offer, you are ineligible to participate in the
exchange offer, or in other specified
circumstances and you notify us that you wish
to have your old notes registered under the
Securities Act. See "The Exchange
Offer -- Procedures for Tendering."
THE EXCHANGE OFFER............ We are offering to exchange $1,000 principal
amount of 8.375% notes due 2011, which have
been registered under the Securities Act, for
each $1,000 principal amount of our
unregistered 8.375% notes due 2011 that were
issued in the original note offering.
In order to be exchanged, an old note must be
properly tendered and accepted. All old notes
that are validly tendered and not validly
withdrawn will be exchanged.
As of this date, there are $300.0 million
aggregate principal amount of old notes
outstanding.
We will issue the registered notes promptly
after the expiration of the exchange offer.
RESALES OF THE REGISTERED
NOTES......................... We believe that registered notes to be issued
in the exchange offer may be offered for
resale, resold and otherwise transferred by you
without compliance with the registration and
prospectus delivery provisions of the
Securities Act if you meet the following
conditions:
(1) the registered notes are acquired by you in
the ordinary course of your business;
(2) you are not engaging in and do not intend
to engage in a distribution of the
registered notes;
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(3) you do not have an arrangement or
understanding with any person to
participate in the distribution of the
registered notes; and
(4) you are not an affiliate of ours, as that
term is defined in Rule 405 under the
Securities Act.
Our belief is based on interpretations by the
staff of the Securities and Exchange Commission
(the "Commission"), as set forth in no-action
letters issued to third parties unrelated to
us. The staff has not considered this exchange
offer in the context of a no-action letter, and
we cannot assure you that the staff would make
a similar determination with respect to this
exchange offer.
If you do not meet the above conditions, you
may incur liability under the Securities Act if
you transfer any registered note without
delivering a prospectus meeting the
requirements of the Securities Act. We do not
assume or indemnify you against that liability.
Each broker-dealer that is issued registered
notes in the exchange offer for its own account
in exchange for old notes which were acquired
by that broker-dealer as a result of
market-making activities or other trading
activities must agree to deliver a prospectus
meeting the requirements of the Securities Act
in connection with any resales of the
registered notes. A broker-dealer may use this
prospectus for an offer to resell or to
otherwise transfer these registered notes.
EXPIRATION DATE............... The exchange offer will expire at 5:00 p.m.,
New York City time, on June 10, 2002, unless we
decide to extend the exchange offer. We do not
intend to extend the exchange offer, although
we reserve the right to do so.
CONDITIONS TO THE EXCHANGE
OFFER......................... The only conditions to completing the exchange
offer are that the exchange offer not violate
applicable law or any applicable interpretation
of the staff of the Commission and no
injunction, order or decree has been issued
which would prohibit, prevent or materially
impair our ability to proceed with the exchange
offer. See "The Exchange Offer -- Conditions."
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PROCEDURES FOR TENDERING OLD
NOTES HELD IN THE FORM OF
BOOK-ENTRY INTERESTS.......... The old notes were issued as global securities
in fully registered form without coupons.
Beneficial interests in the old notes which are
held by direct or indirect participants in The
Depository Trust Company through
certificateless depositary interests are shown
on, and transfers of the old notes can be made
only through, records maintained in book-entry
form by DTC with respect to its participants.
If you are a holder of an old note held in the
form of a book-entry interest and you wish to
tender your old note for exchange pursuant to
the exchange offer, you must transmit to The
Bank of New York, as exchange agent, on or
prior to the expiration of the exchange offer
either:
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- a written or facsimile copy of a properly
completed and executed letter of transmittal
and all other required documents to the
address set forth on the cover page of the
letter of transmittal; or
- a computer-generated message transmitted by
means of DTC's Automated Tender Offer Program
system and forming a part of a confirmation
of book-entry transfer in which you
acknowledge and agree to be bound by the
terms of the letter of transmittal.
The exchange agent must also receive on or
prior to the expiration of the exchange offer
either:
- a timely confirmation of book-entry transfer
of your old notes into the exchange agent's
account at DTC, in accordance with the
procedure for book-entry transfers described
in this prospectus under the heading "The
Exchange Offer -- Book-Entry Transfer," or
- the documents necessary for compliance with
the guaranteed delivery procedures described
below.
A letter of transmittal accompanies this
prospectus. By executing the letter of
transmittal or delivering a computer-generated
message through DTC's Automated Tender Offer
Program system, you will represent to us that,
among other things:
- the registered notes to be acquired by you in
the exchange offer are being acquired in the
ordinary course of your business;
- you are not engaging in and do not intend to
engage in a distribution of the registered
notes;
- you do not have an arrangement or
understanding with any person to participate
in the distribution of the registered notes;
and
- you are not our affiliate.
PROCEDURES FOR TENDERING
CERTIFICATED OLD NOTES........ If you are a holder of book-entry interests in
the old notes, you are entitled to receive, in
limited circumstances, in exchange for your
book-entry interests, certificated notes which
are in equal principal amounts to your
book-entry interests. See "Description of the
Registered Notes -- Form of Registered Notes."
No certificated notes are issued and
outstanding as of the date of this prospectus.
If you acquire certificated old notes prior to
the expiration of the exchange offer, you must
tender your certificated old notes in
accordance with the procedures described in
this prospectus under the heading "The Exchange
Offer -- Procedures for Tendering --
Certificated Old Notes."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. If you are the beneficial owner of old notes
and they are registered in the name of a
broker, dealer, commercial bank, trust company
or other nominee, and you wish to tender your
old notes, you should promptly contact the
person in whose name your old notes are
registered and instruct that person to tender
on your behalf. If you
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wish to tender on your own behalf, you must,
prior to completing and executing the letter of
transmittal and delivering your old notes,
either make appropriate arrangements to
register ownership of the old notes in your
name or obtain a properly completed bond power
from the person in whose name your old notes
are registered. The transfer of registered
ownership may take considerable time. See "The
Exchange Offer -- Procedures for
Tendering -- Procedures Applicable to All
Holders."
GUARANTEED DELIVERY
PROCEDURES.................... If you wish to tender your old notes and
(1) they are not immediately available,
(2) time will not permit your old notes or
other required documents to reach the
exchange agent before the expiration of the
exchange offer, or
(3) you cannot complete the procedure for
book-entry transfer on a timely basis,
you may tender your old notes in accordance
with the guaranteed delivery procedures set
forth in "The Exchange Offer -- Procedures for
Tendering -- Guaranteed Delivery Procedures."
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ACCEPTANCE OF OLD NOTES AND
DELIVERY OF REGISTERED
NOTES......................... Except under the circumstances described above
under "Conditions to the Exchange Offer," we
will accept for exchange any and all old notes
which are properly tendered in the exchange
offer prior to 5:00 p.m., New York City time,
on the expiration date. The registered notes to
be issued to you in the exchange offer will be
delivered promptly following the expiration
date. See "The Exchange Offer -- Terms of the
Exchange Offer."
WITHDRAWAL.................... You may withdraw the tender of your old notes
at any time prior to 5:00 p.m., New York City
time, on the expiration date. We will return to
you any old notes not accepted for exchange for
any reason without expense to you as promptly
as we can after the expiration or termination
of the exchange offer.
EXCHANGE AGENT................ The Bank of New York is serving as the exchange
agent in connection with the exchange offer.
CONSEQUENCES OF FAILURE
TO EXCHANGE................... If you do not participate in the exchange
offer, upon completion of the exchange offer,
the liquidity of the market for your old notes
could be adversely affected. See "The Exchange
Offer -- Consequences of Failure to Exchange."
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS................ The exchange of old notes for registered notes
should not be a taxable event for federal
income tax purposes. See "Material Federal
Income Tax Considerations."
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ISSUER........................ Allegheny Technologies Incorporated.
NOTES OFFERED................. $300,000,000 principal amount of 8.375% Notes
due 2011, which have been registered under the
Securities Act.
MATURITY DATE................. December 15, 2011.
INTEREST PAYMENT DATES........ June 15 and December 15 of each year, beginning
June 15, 2002.
OPTIONAL REDEMPTION........... The registered notes are redeemable, in whole
or in part, at our option, at any time, at a
redemption price equal to the greater of (i)
100% of the principal amount of the registered
notes being redeemed, plus accrued and unpaid
interest thereon to the date of redemption, or
(ii) the sum of the remaining scheduled
payments of principal and interest on the
registered notes being redeemed (not including
any portion of the payments of interest accrued
as of the date of redemption), discounted to
its present value as of the redemption date on
a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the
treasury rate plus 25 basis points, plus
accrued and unpaid interest to the redemption
date. See "Description of Registered
Notes -- Optional Redemption."
RANKING....................... The registered notes are our senior unsecured
obligations and rank equally with all of our
other existing and future unsecured and
unsubordinated indebtedness. The registered
notes will be effectively subordinated to any
of our existing and future secured debt to the
extent of the assets securing that debt, and to
all liabilities of our subsidiaries, including
trade payables. We are primarily a holding
company and most of our operations are
conducted by our subsidiaries.
CERTAIN COVENANTS............. The indenture governing the notes contains
covenants limiting our ability and the ability
of our subsidiaries to, among other things:
- incur debt secured by liens;
- engage in sale/leaseback transactions;
- guarantee debt; and
- merge or consolidate or sell all or
substantially all of our assets.
USE OF PROCEEDS............... We will not receive any cash proceeds upon the
completion of the exchange offer.
FURTHER ISSUANCES............. We may from time to time, without notice to or
the consent of the holders of notes, create and
issue additional notes ranking equally and
ratably with the notes. Such further notes may
be issued under the indenture relating to the
notes offered hereby, and may vote with the
notes offered hereby on matters affecting all
noteholders.
FORM OF REGISTERED NOTES...... The registered notes to be issued in the
exchange offer will be represented by one or
more global securities deposited with The Bank
of New York for the benefit of DTC. You will
not receive registered notes in certificated
form unless one of the events set forth
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under the heading "Description of the
Registered Notes -- Form of Registered Notes"
occurs.
Instead, beneficial interests in the registered
notes to be issued in the exchange offer will
be shown on, and a transfer of these interests
will be effected only through, records
maintained in book-entry form by DTC with
respect to its participants.
RISK FACTORS.................. You should refer to the section entitled "Risk
Factors" for a discussion of material risks you
should carefully consider before deciding to
invest in the notes.
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The following table sets forth our ratios of earnings to fixed charges for the periods indicated.
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
-- (1) 5.7x 5.5x 7.7x 11.4x
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(1) For the year ended December 31, 2001, fixed charges exceeded earnings by approximately $37.1 million. Earnings were net of restructuring and transformation charges of approximately $74.2 million in 2001. Without these restructuring and transformation charges, our ratio of earnings to fixed charges would have been 2.0x for 2001.
Before you participate in the exchange offer, you should carefully consider the risks described below and the other information included or incorporated by reference in this prospectus.
RISKS RELATING TO THE EXCHANGE OFFER
THERE MAY BE NO ACTIVE TRADING MARKET FOR THE REGISTERED NOTES TO BE ISSUED IN THE EXCHANGE OFFER.
The registered notes are a new issue of securities for which there is no established market. Accordingly, any or all of the following may occur:
- no liquid market for the registered notes may develop;
- you may be unable to sell your registered notes; or
- the price at which you will be able to sell the registered notes may be lower than their principal amount or purchase price.
If a public market were to exist, the registered notes could trade at prices that may be higher or lower than their principal amount or purchase price, depending on many factors, including prevailing interest rates, the market for similar notes, and our financial performance. We do not intend to list the registered notes to be issued to you in the exchange offer on any securities exchange or to seek approval for quotations through any automated quotation system. No active market for the registered notes is currently anticipated.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO THE DEBT OF OUR SUBSIDIARIES, WHICH COULD ADVERSELY AFFECT YOUR RIGHTS TO RECEIVE PAYMENTS OF INTEREST AND PRINCIPAL ON THE NOTES.
We are primarily a holding company and most of our operations are conducted by our subsidiaries. None of our subsidiaries has guaranteed our obligations to make payments on the notes. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries, their creditors will generally be entitled to payment of claims from their assets before any of those assets are made available for a distribution to us for any purpose, including payments on the notes. As a result, the notes will be effectively subordinated to the liabilities of our subsidiaries. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries, we and our creditors, including the holders of the notes, will have no right to proceed against the assets of our subsidiaries or to cause the liquidation or bankruptcy of these subsidiaries under bankruptcy laws.
RISKS RELATED TO OUR BUSINESS
WE HAVE EXPERIENCED AND MAY CONTINUE TO EXPERIENCE DECLINES IN REVENUE, OPERATING PROFIT AND NET INCOME, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO MAKE PAYMENTS OF INTEREST AND PRINCIPAL ON THE NOTES.
We experienced a decline in total sales to $2.13 billion in 2001 from $2.46 billion in 2000, and recorded an operating profit of $54.3 million in 2001 as compared with an operating profit of $207.8 million in 2001 and a net loss of $25.0 million in 2001 as compared to net income of $132.5 million in 2000 and $300.2 million in 1999. On April 17, 2002, we announced total sales, operating profit and a net loss of $493.1 million, $3.2 million and $11.1 million, respectively, for the quarter ended March 31, 2002. Based on the apparent continuing weakness and uncertainty in the U.S. and most global economies, we expect 2002 to continue to be a difficult year for us. If declines in our operating results continue, our ability to make payments of interest and principal on the notes could be impaired.
Various changes in general economic conditions affect the industries in which our customers operate. These changes include decreases in the rate of consumption or use of our customers' products due to economic downturns. Other factors causing fluctuation in our customers' positions are changes in market demand, lower overall pricing due to national and international overcapacity, currency fluctuations, lower priced imports and increases in use or decreases in prices of substitute materials. As a result of these factors, demand for our products and, therefore, our profitability has been and may in the future be subject to significant fluctuation. In particular, our profitability may be adversely affected by our inability to quickly adjust our cost structure to correspond to changing market conditions, because a significant portion of our operating costs are fixed in the near-term. A continuing decline in our profitability could impair our ability to make payments of interest and principal on the notes.
OUR SUBSTANTIAL INDEBTEDNESS AND RELATED FUTURE DEBT SERVICE REQUIREMENTS COULD ADVERSELY AFFECT OUR ABILITY TO SATISFY OUR OBLIGATIONS WITH RESPECT TO THE NOTES AND OUR FINANCIAL FLEXIBILITY GENERALLY.
At March 31, 2002 we had a total indebtedness of $525.4 million and the ability (subject to satisfaction of borrowing conditions) to borrow up to $325 million under our revolving credit facility. This indebtedness and our related future debt service requirements could have important consequences to us and to you. For example, it could:
- make it more difficult for us to satisfy our obligations with respect to the notes;
- increase our vulnerability to general adverse economic and industry conditions;
- require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; and
- place us at a competitive disadvantage.
THE CURRENT TREND OF PRICE DEFLATION FOR MANY COMMODITY PRODUCTS HAS ADVERSELY AFFECTED PRICES FOR OUR PRODUCTS AND MAY CONTINUE TO DO SO.
Prices for commodity products such as commodity grades of specialty materials, including stainless steel, currently are subject to a trend of price deflation. Because we produce commodity products such as these, our revenues and operating results have been and may continue to be adversely affected by a deflationary price environment for these products. For example, average prices per net finished ton of our commodity stainless steel flat-rolled products decreased 16% in 2001 as compared to 2000. Reduction in the demand for our commodity products by our customers may continue to cause our profitability to decline and could impair our ability to make payments of interest and principal on the notes.
ENERGY RESOURCES AND RAW MATERIALS MARKETS ARE SUBJECT TO CONDITIONS THAT CREATE UNCERTAINTY IN THE PRICES AND AVAILABILITY OF ENERGY RESOURCES UPON WHICH WE RELY.
We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of our energy resources could temporarily impair our ability to manufacture our products for our customers. Further, increases in our energy costs, or changes in costs relative to energy costs paid by our competitors, has and may continue to adversely affect our profitability and could impair our ability to make payments of interest and principal on the notes. For example, in 2001 we incurred substantially higher energy costs in the Flat-Rolled Products and High Performance Metals segments compared to prior years. On a volume-adjusted basis, the Flat-Rolled Products segment incurred $14.3 million in higher energy costs in 2001 compared to 2000. The High Performance Metals segment had $14.1 million in higher energy costs for the first nine months of 2001 compared to the comparable prior year period. We use approximately 10 to 12 million MMBtus of natural gas annually, depending on business conditions, in the manufacture of our products. These purchases of natural gas expose us to the risk of higher gas prices. For example, a hypothetical $1.00 per MMBtu increase in the price of natural gas would result in increased annual energy costs of approximately $10 to $12 million. These factors also impact our ability to implement or maintain energy surcharges and influence the business decisions made by our suppliers and customers. To the extent that these uncertainties cause our suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition and could impair our ability to make payments of interest and principal on the notes.
We rely to a substantial extent on outside vendors to supply us with certain raw materials that are critical to the manufacture of our products. Purchase prices and availability of these critical raw materials are subject to volatility. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, on price and other terms acceptable to us, or at all.
If our suppliers increase the price of our critical raw materials, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to our customers and accepted customer orders for our products prior to purchasing necessary raw materials, we may be unable to raise the price of our products to cover all or part of the increased cost of the raw materials. For example, we generally use more than 40,000 tons of nickel each year. A hypothetical price increase of $1.00 per pound in nickel prices would result in increased annual nickel costs of approximately $80 million.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we have in the past and may in the future experience delays or shortages in the supply of raw materials. If we are unable to obtain adequate and timely deliveries of our required raw materials, we may be unable to timely manufacture sufficient quantities of our products. This could cause us to lose sales, incur additional costs, delay new product introductions and suffer harm to our reputation.
While we enter into raw materials and energy futures contracts from time to time to hedge our exposure to price fluctuations, we cannot be certain that our hedge position adequately reduces our exposure. We believe that we have adequate controls to monitor these contracts, but we may not be able to accurately assess our exposure to price volatility in the markets for critical raw materials. In addition, although we occasionally use raw materials surcharges to offset the impact of increased costs, competitive factors in the marketplace can limit our ability to institute surcharges, and there can be a delay between the increase in the price of raw materials and the realization of the benefit of our surcharges.
We acquire certain important raw materials that we use to produce our specialty materials, including nickel, titanium sponge and ammonia paratungstate, from foreign sources. Some of these sources operate in countries that may be subject to unstable political and economic conditions. These conditions may disrupt supplies or affect the prices of these materials.
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATION, AND VIOLATIONS OF OR LIABILITIES UNDER THESE REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
We are subject to various domestic and international environmental laws and regulations that govern our discharge of pollutants into the air or water, our management and disposal of hazardous substances, and which may require us to investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which we have been identified as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act and comparable state laws. We 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 non-compliance with environmental permits required at our facilities. We currently are involved in the investigation and remediation of number of our current and former sites as well as third party locations. The resolution in any reporting period of one or more of these matters could have a material adverse effect on our results of operations for that period. In addition, future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our financial condition or results of operations and impair our ability to make payments of interest and principal on the notes.
A CONTINUATION OF THE DECLINE IN U.S. EQUITY MARKETS COULD IMPAIR OUR ABILITY TO MAKE PAYMENTS OF INTEREST AND PRINCIPAL ON THE NOTES.
Our pension plans are funded in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Service. If the value of the pension assets were to significantly decline, we could be required to make cash contributions to the pension plan trust in amounts that could be significant. If we were required to fund significant retiree medical costs or pension obligations from cash flow from operations, our ability to make payments of interest and principal on the notes could be impaired.
WE HAVE EXPERIENCED IN THE PAST AND MAY EXPERIENCE IN THE FUTURE LABOR DISPUTES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND PROFITABILITY.
Approximately half of our workforce is covered by various collective bargaining agreements, principally with the United Steelworkers of America. Generally, agreements that expire may be terminated after notice by the USWA. After such a termination, the USWA may authorize a strike. A strike by the employees covered by one or more of the collective bargaining agreements could materially adversely affect our operating results. On September 4, 2001, workers at our Wah Chang facility began a strike. On March 22, 2002 we announced that our Wah Chang facility and the USWA had reached a new six-year labor agreement that became effective on April 1, 2002. In the future, we may not succeed in concluding new collective bargaining agreements with the USWA or other unions to replace those that expire. The effect of future labor disputes could have a materially adverse impact on us and impair our ability to make payments of interest and principal on the notes.
OUR ABILITY TO OBTAIN INSURANCE FOR VARIOUS RISKS, OR ON ACCEPTABLE TERMS, IS UNCERTAIN.
We obtain various kinds of insurance as may be needed to conduct our business. Such insurance may include all risk property, workers' compensation, third party liability and other coverages deemed necessary and prudent. In view of the events of September 11, 2001 and for other reasons associated with the world economies, we cannot predict the conditions under which we will be able to obtain insurance coverage in the future, the level of premiums, the size of deductibles, or any other adjustments to the cost of coverage of insurance.
VARIABLE RATE INTEREST ON OUR INDEBTEDNESS EXPOSES US TO THE RISK OF HIGHER INTEREST COSTS IN THE FUTURE.
At December 31, 2001, we had approximately $124 million of variable interest rate debt outstanding with an average interest rate of approximately 2.9 percent. Since the interest rate on this debt varies with the short-term market rate of interest, we are exposed to the risk that these interest rates may increase. For example, a hypothetical 1 percent increase in the annual rate of interest on $124 million of outstanding variable rate debt would result in increased annual interest costs of $1.2 million. A substantial increase in interest costs could impair our ability to make payments of interest and principal on the notes.
BECAUSE EXPORT SALES CONSTITUTE A SIGNIFICANT PERCENTAGE OF OUR SALES, RISKS ASSOCIATED WITH EXPORT SALES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.
In 2001, international sales accounted for approximately 23 percent of our total revenues, and we believe that export sales will continue to account for a significant percentage of our future revenues. Risks associated with export sales include:
- political and economic instability, including weak conditions in the world's economies;
- accounts receivable collection;
- export controls;
- changes in legal and regulatory requirements;
- changes in tax laws and tariffs; and
- exchange rate fluctuations, which may affect sales to international customers and the value of profits earned on export sales when converted into dollars.
Any of these factors could have a material adverse effect on our results of operations and impair our ability to make payments of interest and principal on the notes.
WE FACE RISKS RELATED TO INVESTIGATIONS OF OUR PERFORMANCE UNDER U.S. GOVERNMENT CONTRACTS, WHICH MAY RESULT IN THE PAYMENT OF MONIES, OR ADVERSELY AFFECT OUR ABILITY TO PERFORM UNDER THESE CONTRACTS.
One of our operating companies performs work under U.S. Government contracts. We, like other government contractors, are subject to various audits, reviews and investigations relating to compliance with laws. Various claims have been asserted against us, principally related to one of our former operations. Depending on the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under the contract. Should the business unit or division involved be charged with wrongdoing, or should the U.S. Government determine that the unit or division is not a "presently responsible contractor," that unit or division, and conceivably our company as a whole, could be temporarily suspended or, in the event of a conviction, debarred for up to three years from receiving new government contracts or government-approved subcontracts. These proceedings may result in damages, fines and penalties if the charges are proven or settlement negotiated and we could expend substantial amounts in defending against such claims which could impair our ability to make payments of interest and principal on the notes.
THE SEPTEMBER 11, 2001 TERRORIST ATTACKS AND THE POSSIBILITY OF ADDITIONAL ATTACKS HAVE ADVERSELY AFFECTED THE U.S. AND OTHER ECONOMIES AND ARE LIKELY TO ADVERSELY AFFECT OUR OPERATING RESULTS.
The September 11, 2001 terrorist attacks and the possibility of additional attacks have adversely affected the U.S. and other economies and are likely to adversely affect our operating results. As a result, demand for our products and our profitability could decline, perhaps significantly. In particular, the events of September 11 resulted in sharply reduced air travel, which led to curtailed or delayed new plane orders and the idling of large portions of the fleets of commercial airlines. A significant portion of the sales of our High Performance Metals Group products are made to customers in the aerospace industry, and we expect that reduced orders from those customers will adversely affect our results of operations, which could impair our ability to make payments of interest and principal on the notes.
WE PLAN TO CONTINUE TO IMPLEMENT ACQUISITION AND DISPOSITION STRATEGIES THAT INVOLVE A NUMBER OF INHERENT RISKS, ANY OF WHICH COULD CAUSE US NOT TO REALIZE ANTICIPATED OPERATING RESULTS.
We intend to continue to strategically position our businesses in order to improve our ability to compete. We plan to do this by seeking specialty niches, expanding our global presence, acquiring businesses complimentary to existing strengths and continually evaluating the performance and strategic fit of exiting business unit dispositions. As a result, the relative makeup of our businesses is subject to change. Acquisitions, joint ventures and other business combinations involve various inherent risks, such as assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions and other transactions could also be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions and deteriorations in domestic and foreign economic relations.
We may be unable to realize, or do so within any particular time frame, the cost reductions, cash flow increases or other synergies expected to result from acquisitions, joint ventures and other transactions or investments we may undertake, or be unable to generate additional revenue to offset any unanticipated inability to realize such expected synergies. Realization of the anticipated benefits of acquisitions or other transactions could take longer than expected, and implementation difficulties, market factors and deteriorations in domestic or global economic conditions could alter the anticipated benefits, which could impair our ability to make payments of interest and principal on the notes.
This prospectus contains forward-looking statements. Forward-looking statements include, without limitation, those statements related to anticipated business, economic and market conditions; operational actions taken to respond to market conditions; sales and earnings, financial condition, financial performance and growth and return on capital; prices, price increases and the effect of price increases on performance and product demand; raw material and energy costs, expected capital expenditures, cost reductions, including energy initiatives, anticipated cost savings, including the anticipated time periods in which savings may be realized; capital investments and the impact of investments on our capabilities; working capital, cash flow, dividends or potential repurchases of our stock; projected pension surplus, excess pension income (expense) and reimbursement of retiree health care expenditures; realization of deferred income tax assets; the ratification of labor agreements as well as the expected benefits and costs under those agreements; anticipated effects of acquisitions, joint ventures or other business combinations on earnings; the outcome of any government inquiries, litigation or other proceedings related to government contracts or other matters; safety performance; and future environmental costs. These statements are based on current expectations or beliefs concerning various future events that involve a number of risks and uncertainties, many of which we are unable to predict or control. Actual results or performance may differ materially from any future results or performance anticipated based on management's current expectations contained in such forward-looking statements.
The factors discussed under the heading "Risk Factors" and elsewhere in this prospectus are not necessarily all of the important factors that could cause our results to differ materially from expected results. Other factors, such as the general state of the economy, could also cause actual results to vary materially from expected results. Forward-looking statements speak only as of the date they were made and we undertake no obligation to update them, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we may make in our reports filed with the Commission.
We will not receive any cash proceeds from the completion of the exchange offer. The net proceeds of approximately $293.3 million from the issuance of the old notes were used to repay a portion of our outstanding short-term indebtedness.
The following table sets forth our consolidated capitalization at December 31, 2001.
DECEMBER 31, 2001
-----------------
(IN MILLIONS)
Short-term borrowings and current portion of long-term
debt...................................................... $ 9.2
--------
Long-term debt:
Allegheny Technologies $300 million 8.375% Notes due 2011,
net.................................................... $ 292.5
Allegheny Ludlum 6.95% Debentures due 2025................ 150.0
Other long-term debt...................................... 130.5
Stockholders' equity:
Preferred stock, par value $0.10; 50,000,000 shares
authorized; none issued................................ --
Common stock, par value $0.10; 500,000,000 shares
authorized; 98,951,490 shares issued; 80,314,624 shares
outstanding............................................ 9.9
Additional paid-in-capital................................ 481.2
Retained earnings......................................... 957.5
Treasury stock, at cost................................... (478.2)
Accumulated other comprehensive loss, net of tax.......... (25.7)
--------
Total stockholders' equity............................. 944.7
--------
Total capitalization................................. $1,517.7
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We derived the selected consolidated financial data shown below as of December 31, 2001, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2001 from our audited consolidated financial statements. You should read the following financial information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes incorporated by reference in this prospectus.
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN MILLIONS EXCEPT OPERATING DATA AND
RATIOS AND AS OTHERWISE INDICATED)
STATEMENT OF OPERATIONS DATA:
Sales
Flat-Rolled Products...................................... $1,088.4 $1,444.1 $1,296.7
High Performance Metals................................... 771.8 735.4 722.7
Industrial Products....................................... 267.8 280.9 276.7
-------- -------- --------
Sales................................................... $2,128.0 $2,460.4 $2,296.1
Operating Profit (Loss)
Flat-Rolled Products...................................... $ (38.1) $ 119.6 $ 85.2
High Performance Metals................................... 82.0 66.5 87.0
Industrial Products....................................... $ 10.4 21.7 12.2
-------- -------- --------
Operating Profit (Loss)................................. $ 54.3 $ 207.8 $ 184.4
Income (loss) from continuing operations before
extraordinary items....................................... (25.2) 132.5 111.0
Income from discontinued operations......................... -- -- 59.6
Extraordinary gains on sales of operations.................. -- -- 129.6
-------- -------- --------
Net income (loss)........................................... $ (25.2) $ 132.5 $ 300.2
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital, excluding current portion of long-term
debt.................................................... $ 602.6 $ 662.5 $ 646.2
Working capital, including current portion of long-term
debt.................................................... 593.4 609.3 493.5
Total assets.............................................. 2,643.2 2,776.2 2,750.6
Cost in excess of net assets acquired..................... 188.4 194.5 204.2
Total debt................................................ 582.2 543.8 353.0
Long-term debt............................................ 573.0 490.6 200.3
Stockholders' equity...................................... 944.7 1,039.2 1,200.2
CASH FLOW INFORMATION:
Cash flow provided by operating activities................ $ 122.8 $ 135.5 $ 102.9
Cash flow provided by (used in) investing activities...... (85.0) (70.0) 429.7
Cash flow used in financing activities.................... (30.3) (90.0) (525.4)
OPERATING DATA:
Volume:
Flat-Rolled Products -- commodity (finished tons)......... 357,894 460,940 475,557
Flat-Rolled Products -- high value (tons)................. 130,172 147,661 117,062
High Performance Metals - nickel-based and specialty steel
alloys (000's lbs.)..................................... 51,899 46,612 43,905
High Performance Metals - titanium mill products (000's
lbs.)................................................... 23,070 24,798 22,792
High Performance Metals - exotic alloys (000's lbs.)...... 3,457 3,691 3,756
Average Prices:
Flat-Rolled Products -- commodity (per finished ton)...... $ 1,527 $ 1,819 $ 1,562
Flat-Rolled Products -- high value (per ton).............. $ 3,956 $ 4,025 $ 4,189
High Performance Metals - nickel-based and specialty steel
alloys (per lb.)........................................ $ 6.31 $ 5.86 $ 5.98
High Performance Metals - titanium mill products (per
lb.).................................................... $ 11.70 $ 10.87 $ 11.70
High Performance Metals - exotic alloys (per lb.)......... $ 33.52 $ 35.56 $ 34.77
RATIO OF ADJUSTED EBITDA (1) TO INTEREST EXPENSE............ 5.3x 10.0x 9.9x
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(1) Adjusted EBITDA represents income before interest, income taxes, extraordinary items and depreciation and amortization. Adjusted EBITDA also excludes merger and restructuring charges of $74.2 million, $29.5 million and $5.6 million in 2001, 2000 and 1999, respectively, and excludes income from discontinued operations and extraordinary gains on sales. Adjusted EBITDA is included because we believe that such information is considered to be an additional basis on which to evaluate our ability to pay interest, repay debt and fund capital expenditures. Adjusted EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, measures of operating performance determined in accordance with generally accepted accounting principles. EBITDA may not be comparable to similarly titled measures reported by other companies.
OVERVIEW
We are one of the largest and most diversified producers of specialty materials in the world. We operate in three business segments: Flat-Rolled Products, High Performance Metals and Industrial Products. Information with respect to each business segment is presented separately below.
2001 was a difficult and challenging year for us. In spite of weak conditions in many of our markets, significant accomplishments included improvements in safety, cost reductions, and working capital management.
- Cash flow from operations in 2001 was $122.8 million.
- Managed working capital (gross inventory and accounts receivable less accounts payable) was reduced by $127.1 million, beating the $70 million managed working capital reduction goal by over 80 percent.
- Cost savings amounted to $115 million in 2001, exceeding the $110 million goal.
- In late December 2001, we strengthened our capital base by issuing $300 million of new 10-year notes and arranging a new $325 million revolving bank credit facility.
- As a result of our continuing focus on safety, in 2001 the OSHA Total Recordable Incident Rate improved 17 percent and the Lost Day Case Rate improved 16 percent compared to 2000. Over the last two years, both measures of safety have improved by over 40 percent.
Looking forward, based on the apparent continuing weakness and uncertainty in the U.S. and most global economies as we enter 2002, we expect the year to be difficult. Therefore, our top financial priority is to continue to reduce costs and generate cash. Cost savings opportunities of $100 million have been identified for 2002. The current 2002 capital expenditure plan for operational necessities and for continuation of capital programs which commenced in 2001 is approximately $50 million, compared to capital investments totaling $104 million in 2001. Through our Operational Excellence initiatives, we will stay focused on safety, customer satisfaction, cost reduction and reducing managed working capital. Our goal for 2002 is to further reduce managed working capital by $65 million. Success in achieving these goals should give us the financial capacity to weather the economic recession and emerge strongly when the economy recovers.
Our Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys and superalloys, and titanium and titanium-based alloys in sheet, strip, plate and Precision Rolled Strip(R) products as well as silicon electrical steels and tool steels. The companies in this segment include Allegheny Ludlum, Allegheny Rodney, Rome Metals, and Allegheny Ludlum's 60 percent interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited ("STAL").
Our High Performance Metals segment produces, converts and distributes nickel- and cobalt-based alloys and superalloys, titanium and titanium-based alloys, zirconium, hafnium, niobium, tantalum and other specialty materials, primarily in slab, ingot, billet, bar, rod, wire and coil forms, seamless tube forms and zirconium chemicals. The companies in this segment include Allvac, Allvac Ltd (U.K.) and Wah Chang.
Our Industrial Products segment's principal business produces tungsten powder, tungsten carbide materials and carbide cutting tools. This segment also produces large grey and ductile iron castings and carbon alloy steel and non-ferrous forgings. The companies in this segment are Metalworking Products, Casting Service and Portland Forge.
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS)
Revenues:
Flat-Rolled Products...................................... $1,088.4 $1,444.1 $1,296.7
High Performance Metals................................... 771.8 735.4 722.7
Industrial Products....................................... 267.8 280.9 276.7
-------- -------- --------
Total.................................................. $2,128.0 $2,460.4 $2,296.1
======== ======== ========
EBITDA(1)................................................... $ 167.1 $ 375.6 $ 305.8
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(1) EBITDA represents income before interest, income taxes, extraordinary items and depreciation and amortization. EBITDA also excludes merger and restructuring charges of $74.2 million, $29.5 million and $5.6 million in 2001, 2000 and 1999, respectively, and excludes income from discontinued operations and extraordinary gains on sales. EBITDA is included because we believe that such information is considered to be an additional basis on which to evaluate our ability to pay interest, repay debt and fund capital expenditures. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, measures of operating performance determined in accordance with generally accepted accounting principles. EBITDA may not be comparable to similarly titled measures reported by other companies.
When we refer to "energy costs" in the following discussion, we are referring to costs of electricity and natural gas. When we refer to "average prices" we are referring to sales of a particular product divided by the number of tons or pounds, as applicable, of that product shipped. All references to amounts shipped are calculated in tons or pounds, as applicable.
RESULTS OF OPERATIONS
Our sales were $2.13 billion in 2001, $2.46 billion in 2000 and $2.30 billion in 1999. International sales represented approximately 23 percent of sales in 2001, 18 percent in 2000, and 20 percent in 1999.
Operating profit was $54.3 million in 2001, $207.8 million in 2000, and $184.4 million in 1999. In 2001, we had a net loss from continuing operations of $25.2 million, which included after-tax charges of $47.8 million related to the permanent idling of the Houston, PA stainless steel melt shop, workforce reductions and other asset impairments. For 2000 and 1999, we had net income from continuing operations of $132.5 million and $111.0 million, respectively.
We operate in three business segments: Flat-Rolled Products, High Performance Metals and Industrial Products. Information with respect to our business segments is presented below.
2001 % CHANGE 2000 % CHANGE 1999
-------- -------- -------- -------- --------
(IN MILLIONS)
Sales to external customers............... $1,088.4 (24.6%) $1,444.1 11.4% $1,296.7
Operating profit (loss)................... (38.1) 119.6 40.4% 85.2
Operating profit (loss) as a percentage of
sales................................... (3.5%) 8.3% 6.6%
International sales as a percentage of
sales................................... 11.9% 7.3% 7.7%
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2001 Compared to 2000
Sales for the Flat-Rolled Products segment decreased 24.6 percent in 2001 compared to 2000 resulting in an operating loss of $38.1 million for the year. During 2001, operating results were severely impacted by very low demand and poor prices for many stainless steel products. Finished tons shipped in 2001 declined by 18 percent to 498,066 tons compared to shipments of 608,601 tons for 2000. The average price of flat-rolled products in 2001 decreased by 9 percent to $2,162 per ton compared to $2,365 per ton in the same 2000 period. Commodity product shipments in the segment (including stainless steel hot roll and cold roll sheet, stainless steel plate and silicon electrical steel, among other products) decreased 20 percent compared to 2000. Average prices for commodity products decreased 16 percent during the same period. These decreases were primarily attributable to continued weak demand for stainless steel sheet and plate due to the weak U.S. industrial economy. High-value product shipments in the segment (including strip, Precision Rolled Strip(R), super stainless steel, and nickel alloy and titanium products) decreased 12 percent compared to 2000, while average prices for high-value products decreased 1 percent. Certain of these high-value products are used largely in the automotive industry and capital goods markets, both of which were impacted by the weak U.S. economy. Increased international sales, primarily of Precision Rolled Strip(R) products, in Europe and Asia were offset by the overall decline in shipments of high-value products in the U.S.
Operating results were also adversely affected by $14.3 million in higher energy costs, on a volume-adjusted basis, in 2001 compared to the prior year. In addition, during 2001, accounts receivable reserves were increased by $7.3 million in recognition of the decline in the economy and the reduced availability of credit.
The decline in operating results was partially offset by ongoing cost reductions in the segment's Allegheny Ludlum operation, including a 10 percent salaried workforce reduction that was completed in the first quarter of 2001 and a further 5 percent reduction in staff at the end of 2001. Cost reductions for 2001 totaled approximately $80 million.
During the 2001 fourth quarter, we decided to permanently idle the melt and associated service operations located at our Houston, PA facility. We had determined that this facility could no longer be operated economically in the highly competitive global stainless steel market. This cost reduction action affected approximately 225 employees. A pre-tax charge of $70.0 million, primarily non-cash, for the related asset impairments, employee benefits, and other closure costs was recorded in the 2001 fourth quarter. These expenses are presented as restructuring costs on the statements of operations and are not included in the results for the segment. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $12 million.
2000 Compared to 1999
Sales and operating profit for the segment increased 11.4 percent and 40.4 percent, respectively, in 2000 compared to 1999.
The increase in sales was a result of improved pricing and higher demand for stainless steel products during the first three quarters of the year. Shipments of finished flat-rolled products were 608,601 tons in 2000 compared to 592,619 tons in 1999.
The average selling prices of finished flat-rolled products increased to $2,365 per ton in 2000 from $2,081 per ton in 1999. This increase was due principally to the impact of revised raw materials surcharge base levels, primarily for nickel and chrome, and an improved product mix. High value margin product shipments increased 13 percent in 2000.
Operating profit increased 40.4 percent to $119.6 million in 2000 primarily due to revised raw material surcharge base levels and improved product mix towards higher margin products. Tight operating cost controls and cost reduction efforts continued in the segment. In the fourth quarter of 2000, Allegheny Ludlum announced a 10 percent salaried workforce reduction, which was subsequently completed in the first quarter of 2001. The segment's fourth quarter 2000 operating profit was reduced by $7.0 million, compared to the fourth quarter of 1999, due to increased natural gas costs.
The STAL joint venture in Shanghai, China completed its first year of commercial production of Precision Rolled Strip(R) stainless steel strip in 2000.
2001 % CHANGE 2000 % CHANGE 1999
------ -------- ------ -------- ------
(IN MILLIONS)
Sales to external customers................... $771.8 4.9% $735.4 1.8% $722.7
Operating profit.............................. 82.0 23.3% 66.5 (23.6%) 87.0
Operating profit as a percentage of sales..... 10.6% 9.0% 12.0%
International sales as a percentage of
sales....................................... 36.0% 34.9% 36.7%
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2001 Compared to 2000
Sales for the High Performance Metals segment increased 4.9 percent in 2001 compared to 2000 as a result of continued strong shipments of high-value products to the aerospace, electrical energy, and oil and gas markets due, in part, to strong order backlog built at the end of 2000 and the first half of 2001. Shipments of nickel-based and specialty steel alloys increased 11 percent and prices increased 8 percent compared to 2000. While titanium mill products shipments decreased 7 percent, prices increased 8 percent compared to 2000. Shipments and prices for exotic alloys were down 6 percent compared to 2000.
Operating profit for 2001 increased 23.3 percent compared to 2000 primarily as a result of higher prices due to strong market conditions, combined with favorable product mix and efforts to reduce costs. Cost reductions for 2001 totaled approximately $27 million. However, operating profit was adversely affected by $14.1 million in higher energy costs in the first nine months of 2001 compared to the prior year.
During the 2001 third quarter, the United Steelworkers of America (USWA) employees at the Wah Chang facility, located in Albany, Oregon, went on strike after the union membership rejected the previously negotiated tentative contract. After a brief shutdown, and while we and the USWA continued discussions, we resumed full operation of the plant with management and salaried employees and replacement workers. The Wah Chang facility is involved in the production of exotic alloys including zirconium and niobium, and the strike does not impact other operations.
During the 2001 fourth quarter, we divested the North American operations of our titanium distribution company, Titanium Industries Inc. Results of operations for this business for 2001 and proceeds from the disposition of this business were not material to us.
Backlog of confirmed orders for the segment was approximately $350 million at December 31, 2001 and approximately $375 million at December 31, 2000. We expect demand for products used in commercial aerospace, which historically has been the segment's largest end-use market, to decrease in 2002 due to weaker market conditions, which have been exacerbated by the tragic events of September 11, 2001. As a result, in the 2001 fourth quarter we announced workforce reductions affecting approximately 220 employees at the Allvac and Allvac Ltd. operations. In connection with these reductions, which were completed in the 2002 first quarter, we recorded a pre-tax charge of $1.8 million for the related employee benefits costs. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment. These cost reduction actions are expected to result in annual pre-tax cost savings of approximately $5 million.
2000 Compared to 1999
Sales for the High Performance Metals segment increased 1.8 percent in 2000 compared to 1999. The increased sales reflected increased demand for nickel-based alloys and superalloys and specialty steel alloys from growing markets for electrical power generation turbines and biomedical products, and improved conditions in aerospace and oil and gas markets. In addition, shipments were strong for niobium-titanium alloys for superconducting applications, nickel-titanium shape memory alloys for cellular phones, nickel-titanium super- elastic alloys for the medical industry, and hafnium alloys used in the production of superalloys for aerospace applications. However, shipments of zirconium alloy products were lower in 2000 as a result of weaknesses in the chemical processing and commercial nuclear markets. Shipments for titanium products improved despite overall weakness in industrial markets, including chemical processing, which adversely affected pricing.
Operating profit decreased 23.6 percent in 2000 compared to 1999. Increased energy costs of $9.0 million in the fourth quarter, primarily for electric power at the Wah Chang operation in Oregon, contributed to the decline in operating profit. Operating profit was also adversely impacted by weaker results for zirconium and titanium and by higher operating costs at our titanium sponge facility, which was permanently idled in the first half of 2001.
In 2000, due to persistent weak market conditions, together with our ability to enter into long-term supply agreements for the purchase of titanium sponge at prices below our manufacturing cost, we decided to discontinue producing titanium sponge. As a result, in the fourth quarter of 2000, we recorded a charge of $20.0 million for asset impairment, employee termination benefits, and contractual costs to exit the business related to the idling of high-cost titanium sponge production assets located in Albany, Oregon. We ceased production of titanium sponge in the first half of 2001.
2001 % CHANGE 2000 % CHANGE 1999
------ -------- ------ -------- ------
(IN MILLIONS)
Sales to external customers................... $267.8 (4.7%) $280.9 1.5% $276.7
Operating profit.............................. 10.4 (52.1%) 21.7 77.9% 12.2
Operating profit as a percentage of sales..... 3.9% 7.7% 4.4%
International sales as a percentage of
sales....................................... 34.4% 28.4% 30.3%
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2001 Compared to 2000
Sales and operating profit for the Industrial Products segment decreased
4.7 percent and 52.1 percent, respectively, in 2001 compared to 2000. Weak
demand from most U.S. industrial markets negatively impacted operating results
for all businesses in the segment. In addition during 2001, accounts receivable
reserves were increased by $1.7 million in recognition of the decline in the
economy and the reduced availability of credit. The decline in operating results
was partially offset by ongoing efforts to reduce costs, which totaled
approximately $9 million in 2001.
2000 Compared to 1999
Sales and operating profit for the Industrial Products segment increased
1.5 percent and 77.9 percent, respectively, in 2000 compared to 1999. These
increases reflect improved performance at Metalworking Products due to stronger
industrial demand in early 2000 and the impact of cost reduction initiatives. In
addition, operating results for the second half of the year reflect the
acquisition of a tungsten carbide products operation. During the second quarter
of 2000, we exited the molybdenum and tungsten mill products business, which had
1999 sales of approximately $15.0 million. The segment's forgings and castings
businesses experienced a decrease in sales and operating profit in 2000 due
primarily to continued weak conditions in the transportation, farm equipment and
wind power generation markets.
Restructuring and transformation costs were $74.2 million, $29.5 million and $5.6 million in 2001, 2000 and 1999, respectively.
In 2001, we recorded a charge of $74.2 million related to the permanent idling of the Houston, PA stainless steel melt shop, workforce reductions and other asset impairments. Of this aggregate charge, $55.6 million related to the Houston, PA stainless steel melt shop, which was permanently idled in the 2001 fourth quarter, and other asset impairments; $9.8 million related to pension and termination benefits; $5.8 million related to severance and personnel costs; and $3.0 million related to contractual obligations and other exit costs. The workforce reductions affected approximately 520 employees across all of the Company's business segments and headquarters operations, and were substantially complete by the end of 2001. These cost reduction actions are estimated to provide annual pre-tax cost savings of approximately $19 million in 2002. We do not anticipate that the permanent idling of the Houston, PA stainless steel melt shop will result in reduced sales as we have the ability to increase our melt output using our existing facilities and can procure additional semi-finished material, if needed, on the world market, where excess stainless steel melt capacity currently exists.
In 2000, we recorded restructuring and transformation charges of $29.5 million. The 2000 charge included $13.3 million for asset impairments, and $6.7 million for employee termination benefits, primarily severance pay, and other contractual obligations related to the decision in the 2000 fourth quarter to permanently idle the high-cost titanium sponge production assets of the High Performance Metals segment. We ceased titanium sponge production in the first half of 2001, and costs associated with operating the facility in 2001 were included in results of operations as they were incurred. The 2000 charge also included $3.1 million related to the 10 percent salaried workforce reduction at Allegheny Ludlum. The staffing reductions were made pursuant to a cost reduction plan, which resulted from a management study undertaken in an effort to remain cost competitive. The salaried workforce was notified by management of the planned workforce reduction and of the availability of termination benefits prior to December 31, 2000. The reduction in workforce was completed in the 2001 first quarter, and resulted in approximately $11 million in cost savings in 2001. In addition, restructuring and transformation charges for 2000 included $6.4 million for costs related to changes in our executive management. Two executives left Allegheny Technologies in the 2000 fourth quarter. Both of these executives were parties to employment and severance arrangements that obligated Allegheny Technologies to make specific payments to them as a result of their departure.
The 1999 net restructuring and transformation charges of $5.6 million include costs associated with adjusting employee benefit plans as a result of the spin-offs which were partially offset by a $7.2 million reversal of restructuring costs accrued in 1998 related to workforce reductions which were implemented at less than expected costs.
At December 31, 2001, substantially all cash expenditures related to the 2000 and 1999 restructuring and transformation charges had been paid.
Gains on sales of assets and other includes pre-tax gains on the sale of real estate, certain investments and other assets, which are primarily included in other income on the statement of operations, as well as charges incurred in connection with closed operations. These items resulted in net charges of $14.8 million, $4.4 million and $0.2 million in 2001, 2000 and 1999, respectively. In 2001, we recorded a pre-tax charge of $5.6 million to write-off its minority interest in the e-Business site, MetalSpectrum, which terminated operations during the 2001 second quarter. In 2000, we realized a gain of $11.0 million on the sale of a minority interest in Gul Technologies Singapore, Ltd.
Gains on sales of assets and other for 1999 does not include extraordinary gains on sales of operations of $129.6 million. These extraordinary gains are presented separately on the statement of operations.
Corporate expenses were $25.5 million in 2001 compared to $30.6 million in 2000, and $38.9 million in 1999. The continued decline in corporate expenses is due to cost controls and reductions in the number of corporate employees.
Our effective income tax rate from continuing operations was (30.8) percent, 36.5 percent and 36.3 percent in 2001, 2000 and 1999, respectively. Our negative effective income tax rate for 2001 represents a tax benefit that will be realized by a refund of income taxes paid in prior years. The effective tax rate for 2001 declined compared to prior years primarily due to losses at certain operations for which we did not receive a state tax benefit.
At December 31, 2001, we had a state deferred tax asset resulting from net operating loss tax carryforwards of $18.2 million. A valuation allowance of $18.2 million was established for the full value of these operating loss carryforwards since we have concluded that it is more likely than not that these tax benefits would not be realized.
FINANCIAL CONDITION AND LIQUIDITY
We believe that internally generated funds, current cash on hand and borrowings from existing credit lines and its commercial paper program will be adequate to meet foreseeable needs. However, our ability to continue to utilize borrowings from existing credit lines and maintain our commercial paper program may be negatively affected by changes in our credit rating based upon our financial performance, and the credit ratings agencies' and credit market's outlook for the industry and markets in which we participate, as well as failure to maintain required financial ratios, and other factors beyond our control.
We have no off-balance sheet financing relationships with special purpose entities, structured finance entities, or any other unconsolidated entities.
During 2001, cash generated from operations of $122.8 million, net borrowings of $37.6 million and net proceeds from asset sales of $18.5 million were used to invest $104.2 million in capital equipment and business expansion, primarily in the High Performance Metals segment, pay dividends of $64.2 million, repurchase common stock of $3.0 million and increase cash balances by $7.5 million. Cash transactions plus cash on hand at the beginning of the year resulted in an ending cash position of $33.7 million at December 31, 2001.
Working capital decreased to $593.4 million at December 31, 2001 compared to $609.3 million at the end of 2000. The current ratio increased to 2.8 in 2001 from 2.5 in 2000. The reduction in working capital was primarily due to a decrease in inventory levels and accounts receivable, partially offset by reductions in short-term debt, accrued liabilities and accounts payable.
As part of managing the liquidity of the business, we focus on controlling inventory, accounts receivable and accounts payable. In measuring performance in controlling this managed working capital, we exclude the effects of the LIFO inventory valuation reserves, excess and obsolete inventory reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. During 2001, excluding the effects of operations sold, managed working capital, which is defined as gross inventory plus accounts receivable less accounts payable, declined by $127 million, or 14.9 percent, to $728 million. For 2001, the decline in managed working capital resulted from a $102 million decline in inventory and a $38 million decline in accounts receivable, partially offset by lower accounts payable balances of $13 million.
Capital expenditures for 2001 were $104.2 million and are expected to approximate $50 million in 2002 for operational necessities and the completion of certain capital projects initiated in 2001.
At December 31, 2001, we had $582.2 million in total outstanding debt. Our debt to capitalization ratio increased to 38.1 percent in 2001 from 34.4 percent in 2000. Our net debt to total capitalization ratio increased to 36.7 percent in 2001 from 33.2 percent in 2000. These higher ratios resulted primarily from the increase in debt levels and a reduction in stockholders' equity.
In December 2001, we issued $300 million of 8.375% Notes due December 15, 2011 in a transaction exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. We are required to file this registration statement with the Securities and Exchange Commission in order to offer the holders of the Notes the ability to exchange the outstanding Notes for new notes with substantially identical terms, but which are registered under the Securities Act. Interest on the Notes is payable semi-annually, on June 15 and December 15, and is subject to adjustment under certain circumstances. These Notes contain default provisions with respect to default for the following, among other things: nonpayment of interest on the Notes for 30 days, default in payment of principal when due, or failure to comply with any covenant. Any violation of the default provision could result in the requirement to immediately repay the borrowings.
On December 21, 2001, we entered into a new credit agreement with a group of banks that provides for borrowings of up to $325 million on a revolving credit basis. This new credit agreement replaces a $500 million credit facility, which was to expire in August 2002. The new credit agreement consists of a short-term 364-day $130 million credit facility which expires in December 2002, and a $195 million credit facility which expires in December 2006. As of April 30, 2002, no borrowings were outstanding under these credit facilities. Interest is payable based upon London Interbank Offered Rates (LIBOR) plus a spread, which is dependent on our credit rating. We also have the option of using other alternative interest rate bases. The agreement has various covenants that limit our ability to dispose of assets and merge with another corporation. We are also required to maintain a ratio of total consolidated indebtedness to total capitalization of not more than 60 percent. At December 31, 2001, our total consolidated indebtedness to total capitalization calculated in accordance with the credit agreement, which includes certain standby letters of credit and guarantees, was 40 percent. This covenant also has the effect of limiting the total amount of dividend payments and share repurchases. Under this covenant, approximately $312 million, or 33 percent, of our retained earnings, is currently free of restrictions pertaining to cash dividends and share repurchases. In addition, the credit agreement contains a covenant requiring the maintenance of specified EBITDA. For 2002, we must have, on a quarterly basis for the preceding twelve month period, EBITDA of at least 3.0 times gross interest expense. For 2003 through the remaining life of the credit agreement, we must have, on a quarterly basis for the preceding twelve month period, EBITDA of at least 3.5 times gross interest expense. Our EBITDA coverage (calculated in accordance with the credit agreement, which excludes non-cash charges) for the twelve months ended December 31, 2001 was 5.3 times gross interest expense. EBITDA is defined under the credit agreement in a manner that excludes non-cash charges. The definition of EBITDA used in the section entitled "Selected Consolidated Financial Data" is described in footnote 1 to the table in that section and excludes both cash and non-cash charges.
During the fourth quarter of 2000, we implemented a commercial paper program designed to cost effectively enhance our access to credit markets. At December 31, 2001, we had $70 million of commercial paper outstanding, which is scheduled to mature in the first quarter of 2002. These commercial paper borrowings are presented as long-term obligations due to our ability and intent to refinance a portion or all of these obligations on a long-term basis. Our intention is to continue to use the commercial paper program to fund its capital needs in excess of cash flow generated from operations. However, our ability to continue our commercial paper program is dependent upon maintaining our current A2/P2 commercial paper credit rating, and on having a bank credit facility to support the program.
A summary of our required payments under financial instruments (excluding accrued interest) and other commitments are presented below.
LESS THAN 1-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
------ --------- ------ ------ -------
(IN MILLIONS)
CONTRACTUAL CASH OBLIGATIONS
Total Debt including Capital Leases............ $582.2 $ 9.2 $ 3.1 $ 99.2 $470.7
Operating Lease Obligations.................... 52.3 15.4 21.3 12.2 3.4
OTHER FINANCIAL COMMITMENTS
Lines of Credit (A)............................ $373.1 $130.0 $ 48.1 $195.0 $ --
Standby Letters of Credit (B).................. 49.6 49.6 -- -- --
Guarantees..................................... 11.2 -- -- -- --
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(A) Drawn amounts are included in total debt.
(B) These instruments expire and are renewed annually and are used to support:
$28.3 million in workers compensation arrangements; $10.8 million in
industrial revenue bonds of which $10.0 million is included in long-term
debt; $6.0 million in facility closure costs; and $4.5 million related to
international trade.
Additionally, we use derivative contracts to hedge, in certain circumstances, our exposure to fluctuations in the cost of energy, raw materials, and the value of foreign currencies. As part of certain of these contracts, we have agreed that the net value of the derivative instrument being used as a hedge will become immediately payable, or receivable, if there is deterioration in our credit rating to non-investment grade. At December 31, 2001, the net value of hedges that would become immediately payable in the event of a downgrade in our credit to non-investment grade was less than $3 million, after-tax.
Our defined benefit pension plan remained overfunded with investments exceeding liabilities by approximately $200 million at December 31, 2001. However, the value of pension plan assets declined by approximately $376 million during 2001 primarily due to the decline in the equity markets in 2001 and payment of benefits. This decline in the value of pension assets along with increased pension liabilities and higher projected retiree health care costs will result in a net non-cash, pre-tax retirement benefit expense for 2002 of approximately $24 million. This compares to non-cash pre-tax income of $53.1 million in 2001.
Our defined benefit pension plan is fully funded with assets in excess of the projected benefit obligation. Under current Internal Revenue Code (Section 420) provisions, certain amounts that we pay for retiree health care benefits may be reimbursed annually from the excess pension plan assets. During the 2001 second quarter, we recovered $35.0 million under these provisions. While not affecting reported operating profit, cash flow from operations increased by the recovered amount. Our ability to be reimbursed for retiree medical costs in future years is dependent upon the level of pension surplus, as computed under regulations of the Internal Revenue Service, as of the beginning of each year. The level of pension surplus (the value of pension assets less pension obligations) changes constantly due to the volatility of pension asset investments. Due to the decline in the U.S. equities market in 2001, the pension overfunded status at the beginning of 2002 is below the threshold required to fully reimburse us for retiree medical costs in 2002. This will negatively impact the after-tax cash flow in 2002 by approximately $22 million. The ability to resume full reimbursement to us for retiree health care costs beyond 2002 will depend upon the performance of the pension investments, and any changes in the Internal Revenue Code and regulations pertaining to reimbursement of retiree health care costs from pension surplus. Beginning in the second half of 2001, we began funding certain retiree health care benefits for Allegheny Ludlum using plan assets held in a Voluntary Employee Benefit Association (VEBA) trust. This allows us to recover a portion of the retiree medical costs that were previously funded from the pension surplus. We may continue to fund certain retiree medical benefits utilizing the plan assets held in the VEBA if the value of these plan assets exceeds $50 million.
Accounting standards require a minimum pension liability be recorded if the value of pension assets is less than the accumulated pension benefit obligation (ABO) at the end of the year. Based upon the value of pension assets as of December 31, 2001, we are not required to record such a minimum pension liability. However, if the value of pension assets were to decline to a level below the ABO, we would record a minimum pension liability and record a charge to shareholders' equity for the value of the prepaid pension asset currently recognized on the balance sheet, and the required minimum pension liability, net of deferred taxes.
On February 14, 2002, the Board of Directors declared a regular quarterly dividend of $0.20 per share of common stock. The dividend was paid on March 12, 2002 to stockholders of record at the close of business on February 25, 2002. We paid a quarterly dividend of $0.20 per share of common stock during each of the 2001 quarters. The future declaration and payment of dividends and the amount of such dividends will depend upon our results of operations, financial condition, cash requirements, future prospects, any limitations imposed by credit agreements or senior securities, and other factors deemed relevant by the Board of Directors.
In October 1998, our Board of Directors authorized up to a total of 25 million shares of Allegheny Technologies common stock to be acquired under our stock repurchase program from time-to-time in the open market or in negotiated transactions. From the inception of the share repurchase program through December 31, 2001, we repurchased 20.5 million shares at a cost of $531.5 million. We have not repurchased shares under the program since early 2001 and do not expect to resume repurchases under the program in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in our specific circumstances. Application of these accounting principles requires Allegheny Technologies management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality.
At December 31, 2001, we had net inventory of $508.4 million. 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. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of our inventory is valued utilizing the LIFO costing methodology. Inventory of our non-U.S. operations are valued using average cost or FIFO methods.
We evaluate product lines on a quarterly basis to identify inventory values that exceed estimated net realizable value. The calculation of a resulting reserve, if any, is recognized as an expense in the period that the need for the reserve is identified. At December 31, 2001, the amount of such reserves was immaterial. It is our general policy to write-down to scrap value any inventory that is identified as obsolete and any inventory that has aged or has not moved in more than twelve months. In some instances this criterion is twenty-four months.
Revenue is recognized when title passes or as services are rendered. We have no significant unusual sale arrangements with any of our customers.
We market our products to a diverse customer base, principally throughout the United States. Trade credit is extended based upon evaluations of each customer's ability to perform its obligations, which are updated periodically. Accounts receivable reserves are based upon an aging of accounts plus identified specific accounts. Accounts receivable are presented net of a reserve for doubtful accounts of $12.3 million at December 31, 2001 and $7.4 million at December 31, 2000, which represented 4.3 percent and 2.2 percent, respectively, of total gross accounts receivable. During 2001, in recognition of the decline in the economy and reduced availability of credit, we recognized expense of $10.1 million to increase the reserve for doubtful accounts and wrote-off $5.2 million of uncollectible accounts, which reduced the reserve.
We monitor the recoverability of the carrying value of our long-lived assets. An impairment charge is recognized when the expected net undiscounted future cash flows from an asset's use (including any proceeds from disposition) are less than the asset's carrying value and the asset's carrying value exceeds its fair value.
At December 31, 2001, we had $188.4 million of goodwill on our balance sheet. Of the total, $126.6 million related to the Flat-Rolled Products segment, $51.5 million related to the High Performance Metals segment, and $10.3 million related to the Industrial Products segment. For 2001 and prior years, we were required to evaluate whether the goodwill presented on the balance sheet was impaired based upon the undiscounted future cash flows of the operating company for which the goodwill relates.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, the test for goodwill impairment changed and, commencing in 2002, goodwill is required to be reviewed annually, or more frequently if impairment indicators arise. The new impairment test for goodwill is a two step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all recognized and unrecognized assets and liabilities.
We are currently evaluating whether the goodwill on the balance sheet at December 31, 2001 is impaired at January 1, 2002. If goodwill is determined to be impaired, we would record a non-cash after-tax charge for the amount of the impairment. This initial impairment charge, if any, would be recorded as a cumulative effect of a change in accounting principle in our resu