Allegheny Technologies Incorporated 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2008
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From ____________ to ____________
Commission File Number 1-12001
ALLEGHENY TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
25-1792394 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
1000 Six PPG Place
Pittsburgh, Pennsylvania
|
|
15222-5479 |
|
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code) |
(412) 394-2800
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
At
April 30, 2008, the registrant had outstanding 101,104,036 shares of its Common Stock.
ALLEGHENY TECHNOLOGIES INCORPORATED
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 2008
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
468.0 |
|
|
$ |
623.3 |
|
Accounts receivable, net |
|
|
716.0 |
|
|
|
652.2 |
|
Inventories, net |
|
|
1,085.5 |
|
|
|
916.1 |
|
Deferred income taxes |
|
|
|
|
|
|
18.8 |
|
Prepaid expenses and other current assets |
|
|
48.2 |
|
|
|
38.3 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
2,317.7 |
|
|
|
2,248.7 |
|
|
Property, plant and equipment, net |
|
|
1,329.9 |
|
|
|
1,239.5 |
|
Prepaid pension asset |
|
|
244.7 |
|
|
|
230.3 |
|
Cost in excess of net assets acquired |
|
|
210.2 |
|
|
|
209.8 |
|
Deferred income taxes |
|
|
49.2 |
|
|
|
42.1 |
|
Other assets |
|
|
124.7 |
|
|
|
125.2 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
4,276.4 |
|
|
$ |
4,095.6 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
469.2 |
|
|
$ |
388.4 |
|
Accrued liabilities |
|
|
246.6 |
|
|
|
277.3 |
|
Accrued income taxes |
|
|
71.2 |
|
|
|
17.4 |
|
Deferred income taxes |
|
|
22.9 |
|
|
|
|
|
Short-term debt and current portion of long-term debt |
|
|
20.9 |
|
|
|
20.9 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
830.8 |
|
|
|
704.0 |
|
|
Long-term debt |
|
|
503.5 |
|
|
|
507.3 |
|
Retirement benefits |
|
|
472.7 |
|
|
|
469.6 |
|
Other long-term liabilities |
|
|
183.1 |
|
|
|
191.2 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,990.1 |
|
|
|
1,872.1 |
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.10: authorized-
50,000,000 shares; issued-none |
|
|
|
|
|
|
|
|
Common stock, par value $0.10: authorized-500,000,000
shares; issued-102,404,256 shares at March 31, 2008 and
December 31, 2007; outstanding-101,102,261 shares at
March 31, 2008 and 101,586,334 shares at December 31, 2007 |
|
|
10.2 |
|
|
|
10.2 |
|
Additional paid-in capital |
|
|
639.2 |
|
|
|
693.7 |
|
Retained earnings |
|
|
1,954.5 |
|
|
|
1,830.7 |
|
Treasury stock: 1,301,995 shares at March 31, 2008 and
817,922 shares at December 31, 2007 |
|
|
(102.0 |
) |
|
|
(75.4 |
) |
Accumulated other comprehensive loss, net of tax |
|
|
(215.6 |
) |
|
|
(235.7 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
2,286.3 |
|
|
|
2,223.5 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
4,276.4 |
|
|
$ |
4,095.6 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
3
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,343.4 |
|
|
$ |
1,372.6 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of sales |
|
|
1,052.8 |
|
|
|
986.1 |
|
Selling and administrative expenses |
|
|
70.2 |
|
|
|
78.1 |
|
|
|
|
|
|
|
|
Income before interest, other income (expense),
and income taxes |
|
|
220.4 |
|
|
|
308.4 |
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
0.2 |
|
|
|
(4.3 |
) |
Other income (expense) |
|
|
(0.7 |
) |
|
|
0.5 |
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
219.9 |
|
|
|
304.6 |
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
77.9 |
|
|
|
106.8 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
142.0 |
|
|
$ |
197.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
1.41 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
1.40 |
|
|
$ |
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.18 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
4
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007* |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
142.0 |
|
|
$ |
197.8 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27.3 |
|
|
|
23.6 |
|
Deferred income taxes |
|
|
25.3 |
|
|
|
14.2 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Inventories |
|
|
(169.3 |
) |
|
|
(156.0 |
) |
Accounts payable |
|
|
80.9 |
|
|
|
87.0 |
|
Accounts receivable |
|
|
(63.8 |
) |
|
|
(75.9 |
) |
Accrued income taxes, net of tax benefits on share-based compensation |
|
|
53.8 |
|
|
|
64.0 |
|
Retirement benefits |
|
|
(6.3 |
) |
|
|
0.1 |
|
Accrued liabilities and other |
|
|
(23.9 |
) |
|
|
(30.5 |
) |
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
66.0 |
|
|
|
124.3 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(112.0 |
) |
|
|
(57.7 |
) |
Asset disposals and other |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(111.7 |
) |
|
|
(57.7 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Payments on long-term debt and capital leases |
|
|
(5.3 |
) |
|
|
(5.7 |
) |
Net repayments under credit facilities |
|
|
(0.3 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
|
Net decrease in debt |
|
|
(5.6 |
) |
|
|
(11.0 |
) |
Purchase of treasury stock |
|
|
(62.3 |
) |
|
|
|
|
Taxes on share-based compensation, net |
|
|
(24.6 |
) |
|
|
(30.4 |
) |
Dividends paid |
|
|
(18.2 |
) |
|
|
(13.2 |
) |
Exercises of stock options |
|
|
1.1 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(109.6 |
) |
|
|
(50.9 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(155.3 |
) |
|
|
15.7 |
|
Cash and cash equivalents at beginning of the year |
|
|
623.3 |
|
|
|
502.3 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
468.0 |
|
|
$ |
518.0 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Certain amounts have been adjusted. See Note 3. |
The accompanying notes are an integral part of these statements.
5
ALLEGHENY TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Accounting Policies
Basis of Presentation
The interim consolidated financial statements include the accounts of Allegheny Technologies
Incorporated and its subsidiaries. Unless the context requires otherwise, Allegheny
Technologies, ATI and the Company refer to Allegheny Technologies Incorporated and its
subsidiaries.
These unaudited consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and note disclosures required by U.S. generally accepted accounting principles
for complete financial statements. In managements opinion, all adjustments (which include only
normal recurring adjustments) considered necessary for a fair presentation have been included.
These unaudited consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys 2007 Annual Report on
Form 10-K. The results of operations for these interim periods are not necessarily indicative of
the operating results for any future period. The December 31, 2007 financial information has been
derived for our audited financial statements.
New Accounting Pronouncements Adopted
In the first quarter 2008, as required, ATI began the adoption process for the change in
measurement date provisions of FASB Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (FAS 158), which amended the standards for defined
benefit pension and other postretirement benefit plans accounting. These provisions require assets
and benefits to be measured at the date of the employers statement of financial position, which is
December 31 for ATI, rather than the Companys measurement date of November 30, as was previously
permitted. The adoption of these provisions did not have a material effect on ATIs financial
statements.
In September 2006, the FASB issued FAS 157, Fair Value Measurements (FAS 157). This
Standard defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, but does not require any new fair
value measurements. The Standard covers financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a recurring basis in financial statements.
FAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and
liabilities, and for fiscal years beginning after November 15, 2008 for other nonfinancial assets
and liabilities. The adoption of FAS 157 for financial assets and liabilities did not have a
material impact on ATIs financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (FAS
159), The Fair Value Option for Financial Assets and Liabilities. FAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair value. If the fair
value option is elected, unrealized gains and losses will be recognized in earnings at each
subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007.
The adoption of FAS 159 did not have an impact on ATIs financial statements.
Pending New Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (FAS
160), Noncontrolling Interests in Consolidated Financial Statements. FAS 160 changes the
classification of noncontrolling (minority) interests on the balance sheet and the accounting for
and reporting of transactions between the reporting entity and holders of such noncontrolling
interests. Under the new standard, noncontrolling interests are considered equity and are to be
reported as an element of stockholders equity rather than within the mezzanine or liability
sections of the balance sheet. In addition, the current practice of reporting minority interest
expense or benefit also will change. Under the new standard, net income will encompass the total
income before minority interest expense. The income statement will include separate disclosure of
the attribution of income between the controlling and noncontrolling interests. Increases and
decreases in the noncontrolling ownership interest amount are to be accounted for as equity
transactions. FAS 160 is effective for fiscal years beginning after December 15, 2008,
and earlier application is prohibited. Upon adoption, the balance sheet and the income
statement will be recast
6
retrospectively for the presentation of noncontrolling interests. The
other accounting provisions of the statement are required to be adopted prospectively. The Company
is currently evaluating the impact of adopting FAS 160, including the reporting of the minority
interest in the STAL joint venture, on ATIs financial statements. As of March 31, 2008, other
long-term liabilities included $60 million for minority interest in the STAL joint venture.
Note 2. Inventories
Inventories at March 31, 2008 and December 31, 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
$ |
203.2 |
|
|
$ |
179.6 |
|
Work-in-process |
|
|
1,097.1 |
|
|
|
962.1 |
|
Finished goods |
|
|
162.3 |
|
|
|
153.1 |
|
|
|
|
|
|
|
|
Total inventories at current cost |
|
|
1,462.6 |
|
|
|
1,294.8 |
|
Less allowances to reduce current cost values to LIFO basis |
|
|
(375.9 |
) |
|
|
(374.6 |
) |
Progress payments |
|
|
(1.2 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
1,085.5 |
|
|
$ |
916.1 |
|
|
|
|
|
|
|
|
Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out
(FIFO), and average cost methods) or market, less progress payments. Most of the Companys
inventory is valued utilizing the LIFO costing methodology. Inventory of the Companys non-U.S.
operations is valued using average cost or FIFO methods. The effect of using the LIFO methodology
to value inventory, rather than FIFO, increased cost of sales by $1.3 million for the first three
months of 2008 compared to $20.9 million for the first three months of 2007.
Note 3. Supplemental Financial Statement Information
Property, plant and equipment at March 31, 2008 and December 31, 2007 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
29.2 |
|
|
$ |
25.5 |
|
Buildings |
|
|
264.8 |
|
|
|
261.6 |
|
Equipment and leasehold improvements |
|
|
2,207.1 |
|
|
|
2,102.3 |
|
|
|
|
|
|
|
|
|
|
|
2,501.1 |
|
|
|
2,389.4 |
|
Accumulated depreciation and amortization |
|
|
(1,171.2 |
) |
|
|
(1,149.9 |
) |
|
|
|
|
|
|
|
Total property, plant and equipment, net |
|
$ |
1,329.9 |
|
|
$ |
1,239.5 |
|
|
|
|
|
|
|
|
The consolidated statement of cash flows for the three months ended March 31, 2007 includes a
presentation adjustment of $49.6 million pertaining to taxes on share-based compensation.
Consistent with the Companys presentation utilized in the 2007 Annual Report on Form 10-K, cash
usage related to the repurchase of shares to satisfy employee-owed taxes on stock-based
compensation is presented as a financing activity rather than an operating activity. As a result,
cash flow from operating activities for the three months ended March 31, 2007 increased from $74.7
million to $124.3 million, and cash used in financing activities increased from $(1.3) million to
$(50.9) million.
Fair values of financial instruments included $10.9 million of assets and $14.9 million of
liabilities associated with derivative financial instruments accounted for as cash flow hedges for
nickel, natural gas and foreign currencies. All fair values for these derivatives were measured
using Level 1 information as defined by FAS 157.
7
Note 4. Debt
Debt at March 31, 2008 and December 31, 2007 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Allegheny Technologies $300 million 8.375% Notes due 2011, net (a) |
|
$ |
305.1 |
|
|
$ |
305.4 |
|
Allegheny Ludlum 6.95% debentures, due 2025 |
|
|
150.0 |
|
|
|
150.0 |
|
Domestic Bank Group $400 million unsecured credit agreement |
|
|
|
|
|
|
|
|
Promissory note for J&L asset acquisition |
|
|
35.9 |
|
|
|
41.0 |
|
Foreign credit agreements |
|
|
19.4 |
|
|
|
17.7 |
|
Industrial revenue bonds, due through 2020 |
|
|
9.9 |
|
|
|
9.9 |
|
Capitalized leases and other |
|
|
4.1 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
Total short-term and long-term debt |
|
|
524.4 |
|
|
|
528.2 |
|
Short-term debt and current portion of long-term debt |
|
|
(20.9 |
) |
|
|
(20.9 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
503.5 |
|
|
$ |
507.3 |
|
|
|
|
|
|
|
|
|
(a) |
|
Includes fair value adjustments for settled interest rate swap contracts of $8.2
million at March 31, 2008 and $8.7 million at December 31, 2007. |
The Company has a $400 million senior unsecured domestic revolving credit facility (the
facility), which includes a $200 million sublimit for the issuance of letters of credit. As of
March 31, 2008, there had been no borrowings made under the facility, although a portion of the
facility was used to support approximately $44 million in letters of credit.
In addition, STAL, the Companys Chinese joint venture company in which ATI has a 60%
interest, has approximately $24 million in letters of credit outstanding as of March 31, 2008,
related to the expansion of its operations in Shanghai, China. These letters of credit are
supported solely by STALs financial capability without any guarantees from the joint venture
partners.
Note 5. Per Share Information
The following table sets forth the computation of basic and diluted net income per common
share (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net income
per common share net income |
|
$ |
142.0 |
|
|
$ |
197.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic net income per common
share-weighted average shares |
|
|
100.8 |
|
|
|
101.4 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Option equivalents |
|
|
0.5 |
|
|
|
0.7 |
|
Contingently issuable shares |
|
|
0.3 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
Denominator for diluted net income per common
share adjusted weighted average shares and
assumed conversions |
|
|
101.6 |
|
|
|
102.8 |
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
1.41 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
1.40 |
|
|
$ |
1.92 |
|
|
|
|
|
|
|
|
8
Note 6. Comprehensive Income
The components of comprehensive income, net of tax, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
142.0 |
|
|
$ |
197.8 |
|
|
|
|
|
|
|
|
Foreign currency translation gains |
|
|
6.7 |
|
|
|
8.0 |
|
Unrealized gains on energy, raw material and
currency hedges |
|
|
10.2 |
|
|
|
11.6 |
|
Retirement benefits |
|
|
2.0 |
|
|
|
12.6 |
|
Unrealized gains on securities |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
18.9 |
|
|
|
32.6 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
160.9 |
|
|
$ |
230.4 |
|
|
|
|
|
|
|
|
Note 7. Income Taxes
Results for the first quarter 2008 included a provision for income taxes of $77.9 million, or
35.4% of income before tax, compared to an income tax provision of $106.8 million, or 35.1% of
income before tax, for the comparable 2007 quarter. The first quarter 2008 included a discrete
benefit of $2.6 million related to foreign taxes. The first quarter 2007 benefited from a lower
income tax provision due to a $4.2 million reduction in the valuation allowances associated with
state deferred tax assets.
As required, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, on January 1, 2007. For the quarter ended March 31, 2008, the Companys liability
for unrecognized tax benefits increased $4.2 million related to uncertain tax positions taken in
prior periods, including interest expense of $0.4 million, which increased the long-term liability
to $42.3 million.
Note 8. Pension Plans and Other Postretirement Benefits
The Company has defined benefit pension plans and defined contribution plans covering
substantially all employees. Benefits under the defined benefit pension plans are generally based
on years of service and/or final average pay. The Company funds the U.S. pension plans in
accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal
Revenue Code.
The Company also sponsors several postretirement plans covering certain salaried and hourly
employees. The plans provide health care and life insurance benefits for eligible retirees. In
most plans, Company contributions towards premiums are capped based on the cost as of a certain
date, thereby creating a defined contribution. For the non-collectively bargained plans, the
Company maintains the right to amend or terminate the plans at its discretion.
For the three months ended March 31, 2008 and 2007, the components of pension (income) expense
for the Companys defined benefit plans and components of other postretirement benefit expense
included the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Pension Benefits: |
|
|
|
|
|
|
|
|
Service cost benefits earned during the year |
|
$ |
7.0 |
|
|
$ |
6.9 |
|
Interest cost on benefits earned in prior years |
|
|
32.6 |
|
|
|
31.9 |
|
Expected return on plan assets |
|
|
(50.2 |
) |
|
|
(46.7 |
) |
Amortization of prior service cost |
|
|
4.1 |
|
|
|
4.4 |
|
Amortization of net actuarial loss |
|
|
3.2 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
Total pension (income) expense |
|
$ |
(3.3 |
) |
|
$ |
4.3 |
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Other Postretirement Benefits: |
|
|
|
|
|
|
|
|
Service cost benefits earned during the year |
|
$ |
0.8 |
|
|
$ |
0.8 |
|
Interest cost on benefits earned in prior years |
|
|
7.9 |
|
|
|
7.7 |
|
Expected return on plan assets |
|
|
(1.4 |
) |
|
|
(1.8 |
) |
Amortization of prior service cost (credit) |
|
|
(5.3 |
) |
|
|
(6.2 |
) |
Amortization of net actuarial loss |
|
|
1.3 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
Total other postretirement benefit expense |
|
$ |
3.3 |
|
|
$ |
3.3 |
|
|
|
|
|
|
|
|
Total retirement benefit expense |
|
$ |
|
|
|
$ |
7.6 |
|
|
|
|
|
|
|
|
In April 2008, the Company entered into a new five-year labor agreement with United
Steelworkers represented employees at the ATI Wah Chang operation. As a result, retirement benefit
expense is expected to be $8 million for the full year 2008 due to the establishment of a Voluntary
Employee Benefit Association (VEBA) trust for certain post-retirement benefits, and will be
recognized ratably over the remaining three quarters of 2008.
Note 9. Business Segments
Following is certain financial information with respect to the Companys business segments for
the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Total sales: |
|
|
|
|
|
|
|
|
High Performance Metals |
|
$ |
525.1 |
|
|
$ |
518.7 |
|
Flat-Rolled Products |
|
|
760.6 |
|
|
|
810.7 |
|
Engineered Products |
|
|
128.5 |
|
|
|
117.8 |
|
|
|
|
|
|
|
|
|
|
|
1,414.2 |
|
|
|
1,447.2 |
|
Intersegment sales: |
|
|
|
|
|
|
|
|
High Performance Metals |
|
|
44.1 |
|
|
|
41.3 |
|
Flat-Rolled Products |
|
|
13.7 |
|
|
|
27.0 |
|
Engineered Products |
|
|
13.0 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
70.8 |
|
|
|
74.6 |
|
Sales to external customers: |
|
|
|
|
|
|
|
|
High Performance Metals |
|
|
481.0 |
|
|
|
477.4 |
|
Flat-Rolled Products |
|
|
746.9 |
|
|
|
783.7 |
|
Engineered Products |
|
|
115.5 |
|
|
|
111.5 |
|
|
|
|
|
|
|
|
|
|
$ |
1,343.4 |
|
|
$ |
1,372.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit: |
|
|
|
|
|
|
|
|
High Performance Metals |
|
$ |
131.4 |
|
|
$ |
167.5 |
|
Flat-Rolled Products |
|
|
101.2 |
|
|
|
160.2 |
|
Engineered Products |
|
|
5.7 |
|
|
|
12.6 |
|
|
|
|
|
|
|
|
Total operating profit |
|
|
238.3 |
|
|
|
340.3 |
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
(17.7 |
) |
|
|
(21.0 |
) |
Interest income (expense), net |
|
|
0.2 |
|
|
|
(4.3 |
) |
Other expense, net of gains on asset sales |
|
|
(0.9 |
) |
|
|
(2.8 |
) |
Retirement benefit expense |
|
|
|
|
|
|
(7.6 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
219.9 |
|
|
$ |
304.6 |
|
|
|
|
|
|
|
|
Retirement benefit expense represents pension expense and other postretirement benefit
expense. Operating profit with respect to the Companys business segments excludes any retirement
benefit expense.
In March 2007, the Company reached early resolution on new labor agreements for ATI Allegheny
Ludlum and ATIs Allvac Albany, OR employees. Operating profit for the High Performance Metals and
Flat-Rolled Products
10
segments for the first quarter 2007 was negatively impacted by $0.7 million
and $5.9 million, respectively, of pre-tax, one-time costs related to the new labor agreements.
Corporate expenses for the first three months of 2008 were $17.7 million, compared to $21.0
million for the first three months of 2007. This decrease is due primarily to lower expenses
associated with annual and long-term performance-based incentive compensation programs.
Other expense, net of gains on asset sales, includes charges incurred in connection with
closed operations, pretax gains and losses on the sale of surplus real estate and other assets, and
other non-operating income or expense. These items are presented primarily in selling and
administrative expenses and in other expense in the statement of income. These items resulted in
net charges of $0.9 million for the first three months of 2008 and $2.8 million for the first three
months of 2007.
Note 10. Financial Information for Subsidiary and Guarantor Parent
The payment obligations under the $150 million 6.95% debentures due 2025 issued by Allegheny
Ludlum Corporation (the Subsidiary) are fully and unconditionally guaranteed by Allegheny
Technologies Incorporated (the Guarantor Parent). In accordance with positions established by the
Securities and Exchange Commission, the following financial information sets forth separately
financial information with respect to the Subsidiary, the non-guarantor subsidiaries and the
Guarantor Parent. The principal elimination entries eliminate investments in subsidiaries and
certain intercompany balances and transactions. Investments in subsidiaries, which are eliminated
in consolidation, are included in other assets on the balance sheets.
Allegheny Technologies is the plan sponsor for the U.S. qualified defined benefit pension plan
(the Plan) which covers certain current and former employees of the Subsidiary and the
non-guarantor subsidiaries. As a result, the balance sheets presented for the Subsidiary and the
non-guarantor subsidiaries do not include any Plan assets or liabilities, or the related deferred
taxes. The Plan assets, liabilities and related deferred taxes and pension income or expense are
recognized by the Guarantor Parent. Management and royalty fees charged to the Subsidiary and to
the non-guarantor subsidiaries by the Guarantor Parent have been excluded solely for purposes of
this presentation.
11
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
32.9 |
|
|
$ |
435.1 |
|
|
$ |
|
|
|
$ |
468.0 |
|
Accounts receivable, net |
|
|
0.5 |
|
|
|
325.3 |
|
|
|
390.2 |
|
|
|
|
|
|
|
716.0 |
|
Inventories, net |
|
|
|
|
|
|
337.4 |
|
|
|
748.1 |
|
|
|
|
|
|
|
1,085.5 |
|
Prepaid
expenses and other current assets |
|
|
0.3 |
|
|
|
8.0 |
|
|
|
39.9 |
|
|
|
|
|
|
|
48.2 |
|
|
|
|
Total current assets |
|
|
0.8 |
|
|
|
703.6 |
|
|
|
1,613.3 |
|
|
|
|
|
|
|
2,317.7 |
|
Property, plant and equipment, net |
|
|
1.2 |
|
|
|
374.2 |
|
|
|
954.5 |
|
|
|
|
|
|
|
1,329.9 |
|
Prepaid pension asset |
|
|
244.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244.7 |
|
Cost in excess of net assets acquired |
|
|
|
|
|
|
112.1 |
|
|
|
98.1 |
|
|
|
|
|
|
|
210.2 |
|
Deferred income taxes |
|
|
49.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49.2 |
|
Investments in subsidiaries and other
assets |
|
|
3,969.1 |
|
|
|
1,361.8 |
|
|
|
1,364.7 |
|
|
|
(6,570.9 |
) |
|
|
124.7 |
|
|
|
|
Total assets |
|
$ |
4,265.0 |
|
|
$ |
2,551.7 |
|
|
$ |
4,030.6 |
|
|
$ |
(6,570.9 |
) |
|
$ |
4,276.4 |
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4.3 |
|
|
$ |
232.1 |
|
|
$ |
232.8 |
|
|
$ |
|
|
|
$ |
469.2 |
|
Accrued liabilities |
|
|
1,502.0 |
|
|
|
66.5 |
|
|
|
809.9 |
|
|
|
(2,131.8 |
) |
|
|
246.6 |
|
Accrued income taxes |
|
|
71.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.2 |
|
Deferred income taxes |
|
|
22.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.9 |
|
Short-term debt and current portion of
long-term debt |
|
|
|
|
|
|
10.5 |
|
|
|
10.4 |
|
|
|
|
|
|
|
20.9 |
|
|
|
|
Total current liabilities |
|
|
1,600.4 |
|
|
|
309.1 |
|
|
|
1,053.1 |
|
|
|
(2,131.8 |
) |
|
|
830.8 |
|
Long-term debt |
|
|
305.1 |
|
|
|
377.0 |
|
|
|
21.4 |
|
|
|
(200.0 |
) |
|
|
503.5 |
|
Retirement benefits |
|
|
10.3 |
|
|
|
273.9 |
|
|
|
188.5 |
|
|
|
|
|
|
|
472.7 |
|
Other long-term liabilities |
|
|
62.9 |
|
|
|
16.4 |
|
|
|
103.8 |
|
|
|
|
|
|
|
183.1 |
|
|
|
|
Total liabilities |
|
|
1,978.7 |
|
|
|
976.4 |
|
|
|
1,366.8 |
|
|
|
(2,331.8 |
) |
|
|
1,990.1 |
|
|
|
|
Total stockholders equity |
|
|
2,286.3 |
|
|
|
1,575.3 |
|
|
|
2,663.8 |
|
|
|
(4,239.1 |
) |
|
|
2,286.3 |
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
4,265.0 |
|
|
$ |
2,551.7 |
|
|
$ |
4,030.6 |
|
|
$ |
(6,570.9 |
) |
|
$ |
4,276.4 |
|
|
|
|
12
Note 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Income
For the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Sales |
|
$ |
|
|
|
$ |
695.0 |
|
|
$ |
648.4 |
|
|
$ |
|
|
|
$ |
1,343.4 |
|
Cost of sales |
|
|
10.2 |
|
|
|
572.6 |
|
|
|
470.0 |
|
|
|
|
|
|
|
1,052.8 |
|
Selling and administrative expenses |
|
|
27.1 |
|
|
|
9.8 |
|
|
|
33.3 |
|
|
|
|
|
|
|
70.2 |
|
Interest income (expense), net |
|
|
(0.7 |
) |
|
|
(2.1 |
) |
|
|
3.0 |
|
|
|
|
|
|
|
0.2 |
|
Other income (expense) including
equity in income of unconsolidated
subsidiaries |
|
|
257.9 |
|
|
|
9.2 |
|
|
|
(3.7 |
) |
|
|
(264.1 |
) |
|
|
(0.7 |
) |
|
|
|
Income before income tax provision |
|
|
219.9 |
|
|
|
119.7 |
|
|
|
144.4 |
|
|
|
(264.1 |
) |
|
|
219.9 |
|
Income tax provision |
|
|
77.9 |
|
|
|
44.1 |
|
|
|
52.2 |
|
|
|
(96.3 |
) |
|
|
77.9 |
|
|
|
|
Net income |
|
$ |
142.0 |
|
|
$ |
75.6 |
|
|
$ |
92.2 |
|
|
$ |
(167.8 |
) |
|
$ |
142.0 |
|
|
|
|
Condensed Statements of Cash Flows
For the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Cash flows provided by operating
activities |
|
$ |
104.1 |
|
|
$ |
(138.1 |
) |
|
$ |
100.0 |
|
|
$ |
|
|
|
$ |
66.0 |
|
Cash flows used in investing activities |
|
|
(0.1 |
) |
|
|
(12.0 |
) |
|
|
(99.6 |
) |
|
|
|
|
|
|
(111.7 |
) |
Cash flows provided by (used in)
financing activities |
|
|
(104.0 |
) |
|
|
(5.1 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
(109.6 |
) |
|
|
|
Increase (decrease) in cash
and cash equivalents |
|
$ |
|
|
|
$ |
(155.2 |
) |
|
$ |
(0.1 |
) |
|
$ |
|
|
|
$ |
(155.3 |
) |
|
|
|
13
Note 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Balance Sheets
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
188.1 |
|
|
$ |
435.2 |
|
|
$ |
|
|
|
$ |
623.3 |
|
Accounts receivable, net |
|
|
0.4 |
|
|
|
258.3 |
|
|
|
393.5 |
|
|
|
|
|
|
|
652.2 |
|
Inventories, net |
|
|
|
|
|
|
210.4 |
|
|
|
705.7 |
|
|
|
|
|
|
|
916.1 |
|
Deferred income taxes |
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.8 |
|
Prepaid expenses, and other current
assets |
|
|
0.1 |
|
|
|
6.0 |
|
|
|
32.2 |
|
|
|
|
|
|
|
38.3 |
|
|
|
|
Total current assets |
|
|
19.3 |
|
|
|
662.8 |
|
|
|
1,566.6 |
|
|
|
|
|
|
|
2,248.7 |
|
Property, plant and equipment, net |
|
|
1.3 |
|
|
|
371.2 |
|
|
|
867.0 |
|
|
|
|
|
|
|
1,239.5 |
|
Prepaid pension asset |
|
|
230.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230.3 |
|
Cost in excess of net assets acquired |
|
|
|
|
|
|
112.1 |
|
|
|
97.7 |
|
|
|
|
|
|
|
209.8 |
|
Deferred income taxes |
|
|
42.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.1 |
|
Investment in subsidiaries and other
assets |
|
|
4,143.4 |
|
|
|
1,266.0 |
|
|
|
1,411.6 |
|
|
|
(6,695.8 |
) |
|
|
125.2 |
|
|
|
|
Total assets |
|
$ |
4,436.4 |
|
|
$ |
2,412.1 |
|
|
$ |
3,942.9 |
|
|
$ |
(6,695.8 |
) |
|
$ |
4,095.6 |
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3.4 |
|
|
$ |
165.4 |
|
|
$ |
219.6 |
|
|
$ |
|
|
|
$ |
388.4 |
|
Accrued liabilities |
|
|
1,854.0 |
|
|
|
76.7 |
|
|
|
841.5 |
|
|
|
(2,477.5 |
) |
|
|
294.7 |
|
Short-term debt and current portion of
long-term debt |
|
|
|
|
|
|
10.5 |
|
|
|
10.4 |
|
|
|
|
|
|
|
20.9 |
|
|
|
|
Total current liabilities |
|
|
1,857.4 |
|
|
|
252.6 |
|
|
|
1,071.5 |
|
|
|
(2,477.5 |
) |
|
|
704.0 |
|
Long-term debt |
|
|
305.4 |
|
|
|
382.1 |
|
|
|
19.8 |
|
|
|
(200.0 |
) |
|
|
507.3 |
|
Retirement benefits |
|
|
10.4 |
|
|
|
274.6 |
|
|
|
184.6 |
|
|
|
|
|
|
|
469.6 |
|
Other long-term liabilities |
|
|
39.7 |
|
|
|
17.5 |
|
|
|
134.0 |
|
|
|
|
|
|
|
191.2 |
|
|
|
|
Total liabilities |
|
|
2,212.9 |
|
|
|
926.8 |
|
|
|
1,409.9 |
|
|
|
(2,677.5 |
) |
|
|
1,872.1 |
|
|
|
|
Total stockholders equity |
|
|
2,223.5 |
|
|
|
1,485.3 |
|
|
|
2,533.0 |
|
|
|
(4,018.3 |
) |
|
|
2,223.5 |
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
4,436.4 |
|
|
$ |
2,412.1 |
|
|
$ |
3,942.9 |
|
|
$ |
(6,695.8 |
) |
|
$ |
4,095.6 |
|
|
|
|
14
Note 10. CONTINUED
Allegheny Technologies Incorporated
Financial Information for Subsidiary and Guarantor Parent
Statements of Income
For the three months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Sales |
|
$ |
|
|
|
$ |
734.5 |
|
|
$ |
638.1 |
|
|
$ |
|
|
|
$ |
1,372.6 |
|
Cost of sales |
|
|
6.6 |
|
|
|
568.9 |
|
|
|
410.6 |
|
|
|
|
|
|
|
986.1 |
|
Selling and administrative expenses |
|
|
31.7 |
|
|
|
10.3 |
|
|
|
36.1 |
|
|
|
|
|
|
|
78.1 |
|
Interest income (expense), net |
|
|
(5.0 |
) |
|
|
(1.6 |
) |
|
|
2.3 |
|
|
|
|
|
|
|
(4.3 |
) |
Other income (expense) including
equity in income of unconsolidated
subsidiaries |
|
|
347.9 |
|
|
|
6.8 |
|
|
|
(1.0 |
) |
|
|
(353.2 |
) |
|
|
0.5 |
|
|
|
|
Income before income tax provision |
|
|
304.6 |
|
|
|
160.5 |
|
|
|
192.7 |
|
|
|
(353.2 |
) |
|
|
304.6 |
|
Income tax provision |
|
|
106.8 |
|
|
|
60.3 |
|
|
|
71.0 |
|
|
|
(131.3 |
) |
|
|
106.8 |
|
|
|
|
Net income |
|
$ |
197.8 |
|
|
$ |
100.2 |
|
|
$ |
121.7 |
|
|
$ |
(221.9 |
) |
|
$ |
197.8 |
|
|
|
|
Condensed Statements of Cash Flows
For the three months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
|
|
|
Non-guarantor |
|
|
|
|
(In millions) |
|
Parent |
|
Subsidiary |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Cash flows provided by operating
activities |
|
$ |
40.0 |
|
|
$ |
27.7 |
|
|
$ |
56.6 |
|
|
$ |
|
|
|
$ |
124.3 |
|
Cash flows used in investing activities |
|
|
(0.1 |
) |
|
|
(12.6 |
) |
|
|
(45.0 |
) |
|
|
|
|
|
|
(57.7 |
) |
Cash flows used in financing activities |
|
|
(39.9 |
) |
|
|
(5.2 |
) |
|
|
(5.8 |
) |
|
|
|
|
|
|
(50.9 |
) |
|
|
|
Increase in cash
and cash equivalents |
|
$ |
|
|
|
$ |
9.9 |
|
|
$ |
5.8 |
|
|
$ |
|
|
|
$ |
15.7 |
|
|
|
|
Note 11. Commitments and Contingencies
The Company is subject to various domestic and international environmental laws and
regulations that govern the discharge of pollutants and disposal of wastes, and which may require
that it investigate and remediate the effects of the release or disposal of materials at sites
associated with past and present operations. The Company could incur substantial cleanup costs,
fines, and civil or criminal sanctions, third party property damage or personal injury claims as a
result of violations or liabilities under these laws or noncompliance with environmental permits
required at its facilities. The Company is currently involved in the investigation and remediation
of a number of its current and former sites, as well as third party sites.
Environmental liabilities are recorded when the Companys liability is probable and the costs
are reasonably estimable. In many cases, however, the Company is not able to determine whether it
is liable or, if liability is probable, to reasonably estimate the loss or range of loss. Estimates
of the Companys liability remain subject to additional uncertainties, including the nature and
extent of site contamination, available remediation alternatives, the extent of corrective actions
that may be required, and the number, participation, and financial condition of other potentially
responsible parties (PRPs). The Company expects that it will adjust its accruals to reflect new
information as appropriate. Future adjustments could have a material adverse effect on the
Companys results of operations in a given period, but the Company cannot reliably predict the
amounts of such future adjustments.
Based on currently available information, the Company does not believe that there is a
reasonable possibility that a loss exceeding the amount already accrued for any of the sites with
which the Company is currently associated
15
(either individually or in the aggregate) will be an amount that would be material to a decision to
buy or sell the Companys securities. Future developments, administrative actions or liabilities
relating to environmental matters, however, could have a material adverse effect on the Companys
financial condition or results of operations.
At March 31, 2008, the Companys reserves for environmental remediation obligations totaled
approximately $18 million, of which approximately $7.5 million were included in other current
liabilities. The reserve includes estimated probable future costs of $6 million for federal
Superfund and comparable state-managed sites; $7 million for formerly owned or operated sites for
which the Company has remediation or indemnification obligations; $4 million for owned or
controlled sites at which Company operations have been discontinued; and $1 million for sites
utilized by the Company in its ongoing operations. The Company continues to evaluate whether it may
be able to recover a portion of future costs for environmental liabilities from third parties.
The timing of expenditures depends on a number of factors that vary by site. The Company
expects that it will expend present accruals over many years and that remediation of all sites with
which it has been identified will be completed within thirty years.
See Note 13. Commitments and Contingencies to the Companys consolidated financial statements
in the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 2007 for a
discussion of legal proceedings affecting the Company.
A number of other lawsuits, claims and proceedings have been or may be asserted against the
Company relating to the conduct of its currently and formerly owned businesses, including those
pertaining to product liability, patent infringement, commercial, government contracting work,
employment, employee benefits, taxes, environmental and health and safety, and stockholder matters.
While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits,
claims or proceedings may be determined adversely to the Company, management does not believe that
the disposition of any such pending matters is likely to have a material adverse effect on the
Companys financial condition or liquidity, although the resolution in any reporting period of one
or more of these matters could have a material adverse effect on the Companys results of
operations for that period.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Allegheny Technologies Incorporated (ATI) is a Delaware corporation with its principal
executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone
number (412) 394-2800. References to Allegheny Technologies, ATI, the Company, the
Registrant, we, our and us and similar terms mean Allegheny Technologies Incorporated and
its subsidiaries, unless the context otherwise requires.
Allegheny Technologies is one of the largest and most diversified specialty metals producers
in the world. We use innovative technologies to offer growing global markets a wide range of
specialty metals solutions. Our products include titanium and titanium alloys, nickel-based alloys
and superalloys, grain-oriented electrical steel, zirconium, hafnium and niobium, stainless and
specialty alloys, tungsten-based materials, and forgings and castings. Our specialty metals are
produced in a wide range of alloys and product forms and are selected for use in environments that
demand metals having exceptional hardness, toughness, strength, resistance to heat, corrosion or
abrasion, or a combination of these characteristics.
16
Results of Operations
We operate in three business segments: High Performance Metals, Flat-Rolled Products, and
Engineered Products. These segments represented the following percentages of our total revenues and
segment operating profit for the first three months of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Operating |
|
|
|
|
|
|
Operating |
|
|
|
Revenue |
|
|
Profit |
|
|
Revenue |
|
|
Profit |
|
High Performance Metals |
|
|
36 |
% |
|
|
55 |
% |
|
|
35 |
% |
|
|
49 |
% |
|
|
|
Flat-Rolled Products |
|
|
55 |
% |
|
|
43 |
% |
|
|
57 |
% |
|
|
47 |
% |
|
|
|
Engineered Products |
|
|
9 |
% |
|
|
2 |
% |
|
|
8 |
% |
|
|
4 |
% |
|
|
|
Sales for the first quarter 2008 were $1.34 billion, a decrease of 2% compared to the first
quarter 2007. Compared to the 2007 first quarter, sales for the 2008 first quarter increased 1% in
the High Performance Metals segment and 4% in the Engineered Products segment, and decreased 5% in
the Flat-Rolled Products segment. Our key growth markets were solid in the first quarter. Demand
from the global aerospace and defense, chemical process industry, oil and gas, electrical energy
and medical markets accounted for nearly 70% of our first quarter 2008 sales. Aerospace and
defense was the largest of our markets at 28% of first quarter 2008 sales. For the first quarter
2008, direct international sales were $370.6 million, or approximately 28% of total sales. We
believe that more than 50% of our sales are driven by demand from global markets when we consider
exports of our customers. ATI titanium product shipments, including ATI-produced products for our
Uniti Titanium joint venture, reached 12.2 million pounds in the first quarter 2008, a 26% increase
over the same period of last year, as we leverage our manufacturing capabilities across both our
High Performance Metals and Flat-Rolled Products segments and demonstrate our ability to supply
diversified global markets with both long and flat-rolled products.
Segment operating profit for the first quarter 2008 decreased 30%, compared to the first
quarter 2007, to $238.3 million, or 17.7% of sales. First quarter 2008 results were negatively
impacted by certain raw material costs being higher than the raw material indices/surcharges
included in our selling prices for certain products. Segment operating profit as a percentage of
sales for the three month periods ended March 31, 2008 and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
|
High Performance Metals |
|
|
27.3 |
% |
|
|
35.1 |
% |
Flat-Rolled Products |
|
|
13.5 |
% |
|
|
20.4 |
% |
Engineered Products |
|
|
4.9 |
% |
|
|
11.3 |
% |
Results for the first quarter 2008 included a LIFO inventory valuation reserve charge of $1.3
million. For the same 2007 period, the LIFO inventory valuation reserve charge was $20.9 million,
due primarily to higher nickel and nickel-bearing scrap raw material costs. First quarter 2008
gross cost reductions, before the effects of inflation, totaled $32 million.
In the first quarter 2007, we entered into four-year labor agreements with United Steelworkers
represented employees at ATI Allegheny Ludlum and at ATIs Albany, OR titanium operations. As a
result of these labor agreements, we recognized a non-recurring charge of $7.0 million, or $4.4
million after-tax, in the first quarter 2007, which was primarily reflected in the operating
results of the High Performance Metals and Flat-Rolled Products business segments.
Income before tax for the first quarter 2008 was $219.9 million, a decrease of $84.7 million
compared to the first quarter 2007. Net income for the first quarter 2008 was $142.0 million, or
$1.40 per share, compared to the first quarter 2007 of $197.8 million, or $1.92 per share. First
quarter 2008 results include an income tax provision of $77.9 million, or 35.4% of income before
tax, compared to an income tax provision of $106.8 million, or 35.1% of income before tax, for the
comparable 2007 quarter. The 2008 first quarter included a discrete benefit of $2.6 million
related to foreign taxes. The 2007 first quarter benefited from a lower income tax provision due
to a $4.2 million reduction in the valuation allowances associated with state deferred tax assets.
Our business continues to be driven by long-term growth in the global aerospace, defense and
infrastructure markets. Overall demand from these markets remains at a high level. For example,
first quarter orders from our
17
Asian markets significantly exceeded last years rate, which was a
record year. Our airframe and jet engine customers report record backlogs and good order rates so
far in 2008, resulting in improving build rates for existing models. Boeings recently revised
schedule for its 787 Dreamliner brings near-term uncertainty to the supply chain. Boeing has told
us that they intend to honor our supply agreement, and as production increases so will our supply
to this breakthrough aircraft. In the meantime, we intend to continue to navigate through this
period and focus our mill products capabilities on the diversified global markets that we serve.
ATI is well positioned to continue to benefit from the current and long-term global growth
opportunities of our major end markets. We continue our investments to give us unsurpassed
manufacturing capabilities, which enable profitable growth. We are not only focused on product
diversification but also on global market diversification. We are committed to maintaining a
strong balance sheet. Although the condition of the U.S. economy, the impact of Boeings 787
schedule delay, and continuing raw material cost volatility create near-term impacts, we believe
the first quarter 2008 earnings represent the bottom. Generally, base selling prices are flat to
higher; volumes continue to improve; and raw material indices/surcharges are in better balance. As
a result, we expect second quarter earnings to be somewhat higher than first quarter results.
High Performance Metals Segment
Sales increased 1% to $481.0 million, compared to the first quarter 2007. Demand for our
titanium alloys was at a high level from the aerospace and defense market. Demand for our
nickel-based alloys was good from our OEM customers but was lower from some of our distributor
customers as they rebalanced their inventory. Demand for our exotic alloys was strong from the
chemical process industry, and is growing from the nuclear energy market. Segment operating profit
in the quarter was $131.4 million, or 27.3% of sales, a $21.6 million decrease compared to the
first quarter 2007. The decrease in operating profit primarily resulted from lower titanium
selling prices and the negative impact of raw material costs, primarily titanium scrap, being
higher than the raw material indices included in our titanium products selling prices due to long
manufacturing cycle times. These negative impacts were partially offset by increased shipments of
titanium and zirconium products and the benefits of gross cost reductions. Raw material cost
inflation in our exotic alloys business resulted in a LIFO inventory valuation reserve charge of
$1.3 million in the first quarter 2008, compared to a LIFO inventory valuation reserve charge of
$6.6 million for the segment in the comparable 2007 period. Results for the 2008 first quarter
benefited from $14.3 million of gross cost reductions.
Certain comparative information on the segments major products for the three months ended
March 31, 2008 and 2007 is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31, |
|
% |
|
|
2008 |
|
2007 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (000s pounds): |
|
|
|
|
|
|
|
|
|
|
|
|
Titanium mill products |
|
|
8,770 |
|
|
|
7,068 |
|
|
|
24 |
% |
Nickel-based and specialty alloys |
|
|
9,537 |
|
|
|
10,352 |
|
|
|
(8 |
)% |
Exotic alloys |
|
|
1,364 |
|
|
|
985 |
|
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices (per pound): |
|
|
|
|
|
|
|
|
|
|
|
|
Titanium mill products |
|
$ |
25.54 |
|
|
$ |
32.89 |
|
|
|
(22 |
)% |
Nickel-based and specialty alloys |
|
$ |
18.56 |
|
|
$ |
17.90 |
|
|
|
4 |
% |
Exotic alloys |
|
$ |
44.61 |
|
|
$ |
43.52 |
|
|
|
3 |
% |
Shipments of titanium mill products increased primarily due to higher aerospace airframe
volume. Shipments of nickel-based and specialty alloys declined primarily due to product mix and
inventory management actions at distributors. Shipments of exotic alloys increased primarily due
to strong demand for zirconium from the chemical process industry and growing demand from the
nuclear energy market.
In April 2008, we entered into a new labor agreement with the United Steelworkers represented
employees at ATIs Wah Chang operations. The new agreement expires on March 31, 2013. The new
agreement provides for profit sharing above specified minimum pre-tax profit for ATIs Wah Chang operations and is
capped to provide for no more than $9 million of profit sharing payments under this provision over
the five-year life of the contract. Any profit sharing payments under this provision are
contributed to an independently administered VEBA (Voluntary
18
Employee Benefit Association) trust.
As a result of this new agreement, we will recognize additional retirement benefit expense of
approximately $8 million in 2008 ratably over the remaining three quarters of the year.
Flat-Rolled Products Segment
First quarter 2008 sales were $746.9 million, 4.7% lower than the first quarter 2007, due
primarily to lower average base selling prices for standard stainless products. Demand was strong
for CP (commercially pure) titanium sheet products from the chemical process industry and oil and
gas markets. Demand was also strong for grain-oriented electrical steel products from the
electrical energy market. Demand for standard stainless products improved primarily due to better
inventory balance at our U.S. service center customers and improved international shipments.
Although total high-value products shipments were 6% lower compared to first quarter 2007,
shipments of titanium sheet, and grain-oriented electrical steel continued to improve,
significantly exceeding year-ago levels and offsetting lower shipments of engineered strip and
Precision-Rolled Strip® products. Shipments of standard products increased 6% compared to the
first quarter 2007 and 28% compared to the fourth quarter 2007. Total first quarter shipments
increased by 14% compared to the fourth quarter 2007.
Segment operating profit decreased to $101.2 million, or 13.5% of sales, a decrease of $59.0
million compared to the first quarter 2007, primarily as a result of lower average base selling
prices for standard stainless products, a less favorable mix of high-value products, and the
negative impact of raw material costs, primarily nickel and nickel-based scrap, being higher than
the raw material surcharges included in our selling prices due to longer manufacturing cycle times
for some of our high-value products. These negative impacts were partially offset by increased
shipments and higher selling prices for our grain-oriented electrical steel, increased shipments of
flat-rolled titanium products, and the benefits of gross cost reductions. First quarter 2008
results had no LIFO inventory valuation reserve charge, compared to a LIFO charge of $14.0 million
in the first quarter 2007. Additionally, 2007 results were negatively impacted by $5.9 million of
pre-tax, non-recurring costs related to early resolution of the labor agreement for our ATI
Allegheny Ludlum business. Results for the 2008 first quarter benefited from $16.2 million in
gross cost reductions.
Comparative information on the segments products for the three months ended March 31, 2008 and
2007 is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (000s pounds): |
|
|
|
|
|
|
|
|
|
|
|
|
High value |
|
|
119,792 |
|
|
|
127,808 |
|
|
|
(6 |
)% |
Standard |
|
|
170,620 |
|
|
|
161,680 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
290,412 |
|
|
|
289,488 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices (per lb.): |
|
|
|
|
|
|
|
|
|
|
|
|
High value |
|
$ |
3.22 |
|
|
$ |
3.22 |
|
|
|
|
% |
Standard |
|
$ |
2.07 |
|
|
$ |
2.30 |
|
|
|
(10 |
)% |
Combined Average |
|
$ |
2.54 |
|
|
$ |
2.70 |
|
|
|
(6 |
)% |
Engineered Products Segment
Sales for the first quarter 2008 of $115.5 million were 4% higher than the first quarter 2007.
Demand for our tungsten and tungsten carbide products improved from the aerospace and defense and
mining markets. Demand was stable for our forged products from the construction and mining, and
oil and gas markets. Demand for our cast products was strong from the electrical energy market,
particularly for wind and gas turbine components. Demand from the aerospace market remained very
strong for our titanium precision metal processing conversion services. Segment operating profit
in the first quarter 2008 was $5.7 million, or 4.9% of sales, compared to $12.6 million, or 11.3%
of sales, for the comparable 2007 period. The decline in operating profit was primarily due to
higher raw material costs, operational execution issues, and start-up expenses associated with our
Alpena, MI casting operation. First quarter 2008 results had no LIFO inventory valuation reserve charge, compared to a $0.3
million charge in the first quarter 2007. Results benefited from $1.8 million of gross cost
reductions.
Corporate Items
19
Corporate expenses decreased to $17.7 million for the first quarter of 2008, compared to $21.0
million in the year-ago period. This decrease is due primarily to lower expenses associated with
annual performance-based cash incentive compensation programs and long-term performance-based
equity and cash incentive compensation programs.
First quarter 2008 interest income, net of interest expense, was $0.2 million compared to net
interest expense of $4.3 million for the same period last year. The decline in net interest expense
was primarily due to interest capitalization on capital projects. Interest expense was reduced by
$5.7 million in 2008 first quarter and $1.6 million in the 2007 first quarter related to interest
capitalization on capital projects.
Other expense, net of gains on asset sales, includes charges incurred in connection with
closed operations, pretax gains and losses on the sale of surplus real estate and other assets, and
other non-operating income or expense. These items are presented primarily in selling and
administration expenses, and in other income (expense) in the statement of income and resulted in
other expense of $0.9 million for the first quarter of 2008 and $2.8 million for the first quarter
of 2007.
Retirement benefit expense decreased to zero in the first quarter 2008, compared to $7.6
million in the first quarter 2007, primarily as a result of higher than expected returns on plan
assets in 2007 and the positive benefits of voluntary pension contributions made over the last
several years. For the first quarter 2008, the amount of retirement benefit income included in
cost of sales was $0.3 million, and the amount of retirement benefit expense included in selling
and administrative expenses was $0.3 million. For the first quarter 2007, the amount of retirement
benefit expense included in cost of sales was $5.0 million, and the amount included in selling and
administrative expenses was $2.6 million. In April 2008, we entered into a new five-year labor
agreement with USW represented employees at our ATI Wah Chang operation. As a result, we now
expect retirement benefit expense will be approximately $8 million for the full year 2008 due to
the establishment of a VEBA for certain post-retirement benefits. This expense will be recorded
ratably over the last three quarters of 2008.
Income Taxes
Results for the first quarter 2008 include a provision for income taxes of $77.9 million, or
35.4% of income before tax, compared to an income tax provision of $106.8 million, or 35.1% of
income before tax, for the comparable 2007 quarter. The 2008 first quarter included a discrete
benefit of $2.6 million related to foreign taxes. The 2007 first quarter benefited from a lower
income tax provision due to a $4.2 million reduction in the valuation allowances associated with
state deferred tax assets as a result of the increased profitability of the Flat-Rolled Products
segment.
Financial Condition and Liquidity
We believe that internally generated funds, current cash on hand, and available borrowings
under existing credit lines will be adequate to meet foreseeable liquidity needs, including a
substantial expansion of our production capabilities over the next few years. We did not borrow
funds under our domestic senior unsecured credit facility during the first three months of 2008.
However, a portion of this facility is utilized to support letters of credit.
Our ability to access the credit markets in the future to obtain additional financing, if
needed, may be influenced by our credit rating. As of March 31, 2008, Moodys Investor Services
senior unsecured debt rating for our Company was Baa3 with a stable outlook. On February 11, 2008,
Standard & Poors Ratings Services raised our corporate credit and senior unsecured debt ratings to
BBB- with a stable outlook. Changes in our credit rating do not impact our access to, or the cost
of, our existing credit facilities.
We have no off-balance sheet financing relationships with variable interest or structured
finance entities.
20
Cash Flow and Working Capital
For the three months ended March 31, 2008, cash provided by operating activities was $66.0
million, as operating earnings were offset by a $148.9 million increase in managed working capital,
primarily as a result of higher operating volumes in our Flat-Rolled Products segment. Investing
activities included capital expenditures of $112.0 million. Cash used in financing activities was
$109.6 million in the first quarter 2008, and included purchases of $62.3 million of the Companys
common stock, dividend payments of $18.2 million, cash usage related to the repurchase of shares to
satisfy employee-owed taxes on share-based compensation and reductions in estimated federal and
state income tax benefits from share-based compensation of $24.6 million, and a reduction in
borrowings of $5.6 million. At March 31, 2008, cash and cash equivalents totaled $468.0 million, a
decrease of $155.3 million from year end 2007.
As part of managing the liquidity of our business, we focus on controlling managed working
capital, which is defined as gross accounts receivable and gross inventories, less accounts
payable. In measuring performance in controlling this managed working capital, we exclude the
effects of LIFO inventory valuation reserves, excess and obsolete inventory reserves, and reserves
for uncollectible accounts receivable which, due to their nature, are managed separately. At March
31, 2008, managed working capital was 31.1% of annualized sales, compared to 32.2% of annualized
sales at December 31, 2007. During the first three months of 2008, managed working capital
increased by $148.9 million, to $1,775.4 million. The increase in managed working capital from
December 31, 2007, was due to increased accounts receivable of $63.9 million, which reflects the
timing of sales in the first quarter 2008 compared to the fourth quarter 2007, and increased
inventory of $164.6 million, mostly as a result of higher raw material quantities, which was
partially offset by increased accounts payable of $79.6 million. While accounts receivable and
inventory balances have increased during first quarter 2008, days sales outstanding, which measures
actual collection timing for accounts receivable, have stayed relatively constant. Gross inventory
turns, which excludes the effect of LIFO inventory valuation reserves, declined compared to
year-end 2007, due primarily to a shift in mix to more value-added products.
The components of managed working capital were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Accounts receivable |
|
$ |
716.0 |
|
|
$ |
652.2 |
|
Inventories |
|
|
1,085.5 |
|
|
|
916.1 |
|
Accounts payable |
|
|
(469.2 |
) |
|
|
(388.4 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
1,332.3 |
|
|
|
1,179.9 |
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
6.4 |
|
|
|
6.3 |
|
LIFO reserves |
|
|
375.9 |
|
|
|
374.6 |
|
Corporate and other |
|
|
60.8 |
|
|
|
65.7 |
|
|
|
|
|
|
|
|
Managed working capital |
|
$ |
1,775.4 |
|
|
$ |
1,626.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized prior two months sales |
|
$ |
5,702.8 |
|
|
$ |
5,058.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed working capital as a
% of annualized sales |
|
|
31.1 |
% |
|
|
32.2 |
% |
|
|
|
|
|
|
|
|
|
Change in managed working capital from
December 31, 2007 |
|
$ |
148.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
We currently expect capital expenditures for 2008 will be approximately $500 million, of which
approximately $112 million was expended in the first three months of 2008. We are significantly
expanding our manufacturing capabilities to meet current and expected demand growth from the
aerospace (engine and airframe) and defense, chemical process industry, oil and gas, electrical
energy, and medical markets, especially for titanium and titanium-based alloys, nickel-based alloys
and superalloys, specialty alloys, and exotic alloys. These self-funded capital investments remain
on track to be completed as planned and include:
21
|
|
The expansion of ATIs aerospace quality titanium sponge production capabilities, including
our titanium sponge facility in Albany, OR, and our greenfield premium-grade titanium sponge
facility in Rowley, UT. The last reduction furnace at our Albany facility went into operation
at the end of the first quarter, which is ahead of schedule. This facility is now producing at
an annualized rate of 22 million pounds of aerospace quality titanium sponge and represents a
total capital investment of approximately $100 million. The Rowley, UT sponge facility remains
on schedule and will represent a total capital investment of approximately $460 million. We
expect to begin producing premium-grade titanium sponge at the Utah facility by the end of
2008. At full production, this facility is expected to produce 24 million pounds of
premium-grade titanium sponge annually. Upon completion of these titanium sponge expansion
projects, our annual sponge production capacity is projected to be 46 million pounds. In
addition, the Utah facility will have the infrastructure in place to further expand annual
capacity by approximately 18 million pounds, bringing the total annual capacity at that
facility to 42 million pounds, if needed. We expect to supplement our requirements with
titanium sponge and titanium scrap purchases from external sources. |
|
|
|
The expansion of ATIs melting capabilities for titanium and titanium-based alloys,
nickel-based alloys and superalloys, and specialty alloys. For titanium melting, four new
vacuum-arc remelt (VAR) furnaces are on line, and we plan to have one more titanium VAR
furnace customer qualified by the end of the second quarter 2008. VAR melting is a consumable
electrode re-melting process that improves the cleanliness and chemical homogeneity of the
alloys. Our third Plasma Arc Melt (PAM) premium titanium melt furnace is in production and has
completed initial customer qualifications. We expect to have this PAM furnace qualified for
all products, including premium grade jet engine rotating quality products, during the second
quarter 2008. A fourth PAM furnace to support premium titanium alloy growth requirements is
expected to begin production in the second half of 2009. Plasma arc melting is a superior
cold-hearth melting process for making alloyed titanium products for jet engine rotating
parts, medical applications, and other critical applications. One new VAR
furnace for nickel-based alloys and superalloys was qualified and began commercial production
in the first quarter of 2008, and we expect up to three more VARs to be added through 2009
based on production requirements to support titanium and titanium-based alloys and premium
nickel-based alloys and superalloys growth. |
|
|
|
The expansion of ATIs mill products processing and finishing capabilities for titanium and
titanium-based alloys, nickel-based alloys and superalloys, and specialty alloys. Announced
projects include a $260 million expansion of our titanium and superalloy forging capacity at
our Bakers, NC facility through the addition of an integrated 10,000 ton press forge, 700mm
rotary forge, and conditioning, finishing and inspection facilities to support increased
forged product requirements, which is expected to be operational by the third quarter 2009.
Forging is a hot-forming process that produces wrought forging billet and forged machining bar
from an ingot. We also are investing $60 million to expand our titanium and specialty plate
facility located in Washington, PA, which is expected to begin production in the second
quarter 2008. In addition to titanium and titanium alloys, ATIs specialty plate products
include duplex alloys, superaustenitic alloys, nickel-based alloys, zirconium alloys, armor
plate, and specialty and standard stainless grades. This project includes increasing reheat
furnace, annealing, and flattening capacity at the existing plate mill, expanding plate size
capabilities, and implementing productivity improvements. |
|
|
|
We are increasing our zirconium sponge production capacity by approximately 20%. In
addition, we have diverted two new VAR furnaces to zirconium melting. These two VARs were
originally planned for titanium melting. This new zirconium sponge and melting capacity better
positions ATI for the strong nuclear electrical energy and chemical process industry markets. |
Additionally, STAL, our Chinese joint venture company in which ATI has a 60% interest,
commenced an expansion of its operations in Shanghai, China in late 2006. This expansion, which is
expected to more than triple STALs rolling and slitting capacity to produce Precision Rolled
Strip® products, is estimated to cost approximately $110 million. The expansion is expected to be
fully operational in the 2009 first quarter and is expected to be funded through capital
contributions from the joint venture partners made in prior years, bank credit lines of the joint
venture, and cash on hand and internal cash flow of the joint venture. The financial results of
STAL are consolidated into our financial statements with the 40% interest of our minority partner
recognized as other income or expense in the consolidated statements of income and as a liability
in the consolidated statements of financial position.
22
Debt
At March 31, 2008, we had $524.4 million in total outstanding debt, compared to $528.2 million
at December 31, 2007, a decrease of $3.8 million. The decrease in debt was primarily due to
scheduled debt maturity payments.
In
managing our overall capital structure, some of the measures on which
we focus are net debt
to total capitalization, which is the percentage of our debt, net of
cash that may be available to reduce borrowings, to our total invested and borrowed
capital, and total debt to total capitalization, which excludes cash
balances. Net debt as a percentage of capitalization was 2.4% at
March 31, 2008, compared to a negative 4.5% at December 31, 2007, as cash on hand exceeded total
debt at the end of last year. The net debt to capitalization was determined as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
524.4 |
|
|
$ |
528.2 |
|
Less: cash |
|
|
(468.0 |
) |
|
|
(623.3 |
) |
|
|
|
|
|
|
|
Net debt (cash) |
|
$ |
56.4 |
|
|
$ |
(95.1 |
) |
|
|
|
|
|
|
|
|
|
Net debt (cash) |
|
$ |
56.4 |
|
|
$ |
(95.1 |
) |
Stockholders equity |
|
|
2,286.3 |
|
|
|
2,223.5 |
|
|
|
|
|
|
|
|
Total capital |
|
$ |
2,342.7 |
|
|
$ |
2,128.4 |
|
|
|
|
|
|
|
|
|
|
Net debt (cash) to capital ratio |
|
|
2.4 |
% |
|
|
(4.5 |
)% |
Total debt to total capitalization improved to 18.7% at March 31, 2008 from 19.2% at December
31, 2007. Total debt to total capitalization was determined as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
524.4 |
|
|
$ |
528.2 |
|
Stockholders equity |
|
|
2,286.3 |
|
|
|
2,223.5 |
|
|
|
|
|
|
|
|
Total capital |
|
$ |
2,810.7 |
|
|
$ |
2,751.7 |
|
|
|
|
|
|
|
|
|
|
Total debt to total capital ratio |
|
|
18.7 |
% |
|
|
19.2 |
% |
|
|
|
|
|
|
|
We did not borrow funds under our $400 million senior unsecured domestic credit facility
during the first three months of 2008, although a portion of the facility has been utilized to
support the issuance of letters of credit. Outstanding letters of credit issued under the facility
at March 31, 2008, were approximately $44 million.
STAL, our Chinese joint venture company in which ATI has a 60% interest, has a 741 million
renminbi (approximately $106 million at March 31, 2008 exchange rates) revolving credit facility
with a group of banks. This credit facility is supported solely by STALs financial capability
without any guarantees from the joint venture partners, and is intended to be utilized in the
future for the expansion of STALs operations, which are located in Shanghai, China. As of March
31, 2008, there were no borrowings under this credit facility although STAL had approximately $24
million in letters of credit outstanding related to the expansion of its operations.
The ratio of earnings to fixed charges for the three months ended March 31, 2008 was 20.1.
Dividends
A regular quarterly dividend of $0.18 per share of common stock was declared on February 22,
2008, payable on March 28, 2008 to stockholders of record at the close of business on March 14,
2008. On May 9, 2008, a regular quarterly dividend of $0.18 per share of common stock was
declared, payable on June 16, 2008 to stockholders of record at the close of business on May 29,
2008. The payment of dividends and the amount of such dividends depends upon matters deemed
relevant by our Board of Directors, such as our results of operations, financial condition, cash
requirements, future prospects, any limitations imposed by law, credit agreements or senior
securities, and other factors deemed relevant and appropriate.
23
Share Repurchase Program
On November 1, 2007, our Board of Directors approved a share repurchase program of $500
million. Repurchases of Company common stock have been, and are expected to be made on the open
market or in unsolicited or privately negotiated transactions. Share repurchases have been, and are
expected to be funded from internal cash flow and cash on hand. The number of shares to be
purchased, and the timing of the purchases, will be based on several factors, including other
investment opportunities, the level of cash balances, and general business conditions. During the
first quarter 2008, 887,200 shares of common stock were purchased at a cost of $62.3 million under
this program. As of March 31, 2008, 1,562,000 shares of common stock had been purchased under this
program at a cost of $123.5 million.
Critical Accounting Policies
Inventory
At March 31, 2008, we had net inventory of $1,085.5 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 is valued using
average cost or FIFO methods. Under the LIFO inventory valuation method, changes in the cost of raw
materials and production activities are recognized in cost of sales in the current period even
though these material and other costs may have been incurred at significantly different values due
to the length of time of our production cycle. The prices for many of the raw materials we use have
been volatile. Since we value most of our inventory utilizing the LIFO inventory costing
methodology, a rise in raw material costs has a negative effect on our operating results, while
conversely, a fall in material costs results in a benefit to operating results. For example, in
2007, the effect of falling raw material costs on our LIFO inventory valuation method resulted in
cost of sales which was $92.1 million lower than would have been recognized if we utilized the FIFO
methodology to value our inventory. In a period of rising prices, cost of sales expense recognized
under LIFO is generally higher than the cash costs incurred to acquire the inventory sold.
Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is
generally lower than cash costs incurred to acquire the inventory sold.
Since the LIFO inventory valuation methodology is designed for annual determination, interim
estimates of the annual LIFO valuation are required. We recognize the effects of the LIFO
inventory valuation method on an interim basis by projecting the expected annual LIFO cost and
allocating that projection to the interim quarters equally. These projections of annual LIFO
inventory valuation reserve changes are updated quarterly and are evaluated based upon material,
labor and overhead costs and projections for such costs at the end of the year plus projections
regarding year-end inventory levels. For the first quarter 2008, there was no significant expense
or benefit associated with utilizing the LIFO inventory valuation methodology.
The LIFO inventory valuation methodology is not utilized by many of the companies with which
we compete, including foreign competitors. As such, our results of operations may not be
comparable to those of our competitors during periods of volatile material costs due, in part, to
the differences between the LIFO inventory valuation method and other acceptable inventory
valuation 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 March 31, 2008, no such
reserves were required. 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 up to twenty-four months due to the longer
manufacturing and distribution process for such products.
Other Critical Accounting Policies
A summary of other significant accounting policies is discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations and in Note 1 to the consolidated
financial statements contained in our Annual Report on Form 10-K for the year ended December 31,
2007.
The preparation of the financial statements in accordance with U.S. generally accepted
accounting principles requires us to make judgments, estimates and assumptions regarding
uncertainties that affect the reported amounts of assets and liabilities. Significant areas of
uncertainty that require judgments, estimates and assumptions include the
24
accounting for derivatives, retirement plans, income taxes, environmental and other
contingencies as well as asset impairment, inventory valuation and collectibility of accounts
receivable. We use historical and other information that we consider to be relevant to make these
judgments and estimates. However, actual results may differ from those estimates and assumptions
that are used to prepare our financial statements.
New Accounting Pronouncements Adopted
In the first quarter 2008, as required, we began the adoption process for the change in
measurement date provisions of FASB Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (FAS 158), which amended the standards for defined
benefit pension and other postretirement benefit plans accounting. These provisions require assets
and benefits to be measured at the date of the employers statement of financial position, which is
December 31 in our case, rather than our measurement date of November 30, as was previously
permitted. The adoption of these provisions did not have a material effect on our financial
statements.
In September 2006, the FASB issued FAS 157, Fair Value Measurements (FAS 157). This
Standard defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, but does not require any new fair
value measurements. The Standard covers financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a recurring basis in financial statements.
FAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and
liabilities, and for fiscal years beginning after November 15, 2008 for other nonfinancial assets
and liabilities. The adoption of FAS 157 for financial assets and liabilities did not have a
material impact on our financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (FAS
159), The Fair Value Option for Financial Assets and Liabilities. FAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair value. If the fair
value option is elected, unrealized gains and losses will be recognized in earnings at each
subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007.
The adoption of FAS 159 did not have an impact on our financial statements.
Pending New Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (FAS
160), Noncontrolling Interests in Consolidated Financial Statements. FAS 160 changes the
classification of noncontrolling (minority) interests on the balance sheet and the accounting for
and reporting of transactions between the reporting entity and holders of such noncontrolling
interests. Under the new standard, noncontrolling interests are considered equity and are to be
reported as an element of stockholders equity rather than within the mezzanine or liability
sections of the balance sheet. In addition, the current practice of reporting minority interest
expense or benefit also will change. Under the new standard, net income will encompass the total
income before minority interest expense. The income statement will include separate disclosure of
the attribution of income between the controlling and noncontrolling interests. Increases and
decreases in the noncontrolling ownership interest amount are to be accounted for as equity
transactions. FAS 160 is effective for fiscal years beginning after December 15, 2008, and earlier
application is prohibited. Upon adoption, the balance sheet and the income statement will be recast
retrospectively for the presentation of noncontrolling interests. The other accounting provisions
of the statement are required to be adopted prospectively. We are currently evaluating the impact
of adopting FAS 160, including the reporting of the minority interest in our STAL joint venture, on
our financial statements. As of March 31, 2008, other long-term liabilities included $60 million
for minority interest in our STAL joint venture.
Forward-Looking and Other Statements
From time to time, we have made and may continue to make forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this
report relate to future events and expectations and, as such, constitute forward-looking
statements. Forward-looking statements include those containing such words as anticipates,
believes, estimates, expects, would, should, will, will likely result, forecast,
outlook, projects, and similar expressions. Forward-looking statements are based on
managements current expectations and include known and unknown risks, uncertainties and other
factors, many of which we are unable to predict or control, that may cause our actual results,
performance or achievements to materially differ from those expressed or implied in the
forward-looking statements. Important factors that could cause actual results to differ materially
from those in the forward-looking statements include: (a) material adverse changes in economic or
industry conditions generally, including global supply and demand conditions and prices for
25
our specialty metals; (b) material
adverse changes in the markets we serve, including the aerospace and defense, construction and
mining, automotive, electrical energy, chemical process industry, oil and gas, medical and other
markets; (c) our inability to achieve the level of cost savings, productivity improvements,
synergies, growth or other benefits anticipated by management, including those anticipated from
strategic investments and the integration of acquired businesses, whether due to significant
increases in energy, raw materials or employee benefits costs, the possibility of project cost
overruns or unanticipated costs and expenses, or other factors; (d) volatility of prices and
availability of supply of the raw materials that are critical to the manufacture of our products;
(e) declines in the value of our defined benefit pension plan assets or unfavorable changes in laws
or regulations that govern pension plan funding; (f) significant legal proceedings or
investigations adverse to us; and (g) the other risk factors summarized in our Annual Report on
Form 10-K for the year ended December 31, 2007, and other reports filed with the Securities and
Exchange Commission. We assume no duty to update our forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks associated with our business are discussed in Item 7A in our Annual Report on
Form 10-K for the year ended December 31, 2007. There were no material changes in these market
risks during the first quarter 2008.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the Companys disclosure
controls and procedures as of March 31, 2008, and they concluded that these controls and
procedures are effective.
(b) Changes in Internal Controls
There was no change in our internal control over financial reporting identified in connection
with the evaluation of the Companys disclosure controls and procedures as of March 31, 2008,
conducted by our Chief Executive Officer and Chief Financial Officer, that occurred during the
quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A number of lawsuits, claims and proceedings have been or may be asserted against the Company
relating to the conduct of its business, including those pertaining to product liability, patent
infringement, commercial, government contract work, employment, employee benefits, environmental
and health and safety, and stockholder matters. Certain of such lawsuits, claims and proceedings
are described in our Annual Report on Form 10-K for the year ended December 31, 2007, and addressed
in Note 11 to the unaudited interim financial statements included herein. While the outcome of
litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings
may be determined adversely to the Company, management does not believe that the disposition of any
such pending matters is likely to have a material adverse effect on the Companys financial
condition or liquidity, although the resolution in any reporting period of one or more of these
matters could have a material adverse effect on the Companys results of operations for that
period.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2007, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Shares (or Units) |
|
Value) of Shares |
|
|
Total Number |
|
Average Price |
|
Purchased as Part |
|
(or Units) that May |
|
|
of Shares |
|
Paid per |
|
of Publicly |
|
Yet Be Purchased |
|
|
(or Units) |
|
Share |
|
Announced Plans |
|
Under the Plans or |
Period |
|
Purchased (1) |
|
(or Unit) |
|
or Programs |
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1-31, 2008 |
|
|
1,091,796 |
|
|
$ |
69.60 |
|
|
|
862,200 |
|
|
$ |
378,241,242 |
|
February 1-29, 2008 |
|
|
25,000 |
|
|
|
71.80 |
|
|
|
25,000 |
|
|
|
376,479,144 |
|
March 1-31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376,479,144 |
|
|
Total |
|
|
1,116,796 |
|
|
$ |
69.65 |
|
|
|
887,200 |
|
|
$ |
376,479,144 |
|
|
|
|
(1) |
|
Includes shares repurchased by ATI to satisfy employee-owed taxes on share-based
payments. |
Item 6. Exhibits
(a) Exhibits
|
|
|
10.1
|
|
Key Executive Performance Plan, as amended February 21, 2008 (filed
herewith)*. |
|
|
|
10.2
|
|
Form of Total Shareholder Return
Incentive Compensation Program Award Agreement effective as
of January 1, 2008 (filed herewith)*. |
|
|
|
10.3
|
|
Form of Performance/Restricted Stock Agreement dated February 21, 2008 (filed
herewith)*. |
|
|
|
10.4
|
|
2008 Annual Incentive Plan (filed herewith)*. |
|
|
|
12.1
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer required by Securities and
Exchange Commission Rule 13a 14(a) or 15d 14(a) (filed herewith). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer required by Securities and
Exchange Commission Rule 13a 14(a) or 15d 14(a) (filed herewith). |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350 (filed herewith). |
|
|
|
* |
|
Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this
Report. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLEGHENY TECHNOLOGIES INCORPORATED
(Registrant)
|
|
|
|
|
|
|
|
Date: May 9, 2008 |
By |
/s/ Richard J. Harshman
|
|
|
|
Richard J. Harshman |
|
|
|
Executive Vice President, Finance
and
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
|
|
|
|
|
Date: May 9, 2008 |
By |
/s/ Dale G. Reid
|
|
|
|
Dale G. Reid |
|
|
|
Vice President, Controller and Chief Accounting
Officer and Treasurer
(Principal Accounting Officer) |
|
28
EXHIBIT INDEX
|
|
|
10.1
|
|
Key Executive Performance Plan, as amended February 21, 2008. |
|
|
|
10.2
|
|
Form of Total Shareholder Return
Incentive Compensation Program Award Agreement effective as of January
1, 2008. |
|
|
|
10.3
|
|
Form of Performance/Restricted Stock Agreement dated February 21, 2008. |
|
|
|
10.4
|
|
2008 Annual Incentive Plan. |
|
|
|
12.1
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer required by Securities and
Exchange Commission Rule 13a 14(a) or 15d 14(a). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer required by Securities and
Exchange Commission Rule 13a 14(a) or 15d 14(a). |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350. |
29